Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered:
Common Stock, Par Value $0.01
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of Registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark if the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The aggregate market value of the common equity held by non-affiliates of the Registrant
computed by reference to the price at which the common equity was last sold on December 29, 2006,
was approximately $5.5 billion. For purposes of this calculation, shares held by directors,
executive officers and 10% shareholders of the Registrant have been excluded. Such exclusion should
not be deemed a determination or an admission by the Registrant that these individuals are, in
fact, affiliates of the Registrant.
The information required by Part III of this Report, to the extent not set forth herein, is
incorporated herein by reference from the registration’s definitive proxy statement relating to the
annual meeting of shareholders to be held on May 17, 2007, which definitive proxy statement shall
be filed with the Securities and Exchange Commission within 120 days after the end of the
transition period to which this Report relates.
BARR PHARMACEUTICALS, INC.
INDEX
TO TRANSITION REPORT ON FORM 10-K/T
FOR THE SIX MONTHS ENDED DECEMBER 31, 2006
This Transition Report on Form 10-K and the documents incorporated herein by reference contain
forward-looking statements based on expectations, estimates and projections as of the date of this
filing. Actual results may differ materially from those expressed in forward-looking statements.
See Item 1A — “Risk Factors”.
This
report also contains market and industry data obtained from industry publications. We have not independently
verified any of this information and its accuracy and completeness
cannot be guaranteed.
Change in Fiscal Year
On September 21, 2006, the Board of Directors of Barr Pharmaceuticals, Inc. (“Barr”, the
“Company”, “we”, “us” or “our”) approved a change in our fiscal year end from June 30 to December
31. We made this change to align our fiscal year end with that of our recently acquired
subsidiary, PLIVA d.d. (“PLIVA”), and with other companies within our industry. This Form 10-K/T
is a transition report for the period from July 1, 2006 through December 31, 2006 (the “Transition
Period”). Subsequent to this report, our reports on Form 10-K will cover the calendar year January
1 to December 31. We refer to the period beginning July 1, 2005 through June 30, 2006 as “fiscal
2006”, the period beginning July 1, 2004 through June 30, 2005 as “fiscal 2005” and the period
beginning July 1, 2003 through June 30, 2004 as “fiscal 2004”. All information, data and figures
provided in this report for fiscal 2006, 2005 and 2004 relate solely to Barr’s financial results
and do not include the results of PLIVA, which we acquired in late October 2006.
OVERVIEW
We are a global specialty pharmaceutical company that operates in more than 30 countries worldwide.
Our operations are based primarily in North America and Europe, with our key markets being the
United States, Croatia, Germany, Poland and Russia. We are primarily engaged in the development,
manufacture and marketing of generic and proprietary pharmaceuticals. We are one of the world’s
leading generic drug companies. During the Transition Period, which includes PLIVA’s results of
operations from October 25, 2006 through December 31, 2006, we recorded $837.5 million of product
sales and $916.4 million of total revenues worldwide. In addition, we are actively involved in the
development of generic biopharmaceutical products, an area that we believe provides significant
prospects for long-term earnings and profitability.
We market and sell generic pharmaceutical products in the U.S., Europe and certain other
countries in the rest of the world (which we refer to as “ROW”). During the Transition Period, we
recorded $636.6 million of sales of generic pharmaceutical products. We conduct our generics
business in North America principally through our Barr Laboratories subsidiary and in Europe and
the ROW through our PLIVA subsidiary.
Our generic product portfolio includes solid oral dosage forms, injectables and cream/ointment
products. At December 31, 2006, we marketed for sale (a) in the U.S., approximately 245 different
dosage forms and strengths of approximately 115 different generic pharmaceutical products,
including 24 oral contraceptive products, and (b) in Europe and the ROW, approximately 320
different molecules, representing 1,250 generic pharmaceutical products in approximately 3,120
different presentations (where one molecule in one market represents a product, and each
combination of a formulation and strength represents one presentation).
Our generic product development efforts are focused primarily on high barrier-to-entry
products for all our markets, utilizing our various drug delivery platforms. We have development
and manufacturing capabilities for active pharmaceutical ingredients to support our internal
product development efforts.
We market and sell proprietary pharmaceutical products primarily in the United States. During
the Transition Period, we recorded $200.9 million of sales of proprietary pharmaceutical products.
Our proprietary business is conducted by our Duramed Pharmaceuticals (“Duramed”) subsidiary.
Our proprietary product portfolio and pipeline is largely concentrated in the area of female
healthcare. At December 31, 2006, we marketed 25 proprietary pharmaceutical products. These
products include, among others:
SEASONIQUE™ (levonorgestrel/ethinyl estradiol tablets 0.15 mg/0.03 mg and ethinyl
estradiol tablets 0.01 mg), our extended-cycle oral contraceptive product; Mircette®
(Desogestrel and Ethinyl Estradiol), an oral contraceptive; ParaGard® T 380A
(intrauterine copper contraceptive), our IUD contraceptive product; Plan B®
(levonorgestrel), our dual-label, over-the-counter (OTC)/Rx emergency contraceptive; and
ENJUVIA™ (synthetic conjugated estrogens, B), our line of hormone therapy products.
Biopharmaceuticals represent a significant subset of pharmaceutical products and are
manufactured with the use of live organisms as opposed to chemical (non-biological) compounds. At
December 31, 2006, we had several generic biopharmaceutical products in various stages of
development, including granulocyte colony stimulating factor (“G-CSF”), a protein that stimulates
the growth of certain white blood cells. We are optimistic about our prospects as a leader in the
generic biopharmaceuticals market worldwide, and are actively working with the U.S. Congress and
the United States Food and Drug Administration (the “FDA”) to create a regulatory pathway for
generic biopharmaceuticals in the United States.
To supplement our internal efforts in support of our business strategies, we continually
evaluate business development opportunities that we believe will strengthen our product portfolio
and help grow our traditional generic and proprietary businesses, as well as our generic
biopharmaceutical business. A primary example of our execution of this strategy is our recent
acquisition of PLIVA, as discussed in greater detail below.
We operate manufacturing, research and development and administrative facilities in six
primary locations within the U.S., three primary locations in Europe and one location in India.
Our organizational structure reflects the global nature of our business and the sharing of
resources between our generic and proprietary businesses. For example, our operating and corporate
functions are managed on a global basis, supporting both generic and proprietary activities.
Barr Pharmaceuticals, Inc. is a Delaware holding company that was formed through a
reincorporation merger on December 31, 2003. Our predecessor entity, a New York corporation, was
formed in 1970 and commenced active operations in 1972. Our administrative headquarters are located
at 400 Chestnut Ridge Road, Woodcliff Lake, New Jersey07677, and our main telephone number is
201-930-3300.
Our Internet address is www.barrlabs.com. We do not intend for this website address to be an
active link or to otherwise incorporate by reference the contents of the website into this report.
We post the following filings in the Investors section of our website as soon as reasonably
practicable after they are electronically filed with or furnished to the SEC: our annual report on
Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. All
such filings on our Investors section of the website are available free of charge. The public may
read and copy any materials that we file with the SEC at the SEC’s Public Reference Room or
electronically through the SEC website (www.sec.gov). We also provide information concerning corporate
governance, including our Corporate Governance Guidelines, Board committee charters and committee
composition, Code of Conduct and other governance information within the Investors section of our
website.
PLIVA Acquisition
On October 24, 2006, through our subsidiary, Barr Laboratories Europe B.V. (“Barr Europe”), we
completed the acquisition of PLIVA, a generic pharmaceutical company headquartered in Zagreb,
Croatia. Under the terms of the cash tender offer, Barr Europe made payments of approximately $2.4
billion based on an offer price of HRK 820 per share (in the Croatian currency) for all shares
tendered during the offer period. The transaction closed with 17,056,977 shares being tendered as
part of the process, representing approximately 92% of PLIVA’s total share capital being tendered
to Barr Europe. With the addition of the treasury shares held by PLIVA and shares we acquired in
the open market after the offer period expired, we now own or control 97% of PLIVA’s voting
share capital.
Under Croatian law, our ownership of more than 95% of the voting shares in PLIVA permits us to
undertake the necessary actions to acquire the remainder of PLIVA’s outstanding share capital. We
are undertaking the necessary steps to purchase the remaining shares at an expected price of HRK
820 per share, the same per share price offered
to
shareholders during the formal tender period. This process and the subsequent pay-out to
remaining shareholders is expected to be completed in the first half of 2007.
The PLIVA acquisition has been a transforming event for the Company. Prior to the
acquisition, we marketed generic and proprietary pharmaceutical products almost exclusively in the
United States. With our acquisition of PLIVA, we have significantly increased our global reach and
now have access to additional internally developed drug delivery and development capabilities. We
now operate in more than 30 countries worldwide. We have supplemented our historical solid oral
dosage form product portfolio with PLIVA’s portfolio, and capabilities for developing, injectable
products and cream/ointment products.
We also have combined two companies that are at the forefront of the development of generic
biopharmaceuticals, with Barr traditionally focusing on the U.S. market and PLIVA principally
focusing on the European markets (where a regulatory pathway for generic biopharmaceuticals already
exists).
In addition, the PLIVA acquisition has increased our research and development capabilities,
including the addition of a recently opened bio-study facility in Goa, India. It also has given us
access to low cost manufacturing capabilities in Croatia, Poland and the Czech Republic, and the
opportunity to conduct product research and development in jurisdictions that offer favorable tax
treatment for such activities.
Since the closing of the transaction, members from key functions of both organizations have
been working diligently on over 100 integration initiatives. As a result, we have accomplished
several significant milestones, some of which are highlighted below:
•
We have established a single point of contact for all of our U.S. customers.
•
Our Forest, Virginia facility became the single point of distribution for all
generic products in the United States.
•
We have moved all PLIVA proprietary products sold previously under the Odyssey
label to our Duramed label.
•
We completed the FTC-ordered divestitures of four products.
•
We timely complied with our post-closing regulatory reporting requirements,
including the filing of a Form 8-K/A with the SEC on January 9, 2007 that included a
reconciliation of the historical PLIVA financial statements under International
Financial Reporting Standards (“IFRS”) to U.S. Generally Accepted Accounting
Principles (“GAAP”), and presented pro forma financial information for the twelve
months ended June 30, 2006.
•
We have identified certain less profitable businesses as
candidates for possible disposition.
GENERIC PHARMACEUTICALS
We are a global leader in the generic pharmaceutical industry. Generic drugs are the chemical
and therapeutic equivalents of brand-name drugs, typically sold under their generic chemical names
at prices below those of their brand-name equivalents. In the U.S., our largest market, our generic
products are currently marketed under both the Barr and PLIVA labels, although we are in the
process of transitioning the PLIVA label products to the Barr label in order to have a single
corporate identity for all of our generic products in the U.S.
Outside the U.S., our operations are primarily in Central and Eastern Europe, including
Croatia, Germany, Poland, Russia and the Czech Republic (the “Key Non-U.S. Markets”), where the
markets vary considerably from the U.S. market in that in many cases there is a market for branded
generic products (i.e., generic products sold under a company name) for which there are only
limited opportunities for generic substitution by the pharmacist. As a result, physician and
pharmacist loyalty to a particular company’s generic product can be a significant driver in
obtaining market share. In the recently expanded European Union (“EU”), as regulated by the
European Medicine Agency (“EMEA”), the EU’s equivalent of the FDA, the generic pharmaceutical
industry is becoming an increasingly important supplier of pharmaceuticals.
We have the capability to develop, manufacture and market generic pharmaceuticals in various
dosage forms, including tablets and capsules, creams, injectables, and ointments. Our relationships
with third parties provide access to other drug delivery systems, such as nasal sprays, patches and
sterile ophthalmics.
We focus on generic products that have one or more characteristics that we believe will make
it difficult for other competitors to develop competing generic products. The characteristics of
the selected generic products we pursue may include one or more of the following:
•
those with complex formulation or development characteristics;
•
those requiring specialized manufacturing capabilities;
•
those where sourcing the raw material may be difficult; and
•
those that must overcome unusual regulatory or legal challenges,
including patent challenges.
We believe generic products with some or all of these characteristics may produce higher
returns for a longer period of time than products without these characteristics.
We also develop and manufacture active pharmaceutical ingredients (“API”), primarily for use
internally and, to a lesser extent, for sale to third parties. We manufacture 28 different API for
use in pharmaceuticals through our facilities located in Croatia and the Czech Republic. We
believe that our ability to produce API for internal use may provide us with a strategic advantage
over competitors that lack this ability, particularly as to the timeliness of obtaining API for our
products.
For a description of the regulatory process that applies to developing generic
pharmaceuticals, see “Government Regulation” below.
Filings and Approvals
We file each of our regulatory submissions for generic products with the expectation that (1)
the applicable regulator will approve the marketing of the applicable product, (2) we will validate
our process for manufacturing that product within the specifications that have been or will be
approved by the applicable regulator and (3) the cost of producing the inventory relating to the
applicable product will be recovered from the commercialization of the product.
United States
During the Transition Period, in the U.S. market, we:
•
filed 11 abbreviated new drug applications (“ANDAs”) with the FDA;
•
received FDA approvals for seven generic products; and
•
launched seven new generic products.
At December 31, 2006, we had approximately 60 ANDAs, including tentatively approved
applications, pending at the FDA, targeting branded pharmaceutical products with an estimated $30
billion in annual sales, based on industry source data.
Other Markets
During the Transition Period (a portion of which pre-dates our acquisition of PLIVA), we
submitted for registration 85 products in 166 different presentations (where one molecule in one
market represents a product and
each combination of a formulation and strength represents one presentation), representing 39
individual molecules. During this period, we also received approvals for 109 products in 225
different presentations, representing 54 different molecules. As of December 31, 2006, with
regulatory bodies in Europe and ROW, we had a total of 297 product registrations pending,
representing 94 molecules in 671 different presentations.
Operations in our Key Non-US Markets
Croatia. Croatia is the site of our European operations headquarters, where we have
manufacturing, R&D, biopharmaceutical and API facilities. Croatia is our top European market in
terms of revenues. As of the end of 2006, we were the leader in the Croatian pharmaceutical market
with approximately 20% market share. Currently, we market some of the top products for the Croatian
pharmaceutical market including Sumamed (azithromycin), Klavocin (amoxicillin clavulanic acid),
Voltaren (diclofenac) and Peptoran (ranitidine). The Croatian market is a strong branded generic
market where substitution at the pharmacy level is not allowed. Physicians represent the key
decision makers in this market, making product detailing of great importance. Croatia currently has
a reimbursement system based on two independent product lists, one where essential drugs are fully
reimbursed, and a second where other select drugs are partially reimbursed.
Germany. The German market is the largest pharmaceutical market in Europe and is our number
two European market in terms of revenues. In Germany, we market our products through our
subsidiary, AWD.pharma, and our largest selling product is Katadalon (flupirtine). Like the markets
of Central and Eastern Europe, the German market is predominantly a branded generics one with
doctors prescribing international nonproprietary name (“INN”) products and corporate brands.
Substitution is possible at the pharmacy level, but only with one of the three lowest priced
generic alternatives available. All prescription drugs are reimbursed up to the respective
reference price. In 2006, the government introduced a number of new measures that have had a
significant impact on the generic pharmaceutical market. First, it has introduced a price
moratorium which eliminates the possibility of increasing prices through March 2008. Second, it has
imposed a mandatory producer rebate of 10% and banned any further discounts or rebates in kind to
pharmacists. Third, it has allowed health insurers to waive the patient co-pay in cases where the
generic is priced at least 30% below the reference level. At this time, prices for products have
been somewhat reduced, but higher volumes have mostly offset the lower pricing.
Poland. We have both manufacturing and R&D facilities in Poland. The Polish pharmaceuticals
market is the second largest in Central and Eastern Europe and relies heavily on generic drugs,
though it remains a branded market with emphasis on product promotion. Sumamed is our largest
selling product in Poland, where we also have a strong portfolio of over the counter drugs. We
currently rank third in this generic market, where no single player dominates or has significant
market share. As a result of high patient co-payments, competition among pharmacies and general
economic growth, the market is highly competitive and is expected to grow.
Russia.
Our PLIVA subsidiary began operating in Russia over 30 years ago. Our largest selling product in Russia
is Sumamed, which retains its leading position, despite over 15 generic competitors. The Russian
market is the largest in Central and Eastern Europe and is also one of the fastest growing. The
market is fragmented and no one company dominates. State involvement in the market is limited and
most expenditures on drugs are made directly by individuals to pharmacists. In 2005, the government
created the first federal program, known as the “DLO”, providing reimbursement for drugs that are
on the DLO list. In November 2006, the government published a revised DLO list with significant
changes that have affected participating companies to differing degrees. In addition, the budget for the DLO
was significantly overspent in 2006, which has created large delays in payment to producers. Despite these
concerns, we believe that the Russian market offers significant growth potential because of the
overall robust economy and the relatively untapped market.
Czech Republic. We have both manufacturing and R&D facilities, focused on cytostatic
capabilities that include both injectables and solid dosage forms, in the Czech Republic. The Czech
Republic pharmaceuticals market is branded, with doctors making the key decisions and companies
marketing to general practitioners. Reimbursement is organized using a reference pricing system
centered on a defined daily dose (DDD) of active ingredient.
Currently, Zorem (amlodipine) is our largest
selling product in the Czech Republic.
Set forth below is a description of certain generic products that contributed significantly to
our revenues in the Transition Period.
Oral Contraceptives. We currently manufacture and market 24 generic oral contraceptive
products in the U.S. under trade names including Aviane®, Kariva® and Tri-Sprintec®. Our oral
contraceptives compete with the branded versions of the products, and in most instances, with other
generic products and/or “authorized” generic versions of the branded product. “Authorized”
generics are generic products that are manufactured under the brand pharmaceutical company’s New
Drug Application (“NDA”) and sold either by the brand company itself or through a licensee. Oral
contraceptives are the most common method of reversible birth
control, used by approximately 82% of
women in the U.S. at some time during their reproductive years. Oral contraceptives have a long
history with widespread use attributed to many factors, including efficacy in preventing pregnancy,
safety and simplicity in initiation and discontinuation, medical benefits and relatively low
incidence of side effects. According to industry sources, the oral contraceptive market in the U.S.
had sales of approximately $3.2 billion during 2006.
Fentanyl Citrate. In the U.S., we market an oral transmucosal fentanyl citrate product that is
the generic version of Cephalon’s ACTIQ (oral transmucosal fentanyl citrate) [C-II], 200 mcg, 400
mcg, 600 mcg, 800 mcg, 1200 mcg, and 1600 mcg cancer pain-management product. We launched this
product in September 2006 under a license agreement previously granted to us by
Cephalon in August 2004, pursuant to a Federal Trade Commission order. The license grants us a
non-exclusive right to sell a generic version of ACTIQ. Under the licensing agreement, Cephalon is
currently supplying us with fentanyl citrate manufactured under Cephalon’s NDA, which we have the
right to market. Our ANDA is currently under active review at the FDA. Our product competes with
Cephalon’s authorized generic, which Cephalon has licensed to a third party.
Azithromycin/Sumamed. Our Azithromycin product is the generic equivalent of Pfizer’s
Zithromax® antibacterial treatment product, available in tablet, oral suspension and
injectable formulations. Following the expiry of the Azithromycin compound patent in the U.S. in
November 2005, we launched the generic tablet version in the U.S. and are
currently one of four generic competitors in the U.S. In July 2006, we launched the first generic
oral suspension version in the U.S. and are currently one of three generic competitors in that
market. In January 2007, we also received approval from the FDA to market our injectable form and
intend to launch that product in the U.S. in the quarter ending June 30, 2007. In Europe and ROW,
we sell Azithromycin under the trade name Sumamed and detail it to physicians and pharmacists.
Katadolon (flupirtine). Katadalon is a centrally acting non-opioid analgesic with muscle-tone
normalization effect and the ability to prevent pain chronification by inhibiting the development
of “pain memory”. Due to the unique structure and mode of action as a selective neuronal potassium
channel opener, Katadolon is the prototype of a new class of analgesic substances. It has been in
clinical use since 1984 and is marketed and actively promoted in Germany, Russia, other Central and
Eastern European countries, and China. Katadolon S-long, the slow release formulation of flupirtine
maleate, is registered and has been available on the German market since April 2006.
The table below sets forth those products, or classes of products, within our generics segment
that accounted for 10% or more of that segment’s total product sales during the Transition Period
or during fiscal 2006, 2005 and 2004:
We market our generic products to customers in the U.S. and Puerto Rico through an integrated
sales and marketing team that includes a four-person national accounts sales force. The activities
of the sales force are supported by our marketing and customer service organization in our
Woodcliff Lake, New Jersey offices. The U.S. customer base for our generic products includes drug
store chains, supermarket chains, mass merchandisers, wholesalers, distributors, managed care
organizations, mail order accounts, government/military and repackagers.
We promote our generic products in Europe and the ROW through over 1,400 sales
representatives, including contract sales representatives and marketing employees. While products
may be promoted to different audiences in different countries, the sales representatives generally
promote branded generic products to physicians and pharmacists. While we have very few dedicated
sales representatives for our generics business in the U.S., the larger number of sales
representatives in Europe is attributable to Europe being largely a “branded generics” market, as
compared with the substitution-based generics market in the U.S., where bioequivalent generic
products can be easily substituted for one another.
Net sales to customers who accounted for 10% or more of our generic product sales during the
Transition Period or during fiscal 2006, 2005 and 2004 were as follows:
Transition
Fiscal Year Ended June 30,
Period
2006
2005
2004
McKesson Drug Company
17
%
22
%
15
%
21
%
Cardinal Health
*
10
%
13
%
12
%
AmeriSource Bergen
*
*
10
%
*
Walgreens
11
%
13
%
15
%
16
%
CVS
*
12
%
12
%
*
*
Denotes less than 10% in the period indicated.
Patent Challenges
As part of our generic development activities for the U.S. market, we develop generic versions
of select brand products where we believe the patents relating to the brand products are invalid,
unenforceable or not infringed by our competing generic products. Utilizing the patent challenge
process under the Hatch-Waxman Act (discussed below), we seek to invalidate patents or to obtain a declaration that
our generic version does not infringe the patent. Our development activities in this area,
including sourcing raw materials and developing equivalent products, are designed to obtain FDA
approval for our product. Our legal activities in this area, performed by outside counsel, work
toward eliminating the barrier to market entry created by the patents.
Our Patent Challenge History
Our efforts in the area of challenging patents on branded pharmaceutical products have
resulted in the successful conclusion of 16 out of 18 cases as of December 31, 2006. Successful
outcomes have included: court rulings in our favor invalidating patents or finding that our product
does not infringe an existing patent; situations in which we have not been sued for patent infringement; and
settlements with the patent holder. Unfavorable outcomes, including court rulings in favor of the
patent holder, result in our not being able to launch a generic product until the patent(s) on the
brand pharmaceutical product expires. Recent examples of successful outcomes to our patent
challenges include:
•
ADDERALL XR. ADDERALL XR is a once-daily, extended-release, mixed salt
amphetamine product that is indicated for the treatment of ADHD and narcolepsy.
In August 2006, we entered into a product acquisition agreement, a product
development agreement, and settlement and license agreements with Shire plc to
settle our pending patent infringement dispute. Under the terms of the
agreements, we (1) purchased Shire’s ADDERALL® (immediate-release mixed
amphetamine salts) tablets for $63 million; (2) granted Shire a license to
obtain regulatory approval for and market in certain specified territories our
SEASONIQUE.
extended-cycle oral contraceptive product, along with five products in various
stages of development, for an initial $25 million payment for previously incurred
product development expenses, and for reimbursement of development expenses
incurred going forward, up to a maximum of $140 million over an
eight-year period,
not to exceed $30 million per year; and (3) are able to launch a generic version
of ADDERALL XR on April 1, 2009, more than nine years earlier than the
last-to-expire Shire listed patent.
•
Desmopressin. Desmopressin is the generic equivalent of Ferring B.V.’s
DDAVP® Tablets. DDAVP Tablets are indicated as antidiuretic
replacement therapy in the management of central diabetes insipidus and for the
management of the temporary polyuria and polydipsia following head trauma or
surgery in the pituitary region. DDAVP is also indicated for the management of
primary nocturnal enuresis. Following the February 2005 summary judgment ruling
by the U.S. District Court for the Southern District of New York that the patent
alleged to cover DDAVP is unenforceable and not infringed by our product, we
launched Desmopressin Acetate tablets, 0.1 mg and 0.2 mg, on July 5, 2005. In
February 2006, the Federal Circuit Court affirmed the District Court’s ruling
that the patent at issue is unenforceable. In October 2006, the U.S. Supreme
Court denied Ferring’s petition for a writ of certiorari.
•
Modafinil. Modafinil is the generic equivalent of Cephalon’s
PROVIGIL®. In February 2006, we entered into an agreement with
Cephalon to settle our pending patent infringement dispute in the U.S. related
to PROVIGIL. Under the terms of the settlement, Cephalon granted us a
non-exclusive, royalty-bearing right to market and sell a generic version of
PROVIGIL in the U.S. Our license will become effective in October 2011, unless
Cephalon obtains a pediatric extension for PROVIGIL, in which case we would be
permitted entry in April 2012. We may be allowed to enter at an earlier date
based upon the entry of another generic version of PROVIGIL.
•
Niacin. Niacin is the generic equivalent of Kos Pharmaceuticals’
Niaspan® product. In April 2005, we entered into co-promotion,
licensing and manufacturing, and settlement and license agreements relating to
the resolution of the patent litigation involving Niaspan. Under the terms of
the agreements, we: (1) co-promote the current Niaspanand
Advicor® products (the “Kos Products”) to obstetricians,
gynecologists and other practitioners with a focus on women’s healthcare in the
U.S. using our 103-person specialty sales force and in return we receive a
royalty based upon overall sales of the Kos Products, whether by Kos or our
sales force, as described elsewhere in this report; (2) serve as a stand-by,
alternate supply source for the Kos Products; and (3) will be allowed to launch
generic versions of the Kos Products on September 20, 2013, about four years
before the last of the applicable Kos patents is set to expire.
Pending Patent Challenges
At December 31, 2006, we had publicly disclosed the following patent challenges that are in
various stages of litigation:
Set
forth below is a discussion of a patent-challenge matter listed in
the above table.
Allegra
Tablets. Several patents related to fexofenadine hydrochloride, 30 mg, 60 mg and
180 mg tablets, the generic versions of Sanofi-Aventis’
Allegra® tablets, are subject to
litigation. Through an arrangement with Teva, we launched a limited quantity of our generic
fexofenadine hydrochloride tablet product in order to enable Teva to market its generic
fexofenadine hydrochloride tablet product during our 180-day generic exclusivity period. We
participate in the profits Teva earns from the ongoing sales of its product. We and Teva launched
this product “at risk,” meaning prior to the rendering of a final decision in the patent challenge
litigation. If we are unsuccessful in the litigation, we and Teva could
be liable for substantial damages that could have material adverse
effect on the results of our operations. See “Item 3 — Legal Proceedings —Pending Litigation Matters — Patent Matters —
Fexofenadine Hydrochloride Suit” below for additional
information on the status of this
litigation.
We will continue to pursue patent challenges and will evaluate future “at risk” launches
based on the strength of our case.
PROPRIETARY PHARMACEUTICALS
We manufacture and market proprietary pharmaceutical products under the Duramed label in the
United States and Canada. These products include both products that we develop internally and
products that we acquire, whether through licensing or acquisition. Proprietary products often are
patent-protected or benefit from other non-patent market exclusivities. Although the proprietary
products that we develop involve substantially higher risk to bring to market and require more
extensive research and development activities on our part when compared with our generic products,
they offer the potential for a longer period of market or product exclusivity and may generate
greater returns than most of our generic products. The same is true for the proprietary products
that we acquire, although they often involve less development risk. Actively promoted proprietary
products require greater sales and marketing expenses than generic products because we need to
promote them directly to healthcare providers using our sales representatives and, in some cases,
directly to consumers through direct-to-consumer advertising.
In the U.S., FDA approval is required before any new drug can be marketed. An NDA contains
complete pre-clinical and clinical safety and efficacy data (or a right of reference to such data),
and must be submitted to the FDA to obtain approval of a new drug. Before dosing of a new drug may
begin in healthy human subjects or patients, stringent government requirements for pre-clinical
data must be satisfied. The pre-clinical data, derived primarily from laboratory studies, are
submitted in an Investigational New Drug (“IND”) application, or its equivalent in countries
outside the U.S. where clinical trials are to be conducted. The pre-clinical data must provide an
adequate basis for evaluating both the safety and the scientific rationale for the initiation of
clinical trials.
The regulatory process for approval of an NDA is discussed in greater detail below under
“Government Regulation — New Drug Application Process.”
Our proprietary development activities are focused primarily on expanding our portfolio of
women’s healthcare products, which includes oral contraceptives, hormone therapy treatments for
menopause/perimenopause and treatment for endometriosis, labor and delivery, and breast disease. An
important part of our product development strategy is to develop a broad line of products, to be
prescribed primarily by OB/GYNs, that are designed to meet
the unmet medical needs of women. Our
focus in the area of extended-cycle oral contraception, which we established with the launch of
SEASONALE in 2003 and subsequent launch of the next-generation SEASONIQUE in July 2006, is
providing women with the option of four periods per year. In addition, and in response to current
contraception trends of altering the hormone interval, we also
provide women
with the option of
low-dose estrogen instead of a hormonal-free interval, through our SEASONIQUE and
Mircette products. We are also pursuing a urology product that utilizes our transvaginal ring
technology to treat urinary incontinence.
In areas other than women’s healthcare, we are pursuing a second urology product targeted at
the symptoms associated with the treatment of prostate cancer. In addition, we are developing two
oral vaccine products to prevent Adenovirus (Types 4 & 7) infections in U.S. military personnel
under contract with the Department of Defense. We continue to identify other proprietary product
candidates that further expand our product offerings in women’s healthcare and are actively
evaluating additional therapeutic categories to add to our proprietary portfolio.
As a result of internal development and business development activities, at the end of the
Transition Period we had a broad pipeline of short-, mid- and long-term opportunities that include
several proprietary products in clinical development, three of which are in Phase III studies, and
several NDAs pending at the FDA. See “Products in
Development.”
Our proprietary research and development team has experience in managing clinical development
programs and regulatory matters. This team works closely with our generic formulation,
manufacturing and regulatory groups to maximize the efficiency and effectiveness of our development
process.
Proprietary Product Portfolio
The following is a list of the proprietary products that we are actively promoting:
•
SEASONIQUE™ (Levonorgestrel/Ethinyl Estradiol and Ethinyl Estradiol)
extended-cycle oral contraceptive
•
ENJUVIA™ (Synthetic Conjugated Estrogens, B) hormone therapy
•
ParaGard® T 380A (Intrauterine Copper Contraceptive) IUD
•
Mircette® (Desogestrel and Ethinyl Estradiol) oral contraceptive
•
Plan B® OTC/Rx (Levonorgestrel) emergency oral contraceptive
•
Niaspan® (Niacin Extended-Release Tablets) for high cholesterol (marketed
under agreement with Kos Pharmaceuticals, Inc., a wholly owned subsidiary of Abbott)
•
Advicor® (Niacin Extended-Release/Lovastatin Tablets) for high cholesterol
(also marketed under agreement with Kos Pharmaceuticals, Inc.)
Set forth below are descriptions of certain of the proprietary products listed above.
SEASONIQUE™. SEASONIQUE (levonorgestrel/ethinyl estradiol tablets 0.15 mg/0.03 mg
and ethinyl estradiol tablets 0.01 mg) is our next generation extended-cycle oral contraceptive
product. SEASONIQUE provides continuous hormonal support in the form of a low-dose of estrogen in
place of the seven placebo pills. Under the SEASONIQUE extended-cycle regimen, women take active
tablets of 0.15 mg levonorgestrel/0.03 mg of ethinyl estradiol for 84 consecutive days, followed by
seven days of low-dose estrogen (0.01 mg of ethinyl estradiol). We launched SEASONIQUE in July
2006. In August 2006, we initiated full-scale detailing for SEASONIQUE utilizing our 250-person
Women’s Healthcare and 103-person Specialty Sales Forces to approximately 40,000 healthcare
providers. We have also initiated a fully integrated marketing campaign aimed at healthcare
providers and patients which includes professional education materials, medical education initiatives,
published data from our clinical studies demonstrating the safety and efficacy of the
extended-cycle SEASONIQUE regimen, and product sampling kits that contain extensive information for
patients. We are reinforcing our detailing activities with medical journal advertising and a
direct-to-consumer advertising campaign, including television, print and web-based advertising.
Plan
B®Emergency Contraceptive. Plan B, which contains the synthetic progestin
levonorgestrel, is an emergency oral contraceptive that is intended to prevent pregnancy when taken
as soon as possible within 72 hours
following unprotected intercourse or contraceptive failure. The
FDA approved our application to market Plan B as an over-the-counter (OTC) product for consumers 18
years of age and older, while maintaining the prescription status for women 17 and younger. Our
250-Person Women’s Healthcare Sales Force, which had been
promoting the Plan B prescription-only product, now promotes the dual-label Plan B OTC/Rx to a
professional audience that includes pharmacists, physicians and other healthcare providers.
We also implemented a CARE(SM) program (Convenient Access, Responsible Education)
to provide information to pharmacists, physicians and other healthcare providers, as well as
consumers, regarding the appropriate distribution, use and monitoring for compliance with
prescription age requirements of Plan B OTC/Rx. The program also includes a comprehensive education
program for healthcare professionals and consumers. In addition, we initiated various continuing
education programs for pharmacists and other healthcare practitioners, and a publication plan that
includes journal advertising. We continue to work closely with retail pharmacies and drug
wholesalers to ensure that they understand and follow the FDA’s prescription age requirement for
the dispensing of the product.
ParaGard®IUD. Our ParaGard® T 380A (Intrauterine Copper Contraceptive) provides women
with a long-term, reversible, non-hormonal contraceptive option. It
is the only IUD
approved for up to 10 years of continuous use and is more than 99% effective at preventing
pregnancy. We believe that IUDs represent an underutilized contraceptive option for
women in the United States, and
we are well positioned to grow this category through consumer and professional
education and marketing. ParaGard was approved in 1984 and has been
marketed in the United States
since 1988. Duramed acquired FEI Women’s Health, LLC and the
ParaGard IUD in November 2005 and
promotes the product to physicians and health care practitioners using its 103-person Specialty
Sales Force.
ENJUVIA™. In May 2006, we launched our ENJUVIA™ (synthetic conjugated
estrogens, B) tablets and immediately initiated physician detailing using our Women’s Healthcare
Sales Force. ENJUVIA is approved for the treatment of moderate-to-severe vasomotor symptoms
associated with menopause. ENJUVIA tablets are available in a variety
of dosage strengths, including
0.3 mg, 0.45 mg, 0.625 mg and 1.25 mg. ENJUVIA uses a unique delivery system, consisting of
Surelease® technology with a cellulose-based polymer tablet design, to provide slow
release of estrogens over several hours.
Our hormone therapy products, ENJUVIA and Cenestin®, compete in the $1.8 billion
hormone therapy market with products such as Wyeth’s Premarin®, which is a conjugated
equine estrogens product. The hormone therapy market has declined since the findings by the
National Institutes of Health were publicized in July 2002 and created uncertainty in the
minds of many healthcare providers and consumers regarding the risks and rewards of long-term
hormone therapy. However, we believe that a number of women and their healthcare providers will
continue using ENJUVIA and Cenestin products for the short-term treatment of moderate-to-severe
vasomotor symptoms associated with menopause.
As an on-going part of our product acquisition strategy, we have made opportunistic
acquisitions of mature branded products, through litigation settlements, licensing agreements or
direct acquisitions. We currently have 18 branded products that we do not directly promote to
physicians but may undertake some limited marketing initiatives in an effort to maintain sales
levels. These products include ADDERALL IR, which we acquired from Shire plc during the Transition
Period, and five proprietary products that we acquired through PLIVA that are now being sold under
the Duramed label, which are Antabuse® (for Alcohol Dependency), Nystatin®(Anti-fungal), Surmontil® (Anti-Depression), Urecholine® (Urinary Tract
and Bladder Treatment), and Vivactil®(Anti-Depression).
The table below sets forth those products, or classes of products, within our proprietary
segment that accounted for 10% or more of that segment’s total product sales during the Transition
Period or during fiscal 2006, 2005 and 2004:
We have several proprietary products in clinical development in multiple product categories.
Examples of these products are discussed in detail below.
Lo SEASONIQUE™. We are currently in Phase III studies with Lo
SEASONIQUE™, another of our extended-cycle regimen products, under which women would
take active tablets of 0.10 mg levonorgestrel/0.02 mg of ethinyl estradiol for 84 consecutive days,
followed by seven days of 0.01 mg of ethinyl estradiol. The clinical data that we expect to support
our NDA filing will result from one large, pivotal, randomized, open-label, multi-center trial that
is expected to end by June 30, 2007.
Bijuva™(Synthetic Conjugated Estrogens, A) Cream. In June 2004, we filed an NDA
for our Bijuva (Synthetic Conjugated Estrogens, A) vaginal cream product. In April 2005, the FDA
issued a “not approvable” letter for our application pending submission of additional data. We are
currently conducting Phase III clinical work that we believe will provide the additional
information needed to support the Bijuva application. If approved, we intend to market Bijuva for
the treatment of moderate-to-severe symptoms of vulvar and vaginal atrophy associated with
menopause.
Transvaginal Ring (TVR) Products. We have several products in early stages of development
based on our proprietary, novel, TVR drug delivery system. Specifically, our development efforts
are focused on products that treat endometriosis, fertility, fibroids, labor and delivery, and
urinary incontinence.
Oxybutynin TVR. We are currently developing a urinary incontinence product utilizing our TVR
technology. The TVR product offers the potential to deliver higher doses of oxybutynin to the
bladder neck with lower systemic exposure. Phase IIB studies for this product have recently been
completed and the data is being analyzed.
Vaccines. We are developing Adenovirus Vaccines Type 4 and 7 under a $68.9 million, six-year
contract awarded in September 2001 by the U.S. Department of Defense (“DOD”). The Adenovirus
Vaccines are intended to be dispensed to armed forces recruits to prevent epidemics of an acute
respiratory disease that has been a leading cause of hospitalizations of military trainees. In July
2003, we completed construction of a 20,000 square foot manufacturing and packaging facility
designed specifically to produce these vaccines. The facility is located on our Virginia
manufacturing and distribution campus. We completed the Phase I study in April 2006. In September
2006 we began our Phase II/III clinical program, which is currently ongoing. In addition to
supplying the vaccine to the armed forces, we have the right to market the product to other
populations, such as immunosuppressed patients, and foreign markets where the same needs exist as
those of the DOD.
