##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
   Form 10-K  (Mark One)þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended June 30, 2004
 or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 1-9860   Barr Pharmaceuticals, Inc. (Exact name of Registrant as specified in its charter)
 Delaware
    
    42-1612474(State or Other Jurisdiction of
    
    (I.R.S.  EmployerIncorporation or Organization)
    
    Identification No.)400 Chestnut Ridge RoadWoodcliff Lake, New Jersey
    
    07677-7668(Address of principal executive offices)
    
    (Zip Code)
 201-930-3300
(Registrants telephone number) Securities registered pursuant to Section 12(b) of the Act: Title of each class
    
    Name of each exchange on which registered:Common Stock, Par Value $0.01
    
    New York Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act:
None Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. þ Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes þ No o The aggregate market value of the common equity held by non-affiliates of
the Registrant computed by reference to the price at which the common equity
was last sold on December 31, 2003, the last business day of the Registrants
most recently completed second fiscal quarter, was approximately
$4,800,000,000. For purposes of this calculation, shares held by directors,
executive officers and 10% shareholders of the Registrant have been excluded.
Such exclusion should not be deemed a determination or an admission by the
Registrant that these individuals are, in fact, affiliates of the Registrant. As of August 11, 2004, there were 104,601,693 shares of common stock
outstanding. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III of this Report, to the extent not set
forth herein, is incorporated herein by reference from the registrations
definitive proxy statement relating to the annual meeting of shareholders to be
held in October 2004, which definitive proxy statement shall be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year to which this Report relates.




---



BARR PHARMACEUTICALS, INC. INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2004 PagePART IItem 1:
    
    Business
    
    
    3Item 2:
    
    Properties
    
    
    27Item 3:
    
    Legal Proceedings
    
    
    27Item 4:
    
    Submission of Matters to a Vote of Security Holders
    
    
    29PART IIItem 5:
    
    Market for
Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    30Item 6:
    
    Selected Financial Data
    
    
    30Item 7:
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    30Item 7A:
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    49Item 8:
    
    Financial Statements and Supplementary Data
    
    
    50Item 9:
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    50Item 9A:
    
    Controls and Procedures
    
    
    50Item 9B:
    
    Other Information
    
    
    50PART IIIItem 10:
    
    Directors and Executive Officers of the Registrant
    
    
    51Item 11:
    
    Executive Compensation
    
    
    52Item 12:
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    52Item 13:
    
    Certain Relationships and Related Transactions
    
    
    52Item 14:
    
    Principal Accountant Fees and Services
    
    
    52PART IVItem 15:
    
    Exhibits and Financial Statement Schedules
    
    
    53SIGNATURES
    
    
    57EX-21: SUBSIDIARIESEX-23.1: CONSENT OF DELOITTE & TOUCHE LLPEX-31.1: CERTIFICATIONEX-31.1: CERTIFICATIONEX-32.0: CERTIFICATION
  2




---



##### Table of Contents



PART I 
 Item 1.Business Safe Harbor Statement Forward-Looking Statements This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements based on expectations, estimates
and projections as of the date of this filing. Actual results may differ
materially from those expressed in forward-looking statements. See Item 7 of
Part IIManagements Discussion and Analysis of Financial Condition and
Results of OperationsForward-Looking Statements. Overview Barr Pharmaceuticals, Inc. is a specialty pharmaceutical company that
develops, manufactures and markets both generic and proprietary pharmaceutical
products through its operating subsidiaries, Barr Laboratories, Inc. and
Duramed Pharmaceuticals, Inc. We market generic products under the Barr label
and almost all proprietary products under the Duramed label. For our fiscal
year ended June 30, 2004, we recorded net earnings of $123.1 million on record
revenues of $1.3 billion. Of our $1.3 billion of revenues in fiscal 2004,
$1,150.6 million were from sales of our generic products (including sales of
products manufactured for us and sold under distribution agreements), $146.1
million from sales of our proprietary products, and $12.4 million were
attributed to other revenues. Prior to June 2004, we operated in one business segment. In June 2004 we
organized our business into two reportable segments: generic pharmaceuticals
and proprietary pharmaceuticals. On the generic side of our business, we
currently manufacture and distribute more than 100 different dosage forms and
strengths of over 70 different generic pharmaceutical products, including 19
oral contraceptive products, representing the largest category of our generic
portfolio. In our proprietary business, we currently manufacture and distribute 11
proprietary pharmaceutical products, largely concentrated in the female
healthcare arena. These products include our SEASONALE® (levonorgestrel and
ethinyl estradiol) extended-cycle oral contraceptive product, our Cenestin®
(synthetic conjugated estrogens, A) line of hormone therapy products and our
Plan B® emergency contraceptive (levonorgestrel) product. We operate manufacturing, research and development and administrative
facilities located in six locations within the United States. Our
administrative offices are located in Woodcliff Lake, New Jersey. As the
result of a reincorporation merger we effected on December 31, 2003, Barr
Pharmaceuticals, Inc. is a Delaware corporation. Our fiscal year ends on June
30. Our Internet address is www.barrlabs.com. On our Investor Relations
portion of the web site we post the following filings as soon as reasonably
practicable after they are electronically filed with or furnished to the SEC:
our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current
reports on Form 8-K and any amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act. All such filings on our
Investor Relations web site are available free of charge. Business Strategies We focus our resources on three principal strategies: 3




---



##### Table of Contents




    
    developing and marketing selected generic pharmaceuticals;
    
    developing and marketing proprietary pharmaceuticals; and  
    
    pursuing development and marketing of generic biopharmaceuticals. Developing and Marketing Selected Generic Pharmaceuticals We develop and market under the Barr label the generic equivalent of brand
pharmaceuticals that no longer enjoy patent protection. We focus on products
that have one or more characteristics that we believe will make it difficult
for other competitors to develop competing generics. The characteristics of the
selected generic products we pursue may include one or more of the following:  
    
    those with complex formulation or development characteristics;  
    
    those requiring specialized manufacturing capabilities;  
    
    those where sourcing the raw material may be difficult; and  
    
    those that must overcome unusual regulatory or legal challenges, including patent challenges. We believe generic products with some or all of these characteristics may
face limited competition and may produce higher returns for a longer period of
time than products without these characteristics. A good example of this
strategy is our generic oral contraceptive franchise, where revenues have
increased from $93 million in fiscal 2002 to $404 million in fiscal 2004. Our selective generic development strategy also includes developing
generic equivalents of branded pharmaceuticals that are purportedly protected
by patents that we believe are invalid, unenforceable or not infringed by our
competing generic products. Successful patent challenges can result in gaining
180 days of market exclusivity for our generic product, such as when we
successfully challenged Eli Lillys patent on Prozac®, or in settlements that
allow us to market the products before the patents expire, such as the
settlement that resulted in our launch of a distributed brand alternative of
Bayers Cipro® product in June 2003. As branded pharmaceutical companies have
increased the number of patents protecting their products, the number of our
generic products in development facing intellectual property issues and
possible litigation has also increased. As a percentage of our total product sales, sales of our generic products,
including sales of products manufactured for us and sold under distribution
agreements, accounted for 95% of sales in fiscal 2002, 94% in fiscal 2003 and
89% in fiscal 2004. The declining percentage over time reflects the increasing
contribution from our proprietary products over that same period. Developing and Marketing Proprietary Pharmaceuticals We also develop, manufacture and sell proprietary pharmaceutical products
under the Duramed label. As part of our diversification strategy, we have
increased our focus on proprietary products while at the same time maintaining,
or even increasing, our commitment to the generic side of our business.
Although they involve substantially higher risk to bring to market and more
extensive research and development activities on our part, proprietary products
offer the potential for a longer period of market or product exclusivity and
greater returns than most generic products. In addition, proprietary products
require greater sales and marketing expenses because of the need to promote
them directly to physicians and in some cases directly to consumers. An example
of this is our SEASONALE® extended-cycle oral contraceptive product that we
launched in November 2003. As a percentage of our total product sales, sales of our proprietary
products accounted for 5% of sales in fiscal 2002, 6% in fiscal 2003 and 11% in
fiscal 2004. 4




---



##### Table of Contents



Pursuing Development and Marketing of Generic Biopharmaceuticals We are actively pursuing those business development initiatives and
internal development activities that will enable us to bring generic versions
of biopharmaceutical products to market and intend to build a leadership
position in the development and marketing of such products in the future.
Biopharmaceuticals represents an industry with more than $30 billion in annual
sales, and more than 150 biopharmaceutical products are on the market today.
However, the U.S. Food & Drug Administration (FDA) has not recognized an
abbreviated regulatory pathway for the timely and cost-efficient approval of
generic versions of these products, many of which have lost patent protection
or will lose patent protection within the next several years. We are working
with Congress, the Department of Health and Human Services (HHS), including
the FDA, and the generic industrys trade association, the Generic
Pharmaceutical Association (GPhA), to help define the regulatory pathway for
approval of these products. We currently do not sell any generic
biopharmaceutical products. Investment in Research and Development Our investment in research and development has increased steadily from
approximately $76 million in fiscal 2002 to $91 million in fiscal 2003 and to
$169 million in fiscal 2004. Overall, the increase in research and development
has been led primarily by higher spending on proprietary product development
activities, including the acquisition of in-process research and development.
Research and development expenditures for generic development activities
typically include those related to internal personnel, third-party
bioequivalence studies and costs for raw materials used in developing the
products. Proprietary development costs typically include those related to
internal personnel, clinical studies, third-party toxicology studies, clinical
trials conducted by third-party clinical research organizations, and raw
materials. We will continue to strengthen our commitment to research and
development during fiscal 2005 as we continue to invest in proprietary and
generic product development. Business Development To support our business strategies, we continually evaluate acquisition
opportunities to strengthen our product portfolio and help grow our business.
We regularly evaluate opportunities particularly in the following areas:
strategic product acquisitions, new technology arrangements including new
technology platforms, and corporate mergers and acquisitions. Significant Developments in Fiscal 2004 Launch of SEASONALE® Extended-Cycle Oral Contraceptive In November 2003, we launched our SEASONALE extended-cycle oral
contraceptive product. SEASONALE offers women and healthcare providers a unique
choice in oral contraception by reducing the number of menstrual periods to
four per year. See Proprietary Pharmaceuticals  Products We Currently Market below. Leading Market Share of Oral Contraceptive Products During fiscal 2004, we expanded our portfolio of generic and proprietary
oral contraceptive products through the launch of new products and gained
market share from oral contraceptive products we launched over the past two
years. As a result, we became the leading manufacturer and marketer of oral
contraceptive products in the United States, including generic and proprietary
oral contraceptives, with a 30% prescription market share, based on industry
source data for the month ended June 2004. Currently, we market 19 generic and
three proprietary oral contraceptive products. We also launched six new generic oral contraceptive products. Our generic
launches included our Tri-Sprintec® (norgestimate and ethinyl estradiol) oral
contraceptive product, the generic version of Ortho-McNeil Pharmaceuticals
Ortho Tri-Cyclen®. Ortho Tri-Cyclen was the largest selling oral contraceptive
product in the United States with annualized brand sales of approximately $712
million based on sales for the quarter ended December 31, 2003, according to
industry source data. In August 2003, we entered into a settlement of patent
litigation with Ortho-McNeil that enabled us to launch Tri-Sprintec on December
29, 2003. 5




---



##### Table of Contents



During fiscal 2004, we added three proprietary oral contraceptive products
to our product portfolio. We launched our innovative SEASONALE extended-cycle
oral contraceptive product in November 2003, acquired the Plan B®
emergency contraceptive in February 2004, and acquired a license for the
Loestrin® (norethindrone acetate and ethinyl estradiol) and Loestrin® FE
(norethindrone acetate and ethinyl estradiol and ferrous fumarate) oral
contraceptives in March 2004. Ciprofloxacin During fiscal 2004, we recorded sales of $385 million for our distributed
Ciprofloxacin product, an antibiotic used to treat various types of infections,
including urinary tract infections. In 1997, we entered into an agreement with
Bayer to settle our patent challenge litigation regarding its Cipro®
antibiotic. Pursuant to the terms of the agreement, we began distributing
Ciprofloxacin on June 9, 2003. In September 2003, we signed an Amended Supply
Agreement with Bayer that enabled us to distribute the product during Bayers
pediatric exclusivity, which ended on June 9, 2004. After June 9, 2004,
several other generic competitors entered the market and, as expected, the
price for Ciprofloxacin and our market share declined significantly. ERP System During fiscal 2004, we initiated implementation of a multi-million dollar,
company-wide enterprise resource planning (ERP) system from SAP to replace
the current computer system that manages business operations. We are committed
to having the information technology base in place that will allow us to better
operate and manage all facets of our operations. In addition, we believe the
new ERP system will allow us to: (1) more efficiently manage corporate
activities, including generic sales and marketing activities; (2) more
efficiently manage diverse product lines; (3) integrate mergers and
acquisitions more efficiently; and (4) support potential future international
operations. We expect this project to take somewhere between 24 and 27 months
and will require an investment of approximately $60 million. To ensure this
project is timely implemented and on budget, we have dedicated approximately 25
full-time employees to the project, along with third party consultants. Solvay Arbitration On June 17, 2004, a three-member arbitration panel determined that our
Duramed subsidiary did not properly terminate its contract with Solvay
Pharmaceuticals, Inc., regarding the joint promotion of Cenestin®. A
two-member majority of the panel ordered us to pay Solvay $68 million in
monetary damages over the next sixteen months, over the strong disagreement of
the panels Chairman. The majority gave no explanation for its calculation of
the damage award. We are seeking to vacate the panels decision, but
nevertheless have accrued for this award and recognized the related charge in
our consolidated statement of operations as of June 30, 2004. The panels
decision has no impact on our marketing of Cenestin, which we currently promote
in five dosage strengths directly to physicians using our 250-person womens
healthcare sales force. Natural Biologics In March 2002, we signed a series of agreements with Natural Biologics,
LLC (NBL) to develop an AB rated conjugated estrogens product based on
NBLs equine-based raw material. On June 30, 2003, we filed our abbreviated
new drug application (ANDA) with the FDA for this product. On September 15,
2003, the U.S. District Court for the District of Minnesota required NBL to
withdraw its drug master file for equine-based conjugated estrogens raw
material from the FDA. The ruling prevents us from using this raw material in
our application for an AB-rated conjugated estrogens product. NBL is appealing
the decision. As a result of the District Courts decision, we recorded an
expense of $15.7 million for a reserve we established covering loans we made to
NBL from March 2002 to September 2003. 6




---



##### Table of Contents



Acquisitions Estrostep®/Estrostep® FE and Femhrt® License On June 17, 2004, our Barr Laboratories subsidiary and Galen Holdings PLC
(Galen) agreed to settle pending patent litigation regarding Galens
Estrostep (norethindrone acetate and ethinyl estradiol) and Estrostep FE
(norethindrone acetate and ethinyl estradiol and ferrous fumarate) oral
contraceptive and Femhrt hormone therapy products. Galen granted us a
non-exclusive license to launch a generic version of Estrostep and Estrostep FE
in October 2007, six months prior to the expiration of the patent on Estrostep
and Estrostep FE. Galen also granted us a non-exclusive license to launch a
generic version of Femhrt in November 2009, six months prior to the expiration
of the patent on Femhrt. Oxybutynin TVR Effective March 31, 2004, we entered into an agreement with Schering AG of
Germany to acquire the worldwide marketing and sales rights to an oxybutynin
transvaginal ring (TVR) product for urinary incontinence. We had been
developing this product for Schering under a Development and License Agreement
that we assumed as part of our 2002 acquisition of certain assets from Enhance
Pharmaceuticals. As part of our acquisition agreement we assumed all remaining
development efforts and costs for the oxybutynin TVR product and agreed to
forgo all remaining milestone payments and royalties, but gained greater
control over the products development and will have the opportunity to earn
greater profits if the product is approved. Galen Agreements On March 25, 2004, our Duramed subsidiary acquired the exclusive rights in
the United States and Canada for Loestrin®and Loestrin®FE oral contraceptive
products from Galen. Under the terms of a second agreement, we granted Galen an
option to acquire an exclusive five-year license for our generic version of
Galens Ovcon® 35 (norethindrone and ethinyl estradiol) oral contraceptive.
Galen exercised this option on May 6, 2004 and paid us a license fee of $19
million that we are amortizing over the life of the license. In a separate
agreement, Galen granted Barr an exclusive royalty-bearing license to develop
certain oral contraceptives under a patent owned by Galen. Emergency Contraceptive Acquisitions On February 26, 2004, we completed our acquisition of all outstanding
shares of Womens Capital Corporation (WCC), a privately held company,
through a merger with a Barr subsidiary. WCC was the owner of the emergency
contraceptive product Plan B. In a related transaction, we also acquired
certain emergency contraception assets from Gynetics Inc. for an upfront
payment and future royalties. Endeavor Pharmaceuticals, Inc. On December 3, 2003, we acquired substantially all of the assets of
Endeavor Pharmaceuticals, Inc., including the pending new drug application
(NDA) and intellectual property related to the Enjuvia® hormone therapy
product (synthetic conjugated estrogens product, B), and two other early stage
development female healthcare products. Enjuvia is the only plant-derived,
synthetic conjugated estrogen product that includes the component delta
8,9-dehydroestrone sulfate, an additional active estrogenic component. Generic Pharmaceuticals Generic pharmaceutical products are the chemical and therapeutic
equivalent of branded drug products listed in the FDA publication entitled
Approved Drug Products with Therapeutic Equivalence Evaluations, popularly
known in the pharmaceutical industry as the Orange Book. The Drug Price
Competition and Patent Term Restoration Act of 1984, as amended, which is known
as the Hatch-Waxman Act, has been largely credited with launching the generic
drug industry. Among other things, the Hatch-Waxman Act provides that generic
drugs may enter the market upon approval of an ANDA. ANDAs are abbreviated
versions of new drug applications, or NDAs, that must be filed with the FDA for
a branded product. Generic drugs are bioequivalent to their brand-name 7




---



##### Table of Contents



counterparts, meaning they
deliver the same amount of active ingredient at the same rate as the
brand-name drug. Accordingly, generic products provide safe, effective and
cost-efficient alternatives to branded products, typically at a significantly
lower price than the branded equivalent. Research and Development During fiscal 2004, we continued our commitment to developing and
marketing generic products. More specifically, during fiscal 2004, we:  
    
    filed 12 ANDAs  
    
    received FDA approvals for 10 generic products  
    
    received tentative FDA approvals for an additional five
generic products that are related to patent challenge activities;
and  
    
    launched nine new generic products. At June 30, 2004, we had 31 ANDAs pending at the FDA targeting branded
pharmaceutical products with an estimated $6.2 billion in sales for the 12
months ended June 30, 2004. We are committed to maintaining a full pipeline of generic products and
have continued to increase our investment in generic research and development
in support of this commitment. We have a significant number of full-time
employees working in the areas of research and development, manufacturing,
production and quality assurance/control, who help support our generic drug
activities. We traditionally have developed generic pharmaceuticals in tablet, capsule
and powder forms. During the past year, we have devoted significant research
and development resources to developing new dosage forms and more unique
delivery technologies for our products. We are actively developing these
generic products both on our own and through partnerships with third parties
based on delivery technologies such as patches, creams and ointments,
injectables, nasal sprays, and sterile ophthalmics. In addition, we are
developing generic products delivered through transvaginal rings, or TVR. At June 30, 2004 we had approximately 15 products in various stages of
development that utilize dosage forms other than a solid oral tablet or capsule
delivery system. More than half of these products have intellectual property
issues associated with them, and therefore may be susceptible to legal
challenges by third parties in bringing them to market. Some of them will
result in patent challenges while others will have various other issues
associated with their development and commercialization. 8




---



##### Table of Contents



Products We Currently Market

We currently market approximately over 70 generic pharmaceutical products
in approximately 100 dosage forms and strengths. Presently, our products are
manufactured in tablet, capsule and powder form. Examples of the generic
products we currently market are set forth below:

Barr Label
    
    Brand Equivalent
    
    Therapeutic CategoryApri®
    
    Desogen®
    
    Female Healthcare(Desogestrel and Ethinyl Estradiol)
    
    Ortho-Cept®Aviane®
    
    Alesse®
    
    Female Healthcare(Levonorgestrel and Ethinyl Estradiol)Claravis
    
    Accutane®
    
    Dermatology(Isotrentinoin)Amphetamine Salts Combination
    
    Adderall®
    
    PsychotherapeuticsDextroamphetamine Sulfate
    
    Dexedrine® Spansule®
    
    PsychotherapeuticsExtended Release CapsulesKariva®
    
    Mircette®
    
    Female Healthcare(Desogestrel and Ethinyl Estradiol)Lessina®
    
    Levlite®
    
    Female Healthcare(Levonorgestrel and Ethinyl Estradiol)Methotrexate
    
    Rheumatrex®
    
    RheumatologyMirtazapine
    
    Remeron® Soltabs
    
    PsychotherapeuticsNortrel® 7/7/7
    
    Ortho-Novum® 7/7/7
    
    Female Healthcare(Norethindrone and Ethinyl Estradiol)Sprintec®
    
    Ortho-Cyclen®
    
    Female Healthcare(Norgestimate and Ethinyl Estradiol)Tri-Sprintec®
    
    Ortho Tri-Cyclen®
    
    Female Healthcare(Norgestimate and Ethinyl Estradiol)Warfarin Sodium
    
    Coumadin®
    
    Cardiovascular


Set forth below are descriptions of certain generic products that
contributed significantly to our sales and gross profit in fiscal 2004. Product
data are derived from industry sources.

Oral
Contraceptives. As of June 30, 2004, we were the largest manufacturer and
marketer of oral contraceptive products in the United States. Oral
contraceptives are the most common method of reversible birth control, used by
up to 65% of women in the United States at some time during their reproductive
years. Oral contraceptives have a long history with widespread use attributed
to many factors including efficacy in preventing pregnancy, safety and
simplicity in initiation and discontinuation, medical benefits and relatively
low incidence of side effects. We currently manufacture and market 19 generic
oral contraceptive products under trade names, six of which we launched during
the fiscal year ended June 30, 2004. Our generic oral contraceptives compete
with the branded versions of the products, and in most instances, with other
generic products and/or authorized generic versions of the branded product.

Mirtazapine orally disintegrating tablets.Our Mirtazapine product, which
is used to treat depression, is the generic equivalent of Organons Remeron®
Soltab®. We market Mirtazapine in orally disintegrating tablets in 15 mg and 30
mg strengths. We launched our product on December 18, 2003 into a market that
had brand product sales of $126 million in 2003. The product had been the
subject of a patent challenge, and we were granted 180-days of exclusivity as a
result of being the first to file an ANDA containing a certification that the
applicable listed patent for Mirtazapine was invalid, unenforceable or not
infringed (a so-called paragraph IV certification). Currently, we market the
only generic version of this product.

Warfarin Sodium. Our Warfarin Sodium product is the generic equivalent of
Bristol-Myers Squibbs Coumadin, an anticoagulant for patients with heart
disease and/or high risk of stroke. We launched Warfarin Sodium in July 1997
and are presently one of three generic suppliers of the product.

Amphetamine Salts Combination. Our Amphetamine Salts Combination product
is the generic equivalent of Shire Richwoods Adderall® tablets. Adderall is
used to treat moderate to severe distractibility, short attention span,
hyperactivity and impulsivity. We launched the first generic Dextro Salt Combo
product in April 2002, though today we are one of several generic companies
with FDA approval for the product.

9



---



##### Table of Contents



In March 2003, we launched our generic version of Adderall tablets in
strengths of 7.5 mg, 12.5 mg and 15 mg and were granted 180-days of generic
exclusivity, commencing at launch, as a result of being the first to file an
ANDA
containing a paragraph IV certification. The patent holder did not file
suit against us within the statutory 45-day period, clearing the way for us to
launch our product upon receiving FDA approval and today we are one of several
generic companies with FDA approval for the product. Pending Patent Challenges Our generic development activities also include developing generic
versions of select branded products that are alleged to be patent protected,
and utilizing the patent challenge process under the Hatch-Waxman Act to seek
to invalidate patents or to obtain a declaration that our generic version does
not infringe the patent. In this regard, we actively challenge patents on
branded products where we believe such patents are invalid, unenforceable or
not infringed by our competing generic products. Our development activities in
this area, including sourcing raw materials and developing equivalent products,
are designed to obtain FDA approval for our product. Our legal activities in
this area, performed by outside counsel, are designed to eliminate the barrier
to market entry created by the patents. For a detailed discussion of FDA regulations and court decisions regarding
patent challenges, and for a discussion of certain patent challenges that have
been concluded to date, see Government Regulation  Patent Challenges. As of June 30, 2004, we had publicly disclosed the following patent
challenges that are in various stages of litigation: 10




---



##### Table of Contents



Sales
    
    Tentative
    
    TherapeuticIn Millions*
    
    Court Date
    
    CategoryMircette® (Kariva®)
    
    $
    130
    
    
    Late 2004
    
    Female Healthcare(Desogestrel/Ethinyl Estradiol)
    
    
    
    
    
    (On Remand)Allegra Products
    
    
    1,952
    
    
    Mid-2005
    
    Antihistamines(Fexofenadine Hydrochloride and
Fexofenadine Hydrochloride &
Pseudoephedrine Hydrochloride)Niaspan® (Niacin 3 Strengths)
    
    
    310
    
    
    September 2005
    
    CardiovascularEvista®
    
    
    719
    
    
    February 2006
    
    Female Healthcare(Raloxifene Hydrochloride)DDAVP®
    
    
    167
    
    
    Fall 2004
    
    Diabetes(Desmopression)Adderall XR
    
    
    545
    
    
    January 2006
    
    ADHD(Dextroamphetamine)Provigil®
    
    
    349
    
    
    April 2005
    
    Narcolepsy(Modafinil)Prefest®
    
    
    15
    
    
    Early Stage
    
    Hormone Therapy(Estradiol/Norgestimate)Ortho Tri-Cyclen Lo®
    
    
    177
    
    
    Early Stage
    
    Oral Contraceptive(Norgestimate/Ethinyl Estradiol)Fosamax® Weekly
    
    
    1,813
    
    
    Appeal
    
    Female Healthcare(Alendronate)Total
    
    $
    6,177


*Source: IMS Health, last
twelve months sales ended June 30, 2004

Kariva®, our generic version of Organons Mircette, is the only one of the
products listed above that we currently market. We launched the product
following a District Court ruling that our product did not infringe the patent.
In April 2003, the Court of Appeals reversed the District Courts decision and
remanded the case for further proceedings. As a result, the patent challenge
case involving Kariva has not been finally resolved and there is a risk that we
could be required to pay significant damages for patent infringement in the
event of an unfavorable outcome. See Item 3, Legal Proceedings, for a further
description of this matter.

Sales and Marketing

We market our generic products to customers in the United States and
Puerto Rico under the Barr Laboratories, Inc. label through an integrated
sales and marketing team that includes a four-person national accounts sales
force. The activities of the sales force are supported by our marketing and
customer service organization in our Woodcliff Lake, New Jersey offices.

The customer base for our generic products includes drug store chains,
supermarket chains, mass merchandisers, wholesalers, distributors, managed care
organizations, mail order accounts, government/military and repackagers.

We sell our generic products to approximately 130 customers that purchase
directly from us, and indirectly to approximately 85 customers that purchase
our products from wholesalers. Sales to customers who accounted for 10% or more
of our generic sales during the three years ended June 30 were as follows:

2004
    
    2003
    
    2002McKesson Drug Company
    
    
    24
    %
    
    
    21
    %
    
    
    18
    %Cardinal Health
    
    
    14
    %
    
    
    17
    %
    
    
    13
    %Walgreens
    
    
    13
    %
    
    
    11
    %
    
    
    *Amerisource Bergen
    
    
    *
    
    
    
    13
    %
    
    
    12
    %


*Denotes less than 10% in the period indicated.

Proprietary Pharmaceuticals

Our proprietary product development efforts are handled by our Duramed
Research subsidiary, which is headquartered near Philadelphia. Formed in 2001,
Duramed Research develops pharmaceutical products identified either through our
internal efforts or through strategic company, product and/or technology
platform acquisitions. Our proprietary products are marketed under the Duramed
Pharmaceuticals, Inc. label and marketed under brand names and generally are
promoted directly to physicians and in some cases consumers. Proprietary
products often are patent-protected or benefit from other non-patent market
exclusivities. These market exclusivities generally provide proprietary
products with the ability to maintain their profitability for longer periods of
time than generic products. If a proprietary product has achieved physician and
customer loyalties, it will often remain profitable even following the onset of
generic competition, but generate lower profits than it realized prior to
generic competition.

