10-K 1 y50301e10vk.htm FORM 10-K FORM 10-K
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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 December 31, 2007
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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
Incorporation or Organization)
  (I.R.S. — Employer
Identification No.)
     
225 Summit Ave
Montvale, New Jersey
 
07645-1523
(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 if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
     Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
     Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer þ
  Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
 
      (Do not check if a smaller reporting company)    
     Indicate by check mark if the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
     The aggregate market value of the common equity held by non-affiliates of the Registrant computed by reference to the price at which the common equity was last sold on June 29, 2007, was approximately $5.6 billion. For purposes of this calculation, shares held by directors, executive officers and 10% shareholders of the Registrant have been excluded. Such exclusion should not be deemed a determination or an admission by the Registrant that these individuals are, in fact, affiliates of the Registrant.
     As of February 15, 2008, there were 107,907,427 shares of the Registrant’s 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 on May 15, 2008, 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.
 
 

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BARR PHARMACEUTICALS, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
                 
            Page
       
 
       
PART I
Item 1:       3  
Item 1A:       28  
Item 1B:       36  
Item 2:       37  
Item 3:       38  
Item 4:       44  
       
 
       
PART II
Item 5:       44  
Item 6:       45  
Item 7:       46  
Item 7A:       77  
Item 8:       77  
Item 9:       77  
Item 9A:       78  
Item 9B:       81  
       
 
       
PART III
Item 10:       82  
Item 11:       82  
Item 12:       82  
Item 13:       82  
Item 14:       82  
       
 
       
PART IV
Item 15:       83  
            87  
            F-1  
 EX-10.4: AMENDED AND RESTATED NON-QUALIFIED DEFERRED COMPENSATION PLAN
 EX-10.11: AMENDED AND RESTATED EXCESS SAVINGS AND RETIREMENT PLAN
 EX-10.31: AMENDMENT TO EMPLOYMENT AGREEMENT
 EX-21.0: SUBSIDIARIES
 EX-23.1: CONSENT OF DELOITTE & TOUCHE LLP
 EX-23.2: CONSENT OF KPMG HUNGARIA KFT.
 EX-31.1: CERTIFICATION
 EX-31.2: CERTIFICATION
 EX-32.0: CERTIFICATIONS

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PART I
ITEM 1. BUSINESS
Safe Harbor Statement and Market Data
     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 1A — “Risk Factors.”
     This report also contains market and industry data obtained from industry publications. We have not independently verified any of this information and its accuracy and completeness cannot be guaranteed.
Change in Fiscal Year
     Effective December 31, 2006, Barr Pharmaceuticals, Inc. (“Barr”, the “Company”, “we”, “us” or “our”) changed its fiscal year end from June 30 to December 31. This change was made to align our fiscal year end with that of our then recently acquired subsidiary, PLIVA d.d. (“PLIVA”), and with other companies within our industry. This Form 10-K covers the calendar year January 1, 2007 to December 31, 2007, which we refer to as “2007.” Comparative financial information to 2007 is provided in this Form 10-K with respect to the calendar year January 1, 2006 to December 31, 2006, which is unaudited and which we refer to as “2006.” Additional information is provided with respect to the transition period July 1, 2006 through December 31, 2006 (the “Transition Period”), which is audited. We refer to the period beginning July 1, 2005 and ending June 30, 2006 as “fiscal 2006”, and the period beginning July 1, 2004 and ending June 30, 2005 as “fiscal 2005.” All information, data and figures provided in this report for fiscal 2006 and 2005 relate solely to Barr’s financial results and do not include the results of PLIVA, the Croatian company we acquired in October 2006.
OVERVIEW
     We are a global specialty pharmaceutical company that operates in more than 30 countries. Our operations are based primarily in North America and Europe, with our key markets being the United States, Croatia, Germany, Poland and Russia. We are primarily engaged in the development, manufacture and marketing of generic and proprietary pharmaceuticals. We are one of the world’s leading generic drug companies. For 2007, which includes PLIVA’s results of operations for the entire period, we recorded $2.3 billion of product sales and $2.5 billion of total revenues worldwide. In addition, we are actively involved in the development of generic biologic products, an area that we believe provides significant prospects for long-term earnings and profitability.
     Generics
     We market and sell generic pharmaceutical products in the U.S., Europe and certain other countries in the rest of the world (which we refer to as “ROW”). During 2007, we recorded $1.9 billion of sales of generic pharmaceutical products. We conduct our generics business in North America principally through our Barr Laboratories subsidiary and in Europe and the ROW through PLIVA and its subsidiaries.
     Our generic product portfolio includes solid oral dosage forms, injectables, liquids and cream/ointment products. At December 31, 2007, we marketed for sale (a) in the U.S., approximately 245 different dosage forms and strengths of approximately 120 different generic pharmaceutical products, including 25 oral contraceptive products, and (b) in Europe and the ROW, approximately 255 different molecules, representing 1,025 generic pharmaceutical products in approximately 2,790 different presentations (where one molecule in one market represents a product, and each combination of a formulation and strength represents one presentation).
     Our generic product development efforts are focused primarily on high barrier-to-entry products for all our markets, utilizing our various drug delivery platforms. To more effectively compete in some European and ROW markets, we also develop and in-license certain commodity products where we can obtain market share based on the efforts of our sales forces in those markets.

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     Proprietary Products
     We market and sell proprietary pharmaceutical products primarily in the United States. During 2007, we recorded $438.3 million of sales of proprietary pharmaceutical products. Our proprietary business is conducted through our Duramed Pharmaceuticals subsidiary.
     Our proprietary product portfolio and pipeline is largely concentrated in the area of female healthcare. At December 31, 2007, we marketed 26 proprietary pharmaceutical products. These products include, among others: SEASONIQUE® (levonorgestrel/ethinyl estradiol tablets 0.15 mg/0.03 mg and ethinyl estradiol tablets 0.01 mg), our newest generation extended-cycle oral contraceptive product; PLAN BTM (levonorgestrel), our dual-label, over-the-counter (OTC)/Rx emergency contraceptive; PARAGARD® T 380A (intrauterine copper contraceptive), our IUC contraceptive product; MIRCETTE® (Desogestrel and Ethinyl Estradiol), a traditional 28-day oral contraceptive; and our ENJUVIA (synthetic conjugated estrogens, B) line of hormone therapy products.
     Biologics
     Biologic products represent a significant subset of pharmaceutical products and are manufactured with the use of live organisms as opposed to chemical (non-biological) compounds. At December 31, 2007, we had several generic biologics products in various stages of development for the U.S. and European markets, including granulocyte colony stimulating factor (“G-CSF”), a protein that stimulates the growth of certain white blood cells. We are optimistic about our prospects of becoming a leader in the generic biologics market worldwide, and are actively working with the Congress and the Food and Drug Administration (the “FDA”) to create a regulatory pathway for generic biologics in the United States.
     General Information
     To supplement our internal efforts in support of our business strategies, we continually evaluate business development opportunities that we believe will strengthen our product portfolio and help grow our generic, proprietary, and generic biologic businesses. A primary example of this activity is our acquisition of PLIVA, as discussed in greater detail below.
     We operate manufacturing, research and development and administrative facilities in five primary locations within the U.S. and three primary locations in Europe. Through our PLIVA acquisition, we also develop and manufacture active pharmaceutical ingredients to support our internal product development efforts. Our organizational structure reflects the global nature of our business and the sharing of resources between our generic and proprietary businesses. For example, our operating and corporate functions are managed on a global basis, supporting both generic and proprietary activities.
     Barr Pharmaceuticals, Inc. is a Delaware holding company that was formed through a reincorporation merger on December 31, 2003. Our predecessor entity, a New York corporation, was formed in 1970 and commenced active operations in 1972. Our corporate headquarters are located at 225 Summit Avenue, Montvale, New Jersey 07645, and our main telephone number is 201-930-3300.
     Our Internet address is www.barrlabs.com. We do not intend for this website address to be an active link or to otherwise incorporate by reference the contents of the website into this report. We post the following filings in the Investors section of our website as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. All such filings on our Investors section of the website are available free of charge. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room or electronically through the SEC website (www.sec.gov). We also provide information concerning corporate governance, including our Corporate Governance Guidelines, Board committee charters and committee composition, Code of Conduct and other governance information within the Investors section of our website.
PLIVA Acquisition
     On October 24, 2006, we completed the acquisition of PLIVA, a generic pharmaceutical company headquartered in Zagreb, Croatia. Under the terms of the cash tender offer, we paid approximately $2.4 billion based

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on an offer price of HRK 820 per share (in the Croatian currency) for all shares tendered during the offer period. Subsequent to the close of the offer period, we purchased an additional 390,809 shares on the Croatian stock market for $58.3 million, and own 98.1% of all shares of PLIVA as of December 31, 2007.
     Under Croatian law, our ownership of more than 95% of the voting shares in PLIVA permits us to undertake the necessary actions to acquire the remainder of PLIVA’s outstanding share capital though we are not obligated to do so. We are currently evaluating this option and, in the meantime, we may continue to purchase shares on the open market as deemed necessary.
     The PLIVA acquisition has been a transforming event for the Company. Prior to the acquisition, we marketed generic and proprietary pharmaceutical products almost exclusively in the United States. With our acquisition of PLIVA, we have significantly increased our global reach and now have access to additional internally developed drug delivery and development capabilities. We now operate in more than 30 countries worldwide. We have supplemented our historical solid oral dosage form product portfolio with PLIVA’s portfolio and capabilities for developing injectable products and cream/ointment products.
     We also have combined two companies that are at the forefront of the development of generic biologics, with Barr traditionally focusing on the U.S. market and PLIVA principally focusing on the European markets (where a regulatory pathway for generic biologics already exists).
     In addition, the PLIVA acquisition has increased our research and development capabilities. It also has given us access to low cost manufacturing capabilities in Croatia, Poland and the Czech Republic, and the opportunity to conduct product research and development in jurisdictions that offer favorable tax treatment for such activities.
     During 2007, we worked diligently on the integration of Barr and PLIVA. As a result, the integration is largely complete. Some of the milestones we have accomplished are highlighted below:
    all U.S. commercial operations have been consolidated under Barr Laboratories, Inc. or Duramed Pharmaceuticals, Inc.;
 
    we have moved all PLIVA proprietary products sold previously under the Odyssey label to our Duramed label;
 
    we have moved all U.S. PLIVA generic products sold previously under the PLIVA label to our Barr label;
 
    all U.S. sales and marketing and related administrative activities have been consolidated;
 
    we have transferred products between our European and U.S. manufacturing sites to optimize manufacturing efficiency and capacity utilization;
 
    we are on schedule to substantially shut down PLIVA’s U.S. manufacturing facilities by the end of 2008;
 
    we have successfully completed the divestiture of PLIVA’s Veterina animal health business and PLIVA’s operations in Italy and Spain;
 
    senior personnel from Barr and PLIVA have been transferred and relocated outside their home countries to work in functions including commercial operations, finance, quality control and human resources;
 
    we have established global product selection, product development and business development processes;
 
    we have established global operational departments and their integration has been substantially completed;