Sales and Marketing
We
market our proprietary products through two sales teams; our Women’s Healthcare
Sales Force and our Specialty Sales Force:
•
Our Women’s Healthcare Sales Force, which has approximately 250 sales
representatives, currently promotes SEASONIQUE™ extended-cycle oral
contraceptive, our ENJUVIA™ hormone therapy products, our Plan B OTC/Rx
emergency contraceptive, and our Mircette® oral contraceptive product to women’s
healthcare practitioners. This sales force may market additional women’s healthcare
products we develop or acquire.
•
Our Specialty Sales Force, which has 103 sales representatives, promotes the
ParaGard® IUD product, Mircette® and SEASONIQUE to obstetricians,
gynecologists and other practitioners with a focus on women’s healthcare. This
sales force also promotes Niaspan® and Advicor® cholesterol
treatments under a co-promotion agreement with Kos Pharmaceuticals,
Inc. that we entered
into in April 2005.
The customer base for our proprietary products includes drug store chains, supermarket chains,
mass merchandisers, wholesalers, distributors, managed care organizations, mail order accounts, and
the
government/military. Net sales to customers who accounted for 10% or more of our proprietary
sales during the Transition Period or during fiscal 2006, 2005 and 2004 were as follows:
Transition
Fiscal Year Ended June 30,
Period
2006
2005
2004
McKesson Drug Company
36
%
30
%
26
%
21
%
Cardinal Health
16
%
15
%
20
%
21
%
Integrated
Commercialization
Services
15
%
11
%
*
*
AmeriSource Bergen
*
*
11
%
15
%
*
Denotes less than 10% in the period indicated.
BIOPHARMACEUTICALS
Biopharmaceuticals
worldwide represent one of the fastest-growing segments of the global
pharmaceutical industry. Biopharmaceutical products currently on the market worldwide, including
human insulin, interferons, human growth hormones and monoclonal antibodies, had overall sales of
$52 billion in 2005, a 17% increase as compared to $44 billion in 2004, based on industry source
data. In 2005, there were more than 600 biotech drug products and vaccines currently in clinical
trials worldwide. Biopharmaceuticals are a major driver of increasing prescription drug costs. We
believe this area represents a major growth opportunity for us and the generic pharmaceutical
industry as a whole.
In the U.S., the FDA has not recognized an abbreviated regulatory pathway for the timely and
cost-efficient approval of generic versions of biopharmaceutical products. We are working with
Congress, the Department of Health and Human Services (“HHS”), including the FDA, and the generic
industry’s trade association, the Generic Pharmaceutical Association (“GPhA”), to help define the
regulatory pathway for approval of these products. We have been developing these products in
anticipation of Congress and the FDA creating a regulatory pathway for generic biopharmaceuticals
in the United States. In Europe, the EMEA has developed a regulatory pathway for generic
biopharmaceuticals, which also are known as “bio-similars”. As a result, generic
biopharmaceuticals are at a more advanced stage in Europe than they are in the United States.
We currently have a biopharmaceuticals development portfolio that includes G-CSF, a protein
that stimulates the growth of certain white blood cells. G-CSF is the generic version of Amgen’s
Neupogen®. We are also developing EPO, a generic version of Amgen’s EPOGEN, a protein
that stimulates red blood cell production in patients undergoing dialysis therapy or chemotherapy,
the Adenovirus vaccine for the U.S. Department of Defense, and several additional products that are
in various stages of development.
There are, however, three major challenges in pursuing generic biopharmaceuticals: regulatory
challenges; intellectual property challenges; and scientific/manufacturing challenges. The key
regulatory challenge facing us in the U.S. is that the FDA has not recognized an abbreviated
regulatory pathway that would enable the timely and cost-efficient approval of generic versions of
biopharmaceuticals. We are working with Congress and the FDA to overcome this barrier.
Because biopharmaceuticals are highly complex, involving the use of live organisms as opposed
to chemical (non-biological) compounds for their production, brand innovators have sought
intellectual property protection of all aspects of biopharmaceutical development and manufacturing,
including processes, characterization, naturally occurring by-products of biopharmaceutical raw
material production and processes related to scale-up, manufacturing and analysis of the purity,
quality and efficacy of the finished product. We believe that we are well situated, in terms of our
experience with complex intellectual property issues, to address patent and other barriers to the
introduction of these products.
There have been significant recent developments in the generic biopharmaceutical arena. In
November 2005, the EMEA published guidelines to streamline the process for the approval of generic
biopharmaceuticals in the
European Union. Following publication of these guidelines, the European Commission granted
marketing
authorization in the European Union for two generic biopharmaceutical recombinant human
growth hormone products, Sandoz’s Omnitrope® product in April 2006 and Biopartner’s
Valtropin® product in May 2006. In May 2006, the FDA approved Sandoz’s
Omnitrope® product as the first non-substitutable bio-generic product of a previously
approved recombinant biopharmaceutical product in the United States.
Both houses of the U.S. Congress introduced biogenerics legislation in 2006. More recently,
Representative Waxman introduced House Bill 1038 (“Access to Life Saving Medicine Act”) in the U.S.
House of Representatives on February 14, 2007 seeking to provide a regulatory pathway for generic
biopharmaceuticals. The Access to Life Saving Medicine Act, as currently written, would allow the
FDA to approve abbreviated applications for generic versions of biopharmaceutical products licensed
under the Public Health Services Act, without repeating expensive and duplicative clinical trials.
The bill establishes a scientifically rigorous process for approval of generic versions of
biopharmaceutical products, authorizing the FDA to determine, on a
product-by-product basis, what
studies will be necessary to show that a new product is clinically comparable to the brand name
product. The bill would also create an improved process for ensuring that patent disputes are
resolved early to avoid delays in competition. We expect a comparable bill to be introduced in the
Senate this year.
We are actively pursuing business development initiatives and internal development activities
that we believe will enable us to bring generic versions of biopharmaceutical products to market,
both in the U.S. and in Europe, and we intend to build a leadership position in the development and
marketing of such products in the future.
RESEARCH AND DEVELOPMENT
Our commitment to research and development, which includes generics, proprietary products and
biopharmaceuticals, resulted in investments of $123 million in fiscal 2004, $128 million in fiscal
2005, $140 million in fiscal 2006 and $107 million in the
Transition Period. We have consistently made substantial
investments in research and development because of our belief that a significant portfolio of
products in development is critical to our long-term success. Research and development expenditures
for generic development activities typically include those related to internal personnel,
third-party bioequivalence studies, clinical studies related to biopharmaceutical product
development, costs paid to third-party development partners and raw materials used in developing
products. Proprietary product development costs typically include those related to internal
personnel, clinical studies, third-party toxicology studies, clinical trials conducted by
third-party clinical research organizations, raw materials and acquired in-process research and
development charges. We expect to continue to invest aggressively in research and development
projects in generic, proprietary and generic biopharmaceuticals categories.
RAW MATERIALS
We purchase certain bulk pharmaceutical chemicals and raw
materials that are essential to our business from numerous suppliers. We also purchase certain
finished dosage form products, such as our Plan B emergency contraceptive and our
ViaSpan® transplant preservation agent, from third-party suppliers.
Arrangements with non-U.S. suppliers are subject to certain risks, including obtaining
governmental clearances, export duties, political instability, currency fluctuations and
restrictions on the transfer of funds. In addition, in the U.S., the Drug Enforcement Agency
(“DEA”) regulates the allocation to us of raw materials used in the production of controlled
substances based on historical sales data. Any inability to obtain raw materials or finished
products on a timely basis, or any significant price increases that cannot be passed on to
customers, could adversely affect us. Because prior FDA approval of raw material suppliers or
product manufacturers may be required, if raw materials or finished products from an approved
supplier or manufacturer were to become unavailable, the required FDA approval of a new supplier
could cause a significant delay in the manufacture or supply of the affected drug product.
PATENTS AND PROPRIETARY RIGHTS
We file patent applications and obtain patents to protect our products, technologies,
inventions and improvements that we consider important to the development of our business. We also
rely upon trade secrets,
know-how, continuing technological innovations and licensing opportunities to develop and
maintain our
competitive position. Preserving our trade secrets and protecting our proprietary
rights are important to our long-term success.
From time-to-time, we may find it necessary to initiate litigation to enforce our patent
rights, to protect our trade secrets or know-how or to determine the scope and validity of the
proprietary rights of others. Litigation concerning patents, trademarks, copyrights and proprietary
technologies can often be protracted and expensive and, as with litigation generally, the outcome
is often uncertain. See Item 3 “Legal
Proceedings”.
GOVERNMENT REGULATION
United States
We are subject to extensive regulation by the FDA, the DEA and state governments, among
others. The Federal Food, Drug, and Cosmetic Act, the Controlled Substances Act, the Prescription
Drug Marketing Act and other federal statutes and regulations govern or influence the testing,
manufacturing, safety, labeling, storage, record keeping, approval, marketing, advertising and
promotion of our products. Non-compliance with applicable requirements can result in fines,
recalls and seizure of products.
Abbreviated New Drug Application Process
In the U.S., generic pharmaceutical products are the chemical and therapeutic equivalent of
branded drug products listed in the FDA publication entitled “Approved Drug Products with
Therapeutic Equivalence Evaluations,” popularly known in the industry as the “Orange Book.” The
Drug Price Competition and Patent Term Restoration Act of 1984, as amended, which is known as the
“Hatch-Waxman Act,” has been largely credited with launching the generic drug industry in the
United States. Generic drugs are bioequivalent to their brand-name counterparts, meaning they
deliver the equivalent amount of active ingredient at the same rate as the brand-name drug.
Accordingly, generic products provide safe, effective and cost-efficient alternatives to branded
products, typically at a significantly lower price than the branded equivalent.
FDA approval is required before a generic equivalent can be marketed. We seek approval for
such products by submitting an ANDA to the FDA. ANDAs are abbreviated versions of NDAs that must be
filed with the FDA for a branded product. The Hatch-Waxman Act provides that generic drugs may
enter the market upon approval of an ANDA. When processing an ANDA, the FDA waives the requirement
of conducting complete clinical studies, although it normally requires bioavailability and/or
bioequivalence studies. “Bioavailability” indicates the rate and extent of absorption and levels of
concentration of a drug product in the blood stream needed to produce a therapeutic effect.
“Bioequivalence” compares the bioavailability of one drug product with another, and when
established, indicates that the rate of absorption and levels of concentration of the active drug
substance in the body are equivalent for the generic drug and the previously approved drug. An ANDA
may be submitted for a drug on the basis that it is the equivalent of a previously approved drug
or, in the case of a new dosage form, is suitable for use for the indications specified.
Before approving a product, the FDA also requires that our procedures and operations conform
to Current Good Manufacturing Practice (“cGMP”) regulations, relating to good manufacturing
practices as defined in the U.S. Code of Federal Regulations. We must follow the cGMP regulations
at all times during the manufacture of our products. We continue to spend significant time, money
and effort in the areas of production and quality testing to help ensure full compliance with cGMP
regulations.
If the FDA believes a company is not in compliance with cGMP, sanctions may be imposed upon
that company including: withholding from the company new drug approvals as well as approvals for
supplemental changes to existing applications; preventing the company from receiving the necessary
export licenses to export its products; and classifying the company as an “unacceptable supplier”
and thereby disqualifying the company from selling products to federal agencies. We believe we are
currently in compliance with cGMP regulations.
The timing of final FDA approval of an ANDA depends on a variety of factors, including whether
the applicant challenges any listed patents for the drug and whether the brand-name manufacturer is
entitled to one or more
statutory exclusivity periods, during which the FDA may be prohibited from accepting
applications for, or
approving, generic products. In certain circumstances, a regulatory period can
extend beyond the life of a patent, and thus block ANDAs from being approved on the patent
expiration date. For example, in certain circumstances the FDA may extend the exclusivity of a
product by six months past the date of patent expiry if the manufacturer undertakes studies on the
effect of their product in children, a so-called pediatric extension. The pediatric extension
results from a 1997 law designed to reward branded pharmaceutical companies for conducting research
on the effects of pharmaceutical products in the pediatric population. As a result, under certain
circumstances, a branded company can obtain an additional six months of market exclusivity by
performing pediatric research.
In May 1992, Congress enacted the Generic Drug Enforcement Act of 1992, which allows the FDA
to impose debarment and other penalties on individuals and companies that commit certain illegal
acts relating to the generic drug approval process. In some situations, the Generic Drug
Enforcement Act requires the FDA to not accept or review ANDAs for a period of time from a company
or an individual that has committed certain violations. It also provides for temporary denial of
approval of applications during the investigation of certain violations that could lead to
debarment and also, in more limited circumstances, provides for the suspension of the marketing of
approved drugs by the affected company. Lastly, the Generic Drug Enforcement Act allows for civil
penalties and withdrawal of previously approved applications. Neither we nor any of our employees
have ever been subject to debarment.
Patent Challenges
We actively challenge patents on branded pharmaceutical products where we believe such patents
are invalid, unenforceable, or not infringed by our competing generic products. Our development
activities in this area, including sourcing raw materials and developing equivalent products, are
designed to obtain FDA approval for our product. Our legal activities in this area, performed
primarily by outside counsel, are designed to eliminate the barriers to market entry created by the
patents. Under the Hatch-Waxman Act, the first generic ANDA applicant whose filing includes a
certification that a listed patent on the brand name drug is invalid, unenforceable, or not
infringed (a so-called “paragraph IV certification”), may be eligible to receive a 180-day period
of generic market exclusivity. This period of market exclusivity may provide the patent challenger
with the opportunity to earn a significant return on the risks taken and its legal and development
costs. Patent challenge product candidates typically must have several years of remaining patent
protection to ensure that the legal process can be completed prior to patent expiry. Because of the
potential value of being the only generic in the market for the 180-day generic exclusivity period,
we typically seek to be the first company to file an ANDA containing a paragraph IV certification
for a targeted product.
The process for initiating a patent challenge begins with the identification of a drug
candidate and evaluation by qualified legal counsel of the patents purportedly protecting that
product. We have reviewed a number of potential challenges and have pursued only those that we
believe have merit. Our general practice is to disclose patent challenges after the patent holder
has sued us. Thus, at any time, we could have several undisclosed patent challenges in various
stages of development.
Patent challenges are complex, costly, and can take three to six years to complete. As a
result, we have in the past and may elect in the future to have partners on selected patent
challenges. These arrangements typically provide for a sharing of the costs and risks, and
generally provide for a sharing of the benefits of a successful outcome. In addition, our patent
challenges may result in settlements that we believe are reasonable, lawful, and in our
shareholders’ best interests.
Over the past few years the use of so-called “authorized” generics has increased significantly
in response to generic pharmaceutical patent challenges. Authorized generics involve the brand
pharmaceutical maker either marketing a “generic” version of its brand product or licensing its
brand drug to another company, which is then marketed in competition with the true generic during
the 180-day generic exclusivity period. Because the “authorized” generic is not sold under an ANDA,
but rather is sold under the brand pharmaceutical maker’s NDA, courts have held that it can
compete against the patent challenger’s generic product during the 180-day exclusivity period.
We believe that the marketing of “authorized” generics during a generic company’s 180-day
exclusivity period undermines the original intent of the Hatch-Waxman Act and devalues the
incentive. That act provided for pursuing paragraph IV certifications. In addition, “authorized”
generics may have a chilling effect on investment in future patent challenges by some generic
pharmaceutical
companies. We continue to work with Congress to seek legislation that would restore
the full value of the incentive period. In January 2007, Senators Rockefeller, Schumer, Leahy and
Kohl introduced Senate Bill 438 seeking to prohibit the entry of an authorized generic drug into
the market during a generic company’s 180-day exclusivity period.
Sales of several of our products have been impacted by the brand company’s authorized generic
product launch during our 180-day exclusivity period and we anticipate that certain future products
may also face competition from authorized generics. In fiscal 2006, for example, Sanofi-Aventis
launched an authorized generic product during our 180-day exclusivity period for generic Allegra
tablets. In this case, the authorized generic captured approximately 43% of the overall market by
the end of our 180-day exclusivity period.
Patent Challenge Process
The Hatch-Waxman Act offers an incentive to generic pharmaceutical companies that challenge
suspect patents on branded pharmaceutical products. The legislation recognizes that there is a
potential for non-infringement of an existing patent or the improper issuance of patents by the
U.S. Patent and Trademark Office, or PTO, resulting from a variety of technical, legal, or
scientific factors. The Hatch-Waxman legislation places significant burdens on the challenger to
ensure that such suits are not frivolous, but also may offer the opportunity for significant
financial reward if successful.
At the time an ANDA
is filed with the FDA, the generic company that wishes to challenge the patent files a paragraph IV
certification. After receiving notice from the FDA that its application is accepted for filing, the
generic company sends the patent holder and NDA owner a notice explaining why it believes that the
patent(s) in question are invalid, unenforceable, or not infringed. If the patent holder and NDA
owner bring suit in federal district court against the generic company to enforce the challenged
patent within 45 days of the receipt of the notice from the generic company, the Hatch-Waxman Act
provides for an automatic stay of the FDA’s authority to grant the approval that would otherwise
give the patent challenger the right to market its generic product. This stay is set at 30 months,
or such shorter or longer period as may be ordered by the court. The 30 months often does not
coincide with the timing of a trial or the expiration of a patent. The discovery, trial, and
appeals process can take several years.
Under the Hatch-Waxman Act, the developer of a generic drug that files the first ANDA
containing a paragraph IV certification may be eligible to receive a 180-day period of generic
market exclusivity. This period of market exclusivity may provide the patent challenger with the
opportunity to earn a return on the risks taken and its legal and development costs.
The FDA adopted regulations implementing the 180-day generic marketing exclusivity provision
of the Hatch-Waxman Act. However, over the years, courts have found various provisions of the
regulations to be in conflict with the statute. For example, in Mova Pharmaceutical Corp. v.
Shalala, 140 F.3d 1060 (D.C. Cir. 1998), the court of appeals held that the Hatch-Waxman Act
required generic exclusivity to be awarded to the first generic company to file an ANDA containing
a paragraph IV certification, regardless of whether that company prevailed in a court challenge to
the relevant patent(s) before another company was ready for approval. In contrast, the FDA’s
regulations had required the first patent challenger to successfully defend its challenge to the
patent(s) before another generic company was ready to receive approval. In Mylan Pharmaceuticals v.
Shalala, 81 F. Supp. 2d 30 (D.D.C. 2000), the court found that the statute requires the 180-day
generic period to commence on the date of the first court decision in favor of the generic
applicant, even if the first successful decision was a district court decision finding the
challenged patent invalid, unenforceable, or not infringed and the innovator company appealed the
court’s decision. The decision was in contrast to the FDA’s regulation under which the exclusivity
period would not commence until the appellate court affirmed the district court’s invalidity,
unenforceability, or non-infringement ruling.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act (“MMA”)
was signed into law. The MMA included provisions modifying the Hatch-Waxman Act and generic
exclusivity related to patent challenges. The MMA includes several provisions regarding the patent
challenge process designed to level the
playing field for generic companies. Generally speaking, the MMA provisions apply when the
first ANDA containing a paragraph IV certification was filed after December 8, 2003. These reforms
included:
•
Only one 30-month stay allowed per drug;.
•
Product-by-product exclusivity;
•
Shared 180-day exclusivity in limited circumstances;.
•
Counterclaim for an Orange Book delisting allowed; and
•
180-day exclusivity cannot be triggered by a district court decision.
First, under the MMA, only patents submitted to the FDA before an ANDA is filed can result in
a 30-month stay. No additional 30-month stay can be obtained on patents listed in the Orange Book
after the ANDA has been filed. Second, exclusivity is expressly on a product-by-product basis,
meaning that there will only be one 180-day exclusivity period per listed drug. Third, because
exclusivity is product-by-product, shared exclusivity will result only when multiple companies
submit the first ANDA containing a paragraph IV certification on the same day. Fourth, ANDA
applicants now have the ability to challenge the propriety of a patent listing. If an ANDA
applicant is sued, the company can now bring a counterclaim seeking to have a patent delisted from
the Orange Book. Finally, for ANDAs where the first paragraph IV certification was filed before
December 8, 2003, Congress reinstated FDA’s prior interpretation of “court decision,” meaning that
exclusivity for such applications can be triggered by first commercial marketing or by the
appellate court’s affirmance of an appealed district court’s ruling. Thus, for such applications,
the 180-day exclusivity period cannot be triggered by a district court decision that is on appeal.
Where the first paragraph IV ANDA was submitted after the enactment of the MMA, exclusivity can
only be triggered by the first ANDA filer’s marketing of its own generic product or a product made
by the brand company. While exclusivity could be forfeited as a result of a court decision, that
court decision must either be an unappealed district court decision or an appellate court decision.
New Drug Application Process
FDA approval is required before any new drug can be marketed in the U.S. An NDA is a filing
submitted to the FDA to obtain approval of a new drug and must contain complete pre-clinical and
clinical safety and efficacy data or a right of reference to such data. Before dosing a new drug in
healthy human subjects or patients may begin, stringent government requirements for pre-clinical
data must be satisfied. The pre-clinical data, typically obtained from studies in animal species as
well as from laboratory studies, are submitted in an Investigational New Drug, or IND, application,
or its equivalent in countries outside the U.S. where clinical trials are to be conducted. The
pre-clinical data must provide an adequate basis for evaluating both the safety and the scientific
rationale for the initiation of clinical trials.
Clinical trials are typically conducted in three sequential phases, although the phases may
overlap.
•
In Phase I, which frequently begins with the initial introduction of the
compound into healthy human subjects prior to introduction into patients, the
product is tested for safety, adverse effects, dosage, tolerance absorption,
metabolism, excretion and other elements of clinical pharmacology.
•
Phase II typically involves studies in a small sample of the intended patient
population to assess the efficacy of the compound for a specific indication, to
determine dose tolerance and the optimal dose range, and to gather additional
information relating to safety and potential adverse effects.
•
Phase III trials are undertaken to further evaluate clinical safety and
efficacy in an expanded patient population at typically dispersed study sites,
in order to determine the overall risk-benefit ratio of the compound and to
provide an adequate basis for product labeling.
Each trial is conducted in accordance with certain standards under protocols that detail the
objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to
be evaluated. Each protocol must be
submitted to the FDA as part of the IND. In some cases, the FDA allows a company to rely on
data developed in foreign countries, or previously published data, which eliminates the need to
independently repeat some or all of the studies.
Data from pre-clinical testing and clinical trials are submitted to the FDA as an NDA for
marketing approval and to other health authorities as a marketing authorization application. The
process of completing clinical trials for a new drug may take several years and require the
expenditure of substantial resources. Preparing an NDA or marketing authorization application
involves considerable data collection, verification, analysis and expense, and there can be no
assurance that approval from the FDA or any other health authority will be granted on a timely
basis, if at all. The approval process is affected by a number of factors, primarily the risks and
benefits demonstrated in clinical trials as well as the severity of the disease and the
availability of alternative treatments. The FDA or other health authorities may deny an NDA or
marketing authorization application if the regulatory criteria are not satisfied, or such
authorities may require additional testing or information.
Even after initial FDA or other health authority approval has been obtained, further studies,
including Phase IV post-marketing studies, may be required to provide additional data on safety.
The post-marketing studies could be used to gain approval for the use of a product as a treatment
for clinical indications other than those for which the product was initially tested.
Also, the FDA or other regulatory authorities require post-marketing reporting to monitor the
adverse effects of the drug. Results of post-marketing programs may limit or expand the further
marketing of the products. Further, if there are any modifications to the drug, including changes
in indication, manufacturing process or labeling or a change in the manufacturing facility, an
application seeking approval of such changes must be submitted to the FDA or other regulatory
authority. Additionally, the FDA regulates post-approval promotional labeling and advertising
activities to assure that such activities are being conducted in conformity with statutory and
regulatory requirements. Failure to adhere to such requirements can result in regulatory actions
that could have an adverse effect on our business, results of operations and financial condition.
United States Drug Enforcement Agency (“DEA”)
Because we sell and are currently developing several other products that contain controlled
substances, we must meet the requirements and regulations of the Controlled Substances Act, which
are administered by the DEA. These regulations include stringent requirements for manufacturing
controls and security to prevent diversion of or unauthorized access to the drugs in each stage of
the production and distribution process. The DEA regulates allocation to us of raw materials used
in the production of controlled substances based on historical sales data. We believe we are
currently in compliance with all applicable DEA requirements.
Medicaid
In November 1990, a law regarding reimbursement for prescribed Medicaid drugs was passed as
part of the Congressional Omnibus Budget Reconciliation Act of 1990. The law requires drug
manufacturers to enter into a rebate contract with the Federal Government. All generic
pharmaceutical manufacturers whose products are covered by the Medicaid program are required to
rebate to each state a percentage of their average net sales price for the products in question.
These percentages are currently 11% in the case of products sold by us which are covered by an ANDA
and 15% of products sold by us which are covered by an NDA. We accrue for these future estimated
rebates in our consolidated financial statements.
We believe that federal and/or state governments may continue to enact measures in the future
aimed at reducing the cost of providing prescription drug benefits to the public, particularly
senior citizens. We cannot predict the nature of such measures or their impact on our
profitability.
Medicare
Effective June 2004, under the guidelines of the Medicare Prescription Drug Improvement and
Modernization Act of 2003, we have been paying rebates on two of our proprietary products, Cenestin
and Trexall™, to various managed care organizations and pharmacy benefit management
companies (PBMs) that have received an
endorsement from the Centers for Medicare and Medicaid Services (CMS) as sponsors of one or
more established Medicare drug discount card programs. We have signed negotiated agreements with
these entities under which we have agreed to pay rebates and, in some cases administrative fees,
based on the wholesale acquisition cost (“WAC”) for units dispensed to eligible cardholders. The
discount card program was a transitional assistance program. In January 2006, a Medicare Part D
prescription drug benefit took effect which provides for comprehensive prescription drug coverage
to seniors. During 2006, we finalized negotiated rebate agreements involving Cenestin, ENJUVIA and
Trexall with numerous Part D sponsors.
Other Countries
In Europe and the ROW, the manufacture and sale of pharmaceutical products is regulated in a
manner substantially similar to that in the United States. Legal requirements generally prohibit
the handling, manufacture, marketing and importation of any pharmaceutical product unless it is
properly registered in accordance with applicable law. The registration file relating to any
particular product must contain medical data related to product efficacy and safety, including
results of clinical testing and references to medical publications, as well as detailed information
regarding production methods and quality control. Health ministries are authorized to cancel the
registration of a product if it is found to be harmful or ineffective or manufactured and marketed
other than in accordance with registration conditions.
A directive of the European Union requires that medicinal products shall have a marketing
authorization before they are placed on the market in the European Union. Authorizations are
granted after the assessment of quality, safety and efficacy. In order to control expenditures on
pharmaceuticals, most member states of the European Union regulate the pricing of such products and
in some cases limit the range of different forms of a drug available for prescription by national
health services. These controls can result in considerable price differences among member states.
As part of the mutual recognition procedure established by the European Union, an attempt was made
to simplify registration, although centralized registration for generic products is, as yet, only
possible in a few cases in Europe.
The duration of certain pharmaceutical patents may be extended in Europe and the ROW by up to
five years in order to extend effective patent life to fifteen years. Additionally, data
exclusivity provisions in Europe (as discussed below) may prevent launch of a generic product by
six or ten years from the date of the first market authorization in the European Union. New
legislation, effective as of November 21, 2005, lengthens the exclusivity period for new products
to 10 years for all members of the EU, with a possibility of extending the period to 11 years under
certain circumstances. This legislation will begin to have an effect on the European market only
after the current periods have expired. This legislation also enables the submission of a generic
dossier to the health authorities eight years after the first market authorization, and allows for
research and development work during the patent term for the purpose of submitting registration
dossiers.
Data exclusivity provisions exist in many countries worldwide, including in the European
Union, although their application is not uniform. Similar provisions may be adopted by additional
countries or otherwise strengthened. In general, these exclusivity provisions prevent the approval
and/or submission of generic drug applications to the health authorities for a fixed period of time
following the first approval of a novel brand-name product in that country. As these exclusivity
provisions operate independently of patent exclusivity, they may prevent the approval and/or
submission of generic drug applications for some products even after the patent protection has
expired.
Government Relations Activities
Because we believe a balanced and fair legislative and regulatory arena is critical to the
pharmaceutical industry, we have and will continue to place a major emphasis in terms of management
time and financial resources on government affairs activities. We currently maintain an office and
staff a full-time government affairs department in Washington, D.C., which has responsibility for
coordinating state and federal legislative activities and coordinating with the generic industry
trade association and other associations, such as the National Association of Chain Drug Stores,
whose interests and goals are aligned with ours. Outside the U.S., we participate in the European
Generic Association and local government affairs matters are handled by country managers on a local
level.
We face intense competition from numerous branded and generic pharmaceutical companies in
nearly every country where our pharmaceutical products are marketed. Our competitors include:
•
the generic divisions and subsidiaries of brand pharmaceutical companies,
including Sandoz US, a subsidiary of Novartis AG;
•
large independent domestic and international generic manufacturers including
Mylan Laboratories, Watson Pharmaceuticals, Inc., Teva Pharmaceuticals and
distributors with large product lines where there is competition with some of
our products;
•
generic manufacturers in Europe such as Ratiopharm, Gedeon Richter Ltd,
Actavis and Krka d.d.;
•
generic manufacturers in India that have certain cost advantages over U.S.
generic manufacturers, such as Ranbaxy and Dr. Reddy’s; and
•
brand pharmaceutical companies whose therapies compete with our generic and
proprietary products, including Johnson & Johnson, Wyeth, Organon, Berlex and
Warner Chilcott.
The expiration of patents and other market exclusivities on branded products results in
generic competitors, entering the marketplace. Normally, there is unit price decline as additional
generic competitors enter the market and we may lose market share. The timing of price decreases is
unpredictable and can result in a significantly curtailed period of profitability for a particular
generic product. In addition, brand-name manufacturers frequently take actions in the U.S. to
prevent or discourage the use of generic equivalents. These actions may include:
•
filing new patents on drugs whose original patent protection is about to
expire;
•
obtaining patents on “next-generation” products reflecting, for example
changes in formulation, means of delivery or other product improvement
modifications;
•
increasing marketing initiatives;
•
launching authorized generic versions of their branded products;
•
using the Citizen’s Petition process to request amendments to FDA standards;
•
pricing the brand product below the already reduced price of the generic
product in certain formularies in order to maintain a favored reimbursement
status; and
•
commencing litigation.
Generic pharmaceutical market conditions have also been affected by industry consolidation and
a fundamental shift in industry distribution, purchasing and stocking patterns resulting in the
increased importance of sales to major chain drug stores and major wholesalers and a concurrent
reduction in sales to private label generic distributors.
In the generic oral contraceptive market, which represents the largest category of our
generics segment, our most significant competitor is Watson Pharmaceuticals, which markets and
distributes a sizeable portfolio of generic oral contraceptive products. Teva Pharmaceuticals,
which currently markets two generic oral contraceptive products manufactured by Andrx Corporation,
now a subsidiary of Watson Pharmaceuticals, is also a competitor. As a result of Watson’s
acquisition of Andrx, Teva has gained the rights to Andrx’s oral contraceptive products and pending
applications. In addition, a small, privately held pharmaceutical company distributes authorized
generic versions of two oral contraceptive products that we manufacture and market. Although we
expect competition in the generic
oral contraceptive field to intensify, we believe that our large portfolio of generic oral
contraceptives will remain a significant component of our total revenues.
In Europe, we compete with other generic companies (several major multinational generic drug
companies and various local generic drug companies) and branded drug companies that continue to
sell or license branded pharmaceutical products after patent expirations and other statutory
expirations. As in the U.S., the generic market in Europe is very competitive, with the main
competitive factors being prices, time to market, reputation, customer service and breadth of
product line.
Our proprietary pharmaceutical products compete with products manufactured by branded
pharmaceutical companies in competitive markets throughout the U.S. and Canada. The competitive
factors that impact this part of our business include product efficacy, safety, market acceptance,
price, marketing effectiveness, patent protection, and research and development of new products.
Our proprietary products often must compete with other products that already have an established
position in the market. If competitors introduce new products, delivery systems or processes with
therapeutic or cost advantages, our products could be subject to price reductions or decreased
volume of sales, or both. Our proprietary products may also face competition from manufacturers of
generic pharmaceuticals, following the expiration of non-patent product exclusivities or a
successful challenge to our patents.
To ensure our ability to compete effectively, we:
•
focus our proprietary and generic product development in areas of historical
strength or competitive advantage;
•
target generic products for development that have unique characteristics,
including difficulty in sourcing raw materials, difficulty in formulation or
establishing bioequivalence, and manufacturing that requires unique facilities,
processes or expertise;
•
develop innovative, cost-effective proprietary products that serve unmet medical needs; and
•
make significant investments in plant and equipment to improve our efficiency.
These strategies provide the basis for our belief that we will continue to remain a leading
independent specialty pharmaceutical company.
EMPLOYEES
Our success depends on our ability to recruit and retain highly qualified scientific and
management personnel. We face competition for personnel from other companies (including other
pharmaceutical companies), academic institutions, government entities and other organizations. As
of December 31, 2006, we had approximately 8,500 full-time employees. In the U.S., approximately
80 of our employees are represented by unions. Outside of the U.S., approximately 2,500 of our
employees are represented by unions, and almost 5,200 employees are covered by collective
bargaining agreements in Croatia, the Czech Republic, Germany and Poland.
We believe that our relations with our employees are good.
INSURANCE
Our insurance coverage at any given time reflects market conditions, including cost and
availability, existing at the time it is written, and the decision to obtain insurance coverage or
to self-insure varies accordingly. If we were to incur substantial liabilities that are not
covered by insurance or that substantially exceed coverage levels or accruals for probable losses,
there could be a material adverse effect on our financial statements in a particular period.
We maintain third-party insurance that provides coverage, a portion of which is subject to
specified co-insurance requirements, for the cost of product liability claims related to products
distributed in North America and arising during the current policy period, which began on October1, 2006 and ends on September 30, 2007, between an aggregate amount of $25 million and $75 million.
We have retained the first $25 million of costs incurred relating to product liability claims
arising during the current policy period.
We also maintain a separate insurance program for our international product liability claims.
That program began on January 1, 2007 and ends on December 31, 2007 and provides an aggregate
amount of $75 million of coverage, subject to per claim and aggregate retentions of $1 million and
$5 million, respectively.
In addition to the above programs, we also have obtained extended reporting periods under
previous policies for certain claims asserted during the current policy period where those claims
relate to remote and prior occurrences. The applicable retentions and dates of occurrence under the
previous policies vary by policy.
ENVIRONMENTAL
We believe that our operations comply in all material respects with applicable laws and
regulations concerning the environment. While it is impossible to predict accurately the future
costs associated with environmental compliance and potential remediation activities, we do not
expect compliance with environmental laws to require significant capital expenditures nor do we
expect such compliance to have a material adverse effect on our consolidated financial statements.
The statements in this section describe the major risks to our business and should be
considered carefully. In addition, these statements constitute our cautionary statements under the
Private Securities Litigation Reform Act of 1995.
Our disclosure and analysis in this Form 10-K/T contain some forward-looking statements that
set forth anticipated results based on management’s plans and assumptions. From time to time, we
also provide forward-looking statements in other materials we release to the public as well as oral
forward-looking statements. Such statements give our current expectations or forecasts of future
events; they do not relate strictly to historical or current facts. We have tried, wherever
possible, to identify such statements by using words such as “anticipate,”“estimate,”“expect,”“project,”“intend,”“plan,”“believe,”“target,”“forecast” and similar expressions in connection
with any discussion of future operating or financial performance. In particular, these include
statements relating to future actions, prospective products or product approvals, potential
acquisitions, future performance or results of current and anticipated products, sales efforts,
expenses, foreign exchange rates, the outcome of contingencies, such as legal proceedings, and
financial results.
We cannot guarantee that any forward-looking statement will be realized, although we believe
we have been prudent in our plans and assumptions. Achievement of future results is subject to
risks, uncertainties and potentially inaccurate assumptions. Should known or unknown risks or
uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could
differ materially from past results and those anticipated, estimated or projected. You should bear
this in mind as you consider forward-looking statements.
We undertake no obligation to publicly update forward-looking statements, whether as a result
of new information, future events or otherwise. You are advised, however, to consult any further
disclosures we make on related subjects in our reports on forms 10-Q
and 8-K filed with the SEC. Also note that we
provide the following cautionary discussion of risks, uncertainties and possibly inaccurate
assumptions relevant to our businesses. These are factors that, individually or in the aggregate,
we think could cause our actual results to differ materially from expected and historical results.
We note these factors for investors as permitted by the Private Securities Litigation Reform Act of
1995. You should understand that it is not possible to predict or identify all such factors.
Consequently, you should not consider the following to be a complete discussion of all potential
risks or uncertainties.
Our success depends on our ability to successfully develop and commercialize additional
pharmaceutical products
Our future results of operations depend, to a significant degree, upon our ability to
successfully commercialize additional generic and proprietary pharmaceutical products. With our
generic products we must develop, test and manufacture these products, as well as prove that our
generic products are bioequivalent to their branded counterparts. With our proprietary products we
must complete clinical studies that prove the safety and efficacy of our proprietary products. All
of our products must meet and continue to comply with regulatory and safety standards and receive
regulatory approvals. We may be forced to withdraw a product from the market if health or safety
concerns arise with respect to the product. The development and commercialization process,
particularly with respect to proprietary products, is both time-consuming and costly and involves a
high degree of business risk. Our products currently under development, if and when fully developed
and tested, may not perform as we expect, necessary regulatory approvals may not be obtained in a
timely manner, if at all, and we may not be able to successfully and profitably produce and market
such products. Delays in any part of the process or our inability to obtain regulatory approval of
our products could adversely affect our operating results by restricting or delaying our
introduction of new products. Our ability to introduce and benefit from new products may depend
upon our ability to successfully challenge patent rights held by branded companies. The continuous
introduction of new products is critical to our business.
Impact on our revenues and profits as competition is introduced
We attempt to select our generic products based on the prospects for limited competition from
competing generic companies. We do so because we believe that the more generic competitors that
market the same generic
product, the lower the revenue and profitability we will record for our product. Therefore, if
any of our currently marketed products or any newly launched generic product are subject to
additional generic competition from one or more competing products, our price and market share for
the affected generic product could be dramatically reduced. As a consequence, unless we
successfully replace generic products that are declining in profitability with new generic products
with higher profitability, our business could be adversely affected.
Upon the expiration or loss of patent protection or regulatory exclusivity periods for one of
our branded products, or upon the “at risk” launch by a generic manufacturer of a generic version
of one of our branded products, we can lose the major portion of sales of that product in a very
short period, which can adversely affect our business. For example, SEASONALE was our largest
selling proprietary product during the year ended June 30, 2006, generating $100 million in
revenues. In September 2006, a competitor received FDA approval for its generic version of
SEASONALE and launched a competing product. As the result of generic competition, our revenues and
gross profit contributions from SEASONALE have declined significantly. If we do not continue to
successfully replace proprietary products through internal development or acquisition, our revenue
and profits will decline.
