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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, 2003 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 outstanding as of March 31, 2003: 66,284,651
BARR LABORATORIES, INC.
INDEX TO FORM 10-Q
PAGE
PART I FINANCIAL INFORMATION NUMBER
------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2003 (unaudited) and
June 30, 2002.............................................................. 1
Consolidated Statements of Operations for the three and nine months ended
March 31, 2003 and 2002 (unaudited)........................................ 2
Consolidated Statements of Cash Flows for the nine months ended March 31,
2003 and 2002 (unaudited).................................................. 3
Notes to Consolidated Financial Statements (unaudited)....................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 36
Item 4. Controls and Procedures.......................................................... 36
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 38
Item 6. Exhibits and Reports on Form 8-K................................................. 40
Signatures and Rule 13a-14 Certifications........................................ 40
i
BARR LABORATORIES, INC.
Consolidated Balance Sheets
(in thousands, except share amounts)
MARCH 31,
2003 JUNE 30,
(UNAUDITED) 2002
----------- ---------
Assets
Current assets:
Cash and cash equivalents $ 401,769 $ 331,257
Marketable securities 14,400 --
Accounts receivable, net 87,234 103,168
Other receivables 27,115 23,230
Inventories 96,204 151,133
Deferred income taxes 18,208 18,208
Prepaid expenses and other current assets 10,027 7,852
--------- ---------
Total current assets 654,957 634,848
Property, plant and equipment, net of accumulated depreciation
of $99,036 and $87,419, respectively 205,876 165,522
Deferred income taxes 21,746 21,270
Marketable securities 30,100 15,502
Patents and product licenses, net 24,790 28,200
Goodwill 14,118 13,941
Other assets 21,476 9,271
--------- ---------
Total assets $ 973,063 $ 888,554
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 35,333 $ 110,879
Accrued liabilities 44,264 51,438
Current portion of long-term debt 7,029 3,642
Current portion of capital lease obligations 1,449 1,695
Income taxes payable 24,518 9,801
--------- ---------
Total current liabilities 112,593 177,455
Long-term debt 31,029 37,657
Long-term capital lease obligations 3,779 4,977
Other liabilities 3,931 1,933
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 66,565,049 and 43,792,170, respectively 666 438
Additional paid-in capital 316,800 291,637
Retained earnings 505,122 375,066
Accumulated other comprehensive (loss) income (149) 99
--------- ---------
822,439 667,240
Treasury stock, at cost: 280,398 and 186,932 shares, respectively (708) (708)
--------- ---------
Total shareholders' equity 821,731 666,532
--------- ---------
Total liabilities and shareholders' equity $ 973,063 $ 888,554
========= =========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
1
BARR LABORATORIES, INC.
Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2003 2002 2003 2002
---------- --------- --------- ---------
Revenues:
Product sales $ 169,006 $ 255,916 $ 595,389 $ 963,164
Development and other revenue 2,917 5,495 5,997 16,440
--------- --------- --------- ---------
Total revenues 171,923 261,411 601,386 979,604
Costs and expenses:
Cost of sales 55,182 139,142 260,973 570,040
Selling, general and administrative 34,203 26,271 98,604 84,062
Research and development 21,127 18,715 64,710 53,608
Merger-related costs -- 2,356 -- 33,295
--------- --------- --------- ---------
Earnings from operations 61,411 74,927 177,099 238,599
Proceeds from patent challenge settlement 8,563 7,937 25,688 23,812
Interest income 1,547 1,953 4,728 5,936
Interest expense 370 684 1,291 2,925
Other (income) expense (187) (8) 59 (2,019)
--------- --------- --------- ---------
Earnings before income taxes 71,338 84,141 206,165 267,441
Income tax expense 25,464 31,034 75,687 100,088
--------- --------- --------- ---------
Net earnings 45,874 53,107 130,478 167,353
Preferred stock dividends -- -- -- 457
Deemed dividend on convertible preferred stock -- -- -- 1,493
--------- --------- --------- ---------
Net earnings applicable to common shareholders $ 45,874 $ 53,107 $ 130,478 $ 165,403
========= ========= ========= =========
Earnings per common share $ 0.69 $ 0.82 $ 1.98 $ 2.57
========= ========= ========= =========
Earnings per common share - assuming dilution $ 0.66 $ 0.78 $ 1.90 $ 2.43
========= ========= ========= =========
Weighted average shares 66,189 65,045 65,893 64,454
========= ========= ========= =========
Weighted average shares - assuming dilution 69,460 68,348 68,762 68,058
========= ========= ========= =========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
2
BARR LABORATORIES, INC.
Consolidated Statements of Cash Flows
For the Nine Months Ended March 31, 2003 and 2002
(in thousands of dollars)
(unaudited)
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 130,478 $ 167,353
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 16,145 11,271
Deferred income tax benefit (321) (1,790)
Write-off of intangible asset 1,330 --
Write-off of deferred financing fees associated with early extinguishment of debt -- 247
Gain on disposal of property, plant & equipment (425) --
Write-off of investment 250 --
Other (52) 200
Tax benefit of stock incentive plans 10,575 5,256
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable and other receivables, net 12,049 46,280
Inventories 54,929 4,042
Prepaid expenses and other current assets (343) 1,037
Other assets (4,658) 86
Increase (decrease) in:
Accounts payable, accrued liabilities and other liabilities (82,554) 68,231
Income taxes payable 14,717 14,183
--------- ---------
Net cash provided by operating activities 152,120 316,396
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (56,685) (32,598)
Proceeds from sale of property, plant and equipment 2,948 395
Loans to Natural Biologics (8,086) (3,500)
Purchases of marketable securities, net (29,400) (10,000)
--------- ---------
Net cash used in investing activities (91,223) (45,703)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and capital leases (4,779) (9,848)
Net payments on line of credit -- (20,316)
Purchase of treasury stock -- (695)
Proceeds from exercise of stock options and employee stock purchases 14,594 18,890
Other (200) (61)
--------- ---------
Net cash provided by (used in) financing activities 9,615 (12,030)
--------- ---------
Increase in cash and cash equivalents 70,512 258,663
Cash and cash equivalents at beginning of period 331,257 222,343
--------- ---------
Cash and cash equivalents at end of period $ 401,769 $ 481,006
========= =========
SUPPLEMENTAL CASH FLOW DATA:
Cash paid during the period:
Interest, net of portion capitalized $ 890 $ 2,457
========= =========
Income taxes $ 50,636 $ 81,446
========= =========
Non-cash transactions:
Equipment under capital lease $ -- $ 612
========= =========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3
BARR LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements of Barr Laboratories, Inc.
and subsidiaries ("Barr" or "the Company") are prepared in conformity with
accounting principles generally accepted in the United States ("GAAP"). In
the opinion of management, all adjustments necessary for a fair
presentation of the financial position and results of operations for the
periods presented have been included. These unaudited consolidated
financial statements should be read in conjunction with the Company's
audited consolidated financial statements for the year ended June 30,
2002, included in the annual report on Form 10-K filed by the Company with
the Securities and Exchange Commission (the "SEC") on August 26, 2002; the
quarterly report on Form 10-Q for the three months ended September 30,
2002 filed by the Company with the SEC on November 14, 2002; and the
quarterly report on Form 10-Q for the three and six months ended December
31, 2002 filed by the Company with the SEC on January 29, 2003. The
consolidated financial statements include the accounts of the Company and
its subsidiaries. All intercompany transactions have been eliminated.
Management believes that, along with the following information, the
disclosures are adequate to make the information presented herein not
misleading. Certain prior year amounts have been reclassified to conform
to the current presentation. The results of operations for the three and
nine months ended March 31, 2003 may not be indicative of the results to
be expected for the fiscal year ending June 30, 2003.
2. ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and the related notes to the
financial statements. The methods, estimates and judgments the Company
uses in applying the accounting policies most critical to its financial
statements have a significant impact on the results reported in the
Company's financial statements. The SEC has defined the most critical
accounting policies as the ones that are most important to the portrayal
of the Company's financial condition and results, and require the Company
to make its most difficult and subjective judgments. Based on this
definition, the Company's most critical policies include the following:
(1) provisions for estimated sales returns and allowances; (2) accrual of
inventory reserves; (3) deferred taxes; (4) accrual for litigation; (5)
accrual for self-insurance reserve; and (6) the assessment of
recoverability of goodwill and other intangible assets. The Company also
has other key accounting policies, including policies for revenue
recognition. The Company believes that these other policies either do not
generally require it to make estimates and judgments that are as difficult
or as subjective as the six listed above, or it is less likely that they
would have a material impact on the Company's reported results of
operations for a given period. Although the Company believes that its
estimates and assumptions are reasonable, they are based upon information
presently available. Actual results may differ significantly from the
4
Company's estimates and such estimates could be different using different
assumptions or conditions.
The Company summarizes its most critical accounting policies below:
Sales returns and allowances
When the Company recognizes revenue from the sale of its pharmaceutical
products, it simultaneously records an estimate of various costs that
reduce product sales. These costs include estimates for product returns,
rebates, chargebacks and other sales allowances. In addition, as discussed
in detail below, the Company may record allowances for shelf-stock
adjustments when the conditions are appropriate. The Company bases its
estimates for sales allowances such as product returns, rebates and
chargebacks for a product on a variety of factors, including actual return
experience of that product or similar products, rebate agreements for each
product, and estimated sales by its wholesale customers to other third
parties with whom the Company has contracts. Actual experience associated
with any of these items may differ materially from the Company's
estimates. The Company reviews the factors that influence its estimates
and, if necessary, makes adjustments when it believes that actual product
returns, credits and other allowances may differ from established
reserves.
The Company often issues credits to customers for inventory remaining on
their shelves following a decrease in the market price of a generic
pharmaceutical product. These credits, commonly referred to in the
pharmaceutical industry as "shelf-stock adjustments," can then be used by
customers to offset future amounts owing to the Company under invoices for
future product deliveries. The shelf-stock adjustment is intended to
reduce a customer's inventory cost to better reflect current market prices
and is often used by the Company to maintain its long-term customer
relationships. The determination to grant a shelf-stock credit to a
customer following a price decrease is usually at the Company's discretion
rather than contractually required. The Company records allowances for
shelf-stock adjustments at the time it sells products that it believes
will be subject to a price decrease. When determining whether to record a
shelf-stock adjustment and the amount of any such adjustment, the Company
analyzes several variables including the estimated launch date of a
competing product, the estimated decline in market price and estimated
levels of inventory held by the customer at the time of the decrease in
market price. As a result, a shelf-stock reserve depends on a product's
unique facts and circumstances. The Company regularly monitors these and
other factors for its significant products and evaluates its reserves and
estimates as additional information becomes available.