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    our Forest, Virginia facility became the single point of distribution for all generic products in the United States; and
 
    we completed the FTC-ordered divestitures of four products.
GENERIC PHARMACEUTICALS
     We are a global leader in the generic pharmaceutical industry. Generic drugs are the chemical and therapeutic equivalents of brand-name drugs, typically sold at prices below those of their brand-name equivalents. In the U.S., our largest market, our generic products are marketed under the Barr label.
     Outside the U.S., our operations are primarily in Central and Eastern Europe, including Croatia, Germany, Poland and Russia (the “Key Non-U.S. Markets”), where the markets vary considerably from the U.S. market in that in many cases there is a market for branded generic products (i.e., generic products sold under a company name) for which there are only limited opportunities for generic substitution by the pharmacist. As a result, physician and pharmacist loyalty to a particular company’s generic product can be a significant driver in obtaining market share. In the recently expanded European Union (“EU”), as regulated by the European Medicine Agency (“EMEA”), the EU’s equivalent of the FDA, the generic pharmaceutical industry is becoming an increasingly important supplier of pharmaceuticals.
     We have the capability to develop, manufacture and market generic pharmaceuticals in various dosage forms, including tablets and capsules, creams and topicals, and liquids and injectables. Our relationships with third parties provide access to other drug delivery systems, such as nasal sprays, patches and sterile ophthalmics.
     In general, we focus our development activities on generic products that have one or more characteristics that we believe will make it difficult for others to develop competing generic products. The characteristics of the selected generic products we pursue may include one or more of the following:
    those with complex formulation or development characteristics;
 
    those requiring specialized manufacturing capabilities;
 
    those where sourcing the raw material may be difficult; and
 
    those that must overcome unusual regulatory or legal challenges, including patent challenges.
     We believe generic products with some or all of these characteristics may produce higher returns for a longer period of time than products without these characteristics. Examples of such products in our portfolio include generic oral contraceptives and injectables. We currently manufacture 25 generic oral contraceptive products and six generic injectable products. We expect our portfolio of injectable products to grow to over a dozen products within the next two years.
     We also develop and manufacture active pharmaceutical ingredients (“API”), primarily for use internally and, to a lesser extent, for sale to third parties. We manufacture 23 different APIs for use in pharmaceuticals through our facilities located in Croatia and the Czech Republic. We believe that our ability to produce API for internal use may provide us with a strategic advantage over competitors that lack this ability, particularly as to the timeliness of obtaining API for our products.
     For a description of the regulatory process that applies to developing generic pharmaceuticals, see “Government Regulation” below.
Filings and Approvals
     We file each of our regulatory submissions for generic products with the expectation that: (1) the applicable regulator will approve the marketing of the applicable product; (2) we will validate our process for manufacturing

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that product within the specifications that have been or will be approved by the applicable regulator; and (3) the cost of producing the inventory relating to the applicable product will be recovered from the commercialization of the product.
     United States
     During 2007, in the U.S. market, we:
    filed 30 abbreviated new drug applications (“ANDAs”) with the FDA;
 
    received FDA approvals for 19 generic products, including tentative approvals; and
 
    launched 14 new generic products.
     At December 31, 2007, we had approximately 70 ANDAs, including tentatively approved applications, pending at the FDA, targeting branded pharmaceutical products with an estimated $29 billion in annual sales, based on industry source data.
     Europe and ROW
     During 2007, we submitted for registration 224 products in 584 different presentations (where one molecule in one market represents a product and each combination of a formulation and strength represents one presentation), representing 65 individual molecules. During this period, we also received approvals for 143 products in 310 different presentations, representing 54 different molecules. As of December 31, 2007, with regulatory bodies in Europe and ROW, we had a total of 287 product registrations pending, representing 90 molecules in 735 different presentations.
Operations in our Key Non-US Markets
     Germany. The German market is the largest pharmaceutical market in Europe and is our largest European market in terms of revenues. In Germany, we market our products through our subsidiary, AWD.pharma, and our largest selling product is Katadolon (flupirtine). Like the markets of Central and Eastern Europe, the German market is predominantly a branded generics one with doctors prescribing international nonproprietary name (“INN”) products and corporate brands. Substitution is possible at the pharmacy level, but only with one of the three lowest priced generic alternatives available. All prescription drugs are reimbursed up to the respective reference price. In March 2007, Germany’s largest health insurance company, Allgemeinen Ortskrankenkassen (AOK), representing more than 25 million of the approximately 79 million publicly-insured people in Germany, announced that for 2007 it had selected 43 products from 11 pharmaceutical companies — including several from our German subsidiary — as a result of a competitive bidding process. Our selection in this tender process significantly increased our sales as compared to a year earlier. AOK also conducted a competitive bidding (or “tender”) process for an increased number of products for 2008-2009, in which we also participated. This tender process was completed in September 2007, but the results have not been publicly announced or implemented because the legality of this tender process is currently being litigated.
     In 2006, the government introduced a number of new measures that have had a significant impact on the generic pharmaceutical market. First, it has introduced a price moratorium which eliminates the possibility of increasing prices through March 2008. Second, it has imposed a mandatory producer rebate of 10% and banned any further discounts or rebates in kind to pharmacists. Third, it has allowed health insurers to waive the patient co-pay in cases where the generic is priced at least 30% below the reference level. At this time, prices for products have been somewhat reduced, but higher volumes have mostly offset the lower pricing.
     In September 2007, we acquired O.R.C.A.pharm GmbH, a specialty pharmaceutical company focused on the oncology market in Germany, for an initial payment of EUR 21 million in September, a EUR 2.2 million payment in the quarter ended December 31, 2007 for working capital assumed in the transaction, and additional payments of up to EUR 12.1 million based on the achievement of profitability milestones. This acquisition strengthens our position in

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the oncology market in Germany and will also allow us to add existing Barr and PLIVA products to the O.R.C.A.pharm portfolio.
     Croatia. Croatia is the site of our European headquarters, where we have manufacturing, R&D, biologic and API facilities. Croatia is our second largest European market in terms of revenues. As of the end of 2007, we were the leader in the Croatian generic market with approximately 37% market share. Currently, we market some of the top products for the Croatian pharmaceutical market including Sumamed (azithromycin), Klavocin (amoxicillin clavulanic acid), Voltaren (diclofenac) and Peptoran (ranitidine). The Croatian market is a strong branded generic market where substitution at the pharmacy level is generally not allowed. Physicians represent the key decision makers in this market, making product detailing of great importance. Croatia currently has a reimbursement system based on two independent product lists, one where essential drugs are fully reimbursed, and a second where other select drugs are partially reimbursed.
     Poland. We have both manufacturing and R&D facilities in Poland. The Polish pharmaceuticals market is the second largest in Central and Eastern Europe and relies heavily on generic drugs, though it remains a branded market with emphasis on product promotion. Sumamed is our largest selling product in Poland, where we also have a strong portfolio of over-the-counter drugs. We currently rank fourth in this generic market. As a result of high patient co-payments, competition among pharmacies and general economic growth, the market is highly competitive and is expected to grow.
     Russia. The Russian market is the largest in Central and Eastern Europe and is also one of the fastest growing. The market is fragmented and no one company dominates. State involvement in the market is limited and most expenditures on drugs are made directly by individuals to pharmacists. Our largest selling product in Russia is Sumamed, which retains its leading position despite over 15 generic competitors. In 2005, the government created the first federal healthcare program, known as the “DLO”, providing reimbursement for drugs that are on the DLO list. In November 2006, the government published a revised DLO list with significant changes that have affected participating companies to differing degrees. In addition, the budget for the DLO was significantly overspent in 2006, which has created large delays in payment to producers. As a result, we have decreased our participation in the DLO market and in 2007 nearly 95% of our sales in Russia were in the commercial market. We believe that the Russian market offers significant growth potential because of the overall robust economy and the relatively untapped market. We continue to seek to expand our operations in this market.
Generic Product Portfolio
     Set forth below are descriptions of certain generic products that contributed significantly to our revenues in 2007.
     Oral Contraceptives. In the U.S., we currently manufacture and market 25 generic oral contraceptive products under trade names including Aviane®, Kariva® and Tri-Sprintec®. We also market two generic oral contraceptives in Canada with a partner. Our oral contraceptives compete with the branded versions of the products and, in most instances, with other generic products and/or “authorized” generic versions of the branded product. “Authorized” generics are generic products that are manufactured under the brand pharmaceutical company’s New Drug Application (“NDA”) and sold either by the brand company itself or through a licensee. Oral contraceptives are the most common method of reversible birth control, used by approximately 82% of women in the U.S. at some time during their reproductive years. Oral contraceptives have a long history with widespread use attributed to many factors, including efficacy in preventing pregnancy, safety and simplicity in initiation and discontinuation, medical benefits and relatively low incidence of side effects. According to industry sources, the oral contraceptive market in the U.S. had sales of approximately $3.4 billion during 2007.
     Our most significant competitor in this category is Watson Pharmaceuticals (“Watson”), a large generic pharmaceutical company that markets and distributes a sizeable portfolio of generic oral contraceptive products. Additional generic competitors include Teva Pharmaceuticals, a global pharmaceutical company that currently markets two generic oral contraceptive products, and is expected to launch additional products, the timing of which is not known. There is also a small, privately held pharmaceutical company that distributes authorized generic versions of two oral contraceptive products.