Resolving Paragraph IV patent challenges
Our operating results have historically included significant contributions from products that
arise from the success we have had from our patent challenge activities. However, the success we
have had in the past from challenging branded companies’ patents, whether through court decisions
that permit us to launch our generic versions of product or through settlements, may not be
repeated in the future due to the following:
•
legislation recently introduced in Congress that, if passed as currently
written, could significantly limit the ability of companies to settle patent
litigation under the Hatch-Waxman Act;
•
an increase in the number of competitors who pursue patent challenges could
make it more difficult for us to be the first to file a Paragraph IV certification
on a patent protected product;
•
a branded company’s decision to launch an authorized generic version of a
product will reduce our market share and lower the revenues and gross profits we
could have otherwise earned if an authorized generic were not launched;
•
claims brought by third parties, including the FTC, various states’ Attorneys
General and other third-party payers challenging the legality of our settlement
agreements could affect the way in which we resolve our patent challenges with
the brand pharmaceutical companies; and
•
the efforts of brand companies to use legislative and regulatory tactics to
delay the launch of generic products.
Impact of “At Risk” Launches
There are situations in which we have used our business and legal judgment and decided to
market and sell products, subject to claims of alleged patent infringement, prior to final
resolution by the courts, based upon our belief that such patents are invalid, unenforceable, or
would not be infringed. This is referred to in the pharmaceutical industry as an “at risk” launch.
One such example of this is our at risk launch of Fexofenadine hydrochloride 30 mg, 60 mg and 180
mg tablets, the generic versions of Sanofi-Aventis’ Allegra® tablets, together with
Teva, as discussed above. The risk involved in an at risk launch can
be substantial because, if a patent
holder ultimately prevails, the remedies available to such holder may include, among other things,
damages measured by the profits lost by the holder, which are often significantly higher than the
profits we make from selling the generic version of the product. Should we elect to proceed in this
manner we could face substantial damages if the final court decision is adverse to us. In the case
where a patent holder was able to prove that our infringement was “willful”, the definition of
which is subjective, such damages may be trebled.
Uncertainty associated with pharmaceutical pricing, reimbursement and related matters
Increasing expenditures for health care have been the subject of considerable public attention
in almost every jurisdiction where we conduct business. Both private and governmental entities are
seeking ways to reduce or contain health care costs. In many countries in which we currently
operate, pharmaceutical prices are subject to regulation. In the U.S., numerous proposals that
would effect changes in the U.S. health care system have been introduced or proposed in Congress
and in some state legislatures, including the enactment in December 2003 of expanded Medicare
coverage for drugs, which became effective in January 2006. Similar activities are taking place
throughout Europe. We cannot predict the nature of the measures that may be adopted or their impact
on the marketing, pricing and demand for our products.
Managed Care Trends
The trend toward managed healthcare in the U.S., the growth of organizations such as HMOs and
MCOs and legislative proposals to reform healthcare and government insurance programs could
significantly influence the purchase of pharmaceutical products, resulting in lower prices and a
reduction in product demand. Such cost containment measures and healthcare reform could affect our
ability to sell our products and may have a material adverse effect on us. Additionally,
reimbursements to patients may not be maintained and third-party payers, which place limits on
levels of reimbursement, may reduce the demand for, or negatively affect the price of, those
products and could significantly harm our business. We may also be subject to lawsuits relating to
reimbursement programs that could be costly to defend, divert management’s attention and could have
a material adverse effect on our business.
Government Regulation
We are dependent on obtaining timely approvals before marketing most of our products. Any
manufacturer failing to comply with FDA or other applicable regulatory agency requirements may be
unable to obtain approvals for the introduction of new products and, even after approval, initial
product shipments may be delayed. For example, on May 8, 2006, prior to the acquisition, PLIVA
received a warning letter from the FDA that raised numerous concerns regarding our manufacturing
facility in Zagreb, Croatia, and in connection with that letter, the FDA imposed a temporary hold
on approvals of ANDAs for products produced at this facility. The FDA also has the authority, in
certain circumstances, to revoke drug approvals previously granted and remove from the market
previously approved drug products containing ingredients no longer approved by the FDA. Our major
facilities, both in the U.S. and outside the U.S., and our products are periodically inspected by
the FDA, which has extensive enforcement powers over the activities of pharmaceutical
manufacturers, including the power to seize, force to recall and prohibit the sale or import of
non-complying products, and to halt operations of and criminally prosecute non-complying
manufacturers.
In Europe, the manufacture and sale of pharmaceutical products is regulated in a manner
substantially similar to that in the United States. Legal requirements generally prohibit the
handling, manufacture, marketing and importation of any pharmaceutical product unless it is
properly registered in accordance with applicable law. The registration file relating to any
particular product must contain medical data related to product efficacy and safety, including
results of clinical testing and references to medical publications, as well as detailed information
regarding production methods and quality control. Health ministries are authorized to cancel the
registration of a product if it is found to be harmful or ineffective or manufactured and marketed
other than in accordance with registration conditions.
Data exclusivity provisions exist in many countries worldwide, including in the European
Union, although their application is not uniform. Similar provisions may be adopted by additional
countries or otherwise strengthened. In general, these exclusivity provisions prevent the approval
and/or submission of generic drug applications to the health authorities for a fixed period of time
following the first approval of a novel brand-name product in that country. As these exclusivity
provisions operate independently of patent exclusivity, they may prevent the approval and/or
submission of generic drug applications for some products even after the patent protection has
expired.
Difficulties or delays in product manufacturing, including, but not limited to, the inability
to increase production capacity commensurate with demand, or the failure to predict market demand
for, or to gain market acceptance of approved products, could adversely affect future results.
Dependence on Third Parties
We rely on numerous third parties to supply us with most of our raw materials, inactive
ingredients and other components for our manufactured products and for certain of our finished
goods. In many instances there is only a single supplier. In addition, we rely on third-party
distributors and alliance partners to provide services for our business, including product
development, manufacturing, warehousing, distribution, customer service support, medical affairs
services, clinical studies, sales and other technical and financial services for certain of our
products. Also, in Europe we often in-license products that are manufactured by others for us.
Nearly all third-party suppliers and contractors are subject to
governmental regulation and accordingly, we are dependent on the
regulatory compliance of these third parties. We also depend on
the strength, validity and terms of our various contracts with these third-party manufacturers,
distributors and collaboration partners. Any interruption or failure by these suppliers,
distributors and collaboration partners to meet their obligations pursuant to various agreements or
obligations with us could have a material adverse effect on our business.
In addition, our revenues include amounts we earn based on sales generated and recorded by
Teva Pharmaceuticals for generic Allegra, and Kos Pharmaceuticals, a wholly owned subsidiary of
Abbott, for Niaspan and Advicor. Any factors that negatively impact the sales of these products
could adversely impact our revenues and profits.
Customer Consolidation
Our principal customers in the United States are wholesale drug distributors and major retail
drug store chains. These customers comprise a significant part of the distribution network for
pharmaceutical products in the U.S. This distribution network is continuing to undergo significant
consolidation as a result of mergers and acquisitions among wholesale distributors and the growth of
large retail drug store chains. This consolidation may result in these groups gaining additional
purchasing leverage and consequently increasing the product pricing pressures facing our business.
Additionally, the emergence of large buying groups representing independent retail pharmacies and
the prevalence and influence of managed care organizations and similar institutions potentially
enable those groups to extract price discounts on our products. Our net sales and
quarterly growth comparisons may be affected by fluctuations in the buying patterns of major
distributors, retail chains and other trade buyers. These fluctuations may result from seasonality,
pricing, wholesaler buying decisions or other factors.
Acquisitions
We regularly review potential acquisitions of products and companies complementary to our
business. Acquisitions typically entail many risks including difficulties in integrating
operations, personnel, technologies and products. If we are not able to successfully integrate our
acquisitions, we may not obtain the advantages that the acquisitions were intended to create, which
may adversely affect our business, results of operations, financial condition and cash flows, and
our ability to develop and introduce new products. For a more detailed discussion regarding our
acquisition of PLIVA, see “Acquisition and Integration of PLIVA” immediately below.
Acquisition and Integration of PLIVA
The acquisition of PLIVA involves the integration of two companies that have previously
operated independently. There are a number of operational and financial risks associated with this
acquisition and related integration. The operational risks include, but are not limited to, the
following:
the necessity of coordinating and consolidating geographically separated
organizations, systems and facilities, including as they relate to disclosure
controls and internal controls for purposes of regulations promulgated under the
Sarbanes-Oxley Act;
•
the successful integration of our management and personnel with that of PLIVA
and retaining key employees; and
•
changes in intellectual property legal protections and remedies, trade
regulations and procedures and actions affecting approval, production, pricing,
reimbursement and marketing of products.
The financial risks include, but are not limited to, the following:
•
our ability to satisfy obligations with respect to the $2.4 billion of debt
that we incurred to help finance this transaction, nearly all of which is at a
variable rate of interest based upon LIBOR;
•
the ability of the combined company to meet certain revenue and cost-synergy
objectives;
•
charges associated with this transaction, including the write-off of acquired
in-process research and development costs, additional depreciation and
amortization of acquired assets and interest expense and other financing costs
related to the new Credit Facility have impacted and will continue to negatively impact our net income;
•
our ability to accurately forecast financial results is affected by a
significant increase in the scope and complexity of our business;
•
our international-based revenues and expenses are subject to foreign currency
exchange rate fluctuations; and
•
to the extent goodwill or intangible assets associated with the acquisition
become impaired, we may be required to incur material charges to our earnings
for those impairments.
If management is unable to successfully integrate the operations and manage the financial
risks, the anticipated benefits of this acquisition may not be realized and it could result in a
material adverse effect on our operations and cash flow.
We are subject to risks associated with doing business outside of the United States
Our operations outside of the U.S. are subject to risks that are inherent in conducting
business under non-U.S. laws, regulations and customs. The risks associated with our operations
outside the U.S. include:
•
changes in non-U.S. medical reimbursement policies and programs;
•
multiple non-U.S. regulatory requirements that are subject to change and that
could restrict our ability to manufacture and sell our products;
•
compliance with anti-bribery laws such as the U.S. Foreign Corrupt Practices
Act and similar anti-bribery laws in other jurisdictions, as discussed in
further detail below;
•
different local product preferences and product requirements;
•
trade protection measures and import or export licensing requirements;
•
difficulty in establishing, staffing and managing non-U.S. operations;
potentially negative consequences from changes in or interpretations of tax laws;
•
political instability and actual or anticipated military or political conflicts;
•
economic instability, inflation, recession, and interest rate or foreign
currency fluctuations; and
•
minimal or diminished protection of intellectual property in some countries.
These risks, individually or in the aggregate, could have a material adverse effect on our
business, financial condition, results of operations and cash flows.
We are subject to the restrictions imposed by the U.S. Foreign Corrupt Practices Act and
similar worldwide anti-bribery laws
The U.S. Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions
generally prohibit companies and their intermediaries from making improper payments to non-U.S.
officials for the purpose of obtaining or retaining business. Our policies mandate compliance with
these anti-bribery laws. We operate in many parts of the world that have experienced governmental
corruption to some degree and in certain circumstances, strict compliance with anti-bribery laws
may conflict with local customs and practices. We cannot assure you that our internal control
policies and procedures always will protect us from reckless or criminal acts committed by our
employees or agents. Violations of these laws, or allegations of such violations, could disrupt our
business and result in a material adverse effect on our financial condition, results of operations
and cash flows.
Foreign currency exchange rates may adversely affect our results
We are exposed to a variety of market risks, including the effects of changes in foreign
currency exchange rates and interest rates. As a result of our PLIVA acquisition, we expect sales
from non-U.S. markets to represent a significant portion of our net sales going forward.
Therefore, when the U.S. dollar strengthens in relation to the currencies of the countries where we
sell our products, such as the Euro or Croatian Kuna, our U.S. dollar reported revenue and income
will decrease. Changes in the relative values of currencies occur from time to time and, in some
instances, may have a significant effect on our operating results.
Cost and Expense Control/Unusual Events
Growth in costs and expenses, changes in product mix and the impact of acquisitions,
divestitures, restructurings, product withdrawals and other unusual events that could result from
evolving business strategies, evaluation of asset realization and organizational restructuring
could create volatility in our results. Such risks and uncertainties include, in particular, the
potentially significant charges to our operating results for items like in-process research and
development charges and transaction costs.
Legal Proceedings
As described in “Legal Proceedings” in Part I, Item 3 of this report, we and certain of our
subsidiaries are involved in various patent, product liability, consumer and commercial litigations
and claims; government investigations; and other legal proceedings that arise from time to time in
the ordinary course of our business. Litigation is inherently unpredictable, and unfavorable
rulings do occur. An unfavorable ruling could include money damages or, in some rare cases, for
which injunctive relief is sought, an injunction prohibiting the Company from manufacturing or
selling one or more products. Although we believe we have substantial defenses in these matters, we
could in the future incur judgments or enter into settlements of claims that could have a material
adverse effect on our results of operations in any particular period.
Our business inherently exposes us to claims relating to the use of our products. We sell,
and will continue to sell, pharmaceutical products for which product liability insurance coverage
may not be available, and, accordingly, if we are sued and if adverse judgments are rendered, we
may be subject to claims that are not covered by insurance, as well as claims that exceed our policy
limits, each of which could adversely impact our results of operations and our financial condition.
Additional products for which we currently have coverage may be excluded in the future. In
addition, product liability coverage for pharmaceutical companies is becoming more expensive and
increasingly difficult to obtain. As a result, we may not be able to obtain the type and amount of
coverage we desire.
Exposure to Environmental Laws and Regulations
We are subject to numerous environmental protection and health and safety laws in the
countries where we manufacture and sell our products or otherwise operate our business. Such laws
and regulations govern, among other things:
•
the generation, storage, use and transportation of hazardous materials;
•
emissions or discharges of substances into the environment;
•
investigation and remediation of hazardous substances or materials at various sites; and
•
the health and safety of our employees.
We may not have been, or we may not at all times be, in compliance with environmental and
health and safety laws. If we violate these laws, we could be fined, criminally charged or
otherwise sanctioned by regulators. Environmental laws outside of the U.S. are becoming more
stringent and resulting in increased costs and compliance burdens.
Certain environmental laws assess liability on current or previous owners or operators of real
property for the costs of investigation, removal or remediation of hazardous substances or
materials at their properties or at properties at which they have disposed of hazardous substances.
Liability for investigative, removal and remedial costs under certain federal and state laws are
retroactive, strict and joint and several. In addition to clean-up actions brought by governmental
authorities, private parties could bring personal injury or other claims due to the presence of, or
exposure to, hazardous substances. We have received notification from the U.S. Environmental
Protection Agency and similar state environmental agencies that conditions at a number of formerly
owned sites where we and others have disposed of hazardous substances require investigation,
clean-up and other possible remedial action and may require that we reimburse the government or
otherwise pay for the costs of investigation and remediation and for natural resource damage claims
from such sites.
There can be no assurance that the costs of complying with current or future environmental
protection and health and safety laws, or our liabilities arising from past or future releases of,
or exposures to, hazardous substances will not exceed our estimates or adversely affect our
business, financial condition, results of operations and cash flows or that we will not be subject
to additional environmental claims for personal injury or clean-up in the future based on our past,
present or future business activities.
Managing Rapidly Growing Operations
We have grown significantly over the past several years, extending our processes, systems and
people. In particular, our acquisition of PLIVA has significantly added to our operations. We have
made significant investments in enterprise resource systems and our internal control processes to
help manage this incremental activity. We must also attract, retain and motivate executives and
other key employees, including those in managerial, technical, sales and marketing and support
positions to support our growth. As a result, hiring and retaining qualified executives,
scientists, technical staff, manufacturing personnel, qualified quality and regulatory
professionals and sales representatives are critical to our business and competition for these
people can be intense. If
we are unable to hire and retain qualified employees and if we do not continue to invest in
systems and processes to manage our growth, our operations could be adversely impacted.
Changes in Laws and Accounting Standards
Our future results could be adversely affected by changes in laws and regulations, including
changes in accounting standards, taxation requirements (including tax-rate changes, new tax laws
and revised tax law interpretations), competition laws and environmental laws in countries that we
operate.
Terrorist Activity
Our future results could be adversely affected by changes in business, political and economic
conditions, including the cost and availability of insurance, due to the threat of future terrorist
activity in the U.S. and other parts of the world and related U.S. military action overseas.
The following table lists the principal facilities owned or leased by us as of December 31,2006 and indicates the location and principal use of each of these facilities:
We have invested significantly over the last few years to increase our respective production,
laboratory, warehouse, distribution, manufacturing and R&D capacity. We believe that our current
facilities are in good condition and are being used productively. We constantly assess our ongoing
investments in property, plant and equipment to ensure that our facilities are adequate for us to
meet the expected demand of our pipeline products and to handle increases in current product sales.
On October 22, 1999, we entered into a settlement agreement with Schein Pharmaceutical, Inc.
(now part of Watson Pharmaceuticals, Inc.) relating to a 1992 agreement regarding the pursuit of a
generic conjugated estrogens product. Under the terms of the settlement, Schein relinquished any
claim to rights in Cenestin in exchange for a payment of $15 million made to Schein in 1999. An
additional $15 million payment is required under the terms of the settlement if Cenestin achieves
total profits, as defined, of greater than $100 million over any rolling five-year period prior to
October 22, 2014. As of December 31, 2006, no liability has been accrued related to this
settlement.
Pending Litigation Matters
We are involved in various legal proceedings incidental to our business, including product
liability, intellectual property and other commercial litigation and antitrust actions. We record
accruals for such contingencies to the extent that we conclude a loss is probable and the amount
can be reasonably estimated. Additionally, we record insurance receivable amounts from third party
insurers when appropriate.
Many claims involve highly complex issues relating to patent rights, causation, label
warnings, scientific evidence and other matters. Often these issues are subject to substantial
uncertainties and therefore, the probability of loss and an estimate of the amount of the loss are
difficult to determine. Our assessments are based on estimates that we, in consultation with
outside advisors, believe are reasonable. Although we believe we have substantial defenses in these
matters, litigation is inherently unpredictable. Consequently, we could in the future incur
judgments or enter into settlements that could have a material adverse effect on our results of operations, cash flows or financial condition in a particular period.
Summarized below are the more significant matters pending to which we are a party. As of
December 31, 2006, our reserve for the liability associated with claims or related defense costs
for these matters is not material.
Patent Matters
Desmopressin Acetate Suit
In July 2002, we filed an ANDA seeking approval from the U.S. FDA to market Desmopressin
acetate tablets, the generic equivalent of Sanofi-Aventis’ DDAVP product. We notified Ferring AB,
the patent holder, and Sanofi-Aventis pursuant to the provisions of the Hatch-Waxman Act in October
2002. Ferring AB and Sanofi-Aventis filed a suit in the U.S. District Court for the Southern
District of New York in December 2002 for infringement of one of the four patents listed in the
Orange Book for Desmopressin acetate tablets, seeking to prevent us from marketing Desmopressin
acetate tablets until the patent expires in 2008. In January 2003, we filed an answer and
counterclaim asserting non-infringement and invalidity of all four listed patents. In January
2004, Ferring AB amended their complaint to add a claim of willful infringement.
On February 7, 2005, the district court granted summary judgment in our favor, from which
Ferring AB and Sanofi-Aventis appealed. On July 5, 2005, we launched our generic product. On
February 15, 2006, the Court of Appeals for the Federal Circuit denied their appeal. Ferring AB and
Sanofi-Aventis subsequently filed a petition for rehearing and rehearing en banc, which was denied
on April 10, 2006. Ferring AB and Sanofi-Aventis filed a
petition for a writ of certiorari with the
United States Supreme Court on September 11, 2006. On October 30, 2006, the United States Supreme
Court denied the petition.
Fexofenadine Hydrochloride Suit
In June 2001, we filed an ANDA seeking approval from the FDA to market fexofenadine
hydrochloride tablets in 30 mg, 60 mg and 180 mg strengths, the generic equivalent of
Sanofi-Aventis’ Allegra tablet products for allergy relief. We notified Sanofi-Aventis pursuant to
the provisions of the Hatch-Waxman Act and, in September 2001, Sanofi-Aventis filed a patent
infringement action in the U.S. District Court for the District of New Jersey, Newark
Division, seeking to prevent us from marketing this product until after the expiration of
various U.S. patents, the last of which is alleged to expire in 2017.
After the filing of our ANDAs, Sanofi-Aventis listed an additional patent on Allegra in the
Orange Book. We filed appropriate amendments to our ANDAs to address the newly listed patent and,
in November 2002, notified Merrell Pharmaceuticals, Inc., the patent holder, and Sanofi-Aventis
pursuant to the provisions of the Hatch-Waxman Act. Sanofi-Aventis filed an amended complaint in
November 2002 claiming that our ANDAs infringe the newly listed patent.
On March 5, 2004, Sanofi-Aventis and AMR Technology, Inc., the holder of certain patents
licensed to Sanofi-Aventis, filed an additional patent infringement action in the U.S. District
Court for the District of New Jersey — Newark Division, based on two patents that are not listed
in the Orange Book.
In June 2004, the court granted us summary judgment of non-infringement as to two patents. On
March 31, 2005, the court granted us summary judgment of invalidity as to a third patent. Discovery
is proceeding on the five remaining patents at issue in the case. No trial date has been
scheduled.
On August 31, 2005, we received final FDA approval for our fexofenadine tablet products. As
referenced above, pursuant to the agreement between Teva and us, we selectively waived our 180 days
of generic exclusivity in favor of Teva, and Teva launched its generic product on September 1,2005.
On September 21, 2005, Sanofi-Aventis filed a motion for a preliminary injunction or expedited
trial. The motion asked the court to enjoin Teva and Barr from marketing their generic versions of
Allegra tablets, 30 mg, 60 mg and 180 mg, or to expedite the trial in the case. The motion also
asked the court to enjoin Ranbaxy Laboratories, Ltd. and Amino Chemicals, Ltd. from the commercial
production of generic fexofenadine raw material. The preliminary injunction hearing concluded on
November 3, 2005. On January 30, 2006, the Court denied the motion by Sanofi-Aventis for a
preliminary injunction or expedited trial. Sanofi-Aventis appealed the Court’s denial of its motion
to the United States Court of Appeals for the Federal Circuit. On November 8, 2006, the Federal
Circuit affirmed the District Court’s denial of the motion for preliminary injunction.
On May 8, 2006, Sanofi-Aventis and AMR Technology, Inc. served a Second Amended and
Supplemental Complaint based on U.S. Patent Nos. 5,581,011 and 5,750,703 (collectively, “the API
patents”), asserting claims against us for infringement of the API patents based on the sale of our
fexofenadine product and for inducement of infringement of the API patents based on the sale of
Teva’s fexofenadine product. On June 22, 2006, we answered the complaint, denied the allegations,
and asserted counterclaims for declaratory judgment that the asserted patents are invalid and/or
not infringed and for damages for violations of the Sherman Act, 15 U.S.C. §§ 1.2.
On November 14, 2006, Sanofi-Aventis sued the Company and Teva in the U.S. District Court for
the Eastern District of Texas, alleging that Teva’s fexofenadine hydrochloride tablets infringe a
patent directed to a certain crystal form of fexofenadine hydrochloride, and that the Company
induced Teva’s allegedly infringing sales. On November 21, 2006, Sanofi-Aventis filed an amended
complaint in the same court, asserting that the Company’s fexofenadine hydrochloride tablets
infringe a different patent directed to a different crystal form of fexofenadine hydrochloride. On
January 12, 2007, we filed a motion to dismiss the amended
complaint against Barr Pharmaceuticals, denied plaintiff’s allegations against Barr Laboratories, and filed a motion to transfer the
case to the U.S. District Court for the District of New Jersey.
On November 15, 2006 and November 21, 2006, we filed complaints in the U.S. District Court for
the District of New Jersey, seeking declaratory judgment that the Company does not infringe, or
induce infringement of, any valid claim of the patents asserted by Sanofi-Aventis in the U.S.
District Court for the Eastern District of Texas, and that those patents are invalid.
Sanofi-Aventis has not yet responded to those complaints.
Sanofi-Aventis also has brought a patent infringement suit against Teva in Israel, seeking to
have Teva enjoined from manufacturing generic versions of Allegra tablets and seeking damages.
If
the Company and Teva are unsuccessful in the Allegra litigation, the
Company potentially could be liable for a portion of
Sanofi-Aventis’
lost profits on the sale of Allegra, which could potentially exceed
the Company’s profits from its alliance revenue from the sale of
generic Allegra.
We have been named as a defendant in approximately 5,000 personal injury product liability
cases brought against us and other manufacturers by plaintiffs claiming that they suffered injuries
resulting from the use of certain estrogen and progestin medications prescribed to treat the
symptoms of menopause. The cases against us involve our Cenestin products and/or the use of our
medroxyprogesterone acetate product, which typically has been prescribed for use in conjunction
with Premarin or other hormone therapy products. All of these products remain approved by the FDA
and continue to be marketed and sold to customers. While we have been named as a defendant in these
cases, fewer than a third of the complaints actually allege the plaintiffs took a product
manufactured by us, and our experience to date suggests that, even in these cases, a high
percentage of the plaintiffs will be unable to demonstrate actual use of our product. For that
reason, approximately 4,400 of such cases have been dismissed (leaving approximately 600 pending)
and, based on discussions with our outside counsel, more are expected to be dismissed in the near
future.
We believe we have viable defenses to the allegations in the complaints and are defending the
actions vigorously.
Antitrust Matters
Ciprofloxacin
(Cipro®)
We have been named as a co-defendant with Bayer Corporation, The Rugby Group, Inc. and others
in approximately 38 class action complaints filed in state and federal courts by direct and
indirect purchasers of Ciprofloxacin (Cipro) from 1997 to the present. The complaints allege that
the 1997 Bayer-Barr patent litigation settlement agreement was anti-competitive and violated
federal antitrust laws and/or state antitrust and consumer protection laws. A prior investigation
of this agreement by the Texas Attorney General’s Office on behalf of a group of state Attorneys
General was closed without further action in December 2001.
The lawsuits include nine consolidated in California state court, one in Kansas state court,
one in Wisconsin state court, one in Florida state court, and two consolidated in New York state
court, with the remainder of the actions pending in the U.S. District Court for the Eastern
District of New York for coordinated or consolidated pre-trial proceedings (the “MDL Case”). On
March 31, 2005, the Court in the MDL Case granted summary judgment in the Company’s favor and
dismissed all of the federal actions before it. On June 7, 2005, plaintiffs filed notices of appeal
to the U.S. Court of Appeals for the Second Circuit. The Court of Appeals has stayed consideration
of the merits pending consideration of our motion to transfer the appeal to the United States Court
of Appeals for the Federal Circuit as well as plaintiffs’ request for the appeal to be considered
en banc. Merits briefing has not yet been completed because the proceedings are stayed pending en
banc consideration of a similar 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 May 9, 2006, the
Court of Appeals reinstated the complaint on state law grounds for further proceedings in the trial
court, but on July 25, 2006, the Wisconsin Supreme Court granted the defendants’ petition for
further review. Oral argument took place on December 12, 2006 and the parties are awaiting a
decision on whether the case can proceed in the trial court.
On October 17, 2003, the Supreme Court of the State of New York for New York County dismissed
the consolidated New York state class action for failure to state a claim upon which relief could
be granted and denied the plaintiffs’ motion for class certification. An intermediate appellate
court affirmed that decision, and plaintiffs have sought leave to appeal to the New York Court of
Appeals.
On April 13, 2005, the Superior Court of San Diego, California ordered a stay of the
California state class actions until after the resolution of any appeal in the MDL Case.
On April 22, 2005, the District Court of Johnson County, Kansas similarly stayed the action
before it, until after any appeal in the MDL Case.
The Florida state class action remains at a very early stage, with no status hearings,
dispositive motions, pre-trial schedules, or a trial date set as of yet.
We believe that our agreement with Bayer Corporation reflects a valid settlement to a patent
suit and cannot form the basis of an antitrust claim. Based on this belief, we are vigorously
defending Barr in these matters.
Tamoxifen
To date approximately 33 consumer or third-party payor class action complaints have been filed
in state and federal courts against Zeneca, Inc., AstraZeneca Pharmaceuticals L.P. and Barr
alleging, among other things, that the 1993 settlement of patent litigation between Zeneca and us
violated the antitrust laws, insulated Zeneca and Barr from generic competition and enabled Zeneca
and Barr 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. On May 19,2003, the U.S. District Court dismissed the complaints for failure to state a viable antitrust
claim. On November 2, 2005, the United States Court of Appeals for the Second Circuit affirmed the
District Court’s order dismissing the cases for failure to state a viable antitrust claim. On
November 30, 2005, Plaintiffs petitioned the United States Court of Appeals for the Second Circuit
for a rehearing en banc. On September 14, 2006, the Court of Appeals denied Plaintiffs’ petition
for rehearing en banc. On December 13, 2006, plaintiffs filed a petition for writ of certiorari
with the U.S. Supreme Court. We filed our brief in opposition to the petition on February 15,2007.
We believe that our agreement with Zeneca reflects a valid settlement to a patent suit and
cannot form the basis of an antitrust claim. Based on this belief, we are vigorously defending
these matters.
Ovcon
To date, we have been named as a co-defendant with Warner Chilcott Holdings, Co. III, Ltd.,
and others in complaints filed in federal courts by the Federal Trade Commission, various state
Attorneys General and eight private class action plaintiffs claiming to be direct and indirect
purchasers of Ovcon-35®. These actions, the first of which was filed by the FTC on or about
December 2, 2005, allege, among other things, that a March 24, 2004 agreement between Barr and
Warner Chilcott (then known as Galen Holdings PLC) constitutes an unfair method of competition, is
anticompetitive and restrains trade in the market for Ovcon-35® and its generic equivalents.
In the action brought by the FTC, fact discovery has closed and expert discovery is scheduled
to be completed by February 16, 2007. We filed a motion to dismiss the FTC’s claims as moot in
light of our October 2006 launch of our generic product, Balziva. The court denied that motion on
January 22, 2007. The court has not yet set a trial date, although a status conference is
scheduled for April 2007.
In the cases brought by the eight private class-action plaintiffs, discovery and class
certification proceedings are expected to conclude by June 15, 2007. No trial dates have been set.
We believe that we have not engaged in any improper conduct and are vigorously defending these
matters.
Provigil
To date, we have been named as a co-defendant with Cephalon, Inc., Mylan Laboratories, Inc.,
Teva Pharmaceutical Industries, Ltd., Teva Pharmaceuticals USA, Inc., Ranbaxy Laboratories, Ltd.,
and Ranbaxy Pharmaceuticals, Inc. (the “Provigil Defendants”) in nine separate complaints filed in
the U.S. District Court for the Eastern District of Pennsylvania. These actions allege, among
other things, that the agreements between Cephalon and the other individual Provigil Defendants to
settle patent litigation relating to Provigil® constitute an unfair method of competition, are
anticompetitive and restrain trade in the market for Provigil and its generic equivalents in
violation of the antitrust laws. These cases remain at a very early stage and no trial dates have
been set.
We were also named as a co-defendant with the Provigil Defendants in an action filed in the
U.S. District Court for the Eastern District of Pennsylvania by Apotex, Inc. The lawsuit alleges,
among other things, that Apotex sought to market its own generic version of Provigiland
that the settlement agreements entered into between Cephalon and the other individual Provigil
Defendants constituted an unfair method of competition, are anticompetitive and restrain trade in
the market for Provigil and its generic equivalents in violation of the antitrust laws. The
Provigil Defendants have filed motions to dismiss, and briefings have taken place with respect to
these motions.
We believe that we have not engaged in any improper conduct and are vigorously defending these
matters.
Medicaid Reimbursement Cases
We, along with numerous other pharmaceutical companies, have been named as a defendant in
separate actions brought by the states of Alabama, Alaska, Hawaii, Idaho, Illinois, Kentucky,
Mississippi and South Carolina, the Commonwealth of Massachusetts, the City of New York, and
numerous counties in New York. In each of these matters, the plaintiffs seek to recover damages and
other relief for alleged overcharges for prescription medications paid for or reimbursed by their
respective Medicaid programs, with some states also pursuing similar allegations based on the
reimbursement of drugs under Medicare Part B or the purchase of drugs by a state health plan (for
example, South Carolina).
The Commonwealth of Massachusetts case and the New York cases, with the exception of the
action filed by Erie, Oswego, and Schenectady Counties in New York, are currently pending in the
U.S. District Court for the District of Massachusetts. Discovery is underway in the Massachusetts
cases, but no trial dates have been set. In the consolidated New York cases, motions to dismiss are
under advisement, with no trial dates set. The Erie, Oswego, and Schenectady County cases were
filed in state courts in New York, again with no trial dates set.
The Alabama, Illinois and Kentucky cases were filed in state courts, removed to federal court,
and then remanded back to their respective state courts. Discovery is underway. The Alabama trial
court has scheduled an initial group of defendants, not including Barr, to start trial on November26, 2007, with the remaining defendants to be tried in groups thereafter starting on an unspecified
date. No other trials dates have been set.
The State of Mississippi case was filed in Mississippi state court. Discovery was underway,
but that case, along with the Illinois case and the actions brought by Erie, Oswego, and
Schenectady Counties in New York, were recently removed to federal court on the motion of a
co-defendant. Remand motions are pending.
The State of Hawaii case was filed in state court in Hawaii, removed to the United States
District Court for the District of Hawaii, and remanded to state court. Briefing on the
defendants’ motions to dismiss is currently underway. No trial date has been set.
The State of Alaska case was filed in state court in Alaska on October 6, 2006. Briefing on
the defendants’ motions to dismiss is currently underway. No trial date has been set.
The State of Idaho case was filed in state court in Idaho on January 26, 2007. This matter is
at an early stage with no trial date set.
The State of South Carolina cases consist of two complaints, one brought on behalf of the
South Carolina Medicaid Agency and the other brought on behalf of the South Carolina State Health
Plan. Both cases were filed in state court in South Carolina on January 16, 2007. These matters
are at an early stage with no trial dates set.
We believe that we have not engaged in any improper conduct and are vigorously defending these
matters.
On October 6, 2005, plaintiffs Agvar Chemicals Inc., Ranbaxy Laboratories, Inc. and Ranbaxy
Pharmaceuticals, Inc. filed suit against us and Teva Pharmaceuticals USA, Inc. in the Superior
Court of New Jersey. In their complaint, plaintiffs seek to recover damages and other relief, based
on an alleged breach of an alleged contract
requiring us to purchase raw material for our generic Allegra product from Ranbaxy,
prohibiting us from launching our generic Allegra product without Ranbaxy’s consent and prohibiting
us from entering into an agreement authorizing Teva to launch Teva’s generic Allegra product. The
court has entered a scheduling order providing for the completion of discovery by March 7, 2007,
but has not yet set a date for trial. We believe there was no such contract and are vigorously
defending this matter.
Other Litigation
As of December 31, 2006, we were involved with other lawsuits incidental to its business,
including patent infringement actions, product liability, and personal injury claims. Management,
based on the advice of legal counsel, believes that the ultimate outcome of these other matters
will not have a material adverse effect on our consolidated financial statements.
Government Inquiries
On July 11, 2006, we received a request from the FTC for the voluntary submission of
information regarding the settlement agreement reached in the matter of Cephalon, Inc. v. Mylan
Pharmaceuticals, Inc., et al., U.S. District Court for the District of New Jersey. The FTC is
investigating whether Barr and the other parties to the litigation have engaged in unfair methods
of competition in violation of Section 5 of the Federal Trade Commission Act by restricting the
sale of Modafinil products. In its request letter, the FTC stated that neither the request nor the
existence of an investigation indicated that Barr or any other company had violated the law. We
believe that our settlement agreement is in compliance with all applicable laws and intend to
cooperate with the FTC in this matter. On October 3, 2006, the FTC notified Barr it was investigating a patent litigation settlement
reached in matters pending in the U.S. District Court for the Southern District of New York between
Barr and Shire PLC concerning Shire’s ADDERALL XR product. To date, the only FTC request of us
under this investigation has been to preserve relevant documents. We intend to cooperate with the
agency in its investigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Shareholders of Barr Pharmaceuticals, Inc. was held on November 9,2006. Of the 106,350,176 shares entitled to vote, 99,993,645 shares were represented at the meeting
or by proxy or present in person. The meeting was held for the following purposes:
1. To elect seven directors. All seven nominees were elected based on the following votes
cast:
2. To ratify the Audit Committee’s selection of Deloitte & Touche LLP, an independent
registered public accounting firm, as independent auditors for the six-month period ended December31, 2006, and the result of such vote was as follows:
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
(a) Market for Barr’s Common Equity
Our common stock is traded on the New York Stock Exchange under the symbol “BRL.” The
following table sets forth the quarterly high and low share trading price information for the
periods indicated:
As of February 14, 2007, we estimate that there were 1,541 holders of record of our common
stock. We believe that a significant number of investors in our common stock hold their shares in
street name. Therefore, the number of beneficial owners of our common stock is much greater than
the number of record holders of our common stock.
We have not paid any cash dividends on our common stock during the Transition Period or during
the last two fiscal years and we do not anticipate paying any cash dividends in the foreseeable
future.
(b) Recent Sales of Unregistered Securities
In April 2005, holders of warrants to purchase an aggregate of 288,226 shares of our common
stock, at $9.54 per share, exercised the warrants in full. As a result, we issued to the investors
288,226 unregistered shares of our common stock and received proceeds of $2,749,676. The issuance
of the shares to the investors was based on the exemption from registration under Section 4(2) of
the Securities Act.
(c) Issuer Purchases of Equity Securities
We did not repurchase any shares under our share repurchase program during the Transition
Period. Our share repurchase program expired on December 31, 2006.
In September 2006, we changed our fiscal year from June 30th to December
31st. The
following tables set forth selected consolidated financial data for the
Transition Period, the six months ended December 31, 2005, and the five-year period ended June 30, 2006. The data for the Transition Period and the five
fiscal years ended June 30, 2006 have been derived from our audited financial statements. The data
for the six months ended December 31, 2005 are unaudited and are being provided for
comparison purposes. The results of operations of our newly acquired PLIVA subsidiary are included
from October 25, 2006.
Six months
ended
Transition
December 31,
Period
2005
(in thousands, except per share data)
Statements of Operations Data
Total revenues
$
916,403
$
635,956
Earnings
(loss) before income taxes and minority interest
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Change in Fiscal Year
On September 21, 2006, we changed our fiscal year end from June 30 to December 31. We made
this change to align our fiscal year end with that of our recently acquired subsidiary, PLIVA, and
with other companies within our industry. We have defined various periods that are covered in the
discussion below as follows:
All information, data and figures provided for the comparable 2005 six months, as well as
fiscal 2006, 2005 and 2004, relate solely to Barr’s financial results and do not include the
results of PLIVA, which we acquired on October 24, 2006. PLIVA’s results of operations are
included from October 25, 2006 through December 31, 2006. The results of operations for the
comparable 2005 six months are unaudited.
