<PAGE>
Filed Pursuant to Rule 424(b)4
Reg. No. 333-45339
PROSPECTUS March 11, 1998
- --------------------------------------------------------------------------------
3,400,000 Shares
[LOGO]
Common Stock
- ------------------------------------------------------------
Of the 3,400,000 shares of Common Stock, par value $0.01 per share (the "Common
Stock"), offered hereby (the "Offering"), 400,000 shares are being sold by Barr
Laboratories, Inc. ("Barr" or the "Company") and 3,000,000 shares are being sold
by certain selling stockholders (the "Selling Stockholders"). See "Selling
Stockholders." The Company will not receive any of the proceeds from the sale of
shares by the Selling Stockholders.
The Common Stock is listed on the New York Stock Exchange under the symbol
"BRL." On March 10, 1998, the last reported sales price for the Common Stock on
the New York Stock Exchange was $36 per share. See "Price Range of Common
Stock."
FOR A DISCUSSION OF CERTAIN RISKS OF AN INVESTMENT IN THE SHARES OF COMMON STOCK
OFFERED HEREBY, SEE "RISK FACTORS" ON PAGES 7-12.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Proceeds to
Price to Underwriting Discounts Proceeds to Selling
Public and Commissions(1) Company(2) Stockholders(2)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Per Share $35.50 $1.73 $33.77 $33.77
- ----------------------------------------------------------------------------------------------------------
Total(3) $120,700,000 $5,882,000 $13,508,000 $101,310,000
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) THE COMPANY AND THE SELLING STOCKHOLDERS HAVE AGREED TO INDEMNIFY THE
UNDERWRITERS AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. SEE "UNDERWRITING."
(2) BEFORE DEDUCTING EXPENSES OF THE OFFERING PAYABLE BY THE COMPANY AND THE
SELLING STOCKHOLDERS ESTIMATED AT $58,824 AND $441,176, RESPECTIVELY.
(3) THE COMPANY AND THE SELLING STOCKHOLDERS HAVE GRANTED THE UNDERWRITERS A
30-DAY OPTION TO PURCHASE UP TO 480,000 ADDITIONAL SHARES OF COMMON STOCK IN
THE CASE OF THE SELLING STOCKHOLDERS AND UP TO 30,000 ADDITIONAL SHARES IN
THE CASE OF THE COMPANY ON THE SAME TERMS PER SHARE SOLELY TO COVER
OVER-ALLOTMENTS, IF ANY. IF SUCH OPTION IS EXERCISED IN FULL, THE TOTAL
PRICE TO PUBLIC WILL BE $138,805,000, THE TOTAL UNDERWRITING DISCOUNTS AND
COMMISSIONS WILL BE $6,764,300, THE TOTAL PROCEEDS TO THE COMPANY WILL BE
$14,521,100 AND THE TOTAL PROCEEDS TO SELLING STOCKHOLDERS WILL BE
$117,519,600. SEE "UNDERWRITING."
The Common Stock is being offered by the Underwriters as set forth under
"Underwriting" herein. It is expected that the delivery of the certificates
therefor will be made at the offices of SBC Warburg Dillon Read Inc., New York,
New York on or about March 16, 1998. The Underwriters include:
SBC WARBURG DILLON READ INC. DONALDSON, LUFKIN & JENRETTE
SECURITIES
CORPORATION
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Certain information, as
of particular dates, concerning the Company's directors and officers, their
compensation, the principal holders of securities of the Company and any
material interests of such persons in transactions with the Company is discussed
in proxy statements of the Company distributed to stockholders of the Company
and filed with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549; and at the following regional offices of the
Commission: Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and Suite 1300, Seven World Trade Center, New York, New
York 10048. Copies of such materials may be obtained from the Public Reference
Branch of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates. Certain of these materials may also be obtained
via the Commission's Website (http://www.sec.gov). In addition, such reports,
proxy statements and other information can be inspected at the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission in Washington, D.C., a
Registration Statement on Form S-3 under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the securities offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and exhibits thereto, as permitted by the rules and regulations of the
Commission. For further information pertaining to the Company and the securities
offered hereby, reference is made to the Registration Statement and the exhibits
thereto, which may be examined without charge at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies thereof may be obtained from the Public
Reference Branch of the Commission upon payment at prescribed rates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents which have been filed by the Company with the
Commission are incorporated by reference in this Prospectus: (a) the Company's
Annual Report on Form 10-K for the year ended June 30, 1997, except for Item 8;
(b) the Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997; (c) the Company's Quarterly Report on Form 10-Q for the
quarterly period ended December 31, 1997; (d) the Company's Current Report on
Form 8-K dated February 25, 1998; and (e) the Company's Current Report on Form
8-K dated March 9, 1998.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the Offering shall be deemed to be incorporated by reference in
this Prospectus or any Prospectus Supplement and to be a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated by reference or deemed to be incorporated by reference in this
Prospectus or any Prospectus Supplement shall be deemed to be modified or
superseded for all purposes of this Prospectus or such Prospectus Supplement to
the extent that a statement contained herein, therein or in any subsequently
filed document which also is incorporated or deemed to be incorporated by
reference herein or in such Prospectus Supplement modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus or
any Prospectus Supplement.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, upon the written or oral request of such
person, a copy of any and all of the documents referred to above which have been
or may be incorporated in this Prospectus by reference (other than exhibits to
such documents, unless such exhibits are specifically incorporated by reference
therein). Requests for such copies should be directed to: Paul M. Bisaro,
Secretary, Barr Laboratories, Inc., Two Quaker Road, P.O. Box 2900, Pomona, New
York 10970-0519; telephone number (914) 362-1100.
The Barr "b" and "ESP" are registered trademarks of the Company in the
United States. All other trademarks and registered trademarks used in this
Prospectus are property of their respective owners.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN THE
COMMON STOCK AND THE IMPOSITION OF A PENALTY BID, DURING AND AFTER THE OFFERING.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS OR INCORPORATED BY REFERENCE HEREIN INCLUDING INFORMATION UNDER
"RISK FACTORS." UNLESS OTHERWISE INDICATED, ALL REFERENCES IN THIS PROSPECTUS TO
THE "COMPANY" OR "BARR" REFER TO BARR LABORATORIES, INC. AND ITS CONSOLIDATED
SUBSIDIARIES. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. REFERENCES IN
THIS PROSPECTUS TO THE COMPANY'S FISCAL YEAR REFER TO THE TWELVE MONTH PERIOD
ENDING ON JUNE 30TH OF EACH YEAR.
THE COMPANY
Barr is an established pharmaceutical company engaged in the development,
manufacture and marketing of generic and proprietary prescription
pharmaceuticals. The Company currently markets 66 products, representing various
dosage strengths and product forms of 33 chemical entities. Of these products,
29 have been launched since the beginning of 1996. The Company sells 15 products
where its market share in terms of units dispensed is greater than 40%. The
Company's product line is concentrated primarily on six core therapeutic
categories: oncology, female healthcare, cardiovascular, anti-infective, pain
management and psychotherapeutic. Barr generated revenues of $341.5 million and
net income of $32.2 million for the twelve months ended December 31, 1997.
The Company's business strategy is to develop pharmaceutical products which
present barriers to entry that may limit competition, and therefore, offer
longer product life-cycles and/or higher potential profitability. The
characteristics of the products that the Company pursues may include: (i) the
need for specialized manufacturing capabilities; (ii) difficulty in raw material
sourcing; (iii) complex formulation or development characteristics; (iv)
regulatory or legal challenges; or (v) sales and marketing challenges. The
Company's business strategy has three core components: (i) developing and
marketing generic pharmaceuticals that have one or more barriers to entry; (ii)
challenging patents protecting certain brand pharmaceuticals where the Company
believes that such patents are either invalid, unenforceable or not infringed by
the Company's product; and (iii) developing and introducing proprietary
pharmaceuticals that will have some market exclusivity.
The Company's largest selling product is Tamoxifen, the generic version of
Nolvadex-Registered Trademark-, which is used to treat advanced breast cancer as
well as impede the recurrence of tumors following surgery. Tamoxifen accounted
for $195.7 million, or 76% of the Company's net product sales during fiscal
1997. Barr's product accounted for 76% of the total units dispensed in the
United States for the twelve months ended September 30, 1997. In 1993, as a
result of a settlement of a patent challenge against the innovator of Tamoxifen,
the Company entered into a non-exclusive supply and distribution agreement (the
"Tamoxifen Agreement"). Under the terms of the Tamoxifen Agreement, Barr
purchases Tamoxifen directly from the innovator and sells it as a generic
product. The Company is the only distributor of Tamoxifen in the United States
other than the innovator. Although the Company is a non-exclusive distributor,
the Tamoxifen Agreement provides that should an additional distributor or
distributors be selected by the innovator, Barr will be granted terms no less
favorable than those granted to any subsequent distributor. Furthermore, the
Company has a tentatively approved Abbreviated New Drug Application ("ANDA") for
the manufacture of Tamoxifen. Therefore, at the time of patent expiration in
August 2002 (or should another company's patent challenge succeed), Barr will be
permitted to begin the direct manufacture of Tamoxifen. Manufacturing Tamoxifen
would lower significantly Barr's cost of goods for this product and the Company
believes its profit margins on Tamoxifen would improve.
The Company's most significant recent product introduction is Warfarin
Sodium, which was launched by the Company in July 1997. Warfarin Sodium is the
generic equivalent of DuPont Merck's Coumadin-Registered Trademark-, an
anti-coagulant which is given to patients with heart disease and/or high risk of
stroke. Coumadin had U.S. sales of approximately $500 million for the twelve
months ended September 30, 1997. Although
3
<PAGE>
another generic competitor has received an ANDA approval for Warfarin Sodium,
Barr is currently the only company marketing a generic equivalent of Warfarin
Sodium. The Company believes that there will be limited generic competition for
this product because of a number of barriers to entry, including difficulty of
sourcing raw material, the need for specialized manufacturing facilities, and
marketing barriers created by DuPont Merck to oppose generic substitution.
In January 1997, the Company and the innovator of ciprofloxacin settled
pending patent litigation. Ciprofloxacin is the generic equivalent of Bayer's
Cipro-Registered Trademark-, which is used to treat lower respiratory, skin,
bone and joint, and urinary tract infections. Ciprofloxacin had U.S. sales of
approximately $685 million in 1996. As part of the settlement of the patent
challenge, the Company entered into a contingent, non-exclusive supply agreement
(the "Ciprofloxacin Agreement") which ends with the expiration of the patent in
December 2003. Under the Ciprofloxacin Agreement, the innovator has the option
to make payments to Barr or to provide Barr with ciprofloxacin that Barr would
market as a generic pursuant to a license from the innovator. In January 1997,
the Company received an initial cash payment of $24.6 million in connection with
the Ciprofloxacin Agreement. If the innovator chooses not to provide the product
to Barr, the annual value recognized by Barr would approximate the value of the
initial payment.
The Company currently has under development more than 40 pharmaceutical
products, representing more than 30 chemical entities. The Company has six ANDAs
and two ANDA supplements pending at the U.S. Food and Drug Administration
("FDA") for products that had U.S. industry sales of approximately $2 billion
for the twelve months ended September 30, 1997. In addition, prior to December
31, 1998, Barr anticipates filing twelve ANDAs and two ANDA supplements for
products which had U.S. industry sales in excess of $2 billion for the twelve
months ended September 30, 1997. Of these 22 products, the Company anticipates
receiving FDA approval for at least five products by the end of calendar 1998.
One of the pending ANDAs is for fluoxetine, the generic equivalent of Eli
Lilly's anti-depressant Prozac-Registered Trademark-, which is subject to an
ongoing patent challenge. Prozac had U.S. sales of approximately $1.7 billion
for the twelve months ended September 30, 1997. The Company anticipates that a
trial on the patent claims at issue will commence in the second half of calendar
1998. The Company has three additional patent cases in active development and
three of the ANDAs expected to be filed in calendar 1998 relate to such patent
cases. In addition, the Company, in conjunction with strategic partners, has
four proprietary products in various stages of development. A New Drug
Application ("NDA") has been filed by Barr's partner on one of these products,
and the Company anticipates that its partner will receive regulatory approval
for such product before the end of calendar 1998.
The Company competes primarily in the generic pharmaceutical industry.
Generic pharmaceuticals represent an increasing proportion of medicines
dispensed in the United States. In 1995, the U.S. generic pharmaceutical
industry had total U.S. sales of approximately $9 billion. The Company believes
that the generic pharmaceutical market will grow, driven by two primary factors.
The first factor is the future commercialization of generic equivalents of drugs
with patents that (i) have already expired or (ii) will expire over the next
several years. Industry sources estimate that pharmaceuticals with 1996 U.S.
sales in excess of $6 billion are already off-patent and have no generic
competition. In addition, industry sources estimate that, through the year ended
2002, branded drugs with 1996 U.S. sales of approximately $11 billion will lose
patent protection. The Company believes a second factor driving growth will be
increasing rates at which generic pharmaceuticals are substituted for branded
drugs.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 400,000 shares
Common Stock offered by the Selling
Stockholders............................... 3,000,000 shares
Total Common Stock offered........... 3,400,000 shares
Common Stock to be outstanding after the
Offering................................... 22,092,454 shares(1)
Use of proceeds to the Company............... Expansion of working capital, potential
acquisitions and general corporate purposes.
New York Stock Exchange symbol............... BRL
</TABLE>
- ------------------------
(1) As of December 31, 1997, excludes 2,109,383 shares of Common Stock reserved
for issuance upon the exercise of outstanding options granted pursuant to
the Company's 1993 Stock Incentive Plan, the 1986 Stock Option Plan and the
1993 Stock Option Plan for Non-Employee Directors at a weighted average
exercise price of $13.70 per share.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FOR THE YEARS ENDED JUNE 30, DECEMBER 31,
--------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997 1996 1997
--------- ---------- ---------- ---------- ---------- ---------- ----------
STATEMENT OF OPERATIONS DATA:
Revenues:
Net product sales:
Manufactured........................ $ 58,047 $ 59,000 $ 56,170 $ 60,823 $ 61,702 $ 31,882 $ 50,421
Distributed (1)..................... -- 50,133 143,550 171,401 195,734 99,684 124,591
--------- ---------- ---------- ---------- ---------- ---------- ----------
Total net product sales........... 58,047 109,133 199,720 232,224 257,436 131,566 175,012
Proceeds from supply agreement (2).... -- -- -- -- 27,050 -- 13,583
--------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues.......................... 58,047 109,133 199,720 232,224 284,486 131,566 188,595
Costs and expenses:
Cost of sales......................... 35,913 78,021 159,498 189,394 217,196 111,161 133,995
Research and development.............. 5,370 6,778 10,443 11,274 13,536 5,947 8,815
Selling, general & administrative..... 23,554 19,170 19,014 21,695 23,391 8,599 17,607
--------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) from operations......... (6,790) 5,164 10,765 9,861 30,363 5,859 28,178
Interest income (expense), net.......... (2,154) (1,994) (661) 1,011 1,459 525 262
Other income (3)........................ 21,771 575 118 637 228 7 35
Net earnings (4)........................ $ 7,787 $ 2,658 $ 6,225 $ 7,016 $ 19,447 $ 3,995 $ 16,722
Per share data (5):
Net earnings per share.................. $ 0.40 $ 0.14 $ 0.31 $ 0.33 $ 0.92 $ 0.19 $ 0.78
Net earnings per share--assuming
dilution.............................. 0.40 0.13 0.30 0.32 0.87 0.18 0.72
Weighted average shares................. 19,417 19,553 20,125 20,968 21,133 21,074 21,550
Weighted average shares-- assuming
dilution.............................. 19,644 19,999 20,593 21,757 22,430 22,222 23,132
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------
<S> <C> <C>
AS
ACTUAL ADJUSTED(6)
---------- -------------
BALANCE SHEET DATA:
Cash and cash equivalents.............................................................. $ 34,085 $ 47,533
Working capital........................................................................ 64,004 77,452
Total assets........................................................................... 235,290 248,738
Total debt............................................................................. 34,407 34,407
Shareholders' equity................................................................... 121,086 134,534
</TABLE>
- ------------------------
(1) Amounts represent sales of Tamoxifen which the Company began distributing in
November 1993.
(2) See Note 2 to the Consolidated Financial Statements.
(3) Other income in 1993 includes a $21 million cash payment from settlement of
a patent dispute involving Tamoxifen.
(4) Reflects cumulative effect of accounting change of $0.4 million in 1994 and
extraordinary losses on the early extinguishment of debt of $0.1 million and
$0.1 million in fiscal 1995 and 1996, respectively.
(5) Amounts restated to reflect SFAS No. 128 (see Note 1(f) to the Consolidated
Financial Statements) and the 3 for 2 stock splits which occurred in March
1996 and May 1997.
(6) Adjusted to reflect the sale of 400,000 shares of Common Stock offered by
the Company hereby and the receipt of estimated net proceeds therefrom.
6
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN EVALUATING THE
COMPANY AND ITS BUSINESS BEFORE PURCHASING ANY OF THE COMMON STOCK OFFERED
HEREBY. PROSPECTIVE INVESTORS ARE CAUTIONED THAT THE STATEMENTS IN THIS
PROSPECTUS THAT ARE NOT DESCRIPTIONS OF HISTORICAL FACTS MAY BE FORWARD-LOOKING
STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DUE TO A NUMBER OF FACTORS,
INCLUDING THOSE IDENTIFIED UNDER "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS.
DEPENDENCE ON AN EXISTING PRODUCT AND RELIANCE ON THIRD PARTY MANUFACTURER
Barr distributes Tamoxifen (which is sold under the Barr label) under an
agreement with the innovator holding the product's patent. In December 1993, as
a result of a settlement of a patent challenge against the innovator of
Tamoxifen, Barr entered into the Tamoxifen Agreement. Under the terms of the
Tamoxifen Agreement, Barr purchases Tamoxifen directly from the innovator at a
discount and sells it as a generic product.
Tamoxifen accounted for approximately 76%, 74% and 72% of the Company's
total fiscal year 1997, 1996, and 1995 net product sales, respectively.
The Company has a tentatively approved ANDA to manufacture its own generic
version of Tamoxifen. Therefore, at the time of patent expiration (or should
another company's patent challenge succeed), Barr would be permitted to begin
manufacturing Tamoxifen. Within the last 18 months, a court upheld the Tamoxifen
patent in a challenge brought by another generic pharmaceutical company. The
Company is aware of other patent challenges pending against the patents covering
Tamoxifen. While the Company believes that these challenges will not be
successful, there is no assurance that the Tamoxifen patent will not be
successfully challenged before patent expiry.
Tamoxifen is currently one of the leading therapies in the treatment of
breast cancer. However, as new therapies are introduced and if they are
perceived or demonstrated to be better therapies, use of Tamoxifen could be
reduced. If such reduction was significant, it could have a material adverse
impact on the Company's business, results of operations and financial condition.
Tamoxifen is manufactured by the innovator and distributed by the Company
under the Tamoxifen Agreement. Under the Tamoxifen Agreement, the innovator is
obligated to supply the Company with sufficient quantities of Tamoxifen to meet
Barr's requirements. However, if for any reason the innovator's production is
disrupted, there is no assurance that the Company would be able to obtain its
required quantities on a timely basis to meet demand. This would have a material
adverse impact on the Company's business, results of operations and financial
condition. The Company maintains insurance designed to mitigate losses if supply
was interrupted, however, there is no assurance that such insurance would cover
the cause of the delay or that the coverage would be adequate.
UNCERTAINTIES RELATED TO MARKET ACCEPTANCE OF NEW PRODUCTS
The Company's ability to commercialize any generic product or proprietary
drug product following the receipt of regulatory approval will depend in part on
the acceptance of the product by physicians and patients. Unanticipated side
effects or unfavorable publicity concerning any of the Company's acquired, in-
licensed or developed products could have an adverse effect on the Company's
ability to obtain regulatory approvals, to achieve acceptance by prescribing
physicians, managed care providers, customers or patients, or to commercialize
such products, any of which could have a material adverse effect on the
Company's business, results of operations and financial condition.
7
<PAGE>
PRODUCT SPECIFIC REGULATORY/LEGISLATIVE ISSUES
During calendar 1997, the branded pharmaceutical industry increased its
efforts to utilize state and federal legislative and regulatory forums to delay
generic competition and limit the market erosion that occurs once monopoly
protection is lost for a branded product. In the past year, brand pharmaceutical
companies have used the Citizen Petition process (i.e., petition directly to
FDA) to request amendments to FDA standards, sought changes from the United
States Pharmacopeia (an organization which publishes industry recognized
compendia of drug standards) requirements, and attached patent extension
amendments to important federal legislation. One anti-generic defense strategy
involves a state-by-state initiative to enact legislation that restricts the
substitution of generic equivalents of Narrow Therapeutic Index ("NTI") drugs. A
drug is commonly said to have an NTI when small variances in the level of the
drug in the blood can change the effectiveness of the drug. Warfarin Sodium, a
product launched by the Company in July 1997, is considered an NTI drug. See
"Business--Development and Marketing of Selected Generic Pharmaceuticals." The
Company has and will continue to expend resources including management time and
financial resources on government affairs activities. However, there can be no
assurance that the Company's efforts will be successful and that such
legislative and regulatory initiatives will not limit acceptance of Barr's
products. Such limits could adversely affect the Company's business, results of
operations and financial condition.