We focus our proprietary product development activities in three areas:



| |  | patent-protected proprietary products in late stages of
development;
|- |  | --------------------------------------------------------------------

11



---



##### Table of Contents




    
    existing chemical compounds where the development of new forms
(liquid vs. tablets, different dosages or other drug delivery systems,
such as our proprietary, novel vaginal ring delivery system) offer
therapeutic or marketing advantages; and  
    
    new chemical entities in selected therapeutic categories, including
some that are marketed in other countries but not currently sold in the
United States. Our proprietary development activities are currently focused on expanding
our portfolio of female healthcare products including oral contraceptives and
treatments for menopause/perimenopause and endometriosis. An important part of
our product development strategy in the area of female healthcare is to develop
a broad line of products designed to meet the unmet medical needs of women. We
are also pursuing products in urology, specifically to treat female healthcare
issues using the transvaginal ring technology, as well as an oral product
targeted to treat the symptoms associated with treatment of prostate cancer.
In addition, we are developing an oral vaccine product to prevent Adenovirus
(Types 4 & 7) infections. We continue to identify other proprietary product
candidates that further expand our product offerings in these areas and
evaluate additional therapeutic categories to add to our portfolio. Research and Development At the end of fiscal 2004, as a result of our internal and
acquisition-based investment in proprietary research and development, we had:  
    
    three proprietary product applications pending at the FDA: an NDA
for Enjuvia 0.3 mg and 0.45 mg tablets; an NDA for Synthetic
Conjugated Estrogens Vaginal Cream; and a supplemental NDA (sNDA) for
Over-the-Counter (OTC) status for the Plan B® emergency
contraceptive; and  
    
    six proprietary products in clinical development, three of which
are in Phase III studies. Our proprietary research and development team totals approximately 81
employees with experience in managing clinical development programs and
regulatory matters. This team works closely with our generic formulation,
manufacturing and regulatory groups. Products We Currently Market We currently market 11 proprietary products, which are:  
    
    SEASONALE® (Levonorgestrel and Ethinyl Estradiol) extended-cycle oral contraceptive
    
    Cenestin® (Synthetic Conjugated Estrogens, A) hormone therapy
    
    Loestrin®/Loestrin® Fe (Norethindrone Acetate and Ethinyl Estradiol) oral contraceptives
    
    Plan B® (Levonorgestrel) emergency contraceptive
    
    Trexall (Methotrexate) for rheumatoid arthritis
    
    ViaSpan® (Cold Storage Solution) transplant preservation agent
    
    Aygestin® (Norethindrone Acetate) for amenorrhea
    
    Revia® (Naltrexone Hydrochloride) for alcohol dependence
    
    Ziac® (Bisoprolol Fumarate and Hydrochlorothiazide) for hypertension
    
    Zebeta® (Bisprolol Fumarate) for hypertension
    
    Diamox® Sequels® (Acetazolamide) for glaucoma 12




---



##### Table of Contents



SEASONALE®. Our NDA for SEASONALE, an extended-cycle oral contraceptive
indicated for the prevention of pregnancy, was approved by the FDA on September
5, 2003. Our Womens Healthcare Sales Force began promoting SEASONALE directly
to healthcare providers on November 10, 2003. At the time of FDA approval,
SEASONALE was granted a three-year New Product Exclusivity from the date of
approval. The majority of oral contraceptive products currently available in the
United States are based on a regimen of 21 treatment days of active ingredient
and then a seven-day placebo interval. By contrast, under the SEASONALE
extended-cycle regimen, women take the active product for 84 consecutive days,
and then have a seven-day placebo interval. The SEASONALE regimen results in
only 4 menstrual cycles per year, or one per season. Our 250-person Womens Healthcare Sales Force details SEASONALE to
approximately 30,000 physicians who we had determined to be among the most
productive prescribers of oral contraceptive products in the United States.
Marketing support includes professional education materials, published data
from our clinical studies demonstrating the safety and efficacy of the extended
cycle concept, and product sampling kits that contained extensive information
for patients. We reinforce our detailing activities with a trade-advertising
program in leading medical journals. During the second half of fiscal 2004, we
initiated a direct-to-consumer (DTC) advertising campaign, first in leading
general interest publications, and then with television advertising. As a
result of these efforts, we ended the fiscal year with over 170,000
prescriptions filled. SEASONALE was developed under a patent license from the Medical College of
Hampton Roads, Eastern Virginia Medical School (EVMS). EVMS has a patent on
SEASONALE that expires in 2017. On June 3, 2004 EVMS and Barr received notification that Watson
Laboratories had filed an ANDA containing a paragraph IV certification
asserting that the patent covering SEASONALE is invalid, unenforceable or would
not be infringed by Watsons generic product. No patent infringement
litigation has been initiated with respect to Watsons ANDA. The three-year New
Product Exclusivity prevents the FDA from approving Watsons ANDA prior to
September 5, 2006. We also may be eligible to obtain an additional six months
of market exclusivity on SEASONALE by performing pediatric research on the
product. In July 2004, EVMS submitted the patent covering the SEASONALE
extended-cycle oral contraceptive product for reissue with the Patent and
Trademark Office (PTO). The reissue process may take about two years to
complete. The patent covering SEASONALE will remain in effect and continue to
be listed in the FDAs Orange Book while the PTO reviews EVMS submission. If
the patent covering SEASONALE is reissued, it will have the same remaining term
as the existing patent that expires in 2017. Cenestin®. Cenestin is indicated for the treatment of moderate-to-severe
vasomotor symptoms associated with menopause. We currently market the 0.3 mg,
0.45 mg, 0.625 mg, 0.9 mg and 1.25 mg tablet strengths of the Cenestin product
and are developing other related products. The 0.3 mg tablet strength of
Cenestin is indicated for the treatment of vulvar and vaginal atrophy. Our supplemental application for a 0.45 mg strength of Cenestin was
approved by FDA in February 2004 and we launched the product during the fourth
quarter of fiscal 2004. The 0.45 mg strength represents the lowest Cenestin
dose approved for the treatment of moderate to severe vasomotor symptoms
associated with menopause. Its addition completes the solid oral dosage form
of this product family. Cenestin competes in the $1.7 billion hormone therapy market with products
such as Wyeths Premarin®, a conjugated equine estrogens product. Findings by
the National Institutes of Health (NIH) publicized in July 2002 have created
uncertainty in the minds of many healthcare providers and consumers regarding
the risk/reward benefit of long-term hormone therapy products and has resulted
in a reduction in the use of hormone therapy products, including Cenestin.
However, we believe that a number of women and their physicians will continue
using these products, particularly estrogen-only therapies, such as Cenestin,
for the short-term treatment of various symptoms associated with menopause. Plan B® Emergency Contraceptive.During fiscal 2004, we completed the
acquisition of all of the outstanding shares of WCC, a privately held company
that owns the NDA for the emergency contraceptive product called Plan B. Plan
B, which contains the synthetic progestin levonorgestrel, is an emergency oral
contraceptive that can be 13




---



##### Table of Contents



used to prevent pregnancy following unprotected
intercourse or contraceptive failure. To be effective, the product needs to be
taken as soon as possible within 72-hours. The Plan B emergency contraceptive
is currently available by prescription only in the U.S. and Canada. As part of the WCC acquisition, we assumed responsibility for the sNDA
proposing the switch of the product from prescription only to OTC status. On
May 6, 2004, we received a Not Approvable Letter from FDA, which noted that our
application did not provide adequate data to support a conclusion that Plan B
can be used safely by young adolescent women... without professional
supervision. We continue to market Plan B as a prescription-only emergency
contraceptive by seeking to educate consumers and healthcare providers about
its availability, and have
recently submitted to the FDA information under our sNDA that we believe
will support the marketing of Plan B as a prescription-only product for women
15 years of age and younger and a nonprescription product for women 16 years of
age and older. Trexall. Trexall is the brand name for our 5 mg, 7.5 mg, 10 mg and 15 mg
methotrexate tablets that received FDA approval in March 2001. Methotrexate is
used in the treatment of certain forms of cancer, severe psoriasis and
rheumatoid arthritis. Prior to Trexalls approval in March 2001, methotrexate
tablets were available only in a 2.5 mg strength tablet. We designed these new
dosage strengths to simplify drug therapy and increase patient convenience and
compliance. ViaSpan®. We market ViaSpan under a license granted to us by Bristol-Myers
Squibb. ViaSpan is a cold storage solution used for hypothermic flushing and
storage of organs, including the kidneys, liver and pancreas at the time of
their removal from the donor in preparation for storage, transportation and
eventual transplantation into a recipient. We exclusively market the product in
both the United States and Canada to approximately 200 customers, primarily
organ procurement organizations, transplant centers and hospitals. ViaSpan is
patented through March 2006. We also sell, but do not actively market, several other proprietary
products, including Loestrin and Loestrin Fe, which we acquired under license from Galen, and Aygestin®, Ziac®, Zebeta®and Diamox®Sequels®, which we
acquired from Wyeth, and Revia. Products in Development We have several proprietary products in clinical development in multiple
product categories. Examples of these products are discussed in detail below. Female Healthcare Oral Contraception: SEASONALE Line Extension:A lower strength of SEASONALE is under
development and was studied as part of the SEASONALE clinical trials. We expect
to file a sNDA for the lower strength of SEASONALE with the FDA during the
second half of fiscal 2005. New Extended-Cycle Oral Contraceptive. DP3 is our internal identifier for
another of our extended-cycle oral contraceptive products. We have completed
two large full-scale Phase III clinical trials involving 12 months of treatment
and including approximately 2,600 patients at 35 investigational sites,
evaluating DP3 in a 91-day cycle that includes 84 active tablets of
levonorgestrel/ethinyl estradiol, followed by seven days of ethinyl estradiol.
We anticipate filing a NDA for DP3 with the FDA in the first half of fiscal
2005. Hormone Therapy/Estrogen Therapy: Synthetic Conjugated Estrogens Vaginal Cream. At fiscal year-end, we filed
an NDA for a synthetic conjugated estrogens vaginal cream product. We are
seeking approval to manufacture and market the vaginal cream product for the
treatment of moderate to severe symptoms of vulvar and vaginal atrophy
associated with menopause. We expect 14




---



##### Table of Contents



approval of this application in late
fiscal 2005. We will also continue to evaluate the development of additional
products based on medical developments in the hormone therapy area. Enjuvia.In November 2003, we completed the acquisition of the
development-stage Enjuvia (synthetic conjugated estrogen, B) products from
Endeavor Pharmaceuticals. Enjuvia has the nine major components of Wyeths
Premarin conjugated estrogens product, as well as Delta 8,9-dehydroestrone
sulfate, an estrogenic compound found only in Premarin. In May 2004, our NDA
for Enjuvia 0.625 mg and 1.25 mg tablets was approved by the FDA. In April
2003 Endeavor received a Not Approvable Letter from the FDA for their NDA for
the 0.3 mg and 0.45 mg dosage strengths and we are working with FDA to obtain
final approval. We are also developing a 0.9 mg strength to provide physicians
and patients with a complete portfolio. Vaginal Ring Products. We have several products in various stages of
development based on our proprietary, novel, vaginal ring drug delivery system.
Specifically, our development efforts are focused on products that treat
endometriosis, fertility, fibroids, and labor and delivery. Urology Oxybutynin TVR.During fiscal 2004, we acquired the rights to the urinary
incontinence product that had been under development in partnership with
Schering AG. The vaginal ring product offers the potential to deliver higher
doses of oxybutynin to the bladder neck with much lower systemic exposure. This
product is in Phase IIB development. CyPat. Cyproterone acetate, which we intend to market in the United
States under the name CyPat, is a steroid that blocks the action of
testosterone. Cyproterone acetate is not currently approved for marketing in
the United States. Internationally, cyproterone acetate is mainly used in the
management of prostate cancer, both as a single agent and in combination with
other products. In addition, it is used as a component of oral contraceptives
and in the treatment of acne, seborrhea, hirsutism in women, precocious puberty
in children, and hypersexuality/deviant behavior in men. Currently, Cyproterone
acetate is approved for use in over 80 countries throughout Europe, Asia, South
America, Australia and North America. We have completed a trial for the CyPat 50 mg and 100 mg dosages that were
in Phase III clinical trials last year. From an efficacy perspective, both
strengths reduced hot flashes in men who were surgically or chemically
castrated due to their prostate cancer therapy. We are now working with the FDA
to determine the safety and efficacy of lower Cyproterone acetate doses for
this indication. Vaccines Adenovirus Vaccines. We continue to develop Adenovirus Vaccines Type 4 and
7 under a $42.3 million, six-year contract awarded in September 2001 by the
United States Department of Defense (DOD). The Adenovirus Vaccines are
intended to be dispensed to armed forces recruits to prevent epidemics of an
acute respiratory disease that has been a leading cause of hospitalizations of
military trainees. In July 2003, we completed construction of our Adenovirus
Vaccine Virus Types 4 and 7 manufacturing and packaging facility, a 20,000
square foot building designed specifically to produce vaccines that is located
on our Virginia campus. The Adenovirus Investigational New Drug (IND)
application was submitted to the FDA in July 2004, we expect to initiate
clinical trials in early fiscal 2005, and we have developed and manufactured
the tablets for the trials. In addition to supplying the vaccine to the armed
forces, we have the rights to other populations, such as immunosuppressed
patients, and foreign markets where the same needs exist as with the DOD. Sales And Marketing Our proprietary products are marketed under the Duramed Pharmaceuticals,
Inc. label by our three sales teams focused on three core therapeutic
categories: female healthcare, rheumatology/dermatology, and transplant
products. 15




---



##### Table of Contents



Womens Healthcare Sales Force We contract our Womens Healthcare Sales Force from Cardinal Market Force.
In January 2003 we expanded that sales force by 104 sales representatives, 11
district sales managers and three area business directors, and by April 2003,
our total Womens Healthcare Sales Force had nearly doubled to 250 people,
including sales representatives and managers. Our sales force expansion was
undertaken in connection with, and prior to, the November 2003 launch of
SEASONALE. In addition to the promotion of SEASONALE, the sales force promotes
our Cenestin and Plan B emergency contraceptive product and will market
additional female healthcare products we may develop or acquire. The contract
allows us to convert the Cardinal sales force into our employees upon
expiration, which we intend to do in October 2004. Rheumatology/Dermatology Sales Force We contract with Innovex, LP, an affiliate of Quintiles Transnational
Corp., for a 22-person contract sales force that promotes our Trexall product
directly to rheumatologists and dermatologists. These representatives also
promote Claravis, our generic version of Roches Accutane®, to dermatologists.
Our contract with Quintiles expires in December 2004 though we may extend this
term at our option. We expect to use this sales force to promote additional
rheumatology and dermatology products as we develop or acquire them. Transplant Product Sales Force We employ a national account manager to promote our transplant
preservation agent, ViaSpan, to approximately 200 customers in the United
States and Canada. These customers are primarily organ procurement
organizations, transplant centers and hospitals. We expect to use our national
account manager to promote additional transplant products as we develop or
acquire them. Customers The customer base for our proprietary products includes drug store chains,
supermarket chains, mass merchandisers, wholesalers, distributors, managed care
organizations, mail order accounts, and government/military. Sales to customers
who accounted for 10% or more of our proprietary sales over the three years ended June 30,
2004, 2003, and 2002 were as follows: 2004
    
    2003
    
    2002McKesson Drug Company
    
    
    21
    %
    
    
    15
    %
    
    
    14
    %Cardinal Health
    
    
    20
    %
    
    
    19
    %
    
    
    21
    %AmerisourceBergen
    
    
    15
    %
    
    
    11
    %
    
    
    *
 *Denotes less than 10% in the period indicated. Generic Biopharmaceuticals As we evaluate new product development and new technologies to expand our
generic and proprietary operations, we are also investing in the effort to open
an exciting new frontier for future growth: generic biopharmaceuticals. Biopharmaceuticals represent one of the fastest growing segments of the
pharmaceutical industry, with sales in 2003 of more than $30 billion. More
than 150 biopharmaceuticals are on the market, including human insulin,
interferons, human growth hormones and monoclonal antibodies. In the past
year, more than 30 new biopharmaceutical products were approved, compared to
just only two in 1982. There are more than 370 biotech drug products and
vaccines currently in clinical trials targeting more than 200 diseases
including cancer, Alzheimers disease, heart disease, multiple sclerosis, AIDS
and arthritis. Biopharmaceuticals are a major driver of increasing
prescription drug costs. This area represents a major growth opportunity for
Barr, and the generic pharmaceutical industry as a whole. 16




---



##### Table of Contents



There are, however, three major challenges in pursuing generic
biopharmaceuticals: regulatory challenges; intellectual property challenges;
and scientific and manufacturing challenges. The key regulatory challenge
facing us is that the FDA has not recognized an abbreviated regulatory pathway
that would enable the timely and cost-efficient approval of generic versions of
biopharmaceuticals. We are working with Congress and the FDA to overcome this
barrier. Although it may be possible to achieve approval of select
biopharmaceuticals, based on their historic approval under current law, we are
committed to pursuing opportunities through what we believe is a pathway that
currently exists, as well as working towards a second, streamlined regulatory
approval process that will ensure we can bring these products to market. In
addition, we believe that we are well situated, in terms of our experience with
intellectual property issues, to overcome patent and other barriers to the
introduction of these products. Our background in product formulation, and the
experience we are gaining through the production of the Adenovirus vaccine
under contract with the Department of Defense is providing additional expertise
necessary in this area. To support our efforts in this area, we are actively pursuing the
identification of sources for biopharmaceutical active ingredients, as well as
exploring potential partnerships and product acquisitions as we work to bring
generic biopharmaceuticals to market. While we do not expect to launch a generic version of a biopharmaceutical
for some time, we are taking the steps to position ourselves as a leader in
this potential market. Evaluating Complementary or Strategic Business Opportunities We continually evaluate acquisition opportunities to strengthen our
product portfolio and help grow our business. We recently expanded our
activities and resources in this area and regularly evaluate opportunities
particularly in the following areas: strategic product acquisitions, new
technology arrangements including new technology platforms, and corporate
mergers and acquisitions. Set forth in the table below is a list of our
significant business development activities dating back to fiscal 2000, and
products or opportunities we acquired in connection with such transactions. FISCALYEAR
    
    TRANSACTION
    
    ACQUIRED PRODUCT(S)/OPPORTUNITIES2000
    
    DuPont Pharmaceuticals
    
    Acquired ViaSpan, Revia; Funding for
SEASONALE, DP3, CyPat Clinical Studies2002
    
    Duramed Pharmaceuticals
Enhance Pharmaceuticals
    
    Cenestin, Generic Oral Contraceptives
Oxybutynin TVR Product/Vaginal Ring Technology2003
    
    Wyeth
    
    Diamox Sequels, Zebeta, Ziac, Aygestin2004
    
    Endeavor Pharmaceuticals
    
    NDAs for Enjuvia 0.3, 0.45, 0.625 and
1.25 mg Tablets; Two Early Stage Development ProductsWomens Capital Corp.
Galen (Chemicals) Limited
    
    WCCs Plan B Emergency Oral
Contraceptive
Loestrin, Loestrin Fe Oral Contraceptives
 Significant Product Sales; Geography Presently, all of our operations are located within the United States.
Over the last three fiscal years, sales of our products have been primarily to
our direct customers located within the United States. The table below sets forth for each of the last three fiscal years those
products, or classes of products, that accounted for 10% or more of our total
product sales during the three fiscal years ended June 30: 17




---



##### Table of Contents



2004
    
    2003
    
    2002Oral contraceptives (generic and proprietary)
    
    
    34
    %
    
    
    31
    %
    
    
    *Ciprofloxacin
    
    
    30
    %
    
    
    12
    %
    
    
    *Tamoxifen
    
    
    *
    
    
    
    14
    %
    
    
    31
    %Fluoxetine
    
    
    *
    
    
    
    *
    
    
    
    31
    %
 *Denotes less than 10% in the period indicated. Raw Materials & Manufacturing Suppliers We purchase the bulk pharmaceutical chemicals and raw materials that are
essential to our business from numerous U.S. and foreign suppliers. We also
purchase certain finished dosage form products, such as our ViaSpan transplant
preservation agent, from third-party suppliers. As we previously described, our
generic product development strategy includes identifying products where there
are a limited number of raw material suppliers. As a consequence, certain
products that account for a significant portion of our revenues and profits are
currently available only from sole or limited suppliers, including warfarin
sodium, dextro salt combo and several of our oral contraceptives. Arrangements with foreign suppliers are subject to certain additional
risks, including obtaining governmental clearances, export duties, political
instability, currency fluctuations and restrictions on the transfer of funds.
Any inability to obtain raw materials or finished products on a timely basis,
or any significant price increases that cannot be passed on to customers, could
adversely affect us. Because prior FDA approval of raw material suppliers or
product manufacturers is required, if raw materials or finished products from
an approved supplier or manufacturer were to become unavailable, the required
FDA approval of a new supplier could cause a significant delay in the
manufacture or supply of the affected drug product. Patents and Proprietary Rights We file patent applications and obtain patents to protect our products,
technologies, inventions and improvements that we consider important to the
development of our business. We also rely upon trade secrets, know-how,
continuing technological innovations and licensing opportunities to develop and
maintain our competitive position. Preserving our trade secrets and protecting
our proprietary rights are important to our long-term success. From time to time, we may find it necessary to initiate litigation to
enforce our patent rights, to protect our trade secrets or know-how or to
determine the scope and validity of the proprietary rights of others.
Litigation concerning patents, trademarks, copyrights and proprietary
technologies can often be protracted and expensive and, as with litigation
generally, the outcome is often uncertain. Government Regulation We are subject to extensive regulation by the federal government,
principally by the FDA, and, to a lesser extent, by the Drug Enforcement Agency
(DEA) and state governments. The Federal Food, Drug and Cosmetic Act, the
Controlled Substances Act, the Prescription Drug Marketing Act and other
federal statutes and regulations govern or influence the testing,
manufacturing, safety, labeling, storage, record keeping, approval, marketing,
advertising and promotion of our products. Non-compliance with applicable
requirements can result in fines, recalls and seizure of products. Abbreviated New Drug Application Process FDA approval is required before a generic equivalent can be marketed. We
seek 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 normally requires bioavailability and/or
bioequivalence studies. Bioavailability indicates the rate and extent of
absorption and levels of concentration of a drug product in the blood stream
needed to produce a therapeutic effect. Bioequivalence compares the
bioavailability of one drug 18




---



##### Table of Contents



product with another, and when established,
indicates that the rate of absorption and levels of concentration of the active
drug substance in the body are equivalent for the generic drug and the
previously approved drug. An ANDA may be submitted for a drug on the basis that
it is the equivalent of a previously approved drug or, in the case of a new
dosage form, is suitable for use for the indications specified. Before approving a product, the FDA also requires that our procedures and
operations conform to Current Good Manufacturing Practice (cGMP) regulations,
relating to good manufacturing practices as defined in the U.S. Code of Federal
Regulations. We must follow the cGMP regulations at all times during the
manufacture of our products. We continue to spend significant time, money and
effort in the areas of production and quality testing to help ensure full
compliance with cGMP regulations. If the FDA believes a company is not in compliance with cGMP, sanctions
may be imposed upon that company including:  
    
    withholding from the company new drug approvals as well as
approvals for supplemental changes to existing applications;  
    
    preventing the company from receiving the necessary export licenses
to export its products; and  
    
    classifying the company as an unacceptable supplier and thereby
disqualifying the company from selling products to federal agencies. We believe we are currently in compliance with cGMP regulations. The timing of final FDA approval of an ANDA depends on a variety of
factors, including whether the applicant challenges any listed patents for the
drug and whether the brand-name manufacturer is entitled to one or more
statutory exclusivity periods, during which the FDA may be prohibited from
accepting applications for, or approving, generic products. In certain
circumstances, a regulatory exclusivity period can extend beyond the life of a
patent, and thus block ANDAs from being approved on the patent expiration date.
For example, in certain circumstances the FDA may extend the exclusivity of a
product by six months past the date of patent expiry if the manufacturer
undertakes studies on the effect of their product in children, a so-called
pediatric extension. The pediatric extension results from a 1997 law designed
to reward branded pharmaceutical companies for conducting research on the
effects of pharmaceutical products in the pediatric population. As a result,
under certain circumstances, a branded company can obtain an additional six
months of market exclusivity by performing pediatric research. In May 1992, Congress enacted the Generic Drug Enforcement Act of 1992,
which allows the FDA to impose debarment and other penalties on individuals and
companies that commit certain illegal acts relating to the generic drug
approval process. In some situations, the Generic Drug Enforcement Act requires
the FDA to not accept or review ANDAs for a period of time from a company or an
individual that has committed certain violations. It also provides for
temporary denial of approval of applications during the investigation of
certain violations that could lead to debarment and also, in more limited
circumstances, provides for the suspension of the marketing of approved drugs
by the affected company. Lastly, the Generic Drug Enforcement Act allows for
civil penalties and withdrawal of previously approved applications. Neither we
nor any of our employees have ever been subject to debarment. Patent Challenges Background We actively challenge patents on branded pharmaceutical products where we
believe such patents are invalid, unenforceable or not infringed by our
competing generic products. Our development activities in this area, including
sourcing raw materials and developing equivalent products, are designed to
obtain FDA approval for our product. Our legal activities in this area,
performed primarily by outside counsel, are designed to eliminate the barrier
to market entry created by the patents. Under the Hatch-Waxman Act, the first
generic ANDA applicant whose filing includes a certification that a listed
patent on the brand name drug is invalid, unenforceable or not infringed (a
so-called paragraph IV certification), may be eligible to receive a 180-day
period of generic market exclusivity. This 19




---



##### Table of Contents



period of market exclusivity may
provide the patent challenger with the opportunity to earn a significant return
on the risks taken and its legal and development costs. Patent challenge
product candidates typically must have several years of remaining patent
protection to ensure that the legal process can be completed prior to patent
expiry. Because of the potential value of being the only generic in the market
for the 180-day generic exclusivity period, we typically seek to be the first
company to file an ANDA containing a paragraph IV certification for a targeted
product. The process for initiating a patent challenge begins with the
identification of a drug candidate and evaluation by qualified legal counsel of
the patents protecting that product. We have reviewed a number of potential
challenges and have pursued only those that we believe have merit. Our general
practice is to disclose patent challenges after the patent holder has sued us.
Thus, at any time, we could have several undisclosed patent challenges in
various stages of development. Patent challenges are complex, costly and can take three to six years to
complete. As a result, we have in the past and may elect in the future to have
partners on selected patent challenges. These arrangements typically provide
for a sharing of the costs and risks, and generally provide for a sharing of
the benefits of a successful outcome. In addition, our patent challenges may
result in settlements that we believe are reasonable, lawful and in our
shareholders best interests. 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 non-infringement of an
existing patent or the improper issuance of patents by the United States Patent
and Trademark Office, or PTO, resulting from a variety of technical, legal, or
scientific factors. The Hatch-Waxman legislation places significant burdens on
the challenger to ensure that such suits are not frivolous, but also 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 taken in development of any
generic drug. At the time an ANDA is filed with the FDA, the generic company
that wishes to challenge the patent files a paragraph IV certification. After
receiving notice from the FDA that its application is accepted for filing, the
generic company sends the patent holder and NDA owner a notice explaining why
it believes that the patents in question are invalid, unenforceable, or not
infringed. Upon receipt of the notice from the generic company, the patent
holder and NDA owner have 45 days in which to bring suit in federal district
court against the generic company to enforce the challenged patent. The
discovery, trial, and appeals process can take several years. The Hatch-Waxman Act provides for an automatic stay of the FDAs authority
to grant the approval that would otherwise give the patent challenger the right
to market its generic product. This stay is set at 30 months, or such shorter
or longer period as may be ordered by the court. The 30 months may or may not,
and often does not, coincide with the timing of a trial or the expiration of a
patent. Under the Hatch-Waxman Act, the developer of a generic drug which files
the first ANDA containing a paragraph IV certification may be eligible to
receive a 180-day period of generic market exclusivity. This period of market
exclusivity may provide the patent challenger with the opportunity to earn a
return on the risks taken and its legal and development costs. The FDA adopted regulations implementing the 180-day generic marketing
exclusivity provision of the Hatch-Waxman Act. However, over the years, courts
have found various provisions of the regulations to be in conflict with the
statute. For example, in Mova Pharmaceutical Corp. v. Shalala, 140 F.3d 1060
(D.C. Cir. 1998), the court of appeals held that the Hatch-Waxman Act required
generic exclusivity to be awarded to the first generic company to file an ANDA
containing a paragraph IV certification, regardless of whether that company
prevailed in a court challenge to the relevant patent before another company
was ready for approval. In contrast, the FDAs regulations had required the
first patent challenger to successfully defend its challenge to the patent
before another generic company was ready to receive approval. In Mylan
Pharmaceuticals v. Shalala, 81 F.Supp.2d 30 (D.D.C. 2000), the court found that
the statute requires the 180-day generic period to commence on the date of a
district court decision 20




---



##### Table of Contents



finding the challenged patent invalid, unenforceable,
or not infringed, even if the innovator company appealed the courts decision.
The decision was in contrast to the FDAs regulation under which the
exclusivity period would not commence until the appellate court affirmed the
district courts ruling. In December 2003, the Medicare Prescription Drug, Improvement, and
Modernization Act (MMA) was signed into law. Generally speaking, the MMA
provisions apply when the first ANDA containing a paragraph IV
certification was filed after December 8, 2003. The MMA includes several
provisions regarding the patent challenge process designed to level the playing
field for generic companies. These reforms included:  
    
    Only one 30-month stay allowed per drug.  
    
    Product-by-product exclusivity.  
    
    Shared 180-day exclusivity in limited circumstances.  
    
    Counterclaim for an Orange Book delisting allowed.  
    
    180-day exclusivity cannot be triggered by a district court decision. First,
under the MMA, only patents submitted to the FDA before an ANDA is
filed can result in a 30-month stay. No additional 30-month stay can be
obtained on patents listed in the Orange Book after the ANDA has been filed.
Second, exclusivity is on a product-by-product basis, meaning that there will
only be one 180-day exclusivity period per listed drug. Third, because
exclusivity is product-by-product, shared exclusivity will result only when
multiple companies submit the first ANDA containing a paragraph IV
certification on the same day. Fourth, ANDA applicants now have the ability to
challenge the propriety of a patent listing. If an ANDA applicant is sued, the
company can now bring a counterclaim seeking to have a patent delisted from the
Orange Book. Finally, the 180-day exclusivity period cannot be triggered by a
district court decision that is on appeal. Where the first paragraph IV ANDA
was submitted after the enactment of the MMA, exclusivity can only be triggered
by the first ANDA filers marketing of its own generic product or a product
made by the brand company. While exclusivity could be forfeited as a result of
a court decision, that court decision must either be an unappealed district
court decision or an appellate court decision. Where the first paragraph IV
ANDA was submitted before December 8, 2003, Congress reinstated FDAs prior
interpretation of court decision, meaning that exclusivity for such
applications can be triggered by first commercial marketing or by the appellate
courts affirmance of an appealed district courts ruling. During fiscal 2004, the use of authorized generics has increased
significantly. Authorized generics involve the brand pharmaceutical maker
licensing its drug to a company that then markets it as a generic product. The
authorized generic versions are sometimes made by the brand-name company, and
distributed by the generic partner. Because the authorized generic is not
sold under an ANDA, but rather is sold under the brand pharmaceutical makers
NDA, it can compete against the patent challengers generic product during the
180-day exclusivity period that results from a successful patent challenge. The marketing of authorized generics in competition with the patent
challenger during the 180-day generic exclusivity period has undermined the
incentive integral to the Hatch-Waxman patent challenge process. We believe
that authorized generics may provide disincentives to generic companies seeking
to challenge patents on branded pharmaceutical products that may be invalid or
unenforceable and ultimately are negative for consumers. We will continue to
work with Congress, the Department of Health and Human Services, including the
FDA, and the generic industry association to limit the use of authorized
generics that undermine the balance brought about by the Hatch-Waxman Act. Our Patent Challenge History Our efforts in the area of challenging patents on branded pharmaceutical
products have resulted in the successful conclusion of 10 out of 12 cases as of
June 30, 2004. Successful outcomes have included: court rulings in our favor
invalidating patents or finding that our product does not infringe; situations
in which we have not been sued for patent infringement; and settlements with
the patent holder. Unfavorable outcomes have resulted from a loss resulting in
our not being able to launch our generic product until the patent on the brand
pharmaceutical product expires. Examples of successful outcomes to our patent challenges include: 21




---



##### Table of Contents




    
    Fluoxetine.We invalidated the patent on Eli Lillys Prozac®,
which enabled us to launch our generic Fluoxetine product nearly three
years earlier than would otherwise have been possible and recorded
sales of approximately $365 million in fiscal 2002 during the 180-day
period granted to us under the Hatch-Waxman Act.  
    
    Mirtazapine orally disintegrating tablets.Mirtazapine is the
generic equivalent of Organon, Inc.s Remeron Soltab®. After the
litigation against us was dismissed, we launched our mirtazapine
product in December
2003 and enjoyed 180 days of generic exclusivity. Currently, we market
the only generic version of this product.  
    
    Ortho Tri-Cyclen®. Ortho Tri-Cyclen is a regimen of oral
contraceptives that includes three different tablet combinations of
norgestimate and ethinyl estradiol. In August 2003 we settled pending
litigation regarding Ortho-McNeil Pharmaceutical, Inc.s patents
protecting Ortho Tri-Cyclen. Under the terms of the settlement, we
launched our generic version of Ortho Tri-Cyclen on December 29, 2003,
approximately three months prior to the expiration of pediatric
exclusivity.  
    
    Ciprofloxacin. Ciprofloxacin is the generic name for Bayers
antibiotic Cipro®. In 1997, we entered into an agreement with Bayer to
settle our patent challenge litigation under which we distributed a
brand alternative Ciprofloxacin product from June 9, 2003 until June 9,
2004. We recorded sales of approximately $111 million in fiscal 2003
and $385 million in fiscal 2004.  
    
    Tamoxifen Citrate. Tamoxifen Citrate is the generic name for
AstraZenecas Nolvadex®, which is used to treat advanced breast cancer,
impede the recurrence of tumors following surgery, and reduce the
incidence of breast cancer in women at high risk for developing the
disease. In 1993, as a result of a settlement of a patent challenge
against AstraZeneca, we entered into a non-exclusive supply and
distribution agreement. Under the terms of the Tamoxifen agreement, we
distributed a Tamoxifen Citrate product that we purchased directly from
AstraZeneca. The Tamoxifen agreement expired in August 2002. A loss in our patent litigation results in our not being able to launch
our generic product until the patent on the brand pharmaceutical product
expires. Examples include:  
    
    Trazodone Hydrochloride.Trazodone Hydrochloride is the generic
name for Bristol-Myers Desyrel®. We had sought to bring our generic
version of Desyrel to market but were unsuccessful in invalidating the
patent. We launched our product in April 1999, following the expiration
of the patent. New Drug Application 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 new drug and must contain
complete pre-clinical and clinical safety and efficacy data or a right of
reference to such data. Before dosing a new drug in healthy human subjects or
patients may begin, stringent government requirements for 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, or 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. 22




---



##### Table of Contents




    
    Phase II typically involves studies in a small sample of the
intended patient population to assess the efficacy of the compound for
a specific indication, to determine dose tolerance and the optimal dose
range, and to gather additional information relating to safety and
potential adverse effects.  
    
