UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For quarterly period ended March 31, 2002 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-9860
------
BARR LABORATORIES, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
NEW YORK 22-1927534
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. - Employer
Incorporation or Organization) Identification No.)
TWO QUAKER ROAD, P. O. BOX 2900, POMONA, NEW YORK 10970-0519
------------------------------------------------------------
(Address of principal executive offices)
845-362-1100
------------------------------
(Registrant's telephone number)
(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 [X] No [ ]
Number of shares of common stock, par value $.01, outstanding as of March 31,
2002: 43,512,476
1
BARR LABORATORIES, INC.
INDEX PAGE
----- ----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 2002 and June 30, 2001 3
Consolidated Statements of Earnings
for the three and nine months ended
March 31, 2002 and 2001 4
Consolidated Statements of Cash Flows
for the nine months ended
March 31, 2002 and 2001 5
Notes to Consolidated Financial
Statements 6-15
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 16-25
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 27
2
BARR LABORATORIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
MARCH 31, JUNE 30,
2002 2001
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $481,006 $222,343
Accounts receivable, less allowances of
$35,575 and $9,424, respectively 42,092 85,811
Other receivables 31,798 24,732
Inventories 138,787 142,308
Deferred income taxes 5,691 6,248
Prepaid expenses and other assets 5,868 6,282
-------- --------
Total current assets 705,242 487,724
Property, plant and equipment, net of accumulated
depreciation of $86,763 and $80,546, respectively 157,347 131,075
Deferred income taxes 40,900 41,223
Other assets 18,951 6,494
-------- --------
Total assets $922,440 $666,516
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $126,669 $123,774
Accrued liabilities (including accrued
liabilities to a related party of $40,730
and $954, respectively) 99,478 31,743
Current portion of long-term debt 5,027 7,929
Current portion of capital leases 1,650 1,003
Income taxes payable 24,459 10,174
-------- --------
Total current liabilities 257,283 174,623
Long-term debt 38,057 63,539
Long-term capital leases 5,527 2,024
Other liabilities 1,900 1,376
Redeemable convertible stock -- 8,177
Commitments & Contingencies
Shareholders' equity:
Preferred stock $1 par value per share;
authorized 2,000,000; none issued
Common stock $.01 par value per share;
authorized 100,000,000; issued 43,699,408
and 42,333,524, respectively 437 424
Additional paid-in capital 273,100 239,264
Additional paid-in capital - warrants 16,418 16,418
Retained earnings 330,199 160,347
Accumulated other comprehensive income 227 337
-------- --------
620,381 416,790
Treasury stock, shares at cost: 186,932
and 176,932, respectively (708) (13)
-------- --------
Total shareholders' equity 619,673 416,777
-------- --------
Total liabilities and shareholders' equity $922,440 $666,516
======== ========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
3
BARR LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues:
Product sales $255,916 $156,512 $963,164 $415,209
Development and other revenue 5,495 3,269 16,440 13,288
-------- -------- -------- --------
Total revenues 261,411 159,781 979,604 428,497
Costs and expenses:
Cost of sales 139,142 106,815 570,040 286,245
Selling, general and administrative 26,271 18,898 83,815 54,747
Research and development 18,715 15,290 53,608 43,614
Merger-related costs 2,356 -- 33,295 --
-------- -------- -------- --------
Earnings from operations 74,927 18,778 238,846 43,891
Proceeds from patent challenge settlement 7,937 7,000 23,812 21,000
Interest income 1,953 2,521 5,936 7,289
Interest expense 684 1,735 2,925 5,559
Other income 8 2,045 2,019 3,819
-------- -------- -------- --------
Earnings before income taxes and extraordinary loss 84,141 28,609 267,688 70,440
Income tax expense 31,034 10,507 100,175 27,346
-------- -------- -------- --------
Earnings before extraordinary loss 53,107 18,102 167,513 43,094
Extraordinary loss on early extinguishment of debt,
net of taxes of $87 -- -- 160 --
-------- -------- -------- --------
Net earnings 53,107 18,102 167,353 43,094
Preferred stock dividends -- 128 457 214
Deemed dividend on convertible preferred stock -- -- 1,493 --
-------- -------- -------- --------
Net earnings applicable to common shareholders $ 53,107 $ 17,974 $165,403 $ 42,880
======== ======== ======== ========
Earnings per common share - basic
Earnings before extraordinary loss $ 1.22 $ 0.43 $ 3.90 $ 1.03
======== ======== ======== ========
Net earnings $ 1.22 $ 0.43 $ 3.85 $ 1.02
======== ======== ======== ========
Earnings per common share - assuming dilution
Earnings before extraordinary loss $ 1.17 $ 0.41 $ 3.69 $ 0.97
======== ======== ======== ========
Net earnings $ 1.17 $ 0.40 $ 3.65 $ 0.97
======== ======== ======== ========
Weighted average shares 43,363 42,086 42,969 41,923
======== ======== ======== ========
Weighted average shares - assuming dilution 45,565 44,604 45,372 44,379
======== ======== ======== ========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
4
BARR LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2002 AND 2001
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 167,353 $ 43,094
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 11,271 10,694
Deferred income tax benefit (1,790) (264)
Write-off of deferred financing fees associated
with early extinguishment of debt 247 --
Tax benefit of stock incentive plans 5,256 --
Gain on sale of marketable securities -- (6,671)
Write-off of investment -- 2,750
Other 200 379
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable and other receivables, net 46,280 (957)
Inventories 4,042 (26,858)
Prepaid expenses and other current assets 1,037 299
Other assets (3,414) (410)
Increase (decrease) in:
Accounts payable, accrued liabilities and
other liabilities 68,231 7,045
Income taxes payable 14,183 15,035
--------- ---------
Net cash provided by operating activities 312,896 44,136
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (32,598) (11,606)
Proceeds from sale of property, plant and equipment 395 27
Purchases of marketable securities, net (10,000) 10,839
--------- ---------
Net cash used in investing activities (42,203) (740)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and
capital leases (9,848) (15,155)
Payments on revolving line of credit, net (20,316) (1,846)
Long-term borrowings -- 30,712
Earnings from DuPont agreements applied to
warrant receivable -- 1,835
Purchases of treasury stock (695) --
Proceeds from exercise of stock options and
employee stock purchases 18,890 8,871
Other (61) (129)
--------- ---------
Net cash (used in) provided by financing
activities (12,030) 24,288
--------- ---------
Increase in cash and cash equivalents 258,663 67,684
Cash and cash equivalents at beginning of period 222,343 155,926
--------- ---------
Cash and cash equivalents at end of period $ 481,006 $ 223,610
========= =========
SUPPLEMENTAL CASH FLOW DATA:
Cash paid during the period:
Interest, net of portion capitalized $ 2,457 $ 4,426
========= =========
Income taxes $ 81,446 $ 13,044
========= =========
Non-cash transactions:
Equipment under capital lease $ 5,318 $ 612
========= =========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
5
BARR LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Barr
Laboratories, Inc. and its wholly-owned subsidiaries (the "Company" or
"Barr"). The Company when used in the context of "the Company and Duramed"
refers to pre-merger Barr.
In the opinion of the Management of the Company, the interim consolidated
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods.
Interim results are not necessarily indicative of the results that may be
expected for a full year. These financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K for the year
ended June 30, 2001 and quarterly reports on Form 10-Q for the periods
ended September 30, 2001 and December 31, 2001.
Certain amounts in the prior year's financial statements have been
reclassified to conform with the current year presentation.
2. BUSINESS COMBINATION
On June 29, 2001, the Company announced the signing of a definitive
agreement of merger with Duramed Pharmaceuticals, Inc. ("Duramed"), a
developer, manufacturer, and marketer of prescription drug products
focusing on women's health and the hormone replacement therapy markets. On
October 23, 2001 and October 24, 2001, the merger was approved by the
shareholders of Duramed and Barr, respectively. The merger was treated as a
tax-free reorganization and was accounted for as a pooling-of-interests for
financial reporting purposes.