GOVERNMENT REGULATION; NO ASSURANCES OF REGULATORY APPROVAL
All pharmaceutical manufacturers, including the Company, are subject to
extensive regulation by the federal government, principally by the FDA, and, to
a lesser extent, by the U.S. Drug Enforcement Administration ("DEA") and state
governments. The Federal Food, Drug and Cosmetic Act, the Controlled Substances
Act and other federal statutes and regulations govern or influence the testing,
manufacturing, safety, labeling, storage, record keeping, approval, pricing,
advertising and promotion of the Company's products. Non-compliance with
applicable requirements can result in fines, recalls and seizure of products.
Under certain circumstances, the FDA also has the authority to revoke drug
approvals previously granted.
FDA
FDA approval is required before any new drug or a generic equivalent to a
previously approved drug can be marketed. The Company generally receives
approval for generic products by submitting an ANDA to the FDA. When processing
an ANDA, the FDA waives the requirement of conducting complete clinical studies,
although it may require 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 a generic drug in the body are
substantially equivalent to the previously approved drug. An ANDA may be
submitted for a drug on the basis that it is bioequivalent to a previously
listed drug, contains the same active ingredient, has the same route of
administration, dosage form, and strength as the listed drug, and otherwise
complies with legal and regulatory requirements. There can be no assurance that
approval for ANDAs can be obtained in a timely manner, or at all.
Products resulting from the Company's proprietary drug program may require
the Company to submit an NDA to the FDA. When processing an NDA, the FDA
requires pre-clinical and clinical safety and efficacy data. Full clinical
trials, conducted in sequential phases, are used to demonstrate safety and
efficacy of the product to the FDA. The generation of required data, regulated
by the FDA, can be time-consuming and expensive without assurance that the
results will be adequate to justify ultimate approval by the FDA. There can be
no assurance that approval for NDAs can be obtained in a timely manner, or at
all.
8
<PAGE>
Among the requirements for drug approval by the FDA is that the Company's
manufacturing procedures and operations conform to current Good Manufacturing
Practices ("cGMP"), as defined in the U.S. Code of Federal Regulations. The cGMP
regulations must be followed at all times during the manufacture of
pharmaceutical products. In complying with the standards set forth in the cGMP
regulations, the Company must continue to expend time, money and effort in the
areas of production and quality control to ensure full technical compliance.
If the FDA believes a company is not in compliance with cGMP, certain
sanctions are imposed upon that company including: (i) withholding from the
company new drug approvals as well as approvals for supplemental changes to
existing applications; (ii) preventing the company from receiving the necessary
export licenses to export its products; and (iii) classifying the company as an
"unacceptable supplier" and thereby disqualifying the company from selling
products to federal agencies. In 1992, the Company was subject to a civil action
brought by the FDA with respect to non-compliance by the Company with cGMP for
certain of its then marketed products. A final court order was issued in
November 1994 resolving the matter. The Company believes it is currently in
compliance with cGMP.
In May 1992, the Generic Drug Enforcement Act of 1992 (the "Generic Act")
was enacted. The Generic Act, a result of legislative hearings and
investigations into the generic drug approval process, 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 Act requires the FDA to debar (i.e., not accept or review ANDAs for
a period of time) 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 Act
allows for civil penalties and withdrawal of previously approved applications.
Neither the Company nor any of its employees have ever been subject to
debarment.
DEA
Because the Company markets some and intends to introduce or reintroduce a
wide range of controlled substances in its analgesic and psychotherapeutic
product lines, it must meet the requirements of the Controlled Substances Act
and the regulations issued thereunder and 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 monitors allocation of
raw materials used in the production of controlled substances based on
historical sales data.
Regulatory compliance issues or regulatory changes affecting the Company's
operations or the approval or shipment of products could have a material adverse
effect upon the Company's business, results of operations and financial
condition.
INTENSE COMPETITION WITHIN THE GENERIC PHARMACEUTICAL INDUSTRY
The generic pharmaceutical industry is highly competitive. Revenue and gross
profit derived from the sale of developed generic products tend to follow a
pattern based upon regulatory and competitive factors unique to the generic
pharmaceutical industry. Competition among both branded and generic
pharmaceuticals aimed at the markets identified by the Company will be based on,
among other things, product efficacy, safety, reliability, availability and
price. As patents for brand-name products and any related market exclusivity
expire, prices and revenues typically decline as additional generic competitors
enter the marketplace. The number of generic competitors and the intensity of
competitive pricing and other marketing activities is unpredictable and can
result in a significantly curtailed profitable generic product life-cycle.
9
<PAGE>
The selling prices of the Company's products may decline as competition
increases. Currently, many of the Company's generic products compete with other
approved generic products. In addition, some third party payers, wholesalers and
chain buyers have instituted programs which further increase the downward
pressure on prices in the generic industry. These aggressive price reduction
activities could have a material adverse effect on the Company's business,
results of operations and financial condition.
Relatively large research and development expenditures enable a company to
support many FDA applications simultaneously, thereby improving the likelihood
of being among the first to obtain approval of at least some generic drugs.
Other products now in use or under development by others may be more effective
or have fewer side effects than the Company's current or future products. In
addition, competitors may develop their products more rapidly than the Company.
Competitors may also be able to complete the regulatory process sooner, and
therefore may begin to market their products in advance of the Company's
products. There can be no assurance that developments by others will not render
any product the Company produces or may produce obsolete or otherwise
non-competitive.
DEPENDENCE UPON NEW PRODUCTS AND EFFECT OF PRODUCT LIFE CYCLES; FACTORS
AFFECTING RESULTS OF OPERATIONS
The Company's results are affected by a number of factors, including, among
others, the timing of research and development costs, the timing of
introductions of new products by the Company and its competitors, timing of
costs associated with additional patent challenges and receipt of revenues
derived from the successful resolution of patent challenges, and dependence by
the Company on a limited number of products.
The Company's future results of operations will depend to a significant
extent upon its ability to develop and market new pharmaceutical products.
Operating results may vary significantly on an annual or quarterly basis
depending on the timing of, and the Company's ability to obtain, FDA approvals
for such products. Newly introduced generic pharmaceuticals with limited or no
off-patent competition are typically sold at higher selling prices, often
resulting in increased gross profit margins. As competition from other
manufacturers intensifies, selling prices and gross profit margins typically
decline. The Company's future operating results may also be affected by a
variety of additional factors, including the results of future successful patent
challenges, customer purchasing practices, changes in the degree of competition
affecting the Company's products and the timing of FDA approvals for and the
market acceptance of the Company's proprietary drug products.
In addition, a significant portion of the Company's revenues and gross
profit are the result of successful patent challenges undertaken by the Company
under the Drug Price Competition and Patent Term Restoration Act of 1984 (the
"Hatch-Waxman Act"). There can be no assurance the Company will successfully
complete the development of any additional products involving patent challenges,
succeed in any pending or future patent challenges or, if successful, receive
significant revenues or profit from the products covered by successfully
challenged patents. Moreover, the Hatch-Waxman Act or other applicable laws or
regulations may be amended in a way that adversely affects the Company's
business.
While the Company believes the pipeline of generic drugs and proprietary
drugs it currently has under development will allow it to compete effectively,
no assurance can be given that any of the drugs in its pipeline will be
successfully developed or approved by FDA, will be among the first to market or
will achieve significant revenues and profitability.
RISK OF PRODUCT LIABILITY CLAIMS; NO ASSURANCE OF ADEQUATE INSURANCE
Manufacturing, marketing, selling and testing of pharmaceutical products
involve a risk of product liability. Even unsuccessful product liability claims
could result in the expenditure of funds in litigation and the diversion of
management time and resources and could damage the Company's reputation and
impair the marketability of the Company's products. While the Company maintains
liability insurance, there can be no assurance that a successful claim could not
be made against the Company, that the amount of
10
<PAGE>
indemnification payments or insurance would be adequate to cover the costs of
defending against or paying such a claim or that damages payable by the Company
would not have a material adverse effect on the Company's business, results of
operations and financial condition and on the price of the Common Stock.
Furthermore, if the Company receives the required regulatory approvals for any
of its products under development, there can be no assurance that additional
liability insurance coverage for a commercialized product will be available in
the future on acceptable terms, if at all.
DEPENDENCE ON SINGLE SOURCES OF RAW MATERIAL SUPPLY
The principal raw material components of the Company's products are active
and inactive pharmaceutical ingredients and certain packaging materials. Many of
these components including the raw materials used in certain key products are
currently sourced from single qualified suppliers, both foreign and domestic.
Although the Company has not experienced difficulty to date in acquiring active
raw materials, or other materials for production development, no assurance can
be given that supply interruptions will not occur in the future or that the
Company will not have to obtain substitute materials, which would require
additional product validations and regulatory submissions. Any such interruption
of supply could have a material adverse effect on the Company's ability to
manufacture its products or to obtain or maintain regulatory approval of such
products.
CONSOLIDATION OF DISTRIBUTION NETWORK; CUSTOMER CONCENTRATION
The Company's principal customers are wholesale drug distributors and major
drug store chains. These customers comprise a significant part of the
distribution network for pharmaceutical products in the United States. This
distribution network is continuing to undergo significant consolidation marked
by mergers and acquisitions among wholesale distributors and the growth of
distributors controlling a significant share of the market, and the number of
independent drug stores and small drug store chains has decreased. The Company
expects that consolidation of drug wholesalers and retailers may increase
competitive pricing pressure on generic drug manufacturers. For the fiscal year
ended June 30, 1997 and six months ended December 31, 1997, sales to the
Company's ten largest customers represented approximately 64% and 72% of the
Company's gross product sales, respectively. For the six months ended December
31, 1997, two customers accounted for 14% and 10%, respectively, of the
Company's total gross product sales. One customer accounted for 12% of the
Company's total gross product sales in fiscal 1997. The loss of any of these
customers or further pricing pressures could materially and adversely affect the
Company's business, results of operations and financial condition.
THIRD PARTY REIMBURSEMENT PRICING PRESSURES
The Company's commercial success in producing, marketing and selling generic
products will depend, in part, on the availability of adequate reimbursement
from third-party health care payers, such as government and private health
insurers and managed care organizations. Third-party payers are increasingly
challenging the pricing of medical products and services. There can be no
assurance that reimbursement will be available to enable the Company to achieve
market acceptance of its products or to maintain price levels sufficient to
realize an appropriate return on the Company's investment in product acquisition
and development. If adequate reimbursement levels are not provided, the
Company's business, financial condition and results of operations could be
materially adversely affected. The market for the Company's products may be
limited by actions of third-party payers. For example, many managed health care
organizations are now controlling the pharmaceutical products that are on their
formulary lists. The resulting competition among pharmaceutical companies to
place their products on these formulary lists has created a trend of downward
pricing pressure in the industry. There can be no assurance that the Company's
products will be included on the formulary lists of managed care organizations
or that downward pricing pressures in the industry generally will not negatively
impact the Company's business, results of operations and financial condition.
11
<PAGE>
DEPENDENCE ON SCIENTIFIC AND MANAGEMENT PERSONNEL
The success of the Company is dependent on its ability to attract and retain
highly qualified scientific and management personnel. The Company faces intense
competition for personnel from other companies, academic institutions,
government entities and other organizations. There can be no assurance that the
Company will be successful in attracting and retaining such personnel. The loss
of such personnel, or the inability to attract and retain the additional, highly
skilled employees required for the expansion of the Company's activities, could
have a material adverse effect on the Company's business, results of operations
and financial condition.
CONTROL BY EXISTING SHAREHOLDER
Upon the completion of the Offering, Dr. Bernard Sherman, a director of the
Company, will beneficially own approximately 48.6% of the outstanding Common
Stock (without giving effect to the exercise of the Underwriters' over-allotment
option). Accordingly, this shareholder may have significant influence on the
outcome of certain shareholder votes, including votes concerning the elections
of directors, the adoption or amendment of provisions in the Company's
Certificate of Incorporation, and the approval of mergers and other significant
corporate transactions.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of shares by existing stockholders could adversely affect the
prevailing market price of the Company's Common Stock. As of December 31, 1997,
substantially all of the Company's 21,692,454 shares of outstanding Common Stock
were freely tradeable in the public market, however 14,330,197 shares were held
by officers and directors of the Company and were eligible for immediate sale in
the public market subject to volume and other restrictions of Rule 144. The
Selling Stockholders have agreed to sell 3,000,000 of such shares in the
Offering (excluding any over-allotment). In addition, on December 31, 1997,
options to purchase approximately 1,598,000 shares (of which 1,342,000 are held
by officers and directors and are subject to volume and other restrictions of
Rule 144) were exercisable and eligible for immediate sale in the public market.
However, all officers and directors of the Company and the Selling Stockholders
have agreed that they will not, except under this Prospectus or without prior
written consent of SBC Warburg Dillon Read Inc., sell shares of Common Stock
beneficially owned by them (including shares issuable upon exercise of options
held by them) until 90 days after the date of this Prospectus. See
"Underwriting."
POSSIBLE STOCK PRICE VOLATILITY
The stock market has from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, the market price of the Common Stock, like
the stock prices of many publicly traded pharmaceutical and biotechnology
companies, has been and may continue to be highly volatile. The sale by the
Company's principal shareholder or members of the Company's management of shares
of Common Stock, announcements of technological innovations or new commercial
products by the Company or its competitors, developments or disputes concerning
patent or proprietary rights, publicity regarding actual or potential medical
results relating to marketed products, or to products under development by the
Company or its competitors, regulatory developments in either the United States
or foreign countries, public concern as to the safety of pharmaceutical and
biotechnology products and economic and other external factors, as well as
period-to-period fluctuations in financial results, among other factors, may
have a significant impact on the market price of the Common Stock. See "Price
Range of Common Stock."
ABSENCE OF DIVIDENDS
Since inception the Company has not paid any cash dividends. In addition,
the Company is limited by existing debt covenants as to the amount of dividends
it can pay. The Company's current policy is to retain its earnings, if any, to
finance expansion and product development. Payment of dividends in the future
will depend on the Company's earnings and financial condition and other factors
as the Company's Board of Directors may consider or deem appropriate at the
time. See "Dividend Policy."
12
<PAGE>
USE OF PROCEEDS
Of the 3,400,000 shares of Common Stock being offered hereby, the Company is
selling 400,000 shares. The net proceeds to the Company from the sale of these
shares of Common Stock are estimated to be $13.4 million based on a public
offering price of $35.50 per share, after deducting estimated offering expenses
and underwriting discounts payable by the Company. The Company will not receive
any proceeds from the sale of Common Stock by the Selling Stockholders.
The Company intends to use the net proceeds of the offering for general
corporate purposes, including expansion of working capital and potential
acquisitions of companies and/or selected products that are complementary to the
existing business of the Company. Although the Company currently has no
commitments with respect to additional acquisitions, the Company regularly
evaluates such opportunities. Pending such uses, the net proceeds will be
invested in government securities and other short-term investment-grade,
interest-bearing securities.
PRICE RANGE OF COMMON STOCK
Since February 10, 1998 the Common Stock has been listed and traded on the
New York Stock Exchange. Prior to February 10, 1998 the Common Stock was listed
and traded on the American Stock Exchange. The following table sets forth, for
the quarterly periods indicated, high and low prices of the Common Stock.
Amounts reflect adjustment for the March 1996 and May 1997 3-for-2 stock splits.
<TABLE>
<CAPTION>
LOW HIGH
--------- ---------
<S> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1996:
First Quarter.................................................................................. $ 9.11 $ 10.94
Second Quarter................................................................................. 9.33 13.67
Third Quarter.................................................................................. 11.39 18.33
Fourth Quarter................................................................................. 16.42 20.83
FISCAL YEAR ENDED JUNE 30, 1997:
First Quarter.................................................................................. $ 14.75 $ 20.00
Second Quarter................................................................................. 16.83 19.33
Third Quarter.................................................................................. 16.42 28.00
Fourth Quarter................................................................................. 24.38 49.75
FISCAL YEAR ENDING JUNE 30, 1998:
First Quarter.................................................................................. $ 37.00 $ 49.00
Second Quarter................................................................................. 32.50 40.13
Third Quarter (through March 10, 1998)......................................................... 33.25 41.00
</TABLE>
The last reported sales price for the Common Stock on the New York Stock
Exchange on March 10, 1998 was $36 per share.
DIVIDEND POLICY
Since its inception the Company has not declared or paid a cash dividend on
its Common Stock and does not intend to do so in the foreseeable future. In
addition, the Company is limited by existing debt covenants as to the amount of
dividends it can pay. The Company's current policy is to retain its earnings, if
any, to finance expansion and product development. Payment of dividends in the
future will depend on the earnings and financial condition of the Company and
such other factors as the Company's Board of Directors may consider or deem
appropriate at the time.
13
<PAGE>
CAPITALIZATION
The following table sets forth the Company's cash and capitalization as of
December 31, 1997: (i) on an actual basis; and (ii) as adjusted to reflect the
receipt and application of the estimated net proceeds, after deducting
underwriting discounts and commissions and expenses payable by the Company from
the sale of 400,000 shares of Common Stock pursuant to the Offering.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------
<S> <C> <C>
AS ADJUSTED
ACTUAL (1)
---------- --------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................................................ $ 34,085 $ 47,533
---------- --------------
---------- --------------
Total debt........................................................................... $ 34,407 $ 34,407
Shareholders' equity:
Preferred stock, par value $1 per share; 2,000,000 shares authorized; none
issued........................................................................... -- --
Common Stock, par value $.01 per share; 100,000,000 shares authorized; 21,810,409
shares issued; 22,210,409 shares issued as adjusted (1).......................... 218 222
Additional paid in capital......................................................... 48,883 62,327
Retained earnings.................................................................. 72,598 72,598
Unrealized loss on investment...................................................... (600) (600)
Treasury stock at cost............................................................. (13) (13)
---------- --------------
Total shareholders' equity....................................................... 121,086 134,534
---------- --------------
Total capitalization........................................................... $ 155,493 $ 168,941
---------- --------------
---------- --------------
</TABLE>
- ------------------------
(1) Excludes 2,109,383 shares of Common Stock reserved for issuance upon the
exercise of outstanding options granted pursuant to the Company's 1993 Stock
Incentive Plan, the 1986 Stock Option Plan and the 1993 Stock Option Plan
for Non-Employee Directors at a weighted average exercise price of
approximately $13.70 per share.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated Financial Statements
and related Notes included elsewhere in this Prospectus. The statement of
operations data for the three years ended June 30, 1997, and the balance sheet
data at June 30, 1996 and 1997 are derived from the audited financial statements
of the Company included elsewhere in this Prospectus. The statement of
operations data for the two years ended June 30, 1994 and the balance sheet data
as of June 30, 1993, 1994 and 1995 are derived from the audited financial
statements of the Company which are not included in this Prospectus. The interim
information presented is unaudited; however, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair representation of such information have been included. The statement of
operations data for the periods ended December 31, 1996 and 1997 and the balance
sheet data as of December 31, 1997 have been derived from the Company's
unaudited financial statements. The results of operations for the six months
ended December 31, 1997 are not necessarily indicative of the results of
operations to be expected for the fiscal year ending June 30, 1998.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Net product sales:
Manufactured................................... $ 58,047 $ 59,000 $ 56,170 $ 60,823 $ 61,702 $ 31,882 $ 50,421
Distributed (1)................................ -- 50,133 143,550 171,401 195,734 99,684 124,591
--------- --------- --------- --------- --------- --------- ---------
Total net product sales...................... 58,047 109,133 199,720 232,224 257,436 131,566 175,012
Proceeds from supply agreement (2)............... -- -- -- -- 27,050 -- 13,583
--------- --------- --------- --------- --------- --------- ---------
Total revenues..................................... 58,047 109,133 199,720 232,224 284,486 131,566 188,595
Costs and expenses:
Cost of sales.................................... 35,913 78,021 159,498 189,394 217,196 111,161 133,995
Research and development......................... 5,370 6,778 10,443 11,274 13,536 5,947 8,815
Selling, general & administrative................ 23,554 19,170 19,014 21,695 23,391 8,599 17,607
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) from operations.................. (6,790) 5,164 10,765 9,861 30,363 5,859 28,178
Interest income.................................... 345 689 1,874 2,778 2,398 1,164 697
Interest (expense)................................. (2,499) (2,683) (2,535) (1,767) (939) (639) (435)
Other income (3)................................... 21,771 575 118 637 228 7 35
--------- --------- --------- --------- --------- --------- ---------
Earnings before income taxes and extraordinary
loss............................................. 12,827 3,745 10,222 11,509 32,050 6,391 28,475
Income tax expense................................. 5,040 1,461 3,852 4,368 12,603 2,396 10,963
--------- --------- --------- --------- --------- --------- ---------
Earnings before extraordinary loss................. 7,787 2,284 6,370 7,141 19,447 3,995 17,512
Extraordinary loss on extinguishment of debt,
net of taxes..................................... -- -- (145) (125) -- -- (790)
--------- --------- --------- --------- --------- --------- ---------
Net earnings before cumulative effect of accounting
change........................................... 7,787 2,284 6,225 7,016 19,447 3,995 16,722
Cumulative effect of accounting change............. -- 374 -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net earnings (4)................................... $ 7,787 $ 2,658 $ 6,225 $ 7,016 $ 19,447 $ 3,995 $ 16,722
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Per share data (5):
Net earnings per share............................. $ 0.40 $ 0.14 $ 0.31 $ 0.33 $ 0.92 $ 0.19 $ 0.78
Net earnings per share -- assuming dilution........ $ 0.40 $ 0.13 $ 0.30 $ 0.32 $ 0.87 $ 0.18 $ 0.72
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average shares............................ 19,417 19,553 20,125 20,968 21,133 21,074 21,550
Weighted average shares -- assuming dilution....... 19,644 19,999 20,593 21,757 22,430 22,222 23,132
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DEC. 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 25,048 $ 36,499 $ 52,987 $ 44,893 $ 31,923 $ 34,085
Working capital.................................... 51,371 53,227 58,364 52,985 41,807 64,004
Total assets....................................... 94,283 125,907 155,953 169,220 203,802 235,290
Total debt......................................... 30,646 30,500 20,414 21,524 19,080 34,407
Shareholders' equity............................... 51,498 54,984 71,853 80,161 102,138 121,086
</TABLE>
- ------------------------
(1) Amounts represent sales of Tamoxifen, which the Company began distributing
in November 1993.
