Barr Pharmaceuticals (BRL)

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Barr Pharmaceuticals is the parent company for Barr Laboratories and Duramed Pharmaceuticals, Inc. Through its two subsidiaries the company produces roughly 75 different generic pharmaceuticals and 19 brand name pharmaceutical products, largely focused on women's health and birth control.

On July 18th 2008, generic drug manufacturer Teva Pharmaceutical Industries (TEVA) announced it would buy Barr for $66.50 / share in cash and stock. Under the terms of the deal, each share of Barr common stock will be converted into $39.90 in cash and 0.6272 Teva American depositary receipts. Teva said it expects the deal to close in late 2008.^[1]

Barr differentiates itself from the competitors in that it only seeks to formulate hard to reproduce brand name drugs, those with complex formulations or difficult to source materials. This strategy provides it with some measure of protection, by making it more difficult for other generics companies to replicate its products. The company may also benefit from overall growth in the generics market as Medicare and private insurance become increasingly receptive to generics, in the face of rising health care costs.

[edit] Business Financials

Barr makes most of its money from sales of generic products. Its sales of $1.3 billion in 2006 were about 75% from generic products and only 25% proprietary medications. As a subset of these areas, Barr's most important therapeutic area is contraceptives and birth control. The striking difference between revenue and profits (net earnings) in the graphs could in part be caused by Barr's increased marketing efforts of proprietary products in 2003-2004. Initial costs for marketing a product are very high, and as the patient base expands, these costs decrease meaning profits can increase.

An interesting strategy Barr employs is filing patent challenges first. If the challenge is successful, the company that filed the challenge receives 180 days of "exclusivity" wherein there is no competition from other generic producers.

Barr Annual Report^[2]

Barr Annual Report^[3]

[edit] Key Trends and Forces

*Towards Generic Drugs: The generic market has grown significantly in recent years. The percentage of overall prescriptions filled with generic products grew from 46.5% in 2000 to 57.3% by 2005^[4]. The aging population, rising health care costs, and insurance companies' attempts to minimize costs could all contribute to a further increase in demand for generic products. Medicare spending could also play a significant role in the continued growth of the generics industry. The program which accounts for approx. 12% of the federal budget has been under pressure to cut costs. If Medicare moves to encourage greater use of generics, it would be a huge win for the industry and companies like BARR.

*Patent Expiration: Because Barr's main focus is on generic drugs, one of the most important factors in determining its profitability are patent expirations of other companies' successful medications. Pharmaceutical patents are generally short, and the process for gaining FDA Approval for a generic drug is much less rigorous than for a new medication. Often, generic manufacturers only have to prove that their product is equivalent. They do not have to go through the lengthy and expensive process of clinical trials.

When patents expire, often companies will attempt to reformulate products to maintain the patents. By adding new ingredients or changing the formula slightly, patent life can be extended, or brand domination can be maintained through the new formula. Thus, even if it appears that a patent will expire, there is no guarantee that this will really open up the market for generic manufacturers.

Barr Annual Report^[5]

*Legal Challenges: Part of being a generic manufacturer means dealing with the "edge" of patents. That is, there is likely a gray area between when a product is protected by patent and when it is not. Because of this, companies such as Barr often face law suits from brand manufacturers. Currently, Barr has been fighting over patents on Yasmin, Ortho, Try-Cyclen Lo, and Allegra-D, which seem to be coming to an end soon.

*Brand Loyalty: Because patent laws allow brand name medications to monopolize the market for a certain number of years, brands have a chance to build loyalty and get people "hooked." For example, if a patient is taking medication for a life-threatening condition, such as heart disease, doctors are unlikely to switch the patient to a new medication.

*Contraceptive Products: The market for contraceptives is especially important to Barr. One of its major products, the "morning after pill" called Plan-B, is very controversial in some areas. The product causes a fertilized egg not to implant itself in the uterus, and many claim that this is essentially a type of "pre-abortion." Thus, legislation effecting abortion, as well as pharmacists' ability to refuse to fill prescriptions, will effect sales of Plan-B. Also, there is constantly new research on side effects of oral contraceptives and hormones. If it is found that there are negative effects, Barr's sales could suffer.

[edit] Competition

Because patent expiration means that any company can now access the formula of a medication and manufacture it, competition is fierce. Barr has a unique way of side-stepping some competition. It relies on four "qualifications" in deciding what products to produce. These include:

1. Those with complex formulation or development characteristics;
2. Those requiring specialized manufacturing capabilities;
3. Those where sourcing the raw material may be difficult;
4. Those that must overcome unusual regulatory or legal challenges, including patent challenges.

These conditions are designed to create generics that other companies cannot easily create. Barr goes after the more difficult products to manufacture, meaning that it will face less competition than if it went after easy products.

Company Annual Reports^[6]

Barr's major competitors including are:

• Teva Pharmaceutical Industries (TEVA). Teva Pharmaceuticals USA is one if the largest producers of generic drugs. Its products include therapeutic areas such as anti-infective, cardiovascular, oncology, dermatological and anti-inflammatory.
• Sandoz, a generic division of Novartis AG (NVS). Sandoz's major therapeutic areas include antibiotics, preparations for treating the central nervous system, cardiovascular, hormones and antiallergics.
• Mylan Laboratories (MYL) is the third largest generic producer in the US. Mylan also owns subsidiaries that produce proprietary drugs and hospital packages.
• Dr. Reddy's Laboratories (RDY) is one of the largest generic manufactures in the US by revenue. It also manufactures branded products. Dr. Reddy's products include those for hypertension, allergies, urological disorders, cardiovascular, and antibiotics.

[edit] Notes

1. ↑ http://www.nytimes.com/2008/07/19/business/19teva.html The New York Times, "Teva Buy Drug Rival for $7.46 Billion"
2. ↑ 2006 10-K pg. 42
3. ↑ 2006 10-K pg. 46
4. ↑ 2006 10-K pg. 43
5. ↑ 2006 10-K pg. 46
6. ↑ Barr10-K, Mylan 10-K, Teva 20-F, Dr. Reddy's 20-F, Novartis 20-F