UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

BARR PHARMACEUTICALS, INC.

(Exact name of Registrant as specified in its charter)

Delaware		42-1612474
(State or Other Jurisdiction of		(I.R.S. — Employer
Incorporation or Organization)		Identification No.)

225 Summit Ave, Montvale, New Jersey 07645-1523
(Address of principal executive offices)

201-930-3300

(Former name, former address, and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of July 30, 2008, the registrant had 108,829,551 shares of $0.01 par value common stock outstanding.

 

 

BARR PHARMACEUTICALS, INC.

INDEX TO FORM 10-Q

		Page
		Number
Part I Condensed Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007 (unaudited)			3
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007 (unaudited)			4
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007 (unaudited)			5
Notes to Condensed Consolidated Financial Statements (unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
Item 3. Quantitative and Qualitative Disclosures About Market Risk			42
Item 4. Controls and Procedures			43
Part II Other Information
Item 1. Legal Proceedings			44
Item 1A. Risk Factors			44
Item 4. Submissions of Matters to a Vote of Security Holders			44
Item 6. Exhibits			45
Signatures
EX-10.5: AMENDED AND RESTATED EMPLOYMENT AGREEMENT
EX-10.6: AMENDED AND RESTATED EMPLOYMENT AGREEMENT
EX-10.7: AMENDED AND RESTATED EMPLOYMENT AGREEMENT
EX-10.8: AMENDED AND RESTATED EMPLOYMENT AGREEMENT
EX-10.9: AMENDED AND RESTATED EMPLOYMENT AGREEMENT
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.0: CERTIFICATION

Part I. CONDENSED FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

BARR PHARMACEUTICALS, INC. AND SUBSIDIARIES

		June 30,				December 31,
		2008				2007
Assets
Current assets:
Cash and cash equivalents		$	513			$	246
Marketable securities			34				288
Accounts receivable, net			580				497
Other receivables			98				86
Inventories			471				454
Deferred income taxes			76				74
Prepaid expenses and other current assets			55				58
Total current assets			1,827				1,703
Property, plant and equipment, net			1,176				1,112
Deferred income taxes			33				40
Marketable securities			21				17
Other intangible assets, net			1,479				1,483
Goodwill			306				286
Other assets			127				117
Long-term assets held for sale			1				4
Total assets		$	4,970			$	4,762
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	143			$	152
Accrued liabilities			299				291
Current portion of long-term debt and capital lease obligations			231				298
Income taxes payable			47				37
Deferred tax liabilities			2				2
Total current liabilities			722				780
Long-term debt and capital lease obligations			1,773				1,782
Deferred tax liabilities			181				193
Other liabilities			104				103
Commitments & contingencies (Note 16)
Minority interest			32				38
Shareholders’ equity:
Preferred stock, $1 par value per share; authorized 2,000,000; none issued			—				—
Common stock, $.01 par value per share; authorized 200,000,000; issued 111,267,548 and 110,783,167 at June 30, 2008 and December 31, 2007			1				1
Additional paid-in capital			717				682
Retained earnings			1,086				1,006
Accumulated other comprehensive income			455				278
Treasury stock at cost: 2,972,997 shares at June 30, 2008 and December 31, 2007			(101	)			(101	)
Total shareholders’ equity			2,158				1,866
Total liabilities, minority interest and shareholders’ equity		$	4,970			$	4,762

SEE ACCOMPANYING NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

BARR PHARMACEUTICALS, INC. AND SUBSIDIARIES

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Revenues:
Product sales		$	675			$	586			$	1,240			$	1,147
Alliance and development revenue			93				36				125				61
Other revenue			11				12				22				22
Total revenues			779				634				1,387				1,230
Costs and expenses:
Cost of sales			353				275				628				574
Selling, general and administrative			221				188				415				367
Research and development			81				66				145				129
Write-off of acquired in-process research and development			—				3				—				4
Earnings from operations			124				102				199				156
Interest income			7				8				12				19
Interest expense			27				42				59				84
Other (expense) income, net			—				4				(8	)			5
Earnings before income taxes and minority interest			104				72				144				96
Income tax expense			48				26				65				35
Minority interest income (loss), net of taxes			1				—				1				(2	)
Net earnings from continuing operations			57				46				80				59
Net loss from discontinued operations, net of taxes			—				(1	)			—				(2	)
Net earnings		$	57			$	45			$	80			$	57
Basic:
Earnings per common share — continuing operations		$	0.53			$	0.43			$	0.74			$	0.55
Loss per common share — discontinued operations			—				(0.01	)			—				(.02	)
Net earnings per common share — basic		$	0.53			$	0.42			$	0.74			$	0.53
Diluted:
Earnings per common share — continuing operations		$	0.52			$	0.42			$	0.73			$	0.54
Loss per common share — discontinued operations			—				(0.01	)			—				(0.02	)
Net earnings per common share — diluted		$	0.52			$	0.41			$	0.73			$	0.52
Weighted average shares — basic			108				107				108				107
Weighted average shares — diluted			109				108				109				108

SEE ACCOMPANYING NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

BARR PHARMACEUTICALS, INC. AND SUBSIDIARIES

		Six Months Ended
		June 30,
		2008				2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings		$	80			$	57
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization			166				143
Deferred revenue			(3	)			(3	)
Minority interest			(1	)			2
Stock-based compensation expense			16				15
Excess tax benefits from stock-based compensation			(2	)			(5	)
Deferred income tax benefit			(29	)			(29	)
Loss on sale of divested products			—				1
Gain on derivative instruments, net			(1	)			—
Other			9				(2	)
Write-off of in-process research and development associated with acquisitions			—				4
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable and other receivables, net			(82	)			46
Inventories			(1	)			(19	)
Prepaid expenses			5				(1	)
Other assets			2				4
Increase (decrease) in:
Accounts payable, accrued liabilities and other liabilities			(9	)			(55	)
Income taxes payable			19				(9	)
Net cash provided by operating activities			169				149
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment			(62	)			(50	)
Proceeds from sales of property, plant and equipment			8				1
Proceeds from sale of discontinued operations			3				—
Acquisitions, net of cash acquired			(13	)			(49	)
Settlement of derivative instruments			(22	)			—
Purchases of marketable securities			(149	)			(1,147	)
Sales of marketable securities			399				1,270
Investment in debt securities			—				(2	)
Other			4				1
Net cash provided by investing activities			168				24
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and capital leases			(672	)			(223	)
Proceeds from long-term debt			585				—
Excess tax benefits from stock based compensation			2				5
Dividends paid to minority interest shareholders			(6	)			—
Proceeds from exercise of stock options, employee stock purchases and warrants			16				17
Other			1				1
Net cash used in financing activities			(74	)			(200	)
Effect of exchange-rate changes on cash and cash equivalents			4				(1	)
Increase (decrease) in cash and cash equivalents			267				(28	)
Cash and cash equivalents at beginning of period			246				232
Cash and cash equivalents at end of period		$	513			$	204

SEE ACCOMPANYING NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

BARR PHARMACEUTICALS, INC. AND SUBSIDIARIES

1. Basis of Presentation

     Barr Pharmaceuticals, Inc. (“Barr” or the “Company”) is a Delaware holding company whose principal subsidiaries are Barr Laboratories, Inc., Duramed Pharmaceuticals, Inc. (“Duramed”) and PLIVA d.d. (“PLIVA”). The accompanying unaudited interim condensed consolidated financial statements included in this Form 10-Q should be read in conjunction with the consolidated financial statements of Barr Pharmaceuticals, Inc. and its subsidiaries and the accompanying notes that are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. The Company prepared these condensed consolidated financial statements following the requirements of the Securities and Exchange Commission and generally accepted accounting principles in the United States (“GAAP”) for interim reporting. In management’s opinion, the unaudited condensed consolidated financial statements reflect all adjustments (consisting of those that are normal and recurring) that are necessary in the judgment of management for a fair presentation of such statements in conformity with GAAP.