(2) See Note 2 to the Consolidated Financial Statements.
(3) Other income in 1993 includes a $21 million cash payment from the settlement
of a patent dispute involving Tamoxifen.
(4) Reflects cumulative effect of accounting change of $0.4 million in 1994 and
extraordinary losses on the early extinguishment of debt of $0.1 million and
$0.1 million in fiscal 1995 and 1996, respectively.
(5) Amounts restated to reflect SFAS No. 128 (see Note 1(f) to the Consolidated
Financial Statements) and the 3 for 2 stock splits which occurred in March
1996 and May 1997.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Consolidated Financial Statements
of the Company and the Notes thereto included elsewhere in this Prospectus. This
Prospectus contains forward looking statements that involve risks and
uncertainties, such as statements of the Company's objectives and expectations.
The cautionary statements made in this Prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this Prospectus. See "Risk Factors."
OVERVIEW
The Company has engaged in the manufacture of generic drugs since it
commenced operations in 1972. Since 1994, the Company has pursued a business
strategy of developing and marketing selected generic pharmaceuticals,
challenging patents of certain branded products, and developing and introducing
proprietary pharmaceuticals that will have some market exclusivity.
The Company markets approximately 66 drug products, representing various
dosage strengths and product forms of 33 chemical entities. The Company's
product line is concentrated primarily on six core therapeutic categories:
oncology, female healthcare, cardiovascular, anti-infective, pain management and
psychotherapeutic.
The Company's future results of operations will depend to a significant
extent upon its ability to develop and market new pharmaceutical products.
Operating results may vary significantly on an annual or quarterly basis
depending on the timing of, and the Company's ability to obtain, FDA approvals
for such products. Newly introduced generic pharmaceuticals with limited or no
off-patent competition are typically sold at higher selling prices, often
resulting in increased gross profit margins. As competition from other
manufacturers intensifies, selling prices and gross profit margins typically
decline. The Company's future operating results may also be affected by a
variety of additional factors, including the results of future patent
challenges, customer purchasing practices, changes in the degree of competition
affecting the Company's products and the timing of FDA approvals for, and the
market acceptance of, the Company's generic and proprietary drug products.
The Company's dependence on a limited number of products, in particular
Tamoxifen and Warfarin Sodium, the product life cycles for such products, and
the possibility of successful resolution of patent challenges may result in
significant fluctuations in the Company's earnings. Continued growth in the
Company's revenues and profits will depend on continued market demand for its
products, as well as the successful development and marketing of new generic and
proprietary products.
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1996 (THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
----------------------
<S> <C> <C> <C>
1997 1996 CHANGE
---------- ---------- ---------
Revenues:
Net product sales:
Distributed.................................................................. $ 124,591 $ 99,684 $ 24,907
Manufactured................................................................. 50,421 31,882 18,539
---------- ---------- ---------
Total net product sales...................................................... 175,012 131,566 43,446
Proceeds from supply agreement............................................... 13,583 -- 13,583
---------- ---------- ---------
Total revenues................................................................. $ 188,595 $ 131,566 $ 57,029
</TABLE>
16
<PAGE>
Total revenues increased approximately 43% as a result of increased net
product sales and proceeds from the supply agreement. Proceeds from the supply
agreement are earned in accordance with a contingent, non-exclusive supply
agreement ("Ciprofloxacin Agreement") between Bayer AG and Bayer Corporation
("Bayer") and the Company, which ends with the patent expiry in December 2003.
During the term of the Ciprofloxacin Agreement, Bayer has the option of
supplying Barr and an unrelated third party with ciprofloxacin hydrochloride to
market and distribute pursuant to a license from Bayer or making quarterly cash
payments to Barr and such third party beginning in March 1998. If Bayer does not
supply Barr with product, the Company expects its 1998 earnings related to the
Supply Agreement to approximate the $24,550 initial payment received by Barr in
January 1997. If Bayer elects to provide Barr with product, the amount Barr
could earn would be dependent on market conditions.
The increase in net product sales is attributable to sales of Warfarin
Sodium, which was launched in July 1997, as well as an increased demand for
Tamoxifen.
The 25% increase in distributed product sales, which primarily represents
sales of Tamoxifen, is the result of accelerated buying by customers, during the
period, which the Company believes was the result of customers anticipating a
price increase for Barr's Tamoxifen that did not occur. Also contributing to the
increase was increased demand for the 20 mg strength of Tamoxifen, which the
Company began distributing in December 1996.
Net sales of manufactured products increased 58%, which is primarily
attributable to sales of Warfarin Sodium, which the Company launched in July
1997. Manufactured net sales include revenues from three new products in fiscal
1998 compared to four new products in fiscal 1997. These products represented
approximately 38% and 10% of total manufactured sales in fiscal 1998 and 1997,
respectively. Revenue from these products more than offset price declines and
higher discounts on certain existing manufactured products.
Cost of sales increased to $133,995 from $111,161, but decreased as a
percentage of net product sales from 84% to 77%. The decrease in cost of sales
as a percentage of net product sales is primarily attributable to the increase
in manufactured product sales. This positively impacts margins because the
profit margin the Company earns on manufactured products is generally greater
than the margins it earns on distributed products.
Selling, general and administrative expenses increased to $17,607 from
$8,599. The largest components of the increase related to legal and government
affairs activities as well as higher expenses in promotions and advertising
associated with Warfarin Sodium and other new products. The increased legal fees
resulted primarily from lower reimbursements received from patent challenge
partners; the prior year expense reflected approximately $4,400 in reimbursement
of legal fees. Government affairs expenses were higher in the current year due
to the Company's activities directed at countering DuPont Merck's continuing
efforts to restrict substitution of Warfarin Sodium.
Total research and development expenses increased to $8,815 from $5,947. The
increase is the result of increased personnel costs to support the number of
products in development; higher raw material costs including costs associated
with the Company's proprietary drug program which was not in place in the prior
year; and a strategic investment of more than $600, which was allocated to
in-process research and development, for six ANDAs and related technologies.
These increases were partially offset by reimbursements from a proprietary drug
collaborator for certain development costs.
Interest income declined by $467 primarily due to a decrease in the average
cash and cash equivalents balance.
Interest expense decreased $204 due to an increase in capitalized interest
associated with increased capital improvements over the corresponding fiscal
year. The increase in capitalized interest was partially offset by higher fees
paid on the unsecured Tamoxifen balance. See Note 1 to the Consolidated
Financial Statements.
17
<PAGE>
In the quarter ended December 31, 1997, the Company incurred an
extraordinary loss of $790 on the early extinguishment of debt. See Note 5 to
the Consolidated Financial Statements.
FISCAL 1997 COMPARED TO FISCAL 1996 (THOUSANDS OF DOLLARS)
Total revenues increased approximately 23% to $284,486 from $232,224. The
increase was equally attributable to increasing net product sales and earnings
from the contingent non-exclusive Supply Agreement that resulted from the
successful settlement of the Ciprofloxacin patent challenge in January 1997. See
Note 2 to the Consolidated Financial Statements.
Net product sales increased 11% to $257,436 from $232,224. The increase is
primarily attributable to a continued increase in demand for Tamoxifen as well
as increased sales for the balance of the Company's product line.
Net Tamoxifen sales increased 14% to $195,734 or 76% of net product sales
from $171,401 or 74% of net product sales. The growth is primarily attributable
to increases in the Company's market share and price. Tamoxifen is a patented
product manufactured for the Company by the innovator, and is distributed by the
Company under a non-exclusive license agreement with the innovator. In January
1996, the innovator introduced a 20 mg strength of this product. As permitted
under the terms of the Tamoxifen Agreement with the innovator, the Company began
distributing the 20 mg strength in December 1996. This introduction did not have
a material impact on Barr's financial statements which is consistent with the
relatively low sales of the branded version of that 20 mg product. Currently,
Tamoxifen only competes against the innovator's products, which are sold under
the brand name.
Net sales of Barr-manufactured products increased approximately 2%.
Barr-manufactured net sales include revenues from four new products in fiscal
1997 compared to two new products in fiscal 1996. These products represented 11%
and 4% of total Barr-manufactured sales in 1997 and 1996, respectively. Revenues
from these products and volume increases on the Company's existing product line
offset price declines and higher discounts on certain existing products.
Cost of sales increased to $217,196 or 84% of net product sales from
$189,394 or 82%. The increase in cost of sales as a percentage of net product
sales is primarily the result of two factors. First, an increase in Tamoxifen's
share of total Company revenues and second, an increase in sales discounts and
allowances due to increased competition. The increase in Tamoxifen's portion of
net product sales negatively impacts margins because the profit margin the
Company earns as a distributor is generally below the margin it earns as a
manufacturer. Increased sales discounts and allowances reduce the Company's net
selling price and margins, but are offered by the Company to maintain market
share in light of increased competition.
New products such as Megestrol Acetate and Danazol, which were introduced in
November 1995 and August 1996, respectively, as well as Medroxyprogesterone and
Meperidine, which were introduced in the quarter ended December 31, 1996, are
currently subject to less competition and therefore generate margins which help
to offset the declining margins on the Company's established products. The
Company continues to experience competition on sales of its other products, and
it is impossible to predict whether future price erosion will occur.
Selling, general and administrative expenses increased to $23,391 from
$21,695, yet decreased as a percentage of net product sales from 9.3% to 9.1%.
This percentage decrease was expected due to increased net product sales. The
majority of the dollar increase is attributable to increases in expenses in
preparation for the July 1997 launch of Warfarin Sodium and government affairs
expenses, offset by approximately $3,400 of reimbursed legal fees related to the
ciprofloxacin patent challenge.
Research and development expenses increased to $13,536 from $11,274. The
increase is primarily the result of increased salaries and related costs
associated with the addition of scientists and higher outside
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consulting costs necessary to support the number of products in development.
These increases were partially offset by a decrease in outside testing services.
Interest income decreased by $380 in comparison to the prior year. The
decrease is primarily the result of $485 in interest income included in the
prior year's amount in connection with interest earned on a income tax refund
from the Internal Revenue Service. The decrease was partially offset by an
increased return earned by the Company on its investments in the current fiscal
year.
Interest expense decreased $828 due to an increase in capitalized interest
associated with an increase in capital improvements as compared to the prior
year. The increase in capitalized interest was partially offset by interest on
the Company's equipment financing agreement entered in April 1996 and the fee
paid on the unsecured Tamoxifen balance.
FISCAL 1996 COMPARED TO FISCAL 1995 (THOUSANDS OF DOLLARS)
Total revenue increased approximately 16% to $232,224 from $199,720. The
increase is primarily attributable to a continued increase in demand for
Tamoxifen as well as increased sales for the balance of the Company's product
lines.
Net sales of Tamoxifen increased approximately $28,000 to $171,401 or 74% of
net product sales, compared to $143,550 or 72% of net sales in the prior year.
This 20% growth resulted from increases in the Company's market share and price.
While the Company's Tamoxifen revenues increased in fiscal 1996, the rate of
growth between fiscal 1995 and 1996 declined compared to prior years. This
decline in the rate of growth was expected given the dramatic growth achieved
immediately after the Company began distributing Tamoxifen and given the
Company's share of the current market.
Net sales of Barr-manufactured products increased by approximately 8%
primarily as a result of increases in volume. Methotrexate accounted for
approximately 10% of the Company's net product sales in 1996 as compared to 14%
in 1995. No other Barr-manufactured product accounted for 10% or more of net
sales in either year.
Cost of sales increased to $189,394 from $159,498 due to increased sales
volume. However, cost of sales as a percentage of net sales increased from 80%
to 82%. The increase in cost of sales as a percentage of net sales is primarily
attributed to the lower gross margins associated with the increased distribution
of Tamoxifen and price competition on certain of the Company's manufactured
products.
Selling, general and administrative expenses increased to $21,695 from
$19,014, yet remained consistent as a percentage of net product sales as was
expected, due to the increase in net product sales. The increase reflects
increases in personnel costs; additional advertising and promotion costs
associated with the introduction of Megestrol Acetate in late November 1995; and
a full-year of depreciation from the December 1994 implementation of a new core
computer system. Fiscal 1996 also included approximately $700 in non-recurring
charges in connection with a voluntary early retirement program and a legal
settlement. During fiscal 1996, Barr entered into multi-year agreements with
another company and a related party to share in development and litigation costs
associated with certain of its patent challenges. These agreements resulted in
the reimbursement of $1,977 in legal fees.
Research and development expenses increased to $11,274 from $10,443. This
resulted from higher outside testing and raw material costs associated with an
increase in the number of products under development when compared to the prior
year as well as increases in salaries and related costs associated with the
addition of scientists. These increases were partially offset by a decrease in
fees paid to outside laboratories to conduct biostudies. Such a decrease was
expected since the prior year's amounts included biostudy costs for conjugated
estrogens. The number, complexity and associated costs of biostudies for
conjugated estrogens were greater than those for other products under
development in fiscal 1996.
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Interest income increased 48% to $2,778 from $1,874, due to $485 in interest
income received in February 1996 in connection with an income tax refund from
the Internal Revenue Service as well as an increase in the rate of return earned
on cash and cash equivalents during the year.
Interest expense declined 30% primarily due to a reduction in long-term debt
during the year and an increase in capitalized interest associated with an
increase in capital improvements in comparison to the prior year. These
decreases were partially offset by an increase in fees paid in connection with
the Company's December 1995 agreement with the innovator of Tamoxifen to pay a
monthly fee on the unsecured Tamoxifen payable balance in return for the
elimination of the cash collateral requirement.
In fiscal 1996 and 1995, the Company incurred extraordinary losses on the
early extinguishment of debt. In 1996, the Company negotiated the prepayment of
$2,000 in principal of its $20,000 10.15% Senior Secured Notes. The Company
recorded an extraordinary loss for the related prepayment penalty and write-off
of deferred financing costs. In 1995, the Company incurred an extraordinary loss
primarily from the write-off of deferred financing costs associated with its
$10,000 10.05% Convertible Subordinated Notes which were converted to Common
Stock.
LIQUIDITY AND CAPITAL RESOURCES (THOUSANDS OF DOLLARS)
The Company's cash and cash equivalents increased to $34,085 as of December
31, 1997 from $31,923 as of June 30, 1997. During the six months ended December
31, 1997, the Company increased the cash held in its cash collateral account
from $11,239 at June 30, 1997 to $12,072. The Company expects to allocate more
of its cash to this account during the next three months to reduce the fees it
pays to the innovator of Tamoxifen. See Note 1 to the Consolidated Financial
Statements.
Cash provided by operating activities totaled $1,163 for the six months
ended December 31, 1997 as increases in accounts receivable were offset by net
income of $16,722, inventory declines and higher accounts payable. The increase
in accounts receivable and decrease in inventory were driven by a 33% increase
in net product sales. Accounts receivable also increased due to the continuing
accrual of revenue earned under the Ciprofloxacin Agreement entered into by the
Company as part of its settlement with Bayer AG and Bayer Corporation. Quarterly
payments due under the Ciprofloxacin Agreement are expected to begin by March
31, 1998.
During the first six months of fiscal 1998, the Company invested
approximately $13,150 in capital expenditures primarily on its Virginia
manufacturing and distribution facilities. Certain areas of the facility
including the warehouse and distribution area became operational in January
1998. As a result, the Company expects its capital spending will be lower in the
second half of fiscal 1998 than compared to the first half.
In August 1997, Barr made a strategic investment of $4,069 in Warner
Chilcott Public Limited Company ("Warner Chilcott") by acquiring 250,000
Ordinary Shares, represented by American Depository Shares ("ADSs") in an
initial public offering and received warrants to purchase an additional 250,000
shares in the form of ADSs at an exercise price per share equal to $16.25.
Beginning on the first anniversary of Warner Chilcott's initial public offering
and annually thereafter for the next three years, one fourth of the warrants
will be exercisable by Barr. If Barr does not exercise in full the portion of
the warrant exercisable during any one year, such portion of the warrant will
terminate. Exercising its warrant at the stated price represents a potential use
of cash of $1,000 per year over the next four years.
In November 1997, the Company refinanced its $14,400 10.15% Senior Secured
Notes due June 28, 2001 with $30,000 of Senior Unsecured Notes with an average
interest rate of 6.88% per year. The new Senior Unsecured Notes include a
$20,000 7.01% Note due November 18, 2007 and a $10,000 6.61% Note due November
18, 2004. The refinancing reduces the Company's principal payments by
approximately $2,200 per year over the next four years.
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<PAGE>
In addition, the Company replaced its $10,000 Secured Revolving Credit
Facility with a $20,000 Unsecured Revolving Credit Facility (the "Revolving
Credit Facility"), and the Company opted not to renew its $18,750 equipment
leasing facility. There were no borrowings outstanding under the Revolving
Credit Facility at December 31, 1997.
The Company also continues to evaluate other growth opportunities including
additional strategic investments, acquisitions and joint ventures, which could
require significant capital resources.
The Company believes that cash flow from operations and existing borrowing
capacity under its Revolving Credit Facility will be adequate to meet its
operating needs and to take advantage of strategic opportunities as they occur.
To the extent that additional capital resources are required, such capital may
be raised by additional bank borrowings, equity offerings or other means.
OTHER MATTERS
NEW ACCOUNTING PRONOUNCEMENT
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." This Statement
requires companies to replace the presentation of primary earnings per share
("EPS") with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the Statements of Earnings and a
reconciliation of the basic EPS computation to the diluted EPS computation. All
prior period EPS data has been restated to conform with the provisions of SFAS
No. 128.
YEAR 2000
Over the past several years the Company has installed new computer systems
which are Year 2000 compliant. Currently, the Company is reviewing its other
internal systems to determine the impact, if any, of the Year 2000. The Company
believes it will achieve Year 2000 compliance in advance of the year 2000, and
does not anticipate any material disruption in its operations as the result of
any failure by the Company to be in compliance. The Company is currently
developing a plan to evaluate the Year 2000 compliance status of its suppliers
and customers.
FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements that involve a number of risks and
uncertainties, the regulatory environment, fluctuations in operating results,
capital spending, Year 2000 issues and other risks detailed from time-to-time in
the Company's filings with the Commission.
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BUSINESS
OVERVIEW
The Company is an established pharmaceutical company engaged in the
development, manufacture and marketing of generic and proprietary prescription
pharmaceuticals. The Company currently markets 66 products, representing various
dosage strengths and product forms of 33 chemical entities. Of these products,
29 have been launched since the beginning of 1996. The Company sells 15 products
where its market share in terms of units dispensed is greater than 40%. The
Company's product line is concentrated primarily on six core therapeutic
categories: oncology, female healthcare, cardiovascular, anti-infective, pain
management and psychotherapeutic. The Company's most significant recent product
introduction is Warfarin Sodium, which was launched by the Company in July 1997.
Warfarin Sodium is the generic equivalent of DuPont Merck's Coumadin, an
anti-coagulant with U.S. sales of approximately $500 million for the twelve
months ended September 30, 1997. The Company has entered into settlement
agreements with the innovators of two products, Tamoxifen and Ciprofloxacin.
These agreements include distribution agreements and cash payments that provide
the Company with significant revenues and profits. Barr generated revenues of
$341.5 million and net income of $32.2 million for the twelve months ended
December 31, 1997.
