Barr Laboratories, Inc.

2 Quaker Road
Pomona, New York 10970
U.S.A.
(914) 362-1100
(800) BARRLAB; (800) 227-7522
Fax: (914) 362-2774
Web site: http://www.barrlabs.com

Public Company
Incorporated: 1970 as Barr Laboratories, Inc.
Employees: 467
Sales: $377.3 million (1998)
Stock Exchanges: New York
Ticker Symbol: BRL
SICs: 2834 Pharmaceutical Preparations

A fast-growing generic drug company, Barr Laboratories, Inc. develops, manufactures, and markets generic and proprietary Pharmaceuticals. The heart of the company and its original focus was on the generic side, a fast-growing segment of the general pharmaceutical industry in which Barr was one of the early pioneers. The company earned notoriety during the late 1980s, when its founder testified before a congressional committee about bribes between generic drug producers and U.S. Food & Drug Administration officials. Barr began to realize phenomenal financial growth during the 1990s, when the U.S. generic pharmaceutical industry grew from a $4-billion-a-year business to an $11-billion-a-year business. By targeting drugs it considered to be covered by weak patents, Barr scored major successes, such as the right to distribute the cancer drug tamoxifen citrate, which accounted for roughly 75 percent of the company’s sales during most of the 1990s. During the late 1990s the company’s product line was focused on several therapeutic categories, including anti-infectives, cardiovascular agents, hormonal agents, analgesics, oncology, and psychotherapeutic products. At manufacturing facilities in New York, New Jersey, and Virginia, Barr produced more than 60 drug products, including proprietary pharmaceuti-cals, which the company began manufacturing in 1998.

Industry and Company Origins

Barr was founded in 1970 as a generic pharmaceutical concern based in New York. At the time of the company’s formation, the generic drug industry was in its infancy, having first gained legitimacy as a business during the mid-1960s. The catalyst for the industry’s emergence was the Drug Efficacy Study Implementation (DESI) program conducted by the National Research Council of the National Academy of Sciences in 1962, which evaluated all drugs that had been approved for use prior to 1962. The DESI evaluation reviewed more than 3,000 products, determining which products were effective and which were ineffective. Those products that gained the DESI stamp of approval paved the way for a new breed of drug makers: generic manufacturers. With a list of products deemed effective by the National Research Council, generic drug companies could manufacture a product according to the prescribed chemical formula and mark the product without additional study, eliminating the need for the costly and time-consuming biostudies conducted by proprietary drug makers. Barr, founded by Edwin A. Cohen and a partner, became one of the early contenders in the generic drug industry when it introduced its first product in 1972.

Initially, Barr concentrated on making antibiotic products, manufacturing generic drugs primarily for other pharmaceutical companies, such as Lederle Standard Products. For more than a decade Barr remained a small enterprise without the ability to realize much financial growth. The restraints on the company’s growth stemmed from the immaturity of its industry, which had sprung to life in the wake of the DESI program but retained its fledgling characteristics until the mid-1980s. The turning point in the generic drug industry’s evolution occurred when the Drug Price Competition and Patent Restoration Act was promulgated in 1984. Also referred to as the Waxman-Hatch Act, the legislation allowed the production of generic versions of all pharmaceutical products approved after 1962, provided the generic manufacturer could prove the generic version was equivalent to the branded version. The ruling ignited the generic drug industry’s growth, ushering in a new era of frenetic expansion and signaling what observers regarded as the beginning of the modern generic pharmaceutical industry. In the first year following the approval of the Waxman-Hatch Act, more than 1,000 applications for new generic drugs were received by the U.S. Food & Drug Administration (FDA), as scores of new generic producers scurried to secure the decisive rights to be the first to market generic equivalents of branded pharmaceuticals. For an industry long held in check, however, the forces that unleashed its potential nearly caused its ruin. Scandal, bribery, and a litany of criminal accusations followed the passage of the Waxman-Hatch Act, staining the image of generic drug producers and the FDA. At the center of the maelstrom of controversy were Barr and its founder, Edwin Cohen.