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     Fentanyl Citrate. In the U.S., we market an oral transmucosal fentanyl citrate product that is the generic version of Cephalon’s ACTIQ (oral transmucosal fentanyl citrate) [C-II], 200 mcg, 400 mcg, 600 mcg, 800 mcg, 1200 mcg, and 1600 mcg cancer pain-management product. We launched this product in September 2006 under a license agreement previously granted to us by Cephalon in August 2004, pursuant to a Federal Trade Commission order. The license grants us a non-exclusive right to sell a generic version of ACTIQ. Under the licensing agreement, Cephalon is currently supplying us with fentanyl citrate manufactured under Cephalon’s NDA, which we have the right to market. Our ANDA is currently under active review at the FDA. Our product competes with Cephalon’s authorized generic, which Cephalon has licensed to a third party.
     Sumamed/Azithromycin. Azithromycin was developed by PLIVA and licensed to Pfizer for sale in certain territories. In the U.S. our azithromycin product is the generic equivalent of Pfizer’s Zithromax® antibacterial treatment product, available in tablet, oral suspension and injectable formulations. Following the expiry of the azithromycin compound patent in the U.S., in November 2005, we launched the generic tablet version in the U.S. and are currently one of eight generic competitors in the U.S. In July 2006, we launched the first generic oral suspension version in the U.S. and are currently one of four generic competitors in that market. In January 2007, we also received approval from the FDA to market our injectable form and launched that product in the U.S. in the quarter ended September 30, 2007. In Europe and ROW, we sell azithromycin under the trade name Sumamed and detail it to physicians and pharmacists.
     Katadolon (flupirtine). Katadolon is a centrally acting non-opioid analgesic with muscle-tone normalization effect and the ability to prevent pain chronification by inhibiting the development of “pain memory.” Due to the unique structure and mode of action as a selective neuronal potassium channel opener, Katadolon is the prototype of a new class of analgesic substances. It has been in clinical use since 1984 and is marketed and actively promoted in Germany, Russia, other Central and Eastern European countries, and China. Katadolon S-long, the slow release formulation of flupirtine maleate, is registered and has been available on the German market since April 2006.
     The table below sets forth those products, or classes of products, within our generics segment that accounted for 10% or more of that segment’s total product sales during 2007, the Transition Period, fiscal 2006 or fiscal 2005:
                                 
                    Fiscal
            Transition        
    2007   Period   2006   2005
Oral contraceptives
    24 %     53 %     48 %     53 %
Desmopressin
    *       *       13 %     *  
 
*   Denotes less than 10% in the period indicated.
Sales and Marketing
     We market our generic products to customers in the U.S. and Puerto Rico through an integrated sales and marketing team that includes a four-person national accounts sales force. The activities of the sales force are supported by our marketing and customer service organization in our Montvale, New Jersey offices. The U.S. customer base for our generic products includes drug store chains, supermarket chains, mass merchandisers, wholesalers, distributors, managed care organizations, mail order accounts, group purchasing organizations, government/military and repackagers.
     We promote our generic products in Europe and the ROW through over 1,300 sales representatives, including contract sales representatives and marketing employees. While products may be promoted to different audiences in different countries, the sales representatives generally promote branded generic products to physicians and pharmacists. While we have very few dedicated sales representatives for our generics business in the U.S., the significant number of sales representatives in Europe is attributable to Europe being largely a “branded generics” market, as compared with the substitution-based generics market in the U.S., where bioequivalent generic products can be easily substituted for the brand product and other generics.
     Net sales to customers who accounted for 10% or more of our generic product sales during 2007, the Transition Period, fiscal 2006 or fiscal 2005 were as follows:

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                    Fiscal
            Transition        
    2007   Period   2006   2005
McKesson Drug Company
    15 %     17 %     22 %     15 %
Cardinal Health
    *       *       10 %     13 %
AmeriSource Bergen
    *       *       *       10 %
Walgreens
    *       11 %     13 %     15 %
CVS
    *       *       12 %     12 %
 
*   Denotes less than 10% in the period indicated.
Patent Challenges
     As part of our generic development activities for the U.S. market, we develop generic versions of select brand products where we believe the patents relating to the brand products are invalid, unenforceable or not infringed by our competing generic products. Utilizing the patent challenge process under the Hatch-Waxman Act (discussed below), we seek to invalidate patents or to obtain a declaration that our generic version does not infringe the patent. Our development activities in this area, including sourcing raw materials and developing equivalent products, are designed to obtain FDA approval for our product. Our legal activities in this area, performed by outside counsel, work toward eliminating the barrier to market entry created by the patents.
     Our Patent Challenge History
     Our efforts in the area of challenging patents on branded pharmaceutical products have resulted in the successful conclusion of 19 out of 22 cases that have been finally resolved as of December 31, 2007. Successful outcomes have included: court rulings in our favor invalidating patents or finding that our product does not infringe an existing patent; situations in which we have not been sued for patent infringement; situations where we launched our generic product at risk; and settlements with the patent holder. Unfavorable outcomes, including court rulings in favor of the patent holder and cases that are dismissed, result in our not being able to launch a generic product until the patent on the brand pharmaceutical product expires. Recent examples of successful outcomes to our patent challenges include:
    ADDERALL XR. ADDERALL XR is a once-daily, extended-release, mixed salt amphetamine product that is indicated for the treatment of ADHD. In August 2006, we entered into a product acquisition agreement, a product development agreement, and settlement and license agreements with Shire plc to settle our pending patent infringement dispute. Under the terms of the agreements, we (1) purchased Shire’s ADDERALL® (immediate-release mixed amphetamine salts) tablets for $63.0 million; (2) granted Shire a license to obtain regulatory approval for and market in certain specified territories our SEASONIQUE extended-cycle oral contraceptive product, along with five products in various stages of development, for an initial $25.0 million payment for previously incurred product development expenses, and for reimbursement of development expenses incurred going forward, up to a maximum of $140.0 million over an eight-year period, not to exceed $30.0 million per year; and (3) are able to launch a generic version of ADDERALL XR on April 1, 2009, more than nine years earlier than the last-to-expire Shire listed patent.
 
    Desmopressin. Desmopressin is the generic equivalent of Ferring B.V.’s DDAVP® Tablets. DDAVP Tablets are indicated as antidiuretic replacement therapy in the management of central diabetes insipidus and for the management of the temporary polyuria and polydipsia following head trauma or surgery in the pituitary region. DDAVP is also indicated for the management of primary nocturnal enuresis. Following the February 2005 summary judgment ruling by the U.S. District Court for the Southern District of New York that the patent alleged to cover DDAVP is unenforceable and not infringed by our product, we launched Desmopressin Acetate tablets, 0.1 mg and 0.2 mg, on July 5, 2005. In February 2006, the Federal Circuit Court affirmed the District Court’s ruling that the patent at issue is unenforceable. In October 2006, the U.S. Supreme Court denied Ferring’s petition for a writ of certiorari.

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    Modafinil. Modafinil is the generic equivalent of Cephalon’s Provigil®. In February 2006, we entered into an agreement with Cephalon to settle our pending patent infringement dispute in the U.S. related to Provigil. Under the terms of the settlement, Cephalon granted us a non-exclusive, royalty-bearing right to market and sell a generic version of Provigil in the U.S. Our license will become effective in October 2011, unless Cephalon obtains a pediatric extension for Provigil, in which case we would be permitted entry in April 2012. Cephalon has announced that it has been granted a pediatric extension for Provigil. We may be allowed to enter at an earlier date based upon the entry of another generic version of Provigil.
 
    Niacin. Niacin is the generic equivalent of Abbott Laboratories’ (formerly Kos Pharmaceuticals’) NIASPAN® product. In April 2005, we entered into co-promotion, licensing and manufacturing, and settlement and license agreements relating to the resolution of the patent litigation involving NIASPAN. Under the terms of the agreements, we: (1) co-promote the current NIASPAN and ADVICOR® products (the “Kos Products”) to obstetricians, gynecologists and other practitioners with a focus on women’s healthcare in the U.S. using our 93-person specialty sales force, and in return we receive a royalty based upon overall sales of the Kos Products, whether by Kos or our sales force; (2) serve as a stand-by, alternate supply source for the Kos Products; and (3) will be allowed to launch generic versions of the Kos Products on September 20, 2013, about four years before the last of the applicable Kos patents is set to expire.
     Pending Patent Challenges
     During 2007, 11 patent litigation suits were initiated against Barr in response to ANDAs we had filed, representing the largest number of cases initiated against us in any 12 month period. At December 31, 2007, we had publicly disclosed the following patent challenges that are in various stages of litigation:

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($ millions as of December 31, 2007)
         
    MARKET  
ANDA NAME(Brand Product)   VALUE  
Alendronate Sodium (Fosamax®)
  $ 1,836.3  
Alfuzosin Hydrochloride Extended Release (Uroxatral®)
    154.0  
Argatroban Injection (Argatroban®)
    114.6  
Aripiprazole (Abilify® and ABILIFY® Discmelt)
    2,347.4  
Aspirin/Extended-Release Dipyridamole (Aggrenox®)
    297.4  
Dexmethylphenidate Hydrochloride (Focalin® XR)
    268.8  
Drospirenone and Ethinyl Estradiol (YASMIN®)
    572.0  
Fexofenadine (Allegra® Tablets, Allegra® Capsules and Allegra® D)
    1,153.9  
Galantamine Hydrobromide (RAZADYNE®)
    116.0  
Galantamine Hydrobromide (RAZADYNE® ER)
    109.3  
Levalbuterol Hydrochloride (Xopenex®)
    633.2  
Methylphenidate Hydrochloride (Ritalin® LA)
    105.4  
Norethindrone/Ethjnyl Estradiol (Femcon® FE)
    46.1  
Norgestimate/Ethjnyl Estradiol (TRI-CYCLEN LO®)
    407.9  
Olopatadine Hydrochloride (Patanol®)
    301.0  
Pramipexole Dihydrochloride (MIRAPEX®)
    350.2  
Raloxifene Hydrochloride (EVISTA®)
    690.8  
Temozolomide (TEMODAR®)
    286.0  
Thalidomide (Thalomid®)
    400.1  
Tramadol HCl & Acetaminophen (ULTRACET®)
    101.9  
Triamcinolone Acetonide (NASACORT® AQ)
    369.1  
Zolpidem Tartrate (AMBIEN® CR)
    932.8  
 