The Company currently has under development more than 40 pharmaceutical
products, representing more than 30 chemical entities. The Company has six ANDAs
and two ANDA supplements pending at the FDA for products that had U.S. industry
sales of approximately $2 billion for the twelve months ended September 30,
1997. In addition, prior to December 31, 1998, Barr anticipates filing twelve
ANDAs and two ANDA supplements for products which had U.S. industry sales in
excess of $2 billion for the twelve months ended September 30, 1997. Of these 22
products, the Company anticipates receiving FDA approval for at least five
products by the end of calendar 1998. One of the pending ANDAs is for
fluoxetine, the generic equivalent of Eli Lilly's anti-depressant Prozac, which
is subject to an ongoing patent challenge. Prozac had U.S. sales of
approximately $1.7 billion for the twelve months ended September 30, 1997. The
Company anticipates that a trial on the patent claims at issue will commence in
the second half of calendar 1998. The Company has three additional patent cases
in active development and of the ANDAs expected to be filed in calendar 1998
three relate to such patent cases. In addition, the Company, in conjunction with
strategic partners, has four proprietary products in various stages of
development. An NDA has been filed by Barr's partner on one of these products,
and the Company anticipates that its partner will receive regulatory approval
for such product before the end of calendar 1998.
INDUSTRY OVERVIEW AND MARKET DYNAMICS
GENERIC INDUSTRY
Generic pharmaceuticals are the chemical and therapeutic equivalents of
brand name drugs. When an ANDA meets FDA requirements for pharmaceutical and
therapeutic equivalence, it is approved and receives an "AB Rating." This rating
allows the generic drug to be substituted for the branded product when a
prescription is presented to the pharmacist for dispensing. Although generic
pharmaceuticals must meet the same quality standards as branded pharmaceuticals,
these equivalent medicines are sold at prices that are typically 30% to 80%
lower than the branded product.
Generic pharmaceuticals represent an increasing proportion of medicines
dispensed in the United States. In 1995, the U.S. generic pharmaceutical
industry had total U.S. sales of approximately $9 billion. The Company believes
that there has been considerable growth in the generic pharmaceutical industry
which has been driven by: (i) efforts by government (at both the state and
federal level), employers, third-party payers and consumers to control health
care costs; (ii) increased acceptance of generic medicines by physicians,
pharmacists and consumers; and (iii) the increasing number of drugs that lost
patent protection.
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The Company believes that the market for generic pharmaceuticals will
continue to grow, driven by two primary factors. The first factor is the future
commercialization of generic equivalents of drugs with patents that (i) have
already expired or (ii) will expire over the next several years. Industry
sources estimate that pharmaceuticals with 1996 U.S. sales in excess of $6
billion are already off-patent and have no generic competition. In addition,
industry sources estimate that, through the year ended 2002, branded drugs with
1996 U.S. sales of approximately $11 billion will lose patent protection. The
Company believes a second factor driving growth will be increasing rates at
which generic drugs are substituted for branded drugs. The generic substitution
rate is defined as the rate at which a generic pharmaceutical is substituted for
a branded drug when a generic alternative is available.
Generic pharmaceuticals represent a much larger percentage of total drug
prescriptions dispensed than their corresponding sales percentage. The lower
percentage of total dollar sales compared to the percentage of prescriptions
dispensed, reflects the substantial discount to branded pharmaceuticals at which
generic pharmaceuticals are sold. This discount tends to increase (and profits
tend to decrease) as the number of generic competitors rises for a given
product. Because of this pricing dynamic, companies that are among the first to
develop and market an off-patent pharmaceutical tend to garner more profits than
companies with subsequent approvals to market an equivalent product.
Furthermore, products that for various reasons are difficult to develop
generally result in fewer companies marketing those products and may offer
profitability that is higher than those where the number of competitors is
greater. However, profit potential is influenced by many factors beyond the
number of competitors on a given drug. Depending on the actions of each
competitor, price reductions can be just as significant on products with few
competitors as on products with many competitors.
A significant portion of pharmaceuticals are distributed in the United
States through wholesale drug distributors and major retail drug store chains.
During the past several years, there has been a consolidation of these
distribution channels, resulting in a smaller number of wholesale distributors
and the emergence of fewer, larger regional and nationwide retail drug store
chains. In addition to forcing generic drug manufacturers to lower their prices
and/or provide greater volume discounts, these customers have also reduced the
number of sources from which they purchase pharmaceutical products.
PROPRIETARY INDUSTRY
Branded pharmaceuticals had 1995 U.S. sales of approximately $70 billion. A
relatively small amount of products make up a majority of these sales. However,
there are many products which address smaller markets and therefore have lower
levels of sales. The marketplace economics that impact the much larger,
multi-national pharmaceutical companies may limit their ability to provide
therapies targeted at niche treatments, such as orphan drug products or
therapies where the patient population is too small to provide a sufficient
return on investment. These areas could provide an opportunity for limited
competition for products.
BUSINESS STRATEGY
The Company's objective is to utilize its capabilities to maximize return on
shareholder investment. To achieve this objective, the Company focuses it
resources on three core strategies:
DEVELOPING AND MARKETING SELECTED GENERIC PHARMACEUTICALS. The Company
principally pursues the development and marketing of generic pharmaceuticals
that have one or more barriers to entry. The characteristics of the products
that the Company pursues may include: (i) the need for specialized manufacturing
capabilities; (ii) difficulty in raw material sourcing; (iii) complex
formulation or development characteristics; (iv) regulatory or legal challenges;
or (v) sales and marketing challenges. The Company believes products with such
barriers will face limited competition and therefore provide longer product
life-cycles and/or higher profitability than commodity generic products.
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CHALLENGING PATENTS PROTECTING CERTAIN BRAND PHARMACEUTICALS. The Company
pursues the development and marketing of branded pharmaceuticals protected by
patents where the Company believes that such patents are either invalid,
unenforceable or not infringed by the Company's product. This strategy is an
extension of the Company's generic strategy as issued patents, even invalid
patents, present barriers to entry to companies that do not have the
capabilities to assess and challenge the validity of such patents. The Company
believes that the successful development of pharmaceuticals that were perceived
by competitors to be patent protected may offer longer product life-cycles
and/or higher profitability.
DEVELOPING AND INTRODUCING PROPRIETARY PHARMACEUTICALS. The Company is
pursuing the development of proprietary pharmaceuticals that may have some
period of exclusivity, typically from three to seven years. The Company believes
that such products will produce higher and more consistent profitability than
the typical generic product. The Company anticipates that the majority of its
proprietary products will be developed with strategic partners and marketed by
those partners through detail product sales forces or other appropriate
channels.
The Company believes it has the research, development, regulatory,
manufacturing as well as sales and marketing capabilities to implement its three
core strategies successfully. Such capabilities include: (i) specialized
manufacturing facilities equipped to produce products with toxic raw materials;
(ii) a proprietary product development process that enables the Company to
formulate difficult products rapidly and consistently; (iii) the technology
necessary to ensure consistency, speed and quality of output of its quality
assurance/quality control laboratories; (iv) the simultaneous, rather than
sequential, grouping of technical transfer, regulatory and manufacturing tasks
to enable the Company to compress the development and regulatory review process
and launch products as soon as possible after FDA approval; (v) the regulatory
and legal expertise which allows for the efficient prosecution of patent
challenges; and (vi) the sales and marketing infrastructure to commercialize
products with unique characteristics.
DEVELOPMENT AND MARKETING OF SELECTED GENERIC PHARMACEUTICALS
Barr's product line includes approximately 66 pharmaceutical products
representing various dosage strengths and product forms of 33 chemical entities.
Barr's products are manufactured in tablet, capsule and powder form. Of these
products, four were introduced in fiscal 1996 and 11 in fiscal 1997. To date,
the Company has introduced 14 products in fiscal 1998. The Company's product
line is concentrated primarily on six core therapeutic categories: oncology,
female healthcare, cardiovascular, anti-infective, pain management and
psychotherapeutic. The Company sells 15 products where its market share in terms
of units dispensed is greater that 40%.
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The following table lists Barr's currently marketed generic products.
<TABLE>
<CAPTION>
NUMBER OF
GENERIC PRODUCT NAME BRAND NAME DOSAGE FORMS
- --------------------------------- ---------------------------------- -----------------
<S> <C> <C>
ONCOLOGY
Leucovorin Wellcovorin-Registered Trademark- 2
Methotrexate Rheumatrex-Registered Trademark-/Methotrexate 1
Megestrol Acetate Megace-Registered Trademark- 2
Tamoxifen Citrate Nolvadex-Registered Trademark- 2
FEMALE HEALTHCARE
Danazol Danocrine-Registered Trademark- 1
Estradiol Estrace-Registered Trademark- 3
Estropipate Ogen-Registered Trademark- 3
Medroxyprogestrone Provera-Registered Trademark- 3
CARDIOVASCULAR
Amiloride/HCTZ Moduretic-Registered Trademark- 1
Dipyridamole Persantine-Registered Trademark- 3
Propranolol HCl & HCTZ Inderide-Registered Trademark- 2
Triamterene & HCTZ Dyazide-Registered Trademark- 1
Triamterene & HCTZ Maxzide-Registered Trademark- 1
Warfarin Sodium Coumadin-Registered Trademark- 7
ANTI-INFECTIVE
Cephalexin Keflex-Registered Trademark- 2
Cephalexin O/S Keflex-Registered Trademark- 2
Erythromycin DR Eryc-Registered Trademark- 1
Erythromycin Estolate Ilosone-Registered Trademark- 1
EES Granules EES Granules-Registered Trademark- 1
ESP-Registered Trademark- Pediazole-Registered Trademark- 1
Isoniazid none 2
Minocycline Minocin-Registered Trademark- 2
Tetracycline Sumycin-Registered Trademark- 2
PAIN MANAGEMENT
Parafon
Chlorzoxazone Forte-Registered Trademark- 1
Meperidine Demerol-Registered Trademark- 2
Oxycodone & APAP Percocet-Registered Trademark- 1
PSYCHOTHERAPEUTIC
Chlordiazepoxide Librium-Registered Trademark- 3
Diazepam Valium-Registered Trademark- 3
Hydroxyzine Pamoate Vistaril-Registered Trademark- 3
Trazodone Desyrel-Registered Trademark- 2
OTHER
Acetohexamide Dymelor-Registered Trademark- 2
Diphenhydramine Benadryl-Registered Trademark- 1
Sulfinpyrazone Anturane-Registered Trademark- 2
</TABLE>
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KEY CURRENTLY MARKETED PRODUCTS
The following are descriptions of the generic pharmaceuticals currently
marketed by the Company that contribute significantly to sales and gross profit.
All sales and product data is derived from industry sources. It is noted that
market share information below concerning the number of units of a product
dispensed does not correlate to a like percentage of industry sales due to the
lower selling prices for generic products as compared to branded products.
TAMOXIFEN. Tamoxifen is the generic version of Nolvadex, which is used to
treat advanced breast cancer as well as impede the recurrence of tumors
following surgery. Total U.S. brand and generic sales for 1996 were $305
million. Statistics indicate that one in eight women will get breast cancer
during her lifetime, and each year, more than 180,000 new cases of breast cancer
are diagnosed.
Tamoxifen is Barr's largest selling product, accounting for approximately
76% of the Company's total net product sales during the fiscal year ended June
30, 1997. Barr's product accounted for 76% of the total (brand and generic)
units dispensed in the United States for the twelve months ended September 30,
1997.
In 1993, as a result of a settlement of a patent challenge against the
innovator of Tamoxifen, the Company entered into the Tamoxifen Agreement. Under
the terms of the Tamoxifen Agreement, Barr purchases Tamoxifen directly from the
innovator and sells it as a generic product. The Company is the only distributor
of Tamoxifen in the United States other than the innovator. Although the Company
is a non-exclusive distributor, the Tamoxifen Agreement provides that should an
additional distributor or distributors be selected by the innovator, Barr will
be granted terms no less favorable than those granted to any subsequent
distributor. See "Challenging Patents Protecting Certain Brand Pharmaceuticals."
The Company currently has a tentatively approved ANDA for the manufacture of
Tamoxifen. Therefore, at the time of patent expiration in August 2002 (or
earlier, should another company's patent challenge succeed), Barr will be
permitted to begin the direct manufacture of Tamoxifen. Manufacturing Tamoxifen
would lower Barr's costs of goods for this product and the Company believes it
would improve profit margins earned by the Company on Tamoxifen sales. The
Company expects that upon patent expiration, other competitors will enter the
market. Should this occur, the Company believes that while its revenues and
market share could be negatively affected, it expects that its gross margins on
the sales of Tamoxifen would exceed those it currently earns as a distributor.
WARFARIN SODIUM. Warfarin Sodium is the generic equivalent of DuPont
Merck's Coumadin, an anticoagulant which is given to patients with heart disease
and/or high risk of stroke. Warfarin Sodium was introduced by Barr in July 1997
and the Company is the only generic supplier of the product. Total U.S. sales of
Coumadin were approximately $500 million for the twelve months ended September
30, 1997. The Company's Warfarin Sodium product has been gaining market share
since its introduction in mid-1997, however, such market share data is not yet
available for a full year.
Coumadin is the 11th most prescribed drug in the United States and due to
the aging baby boomer generation and a new indication for the treatment of
atrial fibrillation (an abnormal heart rhythm), the market for Coumadin has
shown significant growth. For the twelve months ended December 31, 1997,
Coumadin was prescribed over 19.6 million times, which represents 13% growth
from the prior twelve month period.
Although another generic competitor received an ANDA approval for Warfarin
Sodium, Barr is currently the only company marketing a generic equivalent of
Coumadin. The Company believes that there will be limited generic competition
because of a number of barriers to entry. First, there are a limited number of
FDA approved raw material suppliers for the product. In addition, product
manufacture may require special handling due to the toxic nature of the raw
materials. Finally, the Company has been required to make significant investment
in educational and promotional support of the product to counter DuPont Merck's
extensive physician detailing efforts, and to support government affairs
activities to defeat
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attempts by DuPont Merck to support state legislative and regulatory measures
that would restrict generic substitution of Coumadin.
METHOTREXATE. Methotrexate is the generic version of Lederle's
Methotrexate/Rheumatrex, which is used to treat rheumatoid arthritis and
psoriasis as well as uterine tumors and various types of leukemia. Methotrexate
was introduced by Barr in 1991, and there are currently other generic
competitors in the marketplace. Total U.S. brand and generic sales of
Methotrexate were $50 million for the twelve months ended September 30, 1997.
Barr's product accounted for 48% of the total U.S. (brand and generic) units
dispensed in the twelve months ended September 30, 1997. Methotrexate is another
product for which the Company's specialized manufacturing suites for production
are utilized.
MEGESTROL ACETATE. Megestrol is the generic equivalent of Bristol-Myers'
Megace which is used for the palliative treatment of advanced breast and
endometrial cancer. Megestrol was introduced by Barr in 1995 and there are
currently other generic competitors in the marketplace. Total U.S. brand and
generic sales of Megestrol were $19 million for the twelve months ended
September 30, 1997. Barr's product accounted for 40% of the total U.S. (brand
and generic) units dispensed in the twelve months ended September 30, 1997.
Megestrol is another product for which specialized manufacturing suites for
production are utilized.
DANAZOL. Danazol is the generic equivalent of Sanofi-Winthrop's Danocrine
which is used for the treatment for endometriosis. Danazol was introduced by
Barr in 1996 and there are currently no other generic competitors. Total U.S.
brand and generic sales of Danazol were $19 million for the twelve months ended
September 30, 1997. Barr's product accounted for 41% of the total U.S. (brand
and generic) units dispensed in the twelve months ended September 30, 1997.
Danazol is an example of a product with multiple barriers to entry. Sourcing of
the raw material and the formulation of an approvable, bioequivalent product is
complex and difficult to achieve. In addition, manufacture of the product
requires specialized manufacturing suites.
OTHER REVENUE
CIPROFLOXACIN. Ciprofloxacin is the generic equivalent of Bayer's Cipro
which is used to treat lower respiratory, skin, bone and joint, and urinary
tract infections. Total U.S. sales of ciprofloxacin were approximately $685
million in 1996. In January 1995, the Company received a tentative approval of
its ANDA for ciprofloxacin tablets and commence marketing when the patents
protecting the product expire.
In January 1997, the Company and the innovator of ciprofloxacin settled
pending patent litigation. As part of the settlement of the patent challenge the
Company entered into the Ciprofloxacin Agreement, which ends with the expiration
of the patent in December 2003. Under the Ciprofloxacin Agreement, the innovator
has the option to make payments to Barr or to provide Barr with ciprofloxacin
that Barr would market as a generic pursuant to a license from the innovator. In
January 1997, the Company received an initial cash payment of $24.6 million in
connection with the Ciprofloxacin Agreement. If the innovator chooses not to
provide the product to Barr, the annual value recognized by Barr would
approximinate the value of the initial payment. Under terms of the Ciprofloxacin
Agreement, Barr will be able to enter the marketplace in advance of any generic
competitor. Barr believes this will allow it to develop a significant market
share prior to additional generic entrants.
GENERIC PRODUCT RESEARCH AND DEVELOPMENT
The Company pursues development and marketing of generic pharmaceuticals
that have barriers to entry. The characteristics of the products that the
Company pursues may include: (i) the need for specialized manufacturing
capabilities; (ii) difficulty in raw material sourcing; (iii) complex
formulation or development characteristics; or (iv) sales and marketing
challenges. The Company believes products with such barriers will face limited
competition and therefore offer longer product life-cycles and/or higher
profitability than commodity generic products.
27
<PAGE>
The Company pursues product development and marketing of generic
pharmaceuticals with both large and relatively small existing markets. The
Company believes that small sales volume drugs, (as well as large ones) can
contribute meaningfully and consistently to earnings if they present barriers to
entry that may limit competition. In addition, the Company will seek to develop
products that have been off-patent for some time where barriers to entry have
prevented successful development. By pursuing products that have been off-patent
for some time, and overcoming the barrier to entry, the Company believes that it
has greater assurance of limited generic competition, since many generic
companies typically have focused on developing versions of branded products
which are currently reaching patent expiry.
GENERIC PRODUCTS UNDER DEVELOPMENT
The Company currently has under development more than 40 pharmaceutical
products representing more than 30 chemical entities. The Company has six ANDAs
and two ANDA supplements pending at the FDA for products that had U.S. industry
sales of approximately $2 billion for the twelve months ended September 30,
1997. Prior to December 31, 1998, Barr anticipates filing twelve ANDAs and two
ANDA supplements for products which had U.S. industry sales in excess of $2
billion for the twelve months ended September 30, 1997. Of these products, Barr
anticipates FDA approval of at least four ANDAs and one ANDA supplement by the
end of 1998 which products had U.S. sales of approximately $250 million for the
twelve months ended September 30, 1997.
Of the 22 products mentioned above, ten represent markets where there are
currently no generic products available in the marketplace. Included in
currently filed ANDAs is the Company's ANDA for fluoxetine which is the subject
of an ongoing patent challenge. See "Challenging Patents Protecting Certain
Brand Pharmaceuticals." Fluoxetine is the generic version of Eli Lilly's Prozac
anti-depressant. Prozac is patent protected and total U.S. brand sales were $1.7
billion for the twelve months ended September 30, 1997.
GENERIC PRODUCT PIPELINE ($ IN MILLIONS)
<TABLE>
<CAPTION>
ANNUAL INDUSTRY SALES OF PRODUCTS (1)
--------------------------------------------
<S> <C> <C> <C>
ANDAS CURRENTLY ANDAS TO BE FILED IN
THERAPEUTIC CATEGORY PENDING AT FDA CALENDAR 1998 TOTAL
- ------------------------------------------------------------- ------------------- ----------------------- ---------
Oncology..................................................... $ 24 $ 100 $ 124
Female Healthcare............................................ 2 186 188
Cardiovascular............................................... 47 155 202
Pain Management.............................................. 182 -- 182
Anti-Infective............................................... -- 210 210
Psychotherapeutic / Anticonvulsant........................... 1,703 279 1,982
Other........................................................ 17 45 62
------ ----- ---------
Total................................................ $ 1,975 $ 975 $ 2,950
------ ----- ---------
------ ----- ---------
</TABLE>
- ------------------------
(1) Based on industry data for the twelve months ended September 30, 1997.
28
<PAGE>
CHALLENGING PATENTS PROTECTING CERTAIN BRAND PHARMACEUTICALS
The Company actively challenges the patents protecting certain branded
pharmaceutical products where it believes such patents are either invalid,
unenforceable or not infringed by the Company's products. The successful
execution of this strategy by Barr for two products, Tamoxifen and
Ciprofloxacin, has already resulted in the creation of a significant revenue and
profit stream for the Company.
PATENT CHALLENGE PROCESS
The Hatch-Waxman Act provides incentives for generic pharmaceutical
companies to challenge suspect patents on branded pharmaceutical products. The
legislation recognizes that there is a potential for the improper issuance of
patents by the United States Patent and Trade Office ("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 offers the opportunity for significant financial reward if
successful.
All of the steps involved in the filing of an ANDA with the FDA, including
research and development, are identical with those steps taken in development of
any generic drug. At the time of filing with the FDA for approval of its version
of the branded product, the generic company files with its ANDA a certification
asserting that the patent is invalid, unenforceable or not infringed. After
receiving notice from the FDA that its application is acceptable for filing, the
generic company sends the patent holder a notice explaining why it believes that
the patents in question are invalid, unenforceable or not infringed. Upon
receipt of the notice from the generic company, the patent holder has 45 days in
which to bring legal action against the generic company. The patent holder,
within certain parameters, has the right to bring suit in any federal district
court. The discovery, trial and appeals process can take three to four years.