Under the terms of the merger agreement, Duramed common shareholders
received a fixed exchange ratio of 0.2562 shares of Barr common stock for
each share of Duramed common stock. Based on these terms, Barr issued
approximately 7.5 million shares of its common stock for all the
outstanding common stock of Duramed and exchanged all options and warrants
to purchase Duramed stock for options and warrants to purchase
approximately 1.2 million shares of the Company's common stock.
All financial data of the Company presented in these financial statements
has been restated to include the historical financial data of Duramed in
accordance with generally accepted accounting principles and pursuant to
Regulation S-X of the Securities and Exchange Commission.
The Company and Duramed had different year-ends. Duramed had a calendar
year end, whereas the Company's fiscal year ends on June 30th. For the
current period, financial information as of and for the three and nine
months ended March 31, 2002, includes such periods for both companies.
However, for the prior year periods presented, the consolidated statements
of earnings for Barr's three and nine months ended March 31, 2001 were
combined with Duramed's three and nine months ended September 30, 2000.
Barr's balance sheet as of June 30, 2001 was combined with Duramed's
balance sheet as of December 31, 2000. Barr's statement of cash flows for
the nine months ended March 31, 2001 was combined with Duramed's nine
months ended September 30, 2000.
6
The Company and Duramed had certain differences in the classification of
expenses in their historical statements of operations and certain
differences in the classification of assets and liabilities in their
historical balance sheets. Reclassifications have been made to conform the
combined companies' income statement and balance sheet classifications. In
addition, the historical Duramed balance sheets included approximately $50
million in deferred tax assets, which had been fully offset by a valuation
allowance. On a combined basis with Barr, Barr expects to utilize a
majority of these deferred tax assets. Therefore, in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes", the Company has restated Duramed's historical balance
sheets to include the deferred tax asset that is more likely than not
expected to be utilized.
The results of operations of the previously separate companies for the
period prior to the consummation of the merger, that are included in the
year to date current and prior year combined net income are summarized
below. The adjustments to net income and shareholders' equity below arise
from the income tax adjustment discussed above.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 MARCH 31, 2001
------------------ -----------------
Net revenues:
Barr $ 315,329 $ 368,791
Duramed 36,774 59,706
Adjustment -- --
--------- ---------
Combined 352,103 428,497
Net income/(loss):
Barr $ 67,060 $ 44,037
Duramed 2,892 (1,378)
Adjustment 253 221
--------- ---------
Combined 70,205 42,880
SEPTEMBER 30, 2001 JUNE 30, 2001
------------------ -------------
Shareholders' equity:
Barr $435,427 $365,642
Duramed 29,035 6,380
Adjustment 42,258 44,755
-------- --------
Combined 506,720 416,777
3. CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid investments,
including market auction securities with interest rates that are re-set in
intervals of 7 to 90 days, which are readily convertible into cash at par
value, which approximates cost.
As of March 31, 2002 and June 30, 2001, approximately $105,514 and $96,820,
respectively, of the Company's cash was held in an interest bearing escrow
account. Such amounts represent the portion of the Company's payable
balance with AstraZeneca Pharmaceuticals LP ("AstraZeneca"), which the
Company has decided to secure in connection with its cash management
policy. The Company pays
7
AstraZeneca a monthly fee based on a rate multiplied by the average
unsecured monthly Tamoxifen payable balance.
4. OTHER RECEIVABLES
Other receivables consist primarily of patent challenge settlement
receivables and receivables related to development and other revenue (See
Note 8).
5. INVENTORIES
Inventories consisted of the following:
MARCH 31, 2002 JUNE 30, 2001
-------------- -------------
Raw materials and supplies $ 40,477 $ 36,894
Work-in-process 14,721 6,173
Finished goods 83,589 99,241
-------- --------
$138,787 $142,308
======== ========
Tamoxifen Citrate, purchased as a finished product, accounted for
approximately $58,652 and $66,890 of finished goods inventory as of March
31, 2002 and June 30, 2001, respectively.
6. RELATED PARTIES
The Company's related party transactions are with affiliated companies of
Dr. Bernard C. Sherman, who directly or indirectly owns approximately 25%
of Barr's common stock. Included in accrued liabilities as of March 31,
2002 is $40,210 payable to one such company arising from the Company's
Fluoxetine profit-split agreement. Included in cost of sales for the three
and nine months ended March 31, 2002 is approximately $25,025 and $175,246
also related to the Fluoxetine profit-split agreement. The Company also
purchases bulk pharmaceutical products from another company related to Dr.
Sherman. As of March 31, 2002, the Company had $520 in payables outstanding
to this company.
Barr also sells certain of its pharmaceutical products and bulk
pharmaceutical materials to two other companies owned by Dr. Sherman. As of
March 31, 2002, the Company's accounts receivable included $882 due from
such companies.
7. OTHER ASSETS
Other assets includes $10,000 in market auction preferred securities that
were purchased in January 2002. They have an average maturity of less than
two years.
8. DEVELOPMENT AND OTHER REVENUE
Development and other revenue consists primarily of amounts received from
DuPont Pharmaceuticals Company ("DuPont"), which has since been acquired by
Bristol-Myers Squibb
8
Company ("BMS"), for various development and co-marketing agreements
entered into in March 2000. As the Company incurs research and other
development activity costs, Barr records such expenses as research and
development and invoices and records the related revenue from DuPont as
development and other revenue (See also Note 17).
Development and other revenue also includes royalty income earned under
licensing agreements with other parties.
9. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators used
to calculate earnings per common share ("EPS") on the Consolidated
Statements of Earnings:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
(Share amounts in thousands)
Earnings before extraordinary loss $ 53,107 $ 18,102 $167,513 $ 43,094
Dividends on preferred stock -- 128 457 214
Deemed dividend on convertible preferred stock -- -- 1,493 --
-------- -------- -------- --------
Numerator for basic and diluted earnings per share-
earnings before extraordinary loss available for
common stockholders $ 53,107 $ 17,974 $165,563 $ 42,880
======== ======== ======== ========
EARNINGS PER COMMON SHARE - BASIC:
Weighted average shares (denominator) 43,363 42,086 42,969 41,923
Earnings before extraordinary loss available for
common stockholders $ 1.22 $ 0.43 $ 3.85 $ 1.02
======== ======== ======== ========
EARNINGS PER COMMON SHARE - ASSUMING DILUTION:
Weighted average shares 43,363 42,086 42,969 41,923
Effect of dilutive options 2,202 2,518 2,403 2,456
-------- -------- -------- --------
Weighted average shares - assuming
dilution (denominator) 45,565 44,604 45,372 44,379
Net earnings $ 1.17 $ 0.40 $ 3.65 $ 0.97
======== ======== ======== ========
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Not included in the calculation of diluted
earnings per share because their impact
is antidilutive:
Stock options outstanding 679 412 679 1,080
Warrants -- 139 -- 471
Preferred if converted -- 506 1,013 506
9
10. OTHER INCOME
In December 2001, the Company settled a patent infringement case with a
third party. Under the terms of the settlement, the Company acknowledged
the validity of the third party's patent and agreed to refrain from selling
the product after March 31, 2002. In consideration of the settlement, the
patent holder agreed to pay Barr $2,000 in two installments. The first
payment was made December 2001 and the second is due August 2002.
The prior year included a gain of $2,370 and $6,659 for the three and nine
months ended March 31, 2001, respectively, on the sale of the Company's
investment in Galen Holdings PLC. Partially offsetting these gains in the
prior year was a write-off of approximately $2,500 in the quarter ended
September 30, 2000 related to its investment in Gynetics, Inc.