Executive Overview
We
are a global specialty pharmaceutical company that operates in more than 30 countries worldwide. Our
operations are based primarily in North America and Europe, with our key markets being the United
States, Croatia, Germany, Poland and Russia. We are primarily engaged in the development,
manufacture and marketing of generic and proprietary pharmaceuticals. During the Transition Period
we recorded $837.5 million of product sales and $916.4 million of total revenues.
In the Transition Period, sales of our generic products grew to $636.6 million from $416.3
million in the comparable 2005 six months, accounting for 76% of our total product sales, while
sales of our proprietary products grew to $200.9 million from
$140.4 million in the comparable 2005
six months, accounting for 24% of our total product sales. In addition, we recorded $65.9 million
of alliance and development revenues during the Transition Period, as well as $13.0 million of
other revenues. Alliance and development revenues are derived mainly from profit-sharing
arrangements, co-promotion agreements, and standby manufacturing fees and other reimbursements and
fees we received from third parties, including marketing partners. Other revenues primarily are
derived from our non-core operations, which include our animal health agrochemicals business, which
predominantly consists of generics, feed additives, agro products and vaccines, and our
diagnostics, disinfectants, dialysis and infusions (“DDD&I”) business.
PLIVA Acquisition
On October 24, 2006, we completed the acquisition of PLIVA d.d., headquartered in Zagreb,
Croatia. Under the terms of our cash tender offer, we made a payment of approximately $2.4 billion
based on an offer price of HRK 820 per share for all shares tendered during the offer period. The
transaction closed with 17,056,977 shares being tendered as part of the process, representing 92%
of PLIVA’s total share capital being tendered to us. With the addition of the treasury
shares held by PLIVA, and shares we acquired in the open market after the offer period expired, we
now own or control 97% of PLIVA’s voting share capital.
In
connection with the acquisition, we have been evaluating the profitability and strategic value of
several of PLIVA’s businesses and have identified certain less
profitable businesses as candidates for possible disposition.
On May 8, 2006, prior to the acquisition, PLIVA received a warning letter from the FDA that
raised numerous concerns regarding our manufacturing facility in Zagreb, Croatia, and in connection
with that letter, the FDA imposed a hold on approvals of ANDA’s for products produced at this
facility. PLIVA submitted a timely response to the FDA, and began working cooperatively with the
agency to address the issues raised in the warning letter. In response to the warning letter, PLIVA
took numerous steps to improve overall compliance at the Zagreb site, including improving key
standard operating procedures, hiring new personnel, undertaking additional training, expanding the
senior leadership presence in Croatia and engaging an independent expert consultant to supplement
oversight of good manufacturing practices, and as a combined organization we will enhance and
expand these efforts. In July 2006, the FDA lifted the hold it imposed on approval of ANDA’s for
products from this facility; nevertheless, we continue to undertake remediation efforts. Our goal
is to resolve any remaining issues as quickly as possible and continue to assure the FDA that all
necessary modifications are made to the operation of the facility. However, we cannot exclude the
possibility that these issues will result in further regulatory action or delays in the approval of
new products or release of approved products manufactured at the Zagreb facility.
For a detailed discussion of our PLIVA acquisition, see Item 1, “Business — Overview — PLIVA
Acquisition” above.
Generic Products
For many years, we have successfully utilized a strategy of developing the generic versions of
branded products that possess a combination of unique factors that we believe have the effect of
limiting competition for generics. Such factors include difficult formulation, complex and costly
manufacturing requirements or limited raw material availability. By targeting products with some
combination of these unique factors, we believe that our generic products will, in general, be less
affected by the intense and rapid pricing pressure often associated with more commodity-type
generic products. As a result of this focused strategy, we have been able to successfully
identify, develop and market generic products that generally have few competitors or that are able
to enjoy longer periods of limited competition and thus generate profit margins higher than those
often associated with commodity-type generic products. The development and launch of our generic
oral contraceptive products is an example of our generic development strategy.
Until our acquisition of PLIVA, the execution of this strategy was focused predominantly on
developing solid oral dosage forms of products. While we believe there are more tablet and capsule
products that may fit our “barrier-to-entry” criteria, we have recently expanded our development
activities, both internally through our acquisition of PLIVA and through collaboration with third
parties, to develop non-tablet and non-capsule products such as injectables, patches, creams,
ointments, sterile ophthalmics and nasal sprays.
We also develop and manufacture active pharmaceutical ingredients (“API”), primarily for use
internally and, to a lesser extent, for sale to third parties. We
manufacture 28 different APIs for
use in pharmaceuticals through our facilities located in Croatia and the Czech Republic. We
believe that our ability to produce API for internal use may provide us with a strategic advantage
over competitors that lack such ability, particularly as to the timeliness of obtaining API for our
products.
Challenging the patents covering certain brand products continues to be an integral part of
our generics business. For many products, the patent provides the unique barrier that we seek to
identify in our product selection process. We try to be the first company to initiate a patent
challenge because, in certain cases, we may be able to obtain 180 days of exclusivity for selling
the generic version of the product. Upon receiving exclusivity for a product, we often experience
significant revenues and profitability associated with that product for the 180-day exclusivity
period, but, at the end of that period, we experience significant decreases in our revenues and
market share associated with the product as other generic competitors enter the market. Our record
of successfully resolving patent challenges has made a recurring contribution to our operating
results, but has created periods of revenue and earnings volatility and will likely continue to do
so in the future. While earnings and cash flow volatility may result from the launch of products
subject to patent challenges, we remain committed to this part of our business.
To help diversify our generic product revenue base, we initiated a program more than five
years ago to develop and market proprietary pharmaceutical products. We formalized this program in
2001 through the acquisition of Duramed Pharmaceuticals and by establishing Duramed Research, our
proprietary research and development subsidiary. Today, Duramed is recognized as a leader in the
area of women’s healthcare. We implement our women’s healthcare platform through a substantial
number of employees dedicated to the development and marketing of our proprietary products,
including approximately 350 sales representatives that promote directly to physicians five of our
products — SEASONIQUE, ENJUVIA, Mircette, ParaGard and Plan B — and two products under our
co-promotion agreement with Kos Pharmaceuticals — Niaspan and Advicor. We have accomplished
significant growth in proprietary product sales over the last several years through both
internally-developed products, such as SEASONALE, the first and largest selling extended-cycle oral
contraceptive in the U.S., and through product acquisitions, including ParaGard, the only non-drug
loaded IUD currently on the market in the U.S., in November 2005; Mircette, a well established
28-day oral contraceptive, in December 2005; and Adderall IR, an immediate-release, mixed salt
amphetamine product that is indicated for the treatment of attention deficit hyperactivity disorder
and narcolepsy, in October 2006.
The following table sets forth revenue data for the Transition Period and the comparable 2005
six months (dollars in millions):
Six Months
Ended
Transition
December 31,
Change
Period
2005
$
%
Generic products:
Oral contraceptives
$
235.8
$
191.2
$
44.6
23
%
Other generic
400.8
225.1
175.7
78
%
Total generic products
636.6
416.3
220.3
53
%
Proprietary products
200.9
140.4
60.5
43
%
Total product sales
837.5
556.7
280.8
50
%
Alliance and development revenue
65.9
79.3
(13.4
)
-17
%
Other revenue
13.0
0.0
13.0
0
%
Total revenues
$
916.4
$
636.0
$
280.4
44
%
Product Sales
Generic Products
Sales of our generic products were $636.6 million during the Transition Period, up from $416.3
million during the comparable 2005 six months. Of this $220.3 million increase, the most
significant increase was attributable to sales by our newly acquired subsidiary, PLIVA, as well as
increases attributable to internal growth, largely due to new product launches. During the
Transition Period, we had four significant product launches — Fentanyl Citrate (generic ACTIQ, for
cancer pain management), Jolessa (generic SEASONALE, an extended-cycle oral contraceptive that we
launched after a competitor launched its generic version of our proprietary SEASONALE product),
Balziva (generic Ovcon 35, an oral contraceptive) and Ondansatron
ODT (generic Zofran ODT, to prevent nausea and vomiting). During the
Transition Period, product launches and the contribution of PLIVA
products accounted for 44% of our generic sales.
During the Transition Period, sales of our generic oral contraceptives (“Generic OCs”) were
$235.8 million, an increase of $44.6 million over the comparable 2005 six months. This 23%
increase was positively impacted by strong sales from the launches of Balziva and
Jolessa, as discussed above, and a 22% increase in sales of our Kariva product due to an increase
in both volume and price.
During the Transition Period, sales of our other generic products (“Other Generics”) were
$400.8 million, up from $225.1 million during the comparable 2005 six months. This 78% increase
was mainly due to the incremental sales attributable to products
acquired through the PLIVA acquisition, along with our
launch in September 2006 of Fentanyl Citrate, our generic
version of Cephalon’s ACTIQ, and the
launch of Ondansatron ODT in December 2006. Partially offsetting these increases were significantly lower sales of
Desmopressin, along with lower sales of Warfarin and Methotrexate. We launched Desmopressin in
July 2005 with 180 days of exclusivity as a result of a successful paragraph IV patent challenge.
In March 2006, following the expiration of the exclusivity period, sales of Desmopressin declined
significantly due to the introduction of competing generic products.
Proprietary Products
During the Transition Period, sales of our proprietary products increased 43% to $200.9
million, up from $140.4 million during the comparable 2005 six months. This total
increase of $60 million over the comparable 2005 six months
included: (1) the launch
of our dual-label Plan B® emergency contraceptive OTC/Rx (over the counter “OTC”) in
November 2006; (2) sales recorded from the launch of SEASONIQUE, our second generation extended
cycle oral contraceptive, during the quarter ended September 30, 2006; (3) full period
contributions from ParaGard and Mircette, which we acquired in November 2005 and December 2005,
respectively;
and (4) sales of Adderall IR, which we acquired from Shire and launched in October
2006. Partially offsetting these increases were lower sales of SEASONALE, which were down 48% from
the comparable 2005 six months due to
Watson’s launch of a generic version during the quarter ended September 30, 2006, and our
subsequent launch of Jolessa, our own generic version, resulting in
lower SEASONALE unit sales. We expect
that SEASONALE sales will decline further in 2007 as a result of this competition.
Alliance and Development Revenue
During the Transition Period, we recorded $65.9 million of alliance and development revenue,
down from $79.3 million during the comparable 2005 six months. The decrease was caused by lower
revenues from our profit-sharing arrangement with Teva on generic Allegra, which began in September
2005, partially offset by an increase in royalties and other fees received under our agreements
with Kos Pharmaceuticals relating to Niaspan and Advicor.
Teva
Teva’s 180-day exclusivity period on generic Allegra ended on February 28, 2006. By the end of
December 2006, there were two additional competing generic Allegra products on the market. We are
aware of other companies that have filed ANDAs with Paragraph IV certifications for generic
Allegra. Competition for generic Allegra has and may continue to cause Teva’s Allegra revenues to
decrease. Accordingly, our royalties may decline further in future periods.
Kos
Royalties we earn under our co-promotion agreement with Kos are based on the aggregate sales
of Niaspan and Advicor in a given quarter and calendar year, up to quarterly and annual maximum
amounts. While the annual cap increases each year during the term of our arrangement, which ends in
July 2012 unless extended by either party for an additional year, the royalty rate and our
promotion-related requirements decline in 2007 compared to 2006, after which the rate remains fixed
throughout the remaining term of the agreement. Due to sales realized by Kos during 2006, we
achieved our maximum annual royalty of $45 million for calendar 2006 in November 2006 and,
therefore, our royalties earned during the quarter ended December 31, 2006 were significantly lower
than those earned in prior quarters during calendar 2006. We believe that sales of Niaspan and
Advicor will remain strong in 2007 and that our royalties in 2007 will be substantially similar to
those we earned in 2006.
Shire
As described above, in August 2006 we entered into a series of agreements with Shire plc.
Under one of those agreements, we granted Shire a license to obtain regulatory approval and market
in certain specified territories SEASONIQUE and five other products in various stages of
development, in exchange for (1) an initial $25 million payment for previously incurred product
development expenses and (2) reimbursement of future development expenses up to a maximum of $140
million over an eight-year period, not to exceed $30 million per year. During the Transition
Period, we recorded $2.9 million of revenues from this arrangement, which include research and
development reimbursements and the recognition of a portion of the deferred revenue related to the
$25 million upfront payment. We expect these revenues will increase significantly in 2007 as we
increase spending on the related development projects.
Adenovirus Vaccine
Also included in this category are reimbursements and fees we receive from the U.S. Department
of Defense for the development of the Adenovirus vaccine. We expect that the reimbursements and
fees we earn from development of the Adenovirus vaccine will increase in 2007 as this project moves
into Phase III of testing.
Other Revenue
We recorded $13.0 million of other revenue during the Transition Period. This revenue is
primarily attributable to non-core operations including our animal health and agrochemicals
business, which predominantly consists of
generics, feed additives, agro products and vaccines, as
well as our DDD&I business. These are businesses acquired through the PLIVA
acquisition, and as such, there are
no comparable revenues for the comparable 2005 six months.
Cost of Sales
The following table sets forth cost of sales data, in dollars, as well as the resulting gross
margins expressed as a percentage of product sales (except
‘‘other’’,
which is expressed as a percentage of our other revenue line item), for the Transition Period and the comparable
2005 six months (dollars in millions):
Six Months
Ended
Transition
December 31,
Change
Period
2005
$
%
Generic products
$
307.1
$
138.3
$
168.8
122
%
Gross margin
52
%
67
%
Proprietary products
$
56.2
$
33.8
$
22.4
66
%
Gross margin
72
%
76
%
Other
$
12.0
$
—
$
12.0
100
%
Gross margin
8
%
0
%
Total cost of sales
$
375.3
$
172.1
$
203.2
118
%
Gross margin
56
%
69
%
Amounts that comprise cost of sales include the following:
•
our manufacturing and packaging costs for products we manufacture;
•
amortization expense (as discussed further below);
•
the write-off of the step-up in inventory arising from acquisitions, including PLIVA;
•
profit-sharing or royalty payments we make to third parties, including raw material suppliers;
•
the cost of products we purchase from third parties;
•
lower of cost or market adjustments to our inventories; and
•
stock-based compensation expense relating to employees within certain departments
that we allocate to cost of sales.
In prior periods, we included amortization expense in selling, general and administrative
expenses rather than cost of sales. During the Transition Period, we revised our presentation of
amortization expense to include it within cost of sales rather than SG&A. We have adjusted all
historical periods presented in this discussion to reflect this change.
Cost
of sales, on an overall basis, increased 118% over the comparable 2005 six months due to
higher sales and higher product amortization expense arising from products acquired through the
PLIVA acquisition. Additionally, as part of the PLIVA acquisition, we stepped-up the book value of
inventory acquired by $89.6 million as of October 24, 2006.
The stepped-up value is recorded
as a charge to cost of sales, including $56.8 million during this Transition Period, as acquired
inventory is sold. We expect most of the remaining $32.8 million of stepped-up inventory to be
sold by June 30, 2007. As a result of these expenses and charges, overall gross margins decreased from 69% for the comparable 2005 period to
56% for the Transition Period.
In our generics segment, cost of sales increased in large part due to a 78% increase in total
Other Generics sales, as described above, and $17.9 million of higher amortization expense arising
primarily from product intangibles created as a result of the PLIVA acquisition. When combined
with the charge related to the step-up in inventory described above,
these increases in cost of sales resulted in a
decrease in our generics margins from 67% to 52%. Partially
offsetting
this decrease in gross
margins were the impact from higher sales of our Generic OCs and the
launch of Fentanyl Citrate during the Transition Period, which have above-average margins when
compared to many of our other generic products.
In
our proprietary segment, cost of sales increased both due to a 43% increase in proprietary
sales and an $11 million increase in product amortization expense, thereby reducing margins for our
proprietary products from 76% from 72%. The increase in product amortization expense relates to a
full six-month period of expense relating to our November 2005 acquisition of FEI Women’s Health,
LLC. Product amortization expense and the inventory step-up charge related to the five
proprietary products we acquired through the PLIVA acquisition were not material.
Selling, General and Administrative Expense
The following table sets forth selling, general and administrative expense data for the
Transition Period and the comparable 2005 six months (dollars in millions):
Six Months
Ended
Transition
December 31,
Change
Period
2005
$
%
Selling, general and administrative
$ 267.7
$ 126.4
$ 141.3
112
%
Selling, general and administrative more than doubled in the Transition Period from the
comparable 2005 six months. Of this $141.3 million increase,
approximately $95.0 million is
directly attributable to the PLIVA acquisition, including both operating and integration expenses. These expenses include, but are not limited to:
•
PLIVA’s selling, general and administrative expenses for the PLIVA Stub Period,
including the sales force costs associated with approximately 1,400 incremental global
sales representatives and other general and administrative expenses associated our
worldwide operations;
•
professional fees associated with the integration activities; and
•
incremental legal and audit fees relating to the acquisition.
While certain costs described above are not expected to be repeated in 2007, we
expect a significant amount of ongoing consulting costs and other professional fees will be
incurred during 2007 as part of the integration process.
Other increases in general and administrative expenses during the Transition Period include an
increase in information technology costs of $9.3 million, reflecting higher depreciation costs and
$2.4 million related to the integration of our SAP enterprise
resource planning system, a $6.0
million payment to a raw material supplier during the Transition Period and an $8.4 million net
benefit related to the Mircette transaction that reduced general and administrative expenses in the
comparable 2005 six months. These net increases were partially offset by proceeds of $5.2 million
received in connection with the FTC-ordered sale of two products in connection with the PLIVA
acquisition.
Other increases in selling and marketing expenses include incremental marketing activity
relating to some of our proprietary products, principally the launch of SEASONIQUE, the continued
marketing of our ENJUVIA product and a full period of costs related to the marketing of our
ParaGard product, and higher sales force costs associated with the additional sales
representatives acquired in the FEI Women’s Health acquisition in November 2005.
The following table sets forth research and development expenses for the Transition Period and
the comparable 2005 six months (dollars in millions):
Six Months
Ended
Transition
December 31,
Change
Period
2005
$
%
Research and development
$
107.5
$
66.0
$
41.5
63
%
Write-off of
acquired IPR&D
$
380.7
$
—
$
380.7
N/A
Research and development increased by $41.5 million in the
Transition Period over the comparable 2005 six months primarily due
to an increase of $16 million in costs associated with clinical
trials and bio-studies and the inclusion in the comparable 2005 six
months of a $5 million reimbursement of previously incurred
costs under a third party development agreement which reduced
expenses in that period.
Write-off of acquired in-process research and development
(“IPR&D”), which resulted from the PLIVA acquisition, was $380.7 million in the
Transition Period.
Interest Income
The following table sets forth interest income for the Transition Period and the comparable
2005 six months (dollars in millions):
Six Months
Ended
Transition
December 31,
Change
Period
2005
$
%
Interest income
$
15.7
$
8.9
$
6.8
76
%
The
increase in interest income for the Transition Period is due to
higher interest rates and cash and marketable
securities balances during this period as compared to the comparable 2005 six months.
Interest Expense
The following table sets forth interest expense for the Transition Period and the comparable
2005 six months (dollars in millions):
Six Months
Ended
Transition
December 31,
Change
Period
2005
$
%
Interest expense
$
32.4
$
0.1
$
32.3
32300
%
The increase in interest expense for the Transition Period is primarily due to interest on
borrowings outstanding under our new credit facilities that were drawn in connection with the
acquisition of PLIVA. As a result of the debt incurred to finance the acquisition and debt assumed from PLIVA, interest
expense will be approximately $170 million in 2007.
The following table sets forth other expense for the Transition Period and the comparable 2005
six months (dollars in millions):
Transition
Six Months
Ended
December 31,
Change
Period
2005
$
%
Other (expense) income
$
(72.9
)
$
(0.6
)
$
(72.3
)
12050
%
Other expense increased to $72.9 million in the Transition Period primarily as a result of $69.3 million of losses we recorded
upon the sale or settlement of foreign currency option and forward contracts entered into in
connection with the acquisition of PLIVA. Since our offer was
denominated in Kuna, the Croatian currency, these contracts
were purchased in order to protect against fluctuations in the
USD/Kuna exchange rate, effectively
locking in the U.S. dollar value of our offer. Furthermore, these contracts helped guarantee our
ability to deliver the required Kuna to tendering shareholders. Because these contracts were put in
place to hedge a business combination, they did not qualify for hedge accounting and all associated
gains or losses were required to be recognized in our statement of operations during the Transition
Period.
Income Taxes
The following table sets forth income tax expense and the resulting effective tax rate stated
as a percentage of pre-tax income for the Transition Period and the comparable 2005 six months
(dollars in millions):
Six Months
Ended
Transition
December 31,
Change
Period
2005
$
%
Income tax expense
$
34.5
$
101.5
$
(67.0
)
-66
%
Effective tax rate
-11.3
%
36.3
%
The effective tax rate for the Transition Period was -11.3%, as compared to 36.3% for the
comparable 2005 six months, primarily due to the write-off of
$380.7 million of acquired IPR&D arising from the PLIVA
acquisition, which lowered reported earnings, and was non-deductible
for tax purposes. This resulted in the Company having tax expense for
the Transition Period despite a pre-tax loss.
The federal research and development credit was suspended as of December 31, 2005. In December
2006 it was reinstated retroactively beginning after January 1, 2006. The effective rate for the
Transition Period includes a favorable effect of the reinstatement from the time the credit was
suspended at December 31, 2005 through the end of the Transition Period.
The Company also recorded a favorable release of the tax reserve related to the expiration of
the statute of limitations associated with certain acquisition costs for a prior domestic
acquisition.
The following table sets forth revenue data for the fiscal years ended June 30, 2006 and 2005
(dollars in millions):
Twelve Months Ended June 30,
Change
2006
2005
$
%
Generic products:
Oral contraceptives
$
399.4
$
396.6
$
2.8
1
%
Other generic
439.4
354.8
84.6
24
%
Total generic products
838.8
751.4
87.4
12
%
Proprietary products
330.9
279.3
51.6
18
%
Total product sales
1,169.7
1,030.7
139.0
13
%
Alliance and development revenue
144.7
16.7
128.0
766
%
Total revenues
$
1,314.4
$
1,047.4
$
267.0
25
%
Product Sales
Product sales for the fiscal year ended June 30, 2006 (“fiscal 2006”) increased 13% over
product sales for the fiscal year ended June 30, 2005 (“fiscal 2005”), resulting from increases in
sales of both generic and proprietary products. Generic sales increased in large part due to
contributions from Desmopressin, which was launched at the beginning of fiscal 2006, combined with
continued strong sales of two of our generic oral contraceptive products, Tri-Sprintec and Kariva.
Proprietary sales increased in part due to contributions of products acquired during fiscal 2006 as
well as higher sales of promoted in-line products, including SEASONALE and Plan B.
Generic Products
For
fiscal 2006, sales of Generic OC products increased 1% to $399.4 million from sales of $396.6
million in fiscal 2005. Sales in this category benefited from strong performances from Tri-Sprintec
and Kariva. Tri-Sprintec sales increased 20%, driven in part by market-share gains during the
second half of fiscal 2006, while sales of Kariva were up 32% due both to an increase in market
share and higher pricing. We believe that Tri-Sprintec’s market share gains were the result of
supply shortages encountered by one of our competitors, which was remedied.
Somewhat offsetting the strong performances by Tri-Sprintec and Kariva was the impact of
increased pricing pressure from competition on certain of our other products, including Aviane and
Apri, as well as the ongoing decline in consumer demand for several Generic OC products that occurs
when brand companies cease promotional activities after a generic is launched. These factors more
than offset continued increases in the generic substitution rates for nearly all of our Generic OC
products.
For fiscal 2006, sales of Other Generics increased 24% to $439.4 million from $354.8 million
in fiscal 2005, driven by strong performances from Desmopressin and Didanosine. Desmopressin was
launched in July 2005, and recorded approximately $107.7 million of sales during fiscal 2006.
Didanosine was launched during the middle of fiscal 2005, and saw sales increase 47%
year-over-year. Desmopressin sales, which were favorably impacted in the first half of fiscal 2006
by rapid generic substitution, declined sharply in the second half due to the launch of two
competing generic products.
These increases were partially offset by lower sales of Mirtazapine, Claravis and Warfarin
Sodium, as well as the continued decline in both price and demand for certain of our other generic
products. Mirtazapine sales were lower due to further price declines and a loss of market share.
Claravis sales were lower throughout fiscal 2006 due in large part to the decline in the overall
compound usage and lower prices. As discussed in previous filings, sales of Claravis and other
isotrentinoin products indicated for the treatment of severe acne have been negatively affected by
the implementation effective January 1, 2006 of iPledge, an enhanced risk management program that
is designed to
minimize fetal exposure to isotrentinoin that has also led to reduced product use.
Sales of Warfarin Sodium declined due to lower prices, more than offsetting higher unit volume due
primarily to an increase in our market share.
Proprietary Products
For fiscal 2006, proprietary product sales increased 18% to $330.9 million from $279.3 million
in fiscal 2005. This increase was driven by (1) a 14% increase in sales of SEASONALE, (2) the
inclusion of sales of the ParaGard IUD and of the Mircette oral contraceptive, which we acquired in
November 2005 and December 2005, respectively, (3) the launch of ENJUVIA during the fourth quarter
of fiscal 2006 and (4) higher volume and pricing for our Plan B emergency contraceptive product.
Partially offsetting these increases were lower sales of our Loestrin/Loestrin FE oral
contraceptive products and our Cenestin hormone therapy product, due in part to customer buying
patterns.
SEASONALE sales reached $100 million during fiscal 2006, up 14% from fiscal 2005 sales. Higher
prices for SEASONALE during fiscal 2006 more than offset lower customer shipments, which were
attributable to customer buying patterns during the fourth quarter of fiscal 2006. During fiscal
2006, consumer demand for SEASONALE grew, as prescriptions increased 30% compared to fiscal 2005.
Alliance, Development and Other Revenue
During fiscal 2006, alliance, development and other revenue totaled $144.7 million compared to
$16.7 million in the prior year. The substantial increase was driven by our profit sharing
arrangement with Teva, which began in September 2005 and represented 65% of such revenues in fiscal
2006, and an increase in royalties under our agreements with Kos, under which we began earning
royalties in the fourth quarter of fiscal 2005.
Teva’s 180-day exclusivity period on generic Allegra ended on February 28, 2006. By the end of
June 2006, there were two additional competing generic Allegra products on the market, resulting in
a decrease to Teva’s revenues. Additionally, our royalty percentage decreased following the
expiration of the exclusivity period on February 28, 2006, further reducing the amount we earned.
Cost of Sales
The following table sets forth cost of sales data, in dollars, as well as the resulting gross
margins expressed as a percentage of product sales, for fiscal 2006 and fiscal 2005 (dollars in
millions):
Change
2006
2005
$
%
Generic products
$
286.0
$
264.8
$
21.2
8
%
Gross margin
66
%
65
%
Proprietary products
$
91.9
$
52.6
$
39.3
75
%
Gross margin
72
%
81
%
Total cost of sales
$
377.9
$
317.4
$
60.5
19
%
Gross margin
68
%
69
%
Amounts that comprise cost of sales include:
•
the cost of products we purchase from third parties;
•
our manufacturing and packaging costs for products we manufacture;
•
profit-sharing or royalty payments we make to third parties, including raw material suppliers;
stock-based compensation expense relating to employees within certain departments
that we allocate to cost of sales.
As discussed above, during the Transition Period, we revised our presentation of amortization
expense to include it within cost of sales rather than SG&A. We have adjusted all historical
periods presented in this discussion to reflect this change.
Overall gross margins for fiscal 2006 declined to 67.7% from 69.2% in fiscal 2005. Cost of
sales increased 19% year-over-year primarily due to (1) the inclusion of $8.1 million of
stock-based compensation expense that was not present in fiscal 2005, (2) $20.7 million of charges
to write off the step-up to fair value of ParaGard inventory acquired from FEI in November 2005 and
(3) $12.4 million of higher product amortization expense. As of June 30, 2006, the entire amount of
the step-up adjustment had been charged to cost of sales as the units acquired on the date of
acquisition had been sold.
Margins on our generic products increased slightly in fiscal 2006 due to strong sales of
Desmopressin and Didanosine, both of which had higher margins than the average margin of our other
generic products. The margin increase related to these products was slightly offset by the
first-time inclusion of stock-based compensation expense in cost of sales.
Proprietary margins for the year ended June 30, 2006 were negatively impacted by the $20.7
million inventory step-up charge described above, the inclusion of stock-based compensation expense
and an increase in intangible amortization of $12.4 million.
Selling, General and Administrative Expense
The following table sets forth selling, general and administrative expense data for fiscal
2006 and 2005 (dollars in millions):
Change
2006
2005
$
%
Selling, general and administrative
$
309.0
$
285.6
$
23.4
8
%
Charges included in general and administrative
$
14.1
$
63.2
$
(49.1
)
-78
%
Selling, general and administrative expenses increased 8% in fiscal 2006 primarily due to: (1)
$26.4 million in higher selling and marketing costs associated with our proprietary product
portfolio, largely attributable to the launch of ENJUVIA during the fourth quarter and personnel
costs associated with the additional sales representatives acquired in the FEI acquisition, (2)
$13.4 million in stock-based compensation that was not included in the prior year, (3) higher
information technology costs of $12.5 million relating to the integration of our SAP enterprise
resource planning system, and (4) a $6.5 million increase in legal costs, which more than offset
the charges as described below.
Charges included in general and administrative expenses for fiscal 2006 and 2005 were as
follows:
Fiscal 2006:
On December 2, 2005, after receiving the requisite approvals, we entered into a definitive
agreement with Organon and Savient to acquire the exclusive rights to Mircette for $152.8 million
(see Fiscal 2005 charges below). Based on final valuations of the assets acquired, we recorded an
additional charge in fiscal 2006 of $0.8 million (bringing the total charge to $64 million) for the
difference between amounts recorded as a probable loss at June 30, 2005 and the final loss amount.
We also incurred transaction costs during fiscal 2006 (primarily legal and accounting fees) of $1.8
million. Additionally, we received $11.0 million from a third party as partial reimbursement of the
$64 million charge recorded in conjunction with this transaction. The $11.0 million reimbursement,
together with the additional settlement charge of $0.8 million and the transactions costs of $1.8
million, were all classified as
selling, general and administrative expenses and resulted in a net
benefit of $8.4 million to selling, general and administrative expenses for fiscal 2006.
General and administrative expenses also included a payment of $22.5 million in settlement of
an anti-trust case related to Warfarin Sodium.
Fiscal
2005
On June 15, 2005, we entered into a non-binding letter of intent (“LOI”) with Organon
(Ireland) Ltd., Organon USA and Savient Pharmaceuticals, Inc. to acquire the NDA for Mircette,
obtain an exclusive royalty free license to sell Mircette and Kariva in the U.S. and dismiss all
pending litigation between the parties in exchange for a payment by us of up to $155 million.
Because the transaction included, as one of its components, a payment in settlement of litigation,
it was presumed under GAAP to give rise to a “probable loss,” as defined in Statement of Financial
Accounting Standards No. 5, “Accounting for Contingencies”. Based on valuations of the assets we
acquired and total estimated payments, we recorded a charge of $63.2 million as of June 30, 2005 to
reflect the proposed litigation settlement.
Research and Development
The following table sets forth research and development expenses for fiscal 2006 and 2005
(dollars in millions):
Change
2006
2005
$
%
Research and development
$
140.2
$
128.4
$
11.8
9
%
The increase in research and development expenses costs was due to (1) an increase of $9.5
million in costs associated with clinical trials, (2) the inclusion of $5.6 million of stock-based
compensation that was not similarly included in fiscal 2005 and (3) an increase of $5.6 million in
raw material costs. These increases were offset by a reimbursement of $5.0 million for previously
incurred costs under a third party development agreement and a $4.0 million decrease in costs
associated with bioequivalents studies supporting our generic product activities.
Other Income (expense)
The
following table sets forth other income for fiscal 2006 and 2005
(dollars in millions):
Change
2006
2005
$
%
Other income (expense)
$
17.2
$
3.9
$
13.3
341
%
Other income increased to $17.2 million in fiscal 2006 from $3.9 million in fiscal 2005
primarily as a result of a $10.3 million gain in the value of our foreign currency option related
to the PLIVA acquisition. This gain was the result of fluctuations and volatility in the exchange
rate between the Dollar and the Euro.
Additionally, we recorded a net gain during fiscal 2006 of $5.2 million related to our equity
investment in two venture funds, compared to a loss of $0.8 million during fiscal 2005.
The following table sets forth income tax expense and the resulting effective tax rate stated
as a percentage of pre-tax income for fiscal 2006 and 2005 (dollars in millions):
Change
2006
2005
$
%
Income tax expense
$
186.5
$
114.9
$
71.6
62
%
Effective tax rate
35.7
%
34.8
%
The effective tax rate for fiscal 2006 was slightly higher than the statutory rate of 35%
due to the expiration of the federal research and development tax credit on December 31, 2005,
which was only partially offset by the favorable impact arising from the completion of several tax
audits, the change of the mix in income between various taxing jurisdictions and the enactment of
favorable tax legislation in certain jurisdictions.
During fiscal 2006 the IRS completed an audit of our federal income tax return for fiscal
2004. The resolution favorably impacted our effective tax rate for fiscal year 2006 but did not
have a material effect on our financial position or liquidity. Periods prior to fiscal 2004 have
either been audited or are no longer subject to an IRS audit. We are currently being audited by the
IRS for fiscal year 2005.
The following table sets forth revenue data for the fiscal years ended June 30, 2005 and 2004
(dollars in millions):
Twelve Months Ended June 30,
Change
2005
2004
$
%
Generic products:
Distributed alternative brands(1)
$
—
$
385.3
$
(385.3
)
-100
%
Oral contraceptives
396.6
403.9
(7.3
)
-2
%
Other generic(2)
354.8
361.4
(6.6
)
-2
%
Total generic products
751.4
1,150.6
(399.2
)
-35
%
Proprietary products
279.3
146.2
133.1
91
%
Total product sales
1,030.7
1,296.8
(266.1
)
-21
%
Alliance and development revenue
16.7
12.3
4.4
36
%
Total revenues
$
1,047.4
$
1,309.1
$
(261.7
)
-20
%
(1)
Reflects sales of Ciprofloxacin during Bayer’s pediatric exclusivity period which ended on
June 9, 2004.
(2)
Includes sales of Ciprofloxacin after June 9, 2004.
Revenues — Product Sales
Product sales for fiscal 2005 decreased 21% from the fiscal year ended June 30, 2004(“fiscal
2004”) due primarily to the decline in sales of Ciprofloxacin, as discussed in detail below.
Partially offsetting the decrease in Ciprofloxacin sales was a 91% increase in sales of our
proprietary products.
Generic Products
Distributed Alternative Brands (Ciprofloxacin)
On June 9, 2003 we began distributing Ciprofloxacin hydrochloride tablets and oral suspension
pursuant to a license from Bayer Corporation obtained under a 1997 settlement of a patent challenge
we initiated regarding Bayer’s Ciproâ antibiotic. In September 2003, we entered
into an amended supply agreement with Bayer that enabled us to distribute Ciprofloxacin during and
after Bayer’s period of pediatric exclusivity, which ended on June 9, 2004. As a result of the
exclusivity we enjoyed, Ciprofloxacin was our largest selling product in fiscal 2004. We have
shared and continued to share one-half of our profits, as defined, from the sale of Ciprofloxacin
with Sanofi-Aventis, the contractual successor to our partner in the Cipro patent challenge case.
Upon expiration of Bayer’s period of pediatric exclusivity on June 9, 2004, as expected, several
other competing Ciprofloxacin products were launched. As a result of the flood of competing
products, our market share and product pricing declined dramatically for Ciprofloxacin almost
immediately. Since the expiration of the exclusivity period, we have included sales of
Ciprofloxacin in the “other generic” line item in the table above. Such sales were not significant
for fiscal 2005.
Oral Contraceptives
Sales of our Generic OC products decreased 2% in fiscal 2005 compared to fiscal 2004. Price
declines and lower volumes resulting from increased competition reduced sales on certain of our
products, mainly Apri and Aviane, and a slowdown in the growth rate of generic substitution more
than offset (1) full-year contributions from
products launched during fiscal 2004, (2) two new
products launched in fiscal 2005 and (3) market share gains on other existing products.
Generic Products — Other
Sales of Other Generics decreased 2% in fiscal 2005 as compared to fiscal 2004, as sales from
new products, including Didanosine and Metformin XR 750mg, were more than offset by declines in
other existing product sales. The decline in other existing product sales was primarily due to a
significant decrease in sales of our Dextroamphetamine group of products due to both declining
volumes and lower prices caused by the launch of competing versions in late 2004. In April 2005,
our generic exclusivity period on Metformin XR 750mg ended and several other generic companies
launched competing versions of the product. As a result, we experienced a significant decline in
sales of Metformin XR 750mg.
Proprietary Products
Sales of our proprietary products almost doubled in fiscal 2005 as compared to the prior year.
This increase relates primarily to: (1) higher sales of SEASONALE, which totaled $87.2 million for
the fiscal year, reflecting higher unit sales in support of prescription growth and higher pricing
compared to the prior fiscal year; (2) full year sales of Loestrin/Loestrin Fe and Plan B which we
acquired in February 2004 and March 2004, respectively; and (3) sales of Nordette and Prefest,
which we acquired in November 2004 and December 2004, respectively.
SEASONALE prescriptions, according to IMS data, topped 800,000 for our fiscal year ended June30, 2005, a 370% increase over prescriptions in the prior fiscal year. This increase is a direct
result of our significant marketing initiatives, including direct-to-consumer advertising and the
detailing efforts by our Women’s Healthcare Sales force.
Cost of Sales
Product mix plays a significant role in our quarterly and annual overall gross margin
percentage. In the past, our overall gross margins have been negatively impacted by sales of
lower-margin distributed versions of products such as Ciprofloxacin and Tamoxifen, which were
manufactured for us by brand companies and distributed by us under the terms of the respective
patent challenge settlement arrangements.
As discussed above, during the Transition Period, we revised our presentation of amortization
expense to include it within cost of sales rather than SG&A. We have adjusted all historical
periods presented below to reflect this change.
The following table sets forth cost of sales data in dollars as well as the resulting gross
margins for fiscal 2005 and 2004 (dollars in millions):
Change
2005
2004
$
%
Generic products
$
264.8
$
604.6
$
(339.8
)
-56
%
Gross margin
65
%
47
%
Proprietary products
$
52.6
$
34.4
$
18.2
53
%
Gross margin
81
%
76
%
Total cost of sales
$
317.4
$
639.0
$
(321.6
)
-50
%
Gross margin
69
%
51
%
The decrease in total cost of sales, on a dollar basis, for fiscal 2005 as compared
fiscal 2004, was primarily due to the year-over-year decrease in sales of Ciprofloxacin, which in
the prior year we had purchased from Bayer.
