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UNITED STATES

FORM 10-Q

(Mark One)

For quarterly period ended December 31, 2003 or

For the transition period from __________ to __________

Commission file number 1-9860

BARR PHARMACEUTICALS, INC.

Two Quaker Road, P. O. Box 2900, Pomona, New York 10970-0519

845-362-1100

Barr Laboratories, Inc.

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 [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [  ]

Number of shares of common stock outstanding as of February 10, 2004: 67,328,885

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BARR PHARMACEUTICALS, INC.

INDEX TO FORM 10-Q

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Barr Pharmaceuticals, Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)

See accompanying notes to the consolidated financial statements.

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Barr Pharmaceuticals, Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)

See accompanying notes to the consolidated financial statements.

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Barr Pharmaceuticals, Inc.
Consolidated Statements of Cash Flows
For the Six Months Ended December 31, 2003 and 2002
(in thousands of dollars)
(unaudited)

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BARR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars, except per share amounts)
(unaudited)

1.		Description of Business
		Barr Pharmaceuticals, Inc., a Delaware corporation (“Barr” or the “Company”), was formed in December 2003, in connection with the reincorporation of Barr Laboratories, Inc., a New York corporation (“Barr-NY”). The reincorporation was approved by Barr-NY’s Board of Directors and the holders of a majority of Barr-NY’s outstanding shares of common stock, voting in person or by proxy, at its Annual Meeting of Shareholders held on October 23, 2003. The reincorporation was accomplished by the merger of Barr-NY into the Company, with the Company as the surviving entity. Prior to the merger, Barr-NY contributed its principal operating assets to Barr Laboratories, Inc., a newly formed, wholly-owned subsidiary incorporated in Delaware. Barr Pharmaceuticals, Inc. and its subsidiaries are engaged in the development, manufacture and marketing of generic and proprietary pharmaceuticals.
		As a result of the reincorporation, each share of common stock of Barr Laboratories, Inc. was automatically converted into one share of common stock of Barr Pharmaceuticals, Inc.
2.		Basis of Presentation and Principles of Consolidation
		The unaudited consolidated financial statements of Barr Pharmaceuticals, Inc. and its subsidiaries are prepared in conformity with accounting principles generally accepted in the United States. 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 audited consolidated financial statements of the Company for the year ended June 30, 2003, included in the annual report on Form 10-K filed by the Company with the Securities and Exchange Commission (the “SEC”) on August 26, 2003, as amended by Form 10-K/A thereto filed by the Company with the SEC on August 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 six months ended December 31, 2003, may not be indicative of the results to be expected for the fiscal year ending June 30, 2004.

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3.		Estimates and Critical Accounting Policies
		The methods, estimates and judgments the Company uses in applying the accounting policies most critical to its financial statements have a significant impact on its reported results. 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/or that require the Company to make its most difficult and subjective judgments. Based on this definition, the Company’s most critical policies are the following: (1) provisions for estimated sales returns and allowances (Note 5); (2) accrual of inventory reserves (Note 9); (3) deferred taxes; (4) accrual for litigation (Note 16); (5) accrual for self-insurance reserve (Note 16); 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 are less likely to have a material impact on its reported results of operations for a given period. Although the Company believes that its estimates and assumptions are reasonable, they are based upon information available at the time the estimates and assumptions were made. Actual results may differ significantly from the Company’s estimates and its estimates could be different using different assumptions or conditions.
4.		Acquisition of Endeavor Pharmaceuticals, Inc.
		On November 20, 2003, the Company completed the acquisition of substantially all of the assets of Endeavor Pharmaceuticals, Inc. (“Endeavor”). The Company acquired Endeavor to broaden its line of hormone therapy and other female healthcare products. In the transaction, Barr acquired the currently pending New Drug Application and intellectual property related to Endeavor’s Enjuvia™ synthetic conjugated estrogens product and two other female healthcare products in early-stage development.
		The total purchase price, including transaction costs of $517, was $35,600 and was allocated to acquired in-process research and development. This amount was written-off as research and development expense upon acquisition because the acquired products, which had not received FDA approval, were incomplete and had no alternative future use.
		The operating results of Endeavor are included in the Company’s consolidated financial statements subsequent to the November 20, 2003 acquisition date.
5.		Accounts Receivable
		Accounts receivable are presented net of allowances related to provisions for product returns, rebates, chargebacks and other sales allowances of $142,633 at December 31, 2003 and $136,059 at June 30, 2003.