    Phase III trials are undertaken to further evaluate clinical safety
and efficacy in an expanded patient population at typically dispersed
study sites, in order to determine the overall risk-benefit ratio of
the compound and to provide an adequate basis for product labeling. Each trial is conducted in accordance with certain standards under
protocols that detail the objectives of the study, the parameters to be used to
monitor safety and the efficacy criteria to be evaluated. Each protocol must be
submitted
to the FDA as part of the IND. In some cases, the FDA allows a company to
rely on data developed in foreign countries, or previously published data,
which eliminates the need to independently repeat some or all of the studies. Data from 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
resources. Preparing an NDA or marketing authorization application involves
considerable data collection, verification, analysis and expense, and there can
be no assurance that approval from the FDA or any other health authority will
be granted on a timely basis, if at all. The approval process is affected by a
number of factors, primarily the risks and benefits demonstrated in clinical
trials as well as the severity of the disease and the availability of
alternative treatments. The FDA or other health authorities may deny an NDA or
marketing authorization application if the regulatory criteria are not
satisfied, or such authorities may require additional testing or information. Even after initial FDA or other health authority approval has been
obtained, further studies, including Phase IV post-marketing studies, may be
required to provide additional data on safety. The post-marketing studies could
be used to gain approval for the use of a product as a treatment for clinical
indications other than those for which the product was initially tested. Also, the FDA or other regulatory authorities require post-marketing
reporting to monitor the adverse effects of the drug. Results of post-marketing
programs may limit or expand the further marketing of the products. Further, if
there are any modifications to the drug, including changes in indication,
manufacturing process or labeling or a change in the manufacturing facility, an
application seeking approval of such changes must be submitted to the FDA or
other regulatory authority. Additionally, the FDA regulates post-approval
promotional labeling and advertising activities to assure that such activities
are being conducted in conformity with statutory and regulatory requirements.
Failure to adhere to such requirements can result in regulatory actions that
could have an adverse effect on our business, results of operations and
financial condition. Drug Enforcement Agency Because we sell and develop products containing controlled substances, we
must meet the requirements and regulations of the Controlled Substances Act,
which are administered by the DEA. These regulations include stringent
requirements for manufacturing controls and security to prevent diversion of or
unauthorized access to the drugs in each stage of the production and
distribution process. The DEA regulates allocation to us of raw materials used
in the production of controlled substances based on historical sales data. We
believe we are currently in compliance with all applicable DEA requirements. Medicaid In November 1990, a law regarding reimbursement for prescribed Medicaid
drugs was passed as part of the Congressional Omnibus Budget Reconciliation Act
of 1990. The law requires drug manufacturers to enter into a rebate contract
with the Federal Government. All generic pharmaceutical manufacturers whose
products are covered by the Medicaid program are required to rebate to each
state a percentage of their average net sales price for the products in
question. These percentages are currently 11% in the case of products sold by
us which are covered by an ANDA and 15% of products sold by us which are
covered by an NDA. We accrue for these future estimated rebates in our
consolidated financial statements. 23




---



##### Table of Contents



We believe that federal and/or state governments may continue to enact
measures in the future aimed at reducing the cost of providing prescription
drug benefits to the public, particularly senior citizens. We cannot predict
the nature of such measures or their impact on our profitability. Employees Our success depends on our ability to hire and retain highly qualified
scientific and management personnel. We face competition for personnel from
other companies, academic institutions, government entities and other
organizations. As of June 30, 2004, we had approximately 1,500 full-time
employees. Approximately 86 of our employees are represented by Local 2-149 of
the Paper, Allied, Chemical and Energy (PACE) Union International
under a collective bargaining agreement that expires on April 1, 2005. We
believe that our relations with our employees are good and we have no history
of work stoppages. Competition The pharmaceutical business is subject to intense competition. As patents
and other bases for market exclusivity expire, generic competitors, such as we,
enter the marketplace. Normally, there is a unit price decline as the number of
generic competitors increases. The timing of these price decreases is
unpredictable and can result in a significantly curtailed period of
profitability for a generic product. In addition, brand-name manufacturers
frequently take actions to prevent or discourage the use of generic
equivalents. These actions may include:  
    
    filing new patents on drugs whose original patent protection is about to expire;  
    
    developing patented controlled-release products or other product improvements;  
    
    increasing marketing initiatives; and  
    
    commencing litigation. Generic pharmaceuticals market conditions, particularly in the U.S., have
been affected by industry consolidation and a fundamental shift in industry
distribution, purchasing and stocking patterns resulting from the increased
importance of sales to major chain drug stores and major wholesalers and a
concurrent reduction in sales to private label generic distributors. We also face competition for our proprietary products from other
proprietary and generic products and from promotional activities by other
competing pharmaceutical companies. This competition affects our ability to
market our proprietary products effectively and customer acceptance of our
products. We compete in varying degrees with numerous other manufacturers of
pharmaceutical products, both branded and generic. These competitors include:  
    
    brand pharmaceutical companies whose patent protected therapies
compete with both generic and proprietary products marketed or being
developed by us, including Johnson & Johnson, Wyeth, Bristol-Myers
Squibb and Eli Lilly & Company;  
    
    the generic divisions and subsidiaries of brand pharmaceutical
companies, including Sandoz US, a subsidiary of Novartis AG, as well as
large independent generic manufacturers/distributors that provide a
broad line of products, some of which compete with our products,
including Mylan Laboratories and Teva Pharmaceuticals; and  
    
    generic manufacturers that target categories in our product lines,
such as Watson Pharmaceuticals and Andrx Corporation. 24




---



##### Table of Contents



Some of our competitors have greater financial and other resources than we
have, and are therefore able to devote more resources than we can in such areas
as sales and marketing support and product development. In order to ensure our
ability to compete effectively, we:  
    
    focus our proprietary and generic product development in areas of
historical strength or competitive advantage;  
    
    target generic products for development that have unique
characteristics, including: difficulty in sourcing raw materials;
difficulty in formulation or establishing bioequivalence; and
manufacturing that requires unique facilities, processes or expertise;
and  
    
    make significant investments in plant and equipment to give us a
competitive edge in manufacturing. These factors, when combined with our investment in new product
development and our focus on select therapeutic categories, provide the basis
for our belief that we will continue to remain a leading independent specialty
pharmaceutical company. Product Liability Insurance As a pharmaceutical company, we are susceptible to product liability
claims in the ordinary course of our business. We utilize a combination of a
finite-risk insurance arrangement, self-insurance and traditional third-party
insurance policies to cover us for product liability claims, as discussed in
greater detail below. Finite-Risk Arrangement Through September 2002, we had generally obtained traditional third-party
liability insurance for product liability claims. However, following
September 11, 2001 obtaining such insurance with the desired amount of coverage
and deductibles became, in our view, prohibitively expensive with respect to
many of our products. As a result, we explored other options to traditional
third-party liability insurance, and on September 30, 2002, we entered into a
finite risk insurance arrangement (the Finite Risk Arrangement) with a third
party insurer. Under the Finite Risk Arrangement, we have obtained an aggregate of $15
million of product liability coverage that spans all of the products we sell
during the period of the Finite Risk Arrangement, which commenced on October 1,
2002 and is scheduled to run until September 30, 2007. In exchange for that
coverage, we are required to make four equal annual installments to the insurer
aggregating $14.25 million, with two of such payments having been made to date
and the third being due on September 30, 2004. Self Insurance We are entirely self-insured for costs we may incur relating to product
liability claims arising during the current policy period between $15 million
and $25 million. This means that we would be responsible for paying for any
damages we incur in the $15 million and $25 million range. Our decision to
leave this gap in our current coverage relates directly to the prohibitive cost
of certain third-party insurance coverage for product liability claims and to
our assessment of our ability to pay claims based on our financial condition.
In addition, to the extent the third-party liability insurance discussed below
does not cover certain of our products, we would be responsible for all claims
relating to those excluded products in excess of the coverage available under
our Finite Risk Arrangement. Traditional Third-Party Liability Insurance In addition to the Finite Risk Arrangement above, we have purchased
traditional third-party insurance that will provide coverage for claims arising
during the current policy period for that portion of the exposure to us, if
any, of between $25 million and $40 million. This supplemental policy, which
expires on September 30, 2004, covers all of our products. We have purchased another third-party insurance policy that provides
coverage for claims arising during the current policy period for that portion
of the exposure to us, if any, between $40 million and $50 million. For this 25




---



##### Table of Contents



supplemental policy, in addition to the annual premium we pay, we are
responsible for paying 20% of all claims paid under the policy by the insurer.
This supplemental policy, which expires on September 30, 2004, covers all of
our products. At the time we entered into the Finite Risk Arrangement, we exercised an
option under our previous product liability policy to extend the reporting
period coverage for that policy. By exercising this option, we have obtained
$10 million of coverage for product liability claims arising from products we
sold during the period from September 1987 through September 2002. We can make
a claim against this insurance policy at any time, without expiration, provided
the underlying claim arose during the relevant period and we have not exceeded
the $10 million of coverage. Similarly, in connection with our merger with Duramed in October 2001, we
purchased a supplemental extended reporting policy under Durameds prior
insurance policy. By exercising this option, we have $10 million of coverage
for product liability claims arising from products sold by Duramed between
October 1, 1985 and October 24, 2001. As with our other extended period policy
above, we can make a claim against this insurance policy at any time, without
expiration, provided the underlying claim arose during the relevant period and
we have not exceeded the $10 million of coverage. Insurance Reserves Because we are self insured for a portion of potential claims, we maintain
a self-insurance reserve. This reserve provides an estimate of our potential
product liability claims not covered by our insurance and an estimate of the
future cost of incurred-but-not-reported (IBNR) claims. We develop these
estimates in consultation with outside counsel, our insurance consultants and
an independent actuary. Our self-insurance reserves do not include estimated
administrative or defense costs, which are expensed as incurred. We are a defendant in many product liability actions. For product
liability claims that are not fully or substantially covered by our insurance
arrangements described above, the costs incurred to defend such claims, or any
adverse judgments or settlements in such matters, could adversely affect our
consolidated financial statements. Indemnity Provisions From time-to-time, in the normal course of business, we agree to indemnify
our employees, suppliers and customers concerning product liability and other
matters. We do not believe that the likelihood of paying any amounts related to
the indemnity provision is probable. While the maximum amount to which we may
be exposed under such agreements cannot be reasonably estimated, we maintain a
self insurance reserve and insurance coverage which management believes will
effectively mitigate our obligations under these indemnification provisions. No
amounts have been recorded in the financial statements with respect to our
obligations under such agreements. Environmental We believe that our operations comply in all material respects with
applicable laws and regulations concerning the environment. While it is
impossible to predict accurately the future costs associated with environmental
compliance and potential remediation activities, we do not expect compliance
with environmental laws to require significant capital expenditures nor do we
expect such compliance to have a material adverse effect on our consolidated
financial statements. Government Relations Activities Because a balanced and fair legislative and regulatory arena is critical
to the generic pharmaceutical industry, we have and will continue to place a
major emphasis in terms of management time and financial resources on
government affairs activities. We currently maintain an office and staff a
full-time government affairs department in Washington, D.C., which has
responsibility for coordinating state and federal legislative activities and
coordinating with the generic industry trade association. 26




---



##### Table of Contents



Item 2.Properties We have facilities and operations in New York, New Jersey, Ohio,
Pennsylvania, Virginia and Washington, D.C. The following table presents the
facilities owned or leased by us as of June 30, 2004 and indicates the location
and principal use of each of these facilities: SquareLocation
    
    Footage
    
    Status
    
    DescriptionNEW JERSEYWoodcliff Lake
    
    
    90,000
    
    
    Leased
    
    Administrative OfficesNorthvale
    
    
    27,500
    
    
    Owned
    
    ManufacturingPlainsboro
    
    
    27,000
    
    
    Leased
    
    Research and Development, AdministrationNEW YORKPomona 1
    
    
    41,000
    
    
    Owned
    
    Research and Development, Laboratories, ManufacturingPomona 2
    
    
    133,000
    
    
    Owned
    
    Laboratories, Administrative
Offices, Manufacturing, WarehouseBlauvelt
    
    
    8,500
    
    
    Leased
    
    WarehouseOHIOCincinnati
    
    
    290,000
    
    
    Owned
    
    Manufacturing, Laboratories, PackagingMason
    
    
    117,000
    
    
    Leased
    
    Warehouse, OfficePENNSYLVANIABala Cynwyd
    
    
    39,000
    
    
    Leased
    
    Proprietary Research, Administrative OfficesVIRGINIAForest
    
    
    375,000
    
    
    Owned
    
    Administrative Offices, Manufacturing, Warehouse, Packaging, Distribution, Laboratories, Adenovirus Manufacturing FacilityWASHINGTON D.C.
    
    
    2,700
    
    
    Leased
    
    Government Affairs & Administrative Offices
 Over the past three fiscal years, we have spent approximately $174.7
million on capital expenditures primarily to increase our production,
laboratory, warehouse and distribution capacity. We believe that our current
facilities are in good condition, are being used productively and are adequate
for us to meet the expected demand of our pipeline products and to handle
increases in current product sales. 
 Item 3.Legal Proceedings Patent Challenge Litigation Desogestrel/Ethinyl Estradiol (Mircette®) In May 2000, we filed an ANDA seeking approval from the FDA to market the
tablet combination of desogestrel/ethinyl estradiol tablets and ethinyl
estradiol tablets, the generic equivalent of Organon Inc.s Mircette® oral
contraceptive regimen. We notified Bio-Technology General Corp. (BTG), the
owner of the patent for the Mircette product, pursuant to the provisions of the
Hatch-Waxman Act and BTG filed a patent infringement action in the United
States District Court for the District of New Jersey seeking to prevent us from
marketing the tablet combination. In December 2001, the District Court granted
summary judgment in our favor, finding that our product did not infringe the
patent at issue in the case. BTG appealed the District Courts decision. In
April 2002, we launched our Kariva® product, the generic version of Mircette.
One year later, in April 2003, the U.S. Court of 27




---



##### Table of Contents



Appeals for the Federal
Circuit reversed the District Courts decision granting summary judgment in our
favor and remanded the case to the District Court for further proceedings. In July 2003, BTG (now Savient) filed an amended complaint adding Organon
(Ireland) Ltd. and Organon USA as plaintiffs. The amended complaint seeks
damages and enhanced damages based upon willful infringement. We filed an
answer to BTGs amended complaint in July 2003. A trial on the infringement
and damages issue is expected in late 2004. We believe that our product does
not infringe BTGs patent and, because of this, we continue to market and
sell Kariva. Nevertheless, we expect that Organon will seek to recover lost
profits on sales of Mircette and assert that these lost profits and enhanced
damages significantly exceed our sales of Kariva, which totaled approximately
$110 million from the date of launch through June 30, 2004. If BTG and Organon
were to receive a favorable ruling in the District Court and that ruling were
to be upheld on any further appeal, we could be liable for patent infringement,
and the damages could be significant. Any such unfavorable outcome in the case
could adversely affect our consolidated financial statements. Class Action Lawsuits Ciprofloxacin To date we have been named as co-defendants with Bayer Corporation,
The Rugby Group, Inc. and others in approximately 38 class action complaints
filed in state and federal courts by direct and indirect purchasers of
Ciprofloxacin (Cipro®) from 1997 to the present. The complaints allege that
the 1997 Bayer-Barr patent litigation settlement agreement was anti-competitive
and violated federal antitrust laws and/or state antitrust and consumer
protection laws. A prior investigation of this agreement by the Texas Attorney
Generals Office on behalf of a group of state Attorneys General was closed
without further action in December 2001. The lawsuits include nine consolidated in California state court, one in
Kansas state court, one in Wisconsin state court, one in Florida state court,
and two consolidated in New York state court, with the remainder of the actions
pending in the United States District Court for the Eastern District of New
York for coordinated or consolidated pre-trial proceedings (the MDL Case).
Fact discovery in the MDL Case has been completed and the parties are
proceeding with summary judgment briefing. The direct purchaser and indirect
purchaser plaintiffs also have filed motions for class certification in the MDL
Case, but the Court has indicated that it will defer ruling on the motions at
the present time. The state court actions remain in a relatively preliminary
stage generally, tracked to follow the MDL Case, although defendants have filed
dispositive motions and plaintiffs have moved for class certification in
certain of the cases, and certification of a California-only end-payor class
has been granted in the California consolidated cases. On May 20, 2003, the District Court entered an order in the MDL Case
holding that the Barr-Bayer settlement did not constitute a per se violation of
the antitrust laws and restricting the scope of the legal theories the
plaintiffs could pursue in the case. On May 28, 2004, pursuant to the Courts
instruction and scheduling order, defendants filed motions for summary judgment
on all claims. Plaintiffs opposed those motions on July 9, 2004. A hearing
date on the motions has not been set. All other proceedings (including the
setting of a trial date) have been stayed pending resolution of the summary
judgment motions. On September 19, 2003, the Circuit Court for the County of Milwaukee
dismissed the Wisconsin state class action for failure to state a claim for
relief under Wisconsin law. Plaintiffs appealed, but the appeal has been
stayed pending a decision by the Wisconsin Supreme Court in another case
involving similar legal issues. On October 17, 2003, the Supreme Court of the
State of New York for New York County dismissed the consolidated New York state
class action for failure to state a claim upon which relief could be granted
and denied the plaintiffs motion for class certification. On April 22, 2004,
the District Court of Johnson County, Kansas granted in part and denied in part
defendants motions to dismiss, thereby narrowing some of plaintiffs claims,
although the language of the order memorializing the Courts oral ruling
remains under review. The decisions by the Wisconsin Circuit Court, the New
York Supreme Court, and the Kansas District Court do not affect the federal
class actions currently pending in the U.S. District Court or the state class
actions currently pending in other state courts. On July 24, 2004, the
California Court of Appeal for the Fourth Appellate District concluded that the
certification of a California-only class was overbroad to the extent that it
included purchasers who would have paid the same fixed co-payment for 28




---



##### Table of Contents



generic
ciprofloxacin as for branded Cipro under the terms of their prescription drug
benefit plans. Discovery is ongoing in the California consolidated cases, with
a current trial date of January 2005. We believe that our agreement with Bayer Corporation reflects a valid
settlement to a patent suit and cannot form the basis of an antitrust claim.
Based on this belief, we are vigorously defending ourselves in these matters.
We anticipate that these matters may take several years to resolve, and
although it is not possible to forecast the outcome of these matters, an
adverse judgment in any of the pending cases could adversely affect our
consolidated financial statements. Tamoxifen To date approximately 31 consumer or third-party payor class action
complaints have been filed in state and federal courts against Zeneca, Inc.,
AstraZeneca Pharmaceuticals LP and Barr alleging, among other things, that the
1993 settlement of patent litigation between Zeneca, Inc. and Barr violated the
antitrust laws, insulates Zeneca, Inc. and us from generic competition and
enables Zeneca, Inc. and Barr to charge artificially inflated prices for
Tamoxifen citrate. A prior investigation of this agreement by the U.S.
Department of Justice was closed without further action. The Judicial Panel on Multidistrict Litigation has transferred these cases
to the United States District Court for the Eastern District of New York for
pretrial proceedings. On May 19, 2003, the District Court entered judgment
dismissing the cases for failure to state a viable antitrust claim. Plaintiffs
have filed an appeal, which is currently pending in the United States Court of
Appeals for the Second Circuit. We believe that our agreement with Zeneca reflects a valid settlement to a
patent suit and cannot form the basis of an antitrust claim. Although it is not
possible to forecast the outcome of this matter, we intend to vigorously defend
ourselves. We anticipate that this matter may take several years to resolve,
but an adverse judgment could adversely affect our consolidated financial
statements. Other As of June 30, 2004, Barr Pharmaceuticals and its subsidiaries were
involved in various other disputes, governmental inquiries, investigations and
proceedings, and litigation matters that arise from time to time in the
ordinary course of business, some of which may involved substantial damages.
The process of resolving matters through litigation or other means is
inherently uncertain and it is possible that the resolution of these matters
will adversely affect our consolidated financial statements. 
 Item 4.Submission of Matters to a Vote of Security Holders There were no matters put to the vote of our shareholders during the
quarter ended June 30, 2004. 29




---



##### Table of Contents



PART II 
 Item 5.Market for the Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities Our
common stock is traded on the New York Stock Exchange under the
symbol BRL. The following table sets forth the quarterly
high and low share trading price information for the periods
indicated (as adjusted for the three-for-two stock splits effected in
the form of 50% stock dividends in each of March 2003 and March 2004): High
    
    LowFiscal year ended June 30,
    2004:First quarter
    
    $
    50.33
    
    
    $
    38.83Second quarter
    
    
    56.91
    
    
    
    45.17Third quarter
    
    
    53.99
    
    
    
    45.70Fourth quarter
    
    
    49.25
    
    
    
    32.89Fiscal year ended June 30,
    2003:First quarter
    
    $
    32.05
    
    
    $
    21.95Second quarter
    
    
    30.10
    
    
    
    24.56Third quarter
    
    
    38.77
    
    
    
    28.93Fourth quarter
    
    
    44.35
    
    
    
    34.27 As
of August 11, 2004, we estimate that there were approximately 1,610
holders of record of our common stock. We believe that a significant
number of investors in our common stock hold their shares in street
name. Therefore, the number of beneficial owners of our common stock
is much greater than the number of record holders of our common stock. We
have not paid any cash dividends on our common stock in the last two
fiscal years and we do not anticipate paying any cash dividends in
the foreseeable future. In
March 2004, holders of warrants to purchase an aggregate of 3,375,000
shares of our common stock, consisting of 1,687,500 shares at $13.93
per share and 1,687,500 shares at $16.89 per share, exercised the
warrants in full through a cashless exercise. As a result, we issued
to the investors 2,340,610 unregistered shares of our common stock.
We did not receive any proceeds from the issuance of the shares. The
issuance of the shares to the investors was based on the exemption
from registration under Section 4(2) of the Securities Act. 
 Item 6.Selected Financial Data The following data has been derived from our consolidated financial
statements and should be read in conjunction with those statements, which are
included in Item 8 of this report, together with Managements Discussion and
Analysis of Financial Condition and Results of Operations included in Item 7
of this report. Year Ended June 30,2004
    
    2003
    
    2002
    
    2001 (1)
    
    2000 (1)(in thousands, except per share data)Statements of Operations DataTotal revenues
    
    $
    1,309,088
    
    
    $
    902,864
    
    
    $
    1,188,984
    
    
    $
    593,151
    
    
    $
    490,972Earnings before income taxes
    
    
    194,440
    
    
    
    262,715
    
    
    
    337,537
    
    
    
    101,793
    
    
    
    18,602Income tax expense
    
    
    71,337
    
    
    
    95,149
    
    
    
    125,318
    
    
    
    38,714
    
    
    
    8,042Net earnings applicable to common shareholders
    
    
    123,103
    
    
    
    167,566
    
    
    
    210,269
    
    
    
    62,566
    
    
    
    10,305Earnings per
common share - basic
    
    
    1.21
    
    
    
    1.69
    (4)
    
    
    2.17
    (4)(5)
    
    
    0.66
    (4)(5)
    
    
    0.11
    (4)(5)Earnings per
common share - diluted
    
    
    1.15
    
    
    
    1.62
    (4)
    
    
    2.06
    (4)(5)
    
    
    0.63
    (4)(5)
    
    
    0.11
    (4)(5)Balance Sheet DataWorking capital
    
    $
    670,601
    
    
    $
    582,183
    
    
    $
    457,393
    
    
    $
    313,101
    
    
    $
    212,275Total assets
    
    
    1,333,269
    
    
    
    1,180,937
    
    
    
    888,554
    
    
    
    666,516
    
    
    
    548,188Long-term debt (2)
    
    
    32,355
    
    
    
    34,027
    
    
    
    42,634
    
    
    
    65,563
    
    
    
    59,254Shareholders equity (3)
    
    
    1,042,046
    
    
    
    867,995
    
    
    
    666,532
    
    
    
    416,777
    
    
    
    324,698
  (1)
    
    Financial data presented has been restated to include the historical
financial data of Duramed (See Note 1 to the consolidated financial
statements).(2)
    
    Includes capital leases and excludes current installments.(3)
    
    The Company has not paid a cash dividend in any of the above years.(4)
    
    Amounts have been adjusted for the March 16, 2004 3-for-2 stock split
effected in the form of a 50% stock dividend (See Note 1 to the
consolidated financial statements).(5)
    
    Amounts have been adjusted for the March 17, 2003 3-for-2 stock split
effected in the form of a 50% stock dividend (See Note 1 to the
consolidated financial statements). 
 Item 7.Managements Discussion and Analysis of Financial Condition and Results
of Operations Executive Overview We are a specialty pharmaceutical company that develops, markets and sells
both generic and proprietary (or branded) pharmaceutical products. Over the
past few years, we have continued to build a deep, diverse and profitable
generic product portfolio while strategically diversifying our operations by
developing and acquiring several proprietary products. While sales of generic
products still account for a great majority of our overall revenues, sales of
our proprietary products have grown from $62 million in fiscal 2002 to $146
million in fiscal 2004. 30




---



##### Table of Contents



Generic Products For many years, we have successfully utilized a strategy of developing the
generic versions of branded products that possess some combination of unique
factors that we believe have the effect of limiting competition for generics.
Such factors include difficult formulation, complex and costly manufacturing
requirements or limited raw material availability. By targeting products with
some combination of the unique factors set forth above, we believe that our
generic products will, in general, be less affected by the intense and rapid
pricing pressure often associated with more commodity-type generic products.
As a result of this focused strategy, we have been able to successfully
identify, develop and market generic products that generally have few
competitors or that are able to enjoy longer periods of limited competition and
thus generate profit margins higher than those often associated with
commodity-type generic products. The development and launch of our generic oral
contraceptive products is an example of our generic development strategy. Challenging the patents covering certain brand products is another facet
of our generic product activities. For many products, the patent provides the
unique factor that we seek to identify in our product selection process. We
try to be the first company to initiate a patent challenge because in certain
cases, we are able to obtain 180 days of exclusivity for selling the generic
version of the product. For example, this occurred with fluoxetine, our
generic version of Eli Lillys Prozac®. If we do receive exclusivity for a
product, we typically experience significant revenues and profitability
associated with that product for the six-month exclusivity period, but at the
end of that period experience significant decreases in our revenues and market
share associated with the product as other generic competitors enter the
market. This happened with our fluoxetine product after expiration of our
generic exclusivity period. Our record of successfully resolving patent
challenges has contributed to our growth, but has created periods of revenue
and earnings volatility and will likely do so in the future. Despite the
volatility, challenging patents continues to be an important component of our
generic product strategy. Macroeconomic factors favoring generic products have also helped to grow
sales. The aging population, rising health care costs and the vigilance of
health care providers, insurance companies and others to lower such costs have
helped drive an increase in the substitution of lower-cost generic products for
higher-cost brand products. As evidence of this, the percentage of overall
prescriptions filled with generic products grew from 43% in 2000 to 47% by
2003, and is predicted to continue to rise in the future. Proprietary Products To help diversify our long-term opportunities, we initiated a program more
than five years ago to develop and market proprietary pharmaceutical products.
We formalized this program in 2001 by establishing Duramed Research and today
have over 80 professionals dedicated to the development of a wide range of
proprietary products focused primarily on womens healthcare products. Our growth in proprietary product sales has been accomplished through
product acquisitions and through the November 2003 launch of our first
internally-developed proprietary product, SEASONALE®, a novel extended cycle
oral contraceptive. Our proprietary products are promoted directly to physicians by our 250
person sales force and are sold under the Duramed label. Competition As with any successful business, the greatest challenge we face is
continuing to stay ahead of the competition, both for generic and proprietary
products. Our successful generic product strategy has attracted new
competitors seeking to launch competing generic products. For example, we know
that other generic pharmaceutical companies have recently started developing
and marketing competing generic oral contraceptives in order to capture some of
our market share. Also, as a challenge to the value of our patent challenge strategy, brand
pharmaceutical companies have begun to partner with certain generic drug
companies to license a so-called authorized generic to the generic drug
company. 31




---



##### Table of Contents



The use of authorized generics by certain brand and generic companies
undermines the value of the 180 day
exclusivity period enjoyed by the first company to file an ANDA containing
a Paragraph IV certification by providing another generic drug company with the
ability to have the product on the market at the same time. Finally, as our proprietary pharmaceutical products grow, we anticipate
that competing generic pharmaceutical companies will challenge the patents
protecting our branded products. For example, our SEASONALE extended cycle
oral contraceptive product was recently targeted for a patent challenge by one
of our principal competitors. To address these and other challenges, we continue to (1) invest
aggressively in research and development, (2) develop and launch new generic
and proprietary products and (3) maintain an active acquisition and licensing
effort to complement our internal development activities. Comparison of the fiscal years ended June 30, 2004 and June 30, 2003 ($s in millions) The following table sets forth revenue data for the fiscal years ended
June 30, 2004 and 2003: CHANGE($ in millions)
    
    2004
    
    2003
    
    $
    
    %Generic products:Distributed alternative
brands: (3)Ciprofloxacin
    
    $
    385.3
    
    
    $
    111.4
    
    
    $
    273.9
    
    
    
    246
    %Tamoxifen(1)
    
    
    
    
    
    
    112.5
    
    
    
    (112.5
    )
    
    
    -100
    %Oral contraceptives
    
    
    403.9
    
    
    
    274.4
    
    
    
    129.5
    
    
    
    47
    %Other generic(2)
    
    
    361.4
    
    
    
    338.9
    
    
    
    22.5
    
    
    
    7
    %Total generic products
    
    
    1,150.6
    
    
    
    837.2
    
    
    
    313.4
    
    
    
    37
    %Proprietary products
    
    
    146.1
    
    
    
    57.7
    
    
    
    88.4
    
    
    
    153
    %Total product sales
    
    
    1,296.7
    
    
    
    894.9
    
    
    
    401.8
    
    
    
    45
    %Development and other revenue
    
    
    12.4
    
    
    
    8.0
    
    
    
    4.4
    
    
    
    55
    %Total revenues
    
    $
    1,309.1
    
    
    $
    902.9
    
    
    $
    406.2
    
    
    
    45
    %
  (1)
    
    Reflects sales of Tamoxifen product acquired from innovator.(2)
    
    Includes sales of Tamoxifen product manufactured by Barr.(3)
    
    Distributed alternative brands are distributed by us under terms of agreements entered
into as part of patent challenge settlements. Therefore, for reporting purposes, they are
classified under generic products. Revenues  Product Sales Product sales for the year ended June 30, 2004 increased as compared to
the prior year primarily due to the sales of our distributed version of
Ciprofloxacin and to increased sales of our generic and proprietary products,
which more than offset the large decline in sales of our distributed version of
Tamoxifen. Generic Products Ciprofloxacin On June 9, 2003, we began distributing Ciprofloxacin hydrochloride tablets
and oral suspension pursuant to a license from Bayer obtained under a 1997
settlement of a patent challenge we initiated against Bayers Cipro®
antibiotic. In September 2003, we signed an Amended Supply Agreement with
Bayer that enabled us to distribute Ciprofloxacin during and after Bayers
period of pediatric exclusivity, which ended on June 9, 2004. As a result,
Ciprofloxacin was our largest selling product in fiscal 2004. We have shared
one-half of our profits, as defined, from the sale of Ciprofloxacin with
Aventis, the contractual successor to our partner in the Cipro patent challenge 32




---



##### Table of Contents



case. Bayers period of pediatric exclusivity expired on June 9, 2004 and, as we
expected, several other competing Ciprofloxacin products were launched. As a
result of these additional competitors, our market share and product pricing
declined dramatically thereby lowering our sales of Ciprofloxacin in the
quarter ended June 30, 2004 compared to earlier quarters in the fiscal year.
Our sales of Ciprofloxacin are expected to be less than $2 million in fiscal
2005. Tamoxifen For most of the first six months of fiscal 2003 we sold a distributed
version of Tamoxifen that we purchased from AstraZeneca under the terms of a
1993 Supply and Distribution Agreement entered into as part of a patent
challenge settlement. This Agreement ended in December 2002. We began selling
our manufactured Tamoxifen product when AstraZenecas pediatric exclusivity for
Nolvadex ended on February 20, 2003. Therefore, we recorded no sales from a
distributed version of Tamoxifen in fiscal 2004. Oral Contraceptives The following table sets forth oral contraceptive data for the fiscal
years ended June 30, 2004 and 2003: CHANGE($ in millions)
    