Accounts receivable are presented net of allowances relating to the above
provisions of $112,726 and $93,789 at March 31, 2003 and June 30, 2002,
respectively.
Inventory reserves
The Company establishes reserves for its inventory to reflect situations
in which the cost of the inventory is not expected to be recovered. The
Company regularly reviews its inventory, including products close to
expiration and therefore 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 Company's quality assurance and control standards.
The reserve
5
for these products is equal to all or a portion of the cost of the
inventory based on the specific facts and circumstances. In evaluating
whether inventory is stated at the lower of cost or market, management
considers such factors as the amount of inventory on hand, estimated time
required to sell such inventory, remaining shelf life and current and
expected market conditions, including levels of competition. The Company
monitors inventory levels, expiry dates and market conditions on a regular
basis. The Company records changes in inventory reserves as part of cost
of goods sold.
Deferred taxes
Income taxes are accounted for under Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes". Under this
method, deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the
financial statement and tax basis of assets and liabilities using enacted
tax rates in effect for the years in which the differences are expected to
reverse. A valuation allowance is provided for the portion of deferred tax
assets which are "more-likely-than-not" to be unrealized. The
recoverability of deferred tax assets is dependent upon the Company's
assessment of whether it is more-likely-than-not that sufficient future
taxable income will be generated in the relevant tax jurisdiction to
utilize the deferred tax asset. The Company reviews its internal
forecasted sales and pre-tax earnings estimates to make its assessment
about the utilization of deferred tax assets. In the event the Company
determines that future taxable income will not be sufficient to utilize
the deferred tax asset, a valuation allowance will be recorded. If that
assessment changes, a charge or a benefit would be recorded on the
statement of operations.
Litigation
The Company is subject to litigation in the ordinary course of business
and also to certain other contingencies (See Note 14). Legal fees and
other expenses related to litigation and contingencies are recorded as
incurred. Additionally, the Company assesses, in consultation with its
counsel, the need to record a liability for litigation and contingencies
on a case-by-case basis. Reserves are recorded when the Company, in
consultation with counsel, determines that a loss related to a matter is
both probable and reasonably estimable.
Self-insurance reserve
Since September 30, 2002, the Company has been primarily self-insured for
product liability claims. The Company records a self-insurance reserve for
each reported claim on a case-by-case basis, plus an allowance for the
estimated future cost of incurred but not reported ("IBNR") claims. The
Company will record an allowance for IBNR claims when it believes that an
event has occurred that will likely give rise to future product liability
claims against the Company or one of its subsidiaries. In assessing the
amounts to record for each reported claim, management, in consultation
with counsel and its insurance consultants, considers the nature and
amount of the claim, the Company's prior experience with similar claims,
and whether the amount expected to be paid on a claim is both probable and
reasonably estimable. In determining the allowance for the cost of IBNR
claims, management considers a variety of factors including historical
claims and insurance premium experience. The Company has never incurred a
significant product liability loss.
6
Beginning in the mid-to-late fourth quarter of fiscal 2003 and continuing
annually thereafter, the Company will engage an independent actuary to
perform an estimate of the Company's IBNR claims. Actual payments may
differ materially from the reserve amount for both reported and IBNR
claims. As of and for the nine months ended March 31, 2003, the liability
and related expenses for the Company's self-insurance reserve were
included in accrued liabilities and selling, general and administrative
expenses, respectively.
Goodwill and intangible assets
In connection with acquisitions, the Company determines the amounts
assigned to goodwill and intangibles based on purchase price allocations.
These allocations, including an assessment of the estimated useful lives
of intangible assets, have been performed by qualified independent
appraisers using generally accepted valuation methodologies. Valuation of
intangible assets is generally based on the estimated cash flows related
to those assets, while the value assigned to goodwill is the residual of
the purchase price over the fair value of all identifiable assets acquired
and liabilities assumed. Useful lives are determined based on the expected
future period of benefit of the asset, which considers various
characteristics of the asset, including historical cash flows. As required
by SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), the
Company reviews goodwill for impairment annually or more frequently if
impairment indicators arise.
3. RECENT ACCOUNTING PRONOUNCEMENTS
Goodwill and Other Intangible Assets
In July 2001, the FASB issued SFAS 142, which supercedes APB opinion No.
17, "Intangible Assets." Under SFAS 142, goodwill and indefinite lived
intangible assets are no longer amortized but are reviewed for impairment
annually, or more frequently if impairment indicators arise. The
provisions of SFAS 142 are effective for fiscal years beginning after
December 15, 2001.
The Company adopted SFAS 142 on July 1, 2002. SFAS 142 requires goodwill
to be tested for impairment annually using a two-step process to determine
the amount of impairment, if any, which is then written off. The first
step is to identify potential impairment, which is measured as of the
beginning of the fiscal year. To accomplish this, the Company identified
its reporting units and determined the carrying value of each reporting
unit by assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units. Under SFAS 142,
to the extent a reporting unit's carrying amount exceeds its fair value,
the reporting unit's goodwill may be impaired. The second step of the
goodwill impairment test, if required, measures the amount of the
impairment loss (measured as of the beginning of the year of adoption), if
any. During the quarter ended December 31, 2002, the Company completed the
first step of this process and determined there was no indication of
goodwill impairment. The Company will perform its next valuation of
goodwill as of July 1, 2003.
7
Accounting for Stock Based Compensation
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition Disclosure, An Amendment of FASB Statement No.
123" ("SFAS 148"). This statement provides alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS 148
amends the disclosure requirements of Statement No. 123 to require more
prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. The provisions of SFAS 148 are
effective for fiscal years ending after December 15, 2002 and the interim
disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15,
2002. The Company adopted SFAS 148 during the fiscal quarter ended March
31, 2003. The adoption of SFAS 148 did not have a material impact on the
Company's results of operations or financial position and the additional
required disclosures have been provided below.
The Company applies Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees," and related interpretations, in accounting
for its stock-based compensation plans. Accordingly, no compensation cost
has been recognized for its stock option plans and its stock purchase
plan. Had compensation cost for the Company's stock-based compensation
plans been determined based on the fair value at the grant dates for
awards under those plans consistent with SFAS No. 123, the Company's net
earnings and earnings per share would have been reduced to the pro forma
amounts indicated below:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2003 2002 2003 2002
-------- -------- --------- -----------
Net income, as reported $ 45,874 $ 53,107 $ 130,478 $ 165,403
Add: Stock-based employee compensation -- -- -- --
expense included in reported net income,
net of related tax effects
Deduct: Total stock-based employee 1,724 3,202 4,830 14,622
compensation expense determined under
fair value based method for all awards,
net of related tax effects
-------- -------- --------- -----------
PRO FORMA NET INCOME $ 44,150 $ 49,905 $ 125,648 $ 150,781
======== ======== ========= ===========
EARNINGS PER SHARE:
Basic - as reported $ 0.69 $ 0.82 $ 1.98 $ 2.57
======== ======== ========= ===========
Basic - pro forma $ 0.67 $ 0.77 $ 1.91 $ 2.34
======== ======== ========= ===========
Diluted - as reported $ 0.66 $ 0.78 $ 1.90 $ 2.43
======== ======== ========= ===========
Diluted - pro forma $ 0.64 $ 0.73 $ 1.83 $ 2.22
======== ======== ========= ===========
8
4. 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 49 days, which are readily convertible into cash at par
value, which approximates cost.
As of March 31, 2003 and June 30, 2002, approximately $0 and $84,834,
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 decided to secure in connection with its cash management policy.
On August 21, 2002, the Company's supply agreement with AstraZeneca
expired.
5. OTHER RECEIVABLES
Other receivables consist primarily of patent challenge settlement
receivables and receivables related to development and other revenue (See
Note 11).
6. INVENTORIES
Inventories consist of the following:
March 31, June 30,
2003 2002
-------- --------
Raw materials and supplies $ 52,007 $ 43,952
Work-in-process 17,575 12,897
Finished goods 26,622 94,284
-------- --------
Total $ 96,204 $151,133
======== ========
The Company's distributed version of Tamoxifen Citrate, purchased as a
finished product from AstraZeneca, accounted for approximately $0 and
$69,655 of finished goods inventory as of March 31, 2003 and June 30,
2002, respectively. As the result of the expiration of the Company's
supply agreement with AstraZeneca on August 21, 2002, the March 31, 2003
finished goods balance includes only Tamoxifen inventory manufactured by
the Company.
7. RELATED PARTIES
Dr. Bernard C. Sherman
During the three months ended March 31, 2003 and 2002, the Company
purchased $903 and $1,344, respectively, of bulk pharmaceutical materials
from companies affiliated with
9
Dr. Bernard C. Sherman, the Company's largest beneficial shareholder and a
former member of the Board of Directors. For the nine months ended March
31, 2003 and 2002, such purchases were $3,582 and $2,851, respectively. In
addition, during the three months ended March 31, 2003 and 2002, the
Company sold $3,912 and $3,350, respectively, of certain of its
pharmaceutical products and bulk pharmaceutical materials to companies
owned by Dr. Sherman. For the nine months ended March 31, 2003 and 2002,
such sales were $9,224 and $13,670, respectively. As of March 31, 2003,
the Company's accounts receivable included $974 due as a result of these
sales.
During fiscal 1996, the Company entered into an agreement with a company
owned by Dr. Sherman to share litigation and related costs in connection
with the Company's Fluoxetine patent challenge. For the three months ended
March 31, 2003 and 2002, in connection with this agreement, the Company
recorded $38 as a reduction to operating expenses and $130 as an increase
in operating expenses, respectively. For the nine months ended March 31,
2003 and 2002, the Company recorded $368 and $766, respectively, as a
reduction to operating expenses. Included in cost of sales for the three
months ended March 31, 2003 and 2002 is approximately $102 and $25,025,
respectively, for the related party's share of Fluoxetine profits as
defined in the profit sharing agreement. For the nine months ended March
31, 2003 and 2002, the Company recorded $752 and $175,246, respectively,
as cost of sales related to this agreement.
As of March 31, 2003 and June 30, 2002, the Company's accounts payable
included $1,281 and $634, respectively, related to transactions with these
entities.
8. INTANGIBLE ASSETS
Goodwill of $14,118 and $13,941 at March 31, 2003 and June 30, 2002,
respectively, was attributable to the Company's acquisition of certain
assets and assumption of certain liabilities of Enhance Pharmaceuticals,
Inc. in June 2002. The increase in goodwill from June 30, 2002 is
attributable to acquisition-related professional fees for which invoices
were received subsequent to June 30, 2002.