Crime and Punishment in the Late 1980s

Much of a generic drug producer’s success depended on being “first to market,” a race that began with the submission of detailed information to the FDA concerning the bioequiva-lence of a generic alternative, that is, providing proof that the generic drug had the same therapeutic effects as the branded version. Once FDA approval was obtained, a generic producer could introduce its generic alternative into the market, but in the wake of the Waxman-Hatch Act many began to question the FDA approval process, particularly Cohen. Cohen approached the FDA in 1987 and 1988, accusing the agency of favoring his competitors, complaining that other generic producers were securing approval while his applications languished on the desks of FDA officials. Part of Cohen’s frustration stemmed from Barr’s attempts to market its generic version of erythromycin estolate, an antibiotic. Barr submitted an application for the antibiotic in January 1987 and a short time later the FDA agreed that the company’s drug was bioequivalent, but numerous delays followed. By the end of 1987 Cohen still had not received approval for the antibiotic, so he complained to the FDA. By the end of 1988 approval still had not arrived, prompting Cohen to voice his complaints again. The FDA never responded to Cohen’s accusations, but in mid-1989 Cohen found someone who would listen. In May 1989 the House Subcommittee on Oversight asked Cohen to testify against the FDA during its investigation of the generic drug industry.

Cohen testified before the congressional committee that FDA officials were accepting bribes from generic drug producers to quicken the approval process. Because of the committee’s nearly three-year investigation, more than 40 FDA employees and company executives pleaded guilty to or were convicted of fraud or corruption charges. Of the 52 generic drug producers examined during the investigation, only five, including Barr, were not implicated in the scandal. Although Cohen had helped expose rampant corruption, his triumph did not benefit Barr—if anything, it exacerbated relations with the FDA. By early 1990 Barr still had not received approval for its generic version of erythro-mycin estolate. Cohen believed the delays were retribution for his testimony in front of the congressional subcommittee and his complaints against the FDA, so he filed a lawsuit against the agency. The antibiotic at last was granted approval in October 1990, nearly four years after the application was submitted, but the end of the long wait did not mark the end of Bait’s problems with the FDA. After failing to force Barr to suspend manufacturing and distribution pending the resolution of certain regulatory disputes, the FDA put Barr on its “alert list” of pharmaceutical manufacturers who did not conform to FDA standards. Barr filed another lawsuit in April 1992, contending that its inclusion on the alert list was preventing the company from winning approval on roughly 90 new drugs. Two months later the FDA dropped Barr from its alert list.

There was ample cause for Cohen and other Barr officials to eliminate any impediments to new product introduction as the 1990s began. At stake were billions of dollars of business, business to be won by those generic producers who could identify prime pharmaceutical drugs to produce and then move expeditiously through the FDA approval process. Between 1991 and 1996, patents were to expire on a host of prescription drugs whose aggregate value was estimated at $10 billion in sales. At the time this potentially lucrative five-year period was set to begin, the U.S. generic drug industry was a $4-billion-a-year business and Barr was a $70-million-in-sales company; both were poised for prolific growth. Barr’s first major victory during this period was its challenge on the patent for tamoxifen citrate, a breast cancer treatment that became the financial foundation upon which the company rested. Tamoxifen, which Barr distributed but did not produce, accounted for three-quarters of the company’s sales during the 1990s and represented an early sign of the company’s willingness to dispute the patents of large drug companies. As Barr moved forward during the generic drug industry’s decade of opportunity, it focused on drugs that were hard to copy in order to reduce competition and, more notoriously, it earned a reputation for challenging what it considered weak patents. Aggressive and persistent, Barr displayed no reluctance to avoid fiercely contested legal disputes, even on the heels of its fractious battle with the FDA.

Company Perspectives:

The people ofBarr Laboratories are focused on being first-to-market with quality, off-patent pharmaceuticals in specific therapeutic categories that generate sustainable profitability. Our confidence in our ability to achieve success is based on the skill and dedication of our employees and their commitment to excellence in science, manufacturing and customer satisfaction.

Energetic Growth During the 1990s

Beginning in 1993 Barr recorded a five-year period during which annual sales increased an average of 35 percent per year. Much of this growth rested on the shoulders of tamoxifen, which contributed roughly 75 percent of the company’s total sales during the period, but the financial success also was attributable to Barr’s progress with other drugs, progress achieved after butting heads with some of the country’s biggest drug makers. To lead the company forward during this volatile period was Bruce L. Downey, who became Barr’s president, chief operating officer, and a member of the company’s board of directors in January 1993. Cohen relinquished his title of chief executive officer in early 1994 and was replaced by Downey in February 1994. In Downey, Barr gained a leader well equipped to handle the litigious future it faced. A former partner in the law firm of Winston & Strawn, Downey had served as the lead attorney during Barr’s legal battle with the FDA, which would serve him well as Barr pursued its strategy of challenging the patents of larger drug companies.