    2004
    
    2003
    
    $
    
    %Oral contraceptive sales
    
    $
    403.9
    
    
    $
    274.4
    
    
    $
    129.5
    
    
    
    47
    %Number of Marketed Products at End of Period
    
    
    19
    
    
    
    13
 Sales of our generic oral contraceptive products increased throughout
fiscal 2004 and by June 2004, we became the largest supplier of oral
contraceptives in the U.S. as determined by prescription market share data
provided by IMS America. The revenue growth in fiscal 2004 was fueled by (1) increasing volumes
resulting from growth in market share by products launched in prior periods and
(2) first year sales of new generic oral contraceptives launched during fiscal
2004. The largest new product addition was Tri-Sprintec, our generic
equivalent to Orthos Tri-Cyclen oral contraceptive. We launched Tri-Sprintec
in December 2003 in accordance with the terms of a patent challenge settlement
we entered into with Ortho. Since the beginning of fiscal 2002, sales of our generic oral
contraceptive products have more than quadrupled. This growth has been fueled
by new product launches, the addition of new customers and by increasing rates
of generic substitution. At the end of fiscal 2004, our generic oral
contraceptive portfolio totaled 19 products representing a generic version of
nearly all oral contraceptive products on the market. In addition, the
percentage of prescriptions filled with a generic version, the generic
substitution rate, for many of our oral contraceptives reached 60-70% by the
end of the year. As a result, while we believe the substitution rates for many
of these products will eventually reach 80% or more over the next 12 months, we
will not be able to gain market share as rapidly as we have over the past few
years. We have also recently noted a decline in the total number of prescriptions
being written for the branded versions of many of our generic oral
contraceptives. This decline is common for products that have generic
equivalents available to consumers because demand for pharmaceutical products
and the resulting prescriptions are significantly influenced by brand companies
use of promotional activities, including the use of sales representatives to
market products directly to physicians. When a generic version of a product is
launched, brand companies substantially reduce or eliminate sales and promotion
programs and refocus those efforts on other products that are not subject to
generic competition. In the contraceptive market, the brand companies impacted
by the launch of our generics have either stopped sales and promotional
activities or have shifted their efforts to other contraceptive products which
still enjoy patent protection, including low dose oral contraceptives and patch
products. In fiscal 2004, we were able to offset the impact of these
declining prescriptions with growth in our market share, but as we previously
discussed, our rate of growth in the future will slow. 33




---



##### Table of Contents



Finally, over the past three years, the generic oral contraceptive market
has included us and only one other generic competitor. However, two additional
competitors have entered during the second half of fiscal 2004. As a result,
we anticipate some loss of market share and lower pricing on certain oral
contraceptive products during fiscal 2005. Despite these challenges, we believe our generic oral contraceptive sales
will increase in fiscal 2005 compared to 2004 though at a much lower growth
rate than we experienced during the past year. Our forecast for fiscal 2005
primarily reflects our expectations that: (1) sales of Tri-Sprintec will
increase year-over-year due to a full year contribution in fiscal 2005; (2)
most of our products will continue to gain additional market share through
increased generic substitution which will offset the negative effects of
additional market competitors and declining prescriptions for some of these
products; (3) in fiscal 2005, we will receive approval for and launch two new
oral contraceptive products; and (4) we will add new customers during the year. Generic Products  Other Sales of other generic products increased approximately 7% in fiscal 2004
as compared to the prior year period, primarily due to sales of our Mirtazapine
Orally Disintegrating Tablet (the generic equivalent of Akzo Nobel and Organon,
Inc.s Remeron® Soltab), which we launched in December 2003, and sales of
Claravis® (a generic equivalent of Roche Pharmaceuticals Accutane®), which we
launched in May 2003. These increases were partially offset by a significant
decline in sales of our Dextro salt combo product (a generic equivalent of
Shire Richwood, Inc.s Adderall®) due to lower pricing and lower volumes
resulting from the entry of two additional generic competitors. Proprietary Products Sales of our proprietary products more than doubled in fiscal 2004 as
compared to the prior year. This increase relates primarily to: (1) sales from
the four products we purchased from Wyeth in June 2003; (2) the launch of
SEASONALE, our extended-cycle oral contraceptive; (3) increased sales of
Cenestin; and (4) sales of Loestrin and Loestrin Fe, which we purchased from
Galen (Chemicals) Limited (Galen) in March 2004. In September 2003 we received approval for our SEASONALE extended-cycle
oral contraceptive. We began promoting SEASONALE directly to physicians in
November 2003 and initiated our direct-to-consumer television and print
advertising program during our fourth quarter. Since we launched SEASONALE,
demand for the product as measured by prescription data obtained from IMS
America has risen from 1,736 per week for the week ended December 26, 2003 to
12,731 for the week ended July 30, 2004. The consistent increases in number of
prescriptions drives our expectation that sales of SEASONALE will be
significantly higher in fiscal 2005 than they were in fiscal 2004. Sales of Cenestin increased at a higher than expected rate of 36% in
fiscal 2004 compared to fiscal 2003 primarily due to year-over-year price
increases of approximately 24%, the launch of one additional strength and
customer buying patterns, which more than offset a 9% decline in Cenestin
prescriptions. Prescription declines began after the results of the Womens
Health Initiative (WHI) study was published in July 2002 and continued
through fiscal 2004. However, recent prescription data suggests this decline
may be slowing or stopping. Since July 2002, Cenestin prescriptions have
declined at a slower rate than those written for competing conjugated estrogen
products, thus allowing us to increase our market share to 6.8% as of June 30,
2004 compared to 5.6% as of June 30, 2003. Price increases are expected to continue in fiscal 2005, though they are
not expected to be as significant as they were in fiscal 2004. Therefore,
while we expect fiscal 2005 Cenestin sales to be relatively consistent with
fiscal 2004 levels, the change in Cenestin sales in fiscal 2005 will depend on
several factors including prescription trends, customer inventory levels and
buying patterns and the extent of additional price increases. 34




---



##### Table of Contents



Cost of Sales Our cost of sales includes our acquisition cost for the distributed
versions of products we purchase from third parties, our manufacturing and
packaging costs for products we manufacture, profit sharing payments made to
raw material suppliers and any changes to our inventory reserve. Product mix
plays a significant role in our quarterly and annual overall gross margin
percentage. Though this is true for many companies, our overall margins have
been substantially impacted by the contribution from sales of our distributed
versions of products such as Tamoxifen and Ciprofloxacin, which were
manufactured for us by the innovator and distributed by us under the terms of
patent challenge settlement agreements. The following table sets forth cost of sales data in dollars as well as
the resulting gross margins, for the two years ended June 30, 2004 and 2003: CHANGE($ in millions)
    
    2004
    
    2003
    
    $
    
    %Cost of sales:Generic
products (1)
    
    $
    604.6
    
    
    $
    415.0
    
    
    $
    189.6
    
    
    
    46
    %Gross margin
    
    
    47
    %
    
    
    50
    %Proprietary products
    
    $
    28.1
    
    
    $
    9.1
    
    
    $
    19.0
    
    
    
    209
    %Gross margin
    
    
    81
    %
    
    
    84
    %Total cost of sales
    
    $
    632.7
    
    
    $
    424.1
    
    
    $
    208.6
    
    
    
    49
    %Gross margin
    
    
    51
    %
    
    
    53
    %
  (1)
    
    Includes cost of sales of Distributed Alternative Brand products. The increase in total cost of sales, on a dollar basis, for year ended
June 30, 2004, as compared to the prior year was primarily due to increased
product sales, principally relating to Ciprofloxacin. Margins on our generic products declined slightly in fiscal 2004 due
mainly to the higher percentage of Ciprofloxacin sales in fiscal 2004 compared
to fiscal 2003. As a distributed product that has a profit split paid to our
partner, Ciprofloxacin has a higher cost of sales and a lower margin than our
other products. Margins on our proprietary products declined in fiscal 2004 compared to
fiscal 2003 as increased sales of somewhat lower margin products, including the
products acquired from Wyeth in late fiscal 2003, more than offset higher sales
of Cenestin and SEASONALE. Selling, General and Administrative Expense The following table sets forth selling, general and administrative expense
data for the two years ended June 30, 2004 and 2003: CHANGE($ in millions)
    
    2004
    
    2003
    
    $
    
    %Selling, general and administrative
    
    $
    314.5
    
    
    $
    161.0
    
    
    $
    153.5
    
    
    
    95
    %Charges included in selling, general and administrative
    
    $
    96.6
    
    
    $
    20.0
    
    
    $
    76.6
    
    
    
    383
    %
 Selling, general and administrative expenses for the year ended June 30,
2004 included charges related to strategic acquisitions or other similar
activities including: (1) a $16 million valuation allowance we established in
September 2003 for our loans to Natural Biologics, LLC, the raw material
supplier for our generic equine-based conjugated
estrogens product, as the result of an unfavorable court decision rendered
in September 2003; (2) the 35




---



##### Table of Contents



February 2004 write-off of $4.2 million associated
with the acquisition of certain emergency contraception assets from Gynetics,
Inc.; (3) an arbitration panels decision in June 2004 to award Solvay
Pharmaceuticals, Inc. $68 million in damages on a claim that we improperly
terminated an agreement with Solvay; and (4) an $8.5 million charge in June
2004 related to costs associated with our settlement of the Estrostep and
Femhrt patent challenge litigation against Galen. Included in the year ended
June 30, 2003 is a $20 million contingent attorney fee paid in connection with
a litigation settlement with Wyeth. The remaining increase in selling, general and administrative expenses for
the year ended June 30, 2004 as compared to the prior year period was primarily
due to: (1) increased marketing costs for SEASONALE; (2) higher costs
associated with the nearly doubling of our womens healthcare sales force; (3)
higher legal costs, primarily related to patent matters, the Solvay arbitration
and product liability matters; and (4) increased information technology costs,
including consulting costs related to the initial phases of designing and
implementing our new enterprise resource planning system. Research and Development The following table sets forth research and development expenses for the
two years ended June 30, 2004 and 2003: CHANGE($ in millions)
    
    2004
    
    2003
    
    $
    
    %Research and
development
    
    $
    169.0
    
    
    $
    91.2
    
    
    $
    77.8
    
    
    
    85
    %Charges
included in research and development
    
    $
    68.2
    
    
    $
    3.9
    
    
    $
    64.3
    
    
    
    1649
    %
 For the year ended June 30, 2004 our total research and development costs
reflected charges relating to strategic acquisitions or similar activities
including: (1) a write-off of $22 million in March 2004 resulting from our
agreement to acquire Scherings rights and obligations under a Product
Development and License Agreement that had been capitalized at the time of our
acquisition of Enhance Pharmaceuticals, Inc. in June 2002; (2) a write-off of
$10 million for in-process research and development acquired in connection with
our acquisition of Womens Capital Corporation in February 2004; and (3) the
write-off of $36 million of in-process research and development costs in
connection with our purchase of substantially all of the assets of Endeavor
Pharmaceuticals, Inc. in November 2003. Included in the year ended June 30,
2003 is a $3.9 million write-off of in-process research and development
associated with our June 2003 purchase from Wyeth of four products and the
product rights to an oral contraceptive in development. The remaining increase in research and development for the year ended June
30, 2004 as compared to the prior year was primarily due to: (1) higher third
party development costs; (2) higher headcount costs; and (3) higher raw material
costs in support of internal development projects. Income Taxes The following table sets forth income tax expense and the resulting
effective tax rate stated as a percentage of pre-tax income for the two years
ended June 30, 2004 and 2003: CHANGE($ in millions)
    
    2004
    
    2003
    
    $
    
    %Income tax expense
    
    $
    71.3
    
    
    $
    95.1
    
    
    $
    (23.8
    )
    
    
    -25
    %Effective tax rate
    
    
    36.7
    %
    
    
    36.2
    %
 The effective tax rate for fiscal 2004 was unfavorably impacted by the
write-off of in-process research and development costs associated with our
February 2004 acquisition of Womens Capital Corporation, which was not
deductible for federal and state income tax purposes. Offsetting the
unfavorable impact of the in-process research and development costs was a
favorable impact of a tax benefit of $3.7 million related to the completion of
several tax audits and the Internal Revenue Services approval of a change in
our method of computing certain tax credits. Comparison of the
fiscal years ended June 30, 2003 and June 30,
2002($s in millions) 36




---



##### Table of Contents



The following table sets forth revenue data for the fiscal years ended
June 30, 2003 and 2002: CHANGE($ in millions)
    
    2003
    
    2002
    
    $
    
    %Generic products:Distributed Alternative
Brands:(3)Ciprofloxacin
    
    $
    111.4
    
    
    $
    
    
    
    $
    111.4
    
    
    
    N/ATamoxifen(1)
    
    
    112.5
    
    
    
    366.3
    
    
    
    (253.8
    )
    
    
    -69
    %Oral contraceptives
    
    
    274.4
    
    
    
    92.8
    
    
    
    181.6
    
    
    
    196
    %Other generic(2)
    
    
    338.9
    
    
    
    650.2
    
    
    
    (311.3
    )
    
    
    -48
    %Total generic products
    
    
    837.2
    
    
    
    1,109.3
    
    
    
    (272.1
    )
    
    
    -25
    %Proprietary products
    
    
    57.7
    
    
    
    62.1
    
    
    
    (4.4
    )
    
    
    -7
    %Total product sales
    
    
    894.9
    
    
    
    1,171.4
    
    
    
    (276.5
    )
    
    
    -24
    %Development and other revenue
    
    
    8.0
    
    
    
    17.6
    
    
    
    (9.6
    )
    
    
    -55
    %Total revenues
    
    $
    902.9
    
    
    $
    1,189.0
    
    
    $
    (286.1
    )
    
    
    -24
    %
  (1)
    
    Reflects sales of Tamoxifen product acquired from innovator.(2)
    
    Includes sales of Tamoxifen product manufactured by Barr.(3)
    
    Distributed Alternative Brands are distributed by us under terms of agreements entered into as
part of patent challenge settlements. Therefore, for reporting purposes, they are classified under
Generic products. Revenues  Product Sales Product sales for fiscal 2003 declined from the prior year primarily due
to significant decreases in sales of Tamoxifen and Fluoxetine. Fluoxetine
sales, which are included in the other generic line in the table above,
accounted for $7.2 million of product sales in fiscal 2003, down from $367
million in fiscal 2002, while our distributed version of Tamoxifen accounted
for $113 million of product sales in fiscal 2003, down from $366 million in
fiscal 2002. Partially offsetting these declines were higher sales of our
generic oral contraceptive products and sales from the June 2003 launch of our
distributed version of Ciprofloxacin. Generic Products Ciprofloxacin In June 2003 we began shipping Ciprofloxacin hydrochloride pursuant to a
license from Bayer. Under a 1997 settlement of a patent challenge we initiated
against Bayers Cipro antibiotic, we purchased directly from Bayer
Ciprofloxacin products that were manufactured under Bayers New Drug
Application for Cipro and marketed them under our label. We had the
non-exclusive right to distribute the Ciprofloxacin products until Bayers
patent protecting Cipro expired in December 2003. On June 9, 2003, we began
distributing Ciprofloxacin pursuant to the terms of the settlement and recorded
sales of $111 million for the period from June 9, 2003 to June 30, 2003. We
share one-half of our profits from the sale of Ciprofloxacin, as defined, with
Aventis, the contractual successor to our joint venture partner in the Cipro
patent challenge case. Tamoxifen Sales of our distributed version of Tamoxifen decreased substantially in
fiscal 2003. During the quarter ended December 31, 2002, we sold our remaining
distributed Tamoxifen inventory previously purchased from AstraZeneca.
AstraZenecas pediatric exclusivity for its Nolvadex® brand version of
Tamoxifen ended on February 20, 2003. We were unable to supply distributed
Tamoxifen to our customers after the depletion of our inventory purchased from
AstraZeneca until we launched our manufactured Tamoxifen product at the
expiration of 37




---



##### Table of Contents



AstraZenecas pediatric exclusivity period. At that time, several
other generic competitors launched Tamoxifen products, causing the price to
decline and causing us to lose market share. Sales of our manufactured version
of Tamoxifen totaled less than $10 million during fiscal 2003. Oral Contraceptives The following table sets forth oral contraceptive data for the fiscal
years ended June 30, 2003 and 2002: CHANGE($ in millions)
    
    2003
    
    2002
    
    $
    
    %Oral contraceptive sales
    
    $
    274.4
    
    
    $
    92.8
    
    
    $
    181.6
    
    
    
    196
    %Number of marketed products at end of period
    
    
    13
    
    
    
    6
 The increase in sales of oral contraceptives reflected increasing market
shares for existing products, including our Apri®, Aviane, Kariva and
Nortrel® products, and sales of seven new oral contraceptive products launched
during fiscal 2003. Generic Products  Other In August 2001, we launched our Fluoxetine 20 mg capsule with 180 days of
exclusivity as the only generic manufacturer. Sales of Fluoxetine were $368
million for fiscal 2002, constituting approximately 31% of product sales in
that year. On January 29, 2002, our 180-day generic exclusivity period ended
and, as expected, the FDA approved several other competing Fluoxetine products.
As a result, the selling price declined dramatically and we lost market share
to competing products, causing our sales and profits from Fluoxetine to be
substantially lower than those earned during the exclusivity period. Somewhat
offsetting the decline in Fluoxetine sales were higher sales of our Dextro salt
combo product. We launched our Dextro salt combo product in February 2002 as
the first generic manufacturer to enter the market. Sales of our Dextro salt
combo product in fiscal 2003 were higher than in fiscal 2002 due to the
inclusion of a full-year of sales in our fiscal 2003 results compared with
approximately four months of sales in fiscal 2002. Partially offsetting this
full year contribution were lower prices in fiscal 2003 due to the entry of
competitors into the market. Proprietary Products Lower proprietary product sales in fiscal 2003 compared to fiscal 2002
were primarily the result of lower sales of Cenestin. Sales of Cenestin
declined approximately 17% from $42 million in fiscal 2002 to $35 million in
fiscal 2003. The decline in Cenestin sales was due to declining Cenestin
prescriptions, which more than offset higher prices for the product, and was
consistent with reduced sales of several prominent hormone therapy products due
to the July 9, 2002 release of the findings of the Womens Health Initiative
(WHI) study. The WHI study involved the long-term usage of estrogen and
progestin in healthy post-menopausal women. A portion of the study, which
evaluated the use of a combination of conjugated equine estrogens and the
progestin medroxyprogesterone acetate, was stopped early by the studys
sponsor, because of increased health risks, which the study sponsor felt
outweighed the specified long-term benefits. Although Cenestin is not a
combination product and was not part of the WHI study, the findings negatively
impacted nearly all hormone therapy products. Though we experienced a decline
in our Cenestin prescriptions, our decline was not as significant as other
larger products in the hormone therapy market and, as a result, our market
share increased. Cost of Sales 38




---



##### Table of Contents



The following table sets forth cost of sales data in dollars as well as
the resulting gross margins for the two years ended June 30, 2003 and 2002: CHANGE($ in millions)
    
    2003
    
    2002
    
    $
    
    %Cost of sales:Generic
products (1)
    
    $
    415.0
    
    
    $
    663.6
    
    
    $
    (248.6
    )
    
    
    -37
    %Gross margin
    
    
    50
    %
    
    
    40
    %Proprietary products
    
    $
    9.1
    
    
    $
    12.7
    
    
    $
    (3.6
    )
    
    
    -28
    %Gross margin
    
    
    84
    %
    
    
    80
    %Total cost of sales
    
    $
    424.1
    
    
    $
    676.3
    
    
    $
    (252.2
    )
    
    
    -37
    %Gross margin
    
    
    53
    %
    
    
    42
    %
  (1)
    
    Includes cost of sales of Distributed Alternative Brand products. The decrease in cost of sales, on a dollar basis, was primarily due to
lower sales of Fluoxetine and Tamoxifen. Cost of sales includes the profit
split paid to Apotex, Inc., our partner in the Fluoxetine patent challenge, and
royalties on certain other products paid to certain of our raw material
suppliers. Margins on our generic products increased in fiscal 2003 due mainly to the
fact that higher margin products constituted a larger portion of total product
sales in fiscal 2003 compared to fiscal 2002. In addition, as a percentage of
total product sales, Fluoxetine, which is subject to a profit split with a
partner, decreased from fiscal 2002 to fiscal 2003. Margins on our proprietary products increased in fiscal 2003 compared to
fiscal 2002 due mainly to the reduction in profit splits paid on our Viaspan
organ preservation agent. Selling, General and Administrative Expense The following table sets forth selling, general and administrative expense
data for the two years ended June 30, 2003 and 2002: CHANGE($ in millions)
    
    2003
    
    2002
    
    $
    
    %Selling, general and administrative
    
    $
    161.0
    
    
    $
    111.9
    
    
    $
    49.1
    
    
    
    44
    %Charges included in selling, general and administrative
    
    $
    20.0
    
    
    $
    
    
    
    $
    20.0
    
    
    
    N/A
 The increase in selling, general and administrative expenses was primarily
due to significant costs incurred for pre-launch activities related to
SEASONALE, which we launched in fiscal 2004, and increased marketing and
selling expenses for Cenestin. Also contributing to the increase were the
amortization of intangible assets and higher legal costs, including a charge of
$20 million relating to a contingent attorney fee paid in connection with a
litigation settlement with Wyeth. Partially offsetting these increases were
somewhat lower marketing and administrative costs associated with synergies
achieved as a result of the integration of Duramed. Research and Development Expense The following table sets forth research and development expenses for the
two years ended June 30, 2003 and 2002: 39




---



##### Table of Contents



CHANGE($ in millions)
    
    2003
    
    2002
    
    $
    
    %Research and development
    
    $
    91.2
    
    
    $
    75.7
    
    
    $
    15.5
    
    
    
    20
    %
 The increase in research and development expenses reflected higher
headcount and development costs in our proprietary development program,
including costs associated with our vaginal ring product, as well as increased
expenditures associated with the development of the Adenovirus Vaccine for the
U.S. Department of Defense. Proceeds from Patent Challenge Settlement Under the terms of the contingent supply agreement we entered into with
Bayer to settle our Cipro patent challenge litigation, Bayer had the option to
either supply us with Ciprofloxacin at a predetermined discount for resale or
make quarterly cash payments to us. Until June 9, 2003, Bayer elected to make
payments to us rather than supply us with Ciprofloxacin. Accordingly, we
recognized proceeds from patent challenge settlement of $31 million for fiscal
2003 and $32 million for fiscal 2002. Fiscal 2003 was the last year we
recognized proceeds from the Cipro patent challenge. Income Taxes The following table sets forth income tax expense and the resulting
effective tax rate stated as a percentage of pre-tax income for the two years
ended June 30, 2003 and 2002: CHANGE($ in millions)
    
    2003
    
    2002
    
    $
    
    %Income tax expense
    
    $
    95.1
    
    
    $
    125.3
    
    
    $
    (30.2
    )
    
    
    -24
    %Effective tax rate
    
    
    36.2
    %
    
    
    37.1
    %
 The decrease in the effective tax rate for fiscal 2003 was due primarily
to the increase in certain tax credits, the recognition of a deferred tax asset
resulting from the identification of additional deductible state operating
losses incurred in prior years and the reversal of certain valuation allowances
previously established by Duramed. Liquidity and Capital Resources Overview The
following table highlights selected balance sheet and cash flow components as of
June 30, 2004 and 2003: 40




---



##### Table of Contents



CHANGE($s in millions)
    
    2004
    
    2003
    
    $
    
    %Cash & cash equivalents
    
    $
    419.9
    
    
    $
    367.1
    
    
    $
    52.8
    
    
    
    14
    %Marketable securities:Short-term
    
    
    32.4
    
    
    
    31.7
    
    
    
    0.7
    
    
    
    2
    %Long-term
    
    
    89.1
    
    
    
    15.1
    
    
    
    74.0
    
    
    
    490
    %Debt/Capital lease obligations:Short-term
    
    
    8.4
    
    
    
    8.5
    
    
    
    (0.1
    )
    
    
    -1
    %Long-term
    
    
    32.4
    
    
    
    34.0
    
    
    
    (1.6
    )
    
    
    -5
    %Cash flow from operations
    
    
    258.1
    
    
    
    160.3
    
    
    
    97.8
    
    
    
    61
    %Working capital
    
    
    670.6
    
    
    
    582.2
    
    
    
    88.4
    
    
    
    15
    %
 Our primary source of cash from operations is the collection of accounts
receivable related to product sales and our primary uses of cash include
funding our research and development programs, marketing and selling our
proprietary and generic products, financing the production of inventories,
funding capital projects and investing in business development activities. Our cash flows from operations have been more than sufficient to fund our
operations, capital expenditures and business development activities. As a
result, our cash and cash equivalents balances have increased. Investment in Marketable Securities During fiscal
2004, we increased our investments in short and long-term marketable securities
to provide a greater return on our cash balances. Our investments in
marketable securities are governed by our investment policy which seeks to
optimize our returns while preserving our capital, maintaining adequate
liquidity and investing in tax advantaged securities, as appropriate. Our
short-term portfolio includes $29 million in market auction debt securities
that are readily convertible into cash at par value with maturity dates ranging
from July 2004 to February 2005 while our long-term portfolio includes $89
million of municipal and corporate debt securities with maturity dates ranging
from July 2005 to June 2007. Operating Activities Our operating cash flows have increased from $160 million in fiscal 2003
to $258 million in fiscal 2004, though over the past couple of years, our
operating cash flow levels have fluctuated and are subject to many of the same
risks and uncertainties that impact our earnings. Our operating cash in fiscal
2004 was generated principally by our net earnings, adjusted for in-process
research and development charges totaling $46 million and non-cash charges
including depreciation and amortization which more than offset increases in
certain of our working capital components. Working Capital Working capital as of June 30, 2004 and 2003 consisted of the following: 41




---



##### Table of Contents



CHANGE($ in millions)
    
    2004
    
    2003
    
    $
    
    %Cash & cash equivalents
    
    $
    419.9
    
    
    $
    367.1
    
    
    $
    52.8
    
    
    
    14
    %Accounts receivable
    
    
    153.9
    
    
    
    221.7
    
    
    
    (67.8
    )
    
    
    -31
    %Inventories
    
    
    150.3
    
    
    
    163.9
    
    
    
    (13.6
    )
    
    
    -8
    %Prepaid & other current assets
    
    
    154.1
    
    
    
    97.1
    
    
    
    57.0
    
    
    
    59
    %Subtotal
    
    
    878.2
    
    
    
    849.8
    
    
    
    28.4
    
    
    
    3
    %Accounts payable & accrued liabilities
    
    
    179.1
    
    
    
    247.8
    
    
    
    (68.7
    )
    
    
    -28
    %Income taxes payable
    
    
    20.1
    
    
    
    11.3
    
    
    
    8.8
    
    
    
    78
    %Current portion of long-term debt & capital leases
    
    
    8.4
    
    
    
    8.5
    
    
    
    (0.1
    )
    
    
    -1
    %Subtotal
    
    
    207.6
    
    
    
    267.6
    
    
    
    (60.0
    )
    
    
    -22
    %Working capital
    
    $
    670.6
    
    
    $
    582.2
    
    
    $
    88.4
    
    
    
    15
    %
 Working capital increased from June 30, 2003 to June 30, 2004. Accounts
receivable were lower at June 30, 2004 primarily due to the balance at June 30,
2003 being unusually high because we launched Ciprofloxacin in mid-June 2003.
By June 30, 2003, we had not collected any of the receivables associated with
the sales from our Ciprofloxacin launch. In contrast, additional competitors
entered the generic Ciprofloxacin market in early June 2004, causing our sales
of Ciprofloxacin in the month of June and for the quarter ended June to decline
significantly compared to last years fourth quarter. The decline in our
accounts payable and accrued liabilities was mainly due to a reduction in
accounts payable owed to Bayer for Ciprofloxacin purchases, partially offset by
higher accrued liabilities resulting from current amounts due Solvay under the
arbitration award and current amounts of revenue deferred from a product
licensing agreement we entered into in April 2004, which we will recognize over
a five year period. Prepaid and other current assets increased from June 30,
2003 to June 30, 2004, primarily reflecting a receivable of approximately $48
million due from Bayer as a price adjustment to reduce the cost of our June
2004 inventory of Ciprofloxacin purchased from Bayer during the second half of
our fiscal year. Cash flows in fiscal 2004 were favorably impacted by approximately $21
million in part due to a change in the method used to calculate the annual
limitation under Section 382 of the Internal Revenue Code. As a result of this
change, we have utilized all of the federal net operating losses incurred by
Duramed Pharmaceuticals, Inc. prior to our merger with Duramed in October 2001. In June 2004, an arbitration panel ruled against the Company in its
arbitration with Solvay Pharmaceuticals and awarded Solvay $68 million in
damages. This award is required to be paid out in six installments. The first
payment of $18 million was made on July 23, 2004 and five additional quarterly
payments of $10 million will be due over the five quarters ending October 15,
2005. We have filed a petition with the U.S. District Court in Cincinnati
seeking to vacate the award. SEASONALE Royalty Our current royalty obligation to the SEASONALE patent-holder is a
perpetual royalty based on a percentage of net profits, as defined. However,
our license agreement gives us the option, at any time prior to September 2004,
to make a one-time payment of approximately $19 million to the patent holder in
lieu of future royalty payments. We expect to exercise this option. 42




---



##### Table of Contents



Investing Activities Capital Expenditures During the three fiscal years ended June 30, 2004, we have invested
approximately $175 million in upgrades and expansions to our property, plant
and equipment. This investment has significantly expanded our production,
laboratory, warehouse and distribution capacity in our facilities and was
designed to help ensure that we have the facilities necessary to manufacture,
test, package and distribute our current and future products. During the twelve months ended June 30, 2004, we invested $47 million in
capital projects and expect that our capital investments will be between $60
million and $80 million over the next twelve months. Our estimate reflects
lower spending on our facility expansion programs and higher investments in
information technology projects including the purchase and implementation of a
new enterprise resource planning system. We believe we can continue funding our capital requirements using cash
provided by operations. However, we may consider obtaining long-term debt to
finance a portion of our projects. We believe we have the capital structure
and cash flow to complete any such financing. Strategic Transactions Our investment in strategic product and company acquisitions was $91
million in fiscal 2004 and approximately $162 million for the three years ended
June 30, 2004. In fiscal 2004, these transactions included the acquisition of
Womens Capital Corporation, certain assets of Gynetics, Inc., substantially
all the assets of Endeavor Pharmaceuticals, Inc. and certain product rights
from Galen. We continuously evaluate strategic transactions to further improve
our business and long-range prospects and expect to make additional investments
over the next twelve months. We are unable to predict the timing of potential
transactions, though the cash required to complete them could equal or exceed
the average amounts invested over the past three years. These transactions
typically range from product development and license agreements to asset or
corporate acquisitions. Loans to Natural Biologics In fiscal 2002, we entered into a Loan and Security Agreement (the Loan
Agreement) with Natural Biologics, LLC (Natural Biologics), the raw material
supplier for our generic equine-based conjugated estrogens product for which we
filed an Abbreviated New Drug Application (ANDA) with the FDA in June 2003.
In September 2003, as a result of an adverse legal decision in a lawsuit
brought by Wyeth against Natural Biologics, we reserved $16 million for all
loans made to Natural Biologics since the inception of our loan agreement.
Natural Biologics is appealing the decision and, pending the outcome of the
appeal, we agreed to provide Natural Biologics advances totaling $1.4 million
over four quarters beginning in May 2004, to defray the costs of maintaining
the existing conjugated estrogen raw material. We are fully reserving these
advances. If Natural Biologics prevails on its appeal, we expect to resume
making loans to Natural Biologics on the terms contained in our Loan Agreement. In fiscal 2002, the Company also entered into a Development, Manufacturing
and Distribution Agreement with Natural Biologics which could obligate the
Company to make milestone payments totaling an additional $35 million to
Natural Biologics based on achieving certain legal and product approval
milestones, including the approval of a generic product. Investment in Venture Funds During the second quarter of fiscal 2004, we made investments, as a
limited partner, in two separate venture capital funds as part of our
continuing efforts to identify new products, new technologies and new licensing
opportunities. We have committed up to a total of $15 million for each of
these funds over a five and 10-year period, as defined by each fund. As of
August 15, 2004, we have contributed a total of $8 million to these funds. 43