11. 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 comprises net income and the net changes in
unrealized gains and losses on securities classified for SFAS No. 115
purposes as "available for sale". Total comprehensive income for the three
months ended March 31, 2002 and 2001 was $53,088 and $13,940, respectively,
and for the nine months ended March 31, 2002 and 2001 was $167,243 and
$38,474, respectively.
12. NEW ACCOUNTING PRONOUNCEMENTS
Business Combinations/Goodwill and Other Intangible Assets
----------------------------------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," and No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 supercedes APB opinion No. 16, "Business
Combinations" and amends or supercedes a number of related interpretations
of APB 16. SFAS No. 141 eliminates the pooling-of-interests method of
accounting for business combinations, and changes the criteria to recognize
intangible assets apart from goodwill. SFAS No. 142 supercedes APB opinion
No. 17, "Intangible Assets." Under SFAS No. 142, goodwill and indefinite
lived intangible assets are no longer amortized but are reviewed annually,
or more frequently if impairment indicators arise, for impairment. The
Company has adopted the provisions of SFAS No. 141. The provisions of SFAS
No. 142 are effective for fiscal years beginning after December 15, 2001.
The Company will adopt SFAS No. 142 beginning in the first fiscal quarter
of fiscal 2003. The Company does not believe that the adoption of SFAS No.
142 will have a material impact on its results of operations or financial
position.
Accounting for Asset Retirement Obligations
-------------------------------------------
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long
lived assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and/or the normal operation
of a long-lived asset, except for certain obligations of lessees. The
standard requires entities to record the fair value of a liability for an
asset retirement obligation in the period incurred with a corresponding
increase in the carrying amount of the related long-lived asset. Over time,
the liability is accreted to its present value each period, and
10
the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon
settlement. This statement is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The Company is currently
assessing the potential impact of the adoption of the provisions of SFAS
No. 143 on its consolidated financial statements.
Accounting for the Impairment or Disposal of Long-Lived Assets
--------------------------------------------------------------
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement addresses
financial accounting and reporting for the impairment of long-lived assets.
This statement supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". This statement also amends ARB No. 51, "Consolidated
Financial Statements", to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. This statement
requires that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired.
This statement also broadens the presentation of discontinued operations to
include more disposal transactions. This statement is effective for
financial statements issued for fiscal years beginning after June 15, 2002.
The Company is currently assessing the potential impact of the adoption of
the provisions of SFAS No. 144 on its consolidated financial statements.
13. MERGER-RELATED COSTS
As a result of the acquisition of Duramed discussed in Note 2, the Company
incurred net pre-tax merger-related expenses for the three and nine months
ended March 31, 2002 of approximately $2 and $33 million, respectively,
nearly all of which is included in the consolidated statements of earnings
as merger-related costs. Such expenses include approximately $13 million in
direct transaction costs such as investment banking, legal and accounting
costs, as well as, approximately $7 million in costs associated with
facility and product rationalization and $13 million in severance costs.
Portions of these expenses are not tax deductible. The severance costs
include approximately $10 million intended to satisfy the change in control
payments under certain previously existing employment contracts along with
the expected cost associated with terminating approximately 120 former
Duramed employees primarily representing general and administrative
functions. As of March 31, 2002, all of the direct transaction costs and
approximately $2.6 million in involuntary termination benefits, for
approximately 84 people, have been paid and charged against the liability
leaving a remaining liability balance of approximately $15 million. It is
expected that substantially all of these merger-related expenses will be
paid out of existing cash balances within the next twelve months.
14. COMMON STOCK REPURCHASE
On September 17, 2001, the Securities and Exchange Commission ("SEC")
issued an Emergency Order permitting companies to initiate common stock
repurchase programs without impacting pooling-of-interests accounting. As a
result, the Company's board of directors authorized the Company to spend up
to $100,000 for such a common stock repurchase program. Such authorization
was limited to the time periods established by the SEC. On October 12,
2001, the SEC's order
11
expired and the Company's repurchase program ended. During the period the
Company repurchased 10,000 shares of its common stock at a total cost of
approximately $695.
15. BUSINESS DEVELOPMENT VENTURES
Enhance Pharmaceuticals
-----------------------
On March 21, 2002, the Company signed an agreement for the acquisition of
certain assets and liabilities of Enhance Pharmaceuticals, Inc. ("Enhance")
of Princeton, New Jersey, for $44 million in cash. Enhance, a privately
held company, has developed a proprietary, novel, vaginal ring delivery
system to address a variety of female health issues and unmet medical
needs. The acquisition is contingent upon the satisfaction of certain
conditions but the Company believes that the transaction could close as
early as the quarter ending June 30, 2002.
Natural Biologics
-----------------
On March 6, 2002, Barr signed a series of agreements with Natural
Biologics, LLC ("Natural Biologics") to develop an "AB" rated conjugated
estrogens product based on Natural Biologics' equine-based raw material.
Under the terms of the agreement, Barr will provide financing to Natural
Biologics of up to $35 million over a three-year period and up to an
additional $35 million in milestone payments up to and including approval
of a generic product. Barr will also provide the pharmaceutical,
regulatory, manufacturing and sales and marketing expertise necessary to
commercialize a generic conjugated estrogens product. Barr has the right to
withdraw from the agreements if certain milestones are not met. As of March
31, 2002, Barr had provided $3,500 of financing which is included in other
assets as a loan receivable.
16. COMMITMENTS AND CONTINGENCIES
Class Action Lawsuits
---------------------
As of May 8, 2002, 38 class action complaints have been filed by direct
and/or indirect purchasers of Ciprofloxacin (Cipro(R)) from 1997 to present
against the Company, Bayer Corporation, The Rugby Group, Inc. and others.
The complaints allege that the 1997 Bayer-Barr patent litigation settlement
agreement was in violation of federal antitrust laws and/or state antitrust
and consumer protection laws on the grounds that the agreement was
allegedly anti-competitive.
As of May 8, 2002, 33 consumer or third party payor class action complaints
have been filed against Zeneca, Inc., AstraZeneca Pharmaceuticals LP and
the Company. The complaints allege, among other things, that the 1993
settlement of patent litigation between Zeneca, Inc. and the Company
violates the antitrust laws, insulates Zeneca, Inc. and the Company from
generic competition and enables Zeneca, Inc. and Barr to charge
artificially inflated prices for Tamoxifen citrate.
The Company believes that each of its agreements with Bayer Corporation and
Zeneca, Inc., respectively, is a valid settlement to a patent suit and
cannot form the basis of an antitrust claim. Although it is not possible to
forecast the outcome of these matters, the Company intends to vigorously
defend itself. It is anticipated that these matters may take several years
to be resolved but an adverse judgment could have a material adverse impact
on the Company's consolidated financial statements.
12
Invamed, Inc./Apothecon, Inc. Lawsuit
-------------------------------------
In February 1998 and May 1999, Invamed, Inc. and Apothecon, Inc.,
respectively, both of which have since been acquired by Geneva
Pharmaceuticals, Inc., which is a subsidiary of Novartis AG, named the
Company and several others as defendants in lawsuits filed in the United
States District Court for the Southern District of New York, charging that
the Company unlawfully blocked access to the raw material source for
Warfarin Sodium. The two actions have been consolidated. On May 10, 2002,
the District Court granted summary judgement in the Company's favor on all
antitrust claims in the case, but found that the plaintiffs could proceed
to trial on their allegations that the Company interfered with an alleged
raw material supply contract between Invamed and Barr's raw material
supplier. The Company believes that these suits are without merit and
intends to vigorously defend its position, but an adverse judgment could
have a material impact on the Company's consolidated financial statements.
These actions have gone through the discovery stage and a motion for
summary judgment is pending. If this motion is denied this matter may take
several years to be resolved.