Intangible assets, excluding goodwill, which are comprised primarily of
patents and product licenses, consist of the following:
March 31, June 30,
2003 2002
-------- --------
Patents $ -- $ 1,400
Product licenses 26,800 26,800
-------- --------
26,800 28,200
Less: accumulated amortization (2,010) --
-------- --------
Intangible assets, net $ 24,790 $ 28,200
======== ========
During December 2002, the Company's management decided to suspend
development of a product for which $1,400 in patents had been recorded,
pending review of future market opportunities. As a result, on December
31, 2002, the Company wrote off the remaining
10
$1,330 of patents, net of accumulated amortization. For the nine months
ended March 31, 2003, this amount has been included in selling, general
and administrative expense.
Estimated amortization expense on product licenses is as follows:
Year Ending
June 30,
- -----------
2003 $ 2,750
2004 2,680
2005 2,680
2006 2,680
2007 2,680
The Company's current product licenses have a weighted average useful life
of approximately ten years.
9. LONG-TERM DEBT
The Company has a $40,000 revolving credit facility that expires on
February 27, 2005. As of March 31, 2003, there was approximately $29,312
available to the Company under this facility due to the issuance of a
$10,688 letter of credit in support of the Company's product liability
self-insurance program (See Notes 2 and 14).
10. 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 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, 2003 and 2002 was $45,870 and
$53,088, respectively, and for the nine months ended March 31, 2003 and
2002 was $130,230 and $167,243, respectively.
11. DEVELOPMENT AND OTHER REVENUE
For the three and nine months ended March 31, 2002, development and other
revenue consisted primarily of amounts received from DuPont
Pharmaceuticals Company ("DuPont") for various development and
co-marketing agreements entered into in March 2000. The assets of DuPont
have since been acquired by Bristol-Myers Squibb and the March 2000
agreements that generated these revenues were terminated in April 2002.
For the three and nine months ended March 31, 2003, development and other
revenue includes royalty income earned under licensing agreements, a
development agreement with the U.S. Department of Defense, and a
development agreement related to the Company's vaginal ring products.
11
12. MERGER-RELATED COSTS
As a result of the acquisition of Duramed Pharmaceuticals, Inc. in October
2001 (accounted for as a pooling of interests), for the three and nine
months ended March 31, 2003, the Company incurred net pre-tax
merger-related expenses of approximately $2,356 and $33,295, respectively.
These costs include direct transaction costs such as legal, accounting and
other expenses; costs associated with facility and product rationalization;
and severance costs. As of March 31, 2003, the remaining accrued liability
of approximately $685 consists primarily of facility rationalization costs.
13. EARNINGS PER SHARE
On February 18, 2003, the Company's Board of Directors declared a 3-for-2
stock split effected in the form of a 50% stock dividend. Approximately
22.2 million additional shares of common stock were distributed on March
17, 2003 to shareholders of record at the close of business on February 28,
2003. All applicable prior year share and per share amounts have been
adjusted for the stock split.
The following is a reconciliation of the numerators and denominators used
to calculate earnings per common share ("EPS") in the Consolidated
Statements of Operations:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2003 2002 2003 2002
-------- -------- -------- --------
Net earnings $ 45,874 $ 53,107 $130,478 $167,353
Preferred stock dividends -- -- -- 457
Deemed dividend on convertible preferred stock -- -- -- 1,493
-------- -------- -------- --------
Numerator for basic and diluted earnings per share-
net earnings applicable to common shareholders $ 45,874 $ 53,107 $130,478 $165,403
======== ======== ======== ========
EARNINGS PER COMMON SHARE - BASIC:
Weighted average shares (denominator) 66,189 65,045 65,893 64,454
Net earnings applicable to common shareholders $ 0.69 $ 0.82 $ 1.98 $ 2.57
======== ======== ======== ========
EARNINGS PER COMMON SHARE - ASSUMING DILUTION:
Weighted average shares 66,189 65,045 65,893 64,454
Effect of dilutive options 3,271 3,303 2,869 3,604
-------- -------- -------- --------
Weighted average shares - assuming
dilution (denominator) 69,460 68,348 68,762 68,058
Net earnings applicable to common shareholders $ 0.66 $ 0.78 $ 1.90 $ 2.43
======== ======== ======== ========
12
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2002 2001 2002 2001
---- ---- ---- -----
Not included in the calculation of diluted earnings
per share because their impact is antidilutive:
Stock options outstanding 840 519 844 519
Preferred if converted -- -- -- 1,013
14. COMMITMENTS AND CONTINGENCIES
Office Lease
On February 6, 2003, the Company entered into a 12-year operating lease for
its new executive offices in Woodcliff Lake, New Jersey. The lease term
expires on May 31, 2015. The Company recorded approximately $316 in rent
expense related to this lease for the three months ended March 31, 2003.
Future annual lease payments under this lease are as follows:
Year Ending
June 30,
-----------
2003 $ --
2004 169
2005 2,030
2006 2,030
2007 2,038
Thereafter 17,139
Business Development Venture
In fiscal 2002, the Company entered into a Loan and Security Agreement (the
"Loan Agreement") with Natural Biologics, the raw material supplier for the
Company's generic conjugated estrogens product. The Company believes that
the raw material is pharmaceutically equivalent to raw material used to
produce Wyeth's Premarin(R). Natural Biologics is a defendant in litigation
brought by Wyeth alleging that Natural Biologics misappropriated certain
Wyeth trade secrets with respect to the preparation of this raw material.
This case was tried in November 2002, and a decision may be rendered by the
trial court at any time. An unfavorable decision for Natural Biologics
could materially and adversely affect Natural Biologics' ability to repay
the loans the Company has made to it. If that were to be the case, the
Company may be required to write-off all or a portion of the loans made to
Natural Biologics. As of March 31, 2003, the Company had loaned Natural
Biologics approximately $13,164 under this agreement, and has included such
amount in other assets.
Under the terms of the Loan Agreement, absent the occurrence of a material
adverse event (including, without limitation, an unfavorable court decision
in the Wyeth matter), the Company could loan Natural Biologics up to
$35,000 over a three-year period, including an additional $1,080 during the
remainder of fiscal 2003, and $8,300 and $2,800 during
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fiscal 2004 and 2005, respectively. The Loan Agreement also provides for a
loan of $10,000 based upon the successful outcome of pending legal
proceedings between Wyeth and Natural Biologics, as discussed above. The
loans mature on June 3, 2007.
In fiscal 2002, the Company also entered into a Development, Manufacturing
and Distribution Agreement with Natural Biologics which could obligate the
Company to make milestone payments totaling an additional $35,000 to
Natural Biologics based on achieving certain legal and product approval
milestones, including the approval of a generic product.
Funding of Employee Savings Plan
On September 27, 2002, the Company committed to make a minimum aggregate
contribution of $9,200 to the Barr Laboratories, Inc. Savings and
Retirement Plan for the fiscal year ending June 30, 2003. As of March 31,
2003, the Company has funded $7,368 of the contribution commitment and has
recorded an asset and a matching liability equal to the remaining
contribution commitment.
Employment Agreements
The Company has entered into employment agreements with certain key
employees. These agreements mature at various dates through 2005.
Product Liability Insurance
Due to the significant increase in the cost of product liability insurance,
on September 30, 2002, the Company entered into a finite risk insurance
arrangement (the "Arrangement") with a third party insurer. The Company
believes that the Arrangement is an effective way to insure against a
portion of potential product liability claims. In exchange for $15,000 in
product liability coverage over a five-year term, the Arrangement provides
for the Company to pay approximately $14,250 in four equal annual
installments of $3,563, with the first annual payment having been made in
October 2002. Included in the initial payment is an insurer's margin of
approximately $1,000, which is being amortized over the five-year term. At
any six-month interval, the Company may, at its option, cancel the
Arrangement. In addition, at the earlier of termination or expiry, the
Company is eligible for a return of all amounts paid to the insurer, less
the insurer's margin and amounts for any incurred claims. The Company is
recording the payments, net of the insurer's margin, as deposits included
in other assets.
The Company continues to be self-insured for potential product liability
claims between $15,000 and $25,000. The Company has purchased additional
coverage from an insurance carrier for product liability claims related to
certain products that will offer coverage for claims between $25,000 to
$50,000.
On September 30, 2002, the Company purchased unlimited extended reporting
period insurance for potential product liability claims on all products
related to prior periods from September 10, 1987 to September 30, 2002.
This coverage continues without expiration.
The Company has never been held liable for, or agreed to pay, a significant
product liability claim. However, if a product manufactured or distributed
by the Company were
14
found to be defective and the Company was not successful in the defense or
settlement of the suit, it could have a material adverse effect on the
results of operations or financial condition of the Company to the extent
the Company was self-insured against the resulting liability or such
liability exceeded policy limits.
Litigation Settlement
On October 22, 1999, the Company reached 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 $15,000, which the
Company paid to Schein in 1999. An additional $15,000 payment is required
under the terms of the settlement if Cenestin achieves total profits
(product sales less product-specific cost of goods sold, sales and
marketing and other relevant expenses) of greater than $100,000 over any
five-year or less period prior to October 22, 2014.
Class Action Lawsuits
Ciprofloxacin (Cipro(R))
To date, the Company has been named as co-defendants with Bayer
Corporation, The Rugby Group, Inc. and others in 38 class action complaints
filed in state and federal courts by direct and indirect purchasers of
Ciprofloxacin (Cipro(R)) since 1997. 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. 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.
Tamoxifen
To date, approximately 31 consumer or third party payor class action
complaints have been filed in state and federal courts 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 the Company to charge artificially inflated prices for Tamoxifen
Citrate. A prior investigation of this agreement by the U.S. Department of
Justice was closed without further action.
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.
15
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 judgment 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 the Company's raw material
supplier. Invamed and Apothecon have appealed the District Court's decision
to the United States Court of Appeals for the Second Circuit. Trial on the
merits has been stayed pending the outcome of the appeal. The Company
believes 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.
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 Organon Inc.'s Mircette(R) oral contraceptive
regimen. The Company notified Bio-Technology General Corp. ("BTG"), the
owner of the patent for the Mircette product, 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 seeking to
prevent the Company from marketing the tablet combination. On December 6,
2001, the District Court granted summary judgment in favor of the Company,
finding that the Company's product did not infringe the patent at issue in
the case. Subsequently, BTG filed an appeal of the lower court's ruling. On
April 8, 2002, the FDA granted final approval for the Company's application
and the Company launched its product. On April 1, 2003, the United States
Court of Appeals for the Federal Circuit reversed the District Court's
grant of summary judgment and remanded the case to the District Court for
further proceedings. The Company believes that it has not infringed BTG's
patent and intends to continue marketing its product pending the final
outcome of the litigation. If BTG prevails in the litigation, 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
We previously disclosed this case in our annual report Form 10-K for the
year ended June 30, 2002 as filed with the SEC on August 26, 2002. Shire
has appealed the district court's order denying Shire's request for a
preliminary injunction to the U.S. Court of Appeals for the Third Circuit.