---



##### Table of Contents



Financing Activities Debt Repayments and Credit Availability Debt balances decreased by approximately $1.7 million from June 30, 2003
to June 30, 2004 reflecting principal repayments of $8.5 million, offset by our
issuance of a $6.5 million note to finance a portion of our acquisition of
Womens Capital Corporation. Scheduled principal repayments on existing debt
will be $8.5 million during the next twelve months. We have a $40 million revolving credit facility that expires on February
27, 2005. We currently have $33 million available under this facility due to
the issuance of a $7.1 million letter of credit in support of our product
liability self-insurance program. We expect to replace the existing revolving
credit facility with a larger one before it expires in February 2005. Proceeds from Equity Transactions Over the three years ending June 30, 2004, we received proceeds of
approximately $70 million from the exercise of employee stock options and share
purchases under our employee stock purchase plan. The timing and
sustainability of such proceeds are very difficult to predict because they are
highly dependent upon our stock price, which can be volatile. During March 2004, holders of warrants to purchase an aggregate of
3,375,000 shares of our common stock, consisting of 1,687,500 shares at $13.93
per share and 1,687,500 shares at $16.89 per share, exercised the warrants, in
full, through a cashless exercise. As a result, we issued 2,340,610 shares of
our common stock. We did not receive any proceeds from the issuance of the
shares but we expect to realize a cash tax benefit of approximately $15 million
from this transaction. Share Repurchase Program In August 2004, our Board of Directors authorized the repurchase of up to
$300 million of the Companys common stock in open market or in privately
negotiated transactions, pursuant to terms we deem appropriate and at such
times as we designate through the end of December 2005. The Company will hold
repurchased shares as treasury shares and may use them for general corporate
purposes, including but not limited to acquisition related transactions and for
issuance upon exercise of outstanding stock options. Funding of Employee Savings Plan On September 23, 2003, we committed to make a minimum aggregate
contribution of $11 million to the Barr Pharmaceuticals, Inc. Savings and
Retirement Plan (401(k) Plan) for the fiscal year ending June 30, 2004. We
fully funded the contribution commitment during the fiscal year. We expect to
make a similar minimum contribution commitment in September 2004 for fiscal
2005. Sufficiency of Cash Resources We believe our current cash and investment balances, cash flows from
operations and un-drawn amounts under our revolving credit facility are
adequate to fund our operations and planned capital expenditures and to
capitalize on strategic opportunities as they arise. We have and will continue
to evaluate our capital structure as part of our goal to promote long-term
shareholder value. To the extent that additional capital resources are
required, we believe that such capital may be raised by additional bank
borrowings or debt offerings or other means. 44




---



##### Table of Contents



Contractual Obligations Payments due by period for our contractual obligations at June 30, 2004
are as follows: Payments due by period($ in millions)
    
    Total
    
    Less than 1 Year
    
    1 to 3 Years
    
    4 to 5 Years
    
    ThereafterLong-term debt
    
    $
    37.1
    
    
    $
    7.0
    
    
    $
    23.3
    
    
    $
    6.8
    
    
    $
    Capital leases
    
    
    4.3
    
    
    
    1.8
    
    
    
    2.5
    
    
    
    
    
    
    
    Operating leases
    
    
    36.4
    
    
    
    3.7
    
    
    
    10.7
    
    
    
    3.2
    
    
    
    18.8Purchase obligations1
    
    
    76.8
    
    
    
    62.1
    
    
    
    11.8
    
    
    
    2.2
    
    
    
    0.7Venture Funds commitment
    
    
    21.5
    
    
    
    21.5
    
    
    
    
    
    
    
    
    
    
    
    Annual interest on fixed rate debt
    
    
    1.7
    
    
    
    0.8
    
    
    
    0.9
    
    
    
    
    
    
    
    Other long-term liabilities
    
    
    5.6
    
    
    
    4.6
    
    
    
    1.0
    
    
    
    
    
    
    
    Total
    
    $
    183.4
    
    
    $
    101.5
    
    
    $
    50.2
    
    
    $
    12.2
    
    
    $
    19.5
  (1)
    
    Purchase obligations consist mainly of commitments for raw materials used
in our manufacturing and research and development operations. In addition to the above, we have committed to make potential future
milestone payments to third parties as part of licensing and development
programs. Payments under these agreements generally become due and payable
only upon the achievement of certain developmental, regulatory and/or
commercial milestones. Critical Accounting Policies The methods, estimates and judgments we use in applying the accounting
policies most critical to our financial statements have a significant impact on
our reported results. The Securities and Exchange Commission has defined the
most critical accounting policies as the ones that are most important to the
portrayal of our financial condition and results, and/or require us to make our
most difficult and subjective judgments. Based on this definition, our most
critical policies are the following: (1) revenue recognition and related
provisions for estimated sales returns and allowances; (2) inventories and
related inventory reserves; (3) deferred taxes; (4) contingencies; and (5) the
assessment of recoverability of goodwill and other intangible assets. Although
we believe that our estimates and assumptions are reasonable, they are based
upon information available at the time the estimates and assumptions were made.
We review the factors that influence our estimates and, if necessary, adjust
them. Actual results may differ significantly from our estimates. Revenue Recognition and Sales Reserves and Allowances We recognize revenue from product sales when title and risk of loss have
transferred to our customers and when collectibility is reasonably assured. We
simultaneously record estimates for price adjustments (including shelf-stock
adjustments), product returns, chargebacks, rebates, including Medicaid
rebates, prompt payment discounts and other sales allowances. Accruals for
these estimates reduce our reported product sales and accounts receivable and,
in the case of Medicaid rebates, are recorded in our accrued
liabilities. If we believe we have not met the requirements for recognizing revenue, we
defer the recognition of product sales. In November 2003, we launched our
extended cycle oral contraceptive product, SEASONALE, but did not recognize the
revenue immediately. We monitored SEASONALEs prescription data and other
information during the months following our launch and recognized revenues once
we concluded that the product had achieved market acceptance. All of the
revenues associated with the initial launch were recognized by the end of the
year. Provisions for estimated discounts, rebates, promotional and other credits
require a lower degree of subjectivity and are less complex in nature; yet
combined, they represent a significant portion of the overall provisions.
Other
provisions, such as shelf stock adjustments, returns and chargebacks,
require more subjective judgments. These provisions are discussed in further
detail below. Shelf-stock Adjustments Shelf stock adjustments are credits issued to
reflect decreases in the selling prices of our products and are intended to
reduce a customers inventory cost to better reflect current market prices. The
determination to grant a shelf-stock credit to a customer following a price
decrease is usually at our discretion rather than contractually required. We
record allowances for shelf-stock adjustments at the time we sell products that
we 45




---



##### Table of Contents



determine will be subject to a price decrease or when market conditions
indicate that a shelf-stock adjustment is necessary to facilitate the
sell-through of our product. When deciding whether to record a reserve for a
shelf-stock adjustment, we analyze several variables, including the estimated
launch date of a competing product, the estimated decline in market price and
estimated levels of inventory held by our customers at the time of the decrease
in market price. As a result, a shelf-stock adjustment depends on a products
unique facts and circumstances. Returns- Consistent with industry practice, we maintain a return policy
that allows our customers to return product within a specified period prior to
and subsequent to the expiration date. Our estimate of the provision for
returns is based upon our historical experience with actual returns.
Additionally, we consider factors including product dating and expiration
period when we establish our provision for returns. Chargebacks- The provision for chargebacks is the most significant and
complex estimate used in the recognition of revenue. We market and sell
products directly to wholesalers, distributors, warehousing pharmacy chains,
mail order pharmacies and other direct purchasing groups. We also market
products indirectly to independent pharmacies, non-warehousing chains, managed
care organizations, and group purchasing organizations, collectively referred
to as indirect customers. We enter into agreements with some indirect
customers to establish contract pricing for certain products. These indirect
customers then independently select a wholesaler from which to purchase the
products at these contracted prices. Alternatively, we may pre-authorize
wholesalers to offer specified contract pricing to other indirect customers.
Under either arrangement, we provide credit to the wholesaler for any
difference between the contracted price with the indirect party and the
wholesalers invoice price. Such credit is called a chargeback. The provision
for chargebacks is based on expected sell-through levels by our wholesaler
customers to indirect customers, as well as estimated wholesaler inventory
levels. Accounts receivable are presented net of allowances related to the above
provisions of $142 million at June 30, 2004 and $136 million at June 30, 2003.
Accrued liabilities include $11 million and $9.5 million at June 30, 2004 and
2003, respectively, for estimated Medicaid rebates. Inventory Reserves Inventories are stated at the lower of cost, determined on a first-in,
first-out basis or market and consist of finished goods purchased from third
party manufacturers and held for distribution, as well as raw materials,
work-in-process and finished goods manufactured by us. We also capitalize
inventory costs associated with certain products prior to regulatory approval
and/or resolution of patent infringement litigation, based on managements
judgment of probable future commercial use and net realizable value. If final
regulatory approval for such products is denied or delayed, or if patent
litigation is not resolved in our favor, or if a patent litigation decision is
delayed, we may be required to expense such previously capitalized costs. We establish reserves for our inventory to reflect situations in which the
cost of the inventory is not expected to be recovered. We review our inventory
for products close to expiration and therefore not expected to be sold, for
products that have reached their expiration date and for products that are not
expected to be saleable based on our quality assurance and control standards.
The reserve for these products is equal to all or a portion of the cost of the
inventory based on the specific facts and circumstances. In evaluating whether
inventory is properly stated at the lower of cost or market, we consider such
factors as the amount of product inventory on hand, estimated time required to
sell such inventory, remaining shelf life and current and expected market
conditions, including levels of competition. We record provisions for
inventory reserves as part of cost of sales. Inventories are presented net of reserves of $24 million at June 30, 2004
and $13 million at June 30, 2003. Deferred Taxes Income taxes are accounted for under Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes. Under this method,
deferred tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the financial statement and tax
basis of assets and liabilities using enacted tax rates in effect for the years
in which the differences are expected to reverse. A valuation allowance is
provided for the portion of deferred tax assets, which are
more-likely-than-not to be unrealized. The recoverability of deferred tax
assets is dependent upon our assessment of whether it is more-likely- 46




---



##### Table of Contents



than-not
that sufficient future taxable income will be generated in the relevant tax
jurisdiction to utilize the deferred tax asset. We review our internal sales
forecasts and pre-tax earnings estimates to make our assessment about the
utilization of deferred tax assets. In the event we determine that future
taxable income will not be sufficient to utilize the deferred tax asset, we
will record a valuation allowance. If that assessment changes, we would record
a benefit on the consolidated statement of earnings. Deferred income taxes are presented net of a valuation allowance of $4.7
million at June 30, 2004 and $6.1 million at June 30, 2003. Contingencies We are subject to litigation in the ordinary course of business, including
patent, product liability and other litigation and contingencies. Legal fees
and other costs related to such litigation and contingencies are expensed as
incurred. Additionally, we assess, in consultation with counsel, the need to
record a liability for litigation and contingencies. Reserves are recorded when
we determine that a loss related to a matter is both probable and reasonably
estimable. We are primarily self-insured for potential product liability claims on
products sold on or after September 30, 2002, and we maintain self-insured
retentions and deductibles on policies covering periods prior to September 30,
2002. We maintain a self-insurance reserve, which provides an estimate of our
potential product liability claims not covered by our insurance and an estimate
of the future cost of incurred but not reported (IBNR) claims. We develop
these estimates in consultation with outside counsel, our insurance consultants
and an independent actuary. The self-insurance reserve does not include
estimated administrative or defense costs, which are expensed as incurred. Goodwill and Other Intangible Assets In connection with acquisitions, we determine the amounts assigned to
goodwill and other intangibles based on purchase price allocations. These
allocations, including an assessment of the estimated useful lives of
intangible assets, have been performed by qualified independent appraisers
using generally accepted valuation methodologies. The valuation of intangible
assets is generally based on the estimated future cash flows related to those
assets, while the value assigned to goodwill is the residual of the purchase
price over the fair value of all identifiable assets acquired and liabilities
assumed. Useful lives are determined based on the expected future period of
benefit of the asset, which considers various characteristics of the asset,
including projected cash flows. As required by SFAS No. 142, Goodwill and
Other Intangible Assets, we review goodwill for impairment annually or more
frequently if impairment indicators arise. As a result of our acquisitions, we included goodwill of $18 million on
our balance sheet as of June 30, 2004 and $14 million as of June 30, 2003. As a result of our acquisition of product rights and related intangibles
and certain product licenses, we have included $65 million and $46 million as
other intangible assets, net of accumulated amortization, on our balance sheet
as of June 30, 2004 and June 30, 2003, respectively. Recent Accounting Pronouncements Amendment of Statement 133 on Derivative Instruments and Hedging Activities In April 2003, the Financial Accounting Standards Board (FASB) issued
SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities (SFAS 149), which is generally effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. SFAS 149 clarifies the
circumstances under which a contract with an initial net investment meets the
characteristic of a derivative as discussed in SFAS No. 133, clarifies when a
derivative contains a financing component, amends the definition of an
underlying to conform it to the language used in FASB Interpretation No. 45,
Guarantor Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, and amends certain other
existing pronouncements. We currently have no involvement with derivative
financial 47




---



##### Table of Contents



instruments, and therefore the adoption of SFAS 149 did not have a
material impact on our consolidated financial statements. Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
(SFAS 150). SFAS 150 modifies the accounting for certain financial
instruments that, under previous guidance, issuers could account for as equity.
SFAS 150 requires that those instruments be classified as liabilities in
statements of financial position and affects an issuers accounting for (1)
mandatorily redeemable shares, which the issuing company is obligated to buy
back in exchange for cash or other assets, (2) instruments, other than
outstanding shares, that do or may require the issuer to buy back some of its
shares in exchange for cash or other assets, or (3) obligations that can be
settled with shares, the monetary value of which is fixed, tied solely or
predominately to a variable such as a market index, or varies inversely with
the value of the issuers shares. In addition to its requirements for the
classification and measurement of financial instruments within its scope, SFAS
150 also requires disclosures about alternative ways of settling those
instruments and the capital structure of entities, all of whose shares are
mandatorily redeemable. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS 150 did not have a material impact on our consolidated
financial statements. Environmental Matters We may have obligations for environmental safety and clean-up under
various state, local and federal laws, including the Comprehensive
Environmental Response, Compensation and Liability Act, commonly known as
Superfund. Based on information currently available, environmental
expenditures have not had, and are not anticipated to have, any material effect
on our consolidated financial statements. Effects of Inflation;
Seasonality Inflation
has had only a minimal impact on our operations in recent years.
Similarly, our business is generally not affected by seasonality. Forward-Looking Statements The preceding sections contain a number of forward-looking statements. To
the extent that any statements made in this report contain information that is
not historical, these statements are essentially forward-looking.
Forward-looking statements can be identified by their use of words such as
expects, plans, will, may, anticipates, believes, should,
intends, estimates and other words of similar meaning. These statements are
subject to risks and uncertainties that cannot be predicted or quantified and,
consequently, actual results may differ materially from those expressed or
implied by such forward-looking statements. Such risks and uncertainties
include, in no particular order:  
    
    the difficulty in predicting the timing and outcome of legal
proceedings, including patent-related matters such as patent challenge
settlements and patent infringement cases;  
    
    the outcome of litigation arising from challenging the validity or
non-infringement of patents covering our products;  
    
    the difficulty of predicting the timing of U.S. Food and Drug Administration, or FDA, approvals;  
    
    court and FDA decisions on exclusivity periods;  
    
    the ability of competitors to extend exclusivity periods for their products;
    
    our ability to complete product development activities in the timeframes and for the costs, we expect; 48




---



##### Table of Contents




    
    market and customer acceptance and demand for our pharmaceutical products;  
    
    our dependence on revenues from significant customers;  
    
    reimbursement policies of third party payors;  
    
    our dependence on revenues from significant products;  
    
    the use of estimates in the preparation of our financial statements;  
    
    the impact of competitive products and pricing on products, including the launch of authorized generics;  
    
    the ability to launch new products in the timeframes we expect;  
    
    the availability of raw materials;  
    
    the availability of any product we purchase and sell as a distributor;  
    
    the regulatory environment;  
    
    our exposure to product liability and other lawsuits and contingencies;  
    
    the increasing cost of insurance and the availability of product liability insurance coverage;  
    
    our timely and successful completion of strategic initiatives,
including integrating companies and products we acquire and
implementing our new enterprise resource planning system;  
    
    fluctuations in operating results, including the effects on such
results from spending for research and development, sales and marketing
activities and patent challenge activities; and  
    
    other risks detailed from time-to-time in our filings with the
Securities and Exchange Commission. 
 We
wish to caution each reader of this report to consider carefully
these factors as well as specific factors that may be discussed with
each forward-looking statement in this report or disclosed in our
filings with the SEC, as such factors, in some cases, could affect
our ability to implement our business strategies and may cause actual
results to differ materially from those contemplated by the
statements expressed herein. Readers are urged to carefully review
and consider these factors. We undertake no duty to update the
forward-looking statements even though our situation may change in
the future. Item 7A.Quantitative and Qualitative Disclosures About Market Risk Our exposure to market risk for a change in interest rates relates
primarily to our investment portfolio of approximately $538 million and debt
instruments of approximately $13.2 million. We do not use derivative financial
instruments. Our investment portfolio consists of cash and cash equivalents and market
auction debt securities primarily classified as available for sale. The
primary objective of our investment activities is to preserve principal while
at the same time maximizing yields without significantly increasing risk. To
achieve this objective, we maintain our portfolio in a variety of high credit
quality debt securities, including U.S. government, municipal and corporate
obligations, certificates of deposit and money market funds. Over 80% of our
portfolio matures in less than three months. The carrying value of the
investment portfolio approximates the market value at June 30, 2004 and the
value at maturity. Because our investments consist of cash equivalents and
market auction debt securities, a hypothetical 100 basis point change in
interest rates is not likely to have a material effect on our consolidated
financial statements. Approximately 68% of our debt instruments at June 30, 2004 are subject to
fixed interest rates and principal payments. The related note purchase
agreements permit us to prepay these notes prior to their scheduled maturity,
but may require us to pay a prepayment fee based on market rates at the time of
prepayment. The remaining 32% of debt instruments are primarily subject to
variable interest rates based on the prime rate or LIBOR and have fixed
principal
payments. The fair value of all debt instruments is approximately $38
million at June 30, 2004. In addition, borrowings under our $40 million
unsecured revolving credit facility bear interest at a variable rate based on
the 49




---



##### Table of Contents



prime rate, the Federal Funds rate or LIBOR. As of June 30, 2004, there was
approximately $33 million available under this facility due to the issuance of
a $7.1 million letter of credit in support of our finite risk insurance
program. We do not believe that any market risk inherent in our debt
instruments is likely to have a material effect on our consolidated financial
statements. As discussed in Note 15 in the accompanying Notes to Consolidated
Financial Statements, as of June 30, 2004, we had approximately
$13.2 million of
variable rate debt outstanding. A hypothetical 100 basis point increase in
interest rates, based on the June 30, 2004 balance, would reduce our annual net
income by approximately $84 thousand. Any future gains or losses may differ
materially from this hypothetical amount based on the timing and amount of
actual interest rate changes and the actual term loan balance. 
 Item 8.Financial Statements and Supplementary Data Our financial statements are filed together with this Form 10-K. See the
Index to Financial Statements and Financial Statement Schedules on page F-1 for
a list of the financial statements filed together with this Form 10-K. 
 Item 9.Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures None. 
 Item 9A.Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms, and that such information is accumulated and
communicated to our management, including our Chairman and Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. Management necessarily applied its judgment in
assessing the costs and benefits of such controls and procedures, which, by
their nature, can provide only reasonable assurance regarding managements
control objectives. At the conclusion of the period ended June 30, 2004, we carried out an
evaluation, under the supervision and with the participation of our management,
including the Chairman and Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures. Based upon that evaluation, the Chairman and Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective in alerting them in a timely manner to information
relating to Barr and its consolidated subsidiaries required to be disclosed in
this report. Changes in Internal Controls During
the last quarter of our fiscal year ended June 30, 2004, there have
been no changes to our internal controls over financial reporting
that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting. 
 Item 9B.Other Information None. 50




---



##### Table of Contents



PART III 
 Item 10.Directors and Executive Officers of the Registrant A
description of our directors and executive officers will be set forth
in the sections titled Election of Directors, Executive
Officers and Security Ownership of Certain Beneficial Owners and
Management  Section 16(a) Beneficial Ownership Reporting Compliance
in our Definitive Proxy Statement for our Annual Meeting of
Stockholders scheduled for October 2004 (the Proxy
Statement) and is incorporated herein by reference. 51




---



##### Table of Contents



Code of Business Conduct and Ethics The Company has adopted a Code of Business Conduct and Ethics (the Code)
that applies to all companies, their officers, directors and employees. This
Code and the charters of the Audit, Compensation and Nominating and Corporate
Governance committees are posted on the Companys website at www.barrlabs.com.
The Company intends to post any amendments to or waivers from the Code on our
website. 
 Item 11.Executive Compensation A description of our executive officers compensation will be set forth in
the sections titled Executive Compensation, Option Grants, Option
Exercises and Option Values and Executive Agreements of the Proxy Statement
and is incorporated herein by reference. 
 Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters A description of the security ownership of certain beneficial owners and
management, as well as equity compensation plan information, will be set forth
in the sections titled Ownership of Securities of the Proxy Statement and is
incorporated herein by reference. 
 Item 13.Certain Relationships and Related Transactions A description of certain relationships and related transactions will be
set forth in the section titled Certain Relationships and Related
Transactions of the Proxy Statement and is incorporated herein by reference. 
 Item 14.Principal Accounting Fees and Services A description of the fees paid to our independent auditors will be set
forth in the section titled Independent Registered Public Accountants of the Proxy
Statement and is incorporated herein by reference. 52




---



##### Table of Contents



PART IV 
 Item 15.Exhibits and Financial Statement Schedules  (a) Financial Statement Schedules: See the Index on page F-1 below.  (b) Exhibits 2.1
    
    

Agreement
and Plan of Merger, dated as of June 29, 2001, by and among Barr
Laboratories, Inc.,
Beta Merger Sub I, Inc. and Duramed Pharmaceuticals, Inc. (10)2.2
    
    
    Asset Purchase Agreement dated March 16, 2002 between Enhance Pharmaceuticals, Inc. and
Barr Laboratories, Inc. (18)2.3
    
    

Agreement
and Plan of Merger, dated as of December 31, 2003 between Barr
Pharmaceuticals, Inc., a Delaware corporation and Barr Laboratories,
Inc., a New York corporation (22)2.4
    
    

Asset
Purchase Agreement dated November 20, 2003 between Endeavor Pharmaceuticals, Inc. and
Barr Laboratories, Inc. (2)2.5
    
    

Agreement
and Plan of Merger, dated February 6, 2004, among Duramed
Pharmaceuticals, Inc., WCC Merger Sub, Inc. and Womens Capital
Corporation (21)3.1
    
    

Amended
and Restated Certificate of Incorporation of the Registrant (22)3.2
    
    

Restated
By-Laws of the Registrant (22)4.1
    
    
    The Registrant agrees to furnish to the Securities and Exchange Commission, upon
request, a copy of any instrument defining the rights of the holders of its long-term
debt wherein the total amount of securities authorized thereunder does not exceed 10% of
the total assets of the Registrant and its subsidiaries on a consolidated basis.4.3
    
    

Note
Purchase Agreement dated November 18, 1997 relating to
$10 million of Series A Senior Notes due November, 2004 and
$20 million of Series B Senior Notes due November, 2007. (1)10.1
    
    

Lease, dated March 3, 2004, between City Line Investors L.P. and Barr Research, Inc. (21)10.2
    
    
    Lease, dated February 6, 2003, between Mack-Cali Properties Co. No. 11 L.P. and Barr
Laboratories, Inc. (18)10.3
    
    

Amended
and Restated Employment Agreement with Bruce L. Downey, dated as of
October 24,
2002 (17)10.4
    
    
    1993 Stock Incentive Plan (4)10.5
    
    

Non-Qualified
Deferred Compensation Plan (2)10.6
    
    
    1993 Employee Stock Purchase Plan (5)10.7
    
    
    1993 Stock Option Plan for Non-Employee Directors (6)10.8
    
    

2002 Stock and Incentive Award Plan (16)10.9
    
    

2002 Stock Option Plan for Non-Employee Directors (16)10.10
    
    

Supply Agreement for Ciprofloxacin Hydrochloride dated
January 8, 1997 (7)10.11
    
    

Proprietary Drug Development and Marketing Agreement dated March 20, 2000 (8)
 53




---



##### Table of Contents



10.12
    
    

Description
of Excess Savings and Retirement Plan (9)10.13
    
    
    Amended and Restated Employment Agreement with Paul M. Bisaro,
dated as of October 24, 2002 (17)10.14
    
    
    Amended and Restated Employment Agreement with Carole S.
Ben-Maimon, dated as of October 24, 2002 (17)10.15
    
    
    Amended and Restated Employment Agreement with Timothy P.
Catlett, dated as of February 19, 2003 (20)10.16
    
    
    Amended and Restated Employment Agreement with William T.
McKee, dated as of February 19, 2003 (19)10.17
    
    
    Amended and Restated Employment Agreement with Fredrick J.
Killion, dated as of February 19, 2003 (19)10.18
    
    
    Amended and Restated Employment Agreement with Salah U. Ahmed,
dated as of February 19, 2003 (20)10.19
    
    
    Amended and Restated Employment Agreement with Christine A.
Mundkur, dated as of February 19, 2003 (20)10.20
    
    
    Amended and Restated Employment Agreement with Catherine F.
Higgins, dated as of February 19, 2003 (20)10.21
    
    

Employment
Agreement with Michael J. Bogda, dated as of May 15, 2003 (20)10.22
    
    

Duramed 1988 Stock Option Plan (11)10.23
    
    

Duramed
1991 Stock Option Plan for Nonemployee Directors (12)10.24
    
    

Duramed
1997 Stock Option Plan (13)10.25
    
    

Duramed
2000 Stock Option Plan (14)10.26
    
    

Duramed 1999 Nonemployee Director Stock Plan (15)21.0
    
    
    Subsidiaries of the Company23.1
    
    
    Consent of Deloitte & Touche LLP31.1
    
    
    Certification of Bruce L. Downey pursuant to Exchange
Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of William T. McKee pursuant to Exchange
Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 200232.0
    
    
    Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002(1
    )
    
    Previously filed with the Securities and Exchange
Commission as Exhibit 4-3 to the Registrants Quarterly
Report on Form 10-Q for the quarter ended December 31,
1997 and incorporated herein by reference.(2
    )
    
    Previously filed with the Securities and Exchange
Commission as an Exhibit to the Registrants
 54




---



##### Table of Contents



Quarterly
Report on Form 10-Q for the quarter ended December 31,
2003 and incorporated herein by reference.(3
    )
    
    Previously
filed with the Securities and Exchange Commission on January 6, 2004
as an Exhibit to the Registrants Current Report on Form 8-K and
incorporated herein by reference.(4
    )
    
    Previously filed with the Securities and Exchange
Commission as an Exhibit to the Registrants
Registration Statement on Form S-8 Nos. 33-73696 and
333-17349 and incorporated herein by reference.(5
    )
    
    Previously filed with the Securities and Exchange
Commission as an Exhibit to the Registrants
Registration Statement on Form S-8 No. 33-73700 and
incorporated herein by reference.(6
    )
    
    Previously filed with the Securities and Exchange
Commission as an Exhibit to the Registrants
Registration Statement on Form S-8 Nos. 33-73698 and
333-17351 incorporated herein by reference.(7
    )
    
    Previously filed with the Securities and Exchange
Commission as an Exhibit to the Registrants Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997
and incorporated herein by reference.(8
    )
    
    Previously filed with the Securities and Exchange
Commission as an Exhibit to the Registrants Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000
and incorporated herein by reference.(9
    )
    
    Previously filed with the Securities and Exchange
Commission as an Exhibit to the Registrants Annual
Report on Form 10-K for the year ended June 30, 2000 and
incorporated herein by reference.(10
    )
    
    Previously filed with the Securities and Exchange
Commission as Annex 1 to the Registrants
Registration Statement No. 333-66986 on Form S-4 on
August 7, 2001 and incorporated herein by reference.(11
    )
    
    Previously filed with the Securities and Exchange
Commission as an Exhibit to the Duramed Pharmaceuticals,
Inc. Proxy Statement relating to the 1993 Annual Meeting
of Stockholders and incorporated herein by reference.(12
    )
    
    Previously filed with the Securities and Exchange
Commission as an Exhibit to the Duramed Pharmaceuticals,
Inc. Proxy Statement relating to the 1998 Annual Meeting
of Stockholders and incorporated herein by reference.(13
    )
    
    Previously filed with the Securities and Exchange
Commission as an Exhibit to the Duramed Pharmaceuticals,
Inc. Proxy Statement relating to the 1997 Annual Meeting
of Stockholders and incorporated herein by reference.(14
    )
    
    Previously filed with the Securities and Exchange
Commission as an Exhibit to the Duramed Pharmaceuticals,
Inc. Proxy Statement relating to the 2000 Annual Meeting
of Stockholders and incorporated herein by reference.(15
    )
    
    Previously filed with the Securities and Exchange
Commission as an Exhibit to the Duramed Pharmaceuticals,
Inc. Annual Report on Form 10-K for the year ended
December 31, 1998 and incorporated herein by reference.(16
    )
    
    Previously filed with the Securities and Exchange
Commission as an Appendix to the Registrants Proxy
Statement relating to the 2002 Annual Meeting of
Stockholders and incorporated herein by reference.(17
    )
    
    Previously
filed with the Securities and Exchange Commission as an Exhibit to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003 and incorporated herein by reference.
 55




---



##### Table of Contents



(18
    )
    
    Previously filed with the Securities and Exchange
Commission as an Exhibit to the Registrants Annual
Report on Form 10-K for the year ended June 30, 2002 and
incorporated herein by reference.(19
    )
    
    Previously filed with the Securities and Exchange
Commission as an Exhibit to the Registrants Quarterly
Report on Form 10-Q for the quarter ended March 31, 2003
and incorporated herein by reference.(20
    )
    
    Previously filed with the Securities and Exchange
Commission as an Exhibit to the Registrants Annual
Report on Form 10-K for the year ended June 30, 2003
and incorporated herein by reference.(21
    )
    

Previously
filed with the Securities and Exchange Commission as an Exhibit to the
Registrants Quarterly Report on Form 10-Q for the quarter ended
March 31, 2004 and incorporated herein by reference.
 56




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized. BARR PHARMACEUTICALS, INC.By:
    
    /s/ Bruce L. DowneyBruce L. DowneyChairman of the Board andChief Executive Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated. Signature
    
    Title
    
    Date/s/ Bruce L. Downey
Bruce L. Downey
    
    Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
    
    August 23, 2004/s/ William T. McKee
William T. McKee
    
    Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
    
    August 23, 2004/s/ Carole S. Ben-Maimon
Carole S. Ben-Maimon
    
    Director
    
    August 23, 2004/s/ Paul M. Bisaro
Paul M. Bisaro
    
    Director
    
    August 23, 2004/s/ Harold N. Chefitz
Harold N. Chefitz
    
    Director
    
    August 23, 2004/s/ Richard R. Frankovic
Richard R. Frankovic
    
    Director
    
    August 23, 2004/s/ James S. Gilmore III
James S. Gilmore III
    
    Director
    
    August 23, 2004/s/ Jack M. Kay
Jack M. Kay
    
    Director
    
    August 23, 2004/s/ Peter R. Seaver
Peter R. Seaver
    
    Director
    
    August 23, 2004/s/ George P. Stephan
George P. Stephan
    
    Director
    
    August 23, 2004
 57




---



##### Table of Contents



PART II Item 8.Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of June 30, 2004 and 2003
    
    
    F-3Consolidated Statements of Operations for the years ended June 30, 2004, 2003 and 2002
    