Fluoxetine Hydrochloride Suits
------------------------------
On August 1, October 31 and November 6, 2001, aaiPharma Inc. ("AAI") filed
lawsuits in the United States District Court for the Eastern District of
North Carolina against Barr and others claiming that the generic versions
of Prozac manufactured by those companies infringe AAI's patents. If Barr
is found to infringe the AAI patents, Barr may be liable to AAI for damages
that may reduce Barr's profits from its generic Prozac product. The Company
believes that the suits filed against it by AAI are without merit and
intends to vigorously defend its position. It is anticipated that these
matters may take several years to be resolved but an adverse judgment could
have a material adverse impact on the Company's consolidated financial
statements.
Desogestrel/Ethinyl Estradiol Suit
----------------------------------
In May 2000, the Company filed an Abbreviated New Drug Application ("ANDA")
seeking approval from the FDA to market the tablet combination of
desogestrel/ethinyl estradiol tablets and ethinyl estradiol tablets, the
generic equivalent of Bio-Technology General Corp.'s ("BTG") Mircette(R)
oral contraceptive regimen. The Company notified BTG pursuant to the
provisions of the Hatch-Waxman Act and BTG filed a patent infringement
action in the United States District Court for the District of New Jersey -
Trenton Division seeking to prevent Barr from marketing the tablet
combination. On December 17, 2001, the United States District Court for the
District of New Jersey - Trenton Division granted summary judgement,
finding that Barr's product did not infringe the patent at issue in the
case. Subsequently, the patent holder filed an appeal of the lower court's
ruling. On April 8, 2002, the FDA granted final approval for Barr's
application and Barr launched its product. If the patent holder's appeal is
successful, the Company could be liable for damages for patent
infringement, which could have a material adverse impact on the Company's
consolidated financial statements.
Adderall Trade Dress Infringement Suit
--------------------------------------
On May 1, 2002, Shire Richwood Inc. ("Shire") filed a lawsuit in the United
States District Court for the District of New Jersey against Barr claiming
that Barr's generic Adderall product uses trade dress that is similar in
appearance to Shire's Adderall(R) product. Shire is seeking a preliminary
injunction to restrain Barr from using the trade dress and to have Barr
recall from the marketplace any generic Adderall product sold in such trade
dress. The Company believes that this lawsuit is without merit and will
oppose Shire's request for a preliminary injunction. The Company does not
expect the on-going litigation to cause any disruption in the manufacturing
and sale of its generic Adderall product
13
or to affect the status of product currently in the marketplace. However,
if the injunction is granted, this could have a material adverse impact on
the Company's consolidated financial statements.
Termination of Solvay Co-Marketing Relationship
-----------------------------------------------
On March 31, 2002, Barr gave notice of its intention to terminate on June
30, 2002 the relationship between Barr and Solvay Pharmaceuticals, Inc.
("Solvay") which currently covers the joint promotion of Barr's Cenestin
tablets and Solvay's Prometrium(R) capsules. Solvay has disputed Barr's
right to terminate the relationship and claims it's entitled to
substantial damages. The Company believes its actions are well founded but
if the Company is incorrect, the matter could have a material adverse
impact on the Company's consolidated financial statements.
Other Litigation
----------------
As of March 31, 2002, the Company was involved with other lawsuits
incidental to its business, including patent infringement actions.
Management of the Company, based on the advice of legal counsel, believes
that the ultimate disposition of such other lawsuits will not have any
material adverse effect on the Company's consolidated financial statements.
Administrative Matters
----------------------
In 1998 and 1999, the Company was contacted by the Department of Justice
("DOJ") regarding the March 1993 resolution of the Tamoxifen patent
litigation. On May 6, 2002, the Company received notification that the DOJ
had officially closed its investigation of this matter.
17. SUBSEQUENT EVENT
In April 2002, the Company and BMS reached a four-part arrangement to
restructure a Product Development Agreement and two marketing agreements
that were forged between Barr and DuPont in March 2000, and add an
additional product to Barr's portfolio of branded pharmaceuticals. BMS
acquired DuPont in 2001.
Under the terms of a Proprietary Product Development Agreement between Barr
and DuPont, announced in March 2000, DuPont agreed to invest up to $45
million to support the ongoing development of Barr's CyPat(TM) prostate
cancer therapy, SEASONALE(TM) oral contraceptive and DP3 oral contraceptive
proprietary products in exchange for co-marketing rights and royalties.
Barr and BMS agreed to terminate this agreement and to cap BMS's funding
obligations at $40 million. In return, BMS has agreed to forego its royalty
interest and other rights regarding the marketing of these three products.
Barr and BMS also agreed to terminate the Trexall Marketing Agreement,
under which DuPont had agreed to promote, market and sell Barr's
Trexall(TM) product in exchange for a royalty. As a result of the
termination, Barr will take over BMS' responsibilities to coordinate the
promotion and sales activities for Trexall and BMS will forego its royalty
interest in the product. BMS agreed to fulfill its existing obligation to
fund the Trexall sales force costs over the next two years and paid Barr
$600 to cover BMS' other obligations during the term of the contract.
In March 2000, Barr received from DuPont the right to market and distribute
ViaSpan(R), an organ transplant preservation agent in the United States and
Canada through patent expiry in March 2006.
14
Under the terms of a preliminary agreement to amend the existing ViaSpan
Marketing Agreement, BMS has agreed to extend Barr's rights and obligations
for the marketing and distribution of ViaSpan in the United States and
Canada. Barr will assume BMS' responsibilities for sourcing the product,
coordinating distribution and performing certain regulatory functions and
BMS will forego any further royalties related to sales of the product.
ViaSpan has total annual sales of approximately $15 million.
Finally, under the terms of a preliminary agreement, Barr will acquire BMS'
rights to Revia(R), the brand version of naltrexone hydrochloride tablets,
in the United States and Canada, including the New Drug Application (NDA)
trademark. Barr introduced a generic version of Revia in 1998. The total
Revia market, for both brand and generic products, was approximately $22
million in the 12 months ended December 2001, including approximately $6.5
million for the brand.
The arrangements concerning ViaSpan and Revia are subject to negotiation of
definitive agreements, which the Company expects to finalize in the quarter
ending June 30, 2002.
15
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
As discussed in Note 2 to the consolidated financial statements, on October 24,
2001, the Company completed its merger with Duramed Pharmaceuticals, Inc.
("Duramed"). The merger was treated as a tax-free reorganization and was
accounted for as a pooling-of-interests for financial reporting purposes.
All financial data of the Company presented in these financial statements has
been restated to include the historical financial data of Duramed pursuant to
Regulation S-X of the Securities and Exchange Commission. For the current
period, financial information as of and for the three and nine months ended
March 31, 2002, includes such periods for both companies. However, for the prior
year periods presented, the consolidated statements of earnings for the
Company's three and nine months ended March 31, 2001 were combined with
Duramed's three and nine months ended September 30, 2000. The Company's balance
sheet as of June 30, 2001 was combined with Duramed's balance sheet as of
December 31, 2000. The Company's statement of cash flows for the nine months
ended March 31, 2001 was combined with Duramed's nine months ended September 30,
2000.
Critical Accounting Policies
- ----------------------------
The accounting policies of the Company are described in Note 1 in the Company's
Annual Report on Form 10-K for the year ended June 30, 2001. The policies on
revenue recognition, sales returns and allowances, accrual of inventory
obsolescence reserve, and deferred taxes are considered noteworthy because
changes to certain judgments and assumptions inherent in these policies could
affect the Company's financial statements.