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6.		Stock-Based Compensation
		The Company has three stock-based employee compensation plans, two stock-based non-employee director compensation plans and an employee stock purchase plan. The Company accounts for these plans under the intrinsic value method described in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. The Company, applying the intrinsic value method, has not recorded stock-based employee compensation cost in net earnings. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to its stock-based employee compensation.

7.		Recent Accounting Pronouncements
		In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities – An Interpretation of ARB No. 51” (“FIN 46”). A revised interpretation of FIN 46 (“FIN 46 – R”) was issued in December 2003. The objective of FIN 46-R is to provide guidance on how to identify a variable interest entity (“VIE”) and to determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE need to be included in a company’s consolidated financial statements. A company that will absorb a majority of the VIE’s expected losses and/or receive a majority of the VIE’s expected residual returns, if they occur, is known as the “primary beneficiary.” A primary beneficiary of a VIE will need to consolidate the VIE if the company’s interest in the VIE is such that the company will absorb a majority of the VIE’s expected losses and/or receive a majority of the VIE’s

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		expected residual returns, if they occur. FIN 46-R requires additional disclosures by primary beneficiaries and other significant variable interest holders. FIN 46-R is effective no later than the end of the first reporting period that ends after March 15, 2004, except for those variable interest entities that are considered to be special-purpose entities, for which the effective date is no later than the end of the first reporting period that ends after December 31, 2003. The Company does not expect the adoption of FIN 46-R to have a material effect on the Company’s financial statements.
8.		Other Receivables
		Other receivables consist primarily of amounts due from a development agreement with the U.S. Department of Defense and a development agreement related to the Company’s vaginal ring products.
9.		Inventories
		Inventories consist of the following:

		Inventories are presented net of reserves of $15,558 and $13,201 at December 31, 2003 and June 30, 2003, respectively. The Company’s distributed version of Ciprofloxacin, purchased as a finished product from Bayer, accounted for approximately $24,667 and $48,300 of finished goods inventory as of December 31, 2003 and June 30, 2003, respectively.
10.		Related Parties
		Dr. Bernard C. Sherman
		During the three months ended December 31, 2003 and 2002, the Company purchased $1,379 and $1,766, respectively, of bulk pharmaceutical material from companies affiliated with Dr. Bernard C. Sherman, the Company’s largest shareholder and a director until October 24, 2002. For the six months ended December 31, 2003 and 2002, such purchases were $2,805 and $2,678, respectively. In addition, during the three months ended December 31, 2003 and 2002, the Company sold $2,759 and $2,443, respectively, of its pharmaceutical products and bulk pharmaceutical materials to companies owned by Dr. Sherman. For the six months ended December 31, 2003 and 2002, such sales were $4,862

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		and $5,312, respectively. As of December 31, 2003 and June 30, 2003, the Company’s accounts receivable included $1,920 and $2,398, respectively, due from such companies.
		During fiscal 1996, the Company also entered into an agreement (the “Fluoxetine Agreement”) with Apotex Inc., a company controlled by Dr. Sherman, to share litigation and related costs in connection with the Company’s Fluoxetine patent challenge. For the three months ended December 31, 2003 and 2002, the Company recorded $344 and $195, respectively, in connection with the Fluoxetine Agreement, as a reduction to operating expenses. For the six months ended December 31, 2003 and 2002, the Company recorded $617 and $330, respectively, in connection with the Fluoxetine Agreement, as a reduction to operating expenses. For the three months ended December 31, 2003 and 2002, the Company recorded $144 and $262, respectively, in connection with the Fluoxetine Agreement, as cost of sales related to this agreement. For the six months ended December 31, 2003 and 2002, the Company recorded $336 and $650, respectively, in connection with the Fluoxetine Agreement, as cost of sales.
		As of December 31, 2003 and June 30, 2003, the Company’s accrued liabilities included $140 and $648, respectively, related to transactions with these entities owned by Dr. Sherman.
11.		Other Intangible Assets
		Intangible assets, excluding goodwill, consist of the following:

Estimated amortization expense on these assets is as follows:

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		The product and related licenses have a weighted-average useful life of approximately 10 years and product rights and related intangibles have a weighted-average useful life of approximately 9 years.
12.		Long-Term Debt
		The Company has a $40,000 revolving credit facility that expires on February 27, 2005. As of December 31, 2003, there was approximately $32,875 available to the Company under this facility after the issuance of a $7,125 letter of credit in support of outstanding premiums on the Company’s product liability insurance (see Note 16).
13.		Earnings Per Share
		The following is a reconciliation of the numerators and denominators used to calculate earnings per common share (“EPS”) in the consolidated statements of operations:

		The number of stock options outstanding that were not included in the calculation of diluted earnings because their effect is antidilutive was immaterial.
		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 period share and per share amounts have been adjusted for the stock split.

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14.		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 December 31, 2003 and 2002 was $35,225 and $42,558, respectively, and for the six months ended December 31, 2003 and 2002 was $73,783 and $84,360, respectively.
15.		Deferred Compensation Plan
		In October 2003, the Board of Directors approved the Barr Laboratories, Inc. Non-Qualified Deferred Compensation Plan (the “Plan”) that was adopted effective November 1, 2003. The Plan provides for certain executives to defer all or a portion of their salary or bonus for a particular calendar year. In addition, the Company will make a matching contribution subject to certain limitations defined in the Plan. The matching contribution, as well as the employee deferral, are invested in the Plan as directed by the participant, and are payable on the terms and subject to the conditions provided in the Plan.
16.		Commitments and Contingencies
		Leases
		The Company is party to various leases which relate to the rental of office facilities and equipment. The Company believes it will be able to extend such leases, if necessary. The table below shows the future minimum rental payments, exclusive of taxes, insurance and other costs, under noncancellable long-term leases.

		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 equine-based conjugated estrogens product for which the Company filed an Abbreviated New Drug Application (“ANDA”) with the U.S. Food and Drug Administration (“FDA”)

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		in June 2003. 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 FDA approval of a generic product. The Company believes that the raw material is pharmaceutically equivalent to raw material used to produce Wyeth’s Premarin®.
		Natural Biologics is a defendant in a trade secret lawsuit brought by Wyeth. In September 2003, the U.S. District Court for the District of Minnesota determined that Natural Biologics had misappropriated Wyeth’s trade secrets and enjoined Natural Biologics from further involvement in the equine-based raw material business. Unless the ruling is reversed on appeal, the Company will be prohibited from using Natural Biologics’ raw material in its pending ANDA filed with the FDA. Natural Biologics has appealed the District Court’s ruling.
		As of December 31, 2003 and June 30, 2003, the Company had loaned Natural Biologics approximately $15,729 and $14,408, respectively, including accrued interest, under the Loan Agreement, and has included such amounts in other assets on its consolidated balance sheets. Under the terms of the Loan Agreement, the loans mature on June 3, 2007, are collateralized by a security interest in inventory and certain other assets of Natural Biologics and bear interest at the applicable federal rate as defined by the Loan Agreement (3.50% at December 31, 2003).
		Due to the unfavorable decision of the District Court and its anticipated negative effects on Natural Biologics’ operations, as well as the uncertainty surrounding the timing and outcome of any appeal, the Company has established a full valuation allowance against the loan amount and included the allowance in other assets on its consolidated balance sheet and recorded a charge to selling, general and administrative expense.
		Funding of Employee Savings Plan
		On September 23, 2003, the Company committed to make an irrevocable minimum aggregate contribution of $11,000 to the Barr Laboratories, Inc. Savings and Retirement Plan for the fiscal year ending June 30, 2004. The Company has funded $6,418 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 terminate, upon notice of the parties, at various dates through 2006.
		Investments in Venture Funds
		NewSpring Ventures
		On November 1, 2003, the Company entered into a Limited Partnership Agreement (the “NewSpring Agreement”) with NewSpring Ventures, L.P. (“NewSpring”), a Small