Margins on our generic products increased significantly in fiscal 2005 due mainly to the
decrease in year-over-year distributed Ciprofloxacin sales. As a distributed product for which we
shared the profits with our partner in the Cipro patent challenge, Ciprofloxacin had a higher cost
of sales and a lower margin than our other products.
Margins on our proprietary products increased in fiscal 2005 compared to fiscal 2004 due to
increased sales of higher margin products, primarily SEASONALE and Loestrin/Loestrin Fe.
Selling, General and Administrative Expense
The following table sets forth selling, general and administrative expense data for fiscal
2005 and 2004 (dollars in millions):
Change
2005
2004
$
%
Selling, general and administrative
$
285.6
$
308.2
$
(22.6
)
-7
%
Charges included in general and administrative
$
63.2
$
96.6
$
(33.4
)
-35
%
Lower selling, general and administrative expenses in fiscal 2005 compared to the prior year
were primarily due to a 35% decrease in one-time charges to selling, general and administrative
expenses partially offset by $8.1 million in higher marketing costs associated with our proprietary
product portfolio.
Charges taken in fiscal 2004 that were included in selling, general and administrative
expenses are as follows (the charge taken in fiscal 2005 is detailed above under the comparison of
fiscal years 2006 and 2005):
•
A $16 million valuation allowance we established in September 2003 for our loans to
Natural Biologics, LLC, the raw material supplier for our generic equine-based conjugated
estrogens product, as the result of an unfavorable court decision rendered in September
2003;
•
A $4.2 million write-off in February 2004 associated with the acquisition of certain
emergency contraception assets from Gynetics, Inc;
•
An arbitration panel’s decision in June 2004 to award Solvay Pharmaceuticals $68 million
in damages on its claim that we improperly terminated a joint venture agreement; and
•
An $8.5 million charge in June 2004 related to costs associated with our settlement of
the Estrostep and Femhrt patent challenge litigation with Galen.
Research and Development
The following table sets forth research and development expenses for fiscal 2005 and 2004
(dollars in millions):
Change
2005
2004
$
%
Research and development
$
128.4
$
123.1
$
5.3
4
%
Write-off of
IPR&D
$
—
$
45.9
$
(45.9
)
N/A
Charges included in research and development
$
—
$
68.2
$
(68.2
)
-100
%
For the year ended June 30, 2004 our total research and development costs reflected charges
relating to strategic acquisitions or similar activities including: (1) a write-off of $22 million
in March 2004 resulting from our agreement to acquire Schering’s rights and obligations under a
product development and license agreement that had been capitalized at the time of our acquisition
of Enhance Pharmaceuticals, Inc. in June 2002; (2) a write-off of
$10 million for in-process
research and development acquired in connection with our acquisition of Women’s Capital Corporation
in February 2004; and (3) a write-off of $36 million of in-process research and development costs
in connection with our purchase of substantially all of the assets of Endeavor Pharmaceuticals,
Inc. in November 2003.
The remaining $28 million increase in research and development for fiscal 2005 as compared to
the prior year was primarily due to: (1) $9.1 million in higher third party development costs,
including a $5.0 million payment to PLIVA related to the development, supply and marketing
agreement that we entered into in March 2005 for the generic biopharmaceutical G-CSF; (2) $9.4
million in higher bioequivalence study costs, reflecting both an increase in the number and the
cost of the studies; (3) $5.0 million in higher internal production costs in support of internal
development projects; and (4) $4.5 million in higher headcount costs in support of the
increased number of products in development.
Income Taxes
The following table sets forth income tax expense and the resulting effective tax rate stated
as a percentage of pre-tax income for fiscal 2005 and 2004 (dollars in millions):
Twelve Months Ended June 30,
Change
2005
2004
$
%
Income tax expense
$
114.9
$
71.3
$
43.6
61
%
Effective tax rate
34.8
%
36.7
%
The effective tax rate for fiscal 2005 was favorably impacted by the completion of
several tax audits, the change of the mix in income between various taxing jurisdictions and the
enactment of favorable tax legislation in certain jurisdictions.
During fiscal 2005 the IRS completed audits of our federal income tax returns for fiscal 2002
and 2003. The resolution favorably impacted our effective tax rate for fiscal 2005 but did not have
a material effect on our financial position or liquidity.
Our primary source of liquidity has been cash from operations, which entails the collection of
accounts and other receivables related to product sales, and royalty and other payments we receive
from third parties in various ventures, such as Teva with respect to generic Allegra and Kos with
respect to Niaspan and Advicor. Our primary uses of cash include financing inventory, research and
development programs, marketing and selling, capital projects and investing in business development
activities.
To finance our acquisition of PLIVA we borrowed approximately $2,416 million and used
approximately $100 million of our cash balances. In addition, we assumed approximately $256 million
of debt from PLIVA, as described in greater detail below.
In 2007, operating cash flows will be a significant source of liquidity, while
debt service costs will be a significant use of cash in addition to the activities described above.
We also anticipate refinancing amounts outstanding under our 364-day
term loan that matures in October 2007.
The following table highlights selected measures of our liquidity and capital resources as of
December 31, 2006 and June 30, 2006 (dollars in millions):
December 31,
June 30,
Change
2006
2006
$
%
Cash & cash equivalents, short term marketable securities
$
905.7
$
601.9
$
303.8
50
%
Debt/Capital lease obligations:
Short-term
742.4
8.8
733.6
8336
%
Long-term
1,937.2
7.4
1,929.8
26078
%
Working capital
876.1
921.7
(45.6
)
-5
%
Cash flow from operations
213.3
327.3
(114.0
)
-35
%
Ratio of current assets to current liabilities
1.7 : 1
5.9 : 1
Operating Activities
Our operating cash flow for the
Transition Period was $213.3 million, up from $104.8 million
of operating cash flow for the comparable 2005 six months. Operating cash flows in the Transition
Period reflected a net loss of $338.2 million which was more
than offset by adjustments of $500.9
million. This latter figure includes the add-back of depreciation and
amortization of $74.4 million and a $380.7
million write-off of acquired IPR&D. Operating cash flows were
also positively impacted by a $50.6 million net decrease in working capital, after adjusting for the
PLIVA acquisition, primarily due to
an increase in deferred revenue of approximately $25 million to recognize an upfront payment from
Shire plc under a development agreement.
Investing Activities
Our net cash used in investing
activities was $2,417.2 million during the Transition Period,
primarily reflecting the acquisition of PLIVA, the purchase of the Adderall IR product rights for
$63 million and capital expenditures of $34 million.
Net
cash provided by financing activities was $2,412.0 million in the Transition Period,
primarily reflecting the debt financing of $2,415.7 million described below that we incurred in
connection with the PLIVA acquisition.
On July 21, 2006, in anticipation of the PLIVA acquisition, we entered into $2.8 billion
senior unsecured credit facilities (the “Credit Facilities”) that consisted of a $2.0 billion five
year term facility, a $500 million 364-day term facility and a $300 million revolving credit
facility. When we closed the PLIVA acquisition on October 24, 2006, we incurred the following
borrowings under the Credit Facilities:
•
Five-Year Term Facility: We borrowed the entire $2.0 billion available under this
facility, which bears interest at LIBOR plus 75 basis points (6.13% at December 31,2006) and matures in October 2011.
•
364-Day Term Facility: We drew down $415.7 million of the $500 million
available under this facility, which also bears interest at LIBOR
plus 75 basis points and matures on October 23, 2007.
As of December 31, 2006, we had total debt of $2,679.7 million including $256.4 million held
at our PLIVA subsidiary. During 2007, we will be obligated to repay
$742.4 million of existing debt, including amounts outstanding under the 364-day credit facility,
$200 million under the five-year term facility and approximately
$126.5 million of obligations
incurred by PLIVA. Our current intention is to refinance the amounts due under the 364-day term
facility with long-term notes. Subject to market conditions, we would anticipate that refinancing
to be completed by June 30, 2007. We may also refinance a portion of the $2 billion, five-year term
facility into a longer maturity in order to create a more permanent debt component of our capital
structure.
Under Croatian law, our ownership of more than 95% of the voting shares in PLIVA permits us to
undertake the necessary actions to acquire the remainder of PLIVA’s outstanding share capital. We
initiated this process at a price of HRK 820 per share, the same per share price offered
to shareholders during the formal tender period. This process and the subsequent pay out to
remaining shareholders is expected to be completed by June 30, 2007. We intend to
fund the payout from cash balances on hand and anticipate that the remaining investment will be
approximately $80 million.
Capital Expenditures
During the Transition Period and the three fiscal years ended June 30, 2006 we have invested
approximately $196.8 million in upgrades and expansions to our property, plant and equipment as
well as technology investments, including the purchase and implementation of a new SAP enterprise
resource planning (“ERP”) system. The investment in property, plant and equipment has significantly
expanded our production, laboratory, warehouse and distribution capacity in our facilities and was
designed to help ensure that we have the facilities necessary to manufacture, test, package and
distribute our current and future products. Our investment in the ERP system will help ensure that
we have a platform to grow our business, including better integration of acquired businesses,
expansion into new drug delivery systems and the ability to further expand internationally.
During the Transition Period, we invested $33.7 million in capital projects and expect that
our capital investments will be between $100 million and $120 million during 2007. Our estimate
reflects continued spending on our facility expansion programs, including a new biopharmaceutical
manufacturing facility in Croatia, new administrative headquarters in New Jersey to support our
increasing operations and continued investments in information technology projects to support our
integration activities and anticipated growth.
Proceeds from Equity Transactions
During
the Transition Period, we received proceeds of approximately $14.3 million from the
exercise of warrants and employee stock options and share purchases under our employee stock
purchase plan. We expect
proceeds from future stock option exercises to decline over time, due in part, to our decision
to issue employees stock appreciation rights (“SARs”), rather than stock options. Upon exercise of
a stock option the Company receives proceeds equal to the exercise price per share for each option
exercised. In contrast, the Company will not receive cash proceeds when a SAR is exercised because
the employee receives a net number of shares. While the Company will continue to receive proceeds
from any remaining options that are exercised, the amount of such proceeds is difficult to predict
because the proceeds are highly dependent upon our stock price, which can be volatile.
Share Repurchase Program
In August 2004, our Board of Directors authorized the repurchase of up to $300 million of our
common stock in open market or in privately negotiated transactions. During the life of the
program, we repurchased approximately $100 million in value of our common stock. We hold
repurchased shares as treasury shares and may use them for general corporate purposes, including
acquisitions and for issuance upon exercise of outstanding stock options. We did not repurchase any
shares during fiscal 2006 or the Transition Period. The repurchase program expired on December 31,2006.
Sufficiency of Cash Resources
We believe our current cash and cash equivalents, marketable securities, investment balances,
cash flows from operations and undrawn amounts under our revolving credit facility are adequate to
fund our operations, service our debt requirements, make planned capital expenditures and to
capitalize on strategic opportunities as they arise.
Contractual Obligations
Payments due by period for our contractual obligations at December 31, 2006 are as follows
(dollars in millions):
Payments due by period
Total
Less than 1 Year
1 to 3 Years
4 to 5 Years
Thereafter
Long-term debt
$
2,673.8
$
741.4
$
431.5
$
1,499.6
$
1.3
Capital leases
3.0
1.1
1.4
0.2
0.3
Operating leases
66.2
11.7
20.4
15.6
18.5
Purchase obligations (1)
143.8
137.4
6.1
0.3
—
Venture
fund commitments (2)
14.0
14.0
—
—
—
Annual interest on debt
576.1
169.8
240.9
165.4
—
Other long-term liabilities
17.9
6.2
5.2
4.5
2.0
Total
$
3,494.8
$
1,081.6
$
705.5
$
1,685.6
$
22.1
(1)
Purchase obligations consist mainly of commitments for raw materials used in our
manufacturing and research and development operations.
(2)
Payments related to our venture fund commitments are payable when capital calls are
made.
In addition to the above, we have committed to make potential future “milestone” payments to
third parties as part of licensing and development programs. Payments under these agreements
generally become due and payable only upon the achievement of certain developmental, regulatory
and/or commercial milestones. Because it is uncertain if and when these milestones will be
achieved, such contingencies have not been recorded on our consolidated balance sheet.
Off-Balance Sheet Arrangements
The Company does not have any material off-balance sheet arrangements that have had, or are
expected to have, an effect on our financial statements.
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) revenue recognition and provisions for estimated reductions to gross product
sales; (2) revenue recognition and provisions of alliance and development revenue; (3) inventories;
(4) income taxes; (5) contingencies; (6) acquisitions and amortization of intangible assets; (7)
derivative instruments; and (8) foreign currency translation and transactions. 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. We review the factors that influence our estimates
and, if necessary, adjust them. Actual results may differ significantly from our estimates.
Revenue Recognition and Provisions for Estimated Reductions to Gross Product Sales
We recognize revenue from product sales when title and risk of loss have transferred to our
customers and when collectibility is reasonably assured. This is generally at the time products are
received by the customer. From time to time the Company provides incentives, such as trade show
allowances or stocking allowances, that provide incremental allowances to customers who in turn use
such incremental allowances to accelerate distribution to the end customer. We believe that such
incentives are normal and customary in the industry. Additionally, we understand that certain of
our wholesale customers anticipate the timing of price increases and have made and may continue to
make business decisions to buy additional product in anticipation of future price increases. This
practice has been customary in the industry and would be part of a customer’s “ordinary course of
business inventory level.”
We evaluate inventory levels at our wholesale customers, which account for approximately 50%
of our sales, through an internal analysis that considers, among other things, wholesaler
purchases, wholesaler contract sales, available end consumer prescription information and inventory
data from our largest wholesale customer. We believe that our evaluation of wholesaler inventory
levels as described in the preceding sentence, allows us to make reasonable estimates for our
applicable reserves. Further, our products are typically sold with sufficient dating to permit
sufficient time for our wholesaler customers to sell our products in their inventory through to the
end consumer.
Upon recognizing revenue from a sale, we simultaneously record estimates for the following
items that reduce gross revenues:
•
returns and allowances (including shelf-stock adjustments)
•
chargebacks
•
rebates
•
managed care rebates
•
Medicaid rebates
•
prompt payment discounts and other allowances
For each of the items listed above other than managed care and Medicaid rebates, the estimated
amounts serve to reduce our accounts receivable balance. We include our estimate for managed care
and Medicaid rebates in accrued liabilities. A table showing the activity of each reserve, based on
these estimates, is set forth below (dollars in millions):
Returns and allowances — Our provision for returns and allowances consists of our estimates of
future product returns, pricing adjustments, delivery errors, and our estimate of price adjustments
arising from shelf stock adjustments (which are discussed in greater detail below). Consistent with
industry practice, we maintain a return policy that allows our customers to return product within a
specified period of time both prior and subsequent to the product’s expiration date. The primary
factors we consider in estimating our potential product returns include:
the shelf life or expiration date of each product;
•
historical levels of expired product returns; and
•
the estimated date of return.
Shelf-stock adjustments are credits issued to our customers to reflect decreases in the
selling prices of our products. These credits are customary in the industry and are intended to
reduce a customer’s inventory cost to better reflect current market prices. The determination to
grant a shelf-stock credit to a customer following a price decrease is at our discretion rather
than contractually required. The primary factors we consider when deciding whether to record a
reserve for a shelf-stock adjustment include:
•
the estimated launch date of a competing product, which we determine based on market
intelligence;
•
the estimated decline in the market price of our product, which we determine based on
historical experience and input from customers; and,
•
the estimated levels of inventory held by our customers at the time of the anticipated
decrease in market price, which we determine based upon historical experience and customer
input.
Chargebacks — We market and sell products directly to wholesalers, distributors, warehousing
pharmacy chains, mail order pharmacies and other direct purchasing groups. We also market products
indirectly to independent pharmacies, non-warehousing chains, managed care organizations, and group
purchasing organizations, collectively referred to as “indirect customers.” We enter into
agreements with some indirect customers to establish contract pricing for certain products. These
indirect customers then independently select a wholesaler from which to purchase the products at
these contracted prices. Alternatively, we may pre-authorize wholesalers to offer specified
contract pricing to other indirect customers. Under either arrangement, we provide credit to the
wholesaler for any difference between the contracted price with the indirect customer and the
wholesaler’s invoice price. Such credit is called a chargeback. The primary factors we consider in
developing and evaluating our provision for chargebacks include:
•
the average historical chargeback credits; and
•
an estimate of the inventory held by our wholesalers, based on internal analysis of a
wholesaler’s historical purchases and contract sales.
Rebates - Our rebate programs can generally be categorized into the following four types:
•
direct rebates;
•
indirect rebates;
•
managed care rebates; and
•
Medicaid rebates.
The direct and indirect rebates relate primarily to the generic segment of our business
whereas our managed care rebates are solely associated with the proprietary segment of our
business. Medicaid rebates apply to both of our segments. Direct rebates are generally rebates paid
to direct purchasing customers based on a percentage applied to a direct customer’s purchases from
us. Indirect rebates are rebates paid to “indirect customers” which have purchased our products
from a wholesaler under a contract with us. Managed care and Medicaid rebates are amounts owed
based upon contractual agreements or legal requirements with private sector and public sector
(Medicaid) benefit providers, after the final dispensing of the product by a pharmacy to a benefit
plan participant.
We maintain reserves for our direct rebate programs based on purchases by our direct
purchasing customers. Indirect rebate reserves are based on actual contract purchases in a period
and an estimate of wholesaler inventory subject to an indirect rebate. Managed care and Medicaid
reserves are based on expected payments, which are driven by patient usage, contract performance,
as well as field inventory that will be subject to a managed care or Medicaid rebate.
Prompt Pay Discounts - We offer many of our customers 2% prompt pay discounts. We evaluate the
amounts accrued for prompt pay discounts by analyzing the unpaid invoices in our accounts
receivable aging subject to a prompt pay discount.
Revenue Recognition and Provisions of Alliance and Development Revenue
We have agreements with certain pharmaceutical companies under which we receive payments based
on sales or profits associated with the applicable products. Our two most significant of these
agreements are those with Teva regarding generic Allegra and with Kos Pharmaceuticals regarding
Niaspan and Advicor. Revenue from these agreements is recognized at the time title and risk of loss
pass to a third party and is based on pre-defined formulas contained in our agreements, as adjusted
for our estimates of reserves needed to state our revenues on a basis consistent with our other
revenue recognition policies. The estimates we make to adjust our revenues are based on information
received from our partner, whether Teva or Kos, as well as our own internal information. Selling
and marketing expenses we incur under our co-promotion agreement with Kos are included in selling,
general and administrative expenses.
Inventories
Inventories are stated at the lower of cost or market and consist of finished goods purchased
from third party manufacturers and held for distribution, as well as raw materials, work-in-process
and finished goods manufactured by us. We determine cost on a first-in, first-out basis.
We capitalize the costs associated with certain products prior to receiving final marketing
approval from the regulatory authorities for such products (“pre-launch inventories”). For our
generic products, each filing submission is made with the expectation that: (i) the applicable
regulatory authority will approve the marketing of the applicable product, (ii) we will validate
our process for manufacturing the applicable product within the specifications that have been or
will be approved by the regulatory authority, and (iii) the cost of the inventory will be recovered
from the commercialization of our product. Typically, we capitalize inventory related to our
proprietary products based on the same expectations as above, but we do not begin to capitalize
costs until the NDA is filed or in the case of components to a NDA product, the product development
process has progressed to a point where we have determined that the product has a high probability
of regulatory approval. The accumulation of pre-launch inventory involves risks such as (i) the
applicable regulatory authority may not approve such product(s) for marketing on a timely basis, if
ever, (ii) approvals may require additional or different testing and/or specifications than what
was performed in the manufacture of such pre-launch inventory, and (iii) in those instances where
the pre-launch inventory is for a product that is subject to litigation, the litigation may not be
resolved or settled to our satisfaction. If any of these risks were to materialize and the launch
of such product were significantly delayed, we may have to write-off all or a portion of such
pre-launch inventory and such amounts could be material. As of December 31, 2006, June 30, 2006 and
2005, the amount of pre-launch inventory was not material to our net earnings.
We review our inventory for products that are close to or have reached their expiration date
and therefore are not expected to be sold, for products where market conditions have changed or are
expected to change, and for products that are not expected to be saleable based on our quality
assurance and control standards. In addition, for our pre-launch inventory, we take into
consideration the substance of communications with the applicable regulatory authority during the
approval process and the views of patent and litigation counsel. In evaluating whether inventory is
properly stated at the lower of cost or market, we consider such factors as the amount of product
inventory on hand, estimated time required to sell such inventory, remaining shelf life and current
and expected market conditions, including levels of competition. We record lower of cost or market
provisions for inventory obsolescence as part of cost of sales.
Income Taxes
Our effective tax rate is based on pre-tax income, statutory tax rates and available tax
incentives (i.e. credits) and planning opportunities in the various jurisdictions in which we
operate. We establish reserves when, despite our belief that the tax return positions are fully
supportable, certain positions may be challenged and may not be upheld on audit. We adjust our
reserves upon the occurrence of a discrete event, such as the completion of an income tax audit.
The effective tax rate includes the impact of reserve provisions and charges to reserves that are
considered appropriate. This rate is applied to our quarterly operating results.
Tax regulations require certain items to be included in the income tax return at different
times than the items are reflected in the financial statements. As a result, the effective tax rate
reflected in the financial statements is different than that reported in the income tax return.
Some of the differences are permanent, such as tax-exempt interest income, and some are timing
differences such as depreciation expense. Deferred tax assets generally represent items that can be
used as a tax deduction or credit in future years for which we have already recorded the tax
benefit in the financial statements. We establish valuation allowances for our deferred tax assets
when the amount of expected future taxable income is not likely to support the use of the deduction
or credit. Deferred tax liabilities generally represent tax expense recognized in the financial
statements for which payment has been deferred or expenses for which we have already taken a
deduction on the tax return, but have not yet recognized as expense in the financial statements.
In accordance with APB 23, incremental taxes have not been provided on undistributed earnings
of our international subsidiaries as it is our intention to permanently reinvest these earnings
into the respective businesses. At December 31, 2006, we have not provided for U.S. or foreign
income or withholding taxes that may be imposed on a distribution of such earnings. The
determination of the amount of unremitted earnings and unrecognized deferred tax liability for
temporary differences related to investments in these non-U.S.
subsidiaries is not practicable to
estimate.
Contingencies
We are involved in various patent, product liability, commercial litigation and claims,
government investigations and other legal proceedings that arise from time to time in the ordinary
course of our business. We assess, in consultation with counsel, the need to accrue a liability for
such contingencies and record a reserve when we determine that a loss related to a matter is both
probable and reasonably estimable. Because litigation and other contingencies are inherently
unpredictable, our assessment can involve judgments about future events. We record anticipated
recoveries under existing insurance contracts when collection is reasonably assured.
We utilize a combination of self-insurance and traditional third-party insurance policies to
cover potential product liability claims on products sold on or after September 30, 2002, and we
have obtained extended reporting periods under previous policies for claims arising on products
sold prior to September 30, 2002.
Acquisitions and Amortization of Intangible Assets
We account for acquired businesses using the purchase method of accounting which requires that
the assets acquired and liabilities assumed be recorded at the date of acquisition at their
respective fair values. Our consolidated financial statements and results of operations reflect an
acquired business after the completion of the acquisition and are not restated. The cost to acquire
a business, including transaction costs, is allocated to the underlying net assets of the acquired
business in proportion to their respective fair values. Any excess of the purchase price over the
estimated fair values of the net assets acquired is recorded as goodwill. Amounts allocated to
acquired in-process research and development are expensed at the date of acquisition. Intangible
assets are amortized based on sales over the expected life of the asset. Product amortization
expense is included in the cost of sales expense line item of the statement of operations. When we
acquire net assets that do not constitute a business, no goodwill is recognized.
The judgments made in determining the estimated fair value assigned to each class of assets
acquired and liabilities assumed, as well as asset lives, can materially impact our results of
operations. Accordingly, for significant items, we typically obtain assistance from third party
valuation specialists. Useful lives are determined based on the expected future period of benefit
of the asset, which considers various characteristics of the asset, including projected cash flows.
We review goodwill for impairment annually or more frequently if impairment indicators arise.
As a result of our acquisitions,
we have recorded on our balance sheets goodwill of $276
million, $48 million and $18 million as of December 31, 2006, June 30, 2006 and 2005, respectively.
In addition, as a result of our acquisition of product rights and related intangibles and certain
product licenses, we have recorded $1,474 million, $417 million and $98 million as other intangible
assets, net of accumulated amortization, on our balance sheets as of December 31, 2006, June 30,2006 and 2005, respectively.
The Company uses derivative instruments for the purpose of hedging its exposure to foreign
exchange and interest rate risk. The Company’s derivative instruments include interest rate
forwards and swaps, forward rate agreements and foreign exchange forwards and options.
FASB
Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities as amended and interpreted (“SFAS
133”), requires companies to recognize all of their derivative instruments as either assets or
liabilities in the statement of financial position at fair value based on quoted market prices or
pricing models using current market rates. The accounting for changes (i.e., gains or losses) in
the fair value of a derivative instrument depends on whether the instrument has been designated and
qualifies as part of a hedging relationship and on the type of hedging relationship. For derivative
instruments that are designated and qualify as hedging instruments, a company must designate
the hedging instrument, as a fair value hedge, cash flow hedge or a hedge of a net investment in a
foreign operation. The designation is based upon the nature of the exposure being hedged.
For a derivative instrument that is designated and qualifies as a fair value hedge (i.e., an
instrument that hedges the exposure to changes in the fair value of an asset or a liability or an
identified portion thereof that is attributable to a particular risk), the gain or loss on the
derivative instrument as well as the offsetting loss or gain on the hedged item are recognized in
the same line item associated with the hedged item in earnings.
For a derivative instrument that is designated and qualifies as a cash flow hedge (i.e., an
instrument that hedges the exposure to variability in expected future cash flows that is
attributable to a particular risk), the effective portion of the gain or loss on the derivative
instrument is reported as a component of other comprehensive income and reclassified into earnings
in the same line item associated with the forecasted transaction in the same period or periods
during which the hedged transaction affects earnings.
For all hedging activities, the ineffective portion of a derivative’s change in fair value is
immediately recognized in other income (expense). For derivative instruments not designated as
hedging instruments, the gain or loss is recognized in other income (expense) during the period of
change.
For the periods ending December 31, 2006 and 2005 and for the periods ending June 30, 2006,
2005 and 2004, we did not have any derivatives designated and qualifying as hedging instruments
(See Note 3). However the Company believes that these derivatives
offset the economic risks of the hedged items.
The
Company’s treasury policies do not allow for holding derivative
instruments for trading purposes.
Foreign Currency Translation and Transactions
Foreign Currency Translation - In view of the international nature of our business and the
fact that a significant part of our business is transacted in U.S. dollars our financial statements
continue to be presented in U.S. Dollars. Other significant currencies that are applicable to our
operations include the Croatian Kuna (“HRK”), the Euro, the Polish Zloty, the Czech Krona, and the
UK Pound.
Monthly income and cash flow statements of all of our subsidiaries expressed in currencies
other than U.S. dollars are translated into U.S. dollars at that month’s average exchange rates and
then are combined for the period totals, whereas assets and liabilities are translated at the end
of the period exchange rates. Translation differences on functional currencies are recorded
directly in shareholders’ equity as cumulative translation adjustments.
Foreign Currency Transactions - Outstanding balances in foreign currencies arising from
foreign currency transactions other than the functional currencies are translated at the
end-of-period exchange rates. Revenues and expenses for each month are translated using that
month’s average exchange rate and then are combined for the period totals. The resulting exchange
differences are recorded in the income statement.
In July 2006, the Financial Accounting Standards Board (the “FASB”) issued Interpretation No.
48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (“FIN
48”). FIN 48 clarifies the accounting for the uncertainty in recognizing income taxes in an
organization in accordance with FASB Statement No. 109 by providing detailed guidance for financial
statement recognition, measurement and disclosure involving uncertain tax positions. FIN 48
requires an uncertain tax position to meet a more-likely-than-not recognition threshold at the
effective date to be recognized both upon the adoption of FIN 48 and in subsequent periods. FIN 48
is effective for fiscal years beginning after December 15, 2006. As the provisions of FIN 48 will
be applied to all tax positions upon initial adoption, the cumulative effect of applying the
provisions of FIN 48 will be reported as an adjustment to the opening balance of retained earnings
for that fiscal year. We will adopt FIN 48 as of January 1, 2007 as required. Based on our current
assessment, and subject to any changes that may result from additional guidance, we do not expect
that the adoption of FIN 48 will materially affect our consolidated financial statements for the
historic operations of Barr. We are currently evaluating the effect that the adoption of FIN 48
will have on the historic PLIVA operations and are not yet in a
position to calculate, or reasonably estimate the impact of adoption, but note that it will most likely affect acquired goodwill.
In September 2006, the FASB issued Financial Accounting Standard (“FAS”) No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB
Statements No. 87, 88, 106, and 132(R), which requires an employer to recognize the over-funded or
under-funded status of a defined benefit postretirement plan (other than a multiemployer plan) as
an asset or liability in its statement of financial position and to recognize changes in that
funded status in the year in which the changes occur through comprehensive income of a business
entity. FAS No. 158 also requires an employer to measure the funded status of a plan as of the date
of its year-end statement of financial position, with limited exceptions. The effect of the
adoption of FAS No. 158 did not have a material effect on our consolidated financial statements.
In September 2006, the FASB issued FAS No. 157, Fair Value Measurements, which defines fair
value, establishes a framework for measuring fair value in GAAP and expands disclosure about fair
value measurements. The statement is effective for fiscal years beginning after November 15, 2007.
We are currently evaluating this statement and the effect on our consolidated financial statements.
In September 2006, the Securities and Exchange Commission (“SEC”) staff issued Staff
Accounting Bulletin (“SAB”) 108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 requires that
public companies utilize a “dual-approach” to assessing the quantitative effects of financial
misstatements. This dual approach includes both an income statement focused assessment and a
balance sheet focused assessment. The guidance in SAB 108 must be applied to annual financial
statements for fiscal years ending after November 15, 2006. The adoption of SAB 108 did not have a
material effect on our consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159 (“SFAS
159”) The Fair Value Option for Financial Assets and
Financial Liabilities, providing companies with an option to
report selected financial assets and liabilities at fair value. The
Standard’s objective is to reduce both complexity in accounting
for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. Generally
accepted accounting principles have required different measurement
attributes for different assets and liabilities that can create
artificial volatility in earnings. SFAS 159 helps to mitigate
this type of accounting-induced volatility by enabling companies to
report related assets and liabilities at fair value, which would
likely reduce the need for companies to comply with detailed rules
for hedge accounting. SFAS 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between
companies that choose different measurement attributes for similar
types of assets and liabilities. The Standard requires companies to
provide additional information that will help investors and other
users of financial statements to more easily understand the effect of
the Company’s choice to use fair value on its earnings. It also
requires entities to display the fair value of those assets and
liabilities for which they have chosen to use fair value on the face
of the balance sheet. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. We are currently evaluating
the impact of the adoption of this statement on our consolidated
financial statements.
Effects of Inflation; Seasonality
Inflation has had only a minimal impact on our operations in recent years. Similarly, our
business is generally not affected by seasonality.
Forward-Looking Statements
The preceding 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, in no particular order:
•
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 FDA approvals;
•
court and FDA decisions on exclusivity periods;
•
the ability of competitors to extend exclusivity periods for their products;
•
our ability to complete product development activities in the timeframes and for the costs we expect;
•
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 on products, including the launch of
authorized generics;
•
the ability to launch new products in the timeframes we expect;
•
the availability of raw materials;
•
the availability of any product we purchase and sell as a distributor;
•
the regulatory environment;
•
our exposure to product liability and other lawsuits and contingencies;
•
the 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 our new enterprise resource planning
system;
•
risks associated with doing business outside the United States, as discussed in Risk
Factors above;
•
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.
We wish to caution each reader of this report to consider carefully these factors as well as
specific factors that may be discussed with each forward-looking statement in this report or
disclosed in our filings with the SEC, as such factors, in some cases, could affect our ability to
implement our business strategies and may cause actual results to differ materially from those
contemplated by the statements expressed herein. Readers are urged to carefully review and consider
these factors. We undertake no duty to update the forward-looking statements even though our
situation may change in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risk for changes in interest rates and foreign currency exchange
rates. We manage these exposures through operational means and, when appropriate, through the use
of derivative financial instruments.
Interest Rate Risk
Our exposure to interest rate risk relates primarily to our investment portfolio of
approximately $914.7 million, borrowings under our credit facilities of approximately $2,415.7
million and approximately $155 million of other debt acquired from PLIVA. Our investment portfolio
consists principally of cash and cash equivalents and market auction debt securities primarily
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 debt
securities, including U.S., state and local government and corporate obligations, commercial paper
and money market funds. Over 94% of our portfolio matures in less than three months, or is subject
to an interest-rate reset date that occurs within 90 days. The carrying value of the investment
portfolio approximates the market value at December 31, 2006 and the value at maturity.
We manage the interest rate risk of our net portfolio of investments and debt with the use of
financial risk management instruments or derivatives, including interest rate swaps and forward
rate agreements. See Note 3 to the Company’s financial statements included in Item 8 of this report
for a detailed presentation of the Company’s financial risk management instruments.
During the six months ended December 31, 2006, a 10% increase in interest rates would have
increased the net interest expense of our combined investment, debt and financial risk management
portfolios by $11.6 million.
Foreign Exchange Rate Risk
A significant portion of our revenues and earnings are generated internationally in various
currencies. We also have a number of investments in foreign subsidiaries whose net assets are
exposed to currency translation risk. We seek to manage these exposures through operational means,
to the extent possible, by matching functional currency revenues and costs and functional currency
assets and liabilities. Exposures that cannot be managed operationally are hedged using foreign
exchange forwards, swaps, and option contracts. See Note 3 to the Company’s financial statements
included in Item 8 of this report for a detailed presentation of the Company’s financial risk
management instruments.
As of December 31, 2006, a 10% depreciation in the value of the US dollar would have resulted
in a decrease of $10.6 million in the fair value of the Company’s foreign exchange risk management
instruments. These movements would have been offset by movements in the fair value in the opposite
direction of the underlying transactions and balance sheet items being hedged.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements are filed together with this Form 10-K/T. See the Index to Financial
Statements and Financial Statement Schedules on page F-1 for a list of the financial statements
filed together with this Form 10-K/T.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
We maintain disclosure controls (as defined in Rule 13a-15(e) of
the Securities Exchange Act of 1934 as amended (the “Exchange
Act”)) and procedures that are designed to ensure 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.
At the conclusion of the six-month period ended December 31, 2006, 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 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.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over
financial reporting for Barr Pharmaceuticals, Inc. (the “Company”). We maintain internal control
over financial reporting designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles in the United States of America.
On October 24, 2006, we acquired PLIVA d.d.
As permitted by guidance issued by the SEC staff, management has excluded the PLIVA business
from the scope of its assessment of internal control over financial reporting as of December31, 2006. The PLIVA business constituted approximately 58% of total assets and 23% of revenues as of and for the six months ended December31, 2006.
Because of its inherent limitations, any system of internal control over financial reporting,
no matter how well designed, may not prevent or detect misstatements due to the possibility of
collusion or improper override of controls, or that misstatements due to error or fraud may occur
that are not detected. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Management conducted an assessment of the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2006 using criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). This assessment included an evaluation of the design of the Company’s internal
control over financial reporting and testing of the operational effectiveness of its internal
control over financial reporting. Based on this assessment, management has concluded that the
Company maintained effective internal control over financial reporting as of December 31, 2006,
based upon the COSO framework criteria.
Management’s assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2006 has been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report which appears herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Barr Pharmaceuticals, Inc.:
We have audited management’s assessment, included in the accompanying Management’s Report
on Internal Control over Financial Reporting, that Barr Pharmaceuticals, Inc. and subsidiaries (the
“Company”) maintained effective internal control over financial reporting as of December 31, 2006,
based on the criteria established in Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. As described in Management’s Report on
Internal Control over Financial Reporting, management excluded from their assessment the internal
control over financial reporting at PLIVA d.d., a subsidiary which was acquired on October 24,2006, and whose financial statements constitute 58% of total assets and 23% of revenues of the consolidated financial statement amounts as of and for the six months ended
December 31, 2006. Accordingly, our audit did not include the internal control over financial
reporting at PLIVA d.d. The Company’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an opinion on management’s assessment
and an opinion on the effectiveness of the Company’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including
the possibility of collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control
over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based
on the criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31,2006, based on the criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and financial statement
schedule as of and for the six months ended December 31, 2006 of the Company and our report dated
March 1, 2007, expressed an unqualified opinion on those financial statements and financial
statement schedule and included an explanatory paragraph regarding the Company’s adoption of
Statement of Financial Accounting Standard No. 123(R), “Share-Based Payment,” effective July 1,2005.
In October 2005, we began migrating certain financial and sales processing systems to our new
SAP enterprise resource-planning (ERP) platform. The migration of our remaining financial,
operational, and inventory processes was completed by December 31, 2006. In addition to expanding
and improving access to information, the new ERP system provides a standard scalable information
platform to accommodate business growth plans. In connection with the ERP system implementation, we
updated our internal controls over financial reporting, as necessary, to accommodate modifications
our business processes and to take advantage of enhanced automated controls provided by the system.
We believe we have taken the necessary steps to maintain internal control systems that provide
reasonable assurance of the accuracy of financial information.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Certain information regarding our directors and executive officers will be set forth in the
sections titled “Election of Directors,”“Executive Officers” and “Security Ownership of Certain
Beneficial Owners and Management — Section 16(a) Beneficial Ownership Reporting Compliance” in our
definitive Proxy Statement for our Annual Meeting of Stockholders scheduled for May 17, 2007 (the
“Proxy Statement”) and is incorporated herein by reference.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics (the “Code”) that applies to all Barr
companies, their officers, directors and employees. This Code and the charters of the Audit,
Compensation, and Nominating and Corporate Governance committees are posted on our website at
www.barrlabs.com. We intend to post any amendments to or waivers from the Code on our website.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is incorporated herein by reference to the material
under the captions, “Compensation Discussion and Analysis,”“Executive and Director Compensation”
and “Compensation Committee Report” in the Proxy Statement.
The material incorporated herein by reference to the material under the caption “Compensation
Committee Report” in the Proxy Statement shall be deemed furnished, and not filed, in this Report
on Form 10-K and shall not be deemed incorporated by reference into any filing under the Securities
Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, as a result of this
furnishing.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
A description of the security ownership of certain beneficial owners and management, as well
as equity compensation plan information, will be set forth in the sections titled “Ownership of
Securities” of the Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
A description of certain relationships and related transactions will be set forth in the
section titled “Certain Relationships and Related Transactions” of the Proxy Statement and is
incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
A description of the fees paid to our independent registered public accounting firm will be
set forth in the section titled “Independent Registered Public Accountants” of the Proxy Statement
and is incorporated herein by reference.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
a) Financial Statement Schedules:
See the Index on page F-1 below.