Oral arguments were heard on April 9, 2003. No court decision has been
issued. The Company does not expect the on-going litigation to cause any
disruption in the manufacturing and sale of its Dextro Salt Combo product
or to affect the status of product currently in the marketplace. However,
if Shire is successful on appeal and an injunction is granted or damages
are awarded, it could have a material adverse impact on the Company's
consolidated financial statements.
16
Termination of Solvay Co-Marketing Relationship
On March 31, 2002, the Company gave notice of its intention to terminate,
on June 30, 2002, the relationship between the Company and Solvay
Pharmaceuticals, Inc. ("Solvay") which covered the joint promotion of the
Company's Cenestin(R) tablets and Solvay's Prometrium(R) capsules. Solvay
has disputed the Company's right to terminate the relationship, claims it
is entitled to substantial damages and has notified the Company that it has
demanded arbitration of this matter. 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.
Lemelson
On November 23, 2001, the Lemelson Medical, Education & Research
Foundation, LP filed an action in the United States District Court for the
District of Arizona alleging patent infringement against many defendants,
including the Company, involving "machine vision" or "computer image
analysis." On March 20, 2002, the court stayed the proceedings, pending the
resolution of another suit that involves the same patents, but does not
involve the Company. If Lemelson prevails in its action against the
Company, it could have a material adverse impact on the Company's
consolidated financial statements.
Other Litigation
As of March 31, 2003, the Company was involved with other lawsuits
incidental to its business, including patent infringement actions and
product liability claims. Management, based on the advice of legal counsel,
believes that the ultimate disposition of such other lawsuits will not have
a material adverse effect on the Company's consolidated financial
statements.
Administrative Matters
On June 30, 1999, the Company received a civil investigative demand ("CID")
and a subpoena from the FTC seeking documents and data relating to the
January 1997 agreements resolving the patent litigation involving
Ciprofloxacin hydrochloride, which had been pending in the U.S. District
Court for the Southern District of New York. The CID was limited to a
request for information and did not allege any wrongdoing. The FTC is
investigating whether the Company, through the settlement and supply
agreements, has engaged in activities in violation of the antitrust laws.
The Company continues to cooperate with the FTC in this investigation.
On August 17, 2001, the Oregon Attorney General's Office, as liaison on
behalf of a group of state Attorneys General, served the Company with a
civil investigative demand relating to its investigation of the Company's
settlement of the Tamoxifen patent challenge with AstraZeneca. The
investigative demand requests the production of certain information and
documents that may assist the Attorney General in its investigation. The
Company is reviewing the demand and intends to fully cooperate with the
Attorney General's office in its investigation.
17
The Company's patent challenge settlement agreements relating to
Ciprofloxacin and Tamoxifen have been the subject of investigations by
state and federal antitrust enforcement agencies: the Texas Attorney
General initiated, and closed, an investigation into the Ciprofloxacin
settlement on behalf of several state Attorneys General; and the U.S.
Department of Justice initiated, and closed, an investigation into the
Tamoxifen settlement. The two investigations discussed in the paragraphs
above remain open.
The Company believes that the patent challenge settlements being
investigated represent a pro-consumer and pro-competitive outcome to the
patent challenge cases. The Company believes that once all the facts are
considered, and the benefits to consumers are assessed, these
investigations will be satisfactorily resolved as they have been by the
DOJ, regarding Tamoxifen, and the Texas Attorney General, regarding
Ciprofloxacin. However, consideration of these matters could take
considerable time, and any adverse judgment could have a material adverse
impact on the Company's consolidated financial statements.
In May 2001, the Company received a subpoena, issued by the Commonwealth of
Massachusetts Office of the Attorney General, for the production of
documents related to pricing and Medicaid reimbursement of select products
in Massachusetts. The Company is one of a number of pharmaceutical
companies that have received such subpoenas. The Company is cooperating
with the inquiry and believes that all of its product agreements and
pricing decisions have been lawful and proper.
18
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(dollars in thousands)
FORWARD-LOOKING STATEMENTS
The following sections contain a number of forward-looking statements. To the
extent that any statements made in this report contain information that is not
historical, these statements are essentially forward-looking. Forward-looking
statements can be identified by their use of words such as "expects," "plans,"
"will," "may," "anticipates," "believes," "should," "intends," "estimates" and
other words of similar meaning. These statements 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 difficulty in predicting the timing and outcome of legal
proceedings, including patent related matters such as patent
challenge settlements and patent infringement cases;
- the difficulty of predicting the timing of U.S. Food and Drug
Administration, or FDA, approvals;
- court and FDA decisions on exclusivity periods;
- the ability of competitors to extend exclusivity periods for
their products;
- market and customer acceptance and demand for our pharmaceutical
products;
- reimbursement policies of third party payors;
- our ability to market our proprietary products;
- the successful integration of acquired businesses and products
into our operations;
- the use of estimates in the preparation of our financial
statements;
- the impact of competitive products and pricing;
- the ability to develop and launch new products on a timely basis;
- the availability of raw materials;
- the availability of any product we purchase and sell as a
distributor;
- the regulatory environment;
- fluctuations in operating results, due to spending for research
and development, sales and marketing and patent challenge
activities; and
- other risks detailed from time-to-time in our filings with the
Securities and Exchange Commission.
OVERVIEW
We operate in one business segment, which is the development, manufacture and
marketing of pharmaceutical products.
19
CRITICAL ACCOUNTING POLICIES
The methods, estimates and judgments we use in applying the accounting policies
most critical to our financial statements have a significant impact on the
results we report in our financial statements. The SEC has defined the most
critical accounting policies as the ones that are most important to the
portrayal of our financial condition and results, and require us to make our
most difficult and subjective judgments. Based on this definition, our most
critical policies include the following: (1) provisions for estimated sales
returns and allowances; (2) accrual of inventory reserves; (3) deferred taxes;
(4) accrual for litigation; (5) accrual for self-insurance reserve; and (6) the
assessment of recoverability of goodwill and other intangible assets. We also
have other key accounting policies including policies for revenue recognition.
We believe that these other policies either do not generally require us to make
estimates and judgments that are as difficult or as subjective as the six listed
above, or it is less likely that they would have a material impact on our
reported results of operations for a given period. Although we believe that our
estimates and assumptions are reasonable, they are based upon information
presently available. Actual results may differ significantly from our estimates
and our estimates could be different using different assumptions or conditions.
Our critical accounting polices are as follows:
Sales Returns and Allowances
When we recognize revenue from the sale of our pharmaceutical products, we
simultaneously record an estimate of various costs which reduce product sales.
These costs include estimates for product returns, rebates, chargebacks and
other sales allowances. In addition, as discussed in detail below, we may record
allowances for shelf-stock adjustments when the conditions are appropriate. We
base our estimates for sales allowances such as product returns, rebates and
chargebacks on a variety of factors, including actual return experience of that
product or similar products, rebate agreements for each product, and estimated
sales by our wholesale customers to other third parties who have contracts with
us. Actual experience associated with any of these items may differ materially
from our estimates. We review the factors that influence our estimates and, if
necessary, make adjustments when we believe actual product returns, credits and
other allowances may differ from established reserves.
We often issue credits to customers for inventory remaining on their shelves
following a decrease in the market price of a generic pharmaceutical product.
These credits, commonly referred to in the pharmaceutical industry as
"shelf-stock adjustments," can then be used by customers to offset future
amounts owing to us under invoices for future product deliveries. The
shelf-stock adjustment is intended to reduce a customer's inventory cost to
better reflect current market prices and is often used by us to maintain our
long-term customer relationships. The determination to grant a shelf-stock
credit to a customer following a price decrease is usually at our discretion
rather than contractually required. We record allowances for shelf-stock
adjustments at the time we sell products that we believe will be subject to a
price decrease. When determining whether to record a shelf-stock adjustment and
the amount of any such adjustment, we analyze several variables including the
estimated launch date of a competing product, the estimated decline in market
price and estimated levels of inventory held by the customer at the time of the
decrease in market price. As a result, a shelf-stock reserve depends on a
product's unique facts and circumstances. We regularly monitor these and other
factors for
20
our significant products and evaluate our reserves and estimates as additional
information becomes available.
Inventory Reserves
We establish reserves for our inventory to reflect situations in which the cost
of the inventory is not expected to be recovered. We regularly review our
inventory, including products close to expiration and therefore 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 our quality assurance and
control 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. In
evaluating whether inventory is stated at the lower of cost or market, we
consider such factors as the amount of inventory on hand, estimated time
required to sell such inventory, remaining shelf life and current and expected
market conditions, including levels of competition. We monitor inventory levels,
expiry dates and market conditions on a regular basis. We record changes in
inventory reserves as part of cost of goods sold.
Deferred Taxes
Income taxes are accounted for under Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." Under this method, deferred tax
assets and liabilities are recognized for the expected future tax consequences
of temporary differences between the financial statement and tax basis of assets
and liabilities using enacted tax rates in effect for the years in which the
differences are expected to reverse. A valuation allowance is provided for the
portion of deferred tax assets which are "more-likely-than-not" to be
unrealized. The recoverability of deferred tax assets is dependent upon our
assessment of whether it is more-likely-than-not that sufficient future taxable
income will be generated in the relevant tax jurisdiction to utilize the
deferred tax asset. We review our internal forecasted sales and pre-tax earnings
estimates to make our assessment about the utilization of deferred tax assets.
In the event we determine that future taxable income will not be sufficient to
utilize the deferred tax asset, a valuation allowance will be recorded. If that
assessment changes, a charge or a benefit would be recorded on the statement of
operations.
Litigation
We are subject to litigation in the ordinary course of business and also to
certain other contingencies (See Note 14 to the Consolidated Financial
Statements). Legal fees and other expenses related to litigation and
contingencies are recorded as incurred. Additionally, we assess, in consultation
with counsel, the need to record a liability for litigation and contingencies on
a case-by-case basis. Reserves are recorded when we, in consultation with
counsel, determine that a loss related to a matter is both probable and
reasonably estimable.