Revenue Recognition, Sales Returns and Allowances
- -------------------------------------------------
The Company recognizes product sales revenue when substantially all risks and
rights of ownership have transferred to the buyer. Additional conditions for
recognition of revenue are that collection of sales proceeds is reasonably
assured and the Company has no further performance obligations. The Company
records costs that represent estimated returns, volume rebates, chargebacks and
other sales allowances as a reduction of revenues at the time of the sale. These
estimates are established in accordance with generally accepted accounting
principles based upon consideration of a variety of factors, including actual
return and credit experience for other products during the past several years,
the anticipated number and timing of regulatory approvals for competing products
(both historical and projected), anticipated changes in price due to additional
competitors, the market for the product, expected sell-through levels by our
wholesaler customers to customers with contractual pricing arrangements with us
and estimated customer inventory levels by product. Actual product returns and
credits incurred are, however, dependent upon future events, including price
competition and the level of customer inventories at the time of any price
decrease. We regularly review the factors that influence our estimates and, if
necessary, make adjustments when we believe that actual product returns, credits
and other allowances may differ from established reserves.
Inventory Reserves
- ------------------
The Company establishes reserves for inventory when product is close to
expiration and is not expected to be sold, when product has reached its
expiration date, or when a batch of product is not expected to be saleable based
on the regulatory status of the material or product, as determined by the
Company's quality assurance standards. The reserve for these products is equal
to all or a portion of the cost of the inventory based on the specific facts and
circumstances. The Company records changes in inventory reserves as part of cost
of goods sold.
16
Deferred Taxes
- --------------
The Company applies an asset and liability approach to accounting for income
taxes. Deferred tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the years in which the differences are expected to reverse.
Results of Operations:
Comparison of the Three Months Ended March 31, 2002
to the Three Months Comparable Period Ended March 31, 2001
- - (thousands of dollars)
- ----------------------------------------------------------
Total revenues increased from $159,781 to $261,411 driven by increased product
sales. Product sales increased $99,404 from $156,512 to $255,916 due to the
launch of Fluoxetine 20 mg capsules ("Fluoxetine") in August 2001, the launch of
generic Adderall in February 2002, the launch of Metformin in January 2002 and
increased contributions from the Company's franchise of oral contraceptives and
sales of Cenestin. The increased sales of the above products was somewhat offset
by an expected decrease in sales of Tamoxifen.
Tamoxifen sales decreased 11% from $89,652 to $79,795. The decrease was mainly
attributable to a decrease in units sold somewhat offset by a higher selling
price. The decrease in units sold was primarily due to changes in the timing of
customers' purchases due to a change in the timing of the Tamoxifen price
increase. Barr's quarterly Tamoxifen sales are affected by the timing of price
increases because certain customers increase their purchases in the weeks before
a price increase occurs. This buying strategy leads to lower purchases in the
periods after the price increase occurs. Price increases are initiated by
AstraZeneca at different times each year. Last year's price increase was in
February 2001 and was not well anticipated by the Company's customers. As a
result, last year's third quarter sales did not decline significantly. This
year, customers appear to have anticipated an earlier price increase and as a
result increased substantially their purchases in the quarter ended December
2001. As a result, this year's third quarter sales declined for certain
customers in order to work down their inventories. This year's price increase
occurred on January 4, 2002. Tamoxifen is a patent protected product
manufactured for the Company by AstraZeneca, the innovator. Currently, Barr is
the only distributor of Tamoxifen in the U.S. other than AstraZeneca, whose
product is sold under the brand name Nolvadex(R). The Company currently has an
approved Abbreviated New Drug Application ("ANDA") to manufacture the 10 mg
tablet of Tamoxifen following the expiration of the patent and any period of
pediatric exclusivity awarded to AstraZeneca and is awaiting approval of the 20
mg tablet application. After the patent expires in August 2002 or pediatric
exclusivity expires in February 2003, the Company expects that it will continue
to sell Tamoxifen either as a distributed product or as its own manufactured
product. The Company expects that additional competitors will enter the market
following patent expiry and the expiration of any pediatric exclusivity.
Whenever this occurs, Barr believes that while its revenues and market share
will be negatively affected, its gross profit margins on the sales of Tamoxifen
will exceed those it currently earns as a distributor.
Other product sales increased from $66,860 to $176,121. The increase was
attributable to the August 2001 launch of the Company's Fluoxetine 20 mg
capsule, the generic equivalent of Eli Lilly's Prozac(R), the February 2002
launch of the Company's generic Adderall, the January 2002 launch of Metformin,
a 138% increase in sales of Cenestin and a 185% or approximately $14,000
increase in the Company's franchise of oral contraceptives. These increases were
driven primarily by higher volumes due to increasing market shares. On January
29, 2002, Barr's 180 day generic exclusivity period on Fluoxetine 20 mg capsules
ended and, as expected, the FDA approved several other generic versions. As a
result, the selling price declined dramatically and the Company lost market
share to competing products causing the Company's sales and profits from
Fluoxetine to be substantially lower compared to those earned during the first
two quarters of the year.
17
Sales of Fluoxetine were $54,000 including a $16,000 change in accounting
estimate for Fluoxetine accounts receivable reserves related to anticipated
future returns and inventory price protection. Prior to the launch of Fluoxetine
in August 2001, the Company made certain estimates to record reserves for
various sales discounts and allowances. The Company derived these estimates
through review of historical information and review of like products in its
portfolio. In addition, the Company also made certain estimates regarding
customer inventory levels and expected price declines in order to determine when
and how much to record for potential pricing adjustments at the end of the
exclusivity period. In December 2001, the Company began to record reserves for
potential pricing adjustments. Barr reviewed it's overall reserve position based
on an assessment of several factors including estimates of customer inventory
levels and estimated price declines at December 31, 2001. Based on these
estimates, the Company felt it was properly reserved. Subsequent to the
expiration of the exclusivity period on January 28, 2002 and throughout the
remainder of the quarter, Barr received new information including actual price
declines and customer inventory levels. Based on this new information, the
Company assessed that reserve levels as of December 31, 2001 were approximately
$16,000 too high.
Development and other revenue consists primarily of amounts received from DuPont
Pharmaceuticals Company ("DuPont"), now Bristol-Myers Squibb Company ("BMS") for
various development and co-marketing agreements entered into in March 2000. As
the Company incurs research and other development activity costs, Barr records
such expenses as research and development and invoices and records the related
revenue from BMS as development and other revenue (See Notes 8 and 17 to the
Consolidated Financial Statements). Development and other revenue also includes
royalty income earned under licensing agreements with other third parties.
Cost of sales increased to $139,142 from $106,815, primarily due to increases in
product sales. Cost of sales includes the profit split due to Apotex, Inc., the
Company's partner in the Fluoxetine patent challenge. As a percentage of product
sales, cost of sales declined from 68.2% to 54.4%. The decrease in cost of sales
as a percentage of product sales was due to an improved mix in product sales as
lower margin products like Tamoxifen made up a smaller percentage of sales, due
to new product launches such as Fluoxetine and generic Adderall and continued
growth in the Company's franchise of oral contraceptive products and Cenestin.
Selling, general and administrative expenses increased from $18,898 to $26,271.
The increase was primarily due to higher marketing/selling expense associated
with the Cenestin sales and marketing agreement with Solvay Pharmaceuticals,
Inc.; increased legal costs, which include costs associated with patent
challenge activity, class action lawsuits and other matters; increased headcount
costs and higher advertising and promotions costs associated with the Company's
expanding product line.
Research and development expenses increased from $15,290 to $18,715. The
increase reflected higher costs associated with proprietary products, higher
internal development costs and higher headcount and related costs.
Merger-related costs include direct transaction costs such as legal, accounting
and other costs; costs associated with facility and product rationalization and
severance costs related to the Company's October 2001 merger with Duramed
Pharmaceuticals, Inc. (See Note 13 to the Consolidated Financial Statements).
Interest income decreased by $568 primarily due to a decrease in market rates on
the Company's short-term investments, which was partially offset by an increase
in the average cash and cash equivalents balance.