    
    F-4Consolidated Statements of Shareholders Equity for the years ended June 30, 2004, 2003 and 2002
    
    
    F-5Consolidated Statements of Cash Flows for the years ended June 30, 2004, 2003 and 2002
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7Schedule II - Valuation and Qualifying Accounts for the years ended June 30, 2004, 2003 and 2002
    
    
    S-1




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Barr Pharmaceuticals, Inc.: We have audited the accompanying consolidated balance sheets of Barr
Pharmaceuticals, Inc. and subsidiaries (the Company) as of June 30, 2004 and
2003, and the related consolidated statements of operations, shareholders
equity, and cash flows for each of the three years in the period ended June 30,
2004. Our audits also included the financial statement schedule listed in the
Index at Item 15. These financial statements and financial statement schedule
are the responsibility of the Companys management. Our responsibility is to
express an opinion on the financial statements and financial statement schedule
based on our audits. We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at June 30, 2004
and 2003, and the results of their operations and their cash flows for each of
the three years in the period ended June 30, 2004, in conformity with
accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP Stamford, Connecticut
August 17, 2004
 F-2




---



##### Table of Contents



BARR PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
 June 30,
    
    June 30,2004
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    419,878
    
    
    $
    367,142Marketable securities
    
    
    32,376
    
    
    
    31,682Accounts receivable, net
    
    
    153,890
    
    
    
    221,652Other receivables
    
    
    60,848
    
    
    
    31,136Inventories, net
    
    
    150,252
    
    
    
    163,926Deferred income taxes
    
    
    46,077
    
    
    
    27,375Prepaid expenses and other current assets
    
    
    14,925
    
    
    
    6,873Total current assets
    
    
    878,246
    
    
    
    849,786Property, plant and equipment, net
    
    
    236,831
    
    
    
    223,516Deferred income taxes
    
    
    35,016
    
    
    
    5,589Marketable securities
    
    
    89,143
    
    
    
    15,055Other intangible assets
    
    
    64,897
    
    
    
    45,949Goodwill
    
    
    18,211
    
    
    
    14,118Other assets
    
    
    10,925
    
    
    
    26,924Total assets
    
    $
    1,333,269
    
    
    $
    1,180,937Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    61,089
    
    
    $
    188,852Accrued liabilities
    
    
    117,970
    
    
    
    58,925Current portion of long-term debt and capital lease obligations
    
    
    8,447
    
    
    
    8,510Income taxes payable
    
    
    20,139
    
    
    
    11,316Total current liabilities
    
    
    207,645
    
    
    
    267,603Long-term debt and capital lease obligations
    
    
    32,355
    
    
    
    34,027Other liabilities
    
    
    51,223
    
    
    
    11,312Commitments & Contingencies (Note 23)Shareholders equity:Preferred stock $1 par value per share; authorized 2,000,000; none issued
    
    
    
    
    
    
    Common stock $.01 par value per share; authorized 200,000,000;
issued 104,916,103 and 67,066,196 in 2004 and 2003, respectively
    
    
    1,049
    
    
    
    671Additional paid-in capital
    
    
    377,024
    
    
    
    326,001Retained earnings
    
    
    664,681
    
    
    
    542,210Accumulated other comprehensive loss
    
    
    
    
    
    
    (179
    )1,042,754
    
    
    
    868,703Treasury
stock at cost; 420,597 and 280,398 shares in 2004 and 2003, respectively
    
    
    (708
    )
    
    
    (708
    )Total shareholders equity
    
    
    1,042,046
    
    
    
    867,995Total liabilities and shareholders equity
    
    $
    1,333,269
    
    
    $
    1,180,937
 SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS F-3




---



##### Table of Contents



BARR PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended June 30, 2004, 2003 and 2002
 For the Years Ended June 30,2004
    
    2003
    
    2002(in thousands, except per share amounts)Revenues:Product sales
    
    $
    1,296,709
    
    
    $
    894,888
    
    
    $
    1,171,358Development and other revenue
    
    
    12,379
    
    
    
    7,976
    
    
    
    17,626Total revenues
    
    
    1,309,088
    
    
    
    902,864
    
    
    
    1,188,984Costs and expenses:Cost of sales
    
    
    632,745
    
    
    
    424,099
    
    
    
    676,323Selling, general and administrative
    
    
    314,500
    
    
    
    160,978
    
    
    
    111,886Research and development
    
    
    168,995
    
    
    
    91,207
    
    
    
    75,697Merger-related costs
    
    
    
    
    
    
    
    
    
    
    31,449Earnings from operations
    
    
    192,848
    
    
    
    226,580
    
    
    
    293,629Proceeds from patent challenge settlement
    
    
    
    
    
    
    31,396
    
    
    
    31,958Interest income
    
    
    5,768
    
    
    
    6,341
    
    
    
    7,824Interest expense
    
    
    2,643
    
    
    
    1,474
    
    
    
    3,530Other (expense) income
    
    
    (1,533
    )
    
    
    (128
    )
    
    
    7,656Earnings before income taxes
    
    
    194,440
    
    
    
    262,715
    
    
    
    337,537Income tax expense
    
    
    71,337
    
    
    
    95,149
    
    
    
    125,318Net earnings
    
    
    123,103
    
    
    
    167,566
    
    
    
    212,219Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    457Deemed dividend on convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    1,493Net earnings available to common shareholders
    
    $
    123,103
    
    
    $
    167,566
    
    
    $
    210,269Earnings per common share - basic
    
    $
    1.21
    
    
    $
    1.69
    
    
    $
    2.17Earnings per common share - diluted
    
    $
    1.15
    
    
    $
    1.62
    
    
    $
    2.06Weighted average shares
    
    
    101,823
    
    
    
    99,125
    
    
    
    96,998Weighted average shares - diluted
    
    
    106,661
    
    
    
    103,592
    
    
    
    102,203
 SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS F-4




---



##### Table of Contents



BARR PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY For the Years Ended June 30, 2004, 2003 and 2002
 (in thousands, except share amounts)
 Additional
    
    
    
    
    
    AccumulatedCommon Stock
    
    Additional
    
    Paid
    
    
    
    
    
    Other
    
    Treasury Stock
    
    TotalPaid
    
    in Capital -
    
    Retained
    
    Comprehensive
    
    
    
    ShareholdersShares
    
    Amount
    
    in Capital
    
    Warrants
    
    Earnings
    
    Income / (Loss)
    
    Shares
    
    Amount
    
    EquityBalance, July 1, 2001
    
    
    42,333,524
    
    
    $
    424
    
    
    $
    239,264
    
    
    $
    16,418
    
    
    $
    160,347
    
    
    $
    337
    
    
    
    176,932
    
    
    $
    (13
    )
    
    $
    416,777Comprehensive income:Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    212,219
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    212,219Unrealized loss on marketable
securities, net of tax of $168
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (238
    )
    
    
    
    
    
    
    
    
    
    
    (238
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    211,981Pooling adjustments
    
    
    125,590
    
    
    
    (1
    )
    
    
    1,219
    
    
    
    
    
    
    
    2,551
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,769Tax benefit of stock incentive plans
    
    
    
    
    
    
    
    
    
    
    5,611
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,611Issuance of stock in connection
with benefit plans
    
    
    2,349
    
    
    
    
    
    
    
    177
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    177Issuance of common stock for
exercised stock options and
employees stock purchase plans
    
    
    797,380
    
    
    
    8
    
    
    
    19,882
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,890Issuance of common stock for
exercised warrants
    
    
    21,565
    
    
    
    2
    
    
    
    762
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    764Conversion of preferred stock
    
    
    512,387
    
    
    
    5
    
    
    
    8,841
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,846Deemed dividend on convertible
preferred stock
    
    
    
    
    
    
    
    
    
    
    (80
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80
    )Dividend on convertible preferred
stock
    
    
    
    
    
    
    
    
    
    
    (457
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (457
    )Cash in lieu of fractional shares
    
    
    (625
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (51
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (51
    )Common stock acquired for treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    (695
    )
    
    
    (695
    )Balance, June 30, 2002
    
    
    43,792,170
    
    
    
    438
    
    
    
    275,219
    
    
    
    16,418
    
    
    
    375,066
    
    
    
    99
    
    
    
    186,932
    
    
    
    (708
    )
    
    
    666,532Comprehensive income:Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    167,566
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    167,566Unrealized loss on marketable
securities, net of tax of $170
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (278
    )
    
    
    
    
    
    
    
    
    
    
    (278
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    167,288Tax benefit of stock incentive plans
    
    
    
    
    
    
    
    
    
    
    10,912
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,912Issuance of common stock for
exercised stock options and
employees stock purchase plans
    
    
    1,020,032
    
    
    
    10
    
    
    
    23,453
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,463Issuance of common stock for
exercised warrants
    
    
    83,940
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock split (3-for-2)
    
    
    22,170,054
    
    
    
    222
    
    
    
    
    
    
    
    
    
    
    
    (422
    )
    
    
    
    
    
    
    93,466
    
    
    
    
    
    
    
    (200
    )Balance, June 30, 2003
    
    
    67,066,196
    
    
    
    671
    
    
    
    309,583
    
    
    
    16,418
    
    
    
    542,210
    
    
    
    (179
    )
    
    
    280,398
    
    
    
    (708
    )
    
    
    867,995Comprehensive income:Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    123,103
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    123,103Reclassification adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    179
    
    
    
    
    
    
    
    
    
    
    
    179Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    123,282Tax benefit of stock incentive plans
and warrants
    
    
    
    
    
    
    
    
    
    
    25,262
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,262Issuance of common stock for
exercised stock options and
employees stock purchase plans
    
    
    1,456,808
    
    
    
    14
    
    
    
    25,784
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,798Issuance of common stock for
exercised warrants
    
    
    2,340,610
    
    
    
    23
    
    
    
    16,395
    
    
    
    (16,418
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0Stock split (3-for-2)
    
    
    34,052,489
    
    
    
    341
    
    
    
    
    
    
    
    
    
    
    
    (632
    )
    
    
    
    
    
    
    140,199
    
    
    
    
    
    
    
    (291
    )Balance, June 30, 2004
    
    
    104,916,103
    
    
    $
    1,049
    
    
    $
    377,024
    
    
    $
    
    
    
    $
    664,681
    
    
    $
    
    
    
    
    420,597
    
    
    $
    (708
    )
    
    $
    1,042,046
 SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS F-5




---



##### Table of Contents



BARR PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended June 30, 2004, 2003 and 2002
 (in thousands of dollars)
 2004
    
    2003
    
    2002CASH FLOWS FROM OPERATING ACTIVITIES:Net earnings
    
    $
    123,103
    
    
    $
    167,566
    
    
    $
    212,219Adjustments to reconcile net earnings to net cash provided by operating activities:Depreciation and amortization
    
    
    32,059
    
    
    
    22,713
    
    
    
    15,290Deferred income tax (benefit) expense
    
    
    (44,330
    )
    
    
    6,684
    
    
    
    6,389Write-off of intangible asset
    
    
    22,333
    
    
    
    1,330
    
    
    
    Provision for losses on loans to Natural Biologics
    
    
    16,079
    
    
    
    
    
    
    
    Other
    
    
    17,699
    
    
    
    362
    
    
    
    507Tax benefit of stock incentive plans and warrants
    
    
    25,262
    
    
    
    10,912
    
    
    
    5,611Write-off of in-process research and development associated with acquisitions
    
    
    45,900
    
    
    
    3,946
    
    
    
    1,000Changes in assets and liabilities:(Increase) decrease in:Accounts receivable and other receivables, net
    
    
    38,081
    
    
    
    (126,390
    )
    
    
    (5,155
    )Inventories, net
    
    
    13,771
    
    
    
    (12,793
    )
    
    
    (8,304
    )Prepaid expenses
    
    
    (8,052
    )
    
    
    923
    
    
    
    (844
    )Other assets
    
    
    (201
    )
    
    
    (10,391
    )
    
    
    368Increase (decrease) in:Accounts payable, accrued liabilities and other
liabilities
    
    
    (32,428
    )
    
    
    93,951
    
    
    
    8,219Income taxes payable
    
    
    8,823
    
    
    
    1,515
    
    
    
    (475
    )Net cash provided by operating activities
    
    
    258,099
    
    
    
    160,328
    
    
    
    234,825CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property, plant and equipment
    
    
    (46,907
    )
    
    
    (80,617
    )
    
    
    (47,205
    )Acquisitions, net of cash acquired
    
    
    (90,563
    )
    
    
    (25,992
    )
    
    
    (46,288
    )Purchases of marketable securities, net
    
    
    (73,443
    )
    
    
    (29,400
    )
    
    
    (15,000
    )Other
    
    
    (4,935
    )
    
    
    (6,169
    )
    
    
    (4,835
    )Net cash used in investing activities
    
    
    (215,848
    )
    
    
    (142,178
    )
    
    
    (113,328
    )CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments on long-term debt and capital leases
    
    
    (8,522
    )
    
    
    (5,528
    )
    
    
    (12,166
    )Net borrowings under line of credit
    
    
    
    
    
    
    
    
    
    
    (20,316
    )Principal payment on note assumed in acquisition
    
    
    (6,500
    )
    
    
    
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    (695
    )Proceeds from exercise of stock options and employee stock purchases
    
    
    25,798
    
    
    
    23,463
    
    
    
    20,655Dividends paid on preferred stock
    
    
    
    
    
    
    
    
    
    
    (11
    )Other
    
    
    (291
    )
    
    
    (200
    )
    
    
    (50
    )Net cash provided by (used in) financing activities
    
    
    10,485
    
    
    
    17,735
    
    
    
    (12,583
    )Increase in cash and cash equivalents
    
    
    52,736
    
    
    
    35,885
    
    
    
    108,914Cash and cash equivalents at beginning of period
    
    
    367,142
    
    
    
    331,257
    
    
    
    222,343Cash and cash equivalents at end of period
    
    $
    419,878
    
    
    $
    367,142
    
    
    $
    331,257SUPPLEMENTAL CASH FLOW DATA:Cash paid during the period:Interest, net of portion capitalized
    
    $
    2,658
    
    
    $
    1,455
    
    
    $
    3,510Income taxes
    
    $
    80,733
    
    
    $
    76,039
    
    
    $
    113,563
 SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS F-6




---



##### Table of Contents



BARR PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for per share amounts) (1) Summary of Significant Accounting Policies (a) Principles of Consolidation and Other Matters Barr Pharmaceuticals, Inc. (BPI), a holding company that operates
through its principal subsidiaries, Barr Laboratories, Inc. and Duramed
Pharmaceuticals, Inc., is engaged in the development, manufacture and marketing
of generic and proprietary pharmaceuticals. BPI is a Delaware corporation that
was formed in December 2003, in connection with the reincorporation of Barr
Laboratories, Inc., a New York corporation (Barr-NY). The reincorporation was
accomplished by the merger of Barr-NY into BPI on December 31, 2003, with BPI
as the surviving entity. Prior to the merger, Barr-NY contributed its principal
operating assets to Barr Laboratories, Inc., a newly formed, wholly-owned
subsidiary incorporated in Delaware. References to Barr or the Company
herein include BPI and its subsidiaries. The Company, when used in the context of the Company and Duramed, refers
to pre-merger Barr. All significant intercompany balances and transactions have
been eliminated in consolidation. Sherman Delaware, Inc. owned approximately 9.9% of the outstanding common
stock of the Company at June 30, 2004. Dr. Bernard C. Sherman is a principal
stockholder of Sherman Delaware, Inc. and was a Director of Barr Laboratories,
Inc. until October 24, 2002 (see Note 17). On October 24, 2001, the Company completed a merger with Duramed
Pharmaceuticals, Inc. (Duramed), a developer, manufacturer, and marketer of
prescription drug products focusing on womens health and the hormone therapy
markets. The merger qualified as a tax-free reorganization and was accounted
for as a pooling-of-interests for financial reporting purposes. Accordingly, in
accordance with accounting principles generally accepted in the United States
of America and pursuant to Regulation S-X of the U.S. Securities and Exchange
Commission, all financial data of the Company presented in these financial
statements has been restated as described below to include the historical
financial data of Duramed. The Company and Duramed had different fiscal
year-ends. Duramed had a calendar year-end, whereas the Companys fiscal year
ends on June 30th. Financial information for the fiscal year ended June 30,
2002 is presented as if the Company and Duramed were merged on July 1, 2001. On June 6, 2002, the Company completed the purchase of certain assets and
assumption of certain liabilities of Enhance Pharmaceuticals, Inc. (Enhance).
The operating results of Enhance are included in the consolidated financial
statements subsequent to the June 6, 2002 acquisition date. On November 20, 2003, the Company completed the purchase of substantially
all of the assets of Endeavor Pharmaceuticals, Inc. (Endeavor). The operating
results of Endeavor are included in the consolidated financial statements
subsequent to the November 20, 2003 acquisition date. On February 25, 2004, the Company completed the purchase of 100% of the
outstanding shares of Womens Capital Corporation (WCC). The operating
results of WCC are included in the consolidated financial statements subsequent
to the February 25, 2004 acquisition date. Certain amounts in the prior years financial statements have been
reclassified to conform with the current year presentation. (b) Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and use assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. F-7




---



##### Table of Contents



The most significant estimates made by management include those made in
the areas of revenue recognition and sales returns and allowances, including
shelf stock adjustments and chargebacks; inventory reserves; deferred taxes;
contingencies; and the assessment of the recoverability of goodwill and other
intangible assets. Management periodically evaluates estimates used in the preparation of the
consolidated financial statements for continued reasonableness. Appropriate
adjustments, if any, to the estimates used are made prospectively based on such
periodic evaluations. (c) Revenue Recognition Product sales The Company recognizes product sales revenue when title and risk of loss
have transferred to the customer, when estimated provisions for product
returns, rebates, including Medicaid rebates, chargebacks and other sales
allowances are reasonably determinable, and when collectibility is reasonably
assured. Accruals for these provisions are presented in the consolidated
financial statements as reductions to revenues. Accounts receivable are
presented net of allowances relating to the above provisions of $141,873 and
$136,059 at June 30, 2004 and 2003, respectively. Included in accrued
liabilities are $11,413 and $9,468 relating to estimated Medicaid rebates at
June 30, 2004 and 2003, respectively. Development and other revenue Development and other revenue includes: reimbursements relating to
research and development contracts; licensing fees; and royalties and profit
splits on certain products. The Company recognizes revenues under: 1) research
and development agreements as it performs the related research and development;
2) license fees over the life of the product license; and 3) royalties based
upon the amounts earned in specific periods. (d) Sales Returns and Allowances At the time of sale, the Company simultaneously records estimates for
various costs, which reduce product sales. These costs include estimates for
price adjustments, product returns, chargebacks, rebates, including Medicaid
rebates, prompt payment discounts and other sales allowances. In addition, the
Company records allowances for shelf-stock adjustments when the conditions are
appropriate. Estimates for sales allowances such as product returns, rebates
and chargebacks are based on a variety of factors including actual return
experience of that product or similar products, rebate arrangements for each
product, and estimated sales by our wholesale customers to other third parties
who have contracts with Barr. Actual experience associated with any of these
items may be different than the Companys estimates. Barr regularly reviews the
factors that influence its estimates and, if necessary, makes adjustments when
it believes that actual product returns, credits and other allowances may
differ from established reserves. The Company often issues credits to customers for inventory remaining on
their shelves following a decrease in the market price of a generic
pharmaceutical product. These credits, commonly referred to in the
pharmaceutical industry as shelf-stock adjustments, can then be used by
customers to offset future amounts owing to the Company under invoices for
future product deliveries. The shelf-stock adjustment is intended to reduce a
customers inventory cost to better reflect current market prices. The
determination to grant a shelf-stock adjustment to a customer following a price
decrease is usually at the Companys discretion rather than contractually
required. Allowances for shelf-stock adjustments are recorded at the time Barr
sells products it believes will be subject to a price decrease or when market
conditions indicate that a shelf-stock adjustment is necessary to facilitate
the sell-through of its product. When determining whether to record a
shelf-stock adjustment and the amount of any such adjustment, the Company
analyzes several variables including the estimated launch dates of a competing
product, the estimated decline in market price and estimated levels of
inventory held by the customer at the time of the decrease in market price. As
a result, a shelf-stock reserve depends on a products unique facts and
circumstances. F-8




---



##### Table of Contents



(e) Inventories Inventories are stated at the lower of cost, determined on a first-in,
first-out (FIFO) basis, or market. The Company establishes reserves for its
inventory to reflect situations in which the cost of the inventory is not
expected to be recovered. The Company regularly reviews its inventory,
including when product is close to expiration and is not expected to be sold,
when product has reached its expiration date, or when product is not expected
to be saleable based on the Companys quality assurance and control standards.
The reserve for these products is equal to all or a portion of the cost of the
inventory based on the specific facts and circumstances. In evaluating whether
inventory is stated at the lower of cost or market, management considers such
factors as the amount of inventory on hand, estimated time required to sell
such inventory, remaining shelf life and current and expected market
conditions, including levels of competition. The Company records provisions for
inventory reserves as part of cost of sales. (f) Income Taxes Income taxes are accounted for under SFAS No. 109, Accounting for Income
Taxes. Under this method, deferred tax assets and liabilities are recognized
for the differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the years in which the
differences are expected to reverse. A valuation allowance is provided for the
portion of deferred tax assets that are more-likely-than-not to be
unrealized. Deferred tax assets and liabilities are measured using enacted tax
rates and laws. (g) Litigation The Company is subject to litigation in the ordinary course of business
and also to certain other contingencies (see Note 23). Legal fees and other
expenses related to litigation and contingencies are recorded as incurred.
Additionally, the Company, in consultation with its counsel, assesses the need
to record a liability for litigation and contingencies on a case-by-case basis.
Accruals are recorded when the Company determines that a loss related to a
matter is both probable and reasonably estimable. (h) Self-Insurance The Company is primarily self-insured for potential product liability
claims on products sold on or after September 30, 2002, and it maintains
self-insured retentions and deductibles on policies covering periods prior to
September 30, 2002. The Company maintains a self-insurance reserve, which
provides an estimate of potential product liability claims not covered by
insurance and an estimate of the future cost of incurred but not reported
(IBNR) claims. The Company develops these estimates in consultation with
outside counsel, its insurance consultants and an independent actuary. The
self-insurance reserve does not include estimated administrative or defense
costs which are expensed as incurred. (i) Goodwill and Other Intangible Assets In connection with acquisitions, the Company determines the amounts
assigned to goodwill and intangibles based on purchase price allocations. These
allocations, including an assessment of the estimated useful lives of
intangible assets, have been performed by qualified independent appraisers
using generally accepted valuation methodologies. The valuation of intangible
assets is generally based on the estimated future cash flows related to those
assets, while the value assigned to goodwill is the residual of the purchase
price over the fair value of all identifiable assets acquired and liabilities
assumed. Useful lives are determined based on the expected future period of
benefit of the asset, which considers various characteristics of the asset,
including estimated cash flows. As required by Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets,
the Company reviews goodwill for impairment annually, or more frequently if
impairment indicators arise. (j) Credit and Market Risk F-9




---



##### Table of Contents



Financial instruments that potentially subject the Company to credit risk
consist principally of interest-bearing investments and trade receivables. The
Company performs ongoing credit evaluations of its customers financial
condition and generally does not require collateral from its customers. (k) Cash and Cash Equivalents Cash equivalents consist of short-term, highly liquid investments
including market auction debt securities with maturities of three months or
less and with interest rates that are re-set in intervals of 7 to 49 days,
which are readily convertible into cash at par value, which approximates cost. (l) Property, Plant and Equipment Property, plant and equipment is recorded at cost. Depreciation is
recorded on a straight-line basis over the estimated useful lives of the
related assets. Amortization of capital lease assets is included in
depreciation expense. Leasehold improvements are amortized on a straight-line
basis over the shorter of their useful lives or the terms of the respective
leases. The estimated useful lives of the major classification of depreciable
assets are: YearsBuildings
    
    
    30-45Building improvements
    
    
    10Machinery and equipment
    
    
    3-10Leasehold improvements
    
    
    2-10
 Maintenance and repairs are charged to operations as incurred; renewals
and betterments are capitalized. (m) Stock-Based Compensation The Company has three stock-based employee compensation plans, two
stock-based non-employee director compensation plans and an employee stock
purchase plan, which are described more fully in Note 19. The Company accounts
for these plans under the intrinsic value method described in Accounting
Principles Board Opinion No. 25 Accounting for Stock Issued to Employees, and
related Interpretations. Under the intrinsic value method, no stock-based
employee compensation cost is reflected in net income. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation. F-10




---



##### Table of Contents



For the Year Ended June 30,2004
    
    2003
    
    2002NET INCOME, AS REPORTED
    
    $
    123,103
    
    
    $
    167,566
    
    
    $
    210,269Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects
    
    
    
    
    
    
    
    
    
    
    387Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects
    
    
    12,714
    
    
    
    6,577
    
    
    
    17,572PRO FORMA NET INCOME
    
    $
    110,389
    
    
    $
    160,989
    
    
    $
    193,084EARNINGS PER SHARE:Basic - as reported
    
    $
    1.21
    
    
    $
    1.69
    
    
    $
    2.17Basic - pro forma
    
    $
    1.08
    
    
    $
    1.63
    
    
    $
    1.99Diluted - as reported
    
    $
    1.15
    
    
    $
    1.62
    
    
    $
    2.06Diluted - pro forma
    
    $
    1.03
    
    
    $
    1.55
    
    
    $
    1.89
 The pro forma results for fiscal 2002 reflect the accelerated vesting of
options as a result of the merger with Duramed. For all plans, the fair value of each option grant was estimated at the
date of grant using the Black-Scholes Option Pricing Model with the following
weighted-average assumptions: Year Ended June 30,2004
    
    2003
    
    2002Average expected term (years)
    
    
    4
    
    
    
    4
    
    
    
    3Risk-free interest rate
    
    
    2.19
    %
    
    
    2.29
    %
    
    
    3.62
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility
    
    
    54.11
    %
    
    
    53.73
    %
    
    
    46.96
    %Fair value of options granted at market
    
    $
    16.78
    
    
    $
    15.77
    
    
    $
    17.11
 (n) Research and Development Research and development costs, which consist principally of product
development costs as well as in-process research and development costs as they
relate to acquired products which have not received approval from the U.S. Food
and Drug Administration (FDA), are charged to operations as incurred. (o) Shipping and Handling Costs Shipping and handling costs, which approximated $1,702, $1,591 and $1,533
in fiscal 2004, 2003 and 2002, respectively, were included in selling, general
and administrative expenses. (p) Stock Split On February 13, 2004, the Companys Board of Directors declared a 3-for-2
stock split to be effected in the form of a 50% stock dividend payable on March
16, 2004. On that date, approximately 34.5 million additional shares of common
stock were distributed to shareholders of record at the close of business on
February 23, 2004. F-11




---



##### Table of Contents



On February 18, 2003, the Companys Board of Directors declared a 3-for-2
stock split effected in the form of a 50% stock dividend. Approximately 22.2
million additional shares of common stock were distributed on March 17, 2003 to
shareholders of record at the close of business on February 28, 2003. All applicable prior period share and per share amounts have been adjusted
for the stock splits. (q) Earnings Per Share As discussed above, on October 24, 2001, the Company completed a merger
with Duramed where the Company issued approximately 16.875 million shares of
its common stock for all the outstanding common stock of Duramed and exchanged
all options and warrants to purchase Duramed stock for options and warrants to
purchase approximately 2.7 million shares of the Companys common stock. The following is a reconciliation of the numerators and denominators used
to calculate earnings per common share (EPS) as presented in the consolidated
statements of operations: 2004
    
    2003
    
    2002Net earnings
    
    $
    123,103
    
    
    $
    167,566
    
    
    $
    212,219Dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    457Deemed dividend on convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    1,493Numerator for basic and diluted earnings per share -
earnings available for common stockholders
    
    $
    123,103
    
    
    $
    167,566
    
    
    $
    210,269Earnings per common share - basic:Numerator: earnings available for common shareholders
    
    $
    123,103
    
    
    $
    167,566
    
    
    $
    210,269Denominator: weighted average shares
    
    
    101,823
    
    
    
    99,125
    
    
    
    96,998Earnings per common share - basic
    
    $
    1.21
    
    
    $
    1.69
    
    
    $
    2.17Earnings per common share - diluted:Numerator: earnings available for common shareholders
    
    $
    123,103
    
    
    $
    167,566
    
    
    $
    210,269Denominator: weighted average shares - diluted
    
    
    106,661
    
    
    
    103,592
    
    
    
    102,203Earnings per common share - diluted
    
    $
    1.15
    
    
    $
    1.62
    
    
    $
    2.06Calculation of weighted average
common shares - dilutedWeighted average shares
    
    
    101,823
    
    
    
    99,125
    
    
    
    96,998Effect of dilutive options and warrants
    
    
    4,838
    
    
    
    4,467
    
    
    
    5,205Weighted average shares - diluted
    
    
    106,661
    
    
    
    103,592
    
    
    
    102,203
 2004
    
    2003
    
    2002(In whole share amounts)Not included in the calculation of diluted earnings per
share because their impact is antidilutive:Stock options outstanding
    
    
    56,841
    
    
    
    1,898,811
    
    
    
    1,699,182Preferred if converted
    
    
    
    
    
    
    
    
    
    
    1,139,229
 (r) Deferred Financing Fees F-12




---



##### Table of Contents



All debt issuance costs are being amortized on a straight-line basis over
the life of the related debt, which matures in 2007 and 2010. The total
unamortized amounts of $194 and $310 at June 30, 2004 and 2003, respectively,
are included in other assets in the consolidated balance sheets. (s) Fair Value of Financial Instruments Cash, Accounts Receivable, Other Receivables and Accounts Payable - The
carrying amounts of these items are a reasonable estimate of their fair value. Marketable Securities - Marketable securities are recorded at their fair
value (see Note 8). Other Assets - Investments that do not have a readily determinable market
value are recorded at cost, as it is a reasonable estimate of fair value or
current realizable value. Long-Term Debt - The fair value at June 30, 2004 and 2003 is estimated at
$38,000 and $40,000, respectively (see Note 15 for carrying value). 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, 2004. 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. (t) Advertising and Promotion Costs Costs associated with advertising and promotion are expensed in the period
in which the advertising is used and these costs are included in selling,
general and administrative expenses. Advertising and promotion expenses totaled
approximately $45,637, $21,377 and $4,678 for the years ending June 30, 2004,
2003 and 2002, respectively. (u) Asset Impairment The Company reviews the carrying value of its long-term assets for
impairment whenever events and circumstances indicate that the carrying value
of an asset may not be recoverable from the estimated future cash flows
expected to result from its use and eventual disposition. In cases where
undiscounted expected future cash flows are less than the carrying value, an
impairment loss is recognized equal to an amount by which the carrying value
exceeds the fair value of assets. (v) New Accounting Pronouncements Amendment of Statement 133 on Derivative Instruments and Hedging Activities In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities (SFAS 149), which is
generally effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. SFAS 149
clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative as discussed in SFAS No. 133,
clarifies when a derivative contains a financing component, amends the
definition of an underlying to conform it to the language used in FASB
Interpretation No. 45, Guarantor Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, and
amends certain other existing pronouncements. The Company currently has no
involvement with derivative financial instruments, and therefore the adoption
of SFAS 149 did not have a material impact on its consolidated financial
statements. F-13




---



##### Table of Contents



Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
(SFAS 150). SFAS 150 modifies the accounting for certain financial
instruments that, under previous guidance, issuers could account for as equity.
SFAS 150 requires that those instruments be classified as liabilities in
statements of financial position and affects an issuers accounting for (1)
mandatorily redeemable shares, which the issuing company is obligated to buy
back in exchange for cash or other assets, (2) instruments, other than
outstanding shares, that do or may require the issuer to buy back some of its
shares in exchange for cash or other assets, or (3) obligations that can be
settled with shares, the monetary value of which is fixed, tied solely or
predominantly to a variable such as a market index, or varies inversely with
the value of the issuers shares.
In addition to its requirements for the classification and measurement of
financial instruments within its scope, SFAS 150 also requires disclosures
about alternative ways of settling those instruments and the capital structure
of entities, all of whose shares are mandatorily redeemable. SFAS 150 is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 did not have a material
impact on the Companys consolidated financial statements. (2) Acquisitions Acquisition of Enhance Pharmaceuticals, Inc. On June 6, 2002, the Company acquired certain assets from and assumed
certain liabilities of Enhance Pharmaceuticals, Inc. The acquisition was
accounted for under the purchase method of accounting. The total purchase
price, including acquisition costs of $1,071, was $46,288. The fair values of assets acquired and liabilities assumed on June 6, 2002
were: Current assets
    