Self-Insurance Reserve
Since September 30, 2002, we have primarily been self-insured for product
liability claims. We record a self-insurance reserve for each reported claim on
a case-by-case basis, plus an allowance for the estimated future cost of
incurred but not reported ("IBNR") claims. We will record an allowance for IBNR
claims when we believe that an event has occurred that will likely give rise to
future product liability claims against us or one of our subsidiaries. In
assessing the
21
amounts to record for each reported claim, with the assistance of counsel and
insurance consultants we consider the nature and amount of the claim, our prior
experience with similar claims, and whether the amount expected to be paid on a
claim is both probable and reasonably estimable. In determining the allowance
for the cost of IBNR claims, we consider a variety of factors including
historical claims and insurance premium experience. We have never incurred a
significant product liability loss. Beginning in the mid-to-late fourth quarter
of fiscal 2003 and continuing annually thereafter, we will engage an independent
actuary to perform an estimate of our IBNR claims. The actuary's estimate may
indicate that a change in the amount we have accrued for IBNR claims is
required. Actual payments may differ materially from the reserve amount for both
reported and IBNR claims. As of and for the nine months ended March 31, 2003,
the liability and related expenses for our self-insurance reserve were included
in accrued liabilities and selling, general and administrative expenses,
respectively.
Goodwill and Intangible Assets
In connection with acquisitions, we determine the amounts assigned to goodwill
and intangibles based on purchase price allocations. These allocations,
including an assessment of the estimated useful lives of intangible assets, have
been performed by qualified independent appraisers using generally accepted
valuation methodologies. Valuation of intangible assets is generally based on
the estimated cash flows related to those assets, while the value assigned to
goodwill is the residual of the purchase price over the fair value of all
identifiable assets acquired and liabilities assumed. Useful lives are
determined based on the expected future period of benefit of the asset, which
considers various characteristics of the asset, including historical cash flows.
As required by SFAS 142, "Goodwill and Other Intangible Assets," we review
goodwill for impairment annually or more frequently if impairment indicators
arise. We will perform our next valuation of goodwill as of July 1, 2003.
As the result of the June 2002 purchase of certain assets and assumption of
certain liabilities of Enhance Pharmaceuticals, Inc., we have approximately
$14,118 of goodwill and $24,790 of intangible assets, net, included in our
balance sheet as of March 31, 2003.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2003 AND MARCH 31, 2002
Revenues -- Overview
Total revenues for the three months ended March 31, 2003 were $171,923, a
decrease of 34% compared to $261,411 for the three months ended March 31, 2002.
This decrease in total revenues was anticipated and was primarily due to the
sharp decline in sales of our 20 mg Fluoxetine product, and a reduction in sales
of our distributed version of Tamoxifen. Partially offsetting the decline in
sales of Fluoxetine and Tamoxifen was a 33% increase in sales of other products,
led by higher sales of our oral contraceptive franchise of products.
22
Revenues -- Product Sales
Product sales for the three months ended March 31, 2003 were $169,006, compared
to $255,916 in the prior year period. Fluoxetine accounted for $1,261 of product
sales in the fiscal 2003 period, down from $53,848 in the fiscal 2002 period,
while Tamoxifen accounted for $4,517 of product sales in the fiscal 2003 period,
down from $79,795 in the fiscal 2002 period. Conversely, sales of products other
than Fluoxetine and Tamoxifen increased 33% from $122,273 in the fiscal 2002
period to $163,228 in the current year period.
The increase in sales of products other than Fluoxetine and Tamoxifen was
primarily attributable to increased sales of our oral contraceptive products,
for which sales nearly tripled from the prior year quarter. Sales of oral
contraceptives increased $60,625 or 276% from the three months ended March 31,
2002 to the three months ended March 31, 2003. The increase in sales of the oral
contraceptives reflects higher sales of existing products, including our
Apri(R), Aviane(TM) and Nortrel(R) products, and sales of our nine new oral
contraceptive products, all of which we launched in the last twelve months.
Partially offsetting the increase in sales of our oral contraceptive products
were decreases in sales of our Dextro salt combo product (the generic equivalent
of Shire Richwood, Inc.'s Adderall(R)) and lower sales of Cenestin. We
launched our Dextro salt combo product in February 2002 as the first generic
manufacturer to enter the market. The decline in sales of our Dextro salt combo
product from the three months ended March 31, 2002 reflects higher sales in the
prior year from fulfillment of initial orders by our customers immediately
following product launch in February 2002 and lower prices in the current year
due to the entry of competitors into the market. Sales of Cenestin declined
$6,562, primarily due to significant customer purchases in the prior quarter in
anticipation of our December 2002 price increase and increased purchases of
certain Cenestin package styles that we discontinued in the second quarter of
2003, causing higher than expected customer inventory levels and resulting in
decreased sales.
In August 2001, we launched our Fluoxetine 20 mg capsule with 180 days of
exclusivity as the only generic manufacturer. Sales of Fluoxetine were $53,848
for the three months ended March 31, 2002, constituting approximately 21% of
product sales in that quarter. On January 29, 2002, our 180-day generic
exclusivity period on the Fluoxetine 20 mg capsules ended and, as expected, the
FDA approved several other generic versions. As a result, the selling price
declined dramatically and we lost market share to competing products, causing
our sales and profits from Fluoxetine to be substantially lower than those
earned during the exclusivity period. For the three months ended March 31, 2003,
sales of Fluoxetine accounted for less than 1% of product sales.
Tamoxifen sales decreased from $79,795 for the three months ended March 31, 2002
to $4,517 for the three months ended March 31, 2003. During the quarter ended
December 31, 2002, we sold our remaining distributed Tamoxifen inventory
previously purchased from AstraZeneca. AstraZeneca's pediatric exclusivity for
its Nolvadex(R) brand version of Tamoxifen ended on February 20, 2003. We
were unable to supply Tamoxifen to our customers after the depletion of our
inventory until the launch of our manufactured Tamoxifen product at the
expiration of AstraZeneca's pediatric exclusivity period. At that time, several
other generic competitors launched Tamoxifen products, causing the price to
decline and causing us to lose market share.
23
Revenues -- Development and Other Revenue
For the three months ended March 31, 2003, development and other revenue of
$2,917 includes royalty income earned under licensing agreements with third
parties, our development agreement with the U.S. Department of Defense, and our
development agreement related to one of our vaginal ring products. For the three
months ended March 31, 2002, development and other revenue consisted primarily
of amounts received from DuPont Pharmaceuticals Company for various development
and co-marketing agreements entered into in March 2000. The assets of DuPont
have since been acquired by Bristol-Myers Squibb ("BMS") and the March 2000
agreements that generated these revenues ended in April 2002. As we incurred
research and other development activity costs, we recorded such expenses as
research and development and invoiced and recorded the related revenue from BMS
as development and other revenue. We recorded revenue from these agreements of
$5,000 for the three months ended March 31, 2002.
Cost of Sales
Cost of sales decreased 60% from $139,142 for the three months ended March 31,
2002 to $55,182 for the three months ended March 31, 2003, primarily due to
lower sales of Fluoxetine and Tamoxifen. Cost of sales includes the profit split
paid to Apotex, Inc., our partner in the Fluoxetine patent challenge, and
royalties on certain other products paid to certain of our raw material
suppliers.
As a percentage of product sales, cost of sales decreased from 54% for the three
months ended March 31, 2002 to 33% for the three months ended March 31, 2003.
This decrease reflects an improved product mix from a margin perspective,
including lower sales of our distributed Tamoxifen and Fluoxetine, which have
lower margins, and an increased percentage of sales attributable to our higher
margin manufactured products.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased 30% from $26,271 for the
three months ended March 31, 2002 to $34,203 for the three months ended March
31, 2003. The increase was primarily due to higher marketing expenses for
pre-launch activities related to our extended cycle oral contraceptive,
SEASONALE(R), and increased marketing and selling expenses for Cenestin. Also
contributing to the increase were the amortization of intangible assets and
higher legal costs. Partially offsetting these increases were lower costs
associated with synergies achieved as a result of the integration of Duramed.
Research and Development
Research and development expenses increased 13% from $18,715 for the three
months ended March 31, 2002 to $21,127 for the three months ended March 31,
2003. The increase reflected higher headcount and development costs in our
proprietary development program, including costs associated with our vaginal
ring product, as well as increased expenditures associated with the development
of the Adenovirus Vaccine.
24
Merger-Related Costs
Merger-related costs in the prior year included direct transaction costs related
to our October 2001 merger with Duramed Pharmaceuticals, Inc., such as
investment banking, legal, accounting and other costs; and costs associated with
facility and product rationalization.
Proceeds from Patent Challenge Settlement
Proceeds from patent challenge settlement represent amounts earned under the
terms of the contingent supply agreement entered into with Bayer to settle our
patent challenge litigation regarding its Ciprofloxacin antibiotic. Under the
terms of the contingent supply agreement, Bayer, at its option, must either
supply us with Ciprofloxacin at a predetermined discount for resale or make
quarterly cash payments to us. To date, Bayer has elected to make payments to us
rather than supply us with Ciprofloxacin. Accordingly, we have recognized
proceeds from patent challenge settlement of $7,937 for the three months ended
March 31, 2002 and $8,563 for the three months ended March 31, 2003.
Interest Income
Interest income decreased 21% from $1,953 for the three months ended March 31,
2002 to $1,547 for the three months ended March 31, 2003, primarily due to a
decrease in market interest rates and a slight decline in the average cash and
cash equivalents balance and marketable securities balance.
Interest Expense
Interest expense decreased 46% from $684 for the three months ended March 31,
2002 to $370 for the three months ended March 31, 2003, primarily due to a
decrease in our debt balances combined with lower interest rates on borrowings.
Other (Income) Expense
Other income for the three months ended March 31, 2003 included a $159 gain on
foreign currency exchange.
Income Taxes
Our income tax provision for the three months ended March 31, 2002 reflected a
36.9% effective tax rate on pre-tax income, compared to 35.7% for the three
months ended March 31, 2003 and an effective tax rate of 37.3% for the both the
three and six months ended December 31, 2002.
The decrease in the tax rate for the three months ended March 31, 2003 compared
to the first six months of fiscal 2003 was due primarily to the recognition of a
deferred tax asset resulting from the identification of additional deductible
state net operating losses incurred in prior years during the three months ended
March 31, 2003.
25
COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 2003 AND MARCH 31, 2002
Revenues -- Overview
Total revenues for the nine months ended March 31, 2003 were $601,386, a
decrease of 39% from $979,604 in the nine months ended March 31, 2002. This
anticipated decrease in total revenues was primarily due to sharp declines in
sales of our Fluoxetine 20 mg product and our distributed Tamoxifen product.
Partially offsetting these declines was a 62% increase in sales of other
products, led by higher sales of our oral contraceptive franchise of products.
Revenues -- Product Sales
Product sales for the nine months ended March 31, 2003 were $595,389, compared
to $963,164 in the prior year period. Fluoxetine accounted for $4,720 of product
sales in the fiscal 2003 period, down from $364,955 in the fiscal 2002 period,
while Tamoxifen accounted for $117,029 of product sales in the fiscal 2003
period, down from $306,544 in the fiscal 2002 period. Conversely, sales of
products other than Fluoxetine and Tamoxifen increased 62% from $291,665 in the
fiscal 2002 period to $473,640 in the current year period.