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		Business Investment Corporation with $136,000 in committed capital as of December 31, 2003, that provides venture capital to development stage companies. The fund’s general partner, Progress Capital II, L.P., controls the day-to-day operations and investment decisions of NewSpring. The Company has committed up to $15,000 to NewSpring for investments in healthcare companies. At closing, the Company contributed $1,500, or 10% of its total commitment, to NewSpring. The Company’s remaining commitment is subject to call upon ten days notice from NewSpring at any time prior to the expiration of the NewSpring Agreement on August 18, 2009.
		At December 31, 2003, the Company had a 2.7% limited partnership interest in NewSpring and accounts for this investment using the equity method. Accordingly, the Company’s investment in NewSpring has been recorded in other assets, and changes in the investment equal to the Company’s proportionate share of the fund’s income or loss are reflected in other expense on the consolidated statement of operations.
		Commerce Health Ventures
		On November 25, 2003, the Company entered into an Agreement of Limited Partnership (the “Commerce Health Agreement”) with Commerce Health Ventures, L.P. (“Commerce Health”), a Delaware limited partnership with $20,200 in committed capital as of December 31, 2003, that will provide venture capital to development stage companies in the healthcare industry. The fund’s general partner, BioHealth Capital, L.P., controls the day-to-day operations and investment decisions of Commerce Health. The Company has committed up to $10,000 to Commerce Health, and under the terms of the Commerce Health Agreement, could become obligated to commit an additional $5,000 if Commerce Health obtains additional capital commitments from other limited partners. At closing, the Company contributed $1,980 to Commerce Health. The Company’s remaining commitment is subject to call upon ten days notice from Commerce Health during the existence of the venture, which is expected to have a ten-year life.
		At December 31, 2003, the Company had a 49.5% limited partnership interest in Commerce Health and accounts for this investment using the equity method. Accordingly, the Company’s investment in Commerce Health has been recorded in other assets, and changes in the investment equal to the Company’s proportionate share of the fund’s income or loss are reflected in other expense on the consolidated statement of operations.
		Product Liability Insurance
		The Company is insured for $15,000 in potential product liability claims under a finite risk insurance arrangement (the “Arrangement”) with a third-party insurer. In exchange for $15,000 in product liability coverage over a five-year term expiring on September 30, 2007, the Arrangement provides for the Company to pay approximately $14,250 in four equal annual installments of $3,563. Included in the initial installment payment was an insurer’s margin of approximately $1,050, 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 paid for any incurred claims. After termination or expiry of the policy, the Company will be solely liable for any

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		incurred but not reported (“IBNR”) or unsettled claims under the policy. The Company is recording the payments, net of the insurer’s margin, as deposits included in other assets.
		The Company is self-insured for potential product liability claims between $15,000 and $25,000. The Company has purchased traditional third-party insurance that will provide coverage for claims between $25,000 and $40,000. For claims between $40,000 and $50,000, the Company has purchased additional third-party insurance that provides for the Company to share 20% of all claims paid under the policy by the insurer.
		Simultaneously with entering into the Arrangement, the Company exercised the extended reporting period under its previous insurance policy that provides $10,000 of product liability coverage of unlimited duration for product liability claims on products sold from September 10, 1987 to September 30, 2002. Additionally, in connection with its merger with Duramed, the Company purchased a supplemental extended reporting policy under Duramed’s prior insurance policy that provides $10,000 of product liability coverage for an unlimited duration for product liability claims on products sold by Duramed between October 1, 1985 and October 24, 2001.
		In connection with acquisition transactions, the Company typically purchases a supplemental extended reporting period policy under the acquired company’s prior insurance policy. The Company purchased such coverage in connection with the Endeavor asset acquisition (see Note 4).
		Because the Company is self-insured for a portion of its potential product liability claims, it has established a self-insurance reserve. As of December 31, 2003 and June 30, 2003 the Company included $2,173 and $1,333, respectively, in other liabilities for its estimate of potential product liability claims and expenses. The cost of the ultimate disposition of both existing and potential claims may differ from these reserve amounts.
		Selling, general and administrative expenses include approximately $420 and $500 for the three months ended December 31, 2003 and 2002, respectively, and approximately $840 and $500 for the six months ended December 31, 2003 and 2002, respectively, related to changes in the accrual for both reported and potential product liability claims and expenses.
		The Company is from time-to-time a defendant in product liability actions. If the Company incurs defense costs and liabilities in excess of the Company’s self-insurance reserve that are not otherwise covered by insurance, it could have a material adverse effect on the Company’s consolidated financial statements.
		Indemnity Provisions
		From time-to-time, in the normal course of business, the Company agrees to indemnify its suppliers and customers concerning product liability and other matters.