If the generic company prevails, and that company was the first to file an
ANDA and a certification of invalidity or noninfringement with the FDA for the
product, that company receives 180 days of generic marketing exclusivity. That
is, the FDA may not approve another generic version of the product for any
company during the first 180 days. This period of marketing exclusivity provides
the successful patent challenger with the opportunity to build its market share
to a significant position. While enabling the company to recoup the expenses of
the lawsuit and realize stronger profit margins, this also may provide an
impediment to or limit the entrance of subsequent competitors. Once significant
market share is achieved, the first successful challenger can more effectively
defend its position against future competitors.
Each patent challenge typically requires the investment of as long as four
years, and approximately $6 million to $8 million in legal and product
development costs. The process for initiating a patent challenge begins with the
identification of a drug candidate and evaluation by qualified legal counsel of
the patents protecting that product. The Company has reviewed a number of
challenges and has pursued only those which it believes offered a high
probability of success. Once the Company receives a favorable opinion of patent
counsel that a deficiency exists, the Company must then begin the formulation
and development process. 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.
The Company has brought four patent challenges. Two have been successfully
resolved, one is currently pending and the fourth was unsuccessful.
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<PAGE>
PATENT CHALLENGE HISTORY
<TABLE>
<CAPTION>
PRODUCT (BRAND NAME) STATUS OUTCOME
- ---------------------------------------------- -------------- ---------------------------------------------------------
<S> <C> <C> <C>
Tamoxifen (Nolvadex).......................... Settled - Tentatively approved ANDA
- Distribution agreement until August 2002
- $21 million cash payment in fiscal 1993
Ciprofloxacin (Cipro)......................... Settled - Tentatively approved ANDA
- Contingent supply agreement/expected to
generate annual value of approximately $25
million through 2003
Fluoxetine (Prozac)........................... Pending - ANDA pending
- Outcome to be decided
Zidovudine (Retrovir-Registered Trademark-)... Unsuccessful - Tentatively approved ANDA/awaits patent expiry
</TABLE>
TAMOXIFEN. Tamoxifen is the generic version of Nolvadex, which is used to
treat advanced breast cancer as well as to delay the recurrence of breast cancer
following surgery. Total brand and generic sales for 1996 were $305 million. See
"Development and Marketing of Selected Generic Pharmaceuticals."
In 1993, as a result of a settlement of a patent challenge against the
innovator of Tamoxifen, the Company entered into the Tamoxifen Agreement. Under
the terms of the Tamoxifen Agreement, Barr purchases Tamoxifen directly from the
innovator and sells it as a generic product. The Company is the only distributor
of Tamoxifen in the U.S. other than the innovator. Although it is a
non-exclusive distributor, the Company's agreement with the innovator guarantees
that should an additional distributor or distributors be selected by the
innovator, Barr will be granted terms no less favorable than those granted to
any subsequent distributor.
The Company currently has a tentatively approved ANDA for the manufacture of
Tamoxifen. Therefore, at the time of patent expiration in August 2002 (or
earlier, should another company's patent challenge succeed), Barr will be
permitted to immediately begin the direct manufacture of Tamoxifen.
Manufacturing Tamoxifen would lower Barr's costs of goods for this product and
the Company believes it would improve profit margins earned by the Company on
Tamoxifen sales. The Company expects that upon patent expiration, other
competitors will enter the market. Should this occur, the Company believes that
while its revenues and market share could be negatively affected, it expects
that its gross margins on the sales of products would exceed those it currently
earns as a distributor.
CIPROFLOXACIN. Ciprofloxacin is the generic equivalent of Bayer's Cipro
which is used to treat lower respiratory, skin, bone and joint, and urinary
tract infections. Total U.S. sales were approximately $685 million in 1996. In
January 1995, the Company received a tentative approval of its ANDA for
ciprofloxacin tablets when the patents protecting the product expire.
In January 1997, the Company and the innovator of ciprofloxacin settled
pending patent litigation regarding ciprofloxacin. As part of the settlement of
the patent challenge the Company entered into the Ciprofloxacin Agreement, which
ends with the expiration of the patent in December 2003. Under the Ciprofloxacin
Agreement, the innovator has the option to make payments to Barr or to provide
Barr with ciprofloxacin that Barr would market as a generic pursuant to a
license from the innovator. In 1997, the Company received an initial cash
payment of $24.6 million in connection with the Ciprofloxacin Agreement. If the
innovator chooses not to provide the product to Barr, the annual value
recognized by Barr would approximate the value of the initial payment. Under
terms of the Ciprofloxacin Agreement, Barr will be able to enter the marketplace
in advance of any generic competitor. Barr believes this will allow it to
develop a significant market share prior to additional generic entrants.
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<PAGE>
FLUOXETINE. Fluoxetine is the generic equivalent of Eli Lilly's Prozac
antidepressant, which is patent protected and had annual sales of $1.7 billion
for the twelve months ended September 30, 1997. The Company filed its
application for fluoxetine in January 1996, and has been sued for patent
infringement by Eli Lilly, initiating the patent challenge process. The Company
estimates that the Prozac challenge will last another two to three years and
expects to go to trial during the second half of calendar 1998.
ZIDOVUDINE. Zidovudine is the generic equivalent of Glaxo Wellcome's
Retrovir, also known as AZT, a treatment for AIDS. The patent challenge that
followed Barr's filing was resolved unsuccessfully during 1996. Barr received
tentative approval of its ANDA for this product in February 1995 and anticipates
entering the market with a generic product as soon as practical at the
expiration of the patents in 2005.
At present three additional patent cases are in active development and the
Company expects to file ANDAs for those three products during calendar 1998.
U.S. industry sales of these three products were in excess of $1 billion for the
twelve months ended September 30, 1997. In addition, the Company is actively
evaluating several potential additional challenges both on its own and as part
of collaborations with other companies.
DEVELOPMENT AND INTRODUCTION OF PROPRIETARY PHARMACEUTICALS
The newest component of Barr's overall business strategy is the development
of proprietary pharmaceuticals that have some period of market exclusivity,
typically from three to seven years. Under this strategy, the Company pursues
candidates in two primary categories: (i) existing chemical compounds where the
development of different forms (liquid vs. tablets or different dosages) that
offer therapeutic advantages; and (ii) new chemical entities in selected
therapeutic categories, including some that are marketed in other countries but
not currently sold in the United States.
Some of these activities will result in the filing by the Company of an NDA
with the FDA. The Company anticipates that the majority of its proprietary
products will be developed with strategic partners and marketed by those
partners through detail product sales forces or other appropriate channels.
PROPRIETARY PRODUCT DEVELOPMENT
In conjunction with strategic partners, Barr has four proprietary products
in various stages of development. An NDA has been filed by Barr's partner on one
of these products, and the Company anticipates that its partner will receive
regulatory approval for such product before the end of 1998. The three remaining
projects are in development and the Company believes that they could be filed
with the FDA at the rate of one per calendar year for the next three years
beginning and including calendar 1998.
The Company has developed its first product pursuant to a strategic
arrangement with Gynetics Inc. ("Gynetics"). Barr provided the scientific,
technical, regulatory and manufacturing expertise to develop oral contraceptive
tablets that are a component of Gynetics' emergency oral contraceptive product.
This product includes four oral contraceptive tablets (similar to those sold
under brand names and routinely used for birth control) and are indicated to
prevent a pregnancy from starting if a woman has been exposed to the risk of
pregnancy within the previous 72 hours. In an official statement, the FDA has
pointed out that emergency contraception has no effect on an existing pregnancy
and works primarily by preventing ovulation in exactly the same manner as
conventional brand name oral contraceptive pills. Barr provided the development
expertise necessary to formulate the oral contraceptive tablets and was
responsible for the chemicals, manufacturing and controls section of the NDA. In
addition, Barr will provide the bulk manufacturing of the oral contraceptive
tablets. The Company and Gynetics have agreed to a formula to split profits from
the sale of this product equally, after certain costs to each party have been
accounted for.
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<PAGE>
SALES AND MARKETING
GENERIC PRODUCTS
The Company employs six national account managers who call directly on drug
store chains, wholesalers, distributors and repackagers in the United States and
Puerto Rico. This sales group is supplemented by four customer service
representatives who inform the Company's customers of new Company products,
order status and current pricing. Manufacturers of generic pharmaceuticals
typically require less of an investment in sales and marketing infrastructure
than brand pharmaceutical companies. This is because factors such as statutory
substitution requirements that exist in many states and the influence of
third-party payer plans reduce significantly the need for generic manufacturers
to promote the substitution of their products for brand products.
In addition, the Company's marketing group supports Barr's overall strategy
of developing and selling products with high barriers to entry by developing
marketing programs which promote and support such products. The Company has
developed this capability to support the marketing of Warfarin Sodium. The
Company expects that similar product marketing support will be needed for
products in the Company's development pipeline which also may face marketing
barriers similar to Warfarin Sodium.
WHOLESALERS. Wholesale customers, which accounted for 43% of sales in
fiscal 1997, purchase products, warehouse them, and resell the products to
chains, independent pharmacies, and other retailers of pharmaceuticals.
Wholesalers generally purchase large quantities and have high inventory
turnover.
WAREHOUSING PHARMACY CHAINS. Barr's chain drug store customers, which
accounted for 41% of sales in fiscal 1997, either maintain their own warehouse
facilities or take delivery of purchased products through national or regional
wholesalers.
DISTRIBUTORS. Distributors, which accounted for 12.5% of sales in fiscal
1997, typically have large sales forces which allow them to penetrate markets
and reach customers that Barr's sales organization would be unable to penetrate
effectively. Distributors either sell Barr-label products or contract with Barr
for the manufacture of products sold under the distributor's (private) label.
MANAGED CARE/MAIL ORDER. A fourth customer group, the managed care/mail
order group accounted for 3.5% of sales in fiscal 1997. This distribution
channel has expanded in response to changes in insurance benefits which continue
to move toward increased prescription fulfillment through mail order.
Recently, the Company's customer base has undergone significant
consolidation, particularly in the chain drug store, distributor and wholesaler
trade classes. To date, this consolidation has had little impact on the
Company's business. The Company believes that it has good relationships with its
key customers, but there can be no assurance that continued consolidation will
not impact the Company's business, or that such impact might not be significant.
PROPRIETARY PRODUCTS
The Company is seeking to establish strategic relationships that provide
access to specific health care segments or providers, including specialty
physicians principally to support its proprietary products. To date, the Company
has established two such relationships.
GYNETICS. Barr is working collaboratively with Gynetics on a line of
products, including the emergency oral contraceptive. Gynetics will assume all
marketing responsibilities for these products. The products will be marketed
directly to physicians and other healthcare professionals. The Company will
share equally in the profits expected from the products, the first of which the
Company believes will receive FDA approval by the end of 1998.
Although Gynetics is a start-up pharmaceutical company, it has management
with extensive experience in the development and marketing of branded
prescription contraceptive products. Gynetics' founder,
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<PAGE>
Rod MacKenzie, was president of Ortho Pharmaceutical Corporation and the founder
of GynoPharma Inc., a successful start-up pharmaceutical company.
WARNER CHILCOTT. In July 1997, Barr announced a strategic investment in
Warner Chilcott, a company which markets speciality pharmaceutical products and
complex generics. Barr made an initial investment of approximately $4 million
and has an option to increase its stake by another $4 million over the next four
years. This investment gives Barr access to Warner Chilcott's recognized name
and the dedicated sales force that can help promote certain of Barr's
proprietary drug products directly to physicians. Warner Chilcott has agreed to
market one of the Company's proprietary therapies currently in development. The
collaboration also offers Barr the opportunity to be the generic supplier of
certain current and future Warner Chilcott products.
MANUFACTURING AND FACILITIES
Barr has facilities and operations in Pomona and Blauvelt, New York;
Northvale, New Jersey; and Forest, Virginia. The following table presents the
facilities owned or leased by the Company and indicates the location and type of
each of these facilities.
<TABLE>
<CAPTION>
SQUARE
LOCATION FOOTAGE STATUS DESCRIPTION
- --------------------------------------------- --------- --------- ---------------------------------------------
<S> <C> <C> <C>
NEW JERSEY
Northvale.................................... 28,000 Owned Manufacturing
Northvale.................................... 40,000 Leased Packaging (closing June 1998)
Northvale.................................... 50,000 Leased Warehouse/Distribution
NEW YORK
Blauvelt..................................... 38,000 Leased Corporate Administration
Pomona 1..................................... 33,000 Owned R&D and Analytical Laboratories
Pomona 2..................................... 48,000 Owned Laboratories, Administrative Offices,
Manufacturing
VIRGINIA
Forest 1..................................... 65,000 Owned Administrative Offices, Manufacturing
Forest 2..................................... 100,000 Owned Warehouse, Packaging
</TABLE>
Over the past three fiscal years, the Company has spent approximately $57
million in capital expenditures to expand manufacturing capacity and strengthen
certain competitive advantages. Barr added special enclosed manufacturing
capacity at its Pomona, New York and Northvale, New Jersey facilities and
purchased a 65,000 square foot facility in Forest, Virginia. The Company also
constructed a 100,000 square foot warehouse/packaging site at the Forest site.
PATENTS, PROPRIETARY RIGHTS AND TRADEMARKS
The Company relies on trade secrets and other unpatented proprietary
information in its product development activities. To the extent that the
Company relies on trade secrets and unpatented know-how to maintain its
competitive technological position, there can be no assurance that others may
not independently develop the same or similar technologies. The Company seeks to
protect trade secrets and proprietary knowledge in part through confidentiality
agreements with its employees, consultants, advisors, and collaborators.
Nevertheless, these agreements may not effectively prevent disclosure of the
Company's confidential information and may not provide the Company with an
adequate remedy in the event of unauthorized disclosure of such information. If
the Company's employees, scientific consultants or collaborators develop
inventions or processes independently that may be applicable to the Company's
products under development, disputes may arise about ownership of proprietary
rights to those inventions and processes. Such inventions and processes will not
necessarily become the Company's property, but may
33
<PAGE>
remain the property of those persons or their employers. Protracted and costly
litigation could be necessary to enforce and determine the scope of the
Company's proprietary rights. Failure to obtain or maintain patent and trade
secret protection, for any reason, would have a material adverse effect on the
Company.
COMPETITION
The Company competes in varying degrees with numerous other manufacturers of
pharmaceutical products (both branded and generic). These competitors include
the generic divisions of proprietary pharmaceutical companies (either marketing
units or other generic manufacturers), large independent generic
manufacturers/distributors that seek to provide "one stop shopping" by offering
a full line of products, and generic manufacturers that have targeted select
therapeutic categories and market niches.
The selling prices of the Company's products may decline as competition
increases. Currently, many of the Company's generic products compete with other
approved generic products. In addition, some third party payors, wholesalers and
chain buyers have instituted programs which further increase the downward
pressure on prices in the generic industry. These aggressive price reduction
activities could have a material adverse effect on the Company's business,
results of operations and financial condition.
Relatively large research and development expenditures enable a company to
support many FDA applications simultaneously, thereby improving the likelihood
of being among the first to obtain approval of at least some generic drugs.
Other products now in use or under development by others may be more effective
or have fewer side effects than the Company's current or future products. The
industry is characterized by rapid technological change, and competitors may
develop their products more rapidly than the Company. Competitors may also be
able to complete the regulatory process sooner, and therefore may begin to
market their products in advance of the Company's products. There can be no
assurance that developments by others will not render any product the Company
produces or may produce obsolete or otherwise non-competitive.
GOVERNMENT REGULATION
All pharmaceutical manufacturers, including the Company, are subject to
extensive regulation by the federal government, principally by the FDA, and, to
a lesser extent, by the DEA and state governments. The Federal Food, Drug and
Cosmetic Act, the Controlled Substances Act and other federal statutes and
regulations govern or influence the testing, manufacturing, safety, labeling,
storage, record keeping, approval, pricing, advertising and promotion of the
Company's products. Non-compliance with applicable requirements can result in
fines, recalls and seizure of products. Under certain circumstances, the FDA
also has the authority to revoke drug approvals previously granted.
ANDA PROCESS
FDA approval is required before a generic equivalent to a previously
approved drug or a new dosage form of an existing drug can be marketed. The
Company usually receives approval for such products by submitting an ANDA to the
FDA. When processing an ANDA, the FDA waives the requirement of conducting
complete clinical studies, although it may 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 a generic
drug in the body are substantially equivalent to the previously approved drug.
An ANDA may be submitted for a drug on the basis that it is bioequivalent to a
previously listed drug, contains the same active ingredient, has the same route
of administration, dosage form, and strength as the listed drug, and otherwise
complies with legal and regulatory requirements.
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<PAGE>
Among the requirements for drug approval by the FDA is that the Company's
manufacturing procedures and operations conform to cGMP, as defined in the U.S.
Code of Federal Regulations. The cGMP regulations must be followed at all times
during the manufacture of pharmaceutical products. In complying with the
standards set forth in the cGMP regulations, the Company must continue to expend
time, money and effort in the areas of production and quality control to ensure
full technical compliance.
If the FDA believes a company is not in compliance with cGMP, certain
sanctions are imposed upon that company including (i) withholding from the
company new drug approvals as well as approvals for supplemental changes to
existing applications; (ii) preventing the company from receiving the necessary
export licenses to export its products; and (iii) classifying the company as an
"unacceptable supplier" and thereby disqualifying the company from selling
products to federal agencies. The Company believes it is currently in compliance
with cGMP.
In May of 1992, the Generic Act was enacted. The Generic Act, a result of
the legislative hearings and investigations into the generic drug approval
process, 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 Act requires the FDA to debar
(i.e., not accept or review ANDAs for a period of time) 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 Act allows for civil penalties and withdrawal of
previously approved applications. Neither the Company nor any of its employees
have ever been subject to debarment.
NDA PROCESS
FDA approval is required before any new drug can be marketed. An NDA is a
filing submitted to the FDA to obtain approval of a drug not eligible for an
ANDA 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
preclinical 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 ("IND") application, or its equivalent
in countries outside the United States, where clinical trials are to be
conducted. The preclinical 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 as
well as 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 they study, the parameters to be used to monitor safety and
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 and therefore not independently repeat some or
all of those studies.
Data from preclinical 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
35
<PAGE>
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 and will be required 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 which could have a material adverse effect on the Company's
business, results of operations and financial condition.
DEA
Because the Company markets some and intends to introduce or reintroduce a
wide range of controlled substances in its analgesic and psychotherapeutic
product lines, it must meet the requirements of the Controlled Substances Act
and the regulations issued thereunder and 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 monitors allocation to
the Company of raw materials used in the production of controlled substances
based on historical sales data. The Company believes it is currently in
compliance with all applicable DEA requirements.
GOVERNMENT RELATIONS ACTIVITIES
During the past year, the branded pharmaceutical industry has increased its
efforts to utilize state and federal legislative and regulatory forums to delay
generic competition, or limit the severe market erosion they can experience
which occurs once monopoly protection is lost for the branded product. To
achieve these goals, the brand pharmaceutical companies have used the Citizen
Petition process (i.e. petition directly to the FDA) to request amendments to
FDA standards, sought changes from the United States Pharmacopeia (an
organization which publishes industry recognized compendia of drug standards)
requirements, and attached patent extension amendments to important federal
legislation. Another anti-generic defense strategy involves a state-by-state
initiative to enact legislation that would restrict the substitution of generic
equivalents of NTI drugs. A drug is commonly said to have an NTI when small
variances in the level of the drug in the blood can change the effectiveness of
the drug. Since January 1997, Barr has engaged the resources necessary to fight
proposed NTI legislation in a number of major states.
Because this issue is critical to Barr's continued success, the Company has
and will continue to put a major emphasis in terms of management time and
financial resources on government affairs activities.
PATENTS
The Process Patent Amendments Act of 1988 provides that the use or sale
within the United States, or importation into the United States, of a product
that was made either domestically or abroad by a process
36
<PAGE>
covered by a United States patent, constitutes infringement of the process
patent. After proper notice, this legislation could subject the Company to
potential patent infringement claims if a supplier of an active ingredient to
the Company were to infringe a United States process patent in the manufacture
of such ingredient. The Company has received no such notice.
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. This law basically required 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 (currently 11% in the case of products manufactured by
the Company and 15% for Tamoxifen sold by the Company) of their average net
sales price for the products in question. The Company provides an accrual for
future estimated rebates in its consolidated financial statements.
EFFECT OF THE GENERAL AGREEMENT ON TARIFFS AND TRADE ("GATT")
With the signing of the GATT accord in December 1994, one of the provisions
called for harmonization of patent life throughout GATT countries. U.S. enabling
legislation had provisions which in effect offered a limited extension of the
period of monopoly protection for intellectual property including patents. While
a number of patented drugs received extended patent protection (the maximum
extension being 36 months) as a result of this enabling legislation, the patent
extensions resulting from the implementation of GATT are not expected to impact
materially any of the product candidates in Barr's current pipeline.
OTHER
The Company is also governed by federal, state and local laws of general
applicability, such as laws regulating working conditions, equal employment
opportunity, and environmental protection.