The increase in sales of products other than Fluoxetine and Tamoxifen was
primarily attributable to increased sales of our oral contraceptive products,
for which sales nearly tripled from the prior year period. In addition,
increases in overall market share for our Dextro salt combo and Warfarin Sodium
contributed to the sales increase. Sales of oral contraceptives increased
$144,156 or 275% from the nine months ended March 31, 2002 to the nine months
ended March 31, 2003. The increase in sales of the oral contraceptives reflects
higher sales of existing products, including our Apri(R), Aviane(TM) and
Nortrel(R) products and sales of our nine new oral contraceptive products,
all of which we launched in the past twelve months.
In August 2001, we launched our Fluoxetine 20 mg capsule. Sales of Fluoxetine
were $364,955 for the nine months ended March 31, 2002, constituting
approximately 38% of product sales in that period. On January 29, 2002, our
180-day generic exclusivity period on the Fluoxetine 20 mg capsules ended and,
as expected, the FDA approved several other generic versions. As a result, the
selling price declined dramatically and we lost market share to competing
products, causing our sales and profits from Fluoxetine to be substantially
lower than those earned during the exclusivity period. As a result of these
declines, for the nine months ended March 31, 2003, sales of Fluoxetine were
less than 1% of product sales.
Tamoxifen sales decreased 62% from $306,544 for the nine months ended March 31,
2002 to $117,029 for the nine months ended March 31, 2003. This decrease in
sales is primarily due to the expiration of our supply agreement with
AstraZeneca on August 21, 2002, which prevented us from launching our
manufactured version of Tamoxifen until February 20, 2003.
Revenues -- Development and Other Revenue
For the nine months ended March 31, 2003, development and other revenue of
$5,997 includes royalty income earned under licensing agreements with other
third parties, our development agreement with the U.S. Department of Defense,
and our development agreement related to one of our vaginal ring products. For
the nine months ended March 31, 2002, development and other revenue consisted
primarily of amounts received from DuPont Pharmaceuticals Company
26
for various development and co-marketing agreements entered into in March 2000.
The assets of DuPont have since been acquired by Bristol-Myers Squibb and the
March 2000 agreements that generated these revenues ended in April 2002. We
recorded revenue from these agreements of $15,583 for the nine months ended
March 31, 2002.
Cost of Sales
Cost of sales decreased 54% from $570,040 for the nine months ended March 31,
2002 to $260,973 for the nine months ended March 31, 2003, primarily due to
lower sales of Fluoxetine and Tamoxifen. Cost of sales includes the profit split
paid to Apotex, Inc., our partner in the Fluoxetine patent challenge, and
royalties paid on certain other products to certain of our raw material
suppliers.
As a percentage of product sales, cost of sales decreased from 59% for the nine
months ended March 31, 2002 to 44% for the nine months ended March 31, 2003. The
decrease in cost of sales as a percentage of product sales resulted from sales
of an improved product mix from a margin perspective, including lower sales of
Fluoxetine and Tamoxifen, both of which had margins that were generally lower
than the average earned on our other products, and an increasing percentage of
sales of higher-margin products.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased 17% from $84,062 for the
nine months ended March 31, 2002 to $98,604 for the nine months ended March 31,
2003. The increase was primarily due to higher marketing expenses for pre-launch
activities related to our extended cycle oral contraceptive, SEASONALE(R);
increased marketing and selling expenses for Cenestin; increased legal costs,
which include costs associated with patent challenge activity, class action
lawsuits and other matters; and increased consulting costs primarily associated
with various information technology projects. Also contributing to the increase
was the amortization of intangible assets and a $1,330 write-off of an
intangible asset related to a product that we suspended development of pending
review of future market opportunities. Partially offsetting these increases were
decreases in costs due to synergies achieved as a result of the integration of
Duramed.
Research and Development
Research and development expenses increased 21% from $53,608 for the nine months
ended March 31, 2002 to $64,710 for the nine months ended March 31, 2003. The
increase reflected higher costs associated with increased clinical study and
headcount costs related to our proprietary development program, including costs
associated with our vaginal ring product, and higher biostudy and development
costs related to our generic development activities.
Merger-Related Costs
Merger-related costs in the prior year included direct transaction costs related
to our October 2001 merger with Duramed Pharmaceuticals, Inc., such as
investment banking, legal, accounting and other costs, and costs associated with
facility and product rationalization.
27
Proceeds from Patent Challenge Settlement
Proceeds from patent challenge settlement represent amounts earned under the
terms of the contingent supply agreement entered into with Bayer to settle our
patent challenge litigation regarding Bayer's Ciprofloxacin antibiotic. Under
the terms of the contingent supply agreement, Bayer, at its option, must either
supply us with Ciprofloxacin at a predetermined discount for resale or make
quarterly cash payments to us. To date, Bayer has elected to make payments to us
rather than supply us with Ciprofloxacin. Accordingly, we have recognized
proceeds from patent challenge settlement of $23,812 for the nine months ended
March 31, 2002 and $25,688 for the nine months ended March 31, 2003.
Interest Income
Interest income decreased 20% from $5,936 for the nine months ended March 31,
2002 to $4,728 for the nine months ended March 31, 2003, primarily due to a
decrease in market interest rates on our short-term investments. The decline was
partially offset by an increase in the average cash and cash equivalents balance
and marketable securities balance.
Interest Expense
Interest expense decreased 56% from $2,925 for the nine months ended March 31,
2002 to $1,291 for the nine months ended March 31, 2003, primarily due to a
decrease in our debt balances combined with lower interest rates on borrowings.
Other (Income) Expense
Other income for the nine months ended March 31, 2002 included $2,000 related to
a litigation settlement.
Income Taxes
Our income tax provision for the nine months ended March 31, 2002 reflected a
37.4% effective tax rate on pre-tax income, compared to 36.7% for the nine
months ended March 31, 2003. The decrease in the tax rate for the nine months
ended March 31, 2003 was due primarily to non-deductible costs related to the
merger with Duramed in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents balance increased $70,512 or 21% from $331,257 at
June 30, 2002, to $401,769 at March 31, 2003. In addition, our marketable
securities increased $28,998 from $15,502 at June 30, 2002 to $44,500 at March
31, 2003. Our primary source of cash is funds from operations, and our primary
uses of cash are for operating expenses and capital expenditures.
Operating Activities
Cash provided by operating activities was $152,120 for the nine months ended
March 31, 2003, as net earnings of $130,478 more than offset a slight increase
in working capital. Working
28
capital, defined as current assets (excluding cash and cash equivalents) less
current liabilities, increased slightly as decreases in accounts receivable and
inventory and an increase in income taxes payable more than offset decreases in
accounts payable and accrued liabilities. The $75,546 decrease in accounts
payable is primarily attributable to the payment of the remaining payables owed
to AstraZeneca after the termination of our Tamoxifen purchases. The $54,929
decrease in inventory is due to the sell-off of our remaining units of our
distributed version of Tamoxifen after the termination of our Tamoxifen supply
agreement with AstraZeneca. As a result, we had no purchased Tamoxifen inventory
on-hand at March 31, 2003. Income taxes payable were higher at March 31, 2003 as
compared to June 30, 2002 due to the timing of our estimated tax payments.
Approximately $24,438 of our cash flows from operations for the nine months
ended March 31, 2003 relates to payments from our contingent non-exclusive
supply agreement with Bayer Corporation related to our 1997 Cipro(R) patent
challenge. Under that agreement, Bayer, at its option, must either supply us
with Ciprofloxacin at a predetermined discount for resale or provide us with
quarterly cash payments. This contingent supply agreement expires in December
2003. If Bayer does not elect to supply us with product, we would receive
payments totaling approximately $25,688 for the remainder of the agreement,
including the collection of $19,979 included in other receivables at March 31,
2003. In accordance with our contingent supply agreement we are expecting to
purchase product from Bayer and launch a distributed version of Ciprofloxacin in
June 2003. As a result, working capital items including accounts receivable,
inventory and accounts payable are expected to increase significantly by the end
of June. However, because of the collection and payment terms, we do not expect
Ciprofloxacin to impact our cash flows until fiscal 2004 when the impact is
expected to be significant.
We expect operating cash flows over the next several years to be favorably
impacted by our continued utilization of federal net operating loss
carryforwards acquired in our merger with Duramed. The annual limitation on the
amount of the pre-merger net operating loss that may be deducted is governed by
Section 382 of the Internal Revenue Code. We believe utilizing such federal net
operating losses could generate approximately $9,800 of cash flows in fiscal
2003.
Investing Activities
During fiscal 2002, we initiated a multi-year capital expansion program to
increase our production, laboratory, warehouse and distribution capacity in
Virginia and Cincinnati. In addition to continuing these programs in fiscal
2003, we also continued to add and upgrade equipment in all of our locations.
These capital programs are designed to help ensure that we have the
manufacturing, distribution and laboratory facilities necessary to meet the
expected demand of our pipeline products and handle the increases in current
product sales.
During the nine months ended March 31, 2003, we invested $56,685 in capital
expenditures and believe our fourth quarter capital expenditures could amount to
an additional $15,000 to $20,000. The fourth quarter spending estimate includes
substantially completing the multi-year capital expansion programs noted above
and substantial completion of the construction of a dedicated facility for the
manufacture of the Adenovirus vaccine, the cost of which is being reimbursed by
the Federal government. However, it does not include the significant investment
that would be needed to purchase, install and integrate a new information
management system, which we are currently evaluating.
29
While we believe we have the cash resources to fund the capital spending
described above from cash derived from operations, given the large scale and
extended nature of some of the planned expenditures, we may consider financing a
portion of our projects. We believe we have the capital structure and cash flow
to complete any such financing.
In fiscal 2002, we entered into a Loan and Security Agreement (the "Loan
Agreement") with Natural Biologics, the raw material supplier for our generic
conjugated estrogens product. We believe that the raw material is
pharmaceutically equivalent to raw material used to produce Wyeth's
Premarin(R). Natural Biologics is a defendant in litigation brought by Wyeth
alleging that Natural Biologics misappropriated certain Wyeth trade secrets with
respect to the preparation of this raw material. This case was tried in November
2002, and a decision may be rendered by the trial court at any time. An
unfavorable decision for Natural Biologics could materially and adversely affect
Natural Biologics' ability to repay the loans we have made to it. If that were
to be the case, we may be required to write off all or a portion of the loans
made to Natural Biologics. As of March 31, 2003, we had loaned Natural Biologics
approximately $13,164 pursuant to the terms of this agreement, which we have
included on our balance sheet in other assets.