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		Class Action Lawsuits
		Ciprofloxacin (Cipro®)
		To date the Company has been named as co-defendants with Bayer Corporation, The Rugby Group, Inc. and others in approximately 38 class action complaints filed in state and federal courts by direct and indirect purchasers of Ciprofloxacin (Cipro®) from 1997 to the present. The complaints allege that the 1997 Bayer-Barr patent litigation settlement agreement was anti-competitive and violated federal antitrust laws and/or state antitrust and consumer protection laws. A prior investigation of this agreement by the Texas Attorney General’s Office on behalf of a group of state Attorneys General was closed without further action in December 2001.
		The lawsuits include nine consolidated in California state court, one in Kansas state court, one in Wisconsin state court, one in Florida state court, and two consolidated in New York state court, with the remainder of the actions pending in the United States District Court for the Eastern District of New York for coordinated or consolidated pre-trial proceedings (the “MDL Case”). Fact discovery in the MDL Case has been completed and the parties are proceeding with expert discovery, to be followed by summary judgment briefing. The direct purchaser and indirect purchaser plaintiffs also have filed motions for class certification in the MDL Case, but briefing is not complete and the Court has indicated that it will defer ruling on the motions at the present time. The state court actions remain in a relatively preliminary stage generally, tracked to follow the MDL Case, although defendants have filed dispositive motions and plaintiffs have moved for class certification in certain of the cases.
		On May 20, 2003, the District Court entered an order in the MDL Case holding that the Barr-Bayer settlement did not constitute a per se violation of the antitrust laws and restricting the scope of the legal theories the plaintiffs could pursue in the case.
		On September 19, 2003, the Circuit Court for the County of Milwaukee dismissed the Wisconsin state class action for failure to state a claim for relief under Wisconsin law. On October 17, 2003, the Supreme Court of the State of New York for New York County dismissed the consolidated New York state class action for failure to state a claim upon which relief could be granted and denied the plaintiffs’ motion for class certification. The Wisconsin Circuit Court’s decision and the New York Supreme Court’s decision do not affect the federal class actions currently pending in the U.S. District Court for the Eastern District of New York or the state class actions currently pending in other state courts.
		The Company believes that its agreement with Bayer Corporation reflects a valid settlement to a patent suit and cannot form the basis of an antitrust claim. Although it is not possible to forecast the outcome of these matters, the Company intends to vigorously defend itself. The Company anticipates that these matters may take several years to resolve, but an adverse judgment in any of the pending cases could have a material adverse impact on the Company’s consolidated financial statements.

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		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 L.P. and the Company alleging, among other things, that the 1993 settlement of patent litigation between Zeneca, Inc. and the Company violated the antitrust laws, insulated Zeneca, Inc. and the Company from generic competition and enabled 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 Judicial Panel on Multidistrict Litigation has transferred these cases to the United States District Court for the Eastern District of New York for pretrial proceedings. On May 19, 2003, the District Court entered judgment dismissing the cases for failure to state a viable antitrust claim. Plaintiffs have appealed the District Court’s decision to the United States Court of Appeals for the Second Circuit.
		The Company believes that its agreement with Zeneca reflects a valid settlement to a patent suit and cannot form the basis of an antitrust claim. Although it is not possible to predict the outcome of this matter, the Company intends to vigorously defend itself. It is anticipated that this matter may take several years to resolve, but an adverse judgment could have a material adverse impact on the Company’s consolidated financial statements.
		Invamed, Inc./Apothecon, Inc.
		In February 1998, Invamed, Inc. and Apothecon, Inc., 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 that the suits filed by Invamed and Apothecon are without merit and intends to vigorously defend its position, but an adverse judgment could have a material adverse impact on the Company’s consolidated financial statements.
		Desogestrel/Ethinyl Estradiol Suit
		In May 2000, the Company filed an 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® oral contraceptive regimen. The Company notified Bio-Technology General Corp. (“BTG”), the owner of the patent for the Mircette