     
TOTAL
  $ 11,594.2  
 
     
 
*   Source: IMS Health — twelve months sales ended December 31, 2007.
     Set forth below is a discussion of a patent-challenge matter listed in the above table.
     Fexofenadine (Allegra Tablets). Several patents related to fexofenadine hydrochloride, 30 mg, 60 mg and 180 mg tablets, the generic versions of Sanofi-Aventis’ Allegra® tablets, are subject to litigation. Through an arrangement with Teva, we launched a limited quantity of our generic fexofenadine hydrochloride tablet product in order to enable Teva to market its generic fexofenadine hydrochloride tablet product during our 180-day generic exclusivity period. We participate in the profits Teva earns from the ongoing sales of its product. We and Teva launched this product “at risk,” meaning prior to the rendering of a final decision in the patent challenge litigation. If we are unsuccessful in the litigation, we and Teva could be liable for substantial damages that could have material adverse effect on the results of our operations. See “Item 3 — Legal Proceedings —Pending Litigation Matters — Patent Matters — Fexofenadine Hydrochloride Suit” below for additional information on the status of this litigation.
     We will continue to pursue patent challenges and will evaluate future “at risk” launches based on the strength of our case.

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     PROPRIETARY PHARMACEUTICALS
     We manufacture and market proprietary pharmaceutical products under the Duramed label in the United States and Canada. These products include both products that we develop internally and products that we acquire, whether through licensing or acquisition. Proprietary products often are patent-protected or benefit from other non-patent market exclusivities. Although the proprietary products that we develop involve substantially higher risk to bring to market and require more extensive research and development activities on our part when compared with our generic products, they offer the potential for a longer period of market or product exclusivity and may generate greater returns than our generic products. The same is true for the proprietary products that we acquire, although they often involve less development risk. Actively promoted proprietary products require greater sales and marketing expenses than generic products because we need to promote them directly to healthcare providers using our sales representatives and, in some cases, directly to consumers through direct-to-consumer advertising.
     In the U.S., FDA approval is required before any new drug can be marketed. An NDA contains complete pre-clinical and clinical safety and efficacy data (or a right of reference to such data), and must be submitted to the FDA to obtain approval of a new drug. Before dosing of a new drug may begin in healthy human subjects or patients, stringent government requirements for pre-clinical data must be satisfied. The pre-clinical data, derived primarily from laboratory studies, is submitted in an Investigational New Drug (“IND”) application, or its equivalent in countries outside the U.S. where clinical trials are to be conducted. The pre-clinical data must provide an adequate basis for evaluating both the safety and the scientific rationale for the initiation of clinical trials.
     The regulatory process for approval of an NDA is discussed in greater detail below under “Government Regulation — New Drug Application Process.”
     Our proprietary development activities are focused primarily on expanding our portfolio of women’s healthcare products, which includes oral contraceptives, intrauterine contraception, hormone therapy treatments for menopause/perimenopause and treatment for endometriosis and labor and delivery. An important part of our product development strategy is to develop a broad line of products, to be prescribed primarily by OB/GYNs, that are designed to meet the unmet medical needs of women. Our focus in the area of extended-cycle oral contraception, which we established with the launch of SEASONALE® in 2003 and subsequent launch of the next-generation SEASONIQUE in July 2006, is providing women with the option of four periods per year. In addition, and in response to current contraception trends of altering the hormone interval, we also provide women with the option of low-dose estrogen instead of a hormonal-free interval, through our SEASONIQUE and MIRCETTE products. We are also pursuing several products that utilize our transvaginal ring technology to treat urinary incontinence, endometriosis and infertility.
     In areas other than women’s healthcare, we are pursuing a second urology product targeted at the symptoms associated with the treatment of prostate cancer. In addition, we are developing two oral vaccine products to prevent Adenovirus (Types 4 & 7) infections in U.S. military personnel under contract with the Department of Defense. We continue to identify other proprietary product candidates that further expand our product offerings in women’s healthcare and are actively evaluating additional therapeutic categories to add to our proprietary portfolio.
     As a result of internal development and business development activities, at December 31, 2007 we had a broad pipeline of short-, mid- and long-term opportunities that include several proprietary products in clinical development, two of which are starting Phase III studies, another four of which are in Phase III studies, and three NDAs pending at the FDA. See “Products in Development.”
     Our proprietary research and development team has experience in managing clinical development programs and regulatory matters. This team works closely with our generic formulation, manufacturing and regulatory groups to maximize the efficiency and effectiveness of our development process.
Proprietary Product Portfolio
     The following is a list of the proprietary products that we are actively promoting:

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    SEASONIQUE® (Levonorgestrel/Ethinyl Estradiol and Ethinyl Estradiol) extended-cycle oral contraceptive
 
    PLAN B OTC/Rx (Levonorgestrel) emergency oral contraceptive
 
    PARAGARD® T 380A (Intrauterine Copper Contraceptive) IUD
 
    ENJUVIA (Synthetic Conjugated Estrogens, B) hormone therapy
 
    MIRCETTE® (Desogestrel and Ethinyl Estradiol) oral contraceptive
 
    NIASPAN® (Niacin Extended-Release Tablets) for high cholesterol (marketed under agreement with Kos Pharmaceuticals, Inc., a wholly owned subsidiary of Abbott)
 
    ADVICOR® (Niacin Extended-Release/Lovastatin Tablets) for high cholesterol (also marketed under agreement with Kos Pharmaceuticals, Inc.)
     Set forth below are descriptions of certain of the proprietary products listed above.
     SEASONIQUE®. SEASONIQUE (levonorgestrel/ethinyl estradiol tablets 0.15 mg/0.03 mg and ethinyl estradiol tablets 0.01 mg) is our next generation extended-cycle oral contraceptive product. SEASONIQUE provides continuous hormonal support in the form of a low-dose of estrogen in place of the seven placebo pills. Under the SEASONIQUE extended-cycle regimen, women take active tablets of 0.15 mg levonorgestrel/0.03 mg of ethinyl estradiol for 84 consecutive days, followed by seven days of low-dose estrogen (0.01 mg of ethinyl estradiol). We launched SEASONIQUE in July 2006. In August 2006, we initiated full-scale detailing for SEASONIQUE utilizing our Women’s Healthcare and Specialty Sales Forces to approximately 40,000 healthcare providers. We have also initiated a fully integrated marketing campaign aimed at healthcare providers and patients which includes professional education materials, medical education initiatives, published data from our clinical studies demonstrating the safety and efficacy of the extended-cycle SEASONIQUE regimen, and product sampling kits that contain extensive information for patients. We are reinforcing our detailing activities with medical journal advertising and a direct-to-consumer advertising campaign, including television, print and web-based advertising.
     On January 22, 2008, the U.S. Patent and Trademark Office issued U.S. Patent No. 7,320,969 for SEASONIQUE. The patent will expire on January 30, 2024. The Company immediately submitted the patent to the FDA for listing in the Orange Book. On January 23, 2008, Watson Pharmaceuticals, Inc. notified the Company pursuant to the Hatch-Waxman Act, that Watson had filed an ANDA with the FDA for SEASONIQUE and that Watson had amended its application to include a paragraph IV certification asserting that the SEASONIQUE patent is invalid. The Company believes that the SEASONIQUE patent is valid and enforceable and intends to file a legal action against Watson to enforce the patent and to prevent Watson from marketing a competing product prior to patent expiry in 2024. If we are unsuccessful in this litigation, we may face generic competition for SEASONIQUE as early as May 25, 2009, the date of expiration of our existing new product regulatory exclusivity for SEASONIQUE.
     PLAN B Emergency Contraceptive. PLAN B, which contains the synthetic progestin levonorgestrel, is an emergency oral contraceptive that is intended to prevent pregnancy when taken as soon as possible within 72 hours following unprotected intercourse or contraceptive failure. In August 2006, the FDA approved our application to market PLAN B as an over-the-counter (OTC) product for consumers 18 years of age and older, while maintaining the prescription status for women 17 and younger. Our Women’s Healthcare Sales Force promotes the dual-label PLAN B OTC/Rx to a professional audience that includes pharmacists, physicians and other healthcare providers.
     We implemented and support a CARE(SM) program (Convenient Access, Responsible Education) that provides information to pharmacists, physicians and other healthcare providers, as well as consumers, regarding the appropriate distribution, use and monitoring for compliance with prescription age requirements of PLAN B OTC/Rx. The program also includes a comprehensive education program for healthcare professionals and consumers. In addition, we support various continuing education programs for pharmacists and other healthcare practitioners, a publication plan and journal advertising. We continue to work closely with retail pharmacies and drug wholesalers to ensure that they understand and follow the FDA’s prescription age requirement for the dispensing of the product.
     PARAGARD® IUC. Our PARAGARD T 380A (Intrauterine Copper Contraceptive) provides women with a long-term, reversible, non-hormonal contraceptive option. It is the only IUC approved for up to 10 years of continuous use and is more than 99% effective at preventing pregnancy. We believe that IUCs represent an under-utilized contraceptive option for women in the United States, and we are well positioned to grow this category through professional education and marketing. PARAGARD was approved in 1984 and has been marketed in the United States since 1988. Duramed acquired FEI Women’s Health, LLC and the PARAGARD IUC in November 2005 and promotes the product to physicians and health care practitioners using its Specialty Sales Force.
     ENJUVIA. In May 2006, we launched our ENJUVIA (synthetic conjugated estrogens, B) tablets and immediately initiated physician detailing using our Women’s Healthcare Sales Force. ENJUVIA is approved for the