18
Interest expense decreased $1,051 or 61% primarily due to a decrease in the
Company's debt balances, as well as, a decrease in variable interest rates.
Other income decreased by $2,037 primarily because the prior year included a
gain realized on the sale of the balance of the Company's investment in Galen
Holdings PLC.
Results of Operations:
Comparison of the Nine Months Ended March 31, 2002
to the Nine Months Comparable Period Ended March 31, 2001
- - (thousands of dollars)
- ---------------------------------------------------------
Total revenues increased from $428,497 to $979,604 driven by increased products
sales. Increased product sales were due mainly to new product launches in the
current fiscal year, increased sales of the Company's franchise of oral
contraceptives and higher sales of Cenestin and Tamoxifen.
Tamoxifen sales increased 31% from $234,813 to $306,544. The increase was mainly
attributable to an increase in units sold as well as higher prices. The increase
in units sold was primarily due to changes in the timing of customers' purchases
due to the timing of last year's Tamoxifen price increase. The prior year price
increase was in February 2001, and was not well anticipated by the Company's
customers. As a result, their purchases in last year's December quarter did not
reflect the increases the Company had seen in prior years. This year, customers
appear to have anticipated an earlier price increase and increased their
purchases accordingly. This year's price increase occurred on January 4, 2002.
Other product sales increased from $180,396 to $656,620. The increase was
primarily attributable to new product launches including Fluoxetine 20 mg
capsules and generic Adderall as well as an approximately 232% or $36,684
increase in sales of the Company's franchise of oral contraceptive products and
an approximately 173% or $18,870 increase in sales of Cenestin. These increases
were driven primarily by higher volumes due to increasing market shares. Sales
of Fluoxetine totaled approximately $365,000 in the nine months ended March 31,
2002.
Cost of sales increased from $286,245 to $570,040 due mainly to an increase in
product sales. Cost of sales includes the profit split due to Apotex, Inc., the
Company's partner in the Fluoxetine patent challenge. As a percentage of product
sales, cost of sales declined from 68.9% to 59.2%. The decrease in cost of sales
as a percentage of product sales was due to an improved mix in product sales, as
lower margin products like Tamoxifen made up a smaller percentage of sales, due
to new product launches such as Fluoxetine and generic Adderall and continued
growth in the Company's franchise of oral contraceptive products and Cenestin.
Selling, general and administrative expenses increased from $54,747 to $83,815.
The increase was primarily due to higher marketing/selling expense associated
with our Cenestin sales and marketing agreement with Solvay Pharmaceuticals,
Inc.; increased legal costs, which include costs associated with patent
challenge activity, class action lawsuits and other matters; increased headcount
costs and higher advertising and promotion costs associated with the Company's
expanding product line.
Research and development expenses increased from $43,614 to $53,608. The
increase reflected higher costs associated with proprietary products, higher
internal development costs and higher headcount and related costs.
Interest income decreased by $1,353 primarily due to a decrease in market rates
on the Company's short-term investments, which was partially offset by an
increase in the average cash and cash equivalents balance.
19
Interest expense decreased $2,634 or 47% primarily due to a decrease in variable
interest rates, as well as a decrease in the Company's debt balances.
Other income decreased by $1,800 primarily due to the prior year including the
gain realized on the sale of the Company's investment in Galen Holdings PLC,
partially offset by the write-off of the Company's investment in Gynetics, Inc.
(See Note 10 to the Consolidated Financial Statements).
Liquidity and Capital Resources:
- --------------------------------
The Company's cash and cash equivalents have increased from $222,343 at June 30,
2001 to $481,006 at March 31, 2002. In connection with an Alternative Collateral
Agreement between the Company and the Innovator of Tamoxifen, the Company
increased the cash held in its interest-bearing escrow account from $96,820 at
June 30, 2001 to $105,514 at March 31, 2002 (See Note 3 to the Consolidated
Financial Statements).
The increase in cash during the nine months ended March 31, 2002 was driven by
over $312,000 in cash provided by operations which more than offset increasing
investments in plant and equipment and repayments of debt acquired as part of
the Duramed merger.
Cash from operations of $312,896 for the nine months ended March 31, 2002,
resulted from net earnings of over $167,000 and an approximately $124,000
decrease in net working capital. Net earnings for the first nine months of the
year were positively impacted by the Company's sales of Fluoxetine 20 mg
capsules, which it launched in early August 2001. As expected, the Company's
Fluoxetine 20 mg capsules sales declined significantly during the third quarter
as other manufacturers launched competing versions of Fluoxetine in late January
2002. Tamoxifen sales also declined in the third quarter, but these declines
were somewhat offset by new products launches and increased contributions from
the Company's franchise of oral contraceptives and Cenestin. Working capital
decreases during the nine months ended March 31, 2002 were led by an increase in
accounts payable, accrued liabilities, income taxes payable and a decrease in
accounts receivable. Increases in accrued liabilities primarily relate to
amounts due Barr's partner under a profit sharing arrangement on sales of
Fluoxetine 20 mg capsules, as well as, amounts accrued for merger-related costs.
Income taxes payable have increased due to the increase in net income. Accounts
receivable at March 31, 2002 decreased due to the timing of sales within the
three months ended March 31, 2002 and higher accounts receivable reserves,
primarily associated with Fluoxetine.
Cash flows from operations are expected to decline over the next twelve months
compared to the most recent twelve months. That decline is primarily
attributable to a decline in net income and higher expected working capital. Net
income is expected to decline due to lower sales and profits from Fluoxetine,
which will only be partially offset by sales from new product launches. Working
capital is expected to increase to support new product launches and to reflect
changes in the working capital components of Tamoxifen described below.
Approximately $7.9 million of the Company's quarterly cash flows from operations
relates to payments from its contingent non-exclusive supply agreement with
Bayer Corporation ("Bayer") related to its 1997 Cipro patent challenge. Under
that agreement, Bayer has, at its option, the right to allow Barr and its
partner (collectively Barr) to purchase Cipro at a predetermined discount or to
provide Barr quarterly cash payments. This contingent supply agreement expires
in December 2003. If Bayer does not elect to supply Barr with product, Barr
would receive approximately $31 million per calendar year for the remainder of
the agreement, which are not related to sales of Cipro. However, there is no
guarantee that Bayer will continue to make such payments. If Bayer elected to
supply product to Barr for resale, the earnings and related cash flows, if any,
Barr could earn from the sale of Cipro would be entirely dependent upon market
20
conditions. The supply agreement also provides that, six months prior to patent
expiry, if Barr is not already distributing the product, Barr will have the
right to begin distributing ciprofloxacin product manufactured by Bayer.
In accordance with the Proprietary Product Development Agreement entered into in
March 2000 a portion of the Company's spending on proprietary product
development is being reimbursed by DuPont, which has since been acquired by BMS.
During the three and nine months ended March 31, 2002, the Company earned
approximately $5 million and $15.3 million, respectively, under that agreement.
These payments are reimbursements of Barr's spending with quarterly limits of up
to $4 to $5 million per quarter. In April 2002, the Company and BMS terminated
the Development Agreement and agreed to, among other things, cap BMS' funding
obligations at $40 million. Barr received its final payment from BMS in April
(See Note 17 to the Consolidated Financial Statements).
During the first nine months of fiscal 2002, the Company invested approximately
$32.6 million in capital assets, primarily related to facility expansion in
Virginia and upgrades and new equipment. The Company believes it may invest an
additional $40 to $50 million in capital assets over the next 12 months
primarily on the continued expansion of its distribution, research and
development, manufacturing and packaging facilities and related equipment. Over
the past two years, capital projects have been funded from cash flows provided
by operations. Given the extent and the long-term nature of some of the planned
expenditures, the Company may consider financing a portion of these long-term
assets and believes it has the capital structure and cash flow to take on
additional debt.