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		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. In December 2001, the United States District Court for the District of New Jersey granted summary judgment in favor of the Company, finding that its product did not infringe the patent at issue in the case. BTG appealed the District Court’s decision. In April 2002, the Company launched its Kariva® product, the generic version of Mircette. In April 2003, the U.S. Court of Appeals for the Federal Circuit reversed the District Court’s decision granting summary judgment in the Company’s favor and remanded the case to the District Court for further proceedings.
		In July 2003, BTG (now Savient) filed an amended complaint adding Organon (Ireland) Ltd. and Organon USA as plaintiffs and adding the Company as a defendant. The amended complaint seeks damages and enhanced damages based upon willful infringement. The Company believes that it has not infringed BTG’s patent and continues to manufacture and market Kariva. If BTG and Organon are successful, the Company could be liable for damages for patent infringement, which could have a material adverse effect on its consolidated financial statements.
		Termination of Solvay Co-Marketing Relationship
		On March 31, 2002, the Company gave notice of its intention to terminate, as of June 30, 2002, its relationship with Solvay Pharmaceuticals, Inc. which covered the joint promotion of the Company’s Cenestin tablets and Solvay’s Prometrium® capsules. Solvay has disputed the Company’s right to terminate the relationship and claims it is entitled to substantial damages and has notified the Company that it has demanded arbitration of this matter. The arbitration hearing was held in January 2004. Post-hearing briefs are due in March and April and an oral argument has been scheduled for May. The Company believes its actions are well founded but if the Company is incorrect, an adverse decision in the matter could have a material adverse impact on the Company’s consolidated financial statements.
		Lemelson
		In November 2001, the Lemelson Medical, Education & Research Foundation (“Lemelson Foundation”) 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.” In March 2002, the court stayed the proceedings, pending the resolution of another suit (the “Symbol” case) that involves the same patents, but does not involve the Company. On January 23, 2004, the District Court issued a decision in the Symbol case holding the Lemelson patents to be invalid and unenforceable. The Lemelson Foundation has announced that it intends to appeal the decision in the Symbol case to the United States Court of Appeals for the Federal Circuit.

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		Nortrel 7/7/7 Product Recall
		On July 9, 2003, the Company initiated a recall of three lots of its Nortrel 7/7/7 oral contraceptive product after receiving two customer complaints that the tablets that had been dispensed to them were misconfigured. The Company has since received reports of pregnancies from approximately 25 women who claim to have taken the product, nine of whom have requested compensation from the Company. The Company is in the process of investigating whether these women have taken affected product and whether their pregnancies are related to use of affected product. The Company anticipates that one or more of these women will commence formal legal actions against it. The Company does not have sufficient information at this time to evaluate the likelihood of success in these matters. However, an unfavorable outcome in one or more of these matters could have a material adverse effect on the Company’s consolidated financial statements.
		PPA Litigation
		The Company is a defendant in three personal injury product liability lawsuits involving phenylproanolamine (“PPA”). All three cases are in their initial stages. The Company believes it has strong defenses to all three cases and intends to vigorously defend against them. However, an unfavorable outcome could have a material adverse effect on the Company’s consolidated financial statements.
		MPA Litigation
		The Company has been named as a defendant in at least 18 personal injury product liability cases brought against the Company and other manufacturers by plaintiffs claiming that they suffered injuries resulting from the use of medroxyprogesterone acetate (“MPA”) in conjunction with Premarin or other hormone therapy products. These cases are in a preliminary stage and the Company does not know whether any of these individuals took an MPA product manufactured by the Company. The Company intends to vigorously defend itself against these cases. However, an unfavorable outcome could have a material adverse effect on the Company’s consolidated financial statements.
		Texas HRT Cases
		The Company’s wholly owned Duramed subsidiary has been named, along with several other pharmaceutical manufacturers, as a defendant in seven cases originally brought in Texas state court alleging personal injuries to more than 70 plaintiffs from the use of hormone replacement therapy (“HRT”) products, including Premarin, Prempro, Estratest and Estrace. None of the complaints in these cases specifically alleges that any of the plaintiffs took any products manufactured by Duramed. The cases have been removed to the United States District Court for the Eastern District of Texas and the United States District Court for the Southern District of Texas, and are expected to be transferred to the