(b)
Exhibits
2.1
Agreement and Plan of Merger, dated as of December 31, 2003 between Barr
Pharmaceuticals, Inc., a Delaware corporation, and Barr Laboratories,
Inc., a New York corporation (1)
2.2
Asset Purchase Agreement dated November 20, 2003 between Endeavor
Pharmaceuticals, Inc. and Barr Laboratories, Inc. (2)
2.3
Agreement and Plan of Merger, dated February 6, 2004, among Duramed
Pharmaceuticals, Inc., WCC Merger Sub, Inc. and Women’s Capital
Corporation (3)
2.4
Purchase Agreement dated as of October 14, 2005, by and among Duramed
Pharmaceuticals, Inc., Copper 380T, FEI Women’s Health, LLC and the
individuals listed on the signature pages thereto. (21)
The Registrant agrees to furnish to the Securities and Exchange
Commission, upon request, a copy of any instrument defining the rights of
the holders of its long-term debt wherein the total amount of securities
authorized there under does not exceed 10% of the total assets of the
Registrant and its subsidiaries on a consolidated basis.
4.2
Note Purchase Agreement dated November 18, 1997 relating to $10 million of
Series A Senior Notes due November, 2004 and $20 million of Series B
Senior Notes due November, 2007 (4)
4.3
Credit Agreement (five-year facilities), dated July 21, 2006, among the
Company, certain of its subsidiaries, Bank of America, N.A., as
Administrative Agent, Banc of America Securities LLC, as Lead Arranger and
Book Manager, and certain other lenders. (23)
4.4
Credit Agreement (364-day facility), dated July 21, 2006, among the
Company, certain of its subsidiaries, Bank of America, N.A., as
Administrative Agent, Banc of America Securities LLC, as Lead Arranger and
Book Manager, and certain other lenders. (23)
10.1
Lease, dated February 6, 2003, between Mack-Cali Properties Co. No. 11
L.P. and Barr Laboratories, Inc. (5)
Amended and Restated Employment Agreement with Fredrick J. Killion, dated
as of February 19, 2003 (5)
10.17
Amended and Restated Employment Agreement with Salah U. Ahmed, dated as of
February 19, 2003 (14)
10.18
Amended and Restated Employment Agreement with Christine A. Mundkur, dated
as of February 19, 2003 (14)
10.19
Amended and Restated Employment Agreement with Catherine F. Higgins, dated
as of February 19, 2003 (14)
10.20
Employment Agreement with Michael J. Bogda, dated as of May 15, 2003 (14)
10.21
Duramed 1988 Stock Option Plan (15)
10.22
Duramed 1991 Stock Option Plan for Nonemployee Directors (16)
10.23
Duramed 1997 Stock Option Plan (17)
10.24
Duramed 2000 Stock Option Plan (18)
10.25
Duramed 1999 Nonemployee Director Stock Plan (19)
10.26
Employment Agreement with G. Frederick Wilkinson, dated as of January 5,2006 (20)
10.27
Employment Agreement between Zeljko Covic and PLIVA d.d.
dated October 24, 2005
10.28
Letter Agreement, dated October 5, 2006, made between
Barr Pharmaceuticals, Inc. and Carole Ben-Maimon, amending certain
provisions of her Amended and Restated Employment Agreement (6)
10.29
Release of Claims, dated October 5, 2006, made by Carole
Ben-Maimon in favor of Barr Pharmaceuticals, Inc. and its
subsidiaries and affiliates (6)
Certification of Bruce L. Downey pursuant to Exchange Act Rules 13a-14(a)
and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2
Certification of William T. McKee pursuant to Exchange Act Rules 13a-14(a)
and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.0
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Registrant’s Registration Statement on Form S-8 No. 33-73700 and incorporated herein by
reference.
(9)
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Registrant’s Registration Statement on Form S-8 Nos. 33-73698 and 333-17351 incorporated
herein by reference.
(10)
Previously filed with the Securities and Exchange Commission as an Appendix to the
Registrant’s Proxy Statement relating to the 2002 Annual Meeting of Stockholders and
incorporated herein by reference.
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Registrant’s Annual Report on Form 10-K for the year ended June 30, 2000 and incorporated
herein by reference.
(14)
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Registrant’s Annual Report on Form 10-K for the year ended June 30, 2003 and incorporated
herein by reference.
(15)
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Duramed Pharmaceuticals, Inc. Proxy Statement relating to the 1993 Annual Meeting of
Stockholders and incorporated herein by reference.
(16)
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Duramed Pharmaceuticals, Inc. Proxy Statement relating to the 1998 Annual Meeting of
Stockholders and incorporated herein by reference.
(17)
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Duramed Pharmaceuticals, Inc. Proxy Statement relating to the 1997 Annual Meeting of
Stockholders and incorporated herein by reference.
(18)
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Duramed Pharmaceuticals, Inc. Proxy Statement relating to the 2000 Annual Meeting of
Stockholders and incorporated herein by reference.
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Barr Pharmaceuticals, Inc.
Woodcliff Lake, NJ
We have audited the accompanying consolidated balance sheets of Barr Pharmaceuticals, Inc. and
subsidiaries (the “Company”) as of December 31, 2006 and June 30, 2006 and 2005, and the related
consolidated statements of operations, shareholders’ equity, and cash flows for the six months
ended December 31, 2006 and each of the three years in the period ended June 30, 2006. Our audits
also included the financial statement schedule listed in the Index at Item 15A. These financial
statements and financial statement schedule are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We
did not audit the financial statements of PLIVA d.d. (a consolidated subsidiary) as of December 31,2006 and for the period from October 25, 2006 to December 31, 2006, which
statements reflect total assets constituting 58% of consolidated total assets as of
December 31, 2006 and total revenues constituting 23% of consolidated revenues for
the six months ended December 31, 2006. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the amounts included for
PLIVA d.d, is based solely on the report of the other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of the other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, such consolidated
financial statements present fairly, in all material respects, the financial position of Barr
Pharmaceuticals, Inc. and subsidiaries at December 31, 2006 and June 30, 2006 and 2005, and the
results of their operations and their cash flows for the six months ended December 31, 2006 and
each of the three years in the period ended June 30, 2006 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, based on our audits and
the report of the other auditors, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in Note 15 to the consolidated financial statements, the Company adopted Statement of
Financial Accounting Standard No. 123(R), “Share-Based Payment,” effective July 1, 2005. As a
result, the Company began recording fair value stock-based compensation expense for its various
share-based compensation programs in the year ended June 30, 2006.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Company’s internal control over financial reporting
as of December 31, 2006, based on the criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and other report
dated March 1, 2007 expressed an unqualified opinion on management’s assessment of the
effectiveness of the Company’s internal control over financial reporting and an unqualified opinion
on the effectiveness of the Company’s internal control over financial reporting based on our
audits.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
PLIVA d.d.
(a subsidiary of Barr Pharmaceuticals, Inc.):
We have
audited the accompanying consolidated balance sheet of PLIVA d.d. and
subsidiaries as of
December 31, 2006, and the related consolidated statements of operations, changes in shareholders’
equity, and cash flows for the period from October 25, 2006 through December 31, 2006. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of PLIVA d.d. and subsidiaries as of December 31, 2006
and the results of their operations and their cash flows for the
period October 25, 2006 through December31, 2006, in conformity with U.S. generally accepted accounting principles.
Current portion of long-term debt and capital lease obligations
742,445
8,816
5,446
Income taxes payable
21,359
9,336
13,353
Deferred tax liabilities
8,266
—
—
Total current liabilities
1,211,893
187,319
220,430
Long-term debt and capital lease obligations
1,937,215
7,431
15,493
Deferred tax liabilities
221,895
—
—
Other liabilities
84,533
35,713
20,413
Commitments & Contingencies (Note 19)
Minority interest
41,098
—
—
Shareholders’ equity:
Preferred stock $1 par value per share; authorized 2,000,000; none issued
—
—
—
Common stock $.01 par value per share; authorized 200,000,000;
issued 109,536,481, 109,179,208 and 106,340,470 at December 31,2006 and June 30, 2006 and 2005, respectively
1,095
1,092
1,063
Additional paid-in capital
610,232
574,785
454,489
Retained earnings
877,991
1,216,146
879,669
Accumulated
other comprehensive income (loss)
76,600
(377
)
(561
)
Treasury stock at cost: 2,972,997 shares
(100,690
)
(100,690
)
(100,690
)
Total shareholders’ equity
1,465,228
1,690,956
1,233,970
Total liabilities and shareholders’ equity
$
4,961,862
$
1,921,419
$
1,490,306
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for share and per share amounts)
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation and Other Matters
Barr Pharmaceuticals, Inc. (“Barr” or, the “Company”), is a Delaware holding company whose
principal subsidiaries, Barr Laboratories, Inc., Duramed Pharmaceuticals, Inc. (“Duramed”) and
PLIVA d.d. (“PLIVA”) are engaged in the development, manufacture and marketing of generic and
proprietary pharmaceuticals.
The Company’s consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”). The consolidated financial
statements include all companies, which Barr directly or indirectly controls (meaning it has more
than 50% of voting rights in those companies). Investments in companies where Barr owns between 20%
and 50% of a company’s voting rights are accounted for by using the equity method, with Barr
recording its proportionate share of that company’s net income and shareholder’s equity. The
consolidated financial statements include the accounts of the Company and its majority owned
subsidiaries, after elimination of inter-company accounts and transactions. Non-controlling
interests in the Company’s subsidiaries are recorded net of tax as minority interest.
On October 24, 2006, the Company completed the acquisition of PLIVA (see Note 2). As of that
date, the PLIVA assets acquired and liabilities assumed were recorded at their respective fair
values and our results of operations include PLIVA’s revenues and expenses from October 25, 2006
through December 31, 2006.
On September 21, 2006, the Company changed its fiscal year end from June 30 to December 31.
These Notes to the Consolidated Financial Statements reflect the period from July 1, 2006 through
December 31, 2006. The Company refers to the period beginning July 1, 2005 through June 30, 2006
as “fiscal 2006,” the period beginning July 1, 2004 through June 30, 2005 as “fiscal 2005” and the
period beginning July 1, 2003 through June 30, 2004 as “fiscal 2004”. All information, data and
figures provided in this report for fiscal 2006, 2005 and 2004 relate solely to Barr’s financial
results and do not include PLIVA.
Certain amounts in fiscal 2006, 2005 and 2004 financial statements have been reclassified to
conform to the presentation for the Transition Period. These include
the Company’s reclassification of amortization expense
from selling, general and administrative expense to cost of sales
(see Note 8).
(b) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and use assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. These estimates are often based on judgments, probabilities and assumptions
that management believes are reasonable but that are inherently uncertain and unpredictable. As a
result, actual results could differ from those estimates. Management periodically evaluates
estimates used in the preparation of the consolidated financial statements for continued
reasonableness. Appropriate adjustments, if any, to the estimates used are made prospectively based
on such periodic evaluations.
(c) Foreign currency translation and transactions
Foreign currency translation
The consolidated financial statements are presented in United States Dollars (“USD”), rounded
to the nearest thousand. The functional currency of the Company is the USD.
Monthly statements of operations and cash flows of all of the Company’s subsidiaries that are
expressed in currencies other than USD are translated at that month’s average exchange rates and
then are combined for the period totals, whereas assets and liabilities are translated at the end
of the period exchange rates. Translation differences are recorded directly in shareholders’ equity
as cumulative translation adjustments.
Outstanding balances in foreign currencies are translated at the end of period exchange rates.
Revenues and expenses for each month are translated using that month’s average exchange rate and
then are combined for the period totals. The resulting exchange differences are recorded in the
statement of operations.
(d) Revenue Recognition
The Company recognizes product sales revenue when title and risk of loss have transferred to
the customer, when estimated provisions for product returns, rebates, including Medicaid rebates,
chargebacks and other sales allowances are reasonably determinable, and when collectibility is
reasonably assured. Accruals for these provisions are presented in the consolidated financial
statements as reductions to revenues. Accounts receivable are presented net of allowances relating
to the above provisions. Cash received in advance of revenue recognition is recorded as deferred
revenue.
Alliance and development revenue includes: reimbursements relating to research and development
contracts, licensing fees, royalties earned under co-promotion agreements and profit splits on
certain products. The Company recognizes revenues under: (1) research and development agreements as
it performs the related research and development; (2) license fees over the life of the product
license; and (3) royalties under co-promotion agreements and profit splits as described below.
The Company is party to agreements with certain pharmaceutical companies under which it
receives payments based on sales or profits associated with the applicable products. The most
significant of these agreements are with Teva regarding generic Allegra and Kos regarding Niaspan
and Advicor. Alliance revenue is earned from these agreements at the time our third party partners
record sales and is based on pre-defined formulas contained in the agreements, as adjusted for our
estimates of reserves needed to state the Company’s revenues on a basis consistent with its other
revenue recognition policies. The estimates the Company makes to adjust its revenues are based on
information received from its partner, as well as its own internal information. Of total alliance
and development revenue, approximately 79% and 92% was earned from the alliances with Teva and Kos,
on an aggregate basis, for the six months ended December 31, 2006 and 2005 (unaudited),
respectively, and approximately 92%, 39% and 0% was earned from those alliances, in the aggregate,
for the fiscal years ended June 30, 2006, 2005 and 2004 respectively. Receivables related to
alliance and development revenue are included in “other receivables, net” in the consolidated
balance sheets. Selling and marketing expenses incurred under the co-promotion agreement with Kos
are included in selling, general and administrative expenses.
Other revenue primarily includes certain of the Company’s non-core operations, as well as
consulting fees earned from services provided to third parties. Our non-core operations include our
animal health business, which predominantly consists of generics, feed additives, agro products,
and vaccines, and our diagnostics, disinfectants, dialysis, and infusions business, and our
agrochemicals business. Consulting fees are recognized in the period in which the services are
provided.
(e) Sales Returns and Allowances
At the time of sale, the Company simultaneously records estimates for various costs, which
reduce product sales. These costs include estimates for price adjustments, product returns,
chargebacks, rebates, including Medicaid rebates, prompt payment discounts and other sales
allowances. In addition, the Company records allowances for shelf-stock adjustments when the
conditions are appropriate. Estimates for sales allowances such as product returns, rebates and
chargebacks are based on a variety of factors including actual return experience of that product or
similar products, rebate arrangements for each product, and estimated sales by our wholesale
customers to other third parties who have contracts with the Company. Actual experience associated
with any of these items may be different than the Company’s estimates. The Company regularly
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.
(f) Stock-Based Compensation
The Company adopted Financial Accounting Standards Board (the “FASB”) Statement of Financial
Accounting Standard (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (SFAS 123(R)), effective
July 1, 2005. SFAS 123(R) requires the recognition of the fair value of stock-based compensation
in net earnings. The Company has three stock-based employee compensation plans, two stock-based
non-employee director compensation plans and an employee stock purchase plan, which are described
more fully in Note 15. Stock-based compensation consists of
stock options, stock appreciation rights and the employee stock purchase plan. Stock options
and stock appreciation rights are granted to employees at exercise prices equal to the fair market
value of the Company’s stock at the dates of grant. Generally, stock options and stock appreciation
rights granted to employees fully vest ratably over the three years from the grant date and have a
term of 10 years. Annual stock options granted to directors vest and are generally exercisable on
the date of the first annual shareholders’ meeting immediately following the date of grant. The
Company recognizes stock-based compensation expense over the requisite service period of the
individual grants, which generally equals the vesting period. Prior to July 1, 2005, the Company
accounted 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. Under the
intrinsic value method, no stock-based employee compensation cost was reflected in net earnings.
For effects 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 stock-based
compensation (see Note 15).
(g) Research and Development
Research and development costs are expensed as incurred. These expenses include the costs of
the Company’s research and development efforts, acquired in-process research and development, as
well as costs incurred in connection with the Company’s third party collaboration efforts.
Pre-approved milestone payments due under contract research and development arrangements that are
paid prior to regulatory approval are expensed when the milestone is achieved. Once the product
receives regulatory approval, the Company records any subsequent milestone payments as intangible
assets.
(h) Advertising and Promotion Costs
Costs associated with advertising and promotions are expensed in the period in which the
advertising is used and these costs are included in selling, general and administrative expenses.
Advertising and promotion expenses totaled approximately $50,819 and
$28,406 for the six months
ended December 31, 2006 and 2005 (unaudited) and $59,240,
$52,006 and $45,637 for the fiscal years ended
June 30, 2006, 2005 and 2004, respectively.
(i) Income Taxes
Income taxes have been provided for using an asset and liability approach in which deferred
tax assets and liabilities are recognized for the 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 when, based on available evidence, it is “more-likely-than-not” that a portion of the
deferred tax assets will not be realized. Deferred tax assets and liabilities are measured using
enacted tax rates and laws.
In accordance with APB 23, incremental taxes have not been provided on undistributed earnings
of our international subsidiaries as it is our intention to permanently reinvest these earnings
into the respective businesses. At December 31, 2006, Barr has not provided for U.S. or foreign
income or withholding taxes that may be imposed on a distribution of such earnings. The
determination of the amount of unremitted earnings and unrecognized deferred tax liability for
temporary differences related to investments in these non-U.S.
subsidiaries is not practicable to
estimate.
The Company is currently being audited by the IRS for all periods subsequent to fiscal year
2004. Periods prior to fiscal 2005 have either been audited or are no longer subject to an IRS
audit. Audits in several state jurisdictions are currently underway
for tax years 2002 to 2005. The foreign jurisdictions with
significant operations currently being audited are Croatia for 2004 and 2005 and Poland for 2003.
We regularly assess the potential outcomes of these examinations and any future examinations for
the current or prior years in determining the adequacy of our provision for income taxes.
Accordingly, we assess the likelihood and amount of potential adjustments and adjust the income tax
provision, the current tax liability and deferred taxes in the period in which the facts that give
rise to a revision become known. Although the outcome of tax audits is always uncertain, the
Company believes that adequate amounts of tax have been provided for any expected adjustments.
The following is a reconciliation of the numerators and denominators used to calculate
earnings per common share (“EPS”) as presented in the consolidated statements of operations:
Numerator for basic and diluted earnings (loss) per share
Net earnings (loss)
$
(338,155
)
$
178,127
$
336,477
$
214,988
$
123,103
Earnings (loss) per common share — basic:
Numerator: Net earnings (loss)
$
(338,155
)
$
178,127
$
336,477
$
214,988
$
123,103
Denominator: Weighted average shares
106,377
104,219
105,129
103,180
101,823
Earnings (loss) per common share — basic
$
(3.18
)
$
1.71
$
3.20
$
2.08
$
1.21
Earnings (loss) per common share — diluted:
Numerator: Net earnings (loss)
$
(338,155
)
$
178,127
$
336,477
$
214,988
$
123,103
Denominator: Weighted average shares — diluted
106,377
106,984
107,798
106,052
106,661
Earnings (loss) per common share — diluted
$
(3.18
)
$
1.66
$
3.12
$
2.03
$
1.15
Calculation of weighted average
common shares — diluted
Weighted average shares
106,377
104,219
105,129
103,180
101,823
Effect of dilutive options and warrants
—
2,765
2,669
2,872
4,838
Weighted average shares — diluted
106,377
106,984
107,798
106,052
106,661
Not included in the calculation of
diluted earnings
(loss) per-share because their impact is antidilutive:
Stock options outstanding
1,833
23
66
84
57
During
the six months ended December 31, 2006 and 2005 (unaudited) and the fiscal years ended
June 30, 2006, 2005, and 2004, there were 357,273, 2,000,494, 2,838,738, 1,136,141, and 1,456,808
shares respectively, issued in the aggregate upon the exercise of stock options and under our
employee stock purchase plan.
(k) Cash and Cash Equivalents
Cash and cash equivalents, for the purpose of the balance sheet and the statement of cash
flows, consist of cash in hand and balances with banks, and highly liquid investments with
insignificant risk of changes in value and original maturities of three months or less from the
date of acquisition.
(l) Investments
in Marketable Securities, Debt and Equity Method Investments
Investments
in Marketable Securities and Debt
The Company’s investments in short-term marketable securities primarily consist of commercial
paper, money market investments, market auction debt securities, municipal bonds and federal agency
issues, which are readily convertible into cash. The Company also invests in long-term marketable
securities, including municipal bonds. Investments, which the Company has the ability and intent to
hold until maturity are classified as held to maturity. Held to maturity investments are recorded
at cost, adjusted for the amortization of premiums and discounts, which approximates market value.
Investments that are acquired principally for the purpose of generating a profit from short-term
fluctuations in price are classified as trading at fair value, with resultant gains or losses
recognized in current period income. Debt securities and other marketable securities are classified
as “available for sale” and,
accordingly, are recorded at current market value with offsetting adjustments to shareholders’
equity, net of income taxes. The cost of investments sold is determined by the specific
identification method.
Venture Funds and Other Investments
Investments in which the Company has significant influence over operating and financial
policies of the investee are accounted for under the equity method of accounting. Under this method
the Company records its proportionate share of income or loss from such investments in its results
for the period. Any decline in value of the equity method investments considered by management to
be other than temporary is charged to income in the period in which it is determined.
The Company makes investments, as a limited partner, in two separate venture capital funds as
part of its continuing efforts to identify new products, technologies and licensing opportunities.
The Company accounts for these investments using the equity method of accounting.
(m) Inventories
Inventories are stated at the lower of cost or market. Cost is determined on a first-in,
first-out (FIFO) basis. 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 records as part of cost of sales write-downs to lower of cost or
market.
(n) Credit and Market Risk
Financial instruments that potentially subject the Company to credit risk consist principally
of interest-bearing investments and trade receivables. The Company performs ongoing credit
evaluations of its customers’ financial condition and generally does not require collateral from
its customers.
(o) Fair Value of Financial Instruments
Cash, Accounts Receivable, Other Receivables and Accounts Payable — The carrying amounts of
these items are a reasonable estimate of their fair value.
Marketable Securities — Marketable securities are recorded at their fair value (see Note 7).
Other Assets — Investments that do not have a readily determinable market value are recorded
at cost, as it is a reasonable estimate of fair value or current realizable value.
Debt — The estimated fair values of the Company’s debt approximated $2,676,998, $14,204, and
$18,000 at December 31, 2006 and June 30, 2006 and 2005, respectively. These estimates were
determined by discounting anticipated future principal and interest cash flows using rates
currently available to the Company.
(p) Derivative Instruments
The Company uses derivative instruments for the purpose of hedging its exposure to foreign
exchange and interest rate risk. The Company’s derivative instruments include interest rate
forwards and swaps, forward rate agreements and foreign exchange forwards and options.
FASB
Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities as amended and interpreted (“SFAS
133”), requires companies to recognize all of their derivative instruments as either assets or
liabilities in the statement of financial position at fair value based on quoted market prices or
pricing models using current market rates. The accounting for changes (i.e., gains or losses) in
the fair value of a derivative instrument depends on whether the instrument has been designated and
qualifies as part of a hedging relationship and on the type of hedging relationship. For derivative
instruments that are designated and qualify as hedging instruments, a company must designate the
hedging instrument, as a fair value hedge, cash flow hedge or a hedge of a net investment in a
foreign operation. The designation is based upon the nature of the exposure being hedged.
For a derivative instrument that is designated and qualifies as a fair value hedge (i.e., an
instrument that hedges the exposure to changes in the fair value of an asset or a liability or an
identified portion thereof that is attributable to a particular risk), the gain or loss on the
derivative instrument as well as the offsetting loss or gain on the hedged item are recognized in
the same line item associated with the hedged item in earnings.
For a derivative instrument that is designated and qualifies as a cash flow hedge (i.e., an
instrument that hedges the exposure to variability in expected future cash flows that is
attributable to a particular risk), the effective portion of the gain or loss on the derivative
instrument is reported as a component of other comprehensive income and reclassified into earnings
in the same line item associated with the forecasted transaction in the same period or periods
during which the hedged transaction affects earnings.
For all hedging activities, the ineffective portion of a derivative’s change in fair value is
immediately recognized in other income (expense). For derivative instruments not designated as
hedging instruments, the gain or loss is recognized in other income (expense) during the period of
change.
Property, plant and equipment is recorded at cost, including the allocated portion of the
purchase price arising from the PLIVA acquisition. Depreciation is recorded on a straight-line
basis over the estimated useful lives of the related assets (3 to 20 years for machinery,
equipment, furniture and fixtures and 10 to 45 years for buildings and improvements). Amortization
of capital lease assets is included in depreciation expense. Leasehold improvements are amortized
on a straight-line basis over the shorter of their useful lives or the terms of the respective
leases, with such amortization periods generally ranging from 2 to 10 years. Maintenance and
repairs are charged to operations as incurred; renewals and betterments are capitalized.
(r) Acquisitions and Related Amortization Expense
The Company accounts for acquired businesses using the purchase method of accounting which
requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at
their respective fair values. The Company’s consolidated financial statements and results of
operations reflect an acquired business after the completion of the acquisition and are not
restated. The cost to acquire a business, including transaction costs, is allocated to the
underlying net assets of the acquired business in proportion to their respective fair values. Any
excess of the purchase price over the estimated fair values of the net assets acquired is recorded
as goodwill. Amounts allocated to acquired in-process research and development are expensed at the
date of acquisition. Intangible assets are amortized based generally on sales over the expected
life of the asset. Amortization expense is included in the cost of sales expense line of the
statement of operations. When the Company acquires net assets that do not constitute a business, no
goodwill is recognized.
The judgments made in determining the estimated fair value assigned to each class of assets
acquired and liabilities assumed, as well as asset lives, can materially impact the Company’s
results of operations. Accordingly, for significant items, the Company typically obtains assistance
from third party valuation specialists. Useful lives are determined based on the expected future
period of benefit of the asset, which considers various characteristics of the asset, including
projected cash flows.
(s) Asset Impairment
The Company reviews the carrying value of its long-lived assets for impairment annually and
whenever events and circumstances indicate that the carrying value of an asset may not be
recoverable from the estimated future cash flows expected to result from its use and eventual
disposition. In cases where undiscounted expected future cash flows are less than the carrying
value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the
fair value of assets. Fair value is defined as the market price. If the market price is not
available, fair value is estimated based on the present value of future cash flows.
The Company reviews goodwill for impairment annually or more frequently if impairment
indicators arise. Impairment testing of goodwill compares the fair value of the Company’s
reporting units to their carrying value. There has been no impairment of goodwill recorded.
The Company is involved in various patent, product liability and, commercial litigation and
claims, government investigations and other legal proceedings that arise from time to time in the
ordinary course of its business. The Company assesses, in consultation with counsel and in
accordance with SFAS No. 5, Accounting for Contingencies, the need to accrue a liability for such
contingencies and record a reserve when it determines that a loss related to a matter is both
probable and reasonably estimable. The Company’s assessment of contingencies involves judgments
about future events which are inherently unpredictable. The Company records anticipated recoveries
under existing insurance contracts when collection is reasonably assured.
(u) Pensions and Other Post Employment Benefits
In connection with the acquisition of PLIVA, the Company acquired and will maintain defined
benefit plans and other post-retirement benefits for employees of the acquired entity. The
Company’s net obligation in respect of defined benefit pension plans is calculated separately for
each plan by estimating the amount of future benefit that employees have earned in return for their
service in the current and prior periods. The benefit is discounted to determine its present value.
Discount rates are based on the market yields of high-quality corporate bonds in the country
concerned. The funded status for each plan is recognized in the Company’s consolidated balance
sheets.
For defined contribution plans, the company pays contributions to publicly or privately
administered pension insurance plans on a mandatory, contractual or voluntary basis. Once the
contributions have been paid, the company has no further payment obligations. The regular
contributions constitute net periodic costs for the year in which they are due and as such are
included in staff costs.
(v) Restructuring
When recording acquisitions, we may review the associated operations and implement plans to
restructure and integrate. For restructuring charges associated with a business acquisition that
are identified in connection with an acquisition, the related costs are recorded as
additional goodwill as they are considered to be liabilities assumed in the acquisition. All other
restructuring charges, all integration costs and any charges related to our pre-existing businesses
impacted by an acquisition are included in selling, general and administrative expense.
(w) New Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (the “FASB”) issued Interpretation No.
48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (“FIN
48”). FIN 48 clarifies the accounting for the uncertainty in recognizing income taxes in an
organization in accordance with FASB Statement No. 109 by providing detailed guidance for financial
statement recognition, measurement and disclosure involving uncertain tax positions. FIN 48
requires an uncertain tax position to meet a more-likely-than-not recognition threshold at the
effective date to be recognized both upon the adoption of FIN 48 and in subsequent periods. FIN 48
is effective for fiscal years beginning after December 15, 2006. As the provisions of FIN 48 will
be applied to all tax positions upon initial adoption, the cumulative effect of applying the
provisions of FIN 48 will be reported as an adjustment to the opening balance of retained earnings
for that fiscal year. The Company will adopt FIN 48 as of January 1, 2007 as required. Based on
our current assessment, and subject to any changes that may result from additional guidance, the
Company does not expect that the adoption of FIN 48 will materially affect our consolidated
financial statements for the historic operations of Barr. The Company is currently evaluating the
effect that the adoption of FIN 48 will have on the historic PLIVA operations and is not yet in a
position to calculate or reasonably estimate the impact of adoption, and notes that the effect of
such adjustments would most likely effect acquired goodwill.
In September 2006, the FASB issued Financial Accounting Standard (“FAS”) No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB
Statements No. 87, 88, 106, and 132(R), which requires an employer to recognize the over-funded or
under-funded status of a defined benefit postretirement plan (other than a multiemployer plan) as
an asset or liability in its statement of financial position and to recognize changes in that
funded status in the year in which the changes occur through comprehensive income of a business
entity. FAS No. 158 also requires an employer to measure the funded status of a plan as of the date
of its year-end statement of financial position, with limited exceptions. The effect of the
adoption of FAS No. 158 did not have a material effect on the Company’s consolidated financial
statements.
In September 2006, the FASB issued FAS No. 157, Fair Value Measurements, which defines fair
value, establishes a framework for measuring fair value in GAAP and expands disclosure about fair
value measurements. The statement is effective for fiscal years beginning after November 15, 2007.
The Company is currently evaluating this statement and the effect on its consolidated financial
statements.
In September 2006, the Securities and Exchange Commission (“SEC”) staff issued Staff
Accounting Bulletin (“SAB”) 108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 requires that
public companies utilize a “dual-approach” to assessing the quantitative effects of financial
misstatements. This dual approach includes both an income statement focused assessment and a
balance sheet focused assessment. The guidance in SAB 108 must be applied to annual financial
statements for fiscal years ending after November 15, 2006. Adoption of SAB 108 did not have a
material effect on the Company’s consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159
(“SFAS 159”) The Fair Value Option for Financial
Assets and Financial Liabilities, providing companies with an
option to report selected financial assets and liabilities at fair
value. The Standard’s objective is to reduce both complexity in
accounting for financial instruments and the volatility in earnings
caused by measuring related assets and liabilities differently.
Generally accepted accounting principles have required different
measurement attributes for different assets and liabilities that can
create artificial volatility in earnings. SFAS 159 helps to
mitigate this type of accounting-induced volatility by enabling
companies to report related assets and liabilities at fair value,
which would likely reduce the need for companies to comply with
detailed rules for hedge accounting. SFAS 159 also establishes
presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. The Standard
requires companies to provide additional information that will help
investors and other users of financial statements to more easily
understand the effect of the Company’s choice to use fair value
on its earnings. It also requires entities to display the fair value
of those assets and liabilities for which the Company has chosen to
use fair value on the face of the balance sheet. SFAS 159 is
effective for fiscal years beginning after November 15, 2007.
The Company is currently evaluating the impact of the adoption of
this statement on its consolidated financial statements.
On October 24, 2006, the Company’s wholly owned subsidiary, Barr Laboratories Europe B.V.
(“Barr Europe”), completed the acquisition of PLIVA, headquartered in Zagreb, Croatia. PLIVA
manufactures and supplies a wide range of pharmaceutical products in
more than 30 countries.
The acquisition expands the presence of the Company’s global generic pharmaceutical business, provides
vertical integration capabilities and will allow the Company to capitalize on lower cost area and
tax planning opportunities. Under the terms of the cash tender offer, Barr Europe made a payment of
approximately $2,377,773 based on an offer price of HRK 820 (Croatian Kuna (“HRK”)) per share for
all shares tendered during the offer period. The transaction closed with 96.4% of PLIVA’s total
outstanding share capital being tendered to Barr Europe (17,056,977 of 17,697,419 outstanding
shares at the date of the acquisition). Subsequent to the close of the cash tender offer, Barr
Europe purchased an additional 149,953 shares on the Croatian stock market for $21,937. As the
acquisition was structured as a purchase of equity, the amortization of purchase price assigned to
assets in excess of PLIVA’s historic tax basis will not be deductible for income tax purposes. With
the addition of the open market purchases and the treasury shares held by PLIVA, Barr Europe owned
or controlled 97.0% of PLIVA’s voting share capital as of December 31, 2006.
The
purchase price of the acquisition at October 24, 2006 was
$2,407,473.
Cash consideration for 96.4% of common shares
$
2,377,773
Transaction costs
29,700
Total purchase price for 96.4% of common shares
$
2,407,473
Barr Europe expects to purchase the remaining 3.0% of outstanding common shares (531,989
shares) of PLIVA at a price of no more than HRK 820 per share, under the provisions of Croatian
law, by June 30, 2007 for approximately $80,000.
In accordance with SFAS No. 141, Business Combinations, the Company used the purchase method
of accounting to account for this transaction. Under the purchase method of accounting, the assets
acquired and liabilities assumed from PLIVA were recorded at the date of acquisition, at their
respective fair values. The purchase price plus acquisition costs exceeded the fair values of
acquired assets and assumed liabilities. This resulted in the recognition of goodwill in the amount
of $215,998. The total purchase price, including acquisition costs of
$29,700, less cash acquired
of $191,055, was $2,216,419. The operating results of PLIVA from
October 25, 2006 to December 31,2006 are included in the consolidated financial statements subsequent to the October 24, 2006
acquisition date.
The purchase price allocation of the assets acquired and liabilities
assumed on October 24, 2006 was as
follows:
Current assets (excluding cash and inventories)
$
337,954
Inventories (1)
345,122
Property, plant & equipment (2)
697,416
Identifiable intangible assets (3)
983,856
Other non-current assets, including deferred tax assets
120,245
In-process research & development (4)
378,331
Goodwill (5)
215,998
Total assets acquired
3,078,922
Current liabilities, excluding restructuring
(330,946
)
Restructuring costs (6)
(27,104
)
Deferred tax liabilities
(284,503
)
Other
non-current liabilities, including long-term debt (7)
(178,457
)
Total liabilities assumed
(821,010
)
Total minority interest
(41,493
)
Net assets acquired
$
2,216,419
The above purchase price allocation is preliminary and is based on the information that was
available as of the acquisition date to estimate the fair value of assets acquired and liabilities
assumed. Management believes that information provides a reasonable basis for allocating the
purchase price but the Company is awaiting additional information necessary to finalize the
purchase price allocation. The fair values reflected above will be adjusted upon the final
valuation. Such adjustments could be significant. The Company expects to finalize the valuation
and complete the purchase price allocation as soon as possible but no later than one-year from the
acquisition date.
(1) The fair value of acquired inventory was determined as follows:
§
Raw materials — valued at current replacement cost.
§
Work in progress — valued at the expected selling price of the inventory less the
cost to complete, cost of disposal and reasonable profit on the selling effort of the
acquiring entity.
§
Finished & merchandised goods — valued at expected selling price less the cost of
disposal and a reasonable profit for the selling effort.
(2) Fixed assets were valued at value-in-use, unless there was a known plan to dispose of an
asset. Assets to be disposed of were valued at prevailing market rates, less cost to sell, or
for no value, if to be abandoned.
(3) Components of the fair value of acquired intangible assets are as follows:
Weighted-
Average
Amortization
Period (Years)
Trade names
$
75,600
Indefinite
Existing products and product rights
786,948
10
Land usage
rights
83,386
99
Other intangible assets
38,374
6
Total identifiable intangible assets
$
984,308
In valuing the trade names and related trademarks, the Company applied the relief-from-royalty
method. The fair value of the existing products was determined based on the excess cash flow
method, a form of the income approach. Other intangibles consist primarily of active
pharmaceutical ingredient (“API”) intangible assets, contractual royalty payments, and
contractual milestone payments. The fair value of API intangible assets was determined using
the relief from royalty method. The fair value of contractual milestone and royalty payments
were estimated using an income approach through a discounted cash flow analysis on a
payment-by-payment basis.
(4) The fair value of the acquired IPR&D was based on the excess cash flow method on a
project-by-project basis. This amount was written-off upon acquisition as research and
development expense because the acquired products had not received approval from the applicable
regulators, were incomplete and had no alternative future use.
(5) 100% of the goodwill has been assigned to the Company’s Generic Pharmaceuticals operating
segment. None of the goodwill is deductible for income tax purposes.
(6) Included in accrued liabilities and other liabilities on the consolidated balance sheet are
restructuring costs that impacted goodwill. These exit costs are associated with involuntary
termination benefits for PLIVA employees and costs to exit certain activities of PLIVA and were
recorded as a liability in conjunction with recording the initial
purchase price (see Note 18).
(7) Debt
was recorded at quoted market prices or management’s best
estimate of fair value based on prevailing borrowing rates of PLIVA.
Prior
to consummating the acquisition, Barr and PLIVA had a pre-existing
contractual relationship to develop, supply and market a
biopharmaceutical product. The Company believes the terms and
conditions of the pre-existing relationship are consistent with other
relationships the Company has with other companies, and accordingly
has not recorded a settlement gain or loss.
The purchase price of $21,937 for the 149,953 shares acquired between October 25, 2006 and
December 31, 2006 has been allocated to the estimated fair values using the same methodology as the
October 24, 2006 acquisition. The fair values attributed to IPR&D, which was capitalized as an
asset upon acquisition and expensed in the consolidated statement of
operations for the six months ended
December 31, 2006, was $2,342. The additional share purchases resulted in incremental goodwill of
$7,381.
The following pro forma financial information presents the combined results of
operations of the Company and PLIVA as if the acquisition had occurred as of the beginning of the
periods presented. The pro forma financial information is not necessarily indicative of
what the Company’s consolidated results of operations actually would have been had it completed the
acquisition at the dates indicated. In addition, the pro forma financial information
does not purport to project the future results of operations of the Company.