     The condensed consolidated financial statements include all companies that Barr directly or indirectly controls (meaning it has more than 50% of voting rights in those companies). Investments in companies where Barr owns between 20% and 50% of a company’s voting rights are accounted for by using the equity method, with Barr recording its proportionate share of net income or loss for such investments in its results for that period. The condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries, after elimination of inter-company accounts and transactions. Non-controlling interests in the Company’s subsidiaries are recorded net of tax as minority interest.

     In preparing the condensed consolidated financial statements in conformity with GAAP, the Company must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from those estimates.

     Certain amounts in the Company’s prior-period condensed consolidated financial statements have been reclassified to conform to the presentation for the three and six months ended June 30, 2008. Such amounts include the Company’s reclassification of assets held for sale and discontinued operations. See Note 5.

2. Recent Accounting Pronouncements

     In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 157 (“SFAS 157”), Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosure about fair value measurements. However, in February 2008, the FASB issued FASB Staff Position (“FSP”) 157-2 (“FSP 157-2”) which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP 157-2 defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for items within the scope of FSP 157-2. Effective for 2008, the Company has adopted SFAS 157 in accordance with FSP 157-2. The partial adoption of SFAS 157 did not have a material impact on its condensed consolidated financial statements but additional disclosures were required. See Note 7.

     In February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), The Fair Value Option for Financial Assets and Financial Liabilities, providing companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. GAAP has required different measurement attributes for different assets and liabilities that can create artificial volatility in earnings. SFAS 159 helps to mitigate this type of accounting-induced volatility by enabling companies to report related assets and liabilities at fair value, which would likely reduce the need for companies to comply with detailed rules for hedge accounting. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of a company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which a company has chosen to use fair value on the face of the balance sheet. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company did not elect to adopt the fair value option under SFAS 159.

     In June 2007, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 07-3 (“EITF 07-3”), Accounting for Advance Payments for Goods or Services to be Received for Use in Future Research and Development Activities. EITF 07-3 provides clarification surrounding the accounting for nonrefundable research and development advance payments, whereby such payments should be recorded as an asset when the advance payment is made and recognized as an expense when the research and development activities are performed. EITF 07-3 is effective for interim and annual reporting periods beginning after December 15, 2007. The adoption of EITF 07-3 did not have a material effect on the Company’s condensed consolidated financial statements.

     In December 2007, the FASB issued SFAS No. 141(R) (“SFAS 141(R)”), Business Combinations (revised), replacing SFAS No. 141 (“SFAS 141”) Business Combinations. This new statement requires additional assets and assumed liabilities to be measured at fair value when acquired in a business combination as compared to the original pronouncement. SFAS 141(R) also requires liabilities related to contingent consideration to be re-measured to fair value each reporting period, acquisition-related costs to be expensed and not capitalized and acquired in-process research and development to be capitalized as an indefinite lived intangible asset until completion of project or abandonment of project. SFAS 141(R) requires prospective application for business combinations consummated in fiscal years beginning on or after December 15, 2008. This statement does not allow for early adoption. The Company is currently evaluating the impact of the adoption of this statement on its consolidated financial statements.

     In December 2007, the FASB issued SFAS No. 160 (“SFAS 160”), Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51 (“ARB No. 51"). This amendment of ARB No. 51 requires a noncontrolling interest in subsidiaries initially to be measured at fair value and then to be classified as a separate component of equity. This statement is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008. This statement does not allow for early adoption,

however, application of SFAS 160 disclosure and presentation requirements is retroactive. The Company is currently evaluating the impact of the adoption of this statement on its consolidated financial statements.

     In December 2007, the EITF issued EITF Issue No. 07-1 (“EITF 07-1”), Accounting for Collaborative Arrangements. EITF 07-1 affects entities that participate in collaborative arrangements for the development and commercialization of intellectual property. The EITF affirmed the tentative conclusions reached on (1) what constitutes a collaborative arrangement, (2) how the parties should present costs and revenues in their respective income statements, (3) how the parties should present cost-sharing payments, profit-sharing payments, or both in their respective income statements, and (4) disclosure in the annual financial statements of the parties. EITF 07-1 should be applied as a change in accounting principle through retrospective application to all periods presented for collaborative arrangements existing as of the date of adoption. EITF 07-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact of the adoption of this statement on its consolidated financial statements.

     On March 19, 2008, the FASB issued SFAS No. 161 (“SFAS 161”), Disclosures about Derivative Instruments and Hedging Activities — an Amendment of FASB Statement 133. SFAS 161 enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: (a) an entity uses derivative instruments; (b) derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities; and (c) derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Specifically, SFAS 161 requires: disclosure of the objectives for using derivative instruments in terms of underlying risk and accounting designation; disclosure of the fair values of derivative instruments and their gains and losses in a tabular format; disclosure of information about credit-risk-related contingent features; and cross-referenced from the derivative footnote to other footnotes in which derivative-related information is disclosed. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. Early application is encouraged. The Company is currently evaluating the impact of the adoption of this statement on its consolidated financial statements.

     On April 25, 2008, the FASB issued FASB Staff Position SFAS 142-3 (“FSP 142-3”). FSP 142-3 amends the list of factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS No. 142. The new guidance applies to (1) intangible assets that are acquired individually or with a group of other assets and (2) intangible assets acquired in both business combinations and asset acquisitions. FSP 142-3 is effective for fiscal years ending after December 15, 2008. Early adoption of FSP 142-3 is prohibited. The Company is currently evaluating the impact of the application of FSP 142-3 to its consolidated financial statements.

3. Earnings Per Share

     The following is a reconciliation of the numerators and denominators used to calculate earnings per common share (“EPS”) as presented in the condensed consolidated statements of operations:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
(table in millions, except per share data)
Numerator for basic and diluted earnings (loss) per share
Net earnings from continuing operations		$	57			$	46			$	80			$	59
Net loss from discontinued operations			—				(1	)			—				(2	)
Net earnings		$	57			$	45			$	80			$	57
Denominator: Weighted average shares — basic			108				107				108				107
Earnings per common share — continuing operations		$	0.53			$	0.43			$	0.74			$	0.55
Loss per common share — discontinued operations			—				(0.01	)			—				(0.02	)
Earnings per common share — basic		$	0.53			$	0.42			$	0.74			$	0.53
Denominator: Weighted average shares — diluted			109				108				109				108
Earnings per common share — continuing operations		$	0.52			$	0.42			$	0.73			$	0.54
Loss per common share — discontinued operations			—				(0.01	)			—				(0.02	)
Earnings per common share — diluted		$	0.52			$	0.41			$	0.73			$	0.52
Calculation of weighted average common shares — diluted
Weighted average shares — basic			108				107				108				107
Effect of dilutive options			1				1				1				1
Weighted average shares — diluted			109				108				109				108
Not included in the calculation of diluted earnings per-share because their impact is antidilutive:
Stock options outstanding (amounts in thousands)			6,376				270				4,424				212

4. Acquisitions and Business Combinations

O.R.C.A. pharm GmbH

     On September 5, 2007, the Company acquired 100% of the outstanding shares of O.R.C.A. pharm GmbH (“ORCA”), a privately-owned specialty pharmaceutical company focused on the oncology market in Germany. In accordance with SFAS No. 141 (“SFAS 141”), Business Combinations, the Company used the purchase method to account for this transaction. Under the purchase method of accounting, the assets acquired and liabilities assumed from ORCA are recorded at the date of acquisition, at their respective fair values. The purchase price at September 5, 2007 was approximately $43 million, including minimum future payments due in 2008 and 2009. The Company may also be required to pay up to an additional $7 million based on the achievement of defined performance milestones for 2008. The operating results of ORCA are included in the condensed consolidated financial statements subsequent to the September 5, 2007 acquisition date. The fair value of the assets and liabilities acquired on September 5, 2007, including adjustments made during the purchase price allocation period, are as follows:

$ in millions
Inventory		$	3
Products acquired			29
Goodwill			10
Other assets			6
Liabilities			(5	)
Total		$	43

     The above purchase price allocation is preliminary and is based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed. Management believes the available information provides a reasonable basis for allocating the purchase price but the Company is awaiting additional information necessary to finalize the purchase price allocation. The Company expects to finalize the valuation and complete the purchase price allocation as soon as possible but no later than one year from the acquisition date. Under the guidance of SFAS 141, this acquisition is being treated as an immaterial acquisition. As an immaterial acquisition, pro-forma financial statements are not required to be presented.