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		United States District Court for the Eastern District of Arkansas for coordinated or consolidated pretrial proceedings. The Company intends to vigorously defend itself against these cases. However, an unfavorable outcome could have a material adverse effect on the Company’s consolidated financial statements.
		Medicaid Reimbursement Cases
		The Company has been named as a defendant in separate actions brought by the Commonwealth of Massachusetts; the County of Suffolk, New York; the County of Rockland, New York; and Westchester County, New York against numerous pharmaceutical manufacturers. The action seeks to recover damages and other relief for alleged overcharges for prescription medications paid for by Medicaid. The Company believes that it has not engaged in any improper conduct and intends to vigorously defend itself against the cases. However, an unfavorable outcome could have a material adverse effect on the Company’s consolidated financial statements.
		Other Litigation
		As of December 31, 2003, the Company was involved with other lawsuits incidental to its business, including patent infringement actions and personal injury claims. Management of the Company, 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
		FTC Investigation Regarding Settlement of Ciprofloxacin Patent Litigation
		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. 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 CID relating to its investigation of the Company’s settlement of the Tamoxifen patent challenge with AstraZeneca. The investigative demand requested the production of certain information and documents. The Company is cooperating with the Attorney General’s office in its investigation.
		The Company believes that the patent challenge settlements being investigated represent a pro-consumer and pro-competitive outcome to the patent challenge cases. An investigation of the Tamoxifen settlement by the U.S. Department of Justice and an investigation of the Ciprofloxacin settlement by the Texas Attorney General’s Office on behalf of other state Attorneys General already have been satisfactorily resolved without further action and the Company expects these investigations to be satisfactorily resolved, as well. However,

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		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.
		FTC Request for Information Regarding Settlement of Estrostep and FmHrt Patent Litigation and Related Transactions
		On December 16, 2003, the Company and Galen (Chemicals) Limited received letters from the FTC’s Bureau of Competition requesting that the Company and Galen voluntarily provide certain information concerning the Company’s proposed acquisition of the U.S. and Canadian rights to Galen’s Loestrin® and Loestrin® FE oral contraceptive products and the proposed settlement of pending patent litigation regarding Norethindrone Acetate / Ethinyl Estradiol (Estrostep®) and Norethindrone Acetate / Ethinyl Estradiol (Estrostep FE®) and Norethindrone Acetate / Estradiol (FemHRT®). The letter also requests information concerning the proposed option for Galen to acquire an exclusive license to the Company’s generic version of Galen’s Ovcon® 35 oral contraceptive.
		The FTC specifically stated that its letter should not be viewed as an accusation by the Commission or its staff of any wrongdoing. The Company believes that the proposed transactions are lawful and proper and intends to cooperate fully with the request. The Company anticipates that these transactions will close before the end of March 2004.
		The FTC’s Bureau of Competition previously reviewed the proposed transactions under the Hart-Scott-Rodino Act. On October 24, 2003, the Hart-Scott-Rodino waiting period expired, permitting the parties to close the transactions.

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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

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;
	•		the success of our product development activities;
	•		market and customer acceptance and demand for our pharmaceutical products;
	•		our dependence on revenues from significant customers;
	•		reimbursement policies of third party payors;
	•		our dependence on revenues from significant products;
	•		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;

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	•		our mix of product sales between manufactured products, which typically have higher margins, and distributed products, which typically have lower margins, during any given period;
	•		the regulatory environment;
	•		our exposure to product liability and other lawsuits and contingencies;
	•		the increasing cost of insurance and the availability of product liability insurance coverage;
	•		our timely and successful completion of strategic initiatives, including integrating companies and products we acquire and implementing new enterprise resource planning systems;
	•		fluctuations in operating results, including the effects on such results from spending for research and development, sales and marketing activities and patent challenge activities; and
	•		other risks detailed from time-to-time in our filings with the Securities and Exchange Commission.

Reincorporation Merger and Corporate Restructuring

Barr Pharmaceuticals, Inc., a Delaware corporation (“Barr” or the “Company”), was formed in December 2003 in connection with the reincorporation of Barr Laboratories, Inc., a New York corporation (“Barr-NY”). The reincorporation was accomplished by the merger of
Barr-NY into the Company, with the Company as the surviving entity. Prior to the merger, Barr-NY contributed its principal operating assets to Barr Laboratories, Inc., a newly formed, wholly-owned subsidiary incorporated in Delaware.

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 our reported results. The Securities and Exchange Commission has defined the most critical accounting policies as the ones that are most important to the portrayal of our financial condition and results, and/or require us to make our most difficult and subjective judgments. Based on this definition, our most critical policies are 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 are less likely to 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 available at the time the estimates and assumptions were made. Actual results may differ significantly from our estimates and our estimates could be different using different assumptions or conditions.

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Sales Returns and Allowances