Under the terms of the Loan Agreement, absent the occurrence of a material
adverse event (including, without limitation, an unfavorable court decision in
the Wyeth matter), we could loan Natural Biologics up to $35,000 over a
three-year period, including an additional $1,080 during fiscal 2003, and $8,300
and $2,800 during fiscal 2004 and 2005, respectively. The Loan Agreement also
provides for a loan of $10,000 based upon the successful outcome of the pending
legal proceeding between Wyeth and Natural Biologics, as discussed above. The
loans mature on June 3, 2007.
In fiscal 2002, we also entered into a Development, Manufacturing and
Distribution Agreement with Natural Biologics which could obligate us to make
milestone payments totaling an additional $35,000 to Natural Biologics based on
achieving certain legal and product approval milestones, including the approval
of a generic product.
As of March 31, 2003, we have invested $44,400 in market auction debt securities
that are readily convertible into cash at par value with maturity dates ranging
from May 12, 2003 to July 13, 2004. We may continue to invest in extended
maturity securities based on operating needs and strategic opportunities.
On November 26, 2002 we signed a letter of intent to acquire the rights to four
products currently marketed by Wyeth-Ayerst Laboratories, Inc. ("Wyeth"), and a
sublicense for a product they are currently developing. The total purchase price
of such products is still subject to final negotiation. At closing, we
anticipate acquiring the products for an amount in excess of $20,000, subject to
certain adjustments, and we would make additional future payments as sales
milestones are achieved. In addition, we would assume the obligation to purchase
up to $10,000 in raw material inventory over the next three years. As currently
contemplated, upon closing of the transactions with Wyeth, we would terminate
the litigation with Wyeth relating to the anti-trust suit filed in September
2000 by Duramed Pharmaceuticals, Inc. against Wyeth. The termination of this
litigation will also require a one-time payment to our legal counsel of
approximately $20,000. We expect the transaction to close in the fourth quarter
of fiscal 2003.
Financing Activities
We have not engaged in any off-balance sheet financing involving unconsolidated
subsidiaries.
Debt balances decreased by approximately $4,685 during the nine months ended
March 31, 2003 due to scheduled debt repayments. Scheduled principal repayments
on our existing debt will be approximately $8,478 for the next twelve months. We
have a $40,000 revolving credit facility that expires on February 27, 2005. We
currently have approximately $29,312 available under this facility, with the
balance of the facility committed as a $10,688 letter of credit in support of
our finite risk insurance arrangement described below.
Contributions to Retirement Plan
On September 27, 2002, we committed to make a minimum aggregate contribution of
$9,200 to the Barr Laboratories, Inc. Savings and Retirement Plan for the fiscal
year ending June 30, 2003. As of March 31, 2003, we have funded $7,368 of the
contribution commitment and have recorded an asset and a matching liability
equal to the remaining contribution commitment.
Product Liability Insurance
Due to the significant increase in the cost of product liability insurance, on
September 30, 2002 we entered into a finite risk insurance arrangement (the
"Arrangement") with a third party insurer. We believe that the Arrangement is an
effective way to insure against a portion of potential product liability claims.
In exchange for $15,000 in product liability coverage over a five-year term, the
Arrangement provides for us to pay approximately $14,250 in four equal annual
installments of $3,563, with the first installment having been made in October
2002. At any six-month interval, we may, at our option, cancel the Arrangement.
In addition, at the earlier of termination or expiry, we are eligible for a
return of all amounts paid to the insurer, less the insurer's margin and amounts
for any incurred claims. We are recording the payments, net of the insurer's
margin, as deposits included in other assets.
We continue to be self-insured for potential product liability claims between
$15,000 and $25,000. We have purchased additional product coverage from an
insurance carrier for product liability claims related to certain products that
will offer coverage for claims between $25,000 to $50,000.
On September 30, 2002, we purchased unlimited extended reporting period
insurance for potential product liability claims on selected products related to
prior periods from September 10, 1987 to September 30, 2002. This coverage
continues without expiration.
We have never been held liable for, or agreed to pay, a significant product
liability claim. However, if one of our manufactured or distributed products
were found to be defective and we were not successful in the defense or
settlement of the suit, it could have a material adverse effect on our results
of operations or financial condition to the extent we were self-insured against
the resulting liability or such liability exceeded policy limits.
31
Strategic Transactions
To expand our business opportunities, we have increased our business development
activities and continue to evaluate and enter into various strategic
collaborations or acquisitions. The amount of cash required to enter into these
collaborations may be significant but cannot be predicted.
We believe that our current cash balances, cash flows from operations and
borrowing capacity, including unused amounts under our $40,000 revolving credit
facility, will be adequate to fund our operations and to capitalize on certain
strategic opportunities as they arise. To the extent that additional capital
resources are required, we believe that such capital may be raised by additional
bank borrowings, debt or equity offerings or other means.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 142 supercedes APB opinion No. 17, "Intangible
Assets." Under SFAS 142, goodwill and indefinite lived intangible assets are no
longer amortized but are reviewed for impairment annually, or more frequently if
impairment indicators arise. The provisions of SFAS 142 are effective for fiscal
years beginning after December 15, 2001.
We adopted SFAS 142 on July 1, 2002. SFAS 142 requires goodwill to be tested for
impairment annually using a two-step process to determine the amount of
impairment, if any, which is then written-off. The first step is to identify
potential impairment, which is measured as of the beginning of the fiscal year.
To accomplish this, we identified our reporting units and determined the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units.
Under SFAS 142, to the extent a reporting unit's carrying amount exceeds its
fair value, the reporting unit's goodwill may be impaired. During the second
quarter of 2003, we completed the first step of this process and determined
there was no indication of goodwill impairment.
In December 2002, the FASB issued SFAS No.148, "Accounting for Stock-Based
Compensation - Transition Disclosure, An Amendment of FASB Statement No. 123"
("SFAS 148"). This statement provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of Statement No. 123 to require more prominent and more frequent disclosures in
financial statements about the effects of stock-based compensation. The
provisions of SFAS 148 are effective for fiscal years ending after December 15,
2002 and the interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December 15,
2002. We adopted SFAS 148 during the fiscal quarter ended March 31, 2003. The
adoption of SFAS 148 did not have a material impact on our results of operations
or financial position and the additional required disclosures have been provided
in Note 3 to the Consolidated Financial Statements.
32
OUTLOOK
Revenues
Revenue estimates are based on a variety of factors including the timing of new
product launches and the potential impact of competitive pricing on existing
products. Many of these factors are difficult to predict and are outside of our
control.
We expect total revenues to increase significantly in the fourth quarter of the
year as compared to the $171,923 we recorded in the third quarter of the year
mainly as a result of new product launches, including an estimated contribution
of $65,000 to $75,000 from the distributed version of Ciprofloxacin tablets,
which we expect to launch in June 2003.
We expect sales of our oral contraceptive products to increase moderately
compared to the $82,559 we recorded in the third quarter. This growth is
expected to be led by both increasing market shares for certain of our existing
products and contributions from new products we anticipate launching during the
quarter, including our generic version of Loestrin, which are expected to more
than offset lower sales of oral contraceptive products launched in the third
quarter, including Errin and Nortrel 7/7/7. We continue to expect oral
contraceptive sales in fiscal 2003 to triple compared to the $92,811 we recorded
in fiscal 2002.
We expect sales of our Cenestin product to increase significantly in the fourth
quarter of the year compared to the $3,337 of sales in the third quarter of the
year, driven by consistent prescription levels, more normalized customer buying
patterns and the impact of a price increase that took effect in February.
We are forecasting sales in the fourth quarter of fiscal 2003 for our
manufactured version of Tamoxifen, which we launched in February 2003, to be at
about a $3,500 to $4,500 level, based on maintaining current market share and
relatively stable market pricing.
Proceeds from Patent Challenge Settlement
Proceeds from patent challenge settlement are amounts earned pursuant to the
supply agreement entered into as part of the 1997 settlement of our patent
challenge on Bayer's Ciprofloxacin product. We assume that Bayer will elect, as
they have in the past, not to provide product to us for resale prior to June
2003, at which point we will no longer earn these proceeds. As a result, we
expect to recognize proceeds from patent challenge settlement for April and May
only, causing the total proceeds from patent challenge settlement to decline to
approximately $5,600 in the fourth quarter.
Margins
Product margins represent the amount of gross profit we expect to earn on
product sales expressed as a percentage of product sales. The margins we earn on
a quarterly basis are subject to fluctuation based on the changing mix of our
product sales and therefore are difficult to predict. The anticipated launch of
our distributed version of Ciprofloxacin in June is expected to lower overall
gross profit margins in the fourth quarter as compared to 67.3% earned during
the third quarter of fiscal 2003. This is because our distributed version of
Ciprofloxacin will have a significantly lower margin than our manufactured
products and we will be splitting the gross
33
profit with a partner. Assuming that our manufactured product sales mix in the
fourth quarter is similar to the mix we had in the third quarter, we believe our
margins on manufactured products should remain in the mid-60% range.
Selling, general and administrative
Selling, general and administrative expenses are expected to increase moderately
in the fourth quarter of fiscal 2003 compared to the $34,203 incurred during the
third quarter of the year, primarily due to higher sales and marketing costs.
Higher sales costs will primarily relate to the increase in our female
healthcare contract salesforce, which grew from approximately 125 sales
representatives at the beginning of the third quarter to approximately 225 by
the end of the third quarter. Marketing, promotion and advertising costs are
also expected to be higher in the fourth quarter of fiscal 2003 compared to the
third quarter primarily due to increased spending on pre-launch programs for
SEASONALE. Also contributing to the expected increase in selling, general and
administrative expenses will be higher administrative costs including costs
associated with the relocation of our administrative offices which is expected
to take place in the fourth quarter.
Research and development
Research and development expenses are expected to increase moderately in the
fourth quarter of fiscal 2003 compared to the approximately $21,127 incurred
during the third quarter of fiscal 2003. This increase reflects expected
increases in bio-study and new drug development activities and somewhat higher
headcount costs reflecting continued additions to our proprietary development
team.
Other
Net interest income is expected to be in line with the third quarter of the year
as the average cash and cash equivalents and debt balances should be relatively
constant.
Taxes
Our effective tax rate is forecasted to be approximately 37% for the fourth
quarter of fiscal year 2003.
Earnings per share
Barr had approximately 69.5 million fully diluted shares outstanding as of March
31, 2003. Our weighted average fully diluted shares outstanding is impacted by
option grants, changes in our stock price, and the issuance or repurchase of
common stock. Other than to satisfy option exercises and for our 3-for-2 stock
split, we did not issue any shares during the third quarter of fiscal 2003 and
did not repurchase any shares. Assuming our stock price remains at a price above
our average stock price during the third quarter of approximately $51.00 per
share, we expect the number of fully diluted shares outstanding to be somewhat
higher in the fourth quarter of the year compared to the fully diluted shares at
March 31, 2003. We are not assuming any share issuances for acquisitions or
equity offerings or any share repurchases, though we may consider such
activities if appropriate opportunities are identified.