5. Assets Held for Sale and Discontinued Operations

     The Company has decided to divest or exit its operations in Goa, India. As a result, as of June 30, 2008, the assets and liabilities relating to the Goa operations met the “held for sale” criteria of SFAS No. 144 (“SFAS 144”), Accounting for the Impairment or Disposal of Long Lived Assets. The Company expects to sell these assets and the related liabilities held for sale within one year. This divestiture does not meet the definition of discontinued operations due to migration of cash flows. The Company’s operations in Goa are part of its generic pharmaceuticals segment. During the quarter ended June 30, 2008 the Company recorded impairment charges of approximately $2.7 million related to the Goa facility. These expenses were charged to the selling, general and administrative and research and development expense lines in the condensed consolidated statement of operations.

     The following amounts of assets for Goa have been segregated and included in assets held for sale on the Company’s condensed consolidated balance sheet as of June 30, 2008 and December 31, 2007:

		June 30,				December 31,
$ in millions		2008				2007
Property, plant and equipment, net		$	1			$	4
Long-term assets held for sale		$	1			$	4

     During 2007, the Company sold its operations in Spain and Italy, and its Veterina business. For the three and six months ended June 30, 2007, the Company has segregated from continuing operations and included in discontinued operations, net of taxes, in the condensed consolidated statement of operations, the following:

		Three Months Ended																Six Months Ended
		June 30, 2007																June 30, 2007
$ in millions		Italy				Spain				Veterina				Total				Italy				Spain				Veterina				Total
Revenues
Generics		$	3			$	6			$	–			$	9			$	6			$	14			$	–			$	20
Other			–				–				9				9				–				–				16				16
Total net revenues of discontinued operations		$	3			$	6			$	9			$	18			$	6			$	14			$	16			$	36
Loss before income taxes and minority interest		$	–			$	(1	)		$	–			$	(1	)		$	(1	)		$	(1	)		$	1			$	(1	)
Loss from discontinued operations- net of tax		$	–			$	(1	)		$	–			$	(1	)		$	(1	)		$	(1	)		$	–			$	(2	)

6. Investments in Marketable Securities

     Investments in Marketable Securities and Debt

     Trading Securities

     The fair value of marketable securities classified as trading at each of June 30, 2008 and December 31, 2007 was $4 million, which is included as a component of current marketable securities. Net (losses) gains for the six months ended June 30, 2008 and June 30, 2007 were $0 million and $1 million, respectively. These amounts are included as a component of other (expense) income.

     Available-for-Sale Securities

     Available-for-sale equity securities include amounts invested in connection with the Company’s excess 401(k) and other deferred compensation plans of $11 million and $12 million at June 30, 2008 and December 31, 2007, respectively.

     Available-for-sale debt securities at June 30, 2008 include $29.4 million in market-auction debt securities and $8.8 million in municipal bonds. The market auction debt securities have auction rate reset dates ranging from July 1, 2008 to July 8, 2008 with underlying maturity dates ranging from January 1, 2016 to November 15, 2027. The municipal bonds have maturity dates ranging from July 1, 2008 to February 1, 2010.

     The Company’s holdings of market auction debt securities are restricted to highly rated municipal securities. The Company’s typical practice has been to continue to own the respective securities or liquidate its holdings by selling those securities at par value at the next auction, which generally ranges from 7 to 35 days after purchase. The market auction debt securities held by the Company are investment grade municipal securities (A rated and above) and are insured against loss of principal and interest by bond insurers whose ratings are AA and above (although such ratings remain under review).

     The recent uncertainties in the credit markets have prevented the Company and other investors from liquidating holdings of market auction debt securities in recent auctions because the amount of market auction debt securities submitted for sale has exceeded the amount of purchase orders. In 2008, the Company decided to liquidate its holdings and not reinvest in market auction debt securities in order to intentionally reduce exposure to these instruments. At June 30, 2008, the Company held $29.4 million in market auction debt securities as these securities have not been liquidated due to failed auctions. Of this amount, $10.9 million were redeemed at par value in July 2008. The remaining $18.5 million of securities are classified as long-term as of June 30, 2008 on the condensed consolidated balance sheet.

     Despite these failed auctions, there have been no defaults on the underlying securities, and interest income on these holdings continues to be received on scheduled interest payment dates. As a result, the Company now earns premium interest rates on the failed auction investments (currently earning 2.5% to 3.1% on a tax-free basis). If the issuers of these securities are unable to successfully close future auctions and their credit ratings deteriorate, the Company may be required to adjust the carrying value of these investments to reflect other-than-temporary declines in their value.

     The Company has historically valued these securities at par because this is the value it receives when trading them in the established market. In assessing the fair value of these securities, the Company determined market input comparability based on an analysis of similar security current market data factors. As a result of such assessment, the Company believes that the fair value of these securities continues to be par. Therefore, the Company has not adjusted the recorded value of these securities. The Company continues to re-evaluate these securities each quarter for any possible temporary or permanent adjustments to their value.

     Based on the Company’s ability to access its cash and other short-term investments, its expected operating cash flows and its other sources of cash, the Company does not anticipate that the lack of liquidity in its remaining holdings of market auction debt securities will affect its ability to operate its business.

     The amortized cost, gross unrealized gains, and losses recorded as a component of other comprehensive income, and estimated market values for available-for-sale securities at June 30, 2008 and December 31, 2007 are as follows:

		Available for Sale
						Gross				Gross
		Amortized				Unrealized				Unrealized				Market
$ in millions		Cost				Gains				(Losses)				Value
June 30, 2008
Debt securities		$	38			$	—			$	—			$	38
Equity securities			12				—				—				12
		$	50			$	—			$	—			$	50
December 31, 2007
Debt securities		$	288			$	—			$	—			$	288
Equity securities			12				1				—				13
		$	300			$	1			$	—			$	301

7. Fair Value Measures

     On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements. SFAS 157 applies to all financial instruments that are measured and reported on a fair value basis. This includes items currently reported in marketable securities (current and long-term) on the condensed consolidated balance sheet as well as financial instruments reported in “other assets” and “other liabilities” that are reported at fair value.

     As defined in SFAS 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income, and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable firm inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

	•		Level 1 primarily consists of financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access (examples include active exchange-traded equity securities, exchange-traded derivatives, most U.S. Government and agency securities, and certain other sovereign government obligations).
	•		Level 2 includes financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, volatility factors, prepayment speeds, default rates, loss severity, current market, and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category include certain corporate debt, certain U.S. agency and non-agency mortgage-backed securities and non-exchange-traded derivatives such as interest rate swaps.
	•		Level 3 is comprised of financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.

     In determining the appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are subject to SFAS 157. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3.

     The following table presents the Company’s fair value hierarchy for those financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2008.

		Fair Value Measurements on a Recurring Basis
		as of June 30, 2008
		Level 1				Level 2				Level 3
		Quoted prices				Significant
		in Active				Other				Significant				Balance at
		Markets for				Observable				Unobservable				June 30,
$ in millions		Identical Items				Inputs				Inputs				2008
Assets:
U.S. T-Bills (1)		$	124			$	—			$	—			$	124
Marketable securities — trading (2)			4				—				—				4
Marketable securities — available for sale (3)			22				29				—				51
Venture fund investments (4)			—				—				18				18
Derivative instruments (5)			—				2				—				2
Total assets at fair value		$	150			$	31			$	18			$	199
Liabilities:
Derivative instruments (5)		$	—			$	(19	)		$	—			$	(19	)

The following table represents the Level 3 significant unobservable input components:

		Fair value Measurements
		Using Significant
		Unobservable Inputs
		(Level 3)
		Venture Fund
$ in millions		Investments
Beginning balance January 1, 2008		$	20
Total gains or losses (realized/unrealized)			(1	)
Purchase issuance or settlements			4
Distribution			(5	)
Ending balance June 30, 2008		$	18

     The level 3 fair value disclosure above relates to the Company’s equity interest in venture funds, which are recorded at fair value. The venture funds value their underlying investments based on a combination of recent trading activity and discounted cash flow valuations.