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treatment of moderate-to-severe vasomotor symptoms associated with menopause. ENJUVIA tablets are available in a variety of dosage strengths, including 0.3 mg, 0.45 mg, 0.625 mg and 1.25 mg. ENJUVIA uses a unique delivery system, consisting of Surelease® technology with a cellulose-based polymer tablet design, to provide slow release of estrogens over several hours. In April 2007, we received two FDA approvals related to our ENJUVIA product. First, our supplemental New Drug Application (sNDA) for ENJUVIA 0.9 mg tablet strength was approved. Second, ENJUVIA became the first and only oral estrogen to be approved by FDA to treat moderate-to-severe vaginal dryness and pain with intercourse, symptoms of vulvar and vaginal atrophy associated with menopause. We launched the ENJUVIA 0.9 mg tablet and the new indication for the ENJUVIA product line in October 2007 at the North American Menopausal Society Annual Meeting.
     Our hormone therapy products, ENJUVIA and Cenestin®, compete in the $1.8 billion hormone therapy market with products such as Wyeth’s Premarin®, which is a conjugated equine estrogens product. The hormone therapy market has declined since the findings by the National Institutes of Health were publicized in July 2002 and created uncertainty in the minds of many healthcare providers and consumers regarding the risks and rewards of long-term hormone therapy. However, we believe that a number of women and their healthcare providers will continue using ENJUVIA and Cenestin products for the short-term treatment of moderate-to-severe vasomotor symptoms associated with menopause.
     As an on-going part of our product acquisition strategy, we have acquired more mature branded products, through litigation settlements, licensing agreements or direct acquisitions. We currently have 19 branded products that we do not directly promote to physicians but may undertake some limited marketing initiatives in an effort to maintain sales levels. These products include ADDERALL IR, which we acquired from Shire plc during August 2006, and five proprietary products that we acquired through PLIVA that were formerly marketed under the Odyssey label and are now being sold under the Duramed label, which are Antabuse® (for Alcohol Dependency), Nystatin® (Anti-fungal), Surmontil® (Anti-Depression), Urecholine® (Urinary Tract and Bladder Treatment), and Vivactil® (Anti-Depression).
     The table below sets forth those products, or classes of products, within our proprietary segment that accounted for 10% or more of that segment’s total product sales during 2007, the Transition Period, fiscal 2006 or fiscal 2005:
                                 
            Transition   Fiscal
    2007   Period   2006   2005
PLAN B
    21 %     14 %     *       *  
PARAGARD
    16 %     16 %     11 %     *  
SEASONALE
    *       14 %     30 %     31 %
CENESTIN
    *       *       11 %     16 %
LOESTRIN
    *       *       *       15 %
 
*   Denotes less than 10% in the period indicated.
Products in Development
     We have several proprietary products in clinical development in multiple product categories. Examples of these products are discussed in detail below.
     Bijuva (Synthetic Conjugated Estrogens, A) Cream. In June 2004, we filed an NDA for our Bijuva (Synthetic Conjugated Estrogens, A) vaginal cream product. In April 2005, the FDA issued a “not approvable” letter for our application pending submission of additional data. We have completed Phase III clinical work that we believe will provide the additional information needed to support the Bijuva application. If approved, we intend to market Bijuva for the treatment of moderate-to-severe symptoms of vulvar and vaginal atrophy associated with menopause.
     Transvaginal Ring (TVR) Products. We have three products that utilize our proprietary, novel, TVR drug delivery system, which have completed Phase II studies and for which we are designing Phase III studies. One of these products is a urinary incontinence product that offers the potential to deliver higher doses of oxybutynin to the

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bladder neck with lower systemic exposure. The second product offers the potential to treat infertility. The third product offers the potential to treat endometriosis. We have several other products in early stages of development that are focused on treating endometriosis, infertility, fibroids, labor and delivery, and urinary incontinence based on this TVR drug delivery system.
     Vaccines. We are developing Adenovirus Vaccines Type 4 and 7 under a $68.9 million, six-year contract awarded in September 2001 by the U.S. Department of Defense (“DOD”). The Adenovirus Vaccines are intended to be dispensed to armed forces recruits to prevent epidemics of an acute respiratory disease that has been a leading cause of hospitalizations of military trainees. In July 2003, we completed construction of a 20,000 square foot manufacturing and packaging facility designed specifically to produce these vaccines. The facility is located on our Virginia manufacturing and distribution campus. We completed the Phase I study in April 2006. In September 2006, we began our Phase II/III clinical program, which completed enrollment in late 2007. The results from the study, if positive, would support the filing of a Biologics License Application (“BLA”) in 2008. In addition to supplying the vaccine to the armed forces, we have the right to market the product to other populations, such as immunosuppressed patients, and foreign markets where the same needs exist as those of the DOD.
Sales and Marketing
     We market our proprietary products through three sales teams: our Women’s Healthcare Sales Force, our Specialty Sales Force and our Institutional Sales Force.
    Our Women’s Healthcare Sales Force, which has approximately 200 sales representatives, currently promotes SEASONIQUE extended-cycle oral contraceptive, our ENJUVIA hormone therapy products and our PLAN B OTC/Rx emergency contraceptive product to women’s healthcare practitioners. This sales force may market additional women’s healthcare products we develop or acquire.
 
    Our Specialty Sales Force, which has 90 sales representatives, promotes the PARAGARD IUD product and MIRCETTE to obstetricians, gynecologists and other practitioners with a focus on women’s healthcare. This sales force also promotes NIASPAN and ADVICOR cholesterol treatments under a co-promotion agreement with Kos Pharmaceuticals, Inc. that we entered into in April 2005.
 
    Our Institutional Sales Force, which has approximately 40 sales representatives, promotes the Company’s proprietary products at teaching hospitals and other institutions, targeting attending physicians and OB/GYN residents. In addition, this sales force promotes our generic injectable products to various hospitals.
     The customer base for our proprietary products includes drug store chains, supermarket chains, mass merchandisers, wholesalers, distributors, managed care organizations, mail order accounts, and the government/military. Net sales to customers who accounted for 10% or more of our proprietary sales during 2007, the Transition Period, fiscal 2006 or fiscal 2005 were as follows:
                                 
            Transition   Fiscal
    2007   Period   2006   2005
McKesson Drug Company
    32 %     36 %     30 %     26 %
Cardinal Health
    25 %     16 %     15 %     20 %
Integrated Commercialization Services
    16 %     15 %     11 %     *  
AmeriSource Bergen
    *       *       *       11 %
 
*   Denotes less than 10% in the period indicated.

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BIOLOGICS
     Biologics involve the use of live organisms, as opposed to chemical (non-biological) compounds, for their production. Biologics worldwide represent one of the fastest-growing segments of the global pharmaceutical industry. Biologic products provide treatment for diseases like cancer, arthritis, and rare genetic disorders. Spending on biologics in the United States increased 127% from 2001 to 2005. In 2006, biologic sales increased 20% to $40.3 billion, compared to 8% sales growth for traditional drugs. Eighteen of the 101 drugs that brought in more than $1.0 billion in worldwide sales in 2006 were biologics. Biologics are a major driver of increasing prescription drug costs. We believe this area represents a major growth opportunity for us and the generic pharmaceutical industry as a whole. We also believe that we are among a few companies uniquely qualified to research, characterize, formulate, manufacture, address complex biologics-related issues and commercialize generic biologics in-house.
     In the U.S., the FDA has not recognized an abbreviated regulatory pathway for the timely and cost-efficient approval of generic versions of biologic products under the Public Health Service Act (“PHSA”). We are working with Congress, the Department of Health and Human Services (“HHS”), including the FDA, and the generic industry’s trade association, the Generic Pharmaceutical Association (“GPhA”), to help define the regulatory pathway for approval of these products. We have been developing these products in anticipation of Congress and the FDA creating a regulatory pathway for generic biologics in the United States. In Europe, the EMEA has developed a regulatory pathway for generic biologics, which also are known as “similar biological medicinal products.” As a result, generic biologics are at a more advanced stage in Europe than they are in the United States.
     We are actively pursuing business development initiatives and internal development activities that we believe will enable us to bring generic versions of biologic products to market, both in the U.S. and in Europe, and we intend to build a leadership position in the development and marketing of such products. We currently have a biologics development portfolio that includes recombinant human G-CSF, a protein that stimulates the growth of certain white blood cells. Our recombinant human G-CSF is intended to be a generic version of Amgen’s Neupogen®, and is intended for submission in both the European Union (via a partner) and the U.S. We are also developing an Adenovirus vaccine for the U.S. Department of Defense, and several additional biologic products that are in various stages of development.
     There are, however, three major challenges in pursuing generic biologics: regulatory challenges, intellectual property challenges and scientific/manufacturing challenges. The key regulatory challenge facing us in the U.S. is that the FDA has not recognized an abbreviated regulatory pathway that would enable the timely and cost-efficient approval of generic versions of biologics approved under the PHSA. We are working with Congress and the FDA to overcome this barrier.
     Brand manufacturers of biologic products have sought and obtained intellectual property protection of many aspects of biologic development and manufacturing, including processes, characterization, naturally occurring by-products of biologic raw material production and processes related to scale-up, manufacturing and analysis of the purity, quality and efficacy of the finished product. We believe that we are well situated, in terms of our experience with complex intellectual property issues, to overcome patent and other barriers to the introduction of these products.
     There have been significant recent developments in the generic biologic arena. Both Houses of the U.S. Congress debated generic biologics legislation in 2007. Several Committees, including the Senate Health, Education, Labor and Pensions Committee (“HELP”), the House Oversight and Government Reform Committee, and the House Energy & Commerce Committee held hearings on a generic biologics pathway. Several advocacy groups have also released economic reports on generic biologics, such as that issued by Citizens Against Government Waste (“CAGW”), which estimated savings of $43.2 billion between 2011 and 2020 if an approval pathway is established.
     On February 14, 2007, Representative Waxman introduced House Bill 1038 (“Access to Life Saving Medicine Act”) in the U.S. House of Representatives seeking to provide a regulatory pathway for generic biologics. The Access to Life Saving Medicine Act, as currently written, would allow the FDA to approve abbreviated applications for generic versions of biologic products licensed under the PHSA, without necessarily having to repeat expensive and duplicative clinical trials. The bill establishes a scientifically rigorous process for approval of generic versions