Debt balances declined during the quarter due to scheduled repayments of the
Company's debt. On February 27, 2002, the Company amended and restated the
Revolving Credit Facility to $40 million and extended the term to February 27,
2005. The Company did not use any funds available to it under its $40 million
Revolving Credit Facility during the current quarter. Scheduled debt repayments
over the next twelve months will be approximately $5 million.
On October 24, 2001, the Company completed its merger with Duramed
Pharmaceuticals, Inc. During the nine months ended March 31, 2002, the Company
incurred approximately $33 million of pre-tax expenses in relation to the merger
including approximately $18 million in cash payments. These expenses include
amounts to satisfy existing employment contracts, estimated severance costs,
direct transaction costs including investment banking, legal, accounting,
regulatory agency filings, financial printing and other related costs. The
Company expects the remaining $15 million liability for merger-related costs to
be paid out of existing cash balances within the next twelve months, primarily
to satisfy remaining severance costs for certain Duramed officers and employees.
In accordance with IRS regulations, not all such merger-related costs will be
tax deductible. The Company expects that approximately $6 million of the total
merger costs will not be deductible for federal income tax purposes.
As a result of the merger, Barr expects to earn taxable income sufficient to
utilize federal net operating losses of approximately $100 million generated by
Duramed over the past several years. The portion of the net operating loss Barr
can utilize to reduce federal income tax payments each year is limited in
accordance with IRS guidelines. The Company believes that it will be able to
utilize the net operating losses over the next several years and expects to
lower the amount of federal income taxes it pays by approximately $35 million
over that period.
The working capital costs associated with selling Tamoxifen are expected to
increase if Barr begins to manufacture and sell its own version of Tamoxifen.
For example, the Company's accounts payable are expected to decline
significantly due to lower costs to manufacture and shorter payment terms to the
Company's suppliers compared to those contained in Barr's distribution agreement
with AstraZeneca. In addition, inventory costs for Tamoxifen are expected to
decline significantly, as the cost to manufacture
21
will be well below Barr's current purchase price. Accounts receivable balances
will be affected by lower sales due to the launch of other generics and by
longer payment terms offered to customers. This increase in working capital
could lower Barr's cash balances. The extent of such decline is dependent upon
several factors, some of which are outside Barr's control and is therefore
difficult to predict.
On March 21, 2002, the Company signed an agreement for the acquisition of
certain assets and liabilities of Enhance Pharmaceuticals, Inc. ("Enhance") of
Princeton, New Jersey, for $44 million in cash. The acquisition is contingent
upon the satisfaction of certain conditions but the Company believes that the
transaction could close as early as the quarter ending June 30, 2002.
On March 6, 2002, Barr signed a series of agreements with Natural Biologics, LLC
("Natural Biologics") to develop an "AB" rated conjugated estrogens product
based on Natural Biologics' equine-based raw material. Under the terms of the
agreement, Barr will provide financing to Natural Biologics of up to $35 million
over a three-year period and up to an additional $35 million in milestone
payments up to and including approval of a generic product. As of March 31,
2002, Barr had funded $3.5 million under this agreement. It is anticipated that
additional funding in the amount of $5 to $10 million will be provided over the
next 12 months.
As the Company seeks to grow, it will continue to evaluate and enter into
various strategic collaborations or acquisitions including raw material
development contracts, product acquisitions and corporate acquisitions. The
amount of cash the Company commits to these transactions may be significant,
however, the timing and amount invested is difficult to predict and depends on a
number of factors outside of Barr's control, including the number of interested
parties and the ability to identify attractive opportunities.
The Company believes that its current cash balances, cash flows from operations
and borrowing capacity will be adequate to meet the operations described above
and to take advantage of strategic opportunities as they occur. To the extent
that additional capital resources are required, such capital may be raised by
additional bank borrowings, equity offerings or other means.
Related Parties
- ---------------
The Company's related party transactions are with affiliated companies of Dr.
Bernard C. Sherman, who directly or indirectly owns approximately 25% of Barr's
common stock. Included in accrued liabilities as of March 31, 2002 is $40,210
payable to one such company arising from the Company's Fluoxetine profit-split
agreement. Included in cost of sales for the three and nine months ended March
31, 2002 is approximately $25,025 and $175,246 also related to the Fluoxetine
profit-split agreement. The Company also purchases bulk pharmaceutical products
from another company related to Dr. Sherman. As of March 31, 2002, the Company
had $520 in payables outstanding to this company.
Barr also sells certain of its pharmaceutical products and bulk pharmaceutical
materials to two other companies owned by Dr. Sherman. As of March 31, 2002, the
Company's accounts receivable included $882 due from such companies.
Outlook
- -------
The following section contains a number of forward-looking statements, all of
which are based on current expectations. Actual results may differ materially.
The generic pharmaceutical industry is characterized by relatively short product
lives and declining prices and margins as competitors launch competing products.
The Company's strategy has been to develop generic products that face some
barrier to entry to limit competition and extend product lives and margins. The
Company's expanded efforts in developing and launching proprietary products is
also driven by the desire to market products that will have limited
22
competition and longer product lives. The Company's future operating results,
including achieving the estimates described below, are dependent upon several
factors. These factors include timing of product approvals and launches, the
ability to introduce new products, patient acceptance of new products and new
indications of existing products, customer purchasing practices, pricing
practices of competitors, spending levels including research and development and
patent activities, as well as, risk factors contained in the Company's
Registration Statements on Forms S-3 and S-4 as filed with the Securities and
Exchange Commission in May 2001 and August 2001, respectively. In addition, the
ability to receive sufficient quantities of raw materials to maintain production
is critical. While the Company has not experienced any interruption in sales due
to lack of raw materials, the Company is continually identifying alternate raw
material suppliers for many of its key products in the event that raw material
shortages were to occur.
The following forward-looking statements of forecasted results for the three
months ending June 30, 2002 include the effect of the merger between Barr and
Duramed Pharmaceuticals, Inc. The merger was approved by the shareholders of
both companies and became effective on October 24, 2001. The merger is being
treated as a tax-free reorganization pursuant to section 368 of the Internal
Revenue Code of 1986, as amended, and is being accounted for using the
pooling-of-interests method. These forward-looking statements of forecasted
results for three months ended June 30, 2002 do not include the effect of Barr's
planned acquisition of Enhance Pharmaceuticals, Inc. The Company expects that
acquisition to close before the end of the fiscal year. The forecasted results
are compared to the unaudited combined results from the three months ended March
31, 2002.
Revenues
- --------
Product sales:
- --------------
Total product sales are expected to decline in the fourth quarter of fiscal 2002
compared to the third quarter ended March 31, 2002 as lower Fluoxetine and
Tamoxifen sales will more than offset higher expected sales from other products
and new product launches. Fluoxetine sales were approximately $54 million in the
third quarter but are expected to be less than $5 million in the fourth quarter
due to lower pricing and reduced market share caused by the launch of competing
generic products in late January. Tamoxifen sales are expected to decline by
approximately 30% in the fourth quarter compared to the $80 million sold during
the third quarter as certain larger wholesale customers continue to work down
inventory levels generated by unusually large purchases in the December quarter.
Despite this decline, Tamoxifen sales for the fiscal year are still expected to
be around $360 million, up approximately 10% compared to last year. This
year-over-year increase in Tamoxifen sales is driven both by higher prices and
higher volumes.
Product sales, excluding Fluoxetine and Tamoxifen, were approximately $122
million during the third quarter. This total is expected to increase due to
higher sales from new products launched in the third quarter as well as sales
from new products expected to be launched in the fourth quarter. Key product
launches during the fourth quarter include Kariva (generic Mircette) and Lessina
(generic Levlite) which the Company launched in April and anticipated launches
of other generic oral contraceptives including generic versions of LoOvral,
TriPhasal and Cylen.