EMPLOYEES
As of December 31, 1997, the Company had 508 full-time employees. Of these,
approximately one-quarter are represented by a union which has a collective
bargaining agreement with the Company. The Company's current collective
bargaining agreement with its employees, who are represented by Local 8-149 of
the Oil, Chemical and Atomic Workers International Union expires on April 1,
2001. The Company believes that its relations with its employees are good and
has no history of work stoppages. The Company's employees are organized as
follows:
<TABLE>
<CAPTION>
DEPARTMENT NUMBER OF EMPLOYEES
- ------------------------------------------------------------------------ -----------------------
<S> <C>
Research and Development................................................ 83
Administration.......................................................... 68
Manufacturing
Union................................................................. 164
Non-Union............................................................. 75
Quality................................................................. 101
Sales & Marketing....................................................... 17
---
Total............................................................. 508
---
---
</TABLE>
37
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers, all of whom are elected
annually to serve until the next annual meeting or until their successors have
been elected and qualified, are as follows.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ----------------------------------------------------------------------
<S> <C> <C>
Bruce L. Downey, Esq............... 50 Chairman of the Board, Chief Executive Officer and President
Paul M. Bisaro, Esq................ 36 Senior Vice President, Strategic Business Development, General Counsel
and Secretary
Timothy P. Catlett................. 42 Senior Vice President, Sales and Marketing
Mary E. Petit, Pharm.D............. 48 Senior Vice President, Operations
Salah Ahmed, Ph.D.................. 44 Vice President, Product Development
Robert Bell, Ph.D.................. 41 Vice President, Proprietary Product Development
Ezzeldin A. Hamza.................. 46 Vice President, Research and Development
Catherine F. Higgins............... 45 Vice President, Human Resources
William T. McKee................... 36 Vice President, Chief Financial Officer and Treasurer
Gerald F. Price.................... 50 Vice President, Manufacturing and Engineering
Edwin A. Cohen, RPh................ 65 Vice Chairman of the Board
Robert J. Bolger................... 75 Director
Michael F. Florence................ 60 Director
Jacob (Jack) M. Kay................ 56 Director
Bernard C. Sherman, Ph.D........... 55 Director
George P. Stephan, Esq............. 64 Director
</TABLE>
BRUCE L. DOWNEY, ESQ. became the Company's President, Chief Operating
Officer and a member of the Board of Directors in January 1993 and was elected
Chairman of the Board and Chief Executive Officer in February 1994. Prior to
assuming these positions, from 1981 to 1993, Mr. Downey was a partner in the law
firm of Winston & Strawn and a predecessor firm, Bishop, Cook, Purcell and
Reynolds. Mr. Downey is also a Director of Warner Chilcott (NASDAQ).
PAUL M. BISARO, ESQ. was employed by the Company as General Counsel in July
1992. He was acting General Counsel to the Company since January 1992. Mr.
Bisaro was elected Secretary of the Company in September 1992 and elected a Vice
President in 1993. In August 1994, Mr. Bisaro was elected to the position of
Chief Financial Officer. In September 1996, Mr. Bisaro was elected to the
position of Senior Vice President-Strategic Business Development. Prior to
assuming these positions with the Company, he was associated with the law firm
of Winston & Strawn and a predecessor firm, Bishop, Cook, Purcell and Reynolds.
Prior to his association with Winston & Strawn, Mr. Bisaro was a Consultant with
Arthur Andersen & Co.
TIMOTHY P. CATLETT was employed by the Company in February 1995 as Vice
President, Sales and Marketing. In September 1997, Mr. Catlett was elected to
Senior Vice President of Sales and Marketing. Since 1978, Mr. Catlett held a
number of positions with the Lederle Laboratories division of American Cyanamid
Company. Since 1993, he served as Vice President, Cardiovascular Marketing.
38
<PAGE>
MARY E. PETIT, PHARM.D. was employed by the Company in January 1995 as Vice
President, Quality. In September 1996, Dr. Petit was elected to the position of
Senior Vice President-Operations. From June 1992 to January 1995, Dr. Petit was
Vice President, Quality Management with the Lederle Laboratories division of
American Cyanamid. Dr. Petit held positions of increasing responsibility during
her 12 year tenure with Lederle.
SALAH AHMED, PH.D. was employed by the Company as Director of Research and
Development in 1993. Dr. Ahmed was named Vice President, Product Development in
September 1996. Before joining Barr, Dr. Ahmed was a Senior Scientist with
Forest Laboratories, Inc. from 1989 to 1993. Prior to joining Forest, he was a
Teaching Fellow at St. John's University in New York. Dr. Ahmed also worked as a
pharmacist in Benghazi and Bangladesh before coming to St. John's. Dr. Ahmed has
a Ph.D. in Pharmaceutics and an M.S. in Industrial Pharmacy from St. John's, and
also studied pharmacy at the University of Dacca, Bangladesh. He has published
numerous scientific papers.
ROBERT G. BELL, PH.D. was employed by the Company in 1996 as Vice President
of Proprietary Product Development. Dr. Bell has extensive experience in the
pharmaceutical industry, and most recently served as Vice President, Product
Development and Quality with Somerset Pharmaceuticals. Prior to joining
Somerset, he worked as Vice President of Corporate Development with UDL
Laboratories, and Director of R&D with A.L. Laboratories. In addition to his
experience in the pharmaceutical industry, Dr. Bell has also held several
chemistry and pharmaceutics teaching positions. Dr. Bell has a Ph.D. in
Pharmaceutics, an M.S. in Food Science and Human Nutrition, and a B.S. in
Chemistry all from the University of Florida.
EZZELDIN A. HAMZA was employed by the Company in July 1984 as Director of
Quality Control and thereafter, from August 1987, served as Director of
Scientific Affairs. In December 1988, Mr. Hamza was elected to the position of
Vice President-Technical Affairs. In 1993, he was elected Vice President-
Research and Development.
CATHERINE F. HIGGINS was employed by the Company in January 1992 as Vice
President-Human Resources and was elected an officer in September 1992. From
June 1985 to December 1991, Ms. Higgins served as Vice President-Human Resources
for Inspiration Resources Corporation.
WILLIAM T. MCKEE was employed by the Company in January 1995 as Director of
Finance and was appointed Treasurer in March 1995. In September 1996, Mr. McKee
was elected to the position of Chief Financial Officer, and in December 1997 Mr.
McKee was elected Vice President. Prior to joining the Company, Mr. McKee served
as Vice President-Finance for Absolute Entertainment. From September 1983
through June 1993, Mr. McKee held management positions in the accounting firms
of Deloitte & Touche, LLP and Gramkow & Carnevale, CPAs. Mr. McKee is a C.P.A.
GERALD F. PRICE was employed by the Company in January 1990 as Vice
President, Manufacturing and Engineering. He was elected an officer of the
Company in January 1990. Prior to assuming these positions, he served as Group
Vice President-Operations of Del Laboratories.
EDWIN A. COHEN, RPH. founded the Company in 1970. Mr. Cohen served as
President until January 1993, Chief Executive Officer until February 1994 and
Chairman of the Board from January 1993 to February 1994. In February of 1994,
he was elected to the position of Vice Chairman of the Board and became a
consultant to the Company.
ROBERT J. BOLGER was elected a Director of the Company in February 1988. Mr.
Bolger has been President of Robert J. Bolger Associates, a marketing consulting
company since January 1988. From 1962 through 1987, he served as President of
the National Association of Chain Drug Stores, a major trade association. Mr.
Bolger is also a Director of General Computer Corporation.
MICHAEL F. FLORENCE, CA was elected a Director of the Company in February
1988. Mr. Florence has been President of Sherfam, Inc. since 1989. He is also
Vice President of Shermfin Corp., Vice President of Apotex, Inc. and Vice
President of Sherman Delaware, Inc. From January 1964 through April 1989, Mr.
39
<PAGE>
Florence was a partner in Wm. Eisenberg & Co., Canadian Chartered Accountants.
He is President and a Director of Citadel Gold Mines, Inc. (NASDAQ), and a
Director of Nutrition for Life International, Inc. (NASDAQ). Mr. Florence and
Dr. Sherman are brothers-in-law.
JACOB ("JACK") M. KAY was elected a Director of the Company in December
1994. Mr. Kay is President of Apotex, Inc., and also serves as Chairman of the
Canadian Drug Manufacturers Association. He is also a Director of York Finch
Hospital (Toronto), Cangene Corporation and Humber River Regional Hospital.
BERNARD C. SHERMAN, PH.D. was Chairman of the Board of the Company from July
1981 to January 1993. He remains a Director of the Company. Dr. Sherman is Chief
Executive Officer and Chairman of the Board of Apotex, Inc., a Canadian
manufacturer of generic and brand name drugs. He is also Chairman of the Board
of Cangene Corporation, President of Sherman Delaware, Inc., President of
Shermfin Corp., President of Apotex Holdings, Inc. and a Director of Citadel
Gold Mines, Inc. (NASDAQ). In July 1994, Dr. Sherman and Shermfin Corp.
consented to the issuance of an Order of the Commission that they cease and
desist from violations of certain provisions of the Exchange Act. This Order was
consented to without admitting or denying the findings of the Commission that
there had been a failure to file reports of beneficial ownership of the common
stock of Kinesis, Inc. ("Kinesis") with the Commission on Form 3 and Schedule
13G. Kinesis was a company formed to develop certain sports related products,
never had any operations and was dissolved in March 1994. The Company had no
relationship with Kinesis.
GEORGE P. STEPHAN, ESQ. was elected a Director of the Company in February
1988. Since 1994, Mr. Stephan has been Managing Director of Stonington, Inc.,
(financial intermediaries and consultants). From 1992 to 1994, Mr. Stephan was
counsel to Murtha, Cullina, Richter and Pinney in Hartford, Connecticut. From
January 1991 to November 1991, he served as Interim Chief Executive Officer of
Kollmorgen Corporation (NYSE), a diversified technology company. He also served
as Chairman of Kollmorgen's Board of Directors from 1991 to February 1996. Mr.
Stephan continues to serve as a Director of Kollmorgen Corporation.
40
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth the beneficial ownership of the shares of
Common Stock of the Company by the Selling Stockholders as of December 31, 1997
and as adjusted to reflect the sale of the Common Stock being offered hereby
(assuming no exercise of the Underwriters' over-allotment option).
<TABLE>
<CAPTION>
PRIOR TO OFFERING AFTER OFFERING
------------------------- -------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- ------------------------------------------------------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Bernard C. Sherman, Ph.D. (1)............................... 13,744,426 63.4% 10,744,426 48.6%
</TABLE>
- ------------------------
(1) Consists of 13,248,621 shares held of record by Sherman Delaware, Inc.
("SDI") and 495,805 shares held of record by Glastex Investments, Inc
("Glastex") which are beneficially owned by Dr. Sherman. A total of
10,264,426 of the shares held by SDI are pledged to banks to secure a
guaranty made by SDI. The 3,000,000 shares being sold by the Selling
Stockholders consist of 495,805 shares held of record by Glastex and
2,504,195 shares held of record by SDI. Dr. Sherman is a director of the
Company. The address for SDI, Glastex and Dr. Sherman is 150 Signet Drive,
Weston, Ontario, Canada M9L1T9.
DESCRIPTION OF CAPITAL STOCK
The Company's Certificate of Incorporation authorizes the issuance of
100,000,000 shares of Common Stock, par value $.01 per share, of which
21,692,454 shares were outstanding on December 31, 1997, and 2,000,000 shares of
preferred stock, par value $1.00 per share, of which none is outstanding as of
the date of this Prospectus.
Holders of the Common Stock are entitled to one vote for each share held of
record, in person or by proxy, at all meetings of the shareholders and on all
propositions before such meetings. The Common Stock does not have cumulative
voting rights in the election of directors. Holders of the Common Stock have no
preemptive, subscription, redemption or conversion rights. All outstanding
shares of Common Stock are fully paid and nonassessable. Holders of Common Stock
are entitled to such dividends as may be declared by the Board of Directors out
of funds legally available therefor. In the event of liquidation, dissolution or
winding up of the affairs of the Company, the assets remaining after provision
for payment of creditors and after distribution in full of the preferential
amount to be distributed to the holders of shares of any preferred stock are
distributable pro rata among holders of Common Stock.
The transfer agent and registrar of the Common Stock is Continental Stock
Transfer & Trust Company, 2 Broadway, New York, New York 10004.
41
<PAGE>
UNDERWRITING
The names of the Underwriters of the shares of Common Stock offered hereby
and the aggregate number of shares of Common Stock which each has severally
agreed to purchase from the Company, subject to the terms and conditions
specified in the Underwriting Agreement, are as follows:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
SBC Warburg Dillon Read Inc...................................................... 1,167,500
Donaldson, Lufkin & Jenrette Securities Corporation.............................. 1,167,500
A.G. Edwards & Sons, Inc......................................................... 85,000
Robert W. Baird & Co. Incorporated............................................... 40,000
Bear, Stearns & Co. Inc.......................................................... 85,000
CIBC Oppenheimer Corp............................................................ 85,000
Fahnestock & Co. Inc............................................................. 40,000
Furman Selz LLC.................................................................. 85,000
Gerard Klauer Mattison & Co., LLC................................................ 40,000
Goldman, Sachs & Co.............................................................. 85,000
Gruntal & Co., L.L.C............................................................. 85,000
Lehman Brothers Inc.............................................................. 85,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated............................... 85,000
Neuberger & Berman LLC........................................................... 40,000
David A. Noyes & Company......................................................... 25,000
Parker/Hunter Incorporated....................................................... 25,000
Pennsylvania Merchant Group...................................................... 25,000
Sands Brothers & Co., Ltd........................................................ 40,000
UBS Securities LLC............................................................... 85,000
H.G. Wellington & Co. Inc........................................................ 25,000
----------
Total.................................................................... 3,400,000
----------
----------
</TABLE>
The Managing Underwriters are SBC Warburg Dillon Read Inc. and Donaldson,
Lufkin & Jenrette Securities Corporation.
If any shares of Common Stock offered hereby are purchased by the
Underwriters, all such shares will be so purchased. The Underwriting Agreement
contains certain provisions whereby if any Underwriter defaults in its
obligation to purchase such shares and if the aggregate obligations of the
Underwriters so defaulting do not exceed ten percent of the shares offered
hereby, the remaining Underwriters, or some of them, must assume such
obligations.
The Underwriters propose to offer the shares of Common Stock to the public
initially at the offering price set forth on the cover page of this Prospectus,
and to certain dealers at such price less a concession not to exceed $1.03 per
share. The Underwriters may allow, and such dealers may re-allow, a concession
not to exceed $0.10 per share on sales to certain other dealers. The offering of
the shares of Common Stock is made for delivery when, as and if accepted by the
Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offer without notice. The Underwriters reserve the right to
reject any order for the purchase of the shares. After the shares are released
for sale to the public, the public offering price, the concession and the
reallowance may be changed by the Managing Underwriters.
The Company and the Selling Shareholders have granted to the Underwriters an
option for 30 days from the date of the Underwriting Agreement to purchase up to
an additional 480,000 shares of Common Stock in the case of the Selling
Stockholders and up to 30,000 additional shares in the case of the Company from
them at the offering price less the underwriting discount set forth on the cover
page of this
42
<PAGE>
Prospectus. The Underwriters may exercise such option only to cover
over-allotments made of the shares in connection with this Offering. To the
extent the Underwriters exercise this option, each of the Underwriters will be
obligated, subject to certain conditions, to purchase the number of additional
shares proportionate to such Underwriter's initial commitment.
The Company, each of its directors and officers and the Selling Stockholders
have agreed that they will not sell, contract to sell, grant any option to sell
or otherwise dispose of, directly or indirectly, any shares of the Common Stock
or any securities convertible into or exchangeable for Common Stock, for a
period of at least 90 days after the date of this Prospectus, without the prior
written consent of SBC Warburg Dillon Read Inc., except, without such consent,
(i) the Company may register and the Company may issue securities pursuant to
any of the Company's stock option or other benefit or incentive plans and (ii)
the Company may issue and register the Common Stock and the Company and the
Selling Stockholders may sell the shares of Common Stock offered in the
Offering.
The Managing Underwriters, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate cover transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the Offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
Common Stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the Managing
Underwriters to reclaim a selling concession from a syndicate member when the
Common Stock originally sold by such syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the Common Stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on the New
York Stock Exchange or otherwise and, if commenced, may be discontinued at any
time.
The Company and the Selling Stockholders have agreed in the Underwriting
Agreement to indemnify the Underwriters against certain liabilities, including
any liabilities under the Securities Act, or to contribute to payments, the
Underwriters may be required to make in respect thereof.
The Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
LEGAL MATTERS
The validity of the shares of Common Stock offered by the Company hereby and
certain legal matters will be passed upon for the Company by Winston & Strawn,
Chicago, Illinois. Certain legal matters will be passed upon for the
Underwriters by Cahill Gordon & Reindel, a partnership including a professional
corporation, New York, New York.
EXPERTS
The financial statements as of June 30, 1997 and 1996 and for each of the
three years in the period ended June 30, 1997 included in this Prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein and have been so included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
43
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Barr Laboratories, Inc.
<TABLE>
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets as of June 30, 1996 and 1997 and December 31, 1997
(unaudited)......................................................................... F-3
Consolidated Statements of Operations for the years ended June 30, 1995, 1996, 1997
and the unaudited six months ended December 31, 1996 and 1997....................... F-4
Consolidated Statements of Shareholders' Equity for the years ended June 30, 1995,
1996 and 1997....................................................................... F-5
Consolidated Statements of Cash Flows for the years ended June 30, 1995, 1996 and 1997
and the unaudited six months ended December 31, 1996 and 1997....................... F-6
Notes to the Consolidated Financial Statements........................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Barr Laboratories, Inc.