8. Derivative Instruments

     Interest Rate Risk

     The Company’s interest-bearing investments, loans, and borrowings are subject to interest rate risk. The Company invests and borrows primarily on a variable-rate basis. Depending upon market conditions, the Company may fix the interest rate it either pays or receives by entering into fixed-rate investments and borrowings or through the use of derivative financial instruments.

     During 2007, as reflected in the table below, the Company entered into pay-fixed, receive-floating interest rate swap agreements effectively converting $625 million of variable-rate debt under unsecured senior credit facilities to fixed-rate debt. The objective of the hedge is to manage the variability of cash flows in the interest payments related to the portion of the variable-rate debt designated as being hedged. With the hedge in place, the sole source of variability to the Company is the interest payments it receives based on changes in LIBOR. The swaps are accounted for in accordance with SFAS No. 133 (“SFAS 133”), Accounting for Derivative Instruments and Hedging Activities.

     Derivative financial instruments are measured at fair value, are recognized as assets or liabilities on the condensed consolidated balance sheet, with changes in the fair value of the derivatives recognized in either net income (loss) or other comprehensive income (loss), depending on the timing, and designated purpose of the derivative. When the Company pays interest on the portion of the debt designated as hedged, the gain or loss on the swap designated as hedging the interest payment will be reclassified from accumulated other comprehensive income into interest expense.

     These derivative instruments are designated as cash flow hedges with the related gains or losses recorded in other comprehensive income (net of tax) with an offsetting amount included in other non-current liabilities. The losses are $11 million at each of June 30, 2008 and December 31, 2007.

     The Company estimates that approximately $6 million of the net losses at June 30, 2008 will be reclassified into interest expense over the next twelve months.

     The terms of the interest rate swap agreements that are still in effect as of June 30, 2008 are shown in the following table:

$ in millions
Notional
Principal Amount				Start Date		Maturity Date		Receive Variable Rate		Pay Fixed Rate
$	125			Jun-30-07		Jun-30-10		90 day LIBOR			5.4735	%
$	100			Jun-30-07		Jun-30-10		90 day LIBOR			5.3225	%
$	100			Sept-30-07		Sept-30-10		90 day LIBOR			4.985	%
$	100			Sept-30-07		Sept-30-09		90 day LIBOR			4.92875	%
$	100			Sept-30-07		Mar-31-09		90 day LIBOR			4.755	%
$	100			Sept-30-07		Sept-30-09		90 day LIBOR			4.83	%

Foreign Exchange Risk

     The Company seeks to manage potential foreign exchange risk from foreign subsidiaries by matching each such subsidiary’s revenues and costs in its functional currency. Similarly, the Company seeks to manage the foreign exchange risk relating to assets and liabilities of its foreign subsidiaries by matching the assets and liabilities in the subsidiary’s functional currency. When this is not practical, the Company uses foreign exchange forward contracts or options to manage its foreign exchange risk, as described below.

     The Company entered into foreign exchange forward contracts that serve as economic hedges of certain forecast foreign currency transactions occurring at various dates through 2008. At June 30, 2008, none of the Company’s remaining foreign exchange derivatives were eligible for hedge accounting, resulting in their changes in fair value being included in the Company’s condensed consolidated statement of operations as an other expense of $22 million, which is substantially offset by the change in the mark-to-market value of the underlying exposure that it is hedging.

     All foreign exchange derivative instruments described above are measured at fair value and are reported as assets or liabilities on the condensed consolidated balance sheet. Changes in fair value are reported in net income (loss) or other comprehensive income (loss) depending upon whether the risk-management instrument is classified as a formal hedge pursuant to the guidelines outlined by SFAS 133. Economically, the gains or losses realized on these instruments at maturity are intended to offset the losses or gains of the transactions which they are hedging.

     The table below summarizes the respective fair values of the derivative instruments described above at June 30, 2008 and December 31, 2007:

		June 30, 2008								December 31, 2007
$ in millions		Assets				Liabilities				Assets				Liabilities
Interest rate swap		$	—			$	(17	)		$	—			$	(17	)
Foreign exchange forward contracts			2				(2	)			—				—
Total		$	2			$	(19	)		$	—			$	(17	)

9. Inventories

     Inventories consist of the following:

		June 30,				December 31,
$ in millions		2008				2007
Raw materials and supplies		$	158			$	166
Work-in-process			106				77
Finished goods			207				211
Total inventories		$	471			$	454

     At June 30, 2008 and December 31, 2007, an additional $60 million and $47 million, respectively, of inventory, principally raw materials, is classified as “other assets” as such inventory is not expected to be sold within 12 months of the applicable period. Included in inventory is $17 million and $27 million at June 30, 2008 and December 31, 2007, respectively, of pre-launch inventory related to products that have not yet received the requisite regulatory approvals for commercial launch.

10. Goodwill and Other Intangible Assets

     Goodwill at June 30, 2008 and December 31, 2007 was as follows:

		Generic				Proprietary
$ in millions		Pharmaceuticals				Pharmaceuticals				Total
Goodwill balance at December 31, 2007		$	238			$	48			$	286
PLIVA d.d. goodwill adjustments			2				(3	)			(1	)
Currency translation effect			19				—				19
Additional purchase price of ORCA			2				—				2
Goodwill balance at June 30, 2008		$	261			$	45			$	306

     Intangible assets at June 30, 2008 and December 31, 2007 consist of the following:

		June 30,												December 31,
		2008												2007
		Gross								Net				Gross								Net
		Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
$ in millions		Amount				Amortization				Amount				Amount				Amortization				Amount
Finite-lived intangible assets:
Product licenses		$	45			$	23			$	22			$	45			$	21			$	24
Product rights			1,529				314				1,215				1,456				218				1,238
Land use rights			122				2				120				106				1				105
Other			42				18				24				43				16				27
Total amortized finite-lived intangible assets			1,738				357				1,381				1,650				256				1,394
Indefinite-lived intangible assets - tradenames:			98				—				98				89				—				89
Total identifiable intangible assets		$	1,836			$	357			$	1,479			$	1,739			$	256			$	1,483

     The Company’s product licenses, product rights, land use rights and other finite lived intangible assets have weighted average useful lives of approximately 10, 17, 99 and 10 years, respectively. Amortization expense associated with these acquired intangibles was $51 million and $40 million for the three months ended June 30, 2008 and 2007, respectively, and $95 million and $81 million for the six months ended June 30, 2008 and 2007, respectively.

     The Company reviews the carrying value of its goodwill and indefinite lived intangible assets for impairment annually and whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. Fair value is defined as the market price. If the market price is not available, fair value is estimated based on the present value of future cash flows. Such evaluation last took place as of July 1, 2007, with no impairment deemed required.