The timing of such launches is primarily dependent upon the timing of approvals
from FDA, which are difficult to predict, and outside the Company's control. If
the launches of these new products are delayed significantly or if market
conditions change before Barr launches, forecasted sales and earnings levels may
not be achieved.
23
Development and other revenue:
- ------------------------------
Development and other revenue is expected to decline over $5 million during the
fourth quarter of the year. The decline is due to the recent restructuring of
the Proprietary Product Development Agreement with BMS. Due to the terms of the
restructured agreement, the final $5 million from BMS will be recorded as other
income in the fourth quarter.
Margins:
- --------
Overall gross profit margins on product sales are expected to be a little higher
than the 46% earned in the third quarter, due to a shift in product sales mix,
lower percentages of Tamoxifen and Fluoxetine sales and a higher percentage of
higher margin manufactured product sales. Margins for Fluoxetine are lower than
those earned by other products because of the profit split the Company pays to
its partner.
Research and development:
- -------------------------
Research and development spending during the fourth quarter of the year is
expected to be approximately $23 to $25 million compared to nearly $19 million
in the third quarter. This increase is related to higher expected spending on
proprietary products as well as higher bio-study and raw material costs.
Selling, general and administrative:
- ------------------------------------
Selling, general and administrative costs, excluding merger-related costs, are
expected to increase from approximately $26 million incurred in the third
quarter to approximately $28 million. Contributing to this increase are expected
increases in sales and marketing costs, including higher royalties due to Solvay
on higher Cenestin sales and higher advertising and promotion costs, to support
new launches and other products.
Interest income:
- ----------------
Interest income during the fourth quarter is expected to be slightly lower than
the third quarter due to declining cash balances which are being used to fund
capital spending and the Enhance acquisition.
Interest expense:
- -----------------
Interest expense is expected to be lower than the third quarter due to lower
debt balances.
Other income:
- -------------
Other income is expected to be $5.6 million in the fourth quarter, $5.0 million
of which relates to the termination of the Proprietary Product Development
Agreement with BMS while the remaining $0.6 million relates to the termination
of the Trexall marketing agreement.
Duramed merger costs:
- ---------------------
Additional Duramed merger-related costs, including remaining severance payments,
incurred during the third quarter totaled $2.4 million on a pre-tax basis. The
Company believes that most, if not all, merger costs have been incurred through
March 31, 2002.
24
Tax rate:
- ---------
The tax rate for the fourth quarter of the fiscal year is expected to be
approximately 37%.
Cash flows:
- -----------
Cash balances at the end of June are expected to decline compared to those at
the end of March due to lower operating cash flows, continued funding of capital
expansion and the purchase of Enhance Pharmaceuticals. Operating cash flows are
expected to decline significantly in the fourth quarter due to lower earnings
compared to the third quarter and increases in working capital, primarily
increasing accounts receivable balances and lower accrued liabilities.
Lower accrued liabilities will result from a decline in Barr's Fluoxetine profit
sharing liability due to scheduled payments and a substantial decline in
Fluoxetine sales. The liability for merger-related costs is also expected to
decline as a result of payments expected to be made over the next twelve months.
Income taxes payable are also expected to decline during the remainder of the
fiscal year due to tax payments and an expected decline in the fourth quarter's
net income.
Capital spending is expected to be approximately $14 million in the fourth
quarter to support continued expansion of manufacturing and packaging
operations.
Earnings per share:
- -------------------
Based on the revenue and expense assumptions described above, the Company
expects earnings in the fourth quarter of the year to be in the range of
approximately $0.82 to $0.87 per share excluding merger-related costs and the
impact from the acquisition of Enhance Pharmaceuticals.
Forward-Looking Statements:
- ---------------------------
Except for the historical information contained herein, this Form 10-Q contains
forward-looking statements, all of which are subject to risks and uncertainties
that cannot be predicted or quantified and, consequently, actual results may
differ materially from those expressed or implied by such forward-looking
statements. Such risks and uncertainties include: the timing and outcome of
legal proceedings; the difficulty of predicting the timing of FDA approvals; the
difficulty in predicting the timing and outcome of court decisions on patent
challenges; the court and FDA decisions on exclusivity periods; market and
customer acceptance and demand for new pharmaceutical products; the ability to
market proprietary products; the impact of competitive products and pricing;
timing and success of product development and launch; availability of raw
materials; the regulatory environment; fluctuations in operating results; and,
other risks detailed from time-to-time in the Company's filings with the
Securities and Exchange Commission. Forward-looking statements can be identified
by their use of words such as "expects," "plans," "will," "should," "believes,"
"may," "estimates," "intends" and other words of similar meaning. Should known
or unknown risks or uncertainties materialize, or should our assumptions prove
inaccurate, actual results could vary materially from those anticipated.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As discussed in the 2001 Annual Report on Form 10-K, the Company's exposure to
market risk from changes in interest rates, in general, is not material.
25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Patent Challenges
- -----------------
In September 2001, Barr filed an ANDA seeking approval from the FDA to market
Fexofenadine HC1 60mg/Pseudoephedrine Hydrochloride 120mg extended-release
tablets, the generic equivalent of Aventis Pharmaceuticals' ("Aventis")
ALLEGRA-D(R). The Company notified Aventis pursuant to the Hatch-Waxman Act and
on January 28, 2002, Aventis filed suit in Federal District Court in New Jersey
to prevent Barr from proceeding with the commercialization of this product.
In November 2001, Barr filed an ANDA seeking approval from the FDA to market
niacin extended-release tablet 1000mg, the generic equivalent of Kos
Pharmaceuticals, Inc.'s ("KOS") Niaspan(R) extended-release tablet. The Company
notified Kos pursuant to the provisions of the Hatch-Waxman Act and on March 4,
2002, Kos announced that it had filed suit in Federal Court in New York to
prevent Barr from proceeding with the commercialization of this product.
In February 2002, Barr filed an ANDA seeking approval from the FDA to market
mirtazapine orally disintegrating tablets, the generic equivalent of Akzo Nobel
and Organon, Inc's ("Akzo and Organon") Remeron(R) Soltab(TM). The Company
notified Akzo and Organon pursuant to the Hatch-Waxman Act and on May 3, 2002,
Akzo and Organon filed suit in Federal Court in New Jersey to prevent Barr from
proceeding with the commercialization of this product.
Class Action Lawsuits
- ---------------------
Ciprofloxacin (Cipro) Class Action Suits
The Company has been named as a defendant in an additional indirect purchaser
class-action complaint under New York State law alleging that the 1997
Bayer-Barr settlement agreement was anti-competitive. Plaintiffs seek to recover
overcharges paid as a result of the allegedly anti-competitive activities and
all other appropriate relief. Mermelstein v. Bayer, Barr and Rugby (New York
Supreme Court).
Tamoxifen Citrate Class Action Suits
The Company has been named as a defendant in two additional consumer class
action complaints, brought under state antitrust statutes, arising out of
Zeneca's and Barr's 1993 settlement of a patent infringement action. The
complaints allege that the 1993 settlement insulates Zeneca and the Company from
generic competition and enables Zeneca and Barr to charge artificially inflated
prices for Tamoxifen citrate. Plaintiffs seek to recover damages for the alleged
antitrust violations. Steward v. Barr Laboratories, Inc. et. al. (D. Kansas) and
Schvom v. Barr Laboratories, Inc. et. al. (E.D N.Y.)
26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Number Exhibit
-------------- -------
None
(b) There were no reports filed on Form 8-K in the quarter ended March 31 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BARR LABORATORIES, INC.
Dated: May 14, 2002 /s/ William T. McKee
----------------------------------------
William T. McKee
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
27