We have audited the accompanying consolidated balance sheets of Barr
Laboratories, Inc. and subsidiaries (the "Company") as of June 30, 1997 and
1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended June 30,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Barr Laboratories, Inc. and
subsidiaries at June 30, 1997 and 1996, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1997
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE, LLP
Parsippany, New Jersey
August 28, 1997 (January 28, 1998 as to Notes 1(f), 1(h), 5 and 8)
F-2
<PAGE>
BARR LABORATORIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
---------------------- DECEMBER 31,
1996 1997 1997
---------- ---------- ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 44,893 $ 31,923 $ 34,085
Accounts receivable (including receivables from related parties of $886
in 1996 and $1,358 in 1997) less allowances of $1,799, $1,620 and
$2002, respectively.................................................... 32,065 35,232 64,800
Inventories............................................................ 42,396 56,216 41,810
Deferred income tax.................................................... 2,771 3,160 3,471
Prepaid expenses....................................................... 648 568 860
---------- ---------- ------------
Total current assets............................................... 122,773 127,099 145,026
Property, plant and equipment, net......................................... 45,739 75,928 86,505
Other assets............................................................... 708 775 3,759
---------- ---------- ------------
Total assets....................................................... $ 169,220 $ 203,802 $ 235,290
---------- ---------- ------------
---------- ---------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................... $ 58,537 $ 72,685 $ 66,784
Accrued liabilities...................................................... 6,332 5,117 7,164
Deferred income tax...................................................... -- 957 3,698
Current portion of long-term debt........................................ 3,815 4,139 1,964
Income taxes payable..................................................... 1,104 2,394 1,412
---------- ---------- ------------
Total current liabilities.......................................... 69,788 85,292 81,022
Long-term debt............................................................. 17,709 14,941 32,443
Other liabilities.......................................................... 238 201 207
Deferred income taxes...................................................... 1,324 1,230 532
Commitments and Contingencies (note 11)
Shareholders' Equity:
Preferred stock, $1 par value per share; authorized 2,000,000 shares;
none issued............................................................ -- -- --
Common stock, $.01 par value per share; authorized 30,000,000, 30,000,000
and 100,000,000 shares, respectively; issued 14,115,664, 21,446,053 and
21,810,409, respectively............................................... 141 214 218
Additional paid-in capital............................................... 43,526 46,061 48,883
Retained earnings........................................................ 36,507 55,876 72,598
Unrealized loss on investment............................................ -- -- (600)
---------- ---------- ------------
80,174 102,151 121,099
Treasury stock at cost; 78,637, 117,955 and 117,955 shares, respectively... (13) (13) (13)
---------- ---------- ------------
Total shareholders' equity......................................... 80,161 102,138 121,086
---------- ---------- ------------
Total liabilities and shareholders' equity......................... $ 169,220 $ 203,802 $ 235,290
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
BARR LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
---------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1996 1997
---------- ---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Net product sales (including sales to related parties of
$2,585, $4,296, and $4,971, in 1995, 1996 and 1997,
respectively)........................................... $ 199,720 $ 232,224 $ 257,436 $ 131,566 $ 175,012
Proceeds from supply agreement............................ -- -- 27,050 -- 13,583
---------- ---------- ---------- ---------- ----------
Total revenues.............................................. 199,720 232,224 284,486 131,566 188,595
Costs and expenses:
Cost of sales............................................. 159,498 189,394 217,196 111,161 133,995
Selling, general and administrative....................... 19,014 21,695 23,391 8,599 17,607
Research and development.................................. 10,443 11,274 13,536 5,947 8,815
---------- ---------- ---------- ---------- ----------
Earnings from operations.................................... 10,765 9,861 30,363 5,859 28,178
Interest income............................................. 1,874 2,778 2,398 1,164 697
Interest expense............................................ (2,535) (1,767) (939) (639) (435)
Other income................................................ 118 637 228 7 35
---------- ---------- ---------- ---------- ----------
Earnings before income taxes and extraordinary loss......... 10,222 11,509 32,050 6,391 28,475
Income tax expense.......................................... 3,852 4,368 12,603 2,396 10,963
---------- ---------- ---------- ---------- ----------
Earnings before extraordinary loss.......................... 6,370 7,141 19,447 3,995 17,512
Extraordinary loss on early extinguishment of debt, net of
taxes..................................................... (145) (125) -- -- (790)
---------- ---------- ---------- ---------- ----------
Net earnings................................................ $ 6,225 $ 7,016 $ 19,447 $ 3,995 $ 16,722
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Earnings per common share:
- ------------------------------------------------------------
Earnings before extraordinary loss.......................... $ 0.32 $ 0.34 $ 0.92 $ 0.19 $ 0.82
Net earnings................................................ $ 0.31 $ 0.33 $ 0.92 $ 0.19 $ 0.78
Earnings per common share--assuming dilution:
- ------------------------------------------------------------
Earnings before extraordinary loss.......................... $ 0.31 $ 0.33 $ 0.87 $ 0.18 $ 0.76
Net earnings................................................ $ 0.30 $ 0.32 $ 0.87 $ 0.18 $ 0.72
</TABLE>
See accompanying notes to the consolidated financial statements
F-4
<PAGE>
BARR LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON COMMON STOCK
STOCK ADDITIONAL IN TREASURY TOTAL
----------------------- PAID-IN RETAINED ---------------------- SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT EQUITY
------------ --------- ----------- --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1994.................... 8,783,737 $ 88 $ 31,591 $ 23,318 52,425 $ (13) $ 54,984
Net earnings.............................. 6,225 6,225
Issuance of common stock for exercised
stock options and employees' stock
purchase plans.......................... 40,757 -- 661 661
Issuance of common stock upon conversion
of convertible subordinated notes....... 510,358 5 9,978 9,983
------------ --------- ----------- --------- --------- --- -------------
BALANCE, JUNE 30, 1995.................... 9,334,852 93 42,230 29,543 52,425 (13) 71,853
Net earnings.............................. 7,016 7,016
Issuance of common stock for exercised
stock options and employees' stock
purchase plans.......................... 80,757 1 1,310 1,311
Stock split (3-for-2)..................... 4,700,055 47 (14) (52) 26,212 -- (19)
------------ --------- ----------- --------- --------- --- -------------
BALANCE, JUNE 30, 1996.................... 14,115,664 141 43,526 36,507 78,637 (13) 80,161
Net earnings.............................. 19,447 19,447
Issuance of common stock for exercised
stock options and employees' stock
purchase plans.......................... 220,526 2 2,549 2,551
Stock split (3-for-2)..................... 7,109,863 71 (14) (78) 39,318 -- (21)
------------ --------- ----------- --------- --------- --- -------------
BALANCE, JUNE 30, 1997.................... 21,446,053 $ 214 $ 46,061 $ 55,876 117,955 $ (13) $ 102,138
------------ --------- ----------- --------- --------- --- -------------
------------ --------- ----------- --------- --------- --- -------------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE>
BARR LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
SIX MONTHS ENDED,
FOR THE YEARS ENDED,
JUNE 30, DECEMBER 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net earnings......................................................... $ 6,225 $ 7,016 $ 19,447 $ 3,995 $ 16,722
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization...................................... 4,429 4,920 4,989 2,443 2,565
Deferred income tax (benefit) expense.............................. (407) 777 474 (89) 1,732
Write-off of deferred financing fees associated with early
extinguishment of debt........................................... 188 31 -- -- 195
(Gain) loss on disposal of equipment............................... (113) 63 (203) -- --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable, net......................................... (5,674) (4,758) (3,167) (1,871) (29,568)
Inventories...................................................... (6,540) (6,506) (13,820) 3,052 14,406
Prepaid expenses................................................. (35) 30 80 (251) (292)
Other assets..................................................... 198 (107) (194) (150) 233
Increase (decrease) in:
Accounts payable and accrued liabilities......................... 23,303 4,047 12,896 1,728 (3,848)
Income taxes payable............................................. 320 (145) 1,290 1,264 (982)
--------- --------- --------- --------- ---------
Net cash provided by operating activities.......................... 21,894 5,368 21,792 10,121 1,163
--------- --------- --------- --------- ---------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Purchases of property, plant and equipment........................... (6,328) (16,048) (35,087) (11,032) (13,150)
Proceeds from sale of property, plant and equipment.................. 340 184 239 -- 65
Investment in marketable securities.................................. -- -- -- -- (4,069)
--------- --------- --------- --------- ---------
Net cash used in investing activities.............................. (5,988) (15,864) (34,848) (11,032) (17,154)
--------- --------- --------- --------- ---------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Principal payments on long-term debt................................. (62) (2,043) (4,081) (22) (14,673)
Proceeds from loans.................................................. -- 3,153 1,637 1,387 30,000
Proceeds from revolving line of credit............................... -- -- -- -- 6,600
Payments on revolving line of credit................................. -- -- -- -- (6,600)
Fees associated with stock split..................................... -- (19) (21) -- --
Fees associated with conversion of debt to equity.................... (17) -- -- -- --
Proceeds from exercise of stock options and employee stock
purchases.......................................................... 661 1,311 2,551 289 2,826
--------- --------- --------- --------- ---------
Net cash provided by financing activities.......................... 582 2,402 86 1,654 18,153
--------- --------- --------- --------- ---------
(Decrease) increase in cash and cash equivalents................... 16,488 (8,094) (12,970) 743 2,162
Cash and cash equivalents, beginning of year........................... 36,499 52,987 44,893 44,893 31,923
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of year................................. $ 52,987 $ 44,893 $ 31,923 $ 45,636 $ 34,085
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental cash flow data-Cash paid during the year:
Interest, net of portion capitalized................................. $ 2,541 $ 1,727 $ 930 $ 507 $ 187
Income taxes......................................................... 3,766 3,930 10,830 1,221 9,838
Supplemental disclosure of non-cash financing activity:
Issuance of 1,148,305 shares of common stock upon conversion of
$10,000 Convertible Subordinated Notes............................. $ 10,000
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
<PAGE>
BARR LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION AND OTHER MATTERS
The consolidated financial statements include the accounts of Barr
Laboratories, Inc. (the "Company") and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Sherman Delaware, Inc., and affiliated companies owned 64.1% of the common
stock of the Company at June 30, 1997. Dr. Bernard C. Sherman is a principal
stockholder of Sherman Delaware, Inc. and a Director of Barr Laboratories, Inc.
The unaudited interim consolidated financial statements as of December 31,
1997 and for the six months ended December 31, 1996 and 1997 have been prepared
on the same basis as the audited consolidated financial statements included
herein. In the opinion of management, such unaudited interim consolidated
financial statements include all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the results for such periods.
The operating results for the six months ended December 31, 1997 are not
necessarily indicative of the operating results to be expected for the full
fiscal year or for any future period.
Certain amounts in prior years' financial statements have been reclassified
to conform with the current year presentation.
(B) CREDIT AND MARKET RISK
The Company operates in one industry segment; it manufactures, markets and
distributes a wide range of generic pharmaceutical products. The Company also
distributes a patented breast cancer agent, Tamoxifen Citrate, under an
agreement with the Innovator. The Company's manufacturing plants are located in
New Jersey, New York and Virginia and its products are sold throughout the
United States primarily to wholesale and retail distributors. In addition, the
Company manufactures and sells many products to other companies that resell
these pharmaceuticals under their own (private) label. In fiscal 1996 and 1997
McKesson Drug Company accounted for approximately 10% and 13% of net product
sales, respectively. In fiscal 1995, approximately 10% of net product sales were
generated by sales to Cardinal Health, Inc. No other customer accounted for
greater than 10% of sales in any of the last three fiscal years. The Company
performs ongoing credit evaluations of its customers' financial condition and
generally requires no collateral from its customers.
(C) INVENTORIES
Inventories are stated at the lower of cost, determined on a first-in,
first-out (FIFO) basis, or market.
(D) PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment is recorded at cost. Depreciation is provided
for on a straight-line basis over the estimated useful lives of the related
assets. Leasehold improvements are amortized on a straight-line basis over the
shorter of their useful lives or the terms of the respective leases.
F-7
<PAGE>
BARR LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The estimated useful lives of the major classification of depreciable assets
are:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings.......................................................................... 45
Building Improvements.............................................................. 10
Machinery and Equipment............................................................ 3-10
Leasehold Improvements............................................................. 3-10
Automobiles and Trucks............................................................. 3-5
</TABLE>
Maintenance and repairs are charged to operations as incurred; renewals and
betterments are capitalized.
(E) RESEARCH AND DEVELOPMENT
Research and development costs, which consist principally of product
development costs, are charged to operations as incurred.
(F) EARNINGS PER SHARE
On April 11, 1997, the Company's Board of Directors declared a 3-for-2 stock
split effected in the form of a 50% stock dividend. Approximately 7.1 million
additional shares of common stock were distributed on May 7, 1997 to
shareholders of record as of April 24, 1997. On February 21, 1996, the Company's
Board of Directors declared a 3-for-2 stock split effected in the form of a 50%
stock dividend. Approximately 4.7 million additional shares of common stock were
distributed on March 25, 1996 to shareholders of record as of March 4, 1996. All
prior year share and per share amounts have been adjusted for the stock splits.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS
No. 128 specifies the computation, presentation and disclosure requirements for
earnings per share ("EPS") and became effective for both interim and annual
periods ending after December 15, 1997. All prior period EPS data has been
restated to conform with the provisions of SFAS No. 128. The following is a
reconciliation of the numerators and denominators used to calculate Earnings per
share before extraordinary loss in the Consolidated Statements of Earnings:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
EARNINGS PER COMMON SHARE:
Earnings before extraordinary loss (numerator)................. $ 6,370 $ 7,141 $ 19,447 $ 3,995 $ 17,512
Weighted average shares (denominator).......................... 20,125 20,968 21,133 21,074 21,550
Earnings before extraordinary loss........................... $ 0.32 $ 0.34 $ 0.92 $ 0.19 $ 0.82
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
EARNINGS PER COMMON SHARE--ASSUMING DILUTION:
Earnings before extraordinary loss (numerator)................. $ 6,370 $ 7,141 $ 19,447 $ 3,995 $ 17,512
Weighted average shares........................................ 20,125 20,968 21,133 21,074 21,550
Effect of Dilutive Options..................................... 468 789 1,297 1,148 1,582
--------- --------- --------- --------- ---------
Weighted averages shares--assuming dilution (denominator).... 20,593 21,757 22,430 22,222 23,132
Earnings before extraordinary loss........................... $ 0.31 $ 0.33 $ 0.87 $ 0.18 $ 0.76
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-8
<PAGE>
BARR LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
During the fiscal year ended June 30, 1995 and the six months ended December
31, 1996 there were 204 and 291, respectively, of outstanding options which were
not included in the computation of diluted EPS because the options' exercise
prices were greater than the average market price of the common stock for the
period.
(G) CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid investments (primarily
market auction securities with interest rates that are re-set in intervals of 7
to 71 days) which are readily convertible into cash at par value (cost). As of
June 30, 1996 and 1997, $20,924 and $11,239, respectively, of the Company's cash
was held in a cash collateral account to secure extension of credit to it by the
Innovator of Tamoxifen Citrate in accordance with the Distribution and Supply
Agreement between the Company and the Innovator.
In December 1995, the Company and the Innovator of Tamoxifen entered into an
Alternative Collateral Agreement ("Collateral Agreement") which suspends certain
sections of the Supply and Distribution Agreement ("Distribution Agreement")
entered by both parties in March, 1993. Under the Collateral Agreement,
extensions of credit to the Company will no longer need to be secured by a
letter of credit or cash collateral. However, the Company may at its discretion
maintain a balance in the escrow account based on its short-term cash
requirements. All remaining terms of the Distribution Agreement remain in place.
In return for the elimination of the cash collateral requirement and in lieu of
issuing letters of credit, the Company has agreed to pay the Innovator monthly
interest based on the average monthly Tamoxifen payable balance, as defined in
the agreement, and maintain compliance with certain financial covenants. The
Company was in compliance with such covenants at June 30, 1997.
(H) OTHER ASSETS
DEFERRED FINANCING FEES
All costs associated with the issuance of debt are being amortized on a
straight-line basis over the life of the related debt which matures in 2001 and
2002. The unamortized amounts of $524, $492 and $435 at June 30, 1996, June 30,
1997 and December 31, 1997, respectively, are included in Other Assets in the
Consolidated Balance Sheets.
In connection with the early extinguishment of $2,000 of the 10.15% Senior
Secured Notes and the 10.05% convertible subordinated notes, the Company wrote
off $188 and $31 in deferred financing fees in 1995 and 1996, respectively. In
connection with the November 1997 early extinguishment of the remaining $14,400
of the 10.15% Senior Secured Notes, the Company wrote off $195 in deferred
financing fees in the six months ended December 31, 1997. See Note (5) Long-Term
Debt.
INVESTMENT IN WARNER CHILCOTT
On August 13, 1997 Barr made a strategic investment in Warner Chilcott
Public Limited Company ("Warner Chilcott"), a developer, marketer and
distributor of specialty pharmaceutical products. In connection with Warner
Chilcott's Initial Public Offering ("Offering"), the Company acquired 250,000
Ordinary Shares represented by 250,000 American Depository Shares ("ADSs") at a
price equal to the initial public offering price less underwriting discounts and
commissions. The initial investment totaled $4,069. In addition, the Company was
granted warrants to purchase an additional 250,000 shares in the form of ADSs.
Beginning on the first anniversary of the Offering and annually thereafter for
the next three years, one-fourth of the warrant will be exercisable by Barr. If
Barr does not exercise in full the portion of
F-9
<PAGE>
BARR LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
the warrant exercisable during any one year, such portion of the warrant will
terminate. Finally, in connection with two product agreements signed with Warner
Chilcott, the Company has the opportunity to receive an additional 425,000
shares upon receipt of certain product approvals by Barr.
At December 31, 1997, in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", the Company's investment in
Warner Chilcott is included in Other Assets in the Consolidated Balance Sheet
and is recorded at market value with the unrealized gain or loss recognized as a
separate component of shareholders' equity, net of income taxes.
(I) FAIR VALUE OF FINANCIAL INSTRUMENTS
CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE--The carrying amounts of
these items are a reasonable estimate of their fair value.
LONG-TERM DEBT--The fair value of debt at June 30, 1996 and 1997 is
estimated at $23 million and $20 million, respectively. Estimates were
determined by discounting the future cash flows using rates currently available
to the Company.
The fair value estimates presented herein are based on pertinent information
available to management as of June 30, 1997. Although management is not aware of
any factors that would significantly affect the estimated fair value amounts,
such amounts have not been comprehensively revalued for purposes of these
financial statements since that date, and current estimates of fair value may
differ significantly from the amounts presented herein.
(J) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and use
assumptions that affect certain reported amounts and disclosures; actual results
may differ.
(K) REVENUE RECOGNITION
The Company recognizes revenue when goods are shipped.
(L) STOCK-BASED COMPENSATION
Effective January 1, 1996, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123") "ACCOUNTING
FOR STOCK-BASED COMPENSATION." SFAS No. 123 requires the Company to either
record compensation expense or provide additional disclosures with respect to
stock awards and stock option grants made after December 31, 1994. The
accompanying Notes to Consolidated Financial Statements include the disclosures
required by SFAS No. 123. No compensation expense is recognized pursuant to the
Company's stock option plans under SFAS No. 123 which is consistent with prior
treatment under Accounting Principles Board Opinion No. 25 ("APB No. 25")
"ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES."
(2) PROCEEDS FROM SUPPLY AGREEMENT
In January 1997, Bayer AG and Bayer Corporation ("Bayer") and the Company
reached an agreement to settle the then pending litigation regarding Bayer's
patent protecting ciprofloxacin hydrochloride ("Settlement Agreement"). As a
result, the U.S. Federal Court for the Southern District of New York
F-10
<PAGE>
BARR LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
entered a Consent Judgment ending the litigation. In connection with the
Settlement Agreement, the Company acknowledged the validity and enforceability
of Bayer's world-wide ciprofloxacin patent, received an initial cash payment of
$24,550, and signed a contingent, non-exclusive Supply Agreement ("Supply
Agreement") which becomes effective in January, 1998 and ends at patent expiry
in December, 2003. During the term of the Supply Agreement, Bayer has the option
of supplying Barr and an unrelated third party with ciprofloxacin hydrochloride
to market and distribute pursuant to a license from Bayer or making quarterly
cash payments to Barr beginning in March, 1998. Under terms of the Supply
Agreement, Barr accrued revenue of $2,500 in June 1997.
(3) INVENTORIES
A summary of inventories is as follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------------- DECEMBER 31,
1996 1997 1997
--------- --------- ------------
<S> <C> <C> <C>
Raw Materials and Supplies........................... $ 19,648 $ 21,403 $ 20,062
Work-in-Process...................................... 4,920 3,340 7,035
Finished Goods....................................... 17,828 31,473 14,713
--------- --------- ------------
$ 42,396 $ 56,216 $ 41,810
--------- --------- ------------
--------- --------- ------------
</TABLE>
Tamoxifen Citrate, purchased as a finished product, accounted for $12,590,
$23,155 and $6,447 of finished goods inventory at June 30, 1996, June 30, 1997
and December 31, 1997, respectively.
(4) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment is as follows:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
Land................................................................ $ 2,338 $ 2,338
Buildings and Improvements.......................................... 21,639 23,653
Machinery and Equipment............................................. 36,528 40,209
Leasehold Improvements.............................................. 1,659 1,841
Automobiles and Trucks.............................................. 68 68
Construction in Progress............................................ 13,396 41,686
--------- ---------
75,628 109,795
Less: Accumulated Depreciation & Amortization....................... 29,889 33,867
--------- ---------
$ 45,739 $ 75,928
--------- ---------
--------- ---------
</TABLE>
For the years ended June 30, 1995, 1996 and 1997, $176, $526 and $1,801 of
interest was capitalized, respectively.
F-11
<PAGE>
BARR LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(5) LONG-TERM DEBT
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------------- DECEMBER 31,
1996 1997 1997
--------- --------- ------------
<S> <C> <C> <C>
New Jersey Economic Development $ 371
Authority Bond (a)..................................... $ 328 $ 307
10.15% Senior Secured Notes Due 18,000
June 28, 2001 (b)...................................... 14,400 --
Senior Unsecured Notes (b)............................... -- -- 30,000
Equipment Financing (c).................................. 3,153 4,352 4,100
--------- --------- ------------
21,524 19,080 34,407
Less Current Installments of 3,815
Long-Term Debt......................................... 4,139 1,964
--------- --------- ------------
Total Long-Term Debt..................................... $ 17,709 $ 14,941 $ 32,443
--------- --------- ------------
--------- --------- ------------
</TABLE>
- ------------------------
(a) The New Jersey Economic Development Authority Bond is payable to a bank.
Such loan is secured by a first mortgage on land, building and improvements
on the facility located at 265 Livingston Street. Interest is charged at 75%
of the bank's prime rate. The prime rate was 8.25% and 8.5% at June 30, 1996
and 1997, respectively. Monthly installments are $3.6 plus interest, through
December 1999. Upon maturity in January 2000, there will be a final
installment equal to the then remaining principal balance of $220.
(b) In June 1991, the Company entered into a note purchase agreement and issued
$20,000 of Senior Secured Notes bearing interest at a rate of 10.15%,
payable semiannually. In March 1996, the Company negotiated the prepayment
of $2,000 of these Notes. The cash payment of $2,213 included a prepayment
penalty of $169 and accrued interest through March 15, 1996 of $44. The
prepayment penalty of $169 and the related write-off of approximately $31 in
previously deferred financing costs resulted in an extraordinary loss, which
net of taxes of $76, was $125 or $0.01 per share. The Company began making
annual principal payments of $3,600 in June 1997. These notes were
collateralized by a first mortgage on the Pomona, New York facility and all
machinery and equipment other than machinery and equipment in the Forest,
Virginia facility.
In November 1997, the Company refinanced the outstanding $14,400 Senior
Secured Notes with $30,000 of Senior Unsecured Notes with an average
interest rate of 6.88% per year. The cash payment of $16,055 included the
outstanding principal of $14,400, a prepayment penalty of $1,087 and accrued
interest through November 18, 1997 of $568. The prepayment penalty of $1,087
and the related write-off of approximately $195 in previously deferred
financing costs resulted in an extraordinary loss for the six months ended
December 31, 1997. This extraordinary loss from early extinguishment of
debt, net of taxes of $492, was $790 or $0.04 per share. The new Senior
Unsecured Notes of $30,000 include a $20,000, 7.01% Note due November 18,
2007 and $10,000, 6.61% Notes due November 18, 2004. Annual principal
payments under the Notes total $1,429 through November 2002, $5,429 in 2003
and 2004 and $4,000 in 2005 through 2007.