     The annual estimated amortization expense for the next five calendar years on finite-lived intangible assets is as follows:

$ in millions
Years Ending December 31,
2009		$150
2010		$151
2011		$140
2012		$130
2013		$121

     Included in the finite-lived intangible assets table above are product rights to over 200 intangible assets acquired by the Company over the past five years. The following table disaggregates the values of these product rights into therapeutic categories as of June 30, 2008:

		June 30, 2008
														Weighted
		Gross								Net				Average
		Carrying				Accumulated				Carrying				Amortization
$ in millions		Amount				Amortization				Amount				Period
Therapeutic Category
Contraception		$	384			$	89			$	295				18
Antibiotics, antiviral & anti-infectives			255				55				200				10
Cardiovascular			242				51				191				10
Psychotherapeutics			193				38				155				12
Other (1)			455				81				374				10
Total product rights		$	1,529			$	314			$	1,215

11. Debt

     A summary of outstanding debt is as follows:

		June 30,				December 31,
$ in millions		2008				2007
Credit facilities (a)		$	2,000			$	1,800
Note due to WCC shareholders (b)			—				7
Obligation under capital leases (c)			2				2
Fixed rate bonds (d)			—				113
Dual-currency syndicated credit facility (d)			—				24
Euro commercial paper program (d)			—				78
Dual-currency term loan facility (d)			—				25
Multi-currency revolving credit facility (d)			—				29
Other			2				2
			2,004				2,080
Less: current installments of debt and capital lease obligations			231				298
Total long-term debt		$	1,773			$	1,782

     Principal maturities of existing long-term debt and amounts due on capital leases for the period set forth in the table below are as follows:

$ in millions
Twelve Months Ending June 30,		Total
2010		$	231
2011			231
2012			1,131
2013			180
2014			—
Thereafter			—
Total principal maturities and amounts due on long term debt and capital obligations		$	1,773

(a) In connection with the closing of the PLIVA acquisition, on October 24, 2006, the Company entered into unsecured senior credit facilities (the “Credit Facilities”) and drew $2 billion under a five-year term facility and $416 million under a 364-day term facility, both of which bear interest at variable rates of LIBOR plus 75 basis points (3.55063% at June 30, 2008). The 364-day term facility was repaid in full during 2007. The Company is obligated to repay the outstanding principal amount of the five-year term facility in 18 consecutive quarterly installments of $50 million, with the balance of $1.1 billion due at maturity in October 2011. The five-year term facility had an outstanding principal balance of $1.7 billion at June 30, 2008.

     On June 19, 2008, the Company entered into an unsecured credit facility (“Term Loan”) and drew $300 million under a five-year term facility. This Term Loan bears interest at variable rates of LIBOR plus 150 basis points (4.30063% at June 30, 2008). The Company is obligated to repay the outstanding principal amount of the five-year term facility in 19 consecutive quarterly installments of $7.5 million, with the balance of $157.5 million due at maturity in June 2013.

     The Company also has a $300 million revolving credit facility available, which bears interest at variable rates of LIBOR plus 60 basis points and a facility fee of 15 basis points. On April 17, 2008, the Company drew down $285 million from its $300 million revolving credit facility to refinance debt instruments of PLIVA and its subsidiaries (noted in (d) below). The Company used the drawn funds from the Term Loan to repay its outstanding revolving credit facility and restore its liquidity under its revolving credit facility. No amounts under this facility were drawn at June 30, 2008. Any outstanding borrowings under the revolving credit facility would be payable in October 2011.

     The Credit Facilities and the Term Loan include customary covenants, including financial covenants limiting the total indebtedness of the Company on a consolidated basis. In addition, the Credit Facilities contain events of default provisions, including upon a change of control. See Note 18.

(b) In February 2004, the Company acquired all of the outstanding shares of Women’s Capital Corporation (“WCC”). In connection with that acquisition, the Company issued a four-year, $7 million promissory note to WCC’s former shareholders. The note bears a fixed interest rate of 2%. The entire principal amount and all accrued interest was due and paid in full on February 25, 2008.

(c) The Company has certain capital lease obligations for machinery, equipment, and buildings in the United States and the Czech Republic.

(d) On April 17, 2008, the Company drew down $285 million from its $300 million revolving credit facility (noted in (a) above) to refinance these debt instruments of PLIVA and its subsidiaries. These PLIVA debt instruments were all repaid in April 2008.

12. Accumulated Other Comprehensive Income

     Comprehensive income is defined as the total change in shareholders’ equity during the period other than from transactions with shareholders. For the Company, comprehensive income is comprised of net income, unrealized gains (losses) on securities classified for SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities purposes as “available for sale,” unrealized gains (losses) on pension and other post employment benefits and foreign currency translation adjustments.

		Three Months Ended								Six Months Ended
		June 30,				June 30,				June 30,				June 30,
$ in millions		2008				2007				2008				2007
Net income		$	57			$	45			$	80			$	57
Net unrealized gain on marketable securities, net of tax			—				—				—				1
Net gain on derivative financial instruments designated as cash flow hedges, net of tax			9				2				—				—
Net unrealized gain on currency translation adjustments			17				38				177				47
Total comprehensive income		$	83			$	85			$	257			$	105

     Accumulated other comprehensive income as reflected on the condensed consolidated balance sheet is comprised of the following:

		June 30,				December 31,
$ in millions		2008				2007
Cumulative unrealized gain (loss) on marketable securities, net of tax		$	—			$	—
Cumulative net (loss) on derivative financial instruments designated as cash flow hedges, net of tax			(11	)			(11	)
Cumulative net unrealized gain on pension and other post employment benefits, net of tax			1				1
Cumulative net unrealized gain on currency translation adjustments			465				288
Accumulated other comprehensive income		$	455			$	278

13. Income Taxes

     The Company’s effective tax rate increased in the current quarter to 46.1% from 35.4% in the same period for 2007. The rate was negatively impacted by a change of the mix of income in certain U.S. and foreign taxing jurisdictions, the expiration of the U.S. research and development tax credit at December 31, 2007 and a shift in the Company’s investment portfolio from tax-exempt securities to taxable securities due to market conditions. The rate was favorably impacted by a reduction of the tax rate in Germany. In 2007, the rate was positively affected by the recognition of previously unrecognized tax benefits resulting from audit settlements in various tax jurisdictions.

     The total amount of gross unrecognized tax benefits as of June 30, 2008 was $30 million. During the quarter, the Company adjusted the balance for examinations that were either settled or in progress. Included in the balance at June 30, 2008 was $17 million of tax positions that, if recognized, would positively affect the Company’s effective tax rate. It is also possible that tax authorities could raise new issues requiring increases to the balance of unrecognized tax benefits. However, such potential increases cannot reasonably be estimated at this time. The Company had $5 million accrued for interest and penalties as of June 30, 2008.

     The Company is currently being examined by the IRS for years ending subsequent to December 31, 2006. Prior periods have either been examined or are no longer subject to examination. Examinations in several state jurisdictions are currently in progress for tax years 2004 to 2006. The Company’s significant foreign operations remain subject to examination for tax years 2002 through 2007, with examinations currently in progress for tax years 2003 through 2006.

14. Stock-based Compensation

     The Company recognized stock-based compensation expense, related tax benefits and the effect on net income from recognizing stock-based compensation for the three and six months ended June 30, 2008 and 2007 in the following amounts:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
$ in million except per share data		2008				2007				2008				2007
Stock-based compensation expense		$	10			$	8			$	16			$	15
Related tax benefits		$	3			$	3			$	6			$	5
Effect on net income		$	7			$	5			$	11			$	10
Per share — basic		$	0.06			$	0.05			$	0.10			$	0.10
Per share — diluted		$	0.06			$	0.05			$	0.10			$	0.10

     The total number of shares of common stock issuable upon the exercise of stock options and stock-settled appreciation rights granted during the six months ended June 30, 2008 and 2007 was 2,663,950 and 1,177,150 respectively, with weighted-average exercise prices of $49.11 and $50.27, respectively.

     For all of the Company’s stock-based compensation plans, the fair value of each grant was estimated at the date of grant using the Black-Scholes option-pricing model. Black-Scholes utilizes assumptions related to volatility, the risk-free interest rate, the dividend yield (which is assumed to be zero, as the Company has not paid any cash dividends) and option holder exercise behavior. Expected volatilities utilized in the model are based mainly on the historical volatility of the Company’s stock price and other factors. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect in the period of grant. The model incorporates exercise and post-vesting forfeiture assumptions based on an analysis of historical data. The average expected term is derived from historical and other factors. The stock-based compensation for the awards issued in the respective periods was determined using the following assumptions and calculated average fair values:

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
Average expected term (years)			4.0				4.0				4.0				4.0
Weighted average risk-free interest rate			2.46	%			5.00	%			1.89	%			4.55	%
Dividend yield			0	%			0	%			0	%			0	%
Volatility			24.73	%			26.55	%			23.18	%			26.86	%
Weighted average grant date fair value		$	10.43			$	15.56			$	10.54			$	14.40

     As of June 30, 2008, the aggregate intrinsic value of awards outstanding and exercisable was $48 million. In addition, the aggregate intrinsic value of awards exercised during the six months ended June 30, 2008 and 2007 was $7 million and $16 million, respectively. The total remaining unrecognized compensation cost related to unvested awards amounted to $53 million at June 30, 2008 and is expected to be recognized over the next three years unless accelerated due to a change in control. See Note 18. The weighted average remaining requisite service period of the unvested awards was 25 months.