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of biologic products, authorizing the FDA to determine, on a product-by-product basis, what studies will be necessary to show that a new product is clinically comparable to the brand name product. The bill would also create an improved process for ensuring that patent disputes are resolved early to avoid delays in competition. On February 15, 2007, Senators Clinton and Schumer, among others, introduced a companion bill in the Senate, Senate Bill 623. In April 2007, Representative Inslee introduced House Bill 1956 the “Patient Protection and Innovative Biologic Medicines Act of 2007.” That bill would create significant barriers to timely and expedited approval of generic biologic products. Senator Greg introduced a similar bill in the U.S. Senate in May 2007, Senate Bill 1505. On June 26, 2007, a bipartisan group of Senators, including Senators Clinton, Kennedy, Hatch, and Enzi, introduced Senate Bill 1695, “Biologics Price Competition and Innovation Act of 2007.” That bill would allow the FDA to approve abbreviated applications for generic versions of biologic products licensed under the PHSA and would give the FDA the discretion to decide what data and tests would be necessary for approval. The bill also includes a complex patent dispute resolution mechanism. Barr continues to work in support of passage of a workable bill.
RESEARCH AND DEVELOPMENT
     Our commitment to research and development, which includes generics, proprietary products and biologics, resulted in investments of $248 million in 2007, $107 million in the Transition Period, $140 million in fiscal 2006 and $128 million in fiscal 2005. We have consistently made substantial investments in research and development because of our belief that a significant portfolio of products in development is critical to our long-term success. Research and development expenditures for generic development activities typically include those related to internal personnel, third-party bioequivalence studies, clinical studies related to biologic product development, costs paid to third-party development partners and raw materials used in developing products. Proprietary product development costs typically include those related to internal personnel, clinical studies, third-party toxicology studies, clinical trials conducted by third-party clinical research organizations, raw materials and acquired in-process research and development charges. We expect to continue to invest aggressively in research and development projects in generic, proprietary and generic biologics categories.
RAW MATERIALS
     We purchase certain bulk pharmaceutical chemicals and raw materials that are essential to our business from numerous suppliers. We also purchase certain finished dosage form products, such as our PLAN B emergency contraceptive and our ViaSpan® transplant preservation agent, from third-party suppliers.
     Arrangements with non-U.S. suppliers are subject to certain risks, including obtaining governmental clearances, export duties, political instability, currency fluctuations and restrictions on the transfer of funds. In addition, in the U.S., the Drug Enforcement Agency (“DEA”) regulates the allocation to us of raw materials used in the production of controlled substances based on historical sales data. Any inability to obtain raw materials or finished products on a timely basis, or any significant price increases that cannot be passed on to customers, could adversely affect us. Because prior FDA approval of raw material suppliers or product manufacturers may be required, if raw materials or finished products from an approved supplier or manufacturer were to become unavailable, the required FDA approval of a new supplier could cause a significant delay in the manufacture or supply of the affected drug product.
PATENTS AND PROPRIETARY RIGHTS
     We file patent applications and obtain patents to protect our products, technologies, inventions and improvements that we consider important to the development of our business. We also rely upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain our competitive position. Preserving our trade secrets and protecting our proprietary rights are important to our long-term success.
     From time-to-time, we may find it necessary to initiate litigation to enforce our patent rights, to protect our trade secrets or know-how or to determine the scope and validity of the proprietary rights of others. Litigation concerning patents, trademarks, copyrights and proprietary technologies can often be protracted and expensive and, as with litigation generally, the outcome is often uncertain. See Item 3 — “Legal Proceedings.”

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     GOVERNMENT REGULATION
United States
     We are subject to extensive regulation by the FDA, the DEA and state governments, among others. The Federal Food, Drug, and Cosmetic Act, the Controlled Substances Act, the Prescription Drug Marketing Act and other federal statutes and regulations govern or influence the testing, manufacturing, safety, labeling, storage, record keeping, approval, marketing, advertising and promotion of our products. Non-compliance with applicable requirements can result in fines, recalls and seizure of products.
     Abbreviated New Drug Application Process
     In the U.S., generic pharmaceutical products are the chemical and therapeutic equivalent of branded drug products listed in the FDA publication entitled “Approved Drug Products with Therapeutic Equivalence Evaluations,” popularly known in the industry as the “Orange Book.” The Drug Price Competition and Patent Term Restoration Act of 1984, as amended, which is known as the “Hatch-Waxman Act,” has been largely credited with launching the generic drug industry in the United States. Generic drugs are bioequivalent to their brand-name counterparts, meaning they deliver the equivalent amount of active ingredient at the same rate as the brand-name drug. Accordingly, generic products provide safe and effective alternatives to branded products, typically at a significantly lower price than the branded equivalent.
     FDA approval is required before a generic equivalent can be marketed. We seek approval for such products by submitting an Abbreviated New Drug Application (“ANDA”) to the FDA. ANDAs are abbreviated versions of NDAs that must be filed with the FDA for a branded product. The Hatch-Waxman Act provides that generic drugs may enter the market upon approval of an ANDA. When processing an ANDA, the FDA waives the requirement of conducting complete clinical studies, although it normally requires bioavailability and/or bioequivalence studies. “Bioavailability” indicates the rate and extent of which the active ingredient is absorbed from a drug product and becomes available at the site of action. “Bioequivalence” compares the bioavailability of one drug product with another, and when established, indicates that the rate of absorption and levels of concentration of the active drug substance in the body are equivalent for the generic drug and the previously approved drug. An ANDA may be submitted for a drug on the basis that it is the equivalent of a previously approved drug or, in the case of a new dosage form, is suitable for use for the indications specified.
     Before approving a product, the FDA also requires that our procedures and operations conform to Current Good Manufacturing Practice (“cGMP”) regulations, relating to good manufacturing practices as defined in the U.S. Code of Federal Regulations. We must follow the cGMP regulations at all times during the manufacture of our products. We continue to spend significant time, money and effort in the areas of production and quality testing to help ensure full compliance with cGMP regulations.
     If the FDA believes a company is not in compliance with cGMP, sanctions may be imposed upon that company including: withholding from the company new drug approvals as well as approvals for supplemental changes to existing applications; preventing the company from receiving the necessary export licenses to export its products; and classifying the company as an “unacceptable supplier” and thereby disqualifying the company from selling products to federal agencies. We believe we are currently in compliance with cGMP regulations.
     The timing of final FDA approval of an ANDA depends on a variety of factors, including whether the applicant challenges any listed patents for the drug and whether the brand-name manufacturer is entitled to one or more statutory exclusivity periods, during which the FDA may be prohibited from accepting applications for, or approving, generic products. In certain circumstances, a regulatory period can extend beyond the life of a patent, and thus block ANDAs from being approved on the patent expiration date. For example, in certain circumstances the FDA may extend the exclusivity of a product by six months past the date of patent expiry if the manufacturer undertakes studies on the effect of their product in children, a so-called pediatric extension. The pediatric extension results from a 1997 law designed to reward branded pharmaceutical companies for conducting research on the effects of pharmaceutical products in the pediatric population. As a result, under certain circumstances, a branded company can obtain an additional six months of market exclusivity by performing pediatric research.

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     In May 1992, Congress enacted the Generic Drug Enforcement Act of 1992, which allows the FDA to impose debarment and other penalties on individuals and companies that commit certain illegal acts relating to the generic drug approval process. In some situations, the Generic Drug Enforcement Act requires the FDA to not accept or review ANDAs for a period of time from a company or an individual that has committed certain violations. It also provides for temporary denial of approval of applications during the investigation of certain violations that could lead to debarment and also, in more limited circumstances, provides for the suspension of the marketing of approved drugs by the affected company. Lastly, the Generic Drug Enforcement Act allows for civil penalties and withdrawal of previously approved applications. Neither we nor any of our employees have ever been subject to debarment.
     Patent Challenges
     We actively challenge patents on branded pharmaceutical products where we believe such patents are invalid, unenforceable, or not infringed by our competing generic products. Our development activities in this area, including sourcing raw materials and developing equivalent products, are designed to obtain FDA approval for our product. Our legal activities in this area, performed primarily by outside counsel, are designed to eliminate the barriers to market entry created by the patents. Under the Hatch-Waxman Act, the first generic ANDA applicant whose filing includes a certification that a listed patent on the brand name drug is invalid, unenforceable, or not infringed (a so-called “paragraph IV certification”), may be eligible to receive a 180-day period of generic market exclusivity. This period of market exclusivity may provide the patent challenger with the opportunity to earn a significant return on the risks taken and its legal and development costs. Patent challenge product candidates typically must have several years of remaining patent protection to ensure that the legal process can be completed prior to patent expiry. Because of the potential value of being the only generic in the market for the 180-day generic exclusivity period, we typically seek to be the first company to file an ANDA containing a paragraph IV certification for a targeted product.
     The process for initiating a patent challenge begins with the identification of a drug candidate and evaluation by qualified legal counsel of the patents purportedly protecting that product. We have reviewed a number of potential challenges and have pursued only those that we believe have merit. Our general practice is to disclose patent challenges after the patent holder has sued us. Thus, at any time, we could have several undisclosed patent challenges in various stages of development.
     Patent challenges are complex, costly, and can take three to six years to complete. As a result, we have in the past and may elect in the future to have partners on selected patent challenges. These arrangements typically provide for a sharing of the costs and risks, and generally provide for a sharing of the benefits of a successful outcome. In addition, our patent challenges may result in settlements that we believe are reasonable, lawful, and in our shareholders’ best interests.
     Over the past few years the use of so-called “authorized” generics has increased significantly in response to generic pharmaceutical patent challenges. Authorized generics involve the brand pharmaceutical maker either marketing a “generic” version of its brand product or licensing its brand drug to another company, which is then marketed in competition with the true generic during the 180-day generic exclusivity period. Because the “authorized” generic is not sold under an ANDA, but rather is sold under the brand pharmaceutical maker’s NDA, courts have held to date that the authorized generic can compete against the patent challenger’s generic product during the 180-day exclusivity period.
     We believe that the marketing of “authorized” generics during a generic company’s 180-day exclusivity period undermines the original intent of the Hatch-Waxman Act and devalues the incentives the Hatch-Waxman Act provided for pursuing paragraph IV certifications. In addition, “authorized” generics may have a chilling effect on investment in future patent challenges by some generic pharmaceutical companies. We continue to work with Congress to seek legislation that would restore the full value of the incentive period. In January 2007, Senators Rockefeller, Schumer, Leahy and Kohl introduced Senate Bill 438 seeking to prohibit the entry of an authorized generic drug into the market during a generic company’s 180-day exclusivity period.
     Sales of several of our products have been impacted by the brand company’s authorized generic product launch during our 180-day exclusivity period and we anticipate that certain future products may also face competition from authorized generics.