(c) In April 1996, the Company signed a Loan and Security Agreement with
BankAmerica Leasing and Capital Group which provides the Company up to
$18,750 in financing for equipment to be purchased
F-12
<PAGE>
BARR LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
through October 1997. Notes entered into under this agreement require no
principal payment for the first two quarters; bear interest quarterly at a
rate equal to the London Interbank Offer Rate (LIBOR) plus 125 basis points;
and have a term of 72 months. LIBOR was 5.625% and 5.813% at June 30, 1996
and June 30, 1997, respectively. The Agreement contains certain financial
covenants with which the Company was in compliance as of June 30, 1997. In
November 1997, the Company opted not to renew this facility.
In June 1991, the Company entered into a note purchase agreement and issued
$10,000 of convertible subordinated notes bearing interest at the rate of
10.05%, payable semiannually. In February 1995, these notes were converted into
1,148,305 shares of common stock, as adjusted for the 3-for-2 stock splits in
March 1996 and May 1997; and the Company incurred an extraordinary loss
resulting primarily from the write-off of deferred financing costs. This
extraordinary loss from early extinguishment of debt, net of taxes of $92, was
$145 or $0.01 per share for the year ended June 30, 1995.
In November 1997, the Company replaced its $10,000 Secured Revolving Credit
facility with Bank of America Illinois with a $20,000 Unsecured Revolving Credit
facility ("Revolver"). In addition, the term of the Revolver was extended one
year to July 31, 2000. Borrowings under this facility bear interest at LIBOR
plus 0.75%. In addition the Company is required to pay a commitment fee equal to
.25% of the difference between the outstanding borrowings and $20,000. There
were no borrowings outstanding under the Revolving Credit Facility at December
31, 1997.
At June 30, 1997, principal maturities of existing long-term debt for the
next five years and thereafter are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30,
- ---------------------------------------------------------------------------------
<S> <C>
1998............................................................................. $ 4,139
1999............................................................................. 4,139
2000............................................................................. 4,337
2001............................................................................. 4,095
2002............................................................................. 1,756
Thereafter....................................................................... 614
</TABLE>
(6) RELATED-PARTY TRANSACTIONS
The Company's related party transactions were with affiliated companies of
Dr. Bernard C. Sherman. During the years ended June 30, 1995, 1996, and 1997,
the Company purchased $435, $1,800, and $1,800, respectively, of bulk
pharmaceutical material from such companies. In addition, the Company sold
certain of its pharmaceutical products and bulk pharmaceutical materials to five
other companies owned by Dr. Bernard Sherman and was paid an aggregate of
approximately $2,585, $4,296 and 4,971, upon such sales during the years ended
June 30, 1995, 1996, and 1997, respectively. During fiscal 1996, the Company
also entered a multi-year agreement with a Company owned by Dr. Sherman to share
litigation costs in connection with one of its patent challenges. For the years
ended June 30, 1996 and 1997 the Company received $570 and $987 respectively, in
connection with such agreement which was recorded as a reduction to selling,
general and administrative expenses.
In June 1992, a shareholder action was filed against the Company and Edwin
A. Cohen, then President of the Company, and Louis J. Guerci, who was a Vice
President of the Company. In November 1994, the Company agreed to settle this
matter. Management strongly believed that the case was
F-13
<PAGE>
BARR LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
without merit, but determined that it was in the Company's best interest to
settle rather than participate in continued litigation. In December 1994, the
court approved the settlement. As of June 30, 1997, the final payment amount (on
the "claims made basis") of $1,500 has been paid, approximately one-half by the
Company and one-half by the Company's insurance company.
During the years ended June 30, 1995, 1996 and 1997, Mr. Cohen earned $250,
$213 and $250, respectively, under a consulting agreement.
(7) INCOME TAXES
A summary of the components of income tax expense is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
Federal:
Current................................................... $ 3,680 $ 3,110 $ 10,757
Deferred.................................................. (242) 617 294
--------- --------- ---------
3,438 3,727 11,051
--------- --------- ---------
State:
Current................................................... 487 405 1,372
Deferred.................................................. (165) 160 180
--------- --------- ---------
322 565 1,552
--------- --------- ---------
$ 3,760 $ 4,292 $ 12,603
--------- --------- ---------
--------- --------- ---------
</TABLE>
Income tax expense for the years ended June 30, 1995, 1996 and 1997 is
included in the financial statements as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Continuing operations....................................... $ 3,852 $ 4,368 $ 12,603
Extraordinary loss on early extinguishment of debt.......... (92) (76) --
--------- --------- ---------
$ 3,760 $ 4,292 $ 12,603
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes differs from amounts computed by applying the
statutory federal income tax rate to income before taxes due to the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
Federal Income Taxes at Statutory Rate...................... $ 3,475 $ 3,958 $ 11,214
State Income Taxes, Net of Federal Income Tax Effect........ 212 360 1,070
Other, Net.................................................. 73 (26) 319
--------- --------- ---------
$ 3,760 $ 4,292 $ 12,603
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-14
<PAGE>
BARR LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The temporary differences that give rise to deferred tax assets and
liabilities as of June 30, 1996 and 1997 are as follows:
<TABLE>
<S> <C> <C>
1996 1997
--------- ---------
Deferred Tax Assets:
Receivable Reserves.................................. $ 776 $ 561
Inventory Reserves................................... 187 990
Inventory Capitalization............................. 552 706
Other Operating Reserves............................. 1,256 903
--------- ---------
Total Deferred Tax Assets.............................. 2,771 3,160
Deferred Tax Liabilities:
Plant and Equipment.................................. (1,324) (1,230)
Proceeds from Supply Agreement....................... -- (957)
--------- ---------
Total Deferred Tax Liabilities......................... (1,324) (2,187)
--------- ---------
Net Deferred Tax Asset................................. $ 1,447 $ 973
--------- ---------
--------- ---------
</TABLE>
INTERNAL REVENUE SERVICE ("IRS")
In December 1995, the Company received a "30-day" letter from the IRS
disallowing approximately $750 in research and development tax credits,
originating from the fiscal years ended June 30, 1987 through June 30, 1992, on
the grounds that research and development tax credits taken in developing
generic drugs for approval under the ANDA procedure are excluded from the
definition of the term "qualified research" by the duplication exclusion
contained in section 41(d)(4)(C) of the IRS codes, and other grounds. On May 12,
1997 the Company settled the claim with the IRS, without agreeing that the
Company's activities do not qualify for credit, for approximately $822 including
interest. A provision for an estimate of the settlement amount had been
previously included in the Company's 1996 consolidated financial statements, and
therefore the payment did not have a significant adverse effect on the Company's
1997 consolidated financial statements.
(8) SHAREHOLDERS' EQUITY
EMPLOYEE STOCK OPTION PLANS
The Company has stock option plans, which were approved by the shareholders
and which authorize the granting of options to officers and certain key
employees to purchase the Company's common stock at a price equal to the market
price on the date of grant.
During fiscal 1994, the shareholders ratified the adoption by the Board of
Directors of the 1993 Stock Incentive Plan ("the 1993 Option Plan") in order to
ensure, among other things, that the Company would continue to have an adequate
number of shares of common stock available for grants of incentive and
unqualified stock options.
The Company's other option plan was approved by the shareholders in 1986
("the 1986 Option Plan"). As of June 30, 1996, options will no longer be granted
under this Plan.
F-15
<PAGE>
BARR LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
In December 1996, the shareholders ratified an amendment to the 1993 Option
Plan which increased the number of shares of Common stock which may be granted
by 1,125,000 to a total of 2,812,500 (after giving effect to the May 1997
3-for-2 stock split).
All options granted under the 1993 Option Plan and 1986 Option Plan through
June 30, 1996 are exercisable between one and two years from the date of grant
and expire ten years after the date of grant except in cases of death or
termination of employment as defined in each Plan. Options issued during the
fiscal year ended June 30, 1997 are exercisable between 1 and 3 years from the
date of grant. Also, to date, no option has been granted under either the 1993
Option Plan or the 1986 Option Plan at a price below the current market price of
the Company's common stock on the date of grant.
A summary of the activity resulting from all plans, adjusted for the March
1996 and May 1997 3-for-2 stock splits, is as follows:
<TABLE>
<CAPTION>
NO. OF
SHARES OPTION PRICE
------------ --------------
<S> <C> <C>
Outstanding at 6/30/94......................................... 1,053,571 $ 1.94-9.00
Granted........................................................ 433,125 9.64-11.24
Canceled....................................................... (21,390) 4.00-9.64
Exercised...................................................... (40,500) 1.94-7.66
------------
Outstanding at 6/30/95......................................... 1,424,806 1.94-11.24
Granted........................................................ 573,741 10.52-10.64
Canceled....................................................... (50,062) 2.83-10.52
Exercised...................................................... (110,437) 2.44-10.83
------------
Outstanding at 6/30/96......................................... 1,838,048 1.94-11.24
Granted........................................................ 330,406 17.54-37.38
Canceled....................................................... (1,125) 10.52
Exercised...................................................... (181,938) 1.94-10.94
------------
Outstanding at 6/30/97......................................... 1,985,391 1.94-37.38
------------
------------
Exercised to date through 6/30/97.............................. 864,395
Expired under 1986 Plan........................................ 64,165
Available for Grant (4,162,500 authorized)..................... 1,248,549
Exercisable at 6/30/97......................................... 1,289,942 $ 1.94-11.24
</TABLE>
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
During fiscal year 1994, the shareholders ratified the adoption by the Board
of Directors of the 1993 Stock Option Plan for Non-Employee Directors (the
"Directors' Plan"). An aggregate of 337,500 shares of common stock were
authorized to be granted under the Directors' Plan. In December, 1996 the
shareholders ratified an amendment to the Directors Plan which increased the
number of shares of common stock which may be granted by 225,000 to a total of
562,500. This formula plan, among other things, enhances
F-16
<PAGE>
BARR LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
the Company's ability to attract and retain experienced directors. In December
1995, the number of shares which each non-employee director is optioned was
increased from 6,750 to 11,250 shares on the grant date, except in the case of
the first grant date (which was the date of the 1993 Annual Meeting) where each
eligible director was optioned 27,000 shares.
All options granted under the Directors' Plan have ten-year terms and are
exercisable at an option exercise price equal to the market price of common
stock on the date of grant. Each option is exercisable on the date of the first
annual shareholders' meeting immediately following the date of grant of the
option, provided there has been no interruption of the optionee's service on the
Board before that date. The following is a summary of activity, adjusted for the
March 1996 and May 1997 3-for-2 stock splits, for the three fiscal years ended
June 30, 1997:
<TABLE>
<CAPTION>
NO. OF
SHARES OPTION PRICE
--------- -------------
<S> <C> <C>
Outstanding at 6/30/94.............................................. 108,000 $ 9.16
Granted............................................................. 40,500 11.38
---------
Outstanding at 6/30/95.............................................. 148,500 9.16-11.38
Granted............................................................. 67,500 10.33
---------
Outstanding at 6/30/96.............................................. 216,000 9.16-11.38
Granted............................................................. 67,500 17.25
Exercised........................................................... (40,000) 9.16
---------
Outstanding at 6/30/97.............................................. 243,500 9.16-17.25
---------
---------
Available for Grant (562,500 authorized)............................ 279,000
---------
---------
Exercisable at 6/30/97.............................................. 176,000 $ 9.16-11.38
---------
---------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
During fiscal 1994, the shareholders ratified the adoption by the Board of
Directors of the 1993 Employee Stock Purchase Plan (the "Purchase Plan") to
offer employees an inducement to acquire an ownership interest in the Company.
After giving effect for the May, 1997 stock split the Purchase Plan permits
eligible employees to purchase, through regular payroll deductions, an aggregate
of 450,000 shares of common stock at approximately 85% of the fair market value
of such shares. Under the Plan, purchases were 51,202, 59,977 and 50,916 for the
years ended June 30, 1995, 1996 and 1997, respectively.
The Company applies APB No. 25 and related Interpretations in accounting for
its stock-based compensation plans. Accordingly, no compensation cost has been
recognized for its stock option plans and its stock purchase plan. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the
F-17
<PAGE>
BARR LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
method of SFAS No. 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C> <C>
Net income................................................................... As reported $ 7,016 $ 19,447
Pro forma 6,637 18,120
Net earnings per share....................................................... As reported $ 0.33 $ 0.92
Pro forma 0.32 0.86
Net earnings per share--assuming dilution.................................... As reported $ 0.32 $ 0.87
Pro forma 0.31 0.81
</TABLE>
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions for 1996
and 1997, respectively: dividend yield of 0% in both years; expected volatility
of 38.5% and 42.6%; weighted-average risk-free interest rates of 5.8% and 6.3%;
and expected option life of 3 years for the 1993 Option Plan and 4 years for the
Directors' Plan.
The following table summarizes information about stock options outstanding
at June 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED
RANGE OF NUMBER WEIGHTED AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
PRICES AT 6/30/97 CONTRACTUAL LIFE PRICE AT 6/30/97 PRICE
- ------------- ----------- ---------------- ------------- ---------- -------------
$ 1.94-6.00 554,164 4.8 years $ 4.16 470,915 $ 4.08
7.55-11.38 1,276,821 7.2 years 9.77 995,027 9.56
17.25-19.29 387,406 9.3 years 18.82 -- --
22.12-37.38 10,500 9.9 years 30.84 -- --
----------- ----------
2,228,891 1,465,942
----------- ----------
----------- ----------
</TABLE>
(9) SAVINGS AND RETIREMENT PLAN
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 in the first month following the
month of hire. Prior to June 30, 1995, under the terms of the 401(k) Plan,
participating employees could contribute up to a maximum of 15% of their
earnings (9% of their earnings before taxes and up to 6% of after-tax earnings).
Beginning July 1, 1995, participating employees may contribute up to a maximum
of 12% of their earnings before or after taxes. The Company is required,
pursuant to the terms of its union contract, to contribute to each union
employee's account an amount equal to the 2% minimum contribution made by such
employee. The Company may, at its discretion, contribute a percentage of the
amount contributed by an employee to the 401(k) Plan up to a maximum of 10% of
such employee's compensation. Participants are always fully vested with respect
to their own salary and cash contributions and any profits arising therefrom.
Participants become vested with respect to 20% of the Company's contributions to
their accounts and any profits arising therefrom for each full year of
employment with the Company and thus become fully vested after five full years
of employment.
The Company's contributions to the 401(k) Plan were $1,173, $1,488 and
$1,745, for the years ended June 30, 1995, 1996, and 1997, respectively.
F-18
<PAGE>
BARR LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(10) OTHER INCOME
A summary of other income is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
Net Gain (Loss) on Sale of Equipment................................... $ 113 $ (63) $ 203
Joint Venture Litigation (a)........................................... -- 694 --
Other.................................................................. 5 6 25
--------- --- ---------
Other Income........................................................... $ 118 $ 637 $ 228
--------- --- ---------
--------- --- ---------
</TABLE>
(a) In May 1996, the Company and an affiliated company reached an agreement with
a former partner in a joint venture and received on June 10, 1996, $694 of a
$1,000 deposit which was paid in escrow in furtherance of the possible joint
venture. The Company had previously written off the $1,000 investment in the
fourth quarter of fiscal 1992.
(11) COMMITMENTS AND CONTINGENCIES
The Company is party to various operating leases which relate to the rental
of office and plant facilities and of equipment. The Company is satisfied with
its ability to extend such leases, if necessary. Rent expense charged to
operations was $1,217, $1,126 and $1,314 in 1995, 1996 and 1997, respectively.
Future minimum rental payments, exclusive of taxes, insurance and other costs
under noncancellable long-term operating lease commitments, are as follows:
<TABLE>
<CAPTION>
MINIMUM
YEAR ENDING RENTAL
JUNE 30, PAYMENTS
- ----------------------------------------------------------------------------------- -----------
<S> <C>
1998............................................................................... $ 1,168
1999............................................................................... 806
2000............................................................................... 161
2001............................................................................... 49
Thereafter......................................................................... --
</TABLE>
PRODUCT LIABILITY
The Company maintains product liability insurance coverage in the amount of
$20,000. No significant product liability suit has ever been filed against the
Company, however, if one were filed and such a case were successful against the
Company, it could have a material adverse effect upon the business and financial
condition of the Company to the extent such judgment was not covered by
insurance or exceeded the policy limits.
SHAREHOLDER ACTION
On November 16, 1994, the Company agreed to settle a 1992 shareholder
action, filed against the Company and two former officers, which alleged the
violation of certain SEC regulations. In December 1994, the Court approved the
settlement.
F-19
<PAGE>
BARR LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(11) COMMITMENTS AND CONTINGENCIES (CONTINUED)
Management strongly believed that the case was without merit, but determined
that it was in the Company's best interest to settle rather than participate in
continued litigation. As of June 30, 1997, the total settlement, valued at
approximately $1,500, was shared equally by the Company and its insurers. A
provision for the Company's estimated share of the cost of the action had been
previously included in the Company's 1994 consolidated financial statements.
OTHER LITIGATION
As of June 1997, the Company was involved with other lawsuits incidental to
its business, including patent infringement actions. Management of the Company,
based on the advice of legal counsel, believes that the ultimate disposition of
such other lawsuits will not have any significant adverse effect on the
Company's consolidated financial statements.
F-20
<PAGE>
BARR LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(12) QUARTERLY DATA (UNAUDITED)
A summary of the quarterly results of operations is as follows:
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED
--------------------------------------------------
SEPT. 30 DEC. 31 MAR. 31 JUNE 30
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE
AMOUNTS)
FISCAL YEAR 1997:
Total revenues (1)............................................. $ 64,231 $ 67,335 $ 84,714 $ 68,206
Cost of sales.................................................. 53,476 57,685 50,959 55,076
Net earnings................................................... 1,767 2,228 14,925 527
Net earnings per common share (2).............................. $ 0.08 $ 0.11 $ 0.71 $ 0.02
Net earnings per common share -- assuming dilution (2)......... 0.08 0.10 0.66 0.02
PRICE RANGE OF COMMON STOCK (3)
High........................................................... $ 20.00 $ 19.33 $ 28.00 $ 49.75
Low............................................................ 14.75 16.83 16.42 24.38
FISCAL YEAR 1996:
Total revenues................................................. $ 54,176 $ 57,465 $ 60,088 $ 60,495
Cost of sales.................................................. 43,459 46,541 49,405 49,989
Earnings before extraordinary loss on early extinguishment of
debt......................................................... 2,201 1,989 1,269 1,682
Net earnings................................................... 2,201 1,989 1,144 1,682
Earnings per common share (2):
Earnings before extraordinary loss........................... $ 0.11 $ 0.09 $ 0.06 $ 0.08
Net earnings................................................. 0.11 0.09 0.05 0.08
Earnings per common share -- assuming dilution (2):
Earnings before extraordinary loss........................... $ 0.10 $ 0.09 $ 0.06 $ 0.08
Net earnings................................................. 0.10 0.09 0.05 0.08
PRICE RANGE OF COMMON STOCK (3)
High........................................................... $ 10.94 $ 13.67 $ 18.33 $ 20.83
Low............................................................ 9.11 9.33 11.39 16.42
</TABLE>
- ------------------------
(1) Amounts include Proceeds from Supply Agreement of $24,550 and $2,500 for the
quarters ended March 31, 1997 and June 30, 1997, respectively.
(2) 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 paid no cash
dividend.
(3) The Company's common stock is listed and traded on the American Stock
Exchange. At June 30, 1997, there were approximately 723 record shareholders
of common stock. The Company believes that a significant number of
beneficial owners hold their shares in street name.
F-21
<PAGE>
No dealer, salesperson or other person has been authorized to give any
information or to make any representation other than those contained in this
Prospectus in connection with the offer contained herein, and if given or made,
such information or representation must not be relied upon as having been
authorized by the Company, the Selling Stockholders or any Underwriter. This
Prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, shares of Common Stock in any jurisdiction to any person to whom it is
not lawful to make any such offer or solicitation in such jurisdiction or in
which the person making such offer or solicitation is not qualified to do so.
Neither the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create an implication that there has been no change in the
affairs of the Company since the date hereof.
TABLE OF CONTENTS
-------------------------------------------
<TABLE>
<CAPTION>
Available Information........................... 2
<S> <C>
Incorporation of Certain Documents by
Reference..................................... 2
Prospectus Summary.............................. 3
Risk Factors.................................... 7
Use of Proceeds................................. 13
Price Range of Common Stock..................... 13
Dividend Policy................................. 13
Capitalization.................................. 14
Selected Consolidated Financial Data............ 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 16
Business........................................ 22
Management...................................... 38
Selling Stockholders............................ 41
Description of Capital Stock.................... 41
Underwriting.................................... 42
Legal Matters................................... 43
Experts......................................... 43
Index to Consolidated Financial
Statements.................................... F-1
</TABLE>
PROSPECTUS March 11, 1998
[LOGO]
3,400,000 Shares
BARR LABORATORIES, INC.
Common Stock
SBC WARBURG DILLON READ INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