15. Restructuring

     Management’s plans for the restructuring of the Company’s operations as a result of its acquisition of PLIVA are completed. As of June 30, 2008, certain elements of the restructuring plan have been recorded as a cost of the acquisition.

     Through June 30, 2008, the Company has recorded restructuring costs primarily associated with severance costs and the costs of vacating certain duplicative PLIVA facilities in the U.S. Certain of these costs were recognized as liabilities assumed in the acquisition. The components of the restructuring costs capitalized as a cost of the acquisition are as follows and are included in the generic pharmaceuticals segment:

		December 31,												June 30,
$ in millions		2007				Payments				Additions				2008
Involuntary termination of PLIVA employees		$	1			$	1			$	—			$	—
Lease termination costs			10				—				—				10
		$	11			$	1			$	—			$	10

     Lease termination costs represent costs incurred to exit duplicative activities of PLIVA. Severance includes accrued severance benefits and costs associated with change-in-control provisions of certain PLIVA employment contracts.

     In addition, in connection with its restructuring of PLIVA’s U.S. operations, the Company incurred $1 million of severance and retention bonus expense during the six months ended June 30, 2008 that was charged primarily to cost of sales. As of June 30, 2008, the Company has recorded an accrued liability of $5 million related to this severance and retention bonus.

16. Commitments and Contingencies

Indemnity Provisions

     From time-to-time, in the normal course of business, the Company agrees to indemnify its suppliers, customers, and employees concerning product liability and other matters. For certain product liability matters, the Company has incurred legal defense costs on behalf of certain of its customers under these agreements. No amounts have been recorded in the condensed consolidated financial statements for probable losses with respect to the Company’s obligations under such agreements.

     In September 2001, Barr filed an ANDA for the generic version of Sanofi-Aventis’ Allegra^® tablets. Sanofi-Aventis has filed a lawsuit against Barr claiming patent infringement. A trial date for the patent litigation has not been scheduled. In June 2005, the Company entered into an agreement with Teva Pharmaceuticals USA, Inc., which allowed Teva to manufacture and launch Teva’s generic version of Allegra during the Company’s 180-day exclusivity period, in exchange for Teva’s obligation to pay the Company a specified percentage of Teva’s operating profit, as defined, earned on sales of the product. The agreement between Barr and Teva also provides that each company will indemnify the other for a portion of any patent infringement damages they might incur, so that the parties will share any such damage liability in proportion to their respective share of Teva’s operating profit on generic Allegra.

     On September 1, 2005, Teva launched its generic version of Allegra. The Company, in accordance with FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Other, recorded a liability of $4 million to reflect the fair value of the indemnification obligation it has undertaken.

Litigation Settlement

     On October 22, 1999, the Company entered into a settlement agreement with Schein Pharmaceutical, Inc. (now part of Watson Pharmaceuticals, Inc.) relating to a 1992 agreement regarding the pursuit of a generic conjugated estrogens product. Under the terms of the settlement, Schein relinquished any claim to rights in Cenestin in exchange for a payment of $15 million made to Schein in 1999. An additional $15 million payment is required under the terms of the settlement if Cenestin achieves total profits, as defined, of greater than $100 million over any rolling five-year period prior to October 22, 2014. This payment was earned during the three months ending June 30, 2008, and as a result, the Company has recorded the $15 million liability as of June 30, 2008.

Litigation Matters

     The Company is involved in various legal proceedings incidental to its business, including product liability, intellectual property and other commercial litigation and antitrust actions. The Company records accruals for such contingencies to the extent that it concludes a loss is probable and the amount can be reasonably estimated. The Company also records accruals for litigation settlement offers made by the Company, whether or not the settlement offers have been accepted.

     Many claims involve highly complex issues relating to patent rights, causation, label warnings, scientific evidence, and other matters. Often these issues are subject to substantial uncertainties and therefore, the probability of loss and an estimate of the amount of the loss are difficult to determine. The Company’s assessments are based on estimates that it, in consultation with outside advisors, believe are reasonable. Although the Company believes it has substantial defenses in these matters, litigation is inherently unpredictable. Consequently, the Company could in the future incur judgments or enter into settlements that could have a material adverse effect on its results of operations, cash flows, or financial condition in a particular period.

     Fexofenadine Hydrochloride Suit

     In June 2001, the Company filed an ANDA seeking approval from the FDA to market fexofenadine hydrochloride tablets in 30 mg, 60 mg and 180 mg strengths, the generic equivalent of Sanofi-Aventis’ Allegra tablet products for allergy relief. The Company notified Sanofi-Aventis pursuant to the provisions of the Hatch-Waxman Act and, in September 2001, Sanofi-Aventis filed a patent infringement action in the U.S. District Court for the District of New Jersey — Newark Division, seeking to prevent the Company from marketing this product until after the expiration of various U.S. patents, the last of which is alleged to expire in 2017.

     After the filing of the Company’s ANDA, Sanofi-Aventis listed an additional patent on Allegra in the Orange Book. The Company filed appropriate amendments to its ANDAs to address the newly listed patent and, in November 2002, notified Merrell Pharmaceuticals, Inc., the patent holder, and Sanofi-Aventis pursuant to the provisions of the Hatch-Waxman Act. Sanofi-Aventis filed an amended complaint in November 2002 claiming that the Company’s ANDA infringes the newly listed patent.

     On March 5, 2004, Sanofi-Aventis and AMR Technology, Inc., the holder of certain patents licensed to Sanofi-Aventis, filed an additional patent infringement action in the U.S. District Court for the District of New Jersey — Newark Division, based on two patents that are not listed in the Orange Book.

     In June 2004, the court granted the Company summary judgment of non-infringement as to two patents. On March 31, 2005, the court granted the Company summary judgment of invalidity as to a third patent. Discovery is proceeding on the five remaining patents at issue in the case. No trial date has been scheduled.

     On August 31, 2005, the Company received final FDA approval for its fexofenadine tablet products. As referenced above, pursuant to the agreement between the Company and Teva, the Company selectively waived its 180 days of generic exclusivity in favor of Teva, and Teva launched its generic product on September 1, 2005.

     On September 21, 2005, Sanofi-Aventis filed a motion for a preliminary injunction or expedited trial. The motion asked the court to enjoin the Company and Teva from marketing their generic versions of Allegra tablets, 30 mg, 60 mg and 180 mg, or to expedite the trial in the case. The motion also asked the court to enjoin Ranbaxy Laboratories, Ltd. and Amino Chemicals, Ltd. from the commercial production of generic fexofenadine raw material. The preliminary injunction hearing concluded on November 3, 2005. On January 30, 2006, the court denied the motion by Sanofi-Aventis for a preliminary injunction or expedited trial. Sanofi-Aventis appealed the court’s denial of its motion to the United States Court of Appeals for the Federal Circuit. On November 8, 2006, the Federal Circuit affirmed the District Court’s denial of the motion for preliminary injunction.

     On May 8, 2006, Sanofi-Aventis and AMR Technology, Inc. served a Second Amended and Supplemental Complaint based on U.S. Patent Nos. 5,581,011 and 5,750,703 (collectively, “the API patents”), asserting claims against the Company for infringement of the API (active pharmaceutical ingredient) patents based on the sale of the Company’s fexofenadine product and for inducement of infringement of the API patents based on the sale of Teva’s fexofenadine product. On June 22, 2006, the Company answered the complaint, denied the allegations, and asserted counterclaims for declaratory judgment that the asserted patents are invalid and/or not infringed and for damages for violations of the Sherman Act, 15 U.S.C. §§ 1.2.