Barr Pharmaceuticals, Inc. and Subsidiaries
Pro Forma Condensed Combined Consolidated Statements of Operations
(in thousands, except per share data)
The
unaudited pro forma financial information above includes the
following material, non-recurring charges directly attributable to
the accounting for the acquisition: amortization of the step-up of
inventory of $89,560 for the six months ended December 31, 2006 and
2005 and the year ended June 30, 2006; and
IPR&D charges of $380,673 for the six months ended
December 31, 2006 and 2005 and the year ended June 30, 2006.
Shire PLC Product Acquisition and Development Agreement
On August 14, 2006, the Company entered into an arrangement with Shire PLC (“Shire”)
consisting of a product acquisition and supply agreement for Adderall IR® tablets, a product
development and supply agreement for six proprietary products and a settlement and licensing
agreement relating to the resolution of two pending patent cases involving Shire’s Adderall XR®.
Under the terms of the product acquisition agreement, the Company recorded an intangible asset
in the amount of $63,000 related to the acquisition of Adderall IR.
In addition, under the terms of the product development agreement, the Company received an
upfront non-refundable payment of $25,000 and could receive, based on future incurred research and
development costs and milestones, an additional $140,000 over the next eight years subject to
annual caps of $30,000. In exchange for its funding commitment, Shire obtained a royalty free
license to the products identified in the product development agreement in its defined territory
(which is generally defined to include all markets other than North America, Central Europe,
Eastern Europe and Russia). The Company recognizes revenue under the product development
arrangement described above, including the $25,000 upfront payment, as it performs the related
research and development. These amounts will be reflected in the “alliance and development revenue”
line item in the Company’s consolidated statement of operations as costs are incurred over the life
of the agreement. Included in other liabilities at December 31,2006 is $24,565 of deferred revenue
related to the above mentioned payments under the product development agreement. The Company also
entered into purchase and supply agreements with Shire in conjunction with the product acquisition
and product development agreements.
The settlement and licensing agreement relating to Adderall XR grants the Company certain
rights to launch a generic version of Adderall XR. The license is royalty-bearing and exclusive
during the Company’s FDA granted six-month period of exclusivity and is non-exclusive and
royalty-free thereafter.
Fiscal 2006 Acquisitions
FEI Women’s Health, LLC
On November 9, 2005, the Company acquired all of the outstanding equity interests of FEI
Women’s Health, LLC (“FEI”). FEI is the owner of the ParaGard® T 380A (Intrauterine
Copper Contraceptive) IUD, which is approved for continuous use for the prevention of pregnancy for
up to 10 years.
In accordance with SFAS No. 141, Business Combinations, the Company used the purchase method
of accounting to account for this transaction. Under the purchase method of accounting, the assets
acquired and liabilities assumed from FEI were recorded at the date of acquisition, at their
respective fair values. In connection with the acquisition the Company engaged a valuation firm to
assist management in its determination of the fair value of certain assets and liabilities of FEI.
The purchase price plus acquisition costs exceeded the fair values of acquired assets and assumed
liabilities. This resulted in the recognition of goodwill in the amount of $29,921. The total
purchase price, including acquisition costs of $5,112 less cash acquired of $4,372, was $289,730.
The consolidated financial statements issued after completion of the acquisition reflect these
values. The operating results of FEI are included in the consolidated financial statements
subsequent to the November 9, 2005 acquisition date.
The fair values of the assets acquired and liabilities assumed on November 9, 2005 were as
follows:
Current assets (excluding cash)
$
30,876
Property and equipment
1,955
Intangible asset — ParaGard T 380A IUD
256,000
Goodwill
29,921
Other assets
4,677
Total assets acquired
$
323,429
Current liabilities
10,780
Other liabilities
22,919
Total liabilities assumed
33,699
Net assets acquired
$
289,730
The purchase price has been allocated based on the fair value of assets acquired and
liabilities assumed as of the date of acquisition.
In accordance with the requirements of SFAS No. 142, Goodwill and Other Intangible Assets, the
goodwill associated with the acquisition will not be amortized. The ParaGard T 380A IUD intangible
asset will be amortized based on estimated product sales over its estimated 20-year life. Goodwill
and the intangible asset resulting from this acquisition have been allocated to our proprietary
reporting unit.
Products from Organon Ltd., Organon USA Inc. and Savient Pharmaceuticals, Inc.
On June 15, 2005, the Company entered into a non-binding Letter of Intent with Organon
(Ireland) Ltd., Organon USA Inc. (“Organon”) and Savient Pharmaceuticals, Inc. (“Savient”) to
acquire the New Drug Application (“NDA”) for Mircette®, obtain a royalty-free patent license to
promote Mircette in the United States and dismiss all pending litigation between the parties in
exchange for a payment by the Company of $152,750. At the time the Letter of Intent was signed,
because the proposed transaction included, as one of its components, a payment in settlement of
litigation, it was presumed under GAAP to give rise to a “probable loss,” as defined in SFAS No. 5,
Accounting for Contingencies. Based on valuations of the assets the Company acquired and total
estimated payments, the Company recorded a charge of $63,238 as of June 30, 2005 to reflect the
litigation settlement.
On December 2, 2005, the Company and Organon finalized the agreement that gave the Company
exclusive rights to Mircette. The agreement also terminated the ongoing patent litigation regarding
the Company’s generic version of Mircette, which is marketed under the trade name Kariva®. The
agreement called for the Company to pay Organon $139,000 and Savient $13,750. Based on final
valuations of the asset, the Company has recorded an intangible asset in the amount of $88,700 and
recorded an additional charge of $813 for the difference between the estimated amounts recorded as
a probable loss at June 30, 2005 and the final loss amount. The Company also incurred approximately
$1,800 of additional legal and accounting costs related to the transaction. Additionally, the
Company was reimbursed $11,000 from a third party for partial reimbursement of the Company’s
recorded charge on this transaction. This reimbursement was reflected as a reduction of selling,
general and administrative expenses.
Fiscal 2005 and 2004 Acquisitions
Urinary Incontinence Product
In June 2002, the Company acquired certain assets and liabilities from Enhance
Pharmaceuticals, Inc. including a Product Development and License Agreement with Schering AG. In
March 2004, Barr and Schering agreed that Barr would acquire the worldwide rights to the product,
which terminated the Product Development and License Agreement. Accordingly, during fiscal 2004
the Company wrote-off, as research and development expense, the remaining $22,333 of net book value
associated with the initial intangible asset for the product license.
Endeavor Pharmaceuticals, Inc.
On November 20, 2003, the Company completed the acquisition of substantially all of the assets
of Endeavor Pharmaceuticals, Inc. (“Endeavor”). The total purchase price of $35,600 was allocated
to acquired in-process research and development. This amount was written-off upon acquisition as
research and development expense because the acquired products had not received approval from the
FDA, were incomplete and had no alternative future use. The operating results of Endeavor are
included in the consolidated financial statements subsequent to the November 20, 2003 acquisition
date.
Women’s Capital Corporation
In February 2004, the Company acquired 100% of the outstanding shares of Women’s Capital
Corporation (“WCC”), a privately held company that marketed the prescription version of Plan
B®, an emergency oral contraceptive product and had filed an application with the FDA
for an over-the-counter version of Plan B. As part of the allocation of the purchase price, an
intangible asset of $2,200 representing the fair value of the currently marketed prescription
version of Plan B was amortized over one year during fiscal 2005 and 2004. An acquired in-process
research and development asset in the amount of $10,300, representing the estimated fair value of
the unapproved over-the-counter version of Plan B, was written-off upon acquisition as research and
development expense because the project was incomplete and had alternative future use. The
operating results of WCC are included in the consolidated financial statements subsequent to the
February 25, 2004 acquisition date.
Certain Assets from Gynétics, Inc.
In February 2004, the Company paid $4,200 to purchase certain assets from Gynétics, Inc. that
were being used to develop, manufacture, distribute, promote, market, use and sell the emergency
oral contraceptive known as Preven®. The Company has consolidated its emergency
contraception business in the Plan B product. Accordingly, for the year ended June 30, 2004, the
Company recorded an expense for the $4,200 purchase price as selling, general and administrative
expense.
In March 2004, the Company acquired from Galen (Chemicals) Limited the exclusive rights to
manufacture and market Loestrin® products in the United States and Loestrin and
Minestrin® products in Canada for a $45,000 cash payment. These product rights are
recorded as other intangible assets on the consolidated balance sheets and are being amortized
based on estimated product sales over an estimated useful life of 10 years.
Buy-Out of Royalty Interest from Eastern Virginia Medical School
In September 2004, the Company exercised its option and paid $19,250 to buy-out the future
royalty interests on SEASONALE, from the former patent holder. This payment is recorded as other
intangible assets on the consolidated balance sheets and is being amortized based on estimated
product sales over an estimated useful life of 15 years.
Products from King Pharmaceuticals, Inc.
In November 2004 and December 2004, the Company acquired the exclusive rights in the United
States for Prefest® Tablets and Nordette® Tablets from King Pharmaceuticals, Inc. for $15,000 and
$12,000, respectively. These product rights are recorded as other intangible assets on the
consolidated balance sheets and are being amortized based on estimated product sales over an
estimated useful life of 15 years.
(3) Derivative Instruments
Interest Rate Risk
The Company’s interest-bearing investments, loans, and borrowings are subject to interest rate
risk. The Company invests and borrows primarily on a short-term or variable rate basis. Depending
upon market conditions, the Company may fix the interest rate it either pays or receives by
entering into fixed-rate investments and borrowings or through the use of derivative financial
instruments.
In connection with the PLIVA acquisition, the Company assumed a EUR 75 million fixed rate bond
issued in May 2004, bearing a fixed interest rate of 5.75% per annum payable every six months, and
an interest rate swap under which it pays a floating rate and receives a fixed rate. The Company also assumed forward interest rate agreements by which PLIVA has fixed interest rates
on certain known future payments, which are variable under the debt terms.
All interest rate derivatives
described above are measured at fair value and are reported as
assets or liabilities on the balance sheet. These derivatives are not
designated for hedge accounting under SFAS 133, resulting in their changes in
fair value being reported in other (expense) income.
Foreign Exchange Risk
The Company seeks to manage potential foreign exchange risk from foreign subsidiaries by
matching each such subsidiary’s revenues and costs in its functional currency. Similarly, the
Company seeks to manage the foreign exchange risk relating to assets and liabilities of its foreign
subsidiaries by matching the assets and liabilities in the subsidiary’s functional currency. When
this is not practical, the Company uses foreign exchange forward contracts or options to manage its
foreign exchange risk.
To
manage foreign exchange risk related to the purchase price of PLIVA,
the Company purchased a currency option in June 2006 and entered into
forward exchange contracts during the six months ended
December 31, 2006 (see Note 17).
In connection with the PLIVA acquisition, the Company assumed foreign exchange forward
contracts hedging economically forecasted transactions occurring at various dates through 2007 that are
denominated in foreign currencies. At December 31, 2006, none of the company’s remaining foreign
exchange derivatives were eligible for hedge accounting, resulting in their changes in fair value
being reported in other (expense) income.
All foreign exchange derivatives instruments described above are measured at fair value and
are reported as assets or liabilities on the balance sheet. At December 31, 2006,
none of the Company’s foreign exchange derivatives were classified as formal hedges, resulting in
their changes in fair value being reported in other (expense) income. Economically, the gains or
losses realized on these instruments at maturity are intended to offset the losses or gains of the
transactions which they are hedging.
The table below summarizes the respective fair values of the derivative instruments described
above at December 31, 2006:
Depreciation
expense was $35,177, $16,966, $35,850, $31,591 and $25,678 for the six months
ended December 31, 2006 and 2005 (unaudited) and the fiscal years ended June 30, 2006, 2005 and
2004, respectively.
(7) Investments in Marketable Securities, Debt and Equity Method Investments
Investments in Marketable Securities and Debt
Trading Securities
The fair value of marketable securities classified as trading at
December 31, 2006, June 30, 2006 and 2005 were $3,718, $0
and $0,
which is included as a component of current marketable securities. Net losses for the six-month
period ending December 31, 2006, June 30, 2006 and 2005 were $572, $0
and $0, which is included as a component of other (expense)
income. Of such amount, $591 is unrealized and relates to securities still held at December 31,2006.
Available-for-Sale Securities
Available-for-sale investments are carried at fair value; however equity securities that do
not have readily determinable fair values are measured at cost adjusted for impairment. The
aggregate carrying values of equity securities that do not have readily determinable fair values
were $150, $0, and $0 at December 31, 2006, June 30, 2006 and 2005, respectively.
Available-for-sale equity securities include amounts invested in connection with the Company’s
excess 401(k) and other deferred compensation plans.
Available-for-sale debt securities at December 31, 2006 include $617,286 in commercial paper
and market auction debt securities and $50,419 in municipal and corporate bonds and federal agency
issues. The commercial paper and market auction debt securities are readily convertible into cash
at par value with interest rate reset or underlying maturity dates ranging from January 1, 2007 to
February 11, 2008. The municipal and corporate bonds and federal agency issues have maturity dates
ranging from January 1, 2007 to April 1, 2009.
The realized gains from the sale of available-for-sale investments for the six-month period
ending December 31, 2006 and 2005 and for the fiscal years ended June 30, 2006, 2005 and 2004 were
($17), $0, $11, $0, and $0, respectively. The amortized cost, gross unrealized gains and losses
recorded as a component of other comprehensive income, and estimated market values for
available-for-sale securities at December 31, 2006, June 30, 2006 and 2005 are as follows:
The Company did not sell or purchase any held-to-maturity investments or transfer any
securities between available-for-sale and held-to-maturity during the six-month period ending
December 31, 2006 and 2005 or the periods ending June 30, 2006, 2005 or 2004. The cost of
investments sold is determined by the specific identification method.
The following table summarizes the contractual maturities of held-to-maturity debt securities
at December 31, 2006:
Maturities
Less than one year
15
One to two years
257
Two to five years
31
Total
303
Equity Method Investments
Medika d.d.
Through the acquisition of PLIVA, the Company acquired an ownership interest in Medika d.d
(“Medika”), which is a wholesaler that supplies pharmacies, hospitals and other health institutions
with a wide range of medical merchandise. As of December 31, 2006, the Company held a 24.7%
ownership interest in Medika, which equated to a $14,716 fair value based on the closing bid price
for Medika shares quoted on the Zagreb Stock Exchange.
This investment is accounted for under the equity method whereby the Company recognizes its
proportionate shares of Medika’s profit or loss. The Company eliminates unrealized profits relating
to the sale of goods to Medika from the Generics segment. The following is a summary of the
activity in the Company’s investment in Medika:
The Company has made investments in two separate venture capital funds, Commerce Health
Ventures, L.P. and New Spring Ventures, L.P., as part of its continuing efforts to identify new
products, technologies and licensing opportunities. These investments are accounted for under the
equity method whereby the Company recognizes its proportionate share of each venture’s profit or
loss. As of December 31, 2006, June 30, 2006 and 2005, the Company had carrying values of $8,866,
$9,235, and $4,155 in Commerce Health Ventures, L.P., and $9,788, $9,802, and $3,086 in New Spring
Ventures, L.P.
Total identifiable intangible
assets, less accumulated
amortization
$
1,474,170
$
417,258
$
98,343
As a result of the PLIVA acquisition the
Company recorded intangible assets in the amount of $983,856 representing the fair value for
trade names, existing products and product rights, land usage rights and other intangible assets
acquired during the six-month period ending December 31, 2006.
Under the terms of the product acquisition agreement with Shire plc the Company recorded an intangible asset in the amount of $63,000
related to the acquisition of Adderall IR during the six-month
period ending December 31, 2006.
As a result of the FEI acquisition during the second quarter of fiscal 2006, the Company
recorded an intangible asset in the amount of $256,000 in recognition of the fair value for the
ParaGard IUD product rights acquired.
In December 2005, the Company finalized an agreement that gave the Company exclusive rights to
Mircette. The agreement also terminated the ongoing patent litigation regarding the Company’s
generic version of Mircette, which is marketed under the trade name Kariva®. Based on final
valuations of the asset, the Company recorded an intangible asset in the amount of $88,700.
The annual estimated amortization expense for the next five years on finite lived intangible
assets is as follows:
The Company’s product licenses, product rights, land use rights and other finite lived intangible
assets have weighted average useful lives of approximately 10, 17, 99 and 10 years, respectively.
Amortization expense associated with these acquired intangibles was
$37,192, $8,273, $25,784,
$13,354 and $6,269 for the six months ended December 31, 2006 and 2005 (unaudited), and fiscal
years ended June 30, 2006, 2005 and 2004, respectively. During the six months ended December 31,2006the Company revised the presentation of amortization expense to include this item within cost
of sales instead of selling, general and administrative expense. The presentation for the
six months
ended December 31, 2005 (unaudited) and fiscal years 2006, 2005 and 2004 was reclassified to
conform to that of the six months ended December 31, 2006.
(9) Solvay Arbitration Award
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 disputed the
Company’s right to terminate the relationship, claiming it was entitled to substantial damages and
initiated formal arbitration proceedings. The arbitration hearing was held in January 2004. On June17, 2004, the arbitration panel determined that the Company did not properly terminate its contract
with Solvay and awarded Solvay $68,000 in monetary damages to be paid over sixteen months. The
Company has included these amounts in selling, general and administrative expenses on its statement
of operations.
Less: current installments of debt
and capital lease obligations
742,445
8,816
5,446
Total
long-term debt and capital lease obligations
$
1,937,215
$
7,431
$
15,493
(a) On July 21, 2006, the Company entered into unsecured senior credit facilities (the “Credit
Facilities”) pursuant to which the lenders provided the Company with an aggregate amount not to
exceed $2,800,000. Of such amount, $2,000,000 was in the form of a five-year term facility,
$500,000 was in the form of a 364-day term facility and $300,000 was in the form of a five-year
revolving credit facility. In connection with the close of the PLIVA acquisition, on October 24,2006, the Company drew $2,000,000 of the five-year term facility and
$415,703 of the 364-day term
facility, which bear variable interest rates of LIBOR plus 75 basis points (6.13% at December 31,2006). The Company will repay the outstanding principal amount of the five-year term facility in 18
consecutive 2.50% quarterly installments of $50,000 with one installment at maturity of the
remaining outstanding principal amount. The Credit Facilities include customary covenants,
including financial covenants limiting the total indebtedness of the Company on a consolidated
basis.
(b) In
November 2006, the Company made an $8,000 payment in complete satisfaction of the senior
unsecured notes.
(c) In February 2004, the Company acquired all of the outstanding shares of WCC. In connection
with that acquisition, a four-year $6,500 promissory note was issued to WCC shareholders. The note
bears a fixed interest rate of 2%. The entire principal amount and all accrued interest is payable
on February 25, 2008.
(d) The Company has certain capital lease obligations for machinery, equipment and buildings
in the United States and the Czech Republic. These obligations were established using interest
rates available to the Company at the inception of each lease.
The Company’s long-term debt includes the following liabilities incurred by PLIVA prior to the
acquisition:
(e) In May 2004,
PLIVA issued Euro denominated fixed rate bonds with a face value of
EUR 75,000 ($98,749 based on the exchange rate in effect at December 31,2006). The bonds will mature in 2011 and bear a fixed interest rate of 5.75% payable
semiannually. At the PLIVA acquisition date, the bonds were recorded
at their fair value pursuant to the provisions of SFAS No. 141. The fair
value was $101,910 based on the prevailing market price of the bonds.
The resulting premium, $3,161, will be amortized over the remaining life of the bonds. Amortization for the six months
ended December 31, 2006 was $130.
(f) On October 28, 2004, PLIVA entered into a dual-currency syndicated term loan facility
pursuant to which the lenders provided the borrowers with an aggregate amount not to exceed
$250,000, available to be drawn in either US dollars or Euros. The facility has a five-year term
and bears a variable interest rate based on LIBOR or Euribor plus 70 basis points. As of December31, 2006, there was $59,873 outstanding with an effective interest
rate of 6.13% and the Euro equivalent to $26,414
outstanding with an effective interest rate of 4.40%. The facility includes customary covenants.
(g) In December 1998, PLIVA initiated, and in June 2003 updated, a commercial paper program
that provides for an aggregate amount of Euro denominated financing
not to exceed EUR 250,000 ($329,163 based on the exchange rate in
effect at December 31, 2006) and bears a variable
interest rate. Currently, there is $26,344 outstanding yielding 4.51% that is due on July 4,2007.
(h) On September 9, 2006, PLIVA entered into a dual currency term loan facility pursuant to
which the lenders provided the borrowers an aggregate amount not to exceed $25,000, available to be
drawn in either US dollars or Euros. The facility has a one-year term and bears a variable interest
rate based on LIBOR or Euribor plus a margin which is negotiated at the time the facility is drawn.
As of December 31, 2006, there was $25,000 outstanding with an effective interest rate of 5.35%
plus a negotiated margin. The facility includes customary covenants.
(i) In
June 2005, PLIVA entered into a EUR 30,000 multi-currency
revolving credit facility ($39,500 based on the exchange rate in
effect at December 31, 2006).
The facility matures on December 31, 2007 and bears a variable interest rate based on LIBOR,
Euribor or another relevant reference rate plus a margin which is negotiated at the time the
facility is drawn. As of December 31, 2006, there was Euro
equivalent to $13,167 outstanding with an effective
interest rate of 3.63% plus a negotiated margin. The facility includes customary covenants.
Principal maturities of existing long-term debt and amounts due on capital leases for the next
five years and thereafter are as follows:
Comprehensive income is defined as the total change in shareholders’ equity during the period
other than from transactions with shareholders. For the Company, comprehensive income is comprised
of net income, unrealized gains (losses) on securities classified for SFAS No. 115 purposes as
“available for sale”, unrealized gains (losses) on pension and other post employment benefits and
foreign currency translation adjustments.
Accumulated other comprehensive income consists of the following:
Net unrealized gain (loss) on
marketable securities net of tax
expense (benefit) $21, $(54), $106, $(320), and $102
105
(94
)
184
(561
)
179
Net unrealized gain on
currency translation adjustments net of tax
expense $12,329, $0, $0, $0, and $0
76,850
—
—
—
—
Net unrealized gain on pension
and other post employment benefits net of tax
expense $11, $0, $0, $0, and $0
22
—
—
—
—
Net unrecognized gain (loss)
76,977
(94
)
184
(561
)
179
Ending Balance
$
76,600
$
(655
)
$
(377
)
$
(561
)
$
—
(13) Related-party Transactions
Dr. Bernard C. Sherman and Jack M. Kay
The Company purchases bulk pharmaceutical materials and sells certain pharmaceutical products
and bulk pharmaceutical materials to companies owned or controlled by Dr. Bernard C. Sherman. Dr.
Sherman was a member of the Company’s Board of Directors until October 24, 2002 and is the
principal stockholder of Sherman Delaware, Inc., which owned approximately 5.0% of the Company’s
outstanding common stock at December 31, 2006.
In addition, Jack M. Kay, a former member of the Board of Directors, is president of Apotex,
Inc., one of the companies owned or controlled by Dr. Sherman. The Company entered into an
agreement with Apotex, Inc. to share litigation and related costs in connection with the Company’s
Fluoxetine (generic Prozac) patent challenge. Under this agreement certain costs were shown as a
reduction to operating expenses while other costs were included as cost of sales. Separately, the
Company receives a royalty on one of its products marketed and sold by Apotex, Inc. in Canada.
In connection with the PLIVA acquisition, the FTC required Barr and PLIVA, as a condition to
approving the acquisition, to divest certain products that the FTC viewed as overlapping and
potentially anti-competitive if held within the combined company. Following this directive, the
Company sold two of its products to Apotex, Inc. for $5,200.
Recovery of shared litigation costs included
in operating expenses
$
—
$
—
$
13
$
77
$
1,004
Profit split
(income) expense charged to cost of goods
$
(283
)
$
(333
)
$
(586
)
$
1,027
$
3,680
Royalty revenue
$
238
$
349
$
557
$
216
$
295
One member of the Company’s Board of Directors is a partner at a law firm utilized by the
Company for certain patent and litigation services. Expenses related to these services were $59,
$346, $1,026, $124 and $0 for the six months ended December 31, 2006 and 2005 (unaudited), and the
fiscal years ended June 30, 2006, 2005 and 2004, respectively. As of December 31, 2006, June 30,2006 and 2005, amounts owed to the law firm totaled approximately $0, $99, and $124, respectively.
The Company has an equity investment in Medika d.d. and sells products to Medika primarily
through its Generics segment. The following transactions were carried out with Medika d.d for the
period from October 25, 2006 to December 31, 2006:
Sales of goods and services:
$
6,532
Year-end receivables:
$
27,079
Purchases of goods and services:
$
5
Year-end liabilities:
$
1
(14) Income Taxes
A summary of the components of income tax expense is as follows:
The provision for income taxes differs from amounts computed by applying the statutory federal
income tax rate to earnings before income taxes due to the following:
State income taxes, net of federal income tax effect
3,369
7,968
14,099
9,092
6,687
Tax credits
(5,500
)
(2,000
)
(2,778
)
(6,900
)
(5,900
)
Foreign rate differential
139,394
—
—
—
—
Domestic
manufacturers deduction
(IRC Section 199)
(1,110
)
(1,957
)
(3,661
)
—
—
Change in
valuation allowance
5,353
—
—
—
—
Write-off of
in-process research and development
—
—
—
—
3,605
Other, net
(503
)
(376
)
(4,221
)
(2,761
)
(1,109
)
Total
$
34,505
$
101,507
$
186,471
$
114,888
$
71,337
Included in the foreign rate differential is $80,624 related to
the foreign in-process research and development non-cash charge to income.
In accordance with APB 23, incremental taxes have not been provided on undistributed
earnings of our international subsidiaries as it is our intention to permanently reinvest these
earnings into the respective businesses. At December 31, 2006 Barr has not provided for U.S. or
foreign income or withholding taxes that may be imposed on a distribution of such earnings. The
determination of the amount of unremitted earnings and unrecognized deferred tax liability for
temporary differences related to investments in these non-U.S. subsidiaries is not practical to
estimate.
At December 31, 2006, as a result of certain acquisitions, the Company had cumulative
regular U.S. and State net operating loss carryforwards of approximately $94,209 and $163,281,
respectively, which will expire in the years 2012 to 2025. At June 30, 2006, the Company had
cumulative regular U.S. and State net operating loss carryforwards of approximately $6,373 and
$18,347, respectively, which will expire in the years 2018 to 2023. At June 30, 2005the Company
had cumulative regular US and State net operating loss carryforwards of approximately $8,284 and
$18,347, respectively, which will expire in the years 2018 to 2023. There is an annual limitation
on the utilization of the U.S. net operating loss carry forward, which is calculated under Internal
Revenue Code Section 382.
At December 31, 2006, as a result of the acquisition of PLIVA, the Company had cumulative
foreign net operating loss carryforwards of approximately $237,183 in various jurisdictions that
expire from 2007 to 2020.
The Company has established a valuation allowance to reduce the deferred tax asset recorded
for certain tax credits, capital loss carryforwards, and certain net operating loss carryforwards.
A valuation allowance is recorded because based on available evidence; it is more-likely-than-not
that a deferred tax asset will not be realized. The valuation allowance reduces the deferred tax
asset to the Company’s best estimate of the net deferred tax asset that, more-likely-than-not, will
be realized. The valuation allowance will be reduced when and if the Company determines that the
deferred income tax assets are more likely than not to be realized. Accordingly, for the Transition
Period ended December 31, 2006, the Company added $86,147 to the valuation allowance primarily due
to the acquisition of PLIVA, primarily related to net operating loss carryforwards in various
jurisdictions. Any portion of the valuation allowance for such deferred tax assets that are
subsequently recognized will be allocated to reduce goodwill or other intangible assets.
During fiscal 2006, the Company reduced the valuation allowance by $2,896 due to the
expiration of the statute of limitations related to the carry forward of certain capital losses as
well as the associated deferred tax asset. During fiscal 2005, the Company reduced the valuation
allowance by a net of $1,018 due to the utilization of certain tax capital losses and the write-off
of certain deferred tax assets and related valuation allowances.
(15) Stock-Based Compensation
The Company adopted SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”),
effective July 1, 2005. SFAS 123(R) requires the recognition of the fair value of stock-based
compensation in net earnings. The Company has three stock-based employee compensation plans, two
stock-based non-employee director compensation plans and an employee stock purchase plan.
Stock-based compensation granted to date consists of stock options, stock-settled stock
appreciation rights and the employee stock purchase plan. Stock options and stock-settled stock
appreciation rights are granted to employees at exercise prices equal to the fair market value of
the Company’s stock at the dates of grant. Generally, stock options and stock appreciation rights
granted to employees fully vest ratably over the three years from the grant date and have a term of
10 years. Annual stock options granted to directors generally become exercisable on the date of the
first annual shareholders’ meeting immediately following the date of grant. The Company recognizes
stock-based compensation expense over the requisite service period of the individual grants, which
generally equals the vesting period. The Company has issued and expects to continue to issue, new
registered shares under Registration Statements on Form S-8 to satisfy option and stock
appreciation right exercises.
Prior to July 1, 2005, the Company accounted 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, did not record
stock-based compensation cost in net earnings because the exercise price of its stock options
equaled the market price of the underlying stock on the date of grant. The Company elected to
utilize the modified prospective transition method for adopting SFAS 123(R). Under this method,
the provisions of SFAS 123(R) apply to all awards granted or modified after the date of adoption.
In addition, the unrecognized expense of awards not yet vested at the date of adoption, determined
under the original provisions of SFAS 123, are recognized in net earnings in the periods after the
date of adoption.
The Company recognized stock-based compensation expense for the six-month period ended
December 31, 2006 in the amount of $13,926. The Company also recorded related tax benefits for the
six-month period ended December 31, 2006 in the amount of
$4,261. The effect on net income from
recognizing stock-based compensation for the six-month period ended December 31, 2006 was $9,665,
or $0.09 per basic and diluted share.
The Company recognized stock-based compensation expense for the six months ended December 31,2005 (unaudited) in the amount of $13,894, and recorded tax related benefits during the same period
in the amount of $3,383. The effect on net income from recognizing stock-based compensation for the
six months ended December 31, 2006 was $10,511, or $0.10 per basic share and diluted share.
The Company recognized stock-based compensation expense for fiscal 2006 in the amount of
$27,092, and recorded related tax benefits during the same period in the amount of $7,320. The
effect on net income from recognizing stock-based compensation for fiscal 2006 was $19,772, or
$0.19 per basic share and $0.18 per diluted share.
SFAS 123(R) requires the Company to present pro forma information for periods prior to the
adoption as if it had accounted for all stock-based compensation under the fair value method of
that statement. For purposes of pro forma disclosure, the estimated fair value of the awards at the
date of grant is amortized to expense over the requisite service period, which generally equals the
vesting period. The following table illustrates the effect on net earnings and earnings per share
as if the Company had applied the fair value recognition provisions of SFAS 123(R) to its
stock-based employee compensation for the periods indicated:
Fiscal
Year Ended June 30,
(in thousands, expect per share data)
2005
2004
NET EARNINGS, AS REPORTED
$
214,988
$
123,103
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects
20,178
13,747
PRO FORMA NET EARNINGS
$
194,810
$
109,356
EARNINGS PER SHARE:
Basic — as reported
$
2.08
$
1.21
Basic — pro forma
$
1.89
$
1.07
Diluted — as reported
$
2.03
$
1.15
Diluted
— pro forma
$
1.84
$
1.03
For all of the Company’s stock-based compensation plans, the fair value of each grant was
estimated at the date of grant using the Black-Scholes option-pricing model. Black-Scholes utilizes
assumptions related to volatility, the risk-free interest rate, the dividend yield (which is
assumed to be zero, as the Company has not paid any cash dividends) and employee exercise behavior.
Expected volatilities utilized in the model are based mainly on the historical volatility of the
Company’s stock price and other factors. The risk-free interest rate is derived from the U.S.
Treasury yield curve in effect in the period of grant. The model incorporates exercise and
post-vesting forfeiture assumptions based on an analysis of historical data. The expected life of
the fiscal 2006 grants is derived from historical and other factors.
As of December 31, 2006, the aggregate intrinsic value of awards
outstanding and exercisable was $123,479 and $107,399, respectively.
As of December 31, 2005 (unaudited), the aggregate intrinsic
value of awards outstanding and exercisable was $164,390 and $130,702. In addition, the aggregate
intrinsic value of awards exercised
during the six-month period ended December 31, 2006 and 2005
(unaudited) were $6,573 and $67,216, respectively, and for the fiscal years ended June 30, 2006,
2005, 2004 were $99,304, $29,961 and $69,284, respectively. The total remaining unrecognized
compensation cost related to unvested awards amounted to $45,796 at December 31, 2006 and is
expected to be recognized over the next three years. The weighted average remaining requisite
service period of the unvested awards was 25 months. The total fair value of awards that vested
during the six-month period ended December 31, 2006 and 2005 (unaudited) were $26,229 and $23,922,
respectively, and for the fiscal years ended June 30, 2006, 2005 and 2004 were $24,732, $22,647 and
$11,196, respectively.
Employee Stock Compensation Plans
The Company has three employee stock compensation plans: the Barr Pharmaceuticals, Inc. 2002
Stock and Incentive Award Plan (the “2002 Stock Plan”); the Barr Pharmaceuticals, Inc. 1993 Stock
Incentive Plan (the “1993 Stock Plan”); and the Barr Pharmaceuticals Inc. 1986 Option Plan (the
“1986 Option Plan”), which were approved by the shareholders and which authorize the granting of
options to officers and employees to purchase the Company’s common stock. These plans also
authorize the granting of other awards based on Company common stock to officers and employees,
including but not limited to stock appreciation rights, unrestricted stock, restricted stock,
performance unit and performance share awards. On February 20, 2003, all shares available for grant
in the 1993 Stock Plan were transferred to the 2002 Stock Plan and all subsequent grants have been
made under the 2002 Stock Plan. Effective June 30, 1996, options were no longer granted under the
1986 Option Plan. For the six months ended December 31, 2006 and 2005 (unaudited), fiscal 2006,
2005 and 2004, there were no options that expired under the 1986 Option Plan.
Until fiscal 2006, all awards granted under the 1993 Stock Plan and the 2002 Stock Plan were
either non-qualified stock options (“NQSOs”) or tax-qualified incentive stock options (“ISOs”). All
options outstanding on October 24, 2001 became fully exercisable upon completion of the Duramed
merger. Options granted after October 24, 2001 become fully exercisable over periods as short as
one year and as long as five years from the date of grant, provided there is no interruption of the
optionee’s employment, and subject to acceleration of exercisability in the event of the death of
the optionee or a change in control as defined in the plan under which the options were granted.
Options granted to date under the 1993 Stock Plan and the 2002 Stock Plan expire ten years after
the date of grant except in case of earlier termination of employment, in which case the options
generally expire on such termination or within defined periods of up to one year thereafter,
depending on the circumstances of such termination, but in no event more than ten years after the
date of grant.
During fiscal 2006, we began to grant employees stock-settled stock appreciation rights
(“SSARs”) rather than stock options, and to grant certain employees tax-qualified incentive stock
options (“ISOs”) in tandem with alternative stock-settled SARs (“Tandem ISOs/SSARs”). Each Tandem
ISO/SAR gives the employee the right to either exercise the ISO with respect to one share of stock
or exercise the SSAR with respect to one share of stock, but not both. Employees must pay the
option exercise price in order to exercise an ISO, but they do not pay any exercise price in order
to exercise a SSAR. Upon exercise of a SSAR, the employee receives the appreciation on one share of
Company common stock between the date of grant of the SSAR and the date of exercise of the SSAR.
The appreciation is paid in the form of Company common stock valued at fair market value on the
date of the SSAR exercise. Upon exercise of a stock option the Company receives proceeds equal to
the exercise price per share for each option exercised. In contrast, the Company does not receive
cash proceeds when a SSAR is exercised.
In addition, the Company has options outstanding under the terms of various former Duramed
plans. These include the 1986 Stock Option Plan (the “Duramed 1986 Plan”), the 1988 Stock Option
Plan (the “1988 Plan”), the 1997 Stock Option Plan (the “1997 Plan”), and the 2000 Stock Option
Plan (the “2000 Plan”). All outstanding options under the Duramed plans, with the exception of
options held by certain senior executives of Duramed, became exercisable as of October 24, 2001,
the effective date of the merger. Barr assumed such options under the same terms and conditions as
were applicable under the Duramed stock option plans under which the options were granted. The
number of options and related exercise prices have been adjusted to a Barr equivalent number of
options and exercise price pursuant to the merger. Subsequent to October 24, 2001, additional
options are no longer granted under these Duramed plans.
A summary of the option activity under the Company’s employee stock compensation plans as of
December 31, 2006, and changes during the six-month period then
ended and the 12 month period ended June 30, 2006 is presented below:
Available for grant and authorized amounts are for the 2002 Stock Plan only, because as
of June 30, 2003 employee stock options are no longer granted under the 1993 Stock Plan or any plan
other than the 2002 Stock Plan.
Non-Employee Directors’ Stock Option Plans
During fiscal year 1994, the shareholders approved the Barr Pharmaceuticals, Inc. 1993 Stock
Option Plan for Non-Employee Directors (the “1993 Directors’ Plan”). On October 24, 2002, the
shareholders approved the Barr Pharmaceuticals, Inc. 2002 Stock Option Plan for Non-Employee
Directors (the “2002 Directors’ Plan”). On February 20, 2003, all shares available for grant under
the 1993 Directors’ Plan were transferred to the 2002 Directors’ Plan and all subsequent grants
have been made under the 2002 Directors’ Plan.
All options granted under the 1993 Directors’ Plan and the 2002 Directors’ Plan have ten-year
terms and are exercisable at an option exercise price equal to the market price of the common stock
on the date of grant. Options granted under the 2002 Directors’ Plan when a director is first
elected to the Board of Directors generally become exercisable ratably on each of the first three
annual shareholders’ meetings immediately following the date of grant of the options. Other options
granted under the 1993 Directors’ Plan and the 2002 Directors’ Plan become exercisable on the date
of the first annual shareholders’ meeting immediately following the date of grant of the option.
Options become exercisable on the applicable date provided there has been no interruption of the
optionee’s service on the Board of Directors before that date and subject to acceleration of
exercisability in the event of the death of the optionee or a change in control as defined in the
plan under which the option was granted.
A summary of the option activity under the Company’s stock option plans for non-employee
directors as of December 31, 2006, and changes during the
six-month period then ended and the 12 month period ended
June 30, 2006 is presented
below:
Available for grant and authorized amounts are for the 2002 Directors’ Plan only, because as
of June 30, 2003, options are no longer granted to non-employee directors under the 1993 Directors’
Plan or any plan other than the 2002 Directors’ Plan.
The Company assumed certain stock compensation plans in relation to its acquisition of PLIVA.
PLIVA has two stock option plans (settled in PLIVA equity shares), one for its key employees and
the other for management board members, and two cash settled stock appreciation rights plans, one
for its key employees and the other for management board members.