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     In January 2007, Senators Kohl, Leahy, Grassley, Schumer, and Feingold introduced Senate Bill 316 which would significantly limit the ability of companies to settle Hatch-Waxman patent litigation. In March and April 2007, similar legislation was introduced in the U.S. House. We believe that such potential legislation undermines the original intent of the Hatch-Waxman Act and devalues the 180-day generic exclusivity incentive. We continue to work with Congress to seek legislation that would not so limit the ability of brand and generic companies to enter into pro-consumer settlements.
     In 2006, patent reform legislation was introduced in both the House and Senate. Those bills would make certain changes to the Patent Act. In 2007, new patent reform legislation was introduced in the House and Senate, House Bill 1908 and Senate Bill 1145. The House passed House Bill 1908 in September 2007. The full Senate has not voted on Senate Bill 1145. If adopted, the proposals set forth in these bills could significantly change the way that patent laws currently operate. We continue to work with Congress to seek legislation that would not negatively impact a company’s ability to challenge the validity, enforceability, or infringement of patents.
     Patent Challenge Process
     The Hatch-Waxman Act offers an incentive to generic pharmaceutical companies that challenge suspect patents on branded pharmaceutical products. The legislation recognizes that there is a potential for non-infringement of an existing patent or the improper issuance of patents by the U.S. Patent and Trademark Office, or PTO, resulting from a variety of technical, legal or scientific factors. The Hatch-Waxman legislation places significant burdens on the challenger to ensure that such suits are not frivolous, but also may offer the opportunity for significant financial reward if successful.
     At the time an ANDA is filed with the FDA, a generic company that wishes to challenge the patent files a paragraph IV certification. After receiving notice from the FDA that its application is accepted for filing, the generic company sends the patent holder and NDA owner a notice explaining why it believes that the patent(s) in question are invalid, unenforceable, or not infringed. If the patent holder and NDA owner bring suit in federal district court against the generic company to enforce the challenged patent within 45 days of the receipt of the notice from the generic company, the Hatch-Waxman Act provides for an automatic stay of the FDA’s authority to grant the approval that would otherwise give the patent challenger the right to market its generic product. This stay is set at 30 months, or such shorter or longer period as may be ordered by the court. The 30 months often does not coincide with the timing of a trial or the expiration of a patent. The discovery, trial, and appeals process can take several years.
     Under the Hatch-Waxman Act, the developer of a generic drug that files the first ANDA containing a paragraph IV certification may be eligible to receive a 180-day period of generic market exclusivity. This period of market exclusivity may provide the patent challenger with the opportunity to earn a significant return on the risks taken and its legal and development costs.
     The FDA adopted regulations implementing the 180-day generic marketing exclusivity provision of the Hatch-Waxman Act. However, over the years, courts have found various provisions of the regulations to be in conflict with the statute. For example, in Mova Pharmaceutical Corp. v. Shalala, 140 F.3d 1060 (D.C. Cir. 1998), the court of appeals held that the Hatch-Waxman Act required generic exclusivity to be awarded to the first generic company to file an ANDA containing a paragraph IV certification, regardless of whether that company prevailed in a court challenge to the relevant patent(s) before another company was ready for approval. In contrast, the FDA’s regulations had required the first patent challenger to successfully defend its challenge to the patent(s) before another generic company was ready to receive approval. In Mylan Pharmaceuticals v. Shalala, 81 F. Supp. 2d 30 (D.D.C. 2000), the court found that the statute requires the 180-day generic period to commence on the date of the first court decision in favor of the generic applicant, even if the first successful decision was a district court decision finding the challenged patent invalid, unenforceable, or not infringed and the innovator company appealed the court’s decision. The decision was in contrast to the FDA’s regulation under which the exclusivity period would not commence until the appellate court affirmed the district court’s invalidity, unenforceability, or non-infringement ruling.

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     In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act (“MMA”) was signed into law. The MMA included provisions modifying the Hatch-Waxman Act and generic exclusivity related to patent challenges. The MMA includes several provisions regarding the patent challenge process designed to level the playing field for generic companies. Generally speaking, the MMA provisions apply when the first ANDA containing a paragraph IV certification was filed after December 8, 2003. These reforms included:
    Only one 30-month stay allowed per drug;
 
    Product-by-product exclusivity;
 
    Shared 180-day exclusivity in limited circumstances;
 
    Counterclaim for an Orange Book delisting allowed; and
 
    180-day exclusivity cannot be triggered by a district court decision.
     First, under the MMA, only patents submitted to the FDA before an ANDA is filed can result in a 30-month stay. No additional 30-month stay can be obtained on patents listed in the Orange Book after the ANDA has been filed. Second, exclusivity is expressly on a product-by-product basis, meaning that there will only be one 180-day exclusivity period per listed drug. Third, because exclusivity is product-by-product, shared exclusivity will result only when multiple companies submit the first ANDA containing a paragraph IV certification on the same day. Fourth, ANDA applicants now have the ability to challenge the propriety of a patent listing. If an ANDA applicant is sued, the company can now bring a counterclaim seeking to have a patent removed from the Orange Book. Finally, for ANDAs where the first paragraph IV certification was filed before December 8, 2003, Congress reinstated FDA’s prior interpretation of “court decision,” meaning that exclusivity for such applications can be triggered by first commercial marketing or by the appellate court’s affirmance of an appealed district court’s ruling. Thus, for such applications, the 180-day exclusivity period cannot be triggered by a district court decision that is on appeal.
     Where the first paragraph IV ANDA was submitted after the enactment of the MMA, the MMA made changes to the generic exclusivity provision. Under the MMA, the start of the 180-day exclusivity period can only be triggered by the first ANDA filer’s marketing of its own generic product or a product made by the brand company. The MMA also includes a series of provisions under which the 180-day exclusivity period can be “forfeited.” While exclusivity could be forfeited as a result of a court decision, that court decision must either be an unappealed district court decision or an appellate court decision.
     New Drug Application Process
     FDA approval is required before any new drug can be marketed in the U.S. A New Drug Application (“NDA”) is a filing submitted to the FDA to obtain approval of a new drug and must contain complete pre-clinical and clinical safety and efficacy data or a right of reference to such data. Before dosing a new drug in healthy human subjects or patients may begin, stringent government requirements for pre-clinical data must be satisfied. The pre-clinical data, typically obtained from studies in animal species as well as from laboratory studies, are submitted in an Investigational New Drug, or IND, application, or its equivalent in countries outside the U.S. where clinical trials are to be conducted. The pre-clinical data must provide an adequate basis for evaluating both the safety and the scientific rationale for the initiation of clinical trials.
     Clinical trials are typically conducted in three sequential phases, although the phases may overlap.
    In Phase I, which frequently begins with the initial introduction of the compound into healthy human subjects prior to introduction into patients, the product is tested for safety, adverse effects, dosage, tolerance absorption, metabolism, excretion and other elements of clinical pharmacology.
 
    Phase II typically involves studies in a small sample of the intended patient population to assess the efficacy of the compound for a specific indication, to determine dose tolerance and

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      the optimal dose range, and to gather additional information relating to safety and potential adverse effects.
 
    Phase III trials are undertaken to further evaluate clinical safety and efficacy in an expanded patient population at typically dispersed study sites, in order to determine the overall risk-benefit ratio of the compound and to provide an adequate basis for product labeling.
     Each trial is conducted in accordance with certain standards under protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. In some cases, the FDA allows a company to rely on data developed in foreign countries, or previously published data, which eliminates the need to independently repeat some or all of the studies.
     Data from pre-clinical testing and clinical trials are submitted to the FDA as an NDA for marketing approval and to other health authorities as a marketing authorization application. The process of completing clinical trials for a new drug may take several years and require the expenditure of substantial resources. Preparing an NDA or marketing authorization application involves considerable data collection, verification, analysis and expense, and there can be no assurance that approval from the FDA or any other health authority will be granted on a timely basis, if at all. The approval process is affected by a number of factors, primarily the risks and benefits demonstrated in clinical trials as well as the severity of the disease and the availability of alternative treatments. The FDA or other health authorities may deny an NDA or marketing authorization application if the regulatory criteria are not satisfied, or such authorities may require additional testing or information.
     Even after initial FDA or other health authority approval has been obtained, further studies, including Phase IV post-marketing studies, may be required to provide additional data on safety. The post-marketing studies could be used to gain approval for the use of a product as a treatment for clinical indications other than those for which the product was initially tested.
     Also, the FDA or other regulatory authorities require post-marketing reporting to monitor the adverse effects of the drug. Results of post-marketing programs may limit or expand the further marketing of the products. Further, if there are any modifications to the drug, including changes in indication, manufacturing process or labeling or a change in the manufacturing facility, an application seeking approval of such changes must be submitted to the FDA or other regulatory authority. Additionally, the FDA regulates post-approval promotional labeling and advertising activities to assure that such activities are being conducted in conformity with statutory and regulatory requirements. Failure to adhere to such requirements can result in regulatory actions that could have an adverse effect on our business, results of operations and financial condition.
     United States Drug Enforcement Agency (“DEA”)
     Because we sell and are currently developing several other products that contain controlled substances, we must meet the requirements and regulations of the Controlled Substances Act, which are administered by the DEA. These regulations include stringent requirements for manufacturing controls and security to prevent diversion of or unauthorized access to the drugs in each stage of the production and distribution process. The DEA regulates allocation to us of raw materials used in the production of controlled substances based on historical sales data. We believe we are currently in compliance with all applicable DEA requirements.
     Medicaid
     In November 1990, a law regarding reimbursement for prescribed Medicaid drugs was passed as part of the Congressional Omnibus Budget Reconciliation Act of 1990. All generic pharmaceutical manufacturers whose products are covered by the Medicaid program are required to rebate to each state a percentage of their Average Manufacturer Price (“AMP”) for the products in question. For 2007, these percentages were 11% in the case of products sold by us which are covered by an ANDA and the greater of 15% or the difference between AMP minus the lowest non-government price, or Best Price, for products sold by us which are covered by an NDA. For products covered by an NDA, rebates may include an additional penalty if prices increased faster than the Consumer Price Index-Urban over time.