     On November 14, 2006, Sanofi-Aventis sued the Company and Teva in the U.S. District Court for the Eastern District of Texas, alleging that Teva’s fexofenadine hydrochloride tablets infringe a patent directed to a certain crystal form of fexofenadine hydrochloride, and that the Company induced Teva’s allegedly infringing sales. On November 21, 2006, Sanofi-Aventis filed an amended complaint in the same court, asserting that the Company’s fexofenadine hydrochloride tablets infringe a different patent directed to a different crystal form of fexofenadine hydrochloride. On January 12, 2007, the Company moved to dismiss the suit against Barr Pharmaceuticals, answered the complaint on behalf of Barr Laboratories, denied the allegations against it, and moved to transfer the action to the U.S. District Court for New Jersey. On September 27, 2007, the U.S. District Court for the Eastern District of Texas granted the Company’s motion to transfer the case to the U.S. District for New Jersey and denied Barr Pharmaceutical, Inc.’s motion to dismiss as moot.

     Sanofi-Aventis also has brought a patent infringement suit against Teva in Israel, seeking to have Teva enjoined from manufacturing generic versions of Allegra tablets and seeking damages.

     If the Company and/or Teva are unsuccessful in the Allegra litigation, the Company potentially could be liable for a portion of Sanofi-Aventis’ lost profits on the sale of Allegra, which could potentially exceed the Company’s profits earned from its arrangement with Teva on generic Allegra.

     Product Liability Matters

     Hormone Therapy Litigation

     The Company has been named as a defendant in approximately 6,000 personal injury product liability cases brought against the Company and other manufacturers by plaintiffs claiming that they suffered injuries resulting from the use of certain estrogen and progestin medications prescribed to treat the symptoms of menopause. The cases against the Company involve its Cenestin products and/or the use of the Company’s medroxyprogesterone acetate product, which typically has been prescribed for use in conjunction with Premarin or other hormone therapy products. All of these products remain approved by the FDA and continue to be marketed and sold to customers. While the Company has been named as a defendant in these cases, fewer than a third of the complaints actually allege the plaintiffs took a product manufactured by the Company, and the Company’s experience to date suggests that, even in these cases, a high percentage of the plaintiffs will be unable to demonstrate actual use of a Company product. For that reason, approximately 4,700 of such cases have been dismissed (leaving approximately 1,300 pending) and, based on discussions with the Company’s outside counsel, more are expected to be dismissed.

     The Company believes it has viable defenses to the allegations in the complaints and is defending the actions vigorously.

     Antitrust Matters

     Ciprofloxacin (Cipro^®) Antitrust Class Actions

     The Company has been named as a co-defendant with Bayer Corporation, The Rugby Group, Inc. and others in approximately 38 class action complaints filed in state and federal courts by direct and indirect purchasers of Ciprofloxacin (Cipro) from 1997 to the present. The complaints allege that the 1997 Bayer-Barr patent litigation settlement agreement was anti-competitive and violated federal antitrust laws and/or state antitrust and consumer protection laws. A prior investigation of this agreement by the Texas Attorney General’s Office on behalf of a group of state Attorneys General was closed without further action in December 2001.

     The lawsuits include nine consolidated in California state court, one in Kansas state court, one in Wisconsin state court, one in Florida state court, and two consolidated in New York state court, with the remainder of the actions pending in the U.S. District Court for the Eastern District of New York for coordinated or consolidated pre-trial proceedings (the “MDL Case”). On March 31, 2005, the Court in the MDL Case granted summary judgment in the Company’s favor and dismissed all of the federal actions before it. On June 7, 2005, plaintiffs filed notices of appeal to the U.S. Court of Appeals for the Second Circuit. On November 7, 2007, the Second Circuit transferred the appeal involving the indirect purchaser plaintiffs to the United States Court of Appeals for the Federal Circuit, while retaining jurisdiction over the appeals of the direct purchaser plaintiffs in the case. Briefing on the merits is now complete in the Federal Circuit, and oral argument took place on June 4, 2008. Merits briefing in the Second Circuit is complete, but oral argument has yet to be scheduled.

     On September 19, 2003, the Circuit Court for the County of Milwaukee dismissed the Wisconsin state class action for failure to state a claim for relief under Wisconsin law. The Court of Appeals reinstated the complaint on May 9, 2006 and the Wisconsin Supreme Court affirmed that decision on July 13, 2007, while not addressing the underlying merits of the plaintiffs’ case. The matter was returned to the trial court for further proceedings, and the trial court has stayed the case. A status hearing is scheduled for October 31, 2008.

     On October 17, 2003, the Supreme Court of the State of New York for New York County dismissed the consolidated New York state class action for failure to state a claim upon which relief could be granted and denied the plaintiffs’ motion for class certification. An intermediate appellate court affirmed that decision, and plaintiffs have sought leave to appeal to the New York Court of Appeals.

     On April 13, 2005, the Superior Court of San Diego, California ordered a stay of the California state class actions until after the resolution of any appeal in the MDL Case. Plaintiffs have moved to lift the stay. The court has kept the stay in place at this time, but with a further status hearing scheduled for December 12, 2008.

     On April 22, 2005, the District Court of Johnson County, Kansas similarly stayed the action before it, until after any appeal in the MDL Case, although a status hearing is currently scheduled for November 19, 2008.

     The Florida state class action remains at a very early stage, with no status hearings, dispositive motions, pre-trial schedules, or a trial date set as of yet.

     The Company believes that its agreement with Bayer Corporation reflects a valid settlement to a patent suit and cannot form the basis of an antitrust claim. Based on this belief, the Company is vigorously defending itself in these matters.

     Ovcon Antitrust Proceedings

     The Company has entered into settlements with the FTC, the State Attorneys General (as described below) and the class representatives of the indirect purchasers. Only the claims of the direct purchasers remain active in the litigation.

     Under the FTC settlement, the FTC agreed to dismiss its case against the Company, and the Company agreed to refrain from entering into exclusive supply agreements in certain non-patent challenge situations where the Company is an ANDA holder and the party being supplied is the NDA holder. The settlement was entered and the FTC’s lawsuit against the Company was dismissed with prejudice on November 27, 2007.

     Under the State Attorneys General settlement, the states agreed to dismiss their claims against the Company in exchange for a cash payment of $6 million and commitments by the Company not to engage in certain future conduct similar to the commitments contained in the FTC settlement. The State Attorneys General settlement was finalized on February 25, 2008.

     In the actions brought on behalf of the indirect purchasers, the Company reached court-approved settlements with the class representatives of the certified class of indirect purchasers on behalf of the class. The settlements require the Company to pay $2 million to funds established by plaintiffs’ counsel and to donate branded drug products to, among others, charitable organizations and university health centers.

     In the actions brought on behalf of the direct purchasers, on October 22, 2007, the U.S. District Court for the District of Columbia granted plaintiffs’ motion to certify a class on behalf of all entities that purchased Ovcon-35 directly from Warner Chilcott (or its affiliated companies) from April 22, 2004. In November 2007, the Company and the direct purchasers filed cross motions for summary judgment. No ruling has been made on the motions and no trial date has been set.

     Through June 30, 2008, the Company recorded charges in the amount of $16 million related to these settlements and other settlement offers in the Ovcon litigation.

     Provigil Antitrust Proceedings

     To date, the Company has been named as a co-defendant with Cephalon, Inc., Mylan Laboratories, Inc., Teva Pharmaceutical Industries, Ltd., Teva Pharmaceuticals USA, Inc., Ranbaxy Laboratories, Ltd., and Ranbaxy Pharmaceuticals, Inc. (the “Provigil Defendants”) in ten separate complaints filed in the U.S. District Court for the Eastern District of Pennsylvania. These actions allege, among other things, that the agreements between Cephalon and the other individual Provigil Defendants to settle patent litigation relating to Provigil^® constitute an unfair method of competition, are anticompetitive, and restrain trade in the market for Provigil and its generic equivalents in violation of the antitrust laws. These cases remain at a very early stage and no trial dates have been set.