    $
    1,252Property and equipment
    
    
    2,012Intangible assets
    
    
    28,200Goodwill
    
    
    13,941In-process research and development
    
    
    1,000Total assets acquired
    
    
    46,405Current liabilities
    
    
    89Capital lease obligations
    
    
    28Total liabilities assumed
    
    
    117Purchase price
    
    $
    46,288Total cash paid
    
    $
    45,217Accrued acquisition costs
    
    
    1,071$
    46,288
 Intangible assets included $1,400 of patents and $26,800 in product
license agreements that were each subject to amortization over an estimated
useful life of ten years (see Note 9) and were subsequently written off. The
fair value of net assets acquired was $32,464, resulting in goodwill of
$13,941. The Company acquired Enhance to further its expansion into the female
healthcare market. Certain of the factors contributing to the purchase price
that resulted in goodwill were Enhances proprietary vaginal ring drug delivery
platform and its uses. The entire balance of goodwill is deductible for tax
purposes. The operating results of Enhance are included in the consolidated
financial statements subsequent to the June 6, 2002 acquisition date. F-14




---



##### Table of Contents



Acquired in-process research and development projects in the amount of
$1,000 were written off as research and development expenses upon acquisition
because technological feasibility, through FDA or comparable regulatory body
approval, had not been established and the projects had no alternative future
use. As part of the Enhance acquisition, the Company acquired a Product
Development and License Agreement with Schering AG pursuant to which Barr has
been developing a vaginal ring urinary incontinence product that Schering
intended to market and distribute worldwide. On March 31, 2004, Barr and
Schering agreed that Barr would (i) acquire the worldwide rights to the
product, (ii) forgo all remaining expense reimbursements, development
milestones and royalties, (iii) assume all remaining responsibilities for the
development and marketing of the product and (iv) pay
Schering a milestone payment upon product approval and a royalty on future
product sales. As a result of this agreement, the cash payments Barr expected
to receive pursuant to the Product Development and License Agreement terminated
as of March 31, 2004. Accordingly, the Company wrote-off, as research and
development expense, the remaining $22,333 of net book value associated with
the initial intangible asset for the product license agreements referred to
above. Purchase of Products from Wyeth On June 9, 2003, the Company acquired from Wyeth the rights to four
products and a sublicense on a product in development by Wyeth for initial cash
consideration of $25,992 and an agreement for future royalty payments based on
future sales of the products. The Company also entered into an interim supply
agreement with Wyeth in relation to these products that will terminate as to
certain portions of the agreement on various dates over the next two fiscal
years. Of the total $25,992 purchase price, $22,046 was allocated to the
marketed products (see Note 9) and $3,946 was allocated to an in-process
research and development project. No value was assigned to the supply agreement
for the acquired products because the product purchase prices under the
agreement approximate the price the Company would expect to pay third party
contract manufacturers. The products are being amortized over a
weighted-average useful life of 8.75 years. The $3,946 was written off as research and development expense upon
acquisition because technological feasibility, through the FDA or comparable
regulatory body approval, had not been established and the projects had no
alternative future use. Acquisition of Endeavor Pharmaceuticals, Inc. On November 20, 2003, the Company completed the acquisition of
substantially all of the assets of Endeavor Pharmaceuticals, Inc. (Endeavor).
The Company acquired Endeavor to broaden its line of hormone therapy and other
female healthcare products. In the transaction, the Company acquired the
currently pending New Drug Applications and intellectual property related to
Endeavors Enjuvia synthetic conjugated estrogens product and two other female
healthcare products in early-stage development. The total purchase price, including transaction costs of $517, was $35,600
and was allocated to acquired in-process research and development. This amount
was written-off upon acquisition as research and development expense because
the projects to develop the acquired products, which had not received approval
from the FDA, were incomplete and had no alternative future use. The operating results of Endeavor are included in the Companys
consolidated financial statements subsequent to the November 20, 2003
acquisition date. Acquisition of Womens Capital Corporation On February 25, 2004, the Company acquired 100% of the outstanding shares
of Womens Capital Corporation (WCC), a privately held company that marketed
the prescription version of Plan B®, an emergency oral contraceptive product
and filed an application with the FDA for an over-the-counter version of Plan
B. The Company acquired WCC to further its expansion into the emergency
contraception segment of the female healthcare market. F-15




---



##### Table of Contents



The total purchase price, including acquisition costs of $198 and net of
cash acquired, was $12,273. In addition, at the time of the purchase, the
Company made a payment of $6,690, including principal and interest, to settle a
note payable assumed from WCC as part of the acquisition. The fair values of
the assets acquired and liabilities assumed on February 25, 2004 were: Current assets
    
    $
    885Deferred tax assets
    
    
    3,201Intangible assets
    
    
    2,200Goodwill
    
    
    4,610In-process research and development
    
    
    10,300Total assets acquired
    
    
    21,196Current liabilities
    
    
    1,423Debt
    
    
    7,500Total liabilities assumed
    
    
    8,923Net assets acquired
    
    $
    12,273Cash paid, net of cash acquired
    
    $
    5,773Note issued to WCC stockholders
    
    
    6,500Purchase price
    
    $
    12,273
 An intangible asset of $2,200 representing the fair value of the currently
marketed prescription version of Plan B is being amortized over one year (see
note 9). An acquired in-process research and development asset in the amount of
$10,300, representing the estimated fair value of the unapproved
over-the-counter version of Plan B, was written-off upon acquisition as
research and development expense because the project was incomplete and had no
alternative future use. The difference between the fair value of the net assets
acquired and the purchase price resulted in goodwill of $4,610. The goodwill
and in-process research and development amounts are not deductible for tax
purposes. The operating results of WCC are included in the Companys consolidated
financial statements subsequent to the February 25, 2004 acquisition date.
WCCs results of operations prior to the acquisition date were not significant
in relation to the Companys results of operations. Acquisition of Certain Assets from Gynétics, Inc. On February 26, 2004, the Company paid $4,200 to purchase certain assets
from Gynétics, Inc. that were being used to develop, manufacture, distribute,
promote, market, use and sell the emergency oral contraceptive known as Preven®
and all rights to an additional emergency oral contraceptive product. The
transaction also terminated the Companys obligations under a non-compete
agreement between Barr and Gynétics that would have prevented the Company from
acquiring WCC. As part of the purchase, the Company agreed to pay Gynétics a
royalty on Plan B sales until royalty payments equal $2,500. The Company has
consolidated its emergency contraception business in the Plan B product.
Accordingly, the Company recorded an expense for the $4,200 purchase price as
selling, general and administrative expense. Acquisition of Products from Galen (Chemicals) Limited On March 24, 2004, the Company acquired from Galen (Chemicals) Limited
(Galen) the exclusive rights to manufacture and market Loestrin® products in
the United States and Loestrin and Minestrin® products in Canada for a $45,000
cash payment. These product rights are recorded as other intangible assets on
the consolidated balance sheets and are being amortized over an estimated
useful life of 10 years (see Note 9). F-16




---



##### Table of Contents



(3) Strategic Alliance With DuPont Pharmaceuticals Company On March 20, 2000, the Company signed definitive agreements to establish a
strategic relationship with DuPont Pharmaceuticals Company (DuPont) to
develop, market and promote several proprietary products and to terminate all
litigation between the two companies. The Company was unable to assess whether
the individual terms of each of
the agreements would have been different had each of the agreements been
negotiated separately with other third parties not involved in litigation. DuPont has since been acquired by Bristol-Myers Squibb Company (BMS). In
April 2002, the Company and BMS agreed to restructure and terminate the
proprietary product development funding agreement that was entered into between
Barr and DuPont in March 2000. Under the terms of the March 2000 proprietary product development funding
agreement (Product Development Agreement), DuPont agreed to invest up to
$45,000 to support the ongoing development of Barrs CyPat prostate cancer
therapy and SEASONALE® and DP3 oral contraceptive products in exchange for
co-marketing rights and royalties. Barr and BMS agreed to terminate this
agreement and to cap BMSs funding obligations at $40,000. In return, BMS
agreed to forego its royalty interest and other rights regarding the marketing
of these three products. In connection with the Product Development Agreement,
the Company earned $0, $0 and $15,343 for the years ended June 30, 2004, 2003
and 2002, respectively. (4) Proceeds From Patent Challenge Settlement In January 1997, Bayer AG, Bayer Corporation (collectively, Bayer) and
the Company agreed to settle the then pending litigation regarding Bayers
patent protecting Ciprofloxacin hydrochloride. Under the settlement agreement,
the Company withdrew its patent challenge by amending its Abbreviated New Drug
Application (ANDA) from a paragraph IV certification (claiming invalidity) to
a paragraph III certification (seeking approval upon patent expiry) and
acknowledged the validity and enforceability of the Ciprofloxacin patent. As
consideration for this settlement, the Company received a non-refundable
payment of $24,550 in January 1997, which it recorded as proceeds from patent
challenge settlement. Concurrent with the Settlement Agreement, the Company
also signed a contingent, non-exclusive Supply Agreement (Supply Agreement)
with Bayer that ended at patent expiry in December 2003. Under the terms of the Supply Agreement, until June 9, 2003, Bayer, at its
sole option could either (i) allow Barr and Aventis, the contractual successor
to Barrs joint venture partner in the Cipro patent challenge case, to
purchase, at a predetermined discount to Bayers then selling price, quantities
of Ciprofloxacin for resale under market conditions or (ii) make quarterly cash
payments as defined in the Agreement. Bayer elected to make payments rather
than supply the Company with Ciprofloxacin. Barr recognized the amounts due
under the Supply Agreement as such amounts were realized based on the outcome
of Bayers election. The amounts realized are reported as proceeds from patent
challenge settlement. On June 9, 2003, the Company began distributing
Ciprofloxacin tablets. (5) Other Receivables Included in other receivables at June 30, 2004 is a $47,517 receivable
from Bayer as a price adjustment to reduce the cost of the
Companys June 2004
Ciprofloxacin inventory for products purchased from Bayer during the second
half of our fiscal year. The balance at June 30, 2003 included $25,688 in
receivables under a Supply Agreement, also with Bayer (see Note 4). (6) Inventories, Net F-17




---



##### Table of Contents



June 30,2004
    
    2003Raw materials and supplies
    
    $
    86,238
    
    
    $
    60,075Work-in-process
    
    
    17,449
    
    
    
    18,561Finished goods
    
    
    46,565
    
    
    
    85,290$
    150,252
    
    
    $
    163,926
 Inventories are presented net of reserves of $23,910 and $13,201 at June
30, 2004 and 2003, respectively. The Companys distributed version of
Ciprofloxacin, purchased as a finished product from Bayer, accounted for
approximately $1,986 and $48,300 of finished goods inventory as of June 30,
2004 and 2003, respectively. (7) Property, Plant and Equipment, Net June 30,2004
    
    2003Land
    
    $
    7,299
    
    
    $
    5,819Buildings and improvements
    
    
    135,636
    
    
    
    105,946Machinery and equipment
    
    
    174,858
    
    
    
    144,676Leasehold improvements
    
    
    5,989
    
    
    
    2,759Automobiles and trucks
    
    
    149
    
    
    
    200Construction in progress
    
    
    19,547
    
    
    
    64,430343,478
    
    
    
    323,830Less: accumulated depreciation and amortization
    
    
    106,647
    
    
    
    100,314$
    236,831
    
    
    $
    223,516
 For the years ended June 30, 2004, 2003 and 2002, $21, $1,761 and $1,072
of interest was capitalized, respectively. The Company recorded depreciation
expense of $25,678, $19,547 and $15,010 for the years ended June 30, 2004, 2003
and 2002, respectively. (8) Marketable Securities The Companys investments in marketable securities are primarily
classified as available for sale and, accordingly, are recorded at current
market value with offsetting adjustments to shareholders equity, net of income
taxes. The amortized cost and estimated market values of marketable securities at
June 30, 2004 and 2003 are as follows: Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    MarketCost
    
    Gains
    
    (Losses)
    
    ValueJune 30,
2004Debt Securities
    
    $
    117,843
    
    
    $
    
    
    
    $
    
    
    
    $
    117,843Equity Securities
    
    
    3,676
    
    
    
    
    
    
    
    
    
    
    
    3,676$
    121,519
    
    
    $
    
    
    
    $
    
    
    
    $
    121,519June 30,
2003Debt Securities
    
    $
    44,400
    
    
    $
    
    
    
    $
    
    
    
    $
    44,400Equity Securities
    
    
    2,625
    
    
    
    
    
    
    
    (288
    )
    
    
    2,337$
    47,025
    
    
    $
    
    
    
    $
    (288
    )
    
    $
    46,737
 The cost of investments sold is determined by the specific identification
method. Debt Securities F-18




---



##### Table of Contents



The Company has invested $117,843, including $87,843 in market auction
debt securities, which are readily convertible into cash at par value with
maturity dates ranging from July 7, 2004 to April 19, 2007 and $30,000 in
municipal bonds with maturity dates ranging from July 30, 2004 to April 1,
2007. We may continue to invest in extended maturity securities based on
operating needs and strategic opportunities. Equity Securities Equity securities at June 30, 2004 includes amounts invested in connection
with the Companys excess 401(k) and other deferred compensation plans. Equity securities
at June 30, 2003 also included the value of warrants held in a third party.
These warrants expired unexercised in April 2004. (9) Other Intangible Assets Intangible assets, excluding goodwill, which are comprised primarily of
product licenses and product rights and related intangibles, consist of the
following: June 30,2004
    
    2003Product licenses
    
    $
    2,550
    
    
    $
    26,800Product rights and related intangibles
    
    
    67,046
    
    
    
    22,04669,596
    
    
    
    48,846Less: accumulated amortization
    
    
    (4,699
    )
    
    
    (2,897
    )Intangible assets, net
    
    $
    64,897
    
    
    $
    45,949
 In December 2002, the Companys management decided to suspend development
of a product for which $1,400 in patents had been recorded. As a result, on
December 31, 2002, the Company wrote off the remaining $1,330 of patents, net
of accumulated amortization. This amount has been included in selling, general
and administrative expense in fiscal 2003. During fiscal 2004, the Company acquired the exclusive rights to
manufacture and market Loestrin products from Galen for a cash payment of
$45,000 (see Note 2). In addition, the $26,800 product license for a urinary
incontinence product which was under development with Schering AG was written
off as research and development expense (see Note 2). Estimated amortization expense on product licenses and product rights and
related intangibles in the next five years is as follows: Year Ending June 30,2005
    
    $
    8,6092006
    
    
    7,1432007
    
    
    7,1432008
    
    
    7,1432009
    
    
    7,133
 The Companys product licenses and product rights and related intangibles
have weighted average useful lives of approximately 10 and 8 years,
respectively. (10) Goodwill F-19




---



##### Table of Contents



Goodwill of $18,211 and $14,118 at June 30, 2004 and 2003, respectively,
is attributable to acquisitions the Company has made over the past three fiscal
years. The increase in goodwill from June 30, 2003 is attributable to the
acquisition of WCC. The Company recorded $4,610 related to this
acquisition and subsequently reduced the amount for post-closing activity
related to the transaction to a net amount of $4,093. In fiscal 2003, the
Company adjusted goodwill by $177 for post-closing activity related to its
acquisition of Enhance. The entire goodwill balance at June 30, 2004
and 2003 is assigned to the Companys proprietary product
segment. (11) Other Assets Included in other assets at June 30, 2003 was $14,408 in loans receivable
from Natural Biologics which was fully reserved in fiscal 2004 (see Note 23).
In addition, the Company records the deposits on its finite risk insurance
arrangement as other assets, which total $6,758 and $3,405 at June 30, 2004 and
2003, respectively. (12) Accounts Payable Included in the accounts payable balance at June 30, 2003 was $127,990
relating to the purchase of inventory for Ciprofloxacin during the initial
product launch. Purchases of Ciprofloxacin inventory were significantly lower
in the three months ended June 30, 2004, resulting in a corresponding lower
balance in accounts payable. (13) Solvay Arbitration Award On March 31, 2002, the Company gave notice of its intention to terminate,
as of June 30, 2002, its relationship with Solvay Pharmaceuticals, Inc. which
covered the joint promotion of the Companys Cenestin tablets and Solvays
Prometrium® capsules. Solvay disputed the Companys right to terminate the
relationship, claiming it was entitled to substantial damages and initiated
formal arbitration proceedings. The arbitration hearing was held in January
2004. On June 17, 2004, the arbitration panel determined that the Company did
not properly terminate its contract with Solvay and awarded Solvay $68,000 in
monetary damages to be paid over sixteen months. The Company has included
these amounts in selling, general and administrative expenses on its statement
of operations and in accrued and other liabilities on its balance sheet, as
applicable. (14) Ovcon Licensing Agreement In March 2004, the Company granted Galen an option to acquire an exclusive
license under its ANDA for OVCON® 35, which received FDA approval in April
2004. Galen exercised their option and paid the Company $19,000 which the
Company is amortizing as license fees over a five year period. The Company is
recognizing these revenues over the life of the license and has included the
unrecognized portion as deferred revenue in accrued and other
liabilities, as
applicable. (15) Long-term Debt A summary of long-term debt is as follows: June 30,2004
    
    2003Senior Unsecured Notes (a)
    
    $
    17,429
    
    
    $
    22,858Provident Bank mortgage notes (b)
    
    
    13,200
    
    
    
    14,800Note Due to WCC Shareholders (c)
    
    
    6,500
    
    
    
    37,129
    
    
    
    37,658Less: Current installments of long-term debt
    
    
    (7,029
    )
    
    
    (7,029
    )Total long-term debt
    
    $
    30,100
    
    
    $
    30,629
 F-20




---



##### Table of Contents



(a)
    
    The Senior Unsecured Notes include a $16,000, 7.01% Note due November 18,
2007 and $1,429 of 6.61% Notes due November 18, 2004. Annual principal
payments under the Notes total $5,429 in fiscal 2005, and $4,000 in 2006
through 2008.The Senior Unsecured Notes contain certain covenants including, among
others, a restriction on dividend payments in excess of $10,000 plus 75%
of consolidated net earnings subsequent to June 30, 1997. The Company was in
compliance with all covenants under the senior unsecured notes as of June
30, 2004.(b)
    
    In March 2000, the Company refinanced existing notes payable with a
$12,000 note and an $8,000 note payable to Provident Bank. Provident holds
a first mortgage on the Companys Cincinnati, Ohio manufacturing facility.
Both notes are guaranteed by Solvay America, the parent of Solvay
Pharmaceuticals.The $12,000 note bears interest at the prime rate (4% at June 30, 2004) and
requires monthly payments of $100 plus interest for a ten-year period that
commenced on April 1, 2000. The $8,000 note bears interest at the prime rate
and requires monthly payments of $33 plus interest that commenced on April
1, 2000. Principal payments for the $8,000 note are based upon a twenty-year
amortization with a balloon payment due on March 1, 2010 of $4,000.(c)
    
    In February 2004, the Company acquired all of the outstanding shares of
WCC. In connection with that acquisition, a four-year $6,500 promissory
note was issued to WCC. The note bears interest at 2%. The entire
principal amount and all accrued interest is payable on February 25, 2008
(see Note 2). The Company has a $40,000 revolving credit facility that expires on
February 27, 2005. As of June 30, 2004, there was $32,875 available to the
Company under this facility due to the issuance of a $7,125 letter of credit in
support of the Companys finite risk product liability program (see Note 23).
The Company pays a fee on the committed portion of the credit facility equal to
1.0% of the outstanding balance. A fee of 0.25% is paid on the remainder. Principal maturities of existing long-term debt for the next five years
and thereafter are as follows: Year Ending June 30,2005
    
    $
    7,0292006
    
    
    5,6002007
    
    
    5,6002008
    
    
    12,1002009
    
    
    1,600Thereafter
    
    
    5,200
 (16) Mandatorily Redeemable Convertible Preferred Stock Series G On May 12, 2000, the Company completed a private placement of $10,000 of
Series G Convertible preferred stock with an institutional investor. The
preferred shares were immediately convertible into shares of the Companys
common stock at a fixed price of $2.25 per share. The preferred stock paid a
dividend of 5% annually, payable quarterly in arrears, on all unconverted
preferred stock. The investor also received warrants which were valued at $765
to purchase 288,234 shares of common stock at a price of $9.54 per share,
exercisable at any time before May 12, 2005. In conjunction with the Companys
issuance of the Series G Convertible Preferred Stock, it recorded an adjustment
of approximately $1,300 to properly reflect deemed dividends beyond the stated
5% dividend rate and a beneficial conversion feature as required by EITF 98-5
and 00-27. This adjustment, which reduced the carrying amount of the Series G
Convertible Preferred Stock and increased additional paid-in capital, was being
amortized through May 12, 2004 and reflected as additional deemed dividends. On
September 24 and 28, 2001, the preferred shares were converted to 455,693 and
683,537 shares, respectively, of common stock pursuant to the original terms of
the preferred stock. At the election of the holder of the preferred stock,
the dividend for the quarter ended September F-21




---



##### Table of Contents



30, 2001 of $120 was satisfied by
the issuance of 13,641 shares of common stock. The Company recorded both the
dividend and the fair market valuation of $337 associated with the shares
issued to satisfy the dividend as adjustments to additional paid in capital.
Additionally, the Company wrote-off the remaining unamortized deemed dividend
valuation adjustment of $913 and the unamortized Series G warrant valuation of
$500 as adjustments to additional paid in capital. (17) Related-party Transactions Dr. Bernard C. Sherman During the years ended June 30, 2004, 2003 and 2002, the Company purchased
$2,808, $3,583 and $3,332, respectively, of bulk pharmaceutical material from
companies affiliated with Dr. Bernard C. Sherman, the Companys largest
shareholder and a director until October 24, 2002. In addition, during the
years ended June 30, 2004, 2003 and 2002, the Company sold $9,486, $12,727 and
$16,472, respectively, of its pharmaceutical products and bulk pharmaceutical
materials to companies owned by Dr. Sherman. As of June 30, 2004 and 2003, the
Companys accounts receivable included $1,203 and $2,398, respectively, due
from such companies. During fiscal 1996, the Company also entered into an agreement with a
company owned by Dr. Sherman to share litigation and related costs in
connection with its Fluoxetine patent challenge. For the years ended June 30,
2004, 2003 and 2002, the Company recorded $1,004, $585 and $919, respectively,
in connection with such agreement as a reduction to operating expenses. For the
years ended June 30, 2004, 2003 and 2002, the Company recorded $3,680, $1,440
and $176,681, respectively, as cost of sales related to this agreement. In
addition, during the year ended June 30, 2004, the Company entered into an
agreement with a company owned by Dr. Sherman whereby the Company will receive
royalties on a product marketed and sold by that company. Royalty revenues
totaled $295 for the year ended June 30, 2004. As of June 30, 2004 and 2003, the Companys accrued liabilities included
$2,028 and $648, respectively, related to transactions with these entities. The Company also incurred $55 in expenses in the year ended June 30, 2002
which was reimbursed by Dr. Sherman, related to a secondary stock offering,
completed in May 2001, for the sale of 7.875 million shares of the Companys
common stock, beneficially owned by Dr. Sherman. Edwin A. Cohen In accordance with the provisions of a consulting agreement, which expired
on June 30, 2002, the Companys founder and former Vice Chairman, Edwin A.
Cohen, earned $200 in the year ended June 30, 2002. Harold N. Chefitz Harold N. Chefitz, a member of the Companys Board of Directors, serves as
the Chairman of GliaMed, Inc., in which the Company has made an investment of
$500 which is accounted for at cost and included in other assets at June 30,
2004 and 2003. William T. McKee In connection with the Companys investment in GliaMed, Inc., William T.
McKee, the Companys Chief Financial Officer, became a member of GliaMeds
Board of Directors. F-22




---



##### Table of Contents



(18) Income Taxes A summary of the components of income tax expense is as follows: Year Ended June 30,2004
    
    2003
    
    2002Current:Federal
    
    $
    101,477
    
    
    $
    77,615
    
    
    $
    103,528State
    
    
    18,097
    
    
    
    10,911
    
    
    
    12,719$
    119,574
    
    
    $
    88,526
    
    
    $
    116,247Deferred:Federal
    
    $
    (41,348
    )
    
    $
    9,010
    
    
    $
    8,981State
    
    
    (6,889
    )
    
    
    (2,387
    )
    
    
    90(48,237
    )
    
    
    6,623
    
    
    
    9,071Total
    
    $
    71,337
    
    
    $
    95,149
    
    
    $
    125,318
 The provision for income taxes differs from amounts computed by applying
the statutory federal income tax rate to earnings before income taxes due to
the following: Year Ended June 30,2004
    
    2003
    
    2002Federal income taxes at statutory rate
    
    $
    68,054
    
    
    $
    91,950
    
    
    $
    118,225State income taxes, net of federal income tax effect
    
    
    6,687
    
    
    
    8,207
    
    
    
    8,326Tax credits
    
    
    (5,900
    )
    
    
    (1,000
    )
    
    
    Write-off of in-process research and development
    
    
    3,605
    
    
    
    
    
    
    
    Other, net
    
    
    (1,109
    )
    
    
    (4,008
    )
    
    
    (1,233
    )$
    71,337
    
    
    $
    95,149
    
    
    $
    125,318
 The temporary differences that give rise to deferred tax assets and
liabilities as of June 30, 2004 and 2003 are as follows: F-23




---



##### Table of Contents



2004
    
    2003Deferred tax assets:Net operating loss
    
    $
    5,113
    
    
    $
    16,205Receivable reserves
    
    
    29,888
    
    
    
    24,514Inventory
    
    
    2,707
    
    
    
    2,680Goodwill amortization
    
    
    1,463
    
    
    
    2,131Warrants issued
    
    
    
    
    
    
    6,536Tax credit carryforward
    
    
    15
    
    
    
    4,008Capital loss carryforward
    
    
    3,122
    
    
    
    3,084Amortization of intangibles
    
    
    27,210
    
    
    
    3,076Investments
    
    
    
    
    
    
    109Deferred revenue
    
    
    7,400
    
    
    
    Natural Biologics loan
    
    
    6,673
    
    
    
    Solvay litigation
    
    
    20,226
    
    
    
    Other
    
    
    6,043
    
    
    
    3,866Total deferred tax assets
    
    
    109,860
    
    
    
    66,209Deferred tax liabilities:Plant and equipment
    
    
    (19,889
    )
    
    
    (14,631
    )Proceeds from supply agreement
    
    
    
    
    
    
    (10,225
    )Other
    
    
    (4,196
    )
    
    
    (2,242
    )Total deferred tax liabilities
    
    
    (24,085
    )
    
    
    (27,098
    )Less valuation allowance
    
    
    (4,682
    )
    
    
    (6,147
    )Net deferred tax asset
    
    $
    81,093
    
    
    $
    32,964
 At June 30, 2004 and 2003, as a result of certain acquisitions, the
Company had cumulative regular net operating loss carryforwards of
approximately $10,195 and $38,800, respectively, for federal and state income
tax purposes, which will expire in the years 2018 to 2023. There is an annual
limitation on the utilization of the net operating loss carryforward, which is
calculated under Internal Revenue Code Section 382. The tax credit carryforward is primarily comprised of credits related to
alternative minimum tax payments, which have no expiration. The Company has established a valuation allowance to reduce the deferred
tax asset recorded for certain tax credits, capital loss carryforwards, and
certain net operating loss carryforwards. A valuation allowance is recorded
because based on available evidence, it is more-likely-than-not that a deferred
tax asset will not be realized. The valuation allowance reduces the deferred
tax asset to the Companys best estimate of the net deferred tax asset that,
more-likely-than-not, will be realized. The valuation allowance will be reduced
when and if the Company determines that the deferred income tax assets are
likely to be realized. Accordingly, during the year ended June 30, 2004, the
Company increased the valuation allowance related to preacquisition Womens
Capital Corporation state net operating losses by $589 and reduced the
valuation allowance by a net of $2,054, due to the utilization of certain tax
credits during 2004.  (19)
    Shareholders Equity
(Shares and Per Share amounts expressed in whole numbers) Employee Stock Option Plans The Company has three employee stock option plans, the Barr
Pharmaceuticals, Inc. 2002 Stock and Incentive Award Plan (the 2002 Option
Plan), the Barr Pharmaceuticals, Inc. 1993 Stock Incentive Plan (the 1993
Option Plan) and the Barr Pharmaceuticals, Inc. 1986 Option Plan, which were
approved by the shareholders and which F-24




---



##### Table of Contents



authorize the granting of options to
officers and employees to purchase the Companys common stock. On February 20,
2003, all shares available for grant in the 1993 Option Plan were transferred
to the 2002 Option Plan and all subsequent grants have been made under the 2002
Option Plan. Effective June 30, 1996, options were no longer granted under the
1986 Option Plan. For fiscal 2004, 2003 and 2002, there were no options that
expired under this plan. All options granted prior to June 30, 1996 under the 1993 Option Plan and
1986 Option Plan, become 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. All options outstanding on
October 24, 2001 became fully vested upon completion of the Duramed merger.
Options granted after October 24, 2001 are exercisable between one and five
years from the date of grant. Through fiscal 2000, no option had 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. In
fiscal 2001, options for 67,500 shares were granted to a key executive as part
of her employment agreement at various prices below the market price on the
date of grant. The total value of the discount associated with this grant was
$896 and was being amortized over the five-year vesting period of the options.
In fiscal 2002, these options fully vested as the result of the Duramed merger
and the remaining discount of $615 was expensed. Options granted after February
20, 2003 become exercisable between one and three years from the date of grant
and expire ten years after the date of grant except in cases of death or
termination of employment. In addition, the Company has options outstanding under the terms of
various former Duramed plans. These include the 1986 Stock Option Plan (the
Duramed 1986 Plan), the 1988 Stock Option Plan (the 1988 Plan), the 1997
Stock Option Plan (the 1997 Plan), and the 2000 Stock Option Plan (the 2000
Plan). All outstanding options under the Duramed plans, with the exception of
options held by certain senior executives of Duramed, vested as of October 24,
2001, the effective date of the merger. Such options were assumed by Barr under
the same terms and conditions as were applicable under the Duramed stock option
plans under which the options were granted. The number of options and related
exercise prices have been adjusted to a Barr equivalent number of options and
exercise price pursuant to the merger. Subsequent to October 24, 2001,
additional options are no longer granted under these Duramed plans. A summary of the activity for the three fiscal years ended June 30, 2004,
adjusted for the March 2004 and 2003 3-for-2 stock splits is as follows: F-25




---



##### Table of Contents



Weighted-AverageNo. of Shares
    
    Exercise PriceOutstanding at July 1, 2001
    
    
    7,595,489
    
    
    $
    11.39Granted
    
    
    1,507,520
    
    
    
    35.26Adjustment for pooling
    
    
    (71,366
    )
    
    
    14.65Canceled
    
    
    (125,751
    )
    
    
    25.67Exercised
    
    
    (1,517,633
    )
    
    
    9.72Outstanding at June 30, 2002
    
    
    7,388,259
    
    
    
    16.43Granted
    
    
    2,109,333
    
    
    
    26.74Canceled
    
    
    (208,047
    )
    
    
    27.92Exercised
    
    
    (1,354,542
    )
    
    
    12.57Outstanding at June 30, 2003
    
    
    7,935,003
    
    
    
    19.51Granted
    
    
    1,779,545
    
    
    
    43.01Canceled
    
    
    (148,026
    )
    
    
    28.74Exercised
    
    
    (1,699,190
    )
    
    
    11.82Outstanding at June 30, 2004
    
    
    7,867,332
    
    
    $
    26.26Available for Grant
(20,067,188 authorized)
    