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     The Deficit Reduction Act required changes to our methods of calculating the AMP and Best Price effective October 1, 2007. It is too early to determine the financial effect of these changes. We believe that federal and/or state governments may continue to enact measures in the future aimed at reducing the cost of providing prescription drug benefits to the public, particularly senior citizens. We cannot predict the nature of such measures or their impact on our profitability.
     Medicare
     In January 2006, the Medicare Part D prescription drug benefit, which provides for comprehensive prescription drug coverage to seniors, took effect with the implementation of the Medicare Prescription Drug and Modernization Act (“MMA”). During 2006 and 2007, we finalized negotiated rebate agreements involving Cenestin, ENJUVIA and Trexall with numerous Part D Sponsors. We also calculated and reported our quarterly Average Sales Price (ASP) for products covered under Medicare Part B, as required by the MMA.
Other Countries
     In Europe and ROW, the manufacture and sale of pharmaceutical products is regulated in a manner substantially similar to that in the United States. Legal requirements generally prohibit the handling, manufacture, marketing and importation of any pharmaceutical product unless it is properly registered in accordance with applicable law. The registration file relating to any particular product must contain medical data related to product efficacy and safety, including results of clinical testing and/or references to medical publications, as well as detailed information regarding production methods and quality control. Health ministries are authorized to cancel or suspend the registration of a product if it is found to be harmful or ineffective or manufactured and marketed other than in accordance with registration conditions.
     A directive of the European Union requires that medicinal products shall have a valid marketing authorization before they are sold or supplied in the European Union. Marketing authorizations are granted after the assessment of quality, safety and efficacy. In order to control expenditures on pharmaceuticals, most member states of the European Union regulate the pricing of such products and in some cases limit the range of different forms of a drug available for prescription by national health services. These controls can result in considerable price differences among member states. As part of the mutual recognition and decentralization registration procedures established by the European Union, an attempt was made to simplify the registration process and achieve harmonization for a given product within the community. The centralized registration procedure is mandatory for biosimilar products but is optional for generic versions of centrally approved products. To date, only a few generic products have been approved using this procedure.
     The duration of certain pharmaceutical patents may be extended in Europe and the ROW by up to five years in order to extend effective patent life to fifteen years. Additionally, data exclusivity provisions in Europe (as discussed below) may prevent the submission of a marketing authorization application for a generic product by six or ten years from the date of grant of the first marketing authorization for the originator product in the European Union. New legislation, effective as of November 2005, lengthens the exclusivity period for new products to 10 years for all members of the EU, with a possibility of extending the period up to 11 years under certain circumstances. As this legislation is not retrospective, the old periods of data exclusivity continue to apply to products submitted prior to implementation of the new law. This new legislation also enables the submission of a marketing authorization application for a generic product to the health authorities eight years after the first marketing authorization for the originator product was approved in the EU, and allows for research and development work during the patent term for the purpose of submitting registration dossiers.
     Data exclusivity provisions exist in many countries worldwide, including in the European Union, although their application is not uniform. Similar provisions may be adopted by additional countries or otherwise strengthened. In general, these exclusivity provisions prevent the approval and/or submission of generic drug applications to the health authorities for a fixed period of time following the first approval of a novel brand-name product in that country. As these exclusivity provisions operate independently of patent protection, they may prevent the approval and/or submission of generic drug applications for some products even after the patent protection has expired.

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Government Relations Activities
     Because we believe a balanced and fair legislative and regulatory arena is critical to the pharmaceutical industry, we have and will continue to place a major emphasis in terms of management time and financial resources on government affairs activities. We currently maintain an office and staff a full-time government affairs department in Washington, D.C., which is responsible for coordinating state and federal legislative activities and coordinating with the generic industry trade association and other associations, such as the Consumer Health Product Association and National Association of Manufacturers, whose interests and goals are aligned with ours. Outside the U.S., we participate in the European Generic Association, and local government affairs matters are handled by country managers on a local level, subject to overall coordination by our government affairs department.
     COMPETITION
     We face intense competition from numerous branded and generic pharmaceutical companies in nearly every country where our pharmaceutical products are marketed. Our competitors include:
    the generic divisions and subsidiaries of brand pharmaceutical companies, including Sandoz US, a subsidiary of Novartis AG;
 
    large independent domestic and international generic manufacturers including Mylan Inc., Watson Pharmaceuticals, Inc., Teva Pharmaceuticals and distributors with large product lines where there is competition with some of our products;
 
    generic manufacturers in Europe such as Ratiopharm, Gedeon Richter Ltd, Actavis and Krka d.d.;
 
    generic manufacturers in India that have certain cost advantages over U.S. generic manufacturers, such as Ranbaxy and Dr. Reddy’s; and
 
    brand pharmaceutical companies whose therapies compete with our generic and proprietary products, including Johnson & Johnson, Wyeth, Bayer and Warner Chilcott.
     The expiration of patents and other market exclusivities on branded products results in generic competitors entering the marketplace. In most cases, there is significant unit price decline as additional generic competitors enter the market and we may lose market share as well. The timing of price decreases is often unpredictable and can result in a significantly curtailed period of profitability for a particular generic product. In addition, brand-name manufacturers frequently take actions in the U.S. to prevent or discourage the use of a competitor’s generic equivalents. These actions may include:
    filing new patents on drugs whose original patent protection is about to expire;
 
    obtaining patents on “next-generation” products reflecting, for example changes in formulation, means of delivery or other product improvement modifications;
 
    increasing marketing initiatives;
 
    launching authorized generic versions of their branded products;
 
    using the Citizen’s Petition process to request amendments to FDA standards;
 
    pricing the brand product below the already reduced price of the generic product in certain formularies in order to maintain a favored reimbursement status; and
 
    commencing litigation.

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     Generic pharmaceutical market conditions have also been affected by industry consolidation and a fundamental shift in industry distribution, purchasing and stocking patterns resulting in the increased importance of sales to major chain drug stores and major wholesalers and a concurrent reduction in sales to private label generic distributors.
     In the generic oral contraceptive market, which represents the largest category of our generics segment, our most significant competitor is Watson Pharmaceuticals, which markets and distributes a sizeable portfolio of generic oral contraceptive products. Teva Pharmaceuticals, which currently markets two generic oral contraceptive products manufactured by Andrx Corporation, now a subsidiary of Watson Pharmaceuticals, is also a competitor. As a result of Watson’s acquisition of Andrx, Teva has gained the rights to Andrx’s oral contraceptive products and pending applications. In addition, a small, privately held pharmaceutical company distributes authorized generic versions of two oral contraceptive products that we manufacture and market. Although we expect competition in the generic oral contraceptive field to intensify, we believe that our large portfolio of generic oral contraceptives will remain a significant component of our total revenues in 2008.
     In Europe, we compete with other generic companies (several major multinational generic drug companies and various local generic drug companies) and branded drug companies that continue to sell or license branded pharmaceutical products after patent expirations and other statutory expirations. As in the U.S., the generic market in Europe is very competitive, with the main competitive factors being prices, time to market, reputation, customer service and breadth of product line.
     Our proprietary pharmaceutical products compete with products manufactured by branded pharmaceutical companies in competitive markets throughout the U.S. and Canada. The competitive factors that impact this part of our business include product efficacy, safety, market acceptance, price, marketing effectiveness, patent protection, and research and development of new products. Our proprietary products often must compete with other products that already have an established position in the market. If competitors introduce new products, delivery systems or processes with therapeutic or cost advantages, our products could be subject to price reductions or decreased volume of sales, or both. Our proprietary products may also face competition from manufacturers of generic pharmaceuticals, following the expiration of non-patent product exclusivities or a successful challenge to our patents.
     To ensure our ability to compete effectively, we:
    focus our proprietary and generic product development in areas of historical strength or competitive advantage;
 
    target generic products for development that have unique characteristics, including difficulty in sourcing raw materials, difficulty in formulation or establishing bioequivalence, and manufacturing that requires unique facilities, processes or expertise;
 
    develop innovative, cost-effective proprietary products that serve unmet medical needs; and
 
    make significant investments in plant and equipment to improve our efficiency.
     These strategies provide the basis for our belief that we will continue to remain a leading independent specialty pharmaceutical company.
     EMPLOYEES
     Our success depends on our ability to recruit and retain highly qualified scientific and management personnel. We face competition for personnel from other companies (including other pharmaceutical companies), academic institutions, government entities and other organizations. As of December 31, 2007, we had approximately 8,900 full-time employees. In the U.S., approximately 80 of our employees are represented by unions. Outside of the U.S., approximately 2,650 of our employees are represented by unions, and approximately 5,100 employees are covered by collective