     The Company was also named as a co-defendant with the Provigil Defendants in an action filed in the U.S. District Court for the Eastern District of Pennsylvania by Apotex, Inc. The lawsuit alleges, among other things, that Apotex sought to market its own generic version of Provigil and that the settlement agreements entered into between

Cephalon and the other individual Provigil Defendants constituted an unfair method of competition, are anticompetitive, and restrain trade in the market for Provigil and its generic equivalents in violation of the antitrust laws. The Provigil Defendants have filed motions to dismiss, and briefing has taken place with respect to these motions.

     The Company believes that it has not engaged in any improper conduct and is vigorously defending these matters.

     Medicaid Reimbursement Cases

     The Company, along with numerous other pharmaceutical companies, has been named as a defendant in separate actions brought by the states of Alabama, Alaska, Hawaii, Idaho, Illinois, Iowa, Kentucky, Mississippi, South Carolina, Texas and Utah, the City of New York, numerous counties in New York, and Ven-A-Care of the Florida Keys, Inc. (suing as a qui tam relator on behalf of the federal Medicaid program). In each of these matters, the plaintiffs seek to recover damages and other relief for alleged overcharges for prescription medications paid for or reimbursed by their respective Medicaid programs, with some states also pursuing similar allegations based on the reimbursement of drugs under Medicare Part B or the purchase of drugs by a state health plan (for example, South Carolina).

     The Iowa, Ven-A-Care, and New York cases, with the exception of the actions filed by Erie, Oswego, and Schenectady Counties in New York, are currently pending in the U.S. District Court for the District of Massachusetts. In the Iowa case, the defendants’ motions to dismiss are currently under advisement. The Ven-A-Care complaint was only recently served, with no discovery deadlines or trial dates at this stage. In the consolidated New York cases, discovery is underway, but no trial dates have been set. The Erie, Oswego, and Schenectady County cases were filed in state courts in New York, with discovery underway in the Erie County action but again with no trial dates set.

     The Alabama, Illinois, and Kentucky cases were filed in state courts, removed to federal court, and then remanded back to their respective state courts. On April 11, 2008, the Illinois trial court dismissed all allegations against generic-drug-manufacturer defendants including the Company, but with leave for the State to replead. Briefing on the generic-drug-manufacturer defendants’ motion to dismiss the State’s Second Amended Complaint is underway. Discovery is underway in the Alabama and Kentucky actions. The Alabama trial court has completed the trials of three different defendants, but the sequencing of remaining defendants is not yet known. The Kentucky trial court has scheduled the trials of three other defendants to take place next year, with the first one starting on May 19, 2009, but has not yet determined the trial schedule thereafter.

     The State of Mississippi case was filed in Mississippi state court on October 25, 2005. Discovery was underway, but that case, along with the Illinois case and the actions brought by Erie, Oswego, and Schenectady Counties in New York, were removed to federal court on the motion of a co-defendant. Remand motions were granted on September 17, 2007, and thus the cases have returned to their respective state courts of origin, with discovery underway but again with no trial dates set.

     The State of Hawaii case was filed in state court in Hawaii on April 27, 2007, removed to the United States District Court for the District of Hawaii, and remanded to state court. Discovery is underway. No trial date has been set.

     The State of Alaska case was filed in state court in Alaska on October 6, 2006. Discovery is underway. No trial date has been set.

     The State of South Carolina cases consist of two complaints, one brought on behalf of the South Carolina Medicaid Agency and the other brought on behalf of the South Carolina State Health Plan. Both cases were filed in state court in South Carolina on January 16, 2007. The defendants’ motions to dismiss are currently under advisement. No trial date has been set.

     The State of Idaho case was filed in state court in Idaho on January 26, 2007. Discovery is underway. No trial date has been set. The State of Utah case was filed in state court in Utah on September 21, 2007. The case was removed to federal court and then transferred to the U.S. District Court for the District of Massachusetts, but is

being remanded to state court in Utah. No trial date has been set. The Texas case was served in late July 2008 and is at an early stage, with no trial date set.

     The Company believes that it has not engaged in any improper conduct and is vigorously defending these matters.

     Breach of Contract Action

     On October 6, 2005, plaintiffs Agvar Chemicals Inc., Ranbaxy Laboratories, Inc., and Ranbaxy Pharmaceuticals, Inc. filed suit against the Company and Teva Pharmaceuticals USA, Inc. in the Superior Court of New Jersey. In their complaint, plaintiffs seek to recover damages and other relief, based on an alleged breach of an alleged contract requiring the Company to purchase raw material for its generic Allegra product from Ranbaxy, prohibiting the Company from launching its generic Allegra product without Ranbaxy’s consent and prohibiting the Company from entering into an agreement authorizing Teva to launch Teva’s generic Allegra product. In an amended complaint, plaintiffs further asserted claims for fraud and negligent misrepresentation. The court has entered a scheduling order providing for the completion of discovery by December 8, 2008, but has not yet set a date for trial. The Company believes there was no such contract, fraud or negligent misrepresentation and is vigorously defending this matter.

     Other Litigation

     As of June 30, 2008, the Company was involved with other lawsuits incidental to its business, including patent infringement actions, product liability, and personal injury claims. Management, based on the advice of legal counsel, believes that the ultimate outcome of these other matters will not have a material adverse effect on the Company’s condensed consolidated financial statements.

     Government Inquiries

     On October 3, 2006, the FTC notified the Company it was investigating a patent litigation settlement reached in matters pending in the U.S. District Court for the Southern District of New York between Barr and Shire PLC concerning Shire’s Adderall XR product. On June 20, 2007, the Company received a Civil Investigative Demand, seeking documents and data. The Company is complying with this Civil Investigative Demand and is cooperating with the agency in its investigation.

     Commitments

     On January 15, 2008, the Company made a commitment to invest up to $30 million in a new venture fund, NewSpring Health Capital II L.P. Investments made will also be accounted for under the equity method. Payments related to this commitment are payable when capital calls are made. The Company made capital call payments in January 2008 in the amount of $1 million and June 2008 in the amount of $3 million.

 

17. Segment Reporting

     The Company operates in two reportable business segments: generic pharmaceuticals and proprietary pharmaceuticals. The Company evaluates the performance of its operating segments based on net revenues and gross profit. The Company does not report depreciation expense, total assets or capital expenditures by segment as such information is neither used by management nor accounted for at the segment level. Net product sales and gross profit information for the Company’s operating segments consisted of the following:

Three Months Ended
June 30, 2008																														% of
$ in millions		Generic				%				Proprietary				%				Other (1)				%				Consolidated				revenue
Revenues:
Product sales		$	557				72	%		$	118				15	%		$	—				—	%		$	675				87	%
Alliance and development revenue			—				—	%			—				—	%			93				12	%			93				12	%
Other revenue			—				—	%			—				—	%			11				1	%			11				1	%
Total revenues		$	557				72	%		$	118				15	%		$	104				13	%		$	779				100	%
						Margin								Margin								Margin								Margin
						%								%								%								%
Gross Profit:
Product sales		$	250				45	%			$81				69	%		$	—				—	%		$	331				49	%
Alliance and development revenue			—				—	%			—				—	%			93				100	%			93				100	%
Other revenue			—				—	%			—				—	%			2				12	%			2				12	%
Total gross profit		$	250				45	%			$81				69	%			$95				91	%		$	426				55	%
Three Months Ended
June 30, 2007																														% of
$ in millions		Generic				%				Proprietary				%				Other (1)				%				Consolidated				revenue
Revenues: (2)
Product sales		$	484				76	%		$	102				16	%		$	—				—	%		$	586				92	%
Alliance and development revenue			—				—	%			—				—	%			36				6	%			36				6	%
Other revenue			—				—	%			—				—	%			12				2	%			12				2	%
Total revenues		$	484				76	%		$	102				16	%			$48				8	%		$	634				100	%
						Margin								Margin								Margin								Margin
						%								%								%								%
Gross Profit: (2)
Product sales		$	238				49	%			$79				78	%		$	—				—	%		$	317				54	%
Alliance and development revenue			—				—	%			—				—	%			36				100	%			36				100	%
Other revenue			—				—	%			—				—	%			6				53	%			6				53	%
Total gross profit		$	238				49	%			$79				78	%			$42				89	%		$	359				57	%