After smoothing over relations with the FDA in 1995, Barr earned FDA approval to sell a generic version of the AIDS drug AZT. Before the company could market its product, however, it had to win court approval to overturn existing patents, held by Glaxo Wellcome. The legal battle over Barr’s generic AZT was just one of several ongoing patent challenges that Downey directed during the middle and late 1990s, including the company’s 1996 challenge of the patent held by Eli Lilly for Prozac, which collected $6 million in sales daily. Meanwhile, as Barr contested various patents in the courtroom, its success outside the courtroom was resounding. Financially, the company had suffered during its long dispute with the FDA, entering the 1990s with $70 million in annual sales and watching that total drop to $58 million by 1993. From 1993 forward, however, sales climbed robustly, swelling to $109 million in 1994, $199 million in 1995, and $232 million by 1996. With managed care organizations growing in number and prominence amid escalating health care costs, generic drugs were becoming more sought after than ever before. Evidence of this rise in demand was illustrated at Barr in 1996 when the company purchased a 65,000-square-foot manufacturing facility in Forest, Virginia, to complement its existing facilities in Pomona, New York, and Northvale, New Jersey.

Downey led the company’s charge against DuPont Merck Pharmaceutical Co., which petitioned the FDA in September 1996 for a stay of action against Barr’s warfarin sodium, an anti-coagulation agent that was the generic equivalent of DuPont Merck’s Coumadin. DuPont Merck fought a state-by -state battle to prohibit the distribution of Barr’s generic version of Coumadin, trying to keep the $500 million in sales it collected from Coumadin to itself. Barr received FDA approval in March 1997 and began shipping its warfarin sodium tablets in July 1997, accumulating $15 million in sales during the first month, as DuPont Merck’s attempts to stop distribution continued into 1998.

Thanks to its encouraging sales growth, Barr entered 1997 ranked as one of the top ten generic drug makers in the country. Its role as an industry whistle-blower had weakened its stock performance during the late 1980s and early 1990s, but by the late 1990s the company was drawing praise from Wall Street. One stock analyst noted: “Not every company can do well if the industry is doing well. Barr is a major turnaround company in the industry. They went through some tough times, but have since turned around... Barr is getting a reputation of being aggressive in litigation and patent challenging. Barr is willing to take on Goliath.”

Taking on larger pharmaceutical companies continued to be a major focus of the company’s strategy as it competed in the late 1990s, but in 1997 it added another facet to its operations by launching a proprietary pharmaceutical development program. Research and development spending increased as a result, jumping 54 percent in 1997 to $10.4 million and another 40 percent in 1998 to $19 million. “R&D [research and development] spending is the future,” Downey declared, “and the last thing we’d cut. It leads to the most earnings and in the fastest way.” Less than 18 months after launching its proprietary development program, Barr introduced its first product, a contraceptive codeveloped with Gynetics, Inc. Approved by the FDA in September 1998, the product was the PREVEN Emergency Contraceptive Kit, which contained an information booklet, a pregnancy test, and four high-dosage birth control pills. According to the partnership agreement between the two companies, Barr manufactured the pills and Gynetics marketed the product, billing it as a postcoital “morning-after” product to be taken within 72 hours of intercourse, the first FDA-approved product specifically designed for such use.

Aside from celebrating its first success in proprietary drug development, Barr officials could point to other favorable developments that suggested a bright future for the company. Financially, Barr was performing admirably, registering a 68 percent increase in net earnings in 1998 to $32.7 million and a 33 percent increase in revenues to $377.3 million, more than six times the total collected five years earlier. With a number of potentially lucrative generic products expected to be introduced once approval was granted, Barr’s generic business was as strong as ever, while its new proprietary business, which had four proprietary products in various stages of development in late 1998, provided a promising avenue for future growth. Downey was overjoyed by Barr’s success, declaring, “By all measures, 1998 represents the most successful year in our company’s history.” As Downey prepared for the century ahead, his hope for a succession of record-setting years appeared well-founded, as Barr exited the 1990s in full stride.