34
Based on our estimates and assumptions, many of which are described above,
including the assumed timing of product launches and expense levels, we continue
to expect our full-year fiscal 2003 fully diluted earnings per share estimate to
be $2.57 to $2.63.
Business development activities
A growing part of our business strategy includes identifying and completing
business development opportunities. Such opportunities include but are not
limited to product acquisitions, technology or product license arrangements,
joint-venture agreements, mergers or acquisitions and the settlement of legal
matters. At any time, we may be pursuing one or more of these kinds of
arrangements, such as the one contemplated by our letter of intent with Wyeth
regarding a product acquisition and development arrangement in connection with
the settlement of litigation. However, the forecasts and outlook provided herein
do not include the impact of concluding the Wyeth arrangement or any other such
transaction. We do not undertake any obligation to provide updates to the
forecasts given above if such transactions are completed.
35
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for a change in interest rates relates primarily to
our investment portfolio of approximately $446,269 and debt instruments of
approximately $43,286. We do not use derivative financial instruments.
Our investment portfolio consists of cash and cash equivalents and marketable
securities classified as "available for sale." The primary objective of our
investment activities is to preserve principal while at the same time maximizing
yields without significantly increasing risk. To achieve this objective, we
maintain our portfolio in a variety of high credit-quality securities, including
U.S. government and corporate obligations, certificates of deposit and money
market funds. Ninety-one percent of our portfolio matures in less than three
months. The carrying value of the investment portfolio approximates the market
value at March 31, 2003. Because our investments are diversified and are of
relatively short maturity, a hypothetical 1 or 2 percentage point change in
interest rates would not have a material effect on our consolidated financial
statements.
At March 31, 2003, approximately 65% of our debt instruments are subject to
fixed interest rates. The related note purchase agreements permit us to prepay
these notes prior to their scheduled maturity, but may require us to pay a
prepayment fee based on market rates at the time of prepayment. The remaining
35% of debt instruments are primarily subject to variable interest rates based
on the prime rate. The fair value of all debt instruments is approximately
$40,000 at March 31, 2003. In addition, borrowings under our $40,000 unsecured,
revolving credit facility (the "Revolver") with Bank of America, N.A., bear
interest at a variable rate based on the prime rate, the Federal Funds rate or
LIBOR. At March 31, 2003, there were no amounts outstanding under the Revolver.
We currently have approximately $29,312 available under the Revolver, while the
balance of the Revolver was committed as a $10,688 letter of credit in support
of our product liability insurance arrangements. We do not believe that any risk
inherent in these instruments is likely to have a material effect on our
consolidated financial statements.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to insure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our Chairman and Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. Management necessarily applied its judgment in assessing the costs
and benefits of such controls and procedures, which, by their nature, can
provide only reasonable assurance regarding management's control objectives.
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including the Chairman and Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures. Based upon that evaluation, the Chairman and Chief
36
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective in alerting them in a timely manner to
information relating to Barr and its consolidated subsidiaries required to be
disclosed in this report.
CHANGES IN INTERNAL CONTROLS
Subsequent to the date of their evaluation as described above, there have not
been any significant changes in our internal controls or in other factors that
could significantly affect these controls. No significant deficiencies or
material weaknesses have been identified.
37
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
PATENT CHALLENGES
Dextroamphetamine combination extended release (Adderall XR(TM))
On November 8, 2002, we filed an Abbreviated New Drug Application seeking
approval to manufacture, use and sell the generic versions of Shire's Adderall
XR(TM) products and notified Shire pursuant to the provisions of the Hatch
Waxman Act. On February 24, 2003, Shire filed a patent infringement suit against
us in the U.S. District Court for the Southern District of New York, alleging
that our product infringes U.S. Patent No. 6,322,819. We filed an answer to
Shire's complaint on March 17, 2003, and an amended answer on April 17, 2003. No
scheduling order has yet been entered in this civil action.
We believe that we were the first applicant to file an ANDA containing a
paragraph IV patent certification to this product. If so, we may be eligible for
180 days of generic exclusivity, depending on a variety of factors.
Modafinil (Provigil(R))
On December 24, 2002, we filed an Abbreviated New Drug Application ("ANDA")
seeking approval to manufacture, use and sell the generic versions of Cephalon's
Provigil(R) products and notified Cephalon pursuant to the provisions of the
Hatch Waxman Act. On March 28, 2003, Cephalon filed a patent infringement suit
against us, along with other defendants including Mylan Pharmaceuticals, Inc.,
Mylan Laboratories, Inc., Teva Pharmaceuticals USA, Inc., Teva Pharmaceuticals,
Ltd. and Ranbaxy Laboratories Ltd., in the United States District Court for the
District of New Jersey alleging infringement of U.S. Patent No. RE 37,516 patent
and seeking to prohibit us and others from manufacturing, using or selling its
products until patent expiration.
Alendronate Sodium (Fosamax(R))
We previously disclosed these cases in our annual report on Form 10-K for the
year ended June 30, 2002 as filed with the SEC on August 26, 2002 (the "2002
Annual Report"). On November 4, 2002, the United States District Court for the
District of Delaware issued a decision in an action brought by Merck against
Teva Pharmaceuticals arising out of the filing of an ANDA by Teva for
Alendronate Sodium 5, 10 and 40 mg daily tablets. The District Court ruled that
U.S. patent 4,621,077 was not invalid, was infringed by Teva's ANDA filing, and
was properly extended. Teva has appealed that decision to the Federal Circuit
and the appeal has been fully briefed, but an argument date has not been set.
Merck and Teva tried another case in the United States District Court for the
District of Delaware arising from the filing of Teva's ANDA for Alendronate
Sodium 35 and 70 mg weekly tablets in March 2003, involving U.S. patent
5,994,329. No decision has been entered in the case.
38
On March 4, 2003, we entered into an agreement with Merck to: (1) stay further
proceedings in the case involving our challenge to Merck's Fosomax patents,
subject to certain conditions, pending the entry of final judgments in the
litigation between Merck and Teva; and (2) each be bound, with certain limited
exceptions, by such judgments. That agreement was entered as an order of the
Court on March 6, 2003.
Kariva(TM) Desogestrel Ethinyl Estradiol (Mircette(R))
We previously disclosed this case in our annual 2002 Annual Report. On April 1,
2003, the U.S. Court of Appeals for the Federal Circuit reversed the District
Court's December 6, 2001 decision granting summary judgment in Duramed's favor
and remanded the case to the District Court for further proceedings. We believe
that we have not infringed the patent and have announced our intention to
continue the manufacture and marketing of Kariva(TM), the generic equivalent of
Organon, Inc.'s Mircette(R) oral contraceptive, pending the final outcome of the
litigation. If Bio-Technology General Corp., the owner of the patent, prevails
in the litigation, the Company could be liable for damages for patent
infringement, which could have a material adverse impact on the Company's
consolidated financial statements.
Mirtazapine Orally Disintegrating (Remeron(R) SolTab(TM))
We previously disclosed this case in our 2002 Annual Report. On May 30, 2002, we
asserted declaratory judgment counterclaims of non-infringement and/or
invalidity of two additional Akzo patents. On April 2, 2003, the parties
submitted a stipulation of dismissal with respect to the Akzo patent listed in
the Orange Book on which Akzo's and Organon's original complaint against us was
based. Once the stipulation is entered by the Court, only our declaratory
judgment counterclaims will remain in litigation. No scheduling order has been
entered with respect to these claims.
Niacin (Niaspan(R))
We previously disclosed this case in our 2002 Annual Report. On February 28,
2003, KOS filed a declaratory judgment counterclaim for infringement of two
additional KOS patents. As such, there currently are five patents at issue in
the litigation. On March 20, 2003, we filed our answer to KOS's declaratory
judgment counterclaim. This case is currently scheduled for trial at the end of
2004.
Norgestimate/Ethinyl Estradiol (Ortho Tri-Cyclen(R))
We previously disclosed this case in our 2002 Annual Report. On January 31,
2003, the District Court denied both parties' motions for summary judgment. The
case is currently scheduled for trial commencing on July 14, 2003. Given the
July trial date, we do not anticipate a court decision before the beginning of
August. The patent expires on September 26, 2003. As a consequence, we do not
expect to be able to utilize more than several weeks of the 180-day generic
exclusivity period on this product, even if we prevail in the patent litigation.
If we are unsuccessful in the patent litigation and if the innovator,
Ortho-McNeil Pharmaceutical ("Ortho"), which has indicated that it may seek a
six-month pediatric exclusivity period on this product, is successful in
obtaining pediatric exclusivity, our ability to enter the market with this
product may be delayed until March 26, 2004.
39
OTHER LITIGATION
As of March 31, 2003, the Company was involved with other lawsuits incidental to
and in the ordinary course of its business. Management, based on the advice of
legal counsel, believes that the ultimate disposition of such other lawsuits
will not have a material adverse effect on the Company's consolidated financial
statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
EXHIBIT NO. DESCRIPTION
----------- -----------
10.1 Lease, dated February 6, 2003, between
Mack-Cali Properties Co. No. 11 L.P. and
Barr Laboratories, Inc.
10.2 Amended and Restated Employment Agreement,
dated February 19, 2003, between Barr
Laboratories, Inc. and Frederick J. Killion
10.3 Amended and Restated Employment Agreement,
dated February 19, 2003, between Barr
Laboratories, Inc. and William T. McKee
99.1 Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(b) We filed the following reports on Form 8-K in the quarter ended March
31, 2003.
REPORT DATE ITEM REPORTED
January 29, 2003 We filed with the Securities and Exchange
Commission our Quarterly Report on Form 10-Q
for the six months ended December 31, 2002.
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, the Form 10-Q
was accompanied by a certification of Bruce
L. Downey, Chairman of the Board and Chief
Executive Officer of the Company, and
William T. McKee, Chief Financial Officer of
the Company.
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.
40
BARR LABORATORIES, INC.
Dated: April 25, 2003 /s/ William T. McKee
--------------------
William T. McKee
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting
Officer)
RULE 13A-14 CERTIFICATIONS
I, Bruce L. Downey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Barr
Laboratories, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
41
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: April 25, 2003
/s/ Bruce L. Downey
---------------------
Bruce L. Downey
Chief Executive Officer
I, William T. McKee, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Barr
Laboratories, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by
42
others within those entities, particularly during the period
in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: April 25, 2003
/s/ William T. McKee
-----------------------
William T. McKee
Chief Financial Officer