For the period from October 25, 2006 to December 31, 2006, the Company did not recognize any
expense for stock-based compensation under these PLIVA plans as all remaining unrecognized expense
of stock based compensation awards was accelerated at the change of control date at which time the
stock appreciation rights and options became fully vested. There were no additional grants during
this period nor were any previous grants modified. As of December 31, 2006, 39,382 stock options
were exercisable which had a weighted average exercise price of HRK 362 and an aggregate
intrinsic value of $3,236. Included in other liabilities on the consolidated balance sheet at
December 31, 2006 was $14,678 for unexercised SARs for which the option value has been fixed at the
tender offer price of HRK 820.
Employee Stock Purchase Plan
In accordance with the Company’s 1993 Employee Stock Purchase Plan (the “Purchase Plan”)
employees are offered an inducement to acquire an ownership interest in the Company. The Purchase
Plan permits eligible employees to purchase, through regular payroll deductions, an aggregate of
1,518,750 shares of common stock. Shares are offered for purchase under the Purchase Plan in
offering periods generally of six months’ duration, at a purchase price equal to 85% of the fair
market value of such shares at the beginning of the offering period or at the end of the offering
period, whichever is lower. In November 2005, the Board of Directors adopted an amendment to the
Purchase Plan to increase the number of shares by 1,000,000 bringing the aggregate number of shares
of Common Stock, which may be purchased by employees under the Purchase Plan to 2,518,750. Under
the Purchase Plan, 98,075, 159,620, and 81,708 shares of common stock were purchased during the
years ended June 30, 2006, 2005 and 2004, respectively. During the six months ended December 31,2006, 53,744 shares of common stock were purchased.
Warrants
During 1999, in conjunction with an amendment to a financing agreement, the Company granted to
a bank warrants to purchase 63,410 shares of the Company’s common stock at an exercise price of
$22.19. These warrants vested immediately. In December 1999, the financing agreement was amended to
reset the exercise price of 50% of the warrants to $15.62 per share. During 2000, based on an
antidilutive clause in the agreement, the number of warrants was adjusted to 66,340. The price of
33,426 warrants was adjusted to $21.05 and the remaining 32,918 warrants were repriced to $15.03.
In November 2001 and January 2002 a total of 57,294 of the warrants were exercised. As of December31, 2006, warrants for 9,046 shares were outstanding and remain exercisable until July 2009.
On May 12, 2000, in combination with the issuance of Series G preferred stock, the Company
granted warrants to purchase 288,226 common shares at a price of $9.54 per share. The warrants
vested immediately. In April 2005, all 288,226 warrants were exercised.
In March 2000, the Company issued warrants granting DuPont the right to purchase 1,687,500
shares of Barr’s common stock at $13.93 per share, and 1,687,500 shares at $16.89 per share,
respectively. Each warrant was immediately exercisable. In March 2004, holders of these warrants
exercised the warrants through a cashless exercise which resulted in the issuance of 2,340,610
shares of our common stock.
(16) Savings and Retirement
The Company provides a number of defined contribution plans to its employees. Additionally,
in connection with the acquisition of PLIVA, the Company assumed and will maintain certain pension
and other post employment benefit plans, which include defined pension benefit obligations of
$10,573 and other post employment benefit obligations of $518. Both plans were unfunded at the time
of acquisition.
Defined Benefit Pension Plan and Other Post Employment Benefits
The Company has a defined benefit plan in Germany and a benefit plan for disability and other
post employment benefits in Poland. Eligibility for participation in these plans is based on
completion of a specified period of continuous service or date of hire. Benefits are generally
based on the employees’ years of credited service and average compensation in the years preceding
retirement. The defined benefit plan and other post employment benefit plans were unfunded at
December 31, 2006.
Application of SFAS No. 158
On September 29, 2006, SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans” was issued. SFAS 158 requires, among other things, an enterprise to
measure as of its fiscal year end its plan assets and benefit obligations, as well as, to recognize
the funded status of each defined benefit plan and other post-retirement benefit plans on the
balance sheet. Each overfunded plan is recognized as an asset and each underfunded plan is
recognized as a liability. The initial impact of the standard results in unrecognized prior service
costs or credits, net actuarial gains or losses and subsequent changes in the funded status being
recognized as a component of accumulated other comprehensive income. The Company applied the
provisions of SFAS No. 158 for the six month period ended
December 31, 2006. The measurement date for the Company’s
pension plan is December 31.
The following table summarizes the impact of the initial adoption of SFAS No. 158 as of
December 31, 2006
Of the total $11,653 recorded as unfunded pension and post employment liability at December31, 2006, $408 is current and $11,245 is non-current. The Company has recorded a deferred tax asset
of $11 relating to the $33 balance held in accumulated other comprehensive income.
Net defined benefit plan gains currently included in accumulated other comprehensive gain of
$33 are expected to be recognized as a component of net periodic benefit cost during 2007.
The Company recognized the following amounts for its defined benefit pension plan and post
employment benefits on the December 31, 2006 balance sheet:
Amounts recognized in accumulated other
comprehensive loss consists of:
Net gain
$
(33
)
$
—
Total amount recognized
(33
)
—
Plans with underfunded or non-funded
accumulated benefit obligation:
Projected benefit obligation
$
11,101
$
552
Accumulated benefit obligation
11,101
552
Components of Net Periodic Benefit Expense
The net periodic benefit expense during the six-month period ending December 31, 2006 consists
of the following components:
Post
Pension
Employment
Benefits
Benefits
Service cost
$
42
$
6
Interest cost on benefit obligations
92
3
Subtotal
134
9
Deferred compensation
24
—
Total net periodic benefit cost
$
158
$
9
Key Assumptions
The principal actuarial weighted average assumptions used to determine net periodic benefit
cost during the six-month period ending December 31, 2006 are as follows:
Discount rates are based on the market yields of high-quality corporate bonds in the
respective country.
Benefit Payments
The expected future cash flows to be paid by the Company in respect to the defined benefit
pension plan and post-employment plans at December 31, 2006 were as follows.
Post
Expected Future
Pension
Employment
Benefit Payments
Benefits
Benefits
2007
$
276
$
132
2008
279
24
2009
285
38
2010
390
56
2011
393
48
2012-16
2,160
303
The expected contribution to the defined benefit pension plan and post-employment plans for 2007 is
$408, equal to the expected benefit payments as both plans are unfunded.
Defined Contribution Plans
The Company’s defined contribution plans generally establish amounts to be paid by the Company
on behalf of the employees and in certain situations the opportunity for employees to contribute in
accordance with the specified plan guidelines. Qualifying employees are eligible for participation
based on the specific guidelines in the respective countries. Where allowed by the plan, voluntary
contributions by employees are typically limited to a monetary threshold.
In the United States the Company has a savings and retirement plan (the “401(k) Plan”) which
is intended to qualify under Section 401(k) of the Internal Revenue Code. Employees are eligible to
participate in the 401(k) Plan on the first of the month following their date of hire.
Participating employees may contribute up to a maximum of 60% of their pre-tax earnings, subject to
applicable Internal Revenue Code limits, including an annual limit on pre-tax contributions of
$15,000 in 2006 ($20,000 in the case of participants age 50 or above). The Company is required,
pursuant to the terms of its collective bargaining agreement, to provide to union employees covered
by such agreements a minimum matching contribution of 100% of the first 2% of pre or post tax
employee contributions to the 401(k) Plan. The Company may, at its discretion, make matching
employer contributions equal to a percentage of the amount contributed by an employee to the 401(k)
Plan up to a 10% maximum of such employee’s compensation. For the six month period ending December31, 2006 and 2005 (unaudited), and fiscal years ended June 30, 2006, 2005 and 2004, the Company
chose to make matching employer contributions of 100% of the first 10% of pre or post tax employee
contributions to the 401(k) Plan (pre-tax “catch-up” contributions available to participants age 50
and above were not matched). Participants are always fully vested with respect to their own
contributions and any investment return thereon. Participants become fully vested in the Company’s
contributions and related earnings at 20% each full year of employment until 100% vested after five
full years of employment.
The Company’s contributions to the 401(k) Plans and other defined contribution plans were
$5,260 and $4,102 for the six month period ending December 31, 2006 and 2005 (unaudited),
respectively, and $9,089, $7,650 and $6,534 for the fiscal years ended June 30, 2006, 2005 and
2004, respectively.
The Company has a non-qualified plan (“Excess Plan”) that enables certain executives whose
contributions to the 401(k) Plan are limited by the Internal Revenue Code to defer amounts under
the Excess Plan that they are unable to contribute to the 401(k) Plan as a result of the Internal
Revenue Code limits. The Company credits the executives with the matching employer contributions
they would have received under the 401(k) Plan if the Internal Revenue Code limits did not prevent
them from contributing the amounts deferred under the Excess Plan to the 401(k) Plan. As of
December 31, 2006 and June 30, 2006 and 2005, the Company had an asset and matching liability for
the Excess Plan of $9,565, $7,273 and $5,141, respectively. The Company made contributions of $636,
$561, $667, $556 and $526 during the six month period ending December 31, 2006 and 2005
(unaudited), and fiscal years ended June 30, 2006, 2005 and 2004, respectively.
In October 2003, the Board of Directors approved the Barr Pharmaceuticals, Inc. Non-Qualified
Deferred Compensation Plan (the “Plan”). The Plan provides for executives whose contributions to
the 401(k) Plan are limited by the Internal Revenue Code with the opportunity to defer, in whole or
in part, the portion of their salary or bonus for a particular calendar year that they are unable
to defer through the 401(k) Plan or the Excess Plan. As of December 31, 2006 and June 30, 2006 and
2005, the Company had an asset and matching liability for the Plan of $728, $512 and $308,
respectively. The Company made contributions of $14, $15, $15, $15 and $10 during the six month
period ending December 31, 2006 and 2005 (unaudited), and fiscal years ended June 30, 2006, 2005
and 2004, respectively.
(17) Other (Expense) Income, net
A summary of other (expense) income, net is as follows:
During fiscal 2006, the Company purchased a currency option with a notional amount equal to
€1.8 billion at a cost of $48,900 to hedge its foreign exchange risk related to the acquisition
of PLIVA. At the period ended June 30, 2006, the currency option’s fair value was $59,200,
resulting in a gain of $10,300 recorded as other income. During the six-month period ended December31, 2006, the Company sold the option in a series of transactions for an aggregate amount of
$12,554 in cash, resulting in a loss of $46,646 recorded as other expense.
During the six-month period ended December 31, 2006, the Company also entered into forward
exchange contracts in order to hedge its foreign exchange risk related to the PLIVA transaction,
and to secure the necessary currency needed to finalize the PLIVA transaction. These contracts were
settled and are no longer outstanding. A loss of $22,695 was recorded as other expense.
(18) Restructuring Charges
Management’s plans for the restructuring of the Company’s operations as a result of its
acquisition of PLIVA are in the introductory stages. As of December 31, 2006, certain elements of
the plan that have been finalized have been recorded as a cost of the acquisition. Plans for other
restructuring activities are expected to be completed within one year of the acquisition.
The Company recorded, through December 31, 2006, restructuring costs associated primarily with
severance and the costs of vacating certain duplicative PLIVA facilities in the U.S. These costs
were recognized as liabilities assumed in the acquisition. Additionally, further restructuring
costs incurred as part of our restructuring plan in connection with the acquisition will be
considered part of the purchase price of PLIVA and will be recorded as in increase in goodwill.
The components of the restructuring costs capitalized as a cost of
the acquisition are as follows and are included in the
Company’s generic segment:
Lease termination costs represent costs incurred to exit duplicative activities of PLIVA.
Severance includes accrued severance benefits and costs associated with change-in-control
provisions of certain PLIVA employment contracts.
Additionally, the Company assumed existing PLIVA restructuring accruals of $4,417 related to
severance and $1,713 of other restructuring costs which had a balance
of $6,314 as of December 31, 2006. Of the total restructuring
costs as of December 31, 2006, $24,600 has been classified in
accrued liabilities and $192 has been classified in other liabilities.
(19) Commitments and Contingencies
Leases
The Company is party to various leases that relate to the rental of office facilities and
equipment. The Company believes it will be able to extend its material leases, if necessary. The
table below shows the future minimum rental payments under non-cancelable long-term lease commitments as of December 31, 2006:
Rent expense was $4,266 and $1,686 for the six months ended December 31, 2006 and 2005
(unaudited), respectively, and $3,698, $4,305 and $3,543 for the fiscal years ended June 30, 2006,
2005 and 2004, respectively.
Capital commitments
The
purchase obligations for property, plant and equipment, inventory and
intangible assets as contracted with suppliers but not delivered at
December 31, 2006 are approximately $144,000.
During the second quarter of fiscal 2004, the Company made investments, as a limited partner,
in two separate venture capital funds as part of its continuing efforts to identify new products,
technologies and licensing opportunities. The Company has committed up to a total of $15,000 for
each of these funds over five- and 10-year periods, as defined by each fund. During the six months
ended December 31, 2006the Company did not make any additional investments in these funds. As of
June 30, 2006 and June 30, 2005, the Company had invested $6,550 and $5,941, respectively, in these
funds. The Company accounts for these investments using the equity method of accounting.
Employment Agreements
The Company has entered into employment agreements with certain key employees. The current
terms of these agreements expire at various dates, subject to certain renewal provisions.
Product Liability Insurance
The Company’s insurance coverage at any given time reflects market conditions, including cost
and availability, existing at the time it is written, and the decision to obtain insurance coverage
or to self-insure varies accordingly. If the Company were to incur substantial liabilities that
are not covered by insurance or that substantially exceed coverage levels or accruals for probable
losses, there could be a material adverse effect on our financial statements in a particular
period.
The Company maintains third-party insurance that provides coverage, a portion of which is
subject to specified co-insurance requirements, for the cost of product liability claims related to
products distributed in North America and arising during the current policy period, which began on
October 1, 2006 and ends on September 30, 2007, between an aggregate amount of $25 million and $75
million. The Company has retained the first $25 million of costs incurred relating to product
liability claims arising during the current policy period.
The Company also maintains a separate insurance program for its international product
liability claims. That program began on January 1, 2007 and ends on December 31, 2007 and provides
an aggregate amount of $75 million of coverage, subject to per claim and aggregate retentions of $1
million and $5 million, respectively.
In addition to the above programs, the Company has also obtained extended reporting periods
under previous policies for certain claims asserted during the current policy period where those
claims relate to remote and prior occurrences. The applicable retentions and dates of occurrence
under the previous policies vary by policy.
The Company has been incurring significant legal costs associated with its hormone therapy
litigation (see below). To date, these costs have been covered under extended reporting period
policies that provide up to $25,000 of coverage. As of December 31, 2006, there was approximately
$7,000 of coverage remaining under these policies. The Company has recorded a receivable of $2,994
for legal costs incurred and expected to be recovered under these policies as of December 31, 2006.
Once the coverage from these extended reporting period policies has been exhausted, future legal
and settlement costs will be covered first by a combination of the Company’s cash balances and then
by a combination of self-insurance and other third-party insurance layers.
Indemnity Provisions
From time-to-time, in the normal course of business, the Company agrees to indemnify its
suppliers, customers and employees concerning product liability and other matters. For certain
product liability matters, the Company has incurred legal defense costs on behalf of certain of its
customers under these agreements. No amounts have been recorded in the financial statements for
probable losses with respect to the Company’s obligations under such agreements.
In September 2001, Barr filed an ANDA for the generic version of Sanofi-Aventis’ Allegra®
tablets. Sanofi-Aventis has filed a lawsuit against Barr claiming patent infringement. A trial date
for the patent litigation has not been scheduled. In June 2005, the Company entered into an
agreement with Teva Pharmaceuticals USA, Inc. which allowed Teva to manufacture and launch Teva’s
generic version of Allegra during the Company’s 180 day exclusivity period, in exchange for Teva’s
obligation to pay the Company a specified percentage of Teva’s operating
profit, as defined, earned
on sales of the product. The agreement between Barr and Teva also provides that each company will
indemnify the other for a portion of any patent infringement damages they might incur, so that the
parties will share any such damage liability in proportion to their respective share of Teva’s
operating profit or generic Allegra.
On September 1, 2005, Teva launched its generic version of Allegra. The Company, in
accordance with FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others recorded a liability of $4,057
to reflect the fair value of the indemnification obligation it has undertaken.
Litigation Settlement
On October 22, 1999, the Company entered into a settlement agreement with Schein
Pharmaceutical, Inc. (now part of Watson Pharmaceuticals, Inc.) relating to a 1992 agreement
regarding the pursuit of a generic conjugated estrogens product. Under the terms of the settlement,
Schein relinquished any claim to rights in Cenestin in exchange for a payment of $15,000 made to
Schein in 1999. An additional $15,000 payment is required under the terms of the settlement if
Cenestin achieves total profits, as defined, of greater than $100,000 over any rolling five-year
period prior to October 22, 2014. As of December 31, 2006, no liability has been accrued related
to this settlement.
Litigation Matters
The Company is involved in various legal proceedings incidental to its business, including
product liability, intellectual property and other commercial litigation and antitrust actions.
The Company records accruals for such
contingencies to the extent that it concludes a loss is probable and the amount can be
reasonably estimated. Additionally, the Company records insurance receivable amounts from third
party insurers when appropriate.
Many claims involve highly complex issues relating to patent rights, causation, label
warnings, scientific evidence and other matters. Often these issues are subject to substantial
uncertainties and therefore, the probability of loss and an estimate of the amount of the loss are
difficult to determine. The Company’s assessments are based on estimates that the Company, in
consultation with outside advisors, believes are reasonable. Although the Company believes it has
substantial defenses in these matters, litigation is inherently unpredictable. Consequently, the
Company could in the future incur judgments or enter into settlements that could have a material
adverse effect on its consolidated financial statements in a particular period.
Summarized below are the more significant matters pending to which the Company is a party. As
of December 31, 2006, the Company’s reserve for the liability associated with claims or related
defense costs for these matters is not material.
Patent Matters
Desmopressin Acetate Suit
In July 2002, the Company filed an ANDA seeking approval from the U.S. FDA to market
Desmopressin acetate tablets, the generic equivalent of Sanofi-Aventis’ DDAVP product. The Company
notified Ferring AB, the patent holder, and Sanofi-Aventis pursuant to the provisions of the
Hatch-Waxman Act in October 2002. Ferring AB and Sanofi-Aventis filed a suit in the U.S. District
Court for the Southern District of New York in December 2002 for infringement of one of the four
patents listed in the Orange Book for Desmopressin acetate tablets, seeking to prevent the Company
from marketing Desmopressin acetate tablets until the patent expires in 2008. In January 2003, the
Company filed an answer and counterclaim asserting non-infringement and invalidity of all four
listed patents. In January 2004, Ferring AB amended their complaint to add a claim of willful
infringement.
On February 7, 2005, the district court granted summary judgment in the Company’s favor, from
which Ferring AB and Sanofi-Aventis appealed. On July 5, 2005, the Company launched its generic
product. On February 15, 2006, the Court of Appeals for the Federal Circuit denied their appeal.
Ferring AB and Sanofi-Aventis subsequently filed a petition for rehearing and rehearing en banc,
which was denied on April 10, 2006. Ferring AB and Sanofi-Aventis filed a petition for a writ of
certiorari at the United States Supreme Court on September 11, 2006. On October 30, 2006, the
United States Supreme Court denied the petition.
In June 2001, the Company filed an ANDA seeking approval from the FDA to market fexofenadine
hydrochloride tablets in 30 mg, 60 mg and 180 mg strengths, the generic equivalent of
Sanofi-Aventis’ Allegra tablet products for allergy relief. The Company notified Sanofi-Aventis
pursuant to the provisions of the Hatch-Waxman Act and, in September 2001, Sanofi-Aventis filed a
patent infringement action in the U.S. District Court for the District of New Jersey-Newark
Division, seeking to prevent the Company from marketing this product until after the expiration of
various U.S. patents, the last of which is alleged to expire in 2017.
After the filing of the Company’s ANDAs, Sanofi-Aventis listed an additional patent on Allegra
in the Orange Book. The Company filed appropriate amendments to its ANDAs to address the newly
listed patent and, in November 2002, notified Merrell Pharmaceuticals, Inc., the patent holder, and
Sanofi-Aventis pursuant to the provisions of the Hatch-Waxman Act. Sanofi-Aventis filed an amended
complaint in November 2002 claiming that the Company’s ANDAs infringe the newly listed patent.
On March 5, 2004, Sanofi-Aventis and AMR Technology, Inc., the holder of certain patents
licensed to Sanofi-Aventis, filed an additional patent infringement action in the U.S. District
Court for the District of New Jersey — Newark Division, based on two patents that are not listed
in the Orange Book.
In June 2004, the court granted the Company summary judgment of non-infringement as to two
patents. On March 31, 2005, the court granted the Company summary judgment of invalidity as to a
third patent. Discovery is proceeding on the five remaining patents at issue in the case. No trial
date has been scheduled.
On August 31, 2005, the Company received final FDA approval for its fexofenadine tablet
products. As referenced above, pursuant to the agreement between the Company and Teva, the Company
selectively waived its 180 days of generic exclusivity in favor of Teva, and Teva launched its
generic product on September 1, 2005.
On September 21, 2005, Sanofi-Aventis filed a motion for a preliminary injunction or expedited
trial. The motion asked the court to enjoin the Company and Teva from marketing their generic
versions of Allegra tablets, 30 mg, 60 mg and 180 mg, or to expedite the trial in the case. The
motion also asked the court to enjoin Ranbaxy Laboratories, Ltd. and Amino Chemicals, Ltd. from the
commercial production of generic fexofenadine raw material. The preliminary injunction hearing
concluded on November 3, 2005. On January 30, 2006, the Court denied the motion by Sanofi-Aventis
for a preliminary injunction or expedited trial. Sanofi-Aventis appealed the Court’s denial of its
motion to the United States Court of Appeals for the Federal Circuit. On November 8, 2006, the
Federal Circuit affirmed the District Court’s denial of the motion for preliminary injunction.
On May 8, 2006, Sanofi-Aventis and AMR Technology, Inc. served a Second Amended and
Supplemental Complaint based on U.S. Patent Nos. 5,581,011 and 5,750,703 (collectively, “the API
patents”), asserting claims against the Company for infringement of the API (active pharmaceutical
ingredient) patents based on the sale of the Company’s fexofenadine product and for inducement of
infringement of the API patents based on the sale of Teva’s fexofenadine product. On June 22,2006, the Company answered the complaint, denied the allegations against it, and asserted
counterclaims for declaratory judgment that the asserted patents are invalid and/or not infringed
and for damages for violations of the Sherman Act, 15 U.S.C. §§ 1.2.
On November 14, 2006, Sanofi-Aventis sued the Company and Teva in the United States District
Court for the Eastern District of Texas, alleging that Teva’s fexofenadine hydrochloride tablets
infringe a patent directed to a certain crystal form of fexofenadine hydrochloride, and that the
Company induced Teva’s allegedly infringing sales. On November 21, 2006, Sanofi-Aventis filed an
amended complaint in the same court, asserting that the Company’s fexofenadine hydrochloride
tablets infringe a different patent directed to a different crystal form of fexofenadine
hydrochloride. On January 12, 2007, the Company moved to dismiss
the suit against Barr Pharmaceuticals, answered the
complaint on behalf of Barr Laboratories, denied the allegations against it, and moved to transfer the action
to the United States District Court for the District of New Jersey.
On November 15, 2006 and November 21, 2006, the Company filed complaints in the U.S. District
Court for the District of New Jersey, seeking declaratory judgment that the Company does not
infringe, or induce infringement of, any valid claim of the patents asserted by Sanofi-Aventis in
the United States District Court for the Eastern District of Texas, and that those patents are
invalid. Sanofi-Aventis has not yet responded to those complaints.
Sanofi-Aventis also has brought a patent infringement suit against Teva in Israel, seeking to
have Teva enjoined from manufacturing generic versions of Allegra tablets and seeking damages.
If
Barr and Teva are unsuccessful in the Allegra litigation, Barr
potentially could be liable for a portion of Sanofi-Aventis’ lost
profits on the sale of Allegra, which could potentially exceed
Barr’s profits from its alliance revenue from the sale of
generic Allegra.
Product Liability Matters
Hormone Therapy Litigation
The Company has been named as a defendant in approximately 5,000 personal injury product
liability cases brought against the Company and other manufacturers by plaintiffs claiming that
they suffered injuries resulting from the use of certain estrogen and progestin medications
prescribed to treat the symptoms of menopause. The cases against the Company involve the Company’s
Cenestin products and/or the use of the Company’s medroxyprogesterone acetate product, which
typically has been prescribed for use in conjunction with Premarin or other hormone therapy
products. All of these products remain approved by the FDA and continue to be marketed and sold to
customers. While the Company has been named as a defendant in these cases, fewer than a third of
the complaints actually allege the plaintiffs took a product manufactured by the Company, and the
Company’s experience to date suggests that, even in these cases, a high percentage of the
plaintiffs will be unable to demonstrate actual use of a Company product. For that reason,
approximately 4,400 of such cases have been dismissed (leaving approximately 600 pending) and,
based on discussions with the Company’s outside counsel, more are expected to be dismissed in the
near future.
The Company believes it has viable defenses to the allegations in the complaints and is
defending the actions vigorously.
Antitrust Matters
Ciprofloxacin (Cipro®) Antitrust Class Actions
The Company has been named as a co-defendant with Bayer Corporation, The Rugby Group, Inc. and
others in approximately 38 class action complaints filed in state and federal courts by direct and
indirect purchasers of Ciprofloxacin (Cipro) from 1997 to the present. The complaints allege that
the 1997 Bayer-Barr patent litigation settlement agreement was anti-competitive and violated
federal antitrust laws and/or state antitrust and consumer protection laws. A prior investigation
of this agreement by the Texas Attorney General’s Office on behalf of a group of state Attorneys
General was closed without further action in December 2001.
The lawsuits include nine consolidated in California state court, one in Kansas state court,
one in Wisconsin state court, one in Florida state court, and two consolidated in New York state
court, with the remainder of the actions pending in the U.S. District Court for the Eastern
District of New York for coordinated or consolidated pre-trial proceedings (the “MDL Case”). On
March 31, 2005, the Court in the MDL Case granted summary judgment in the Company’s favor and
dismissed all of the federal actions before it. On June 7, 2005, plaintiffs filed notices of appeal
to the U.S. Court of Appeals for the Second Circuit. The Court of Appeals has stayed consideration
of the merits pending consideration of the Company’s motion to transfer the appeal to the United
States Court of Appeals for the Federal Circuit as well as plaintiffs’ request for the appeal to be
considered en banc. Merits briefing has not yet been completed because the proceedings are stayed
pending en banc consideration of a similar 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 May 9, 2006, the
Court of Appeals reinstated the complaint on state law grounds for further proceedings in the trial
court, but on July 25, 2006, the Wisconsin Supreme Court granted the defendants’ petition for
further review. Oral argument took place on December 12, 2006 and the parties are awaiting a
decision on whether the case can proceed in the trial court. On October 17, 2003, the Supreme
Court of the State of New York for New York County dismissed the consolidated New York state class
action for failure to state a claim upon which relief could be granted and denied the plaintiffs’
motion for class certification. An intermediate appellate court affirmed that decision, and
plaintiffs have sought leave to appeal to the New York Court of Appeals. On April 13, 2005, the
Superior Court of San Diego, California ordered a stay of the California state class actions until
after the resolution of any appeal in the MDL Case. On April 22, 2005, the
District Court of
Johnson County, Kansas similarly stayed the action before it, until after any appeal in the MDL
Case. The Florida state class action remains at a very early stage, with no status hearings,
dispositive motions, pre-trial schedules, or a trial date set as of yet.
The Company believes that its agreement with Bayer Corporation reflects a valid settlement to
a patent suit and cannot form the basis of an antitrust claim. Based on this belief, the Company is
vigorously defending itself in these matters.
Tamoxifen Antitrust Class Actions
To date approximately 33 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 and the
Company violated the antitrust laws, insulated Zeneca and the Company from generic competition and
enabled Zeneca 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. On May 19, 2003, the U.S. District Court dismissed the complaints for failure to state a
viable antitrust claim. On November 2, 2005, the United States Court of Appeals for the Second
Circuit affirmed the District Court’s order dismissing the cases for failure to state a viable
antitrust claim. On November 30, 2005, Plaintiffs petitioned the United States Court of Appeals for
the Second Circuit for a rehearing en banc. On September 14, 2006, the Court of Appeals denied
Plaintiffs’ petition for rehearing en banc. On December 13, 2006, plaintiffs filed a petition for
writ of certiorari with the U.S. Supreme Court. The Company’s brief in opposition to the petition
was filed on February 15, 2007.
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. Based on this belief, the Company is
vigorously defending itself in these matters.
Ovcon Antitrust Proceedings
To date, the Company has been named as a co-defendant with Warner Chilcott Holdings, Co. III,
Ltd., and others in complaints filed in federal courts by the Federal Trade Commission, various
state Attorneys General and eight private class action plaintiffs claiming to be direct and
indirect purchasers of Ovcon-35®. These actions, the first of which was filed by the FTC on or
about December 2, 2005, allege, among other things, that a March 24, 2004 agreement between the
Company and Warner Chilcott (then known as Galen Holdings PLC) constitutes an unfair method of
competition, is anticompetitive and restrains trade in the market for Ovcon-35® and its generic
equivalents.
In the action brought by the FTC fact discovery has closed and expert discovery is scheduled
to be completed by February 16, 2007. The Company filed a motion to dismiss the FTC’s claims as
moot in light of the Company’s October 16, 2006 launch of its generic product, Balziva, which
motion was denied on January 22, 2007. The Court has not yet set a trial date. The Court has
scheduled a status conference in the case for April 2007.
In the cases brought by the eight private class action plaintiffs, discovery and class
certification proceedings are expected to conclude on or about June 15, 2007. No trial dates have
been set.
The Company believes that it has not engaged in any improper conduct and is vigorously
defending itself in these matters.
Provigil Antitrust Proceedings
To date, the Company has been named as a co-defendant with Cephalon, Inc., Mylan Laboratories,
Inc., Teva Pharmaceutical Industries, Ltd., Teva Pharmaceuticals USA, Inc., Ranbaxy Laboratories,
Ltd., and Ranbaxy Pharmaceuticals, Inc. (the “Provigil Defendants”) in nine separate complaints
filed in the U. S. District Court for the Eastern District of Pennsylvania. These actions allege,
among other things, that the agreements between Cephalon and the other individual Provigil
Defendants to settle patent litigation relating to Provigil® constitute an unfair method of
competition, are anticompetitive and restrain trade in the market for Provigil and its generic
equivalents in violation of the antitrust laws. These cases remain at a very early stage and no
trial dates have been set.
The Company was also named as a co-defendant with the Provigil Defendants in an action filed
in the U. S. District Court for the Eastern District of Pennsylvania by Apotex, Inc. The lawsuit
alleges, among other things, that Apotex sought to market its own generic version of Provigiland that the settlement agreements entered into between Cephalon and the other individual
Provigil Defendants constituted an unfair method of competition, are anticompetitive and restrain
trade in the market for Provigil and its generic equivalents in violation of the antitrust laws.
The Provigil Defendants have filed motions to dismiss, which are fully briefed.
The Company believes that it has not engaged in any improper conduct and is vigorously
defending itself in these matters.
Medicaid Reimbursement Cases
The Company, along with numerous other pharmaceutical companies, have been named as a
defendant in separate actions brought by the states of Alabama, Alaska, Hawaii, Idaho, Illinois,
Kentucky and Mississippi, the Commonwealth of Massachusetts, the City of New York, South Carolina
and numerous counties in New York. In each of these matters, the plaintiffs seek to recover damages
and other relief for alleged overcharges for prescription medications paid for or reimbursed by
their respective Medicaid programs, with some states also pursuing similar allegations based on the
reimbursement of drugs under Medicare Part B or the purchase of drugs by a state health plan (for
example, South Carolina).
The Commonwealth of Massachusetts case and the New York cases, with the exception of the
action filed by Erie, Oswego, and Schenectady Counties in New York, are currently pending in the
U.S. District Court for the District of Massachusetts. Discovery is underway in the Massachusetts
cases, but no trial dates have been set. In the
consolidated New York cases, motions to dismiss are under advisement, with no trial dates set.
The Erie, Oswego, and Schenectady County cases were filed in state courts in New York, again with
no trial dates set.
The Alabama, Illinois and Kentucky cases were filed in Alabama, Illinois and Kentucky state
courts, removed to federal court, and then remanded back to their respective state courts.
Discovery is underway. The Alabama trial court has scheduled an initial group of defendants, not
including the Company, to start trial on November 26, 2007, with the remaining defendants to be
tried in groups thereafter starting on an unspecified date. No other trials dates have been set.
The State of Mississippi case was filed in Mississippi state court. Discovery was underway, but
that case, along with the Illinois case and the actions brought by Erie, Oswego, and Schenectady
Counties in New York, were recently removed to federal court on the motion of a co-defendant, Dey,
Inc. Remand motions are pending.
The State of Hawaii case was filed in state court in Hawaii, removed to the United States
District Court for the District of Hawaii, and remanded to state court. Briefing on the defendants’
motions to dismiss is currently underway. No trial date has been set.
The State of Alaska case was filed in state court in Alaska on October 6, 2006. Briefing on
the defendants’ motions to dismiss is currently underway. No trial date has been set.
The State of Idaho case was filed in state court in Idaho on January 26, 2007. This matter is
at an early stage with no trial date set.
The State of South Carolina cases consist of two complaints, one brought on behalf of the
South Carolina Medicaid Agency and the other brought on behalf of the South Carolina State Health
Plan. Both cases were filed in state court in South Carolina on January 16, 2007. These matters
are at an early stage with no trial dates set.
The Company believes that it has not engaged in any improper conduct and is vigorously
defending itself in these matters.
On October 6, 2005, plaintiffs Agvar Chemicals Inc., Ranbaxy Laboratories, Inc. and Ranbaxy
Pharmaceuticals, Inc. filed suit against the Company and Teva Pharmaceuticals USA, Inc. in the
Superior Court of New Jersey. In their complaint, plaintiffs seek to recover damages and other
relief, based on an alleged breach of an alleged contract requiring the Company to purchase raw
material for the Company’s generic Allegra product from Ranbaxy, prohibiting the Company from
launching its generic Allegra product without Ranbaxy’s consent and prohibiting the Company from
entering into an agreement authorizing Teva to launch Teva’s generic Allegra product. The court
has entered a scheduling order providing for the completion of discovery by March 7, 2007, but has
not yet set a date for trial. The Company believes there was no such contract and is vigorously
defending this matter.
Other Litigation
As of December 31, 2006, the Company was involved with other lawsuits incidental to its
business, including patent infringement actions, product liability, and personal injury claims.
Management, based on the advice of legal counsel, believes that the ultimate outcome of these other
matters will not have a material adverse effect on the Company’s consolidated financial statements.
Government Inquiries
On July 11, 2006, the Company received a request from the FTC for the voluntary submission of
information regarding the settlement agreement reached in the matter of Cephalon, Inc. v. Mylan
Pharmaceuticals, Inc., et al., U.S. District Court for the District of New Jersey. The FTC is
investigating whether the Company and the other parties to the litigation have engaged in unfair
methods of competition in violation of Section 5 of the Federal Trade Commission Act by restricting
the sale of Modafinil products. In its request letter, the FTC stated that neither the request nor
the existence of an investigation indicated that Barr or any other company had violated the law.
The Company believes that its settlement agreement is in compliance with all applicable laws and
intends to cooperate with the FTC in this matter.
On October 3, 2006, the FTC notified the Company it was investigating a patent litigation
settlement reached in matters pending in the United States District Court for the Southern District
of New York between the Company and
Shire PLC concerning Shire’s Adderall XR product. To date, the only FTC request of the Company
under this investigation has been to preserve relevant documents. The Company intends to cooperate
with the agency in its investigation.
(20) Segment Reporting
The Company operates in two reportable business segments: generic pharmaceuticals and
proprietary pharmaceuticals.
Generic Pharmaceuticals
Generic pharmaceutical products are therapeutically equivalent to a brand name product and are
marketed primarily to wholesalers, retail pharmacy chains, mail order pharmacies and group
purchasing organizations. Products sold in the U.S. are approved for distribution by the FDA
through the ANDA process. Products sold outside the U.S. are subject to similar approval processes
in the jurisdictions where they are sold. The Company also distributes, from time to time, product
manufactured for the Company by the brand name company. Ciprofloxacin is an example of a
distributed product that is included in the generic pharmaceuticals segment.
The Company also includes in its generic segment revenue and gross profit from the sale of its
developed and manufactured API to third parties.
In
the six months ended December 31, 2006, two customers accounted
for 17% and 11% of generic product sales. In the six months ended December 31, 2005 (unaudited), three
customers accounted for 20%, 16% and 15%. In fiscal year 2006, four
customers accounted for 22%,
13%, 12% and 10% of generic product sales. In fiscal year 2005, five
customers accounted for 15%,
15%, 13%, 12%, and 10% of generic product sales. In fiscal year 2004, three customers accounted for
21%, 16%, and 12% of generic product sales.
Proprietary pharmaceutical products are generally patent-protected products marketed directly
to health care professionals. These products are approved by the FDA primarily through the New Drug
Application process. Barr’s proprietary segment also includes products whose patents have expired
but continue to be sold under trade names to capitalize on prescriber and customer loyalties and
brand recognition.
In
the six months ended December 31, 2006, three customers
accounted for 36%, 16% and 15% of
proprietary product sales. In the six months ended December 31, 2005 (unaudited), three customers
accounted for 27%, 12% and 12% of proprietary product sales. In
fiscal year 2006, three customers
accounted for 30%, 15% and 11% of proprietary product sales. In fiscal year 2005, three customers
accounted for 26%, 20% and 11% of proprietary product sales. In fiscal year 2004, three customers
accounted for 21%, 21%, and 15% of proprietary product sales.
Other
Other revenue primarily includes certain of the Company’s non-core operations, as well as
consulting fees earned from services provided to third parties. Our non-core operations include our
animal health and agrochemicals business, which predominantly consists of generics, feed additives,
agro products, and vaccines, as well as our diagnostics, disinfectants, dialysis, infusions (DDDI)
business.
The accounting policies of the segments are the same as those described in Note 1. The Company
evaluates the performance of its operating segments based on net revenues and gross profit. The
Company does not report depreciation expense, total assets and capital expenditures by segment as
such information is neither used by management nor accounted for at the segment level. Net product
sales and gross profit information for the Company’s operating segments consisted of the following:
The Company’s principal operations are in the United States and Europe. United States and Rest
of World (“ROW”) sales are classified based on the geographic location of the customers. The table
below presents revenues by geographic area based upon geographic location of the customer:
The Company operates in more than 30 countries outside the United States. No single foreign
country contributes more than 10% to consolidated product sales.
The sum of the individual quarters may not equal the full year amounts due to the effects
of the market prices in the application of the treasury stock method. During its two most recent
fiscal years, the Company did not pay any cash dividends.