    
    5,784,627Exercisable at June 30, 2002
    
    
    6,759,795
    
    
    $
    16.01Exercisable at June 30, 2003
    
    
    5,557,977
    
    
    $
    16.79Exercisable at June 30, 2004
    
    
    4,839,386
    
    
    $
    20.02
 Available for grant and authorized amounts are for the 2002 Option Plan
only, because as of June 30, 2003 options are no longer granted under any of
the other option plans discussed above. Non-Employee Directors Stock Option Plans During fiscal year 1994, the shareholders approved the Barr
Pharmaceuticals, Inc. 1993 Stock Option Plan for Non-Employee Directors (the
1993 Directors Plan). All options granted under the 1993 Directors Plan
have ten-year terms and are exercisable at an option exercise price equal to
the market price of the common stock on the date of grant. 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. On October 24, 2002, the shareholders approved the Barr Pharmaceuticals,
Inc. 2002 Stock Option Plan for Non-Employee Directors (the 2002 Directors
Plan). This plan, among other things, enhances the Companys ability to
attract and retain experienced directors. On February 20, 2003, all shares
available for grant under the 1993 Directors Plan were transferred to the 2002
Directors Plan. Duramed had a Stock Option Plan for Non-employee Directors (the 1991
Duramed Directors Plan) under which each new non-employee director was
granted, at the close of business on the date he or she first became a
director, options to purchase 5,765 shares of common stock. Annually, each then
serving non-employee director, other than a new director, was also
automatically granted options to purchase 2,882 shares of common stock at a
price equal to the closing market price on the date of grant. Options granted
under the 1991 Duramed Directors Plan expire 10 years after the date of grant.
Subsequent to October 24, 2001, options were no longer granted under this plan. A summary of the activity for the three fiscal years ended June 30, 2004,
adjusted for the March 2004 and 2003 3-for-2 stock splits is as follows: F-26




---



##### Table of Contents



Weighted-AverageNo. of Shares
    
    Exercise PriceOutstanding at July 1, 2001
    
    
    940,377
    
    
    $
    10.41Granted
    
    
    202,500
    
    
    
    33.30Adjustment for pooling
    
    
    23,058
    
    
    
    16.41Canceled
    
    
    (13,833
    )
    
    
    14.90Exercised
    
    
    (50,058
    )
    
    
    8.17Outstanding at June 30, 2002
    
    
    1,102,044
    
    
    
    14.77Granted
    
    
    101,250
    
    
    
    26.76Canceled
    
    
    (59,270
    )
    
    
    32.87Exercised
    
    
    (464,061
    )
    
    
    9.75Outstanding at June 30, 2003
    
    
    679,963
    
    
    
    18.40Granted
    
    
    118,125
    
    
    
    49.02Canceled
    
    
    
    
    
    
    Exercised
    
    
    (154,498
    )
    
    
    17.75Outstanding at June 30, 2004
    
    
    643,590
    
    
    $
    22.97Available for Grant
(2,798,438 authorized)
    
    
    951,469Exercisable at June 30, 2002
    
    
    899,565
    
    
    $
    10.59Exercisable at June 30, 2003
    
    
    578,714
    
    
    $
    16.94Exercisable at June 30, 2004
    
    
    576,089
    
    
    $
    19.92
 Available for grant and authorized amounts are for the 2002 Directors
Plan only, because as of June 30, 2003, options are no longer granted under the
1993 Directors Plan and the 1991 Duramed Directors Plan. 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.
The Purchase Plan permits eligible employees to purchase, through regular
payroll deductions, an aggregate of 1,518,750 shares of common stock at
approximately 85% of the fair market value of such shares. Under the Purchase
Plan, 81,708, 115,704 and 66,715 shares of common stock were purchased during
the years ended June 30, 2004, 2003 and 2002, respectively. Warrants During 1999, in conjunction with an amendment to a financing agreement,
the Company granted to a bank warrants to purchase 63,410 shares of the
Companys common stock at an exercise price of $22.19. These warrants vested
immediately. In December 1999, the
financing agreement was amended to reset the exercise price of 50% of the
warrants to $15.62 per share. During 2000, based on an antidilutive clause in
the agreement, the number of warrants was adjusted to 66,340. The price of
33,426 warrants was adjusted to $21.05 and the remaining 32,918 warrants were
repriced to $15.03. In November 2001 and January 2002 a total of 57,294 of the
warrants were exercised. As of June 30, 2004, warrants for 9,046 shares were
outstanding with an expiration of July 2009. On May 12, 2000, in combination with the issuance of Series G preferred
stock, the Company granted warrants to purchase 288,234 common shares at a
price of $9.54 per share. The warrants vested immediately and expire on May 12,
2005. As of June 30, 2004, all of these warrants remained outstanding. F-27




---



##### Table of Contents



In March 2000, the Company issued warrants granting DuPont the right to
purchase 1,687,500 shares of Barrs common stock at $13.93 per share, and
1,687,500 shares at $16.89 per share, respectively. Each warrant was
immediately exercisable. In March 2004, holders of these warrants exercised the
warrants through a cashless exercise which resulted in the issuance of
2,340,610 shares of our common stock. The following table summarizes information about stock options and
warrants outstanding at June 30, 2004: Options and Warrants Outstanding
    
    Options and Warrants ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedNumber
    
    Remaining
    
    Average
    
    Number
    
    AverageOutstanding
    
    Contractual
    
    Exercise
    
    Exercisable
    
    ExerciseRange of Exercise Prices
    
    at June 30, 2004
    
    Life
    
    Price
    
    at June 30, 2004
    
    Price$2.86 - $11.75
    
    
    2,672,696
    
    
    
    3.30
    
    
    $
    9.09
    
    
    
    2,665,203
    
    
    $
    9.09$12.03 - $26.58
    
    
    2,728,582
    
    
    
    7.32
    
    
    $
    24.69
    
    
    
    1,585,058
    
    
    $
    23.33$26.61 - $42.22
    
    
    1,640,230
    
    
    
    7.29
    
    
    $
    33.89
    
    
    
    1,462,494
    
    
    $
    34.25$43.13 - $51.61
    
    
    1,766,694
    
    
    
    9.09
    
    
    $
    43.62
    
    
    
    
    
    
    
    8,808,202
    
    
    
    6.45
    
    
    $
    25.46
    
    
    
    5,712,755
    
    
    $
    19.48
 (20) Savings and Retirement Plans 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. Participating employees may contribute up to a
maximum of 60% of their earnings before or after taxes, limited to a maximum of
$13 for pre-tax contributions. The Company is required, pursuant to the terms
of its collective bargaining agreement, 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, make cash contributions equal to 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 contributions and any profits arising
therefrom. Participants become fully vested in the Companys contributions and
related earnings after five full years of employment. The Companys contributions to the 401(k) Plans were $6,534, $5,549 and
$4,790 for the years ended June 30, 2004, 2003 and 2002, respectively. The Company has a non-qualified plan (Excess Plan) that enables certain
executives to defer up to 60% of their compensation in excess of the qualified
plan. The Company may, at its discretion, contribute a percentage of the amount
contributed by the individuals covered under this Excess Plan to a maximum of
10% of such individuals compensation. In fiscal years 2004, 2003 and 2002, the
Company chose to make contributions at the 10% rate to this plan. As of June
30, 2004 and 2003, the Company had an asset and matching liability for the
Excess Plan of $3,563 and $2,282, respectively. The Company has an unfunded pension plan covering two non-employee
directors of Duramed who were elected prior to 1998 and who had served on
Durameds Board for at least five years. At the time of the merger with Barr,
two Duramed directors were eligible to receive benefits. The plan provides an
annual benefit, payable monthly over each directors life, from the time a
participating director ceased to be a member of the Board, equal to 85% and
60%, respectively, of the directors most recent annual Board fee, as adjusted
annually to reflect changes in the Consumer Price Index. As of June 30, 2004
and 2003, the Company has recorded $466 and $487, respectively, as a long-term
liability representing the present value of the estimated future benefit
obligation to the eligible directors. The right of a F-28




---



##### Table of Contents



director to receive
benefits under the plan is forfeited if the director engages in any activity
determined by the Board to be contrary to the best interests of the Company. In October 2003, the Board of Directors approved the Barr Pharmaceuticals,
Inc. Non-Qualified Deferred Compensation Plan (the Plan) that was adopted
effective November 1, 2003. The Plan provides for certain executives to defer
all or a portion of their salary or bonus for a particular calendar year. In
addition, the Company will make a matching contribution subject to certain
limitations as defined in the Plan. The matching contribution, as well as the
employee deferral, are invested in the Plan as directed by the participant, and
are payable on the terms and subject to the conditions provided in the Plan. As
of June 30, 2004, the Company had an asset and matching liability for the Plan
of $114. (21) Other (Expense) Income, Net A summary of other (expense) income, net is as follows: Year Ended June 30,2004
    
    2003
    
    2002Litigation settlement
    
    $
    
    
    
    $
    
    
    
    $
    2,000Briston-Myers Squibb termination payments
    
    
    
    
    
    
    
    
    
    
    5,600Loss on limited partnerships
    
    
    (1,346
    )
    
    
    
    
    
    
    Other
    
    
    (187
    )
    
    
    (128
    )
    
    
    56Total other (expense) income, net
    
    $
    (1,533
    )
    
    $
    (128
    )
    
    $
    7,656
 (22) Merger-Related Costs As a result of the Duramed merger, the Company incurred pre-tax
merger-related expenses for the year ended June 30, 2002 of approximately
$31,449, which is included in the consolidated statements of operations as
merger-related costs. Such expenses included approximately $13,000 in direct
transaction costs such as investment banking, legal and accounting costs, as
well as approximately $7,000 in costs associated with facility and product
rationalization and $11,000 in severance costs. Portions of these expenses were
not tax deductible. The severance costs included approximately $7,000 intended
to satisfy the change in control payments under certain previously existing
employment contracts along with the expected cost associated with terminating
approximately 120 former Duramed employees primarily representing certain
manufacturing and general and administrative functions. (23) Commitments and Contingencies Leases The Company is party to various leases which relate to the rental of
office facilities and equipment. The Company believes it will be able to extend
such leases, if necessary. Rent expense charged to operations was $3,543,
$1,875 and $1,444 in fiscal 2004, 2003 and 2002, respectively. The table below
shows the future minimum rental payments, exclusive of taxes, insurance and
other costs under noncancellable long-term lease commitments at June 30, 2004.
Such payments total $36,400 for operating leases. The net present value of such
payments on capital leases was $3,673 after deducting executory costs and
imputed interest of $129 and $570, respectively. F-29




---



##### Table of Contents



Year Ended June 30,2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    ThereafterOperating leases
    
    $
    3,716
    
    
    $
    3,746
    
    
    $
    3,671
    
    
    $
    3,255
    
    
    $
    3,237
    
    
    $
    18,775Capital leases
    
    
    1,825
    
    
    
    1,627
    
    
    
    792
    
    
    
    128
    
    
    
    
    
    
    
    Minimum lease payments
    
    $
    5,541
    
    
    $
    5,373
    
    
    $
    4,463
    
    
    $
    3,383
    
    
    $
    3,237
    
    
    $
    18,775
 Business Development Venture Natural Biologics In fiscal 2002, the Company entered into a Loan and Security Agreement
(the Loan Agreement) with Natural Biologics, the raw material supplier for
the Companys generic equine-based conjugated estrogens product for which the
Company filed an ANDA with the FDA in June 2003. The Company also entered into
a Development, Manufacturing and Distribution Agreement with Natural Biologics
which could obligate the Company to make milestone payments totaling an
additional $35,000 to Natural Biologics based on achieving certain legal and
product approval milestones, including FDA approval of a generic product. The
Company believes that the raw material is pharmaceutically equivalent to raw
material used to produce Wyeths Premarin®. Natural Biologics is a defendant in a trade secret lawsuit brought by
Wyeth. In September 2003, the U.S. District Court for the District of
Minnesota determined that Natural Biologics had misappropriated Wyeths trade
secrets and enjoined Natural Biologics from further involvement in the
equine-based raw material business. Unless the ruling is reversed on appeal,
the Company will be prohibited from using Natural Biologics raw material in
its ANDA for conjugated estrogens. Natural Biologics has appealed the District
Courts ruling. As of June 30, 2004 and June 30, 2003, the Company had loaned Natural
Biologics approximately $16,079 and $14,408, respectively, including accrued
interest, under the Loan Agreement, and has included such amounts in other
assets on its consolidated balance sheets. Under the terms of the Loan
Agreement, the loans mature on June 3, 2007 and are collateralized by a
security interest in inventory and certain other assets of Natural Biologics
and bear interest at the applicable federal rate as defined by the Loan
Agreement (3.83% at June 30, 2004). Due to the unfavorable decision of the District Court and its anticipated
negative effects on Natural Biologics operations, as well as the uncertainty
surrounding the timing and outcome of any appeal, the Company has established a
full valuation allowance against the loan amount and included the allowance in
other assets on its consolidated balance sheet and recorded a charge to
selling, general and administrative expense. Investment in Venture Funds During the second quarter of fiscal 2004, the Company made investments, as
a limited partner, in two separate venture capital funds as part of its
continuing efforts to identify new products, new technologies and new licensing
opportunities. The Company has committed up to a total of $15,000 for each of
these funds over a five and 10-year period, as defined by each fund. As of
June 30, 2004, the Company has invested $3,500 in these funds. The Company
accounts for these investments using the equity method of accounting. Employment Agreements The Company has entered into employment agreements with certain key
employees. The current terms of these agreements expire at various dates
through 2006, subject to certain renewal provisions. Product Liability Insurance F-30




---



##### Table of Contents



The Company utilizes a combination of a finite risk insurance
arrangement, self insurance and traditional third-party insurance policies to
cover itself from potential product liability claims. Under a finite risk
insurance arrangement (the Arrangement) with a third-party insurer, the
Company is insured for $15,000 in potential product liability claims. In
exchange for $15,000 in product liability coverage over a five-year term
expiring on September 30, 2007, the Arrangement provides for the Company to pay
approximately $14,250 in four equal annual installments of $3,563. At any
six-month interval, the Company may, at its option, cancel the Arrangement. In
addition, at the earlier of termination or expiry, the Company is eligible for
a return of all amounts paid to the insurer, less the insurers margin and
amounts paid for any incurred claims. After termination or expiry of the
policy, the Company will be solely liable for any incurred but not reported
(IBNR) or unsettled claims under the policy. The Company is entirely self-insured for potential product liability
claims between $15,000 and $25,000. The Company has purchased traditional
third-party insurance that will provide coverage for claims between $25,000 and
$40,000. For claims between $40,000 and $50,000, the Company has purchased
additional third-party insurance that provides for the Company to share 20% of
all claims paid under the policy by the insurer. Simultaneously with entering into the Arrangement, the Company exercised
the extended reporting period under its previous insurance policy that provides
$10,000 of product liability coverage of unlimited duration for product
liability claims on products sold from September 10, 1987 to September 30,
2002. Additionally, in connection with its merger with Duramed, the Company
purchased a supplemental extended reporting policy under Durameds prior
insurance
policy that provides $10,000 of product liability coverage for an
unlimited duration for product liability claims on products sold by Duramed
between October 1, 1985 and October 24, 2001. Because the Company is self-insured for a portion of its potential product
liability claims, it has established a self-insurance reserve for its estimate
of potential product liability claims. The Company is a defendant in many product liability actions. For product
liability claims that are not fully or substantially covered by our insurance
arrangements, any adverse judgments or settlements in such matters, may exceed
our reserves and could adversely affect the Companys consolidated financial
statements. Indemnity Provisions From time-to-time, in the normal course of business, we agree to indemnify
our employees, suppliers and customers concerning product liability and other
matters. The Company does not believe that the likelihood of paying amounts
related to the indemnity provision is probable. While the maximum amount to
which the Company may be exposed under such agreements cannot be reasonably
estimated, the Company maintains a self insurance reserve and insurance
coverage which management believes will effectively mitigate the Companys
obligations under these indemnification provisions. No amounts have been
recorded in the financial statements with respect to the Companys obligations
under such agreements. Litigation Settlement On October 22, 1999, the Company reached a settlement agreement with
Schein Pharmaceutical, Inc. (now part of Watson Pharmaceuticals, Inc.) relating
to a 1992 agreement regarding the pursuit of a generic conjugated estrogens
product. Under the terms of the settlement, Schein gave up any claim to rights
in Cenestin in exchange for a payment of $15,000, which was paid to Schein in
1999. An additional $15,000 payment is required under the terms of the
settlement if Cenestin achieves total profits (product sales less
product-specific cost of goods sold, sales and marketing and other relevant
expenses) of greater than $100,000 over any five year or less period prior to
October 22, 2014. Litigation Matters Ciprofloxacin (Cipro®) Antitrust Class Actions F-31




---



##### Table of Contents



To date the Company has been named as co-defendants with Bayer
Corporation, The Rugby Group, Inc. and others in approximately 38 class action
complaints filed in state and federal courts by direct and indirect purchasers
of Ciprofloxacin (Cipro®) from 1997 to the present. The complaints allege that
the 1997 Bayer-Barr patent litigation settlement agreement was anti-competitive
and violated federal antitrust laws and/or state antitrust and consumer
protection laws. A prior investigation of this agreement by the Texas Attorney
Generals Office on behalf of a group of state Attorneys General was closed
without further action in December 2001. The Company believes that its agreement with Bayer Corporation reflects a
valid settlement to a patent suit and cannot form the basis of an antitrust
claim. Based on this belief, the Company is vigorously defending itself in
these matters. The Company anticipates that these matters may take several
years to resolve. An unfavorable outcome could adversely affect the Companys
consolidated financial statements. Tamoxifen Antitrust Class Actions To date approximately 31 consumer or third-party payor class action
complaints have been filed in state and federal courts against Zeneca, Inc.,
AstraZeneca Pharmaceuticals L.P. and the Company alleging, among other things,
that the 1993 settlement of patent litigation between Zeneca and the Company
violated the antitrust laws, insulated Zeneca and the Company from generic
competition and enabled Zeneca and the Company to charge artificially inflated
prices for Tamoxifen citrate. A prior investigation of this agreement by the
U.S. Department of Justice was closed without
further action. On May 19, 2003, the U.S. District Court dismissed the
complaints for failure to state a viable antitrust claim. The cases are now on
appeal. The Company believes that its agreement with Zeneca reflects a valid
settlement to a patent suit and cannot form the basis of an antitrust claim.
Based on this belief, the Company is vigorously defending itself in these
matters. The Company anticipates that these matters may take several years to
resolve. An unfavorable outcome could adversely affect the Companys
consolidated financial statements. Desogestrel/Ethinyl Estradiol Suit In May 2000, the Company filed an ANDA seeking approval from the FDA to
market the tablet combination of desogestrel/ethinyl estradiol tablets and
ethinyl estradiol tablets, the generic equivalent of Organon Inc.s Mircette®
oral contraceptive regimen. The Company notified Bio-Technology General Corp.
(BTG), the owner of the patent for the Mircette product, pursuant to the
provisions of the Hatch-Waxman Act and BTG filed a patent infringement action
in the United States District Court for the District of New Jersey seeking to
prevent the Company from marketing the tablet combination. In December 2001,
the District Court granted summary judgment in favor of the Company, finding
that its generic product did not infringe the patent at issue in the case. BTG
appealed the District Courts decision. In April 2002, the Company launched its
Kariva® product, the generic version of Mircette. In April 2003, the U.S. Court
of Appeals for the Federal Circuit reversed the District Courts decision
granting summary judgment in the Companys favor and remanded the case to the
District Court for further proceedings. In July 2003, BTG (now Savient) filed an amended complaint adding Organon
(Ireland) Ltd. and Organon USA as plaintiffs. The amended complaint seeks
damages and enhanced damages based upon willful infringement. The Company
filed an answer to BTGs amended complaint in July 2003. The Company believes
that it has not infringed BTGs patent and continues to manufacture and market
Kariva. Nevertheless, the Company expects that Organon will seek to recover
lost profits on sales of Mircette and assert that these lost profits and
enhanced damages significantly exceed the Companys approximately $110,000 in
sales of Kariva from its launch to June 30, 2004. If BTG and Organon are
successful, the Company could be liable for damages for patent infringement and
may be prohibited from continuing to sell its Kariva product. An unfavorable
outcome could adversely affect the Companys consolidated financial statements. F-32




---



##### Table of Contents



HRT Litigation The Company and/or Duramed have been named as a defendant in as many as
1,000 personal injury product liability cases brought against the Company and
other manufacturers by plaintiffs claiming that they suffered injuries
resulting from the use of medroxyprogesterone acetate in conjunction with
Premarin or other hormone therapy products, or the use of Cenestin. While Barr
and/or Duramed have been named as defendants in these cases, a much smaller
number of complaints actually allege the plaintiffs took a product
manufactured by Barr and/or Duramed. The majority of these cases are either
pending in the Philadelphia Court of Common Pleas or have been filed in other
state courts, removed to federal court and transferred to the United States
District Court for the Western District of Arkansas for consolidated pretrial
proceedings. The Company believes it has viable defenses to the allegations in the
complaints and is defending the actions vigorously. At this juncture, it is
impossible to accurately assess the exposure the litigation presents for the
Company. Invamed, Inc./Apothecon, Inc. In February 1998, Invamed, Inc. and Apothecon, Inc., both of which have
since been acquired by Sandoz, Inc., which is a subsidiary of Novartis AG,
named the Company and several others as defendants in lawsuits filed in the
United States District Court for the Southern District of New York, charging
that the Company unlawfully blocked
access to the raw material source for Warfarin Sodium. The two actions
have been consolidated. On May 10, 2002, the District Court granted summary
judgment in the Companys favor on all antitrust claims in the case, but found
that the plaintiffs could proceed to trial on their allegations that the
Company interfered with an alleged raw material supply contract between Invamed
and the Companys raw material supplier. Invamed and Apothecon have appealed
the District Courts decision to the United States Court of Appeals for the
Second Circuit. Trial on the merits has been stayed pending the outcome of the
appeal. The Company believes that the suits filed by Invamed and Apothecon are
without merit and is vigorously defending its position, but an adverse judgment
could adversely affect the Companys consolidated financial statements. Medicaid Reimbursement Cases The Company has been named as a defendant in separate actions brought by
the Commonwealth of Massachusetts; Suffolk County, New York; Rockland County,
New York; and Westchester County, New York against numerous pharmaceutical
manufacturers. The plaintiffs seek to recover damages and other relief for
alleged overcharges for prescription medications paid for by Medicaid. Along
with the other defendants in these suits, the Company has moved to dismiss
these complaints. Those motions are now pending. The Company believes that it
has not engaged in any improper conduct and is vigorously defending itself.
However, an unfavorable outcome in any of the matters could adversely affect
the Companys consolidated financial statements. Other Litigation As of June 30, 2004, the Company was involved with other lawsuits
incidental to its business, including patent infringement actions and personal
injury claims. Management of the Company, based on the advice of legal counsel,
believes that the ultimate disposition of such other lawsuits will not
adversely affect the Companys consolidated financial statements. (24) Segment Reporting Prior to June 2004, the Company operated in one business segment - the
development, manufacture and marketing of pharmaceutical products. In June
2004, based on the performance of the Companys proprietary product portfolio F-33




---



##### Table of Contents



and the increasing focus on those products, Barr has organized its business
into two reportable segments: Generic Pharmaceuticals and Proprietary
Pharmaceuticals, based on differences in products, marketing and/or regulatory
approval. Accordingly, all periods reported have been restated to reflect two
reportable segments. Generic Pharmaceuticals Generic pharmaceutical products are therapeutically equivalent to a brand
name product and are marketed primarily to wholesalers, retail pharmacy chains,
mail order pharmacies and group purchasing organizations. These products are
approved for distribution by the FDA through the ANDA process. The Company also
distributes, from time to time, product manufactured for Barr by the brand name
company. Tamoxifen and Ciprofloxacin are examples of products Barr has
distributed and are included in the generic pharmaceuticals segment. In fiscal 2004, three customers separately accounted for over 10% of
generic product sales: McKesson Drug Company, Cardinal Health and Walgreen
which accounted for 24%, 14% and 13%, respectively. In 2003, McKesson Drug
Company, Cardinal Health, Amerisource Bergen and Walgreen accounted for 21%,
17%, 13% and 11% of total generic product sales, respectively. In 2002,
McKesson Drug Company, Cardinal Health and Amerisource Bergen accounted for
approximately 18%, 13% and 12% of total generic product sales, respectively. Proprietary Pharmaceuticals Proprietary pharmaceutical products are generally new, patent-protected
products marketed directly to health care professionals. These products are
approved by the FDA primarily through the New Drug Application process. Barrs
proprietary segment also includes products whose patents have expired but
continue to be sold under trade names to capitalize on prescriber and customer
loyalties and brand recognition. In fiscal 2004, three customers separately accounted for over 10% of
proprietary product sales: McKesson Drug Company, Cardinal Health and
Amerisource Bergen which accounted for 21%, 20% and 15%, respectively. In 2003,
Cardinal Health, McKesson Drug Company and Amerisource Bergen accounted for
19%, 15% and 11% of total proprietary product sales, respectively. In 2002,
Cardinal Health and McKesson Drug Company accounted for 21% and 14% of total
proprietary product sales, respectively. The accounting policies of the segments are the same as those described in
Note 1. The Company evaluates the performance of its operating segments based
on net revenues and gross profit. The other classification consists
primarily of revenues from licensing fees and amounts due under research and
development agreements. Barr does not report depreciation expense, total
assets and capital expenditures by segment as such information is neither used
by management nor accounted for at the segment level. Net revenues and gross
profit information for the Companys operating segments consisted of the
following: 2004
    
    % of sales
    
    2003
    
    % of sales
    
    2002
    
    % of salesRevenues:Proprietary
    
    $
    146,087
    
    
    
    11
    %
    
    $
    57,662
    
    
    
    6
    %
    
    $
    62,061
    
    
    
    5
    %Generic
    
    
    1,150,622
    
    
    
    88
    %
    
    
    837,226
    
    
    
    93
    %
    
    
    1,109,297
    
    
    
    93
    %Development & Other
    
    
    12,379
    
    
    
    1
    %
    
    
    7,976
    
    
    
    1
    %
    
    
    17,626
    
    
    
    2
    %Total revenues
    
    $
    1,309,088
    
    
    
    100
    %
    
    $
    902,864
    
    
    
    100
    %
    
    $
    1,188,984
    
    
    
    100
    %Gross profit:
    
    
    
    
    
    Margin %
    
    
    
    
    
    Margin %
    
    
    
    
    
    Margin %Proprietary
    
    $
    117,994
    
    
    
    81
    %
    
    $
    48,536
    
    
    
    84
    %
    
    $
    49,355
    
    
    
    80
    %Generic
    
    
    545,970
    
    
    
    47
    %
    
    
    422,253
    
    
    
    50
    %
    
    
    445,680
    
    
    
    40
    %Development & Other
    
    
    12,379
    
    
    
    100
    %
    
    
    7,976
    
    
    
    100
    %
    
    
    17,626
    
    
    
    100
    %Total gross profit
    
    $
    676,343
    
    
    
    52
    %
    
    $
    478,765
    
    
    
    53
    %
    
    $
    512,661
    
    
    
    43
    %
 F-34




---



##### Table of Contents



(25) Quarterly Data (Unaudited) A summary of the quarterly results of operations is as follows: Three Month Period EndedSept. 30
    
    Dec. 31
    
    Mar. 31
    
    June 30FISCAL YEAR 2004:Total revenues
    
    $
    310,711
    
    
    $
    374,124
    
    
    $
    321,085
    
    
    $
    303,168Cost of sales
    
    
    160,901
    
    
    
    207,722
    
    
    
    145,288
    
    
    
    118,834Net earnings applicable to common shareholders
    
    
    38,535
    
    
    
    35,069
    
    
    
    35,139
    
    
    
    14,360Earnings per common share - diluted (1) (3) (4)
    
    $
    0.37
    
    
    $
    0.33
    
    
    $
    0.33
    
    
    $
    0.13PRICE RANGE OF COMMON STOCK (2) (3) (4)High
    
    $
    50.33
    
    
    $
    56.91
    
    
    $
    53.99
    
    
    $
    49.25Low
    
    $
    38.83
    
    
    $
    45.17
    
    
    $
    45.70
    
    
    $
    32.89FISCAL YEAR 2003:Total revenues
    
    $
    220,428
    
    
    $
    209,035
    
    
    $
    171,923
    
    
    $
    301,478Cost of sales
    
    
    110,919
    
    
    
    94,872
    
    
    
    55,182
    
    
    
    163,126Net earnings applicable to common shareholders
    
    
    41,857
    
    
    
    42,747
    
    
    
    45,874
    
    
    
    37,088Earnings per common share - diluted (1) (3) (4)
    
    $
    0.41
    
    
    $
    0.42
    
    
    $
    0.44
    
    
    $
    0.35PRICE RANGE OF COMMON STOCK (2) (3) (4)High
    
    $
    32.05
    
    
    $
    30.10
    
    
    $
    38.77
    
    
    $
    44.35Low
    
    $
    21.95
    
    
    $
    24.56
    
    
    $
    28.93
    
    
    $
    34.27
  (1)
    
    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 three most recent fiscal years, the Company did
not pay any cash dividends.  (2)
    
    The Companys common stock is listed and traded on the New York Stock
Exchange under the symbol BRL. At June 30, 2004, there were
approximately 1,610 shareholders of record of common stock. The Company
believes that a significant number of beneficial owners hold their shares
in street name.  (3)
    
    Adjusted for the March 17, 2003 3-for-2 stock split effected in the form
of a 50% stock dividend (See Note 1).  (4)
    
    Adjusted for the March 16, 2004 3-for-2 stock split effected in the form
of a 50% stock dividend (See Note 1). (26) Subsequent Events On August 5, 2004, the Company announced the approval by the Board of
Directors of a share repurchase program of up to $300,000, at the discretion
of the Company, through December 31, 2005. The program permits the Company to
repurchase stock from time to time through open market transactions or
privately negotiated transactions. The Company intends to fund any
repurchases with cash on hand and cash generated from operations. F-35




---



##### Table of Contents



SCHEDULE II BARR PHARMACEUTICALS, INC. VALUATION AND QUALIFYING ACCOUNTS Years Ended June 30, 2004, 2003 and 2002
 Balance at
    
    Additions,
    
    RecoveryBeginning
    
    Costs and
    
    Against
    
    Deductions,
    
    Pooling
    
    Balance atof Year
    
    Expenses
    
    Write-offs
    
    Write-offs
    
    Adjustment
    
    End of Year(In thousands)Allowance for doubtful accounts:Year Ended June 30, 2002
    
    $
    201
    
    
    $
    80
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    281Year Ended June 30, 2003
    
    
    281
    
    
    
    60
    
    
    
    
    
    
    
    (52
    )
    
    
    
    
    
    
    289Year Ended June 30, 2004
    
    
    289
    
    
    
    
    
    
    
    
    
    
    
    (99
    )
    
    
    
    
    
    
    190Reserve for returns and allowances:Year Ended June 30, 2002
    
    
    9,224
    
    
    
    76,935
    
    
    
    
    
    
    
    (57,136
    )
    
    
    (44
    )
    
    
    28,979Year Ended June 30, 2003
    
    
    28,979
    
    
    
    48,623
    
    
    
    
    
    
    
    (24,926
    )
    
    
    
    
    
    
    52,676Year Ended June 30, 2004
    
    
    52,676
    
    
    
    64,446
    
    
    
    
    
    
    
    (59,810
    )
    
    
    
    
    
    
    57,312Inventory reserves:Year Ended June 30, 2002
    
    
    12,439
    
    
    
    12,847
    
    
    
    
    
    
    
    (15,364
    )
    
    
    314
    
    
    
    10,236Year Ended June 30, 2003
    
    
    10,236
    
    
    
    10,280
    
    
    
    
    
    
    
    (7,315
    )
    
    
    
    
    
    
    13,201Year Ended June 30, 2004
    
    
    13,201
    
    
    
    17,058
    
    
    
    
    
    
    
    (6,349
    )
    
    
    
    
    
    
    23,910
 S-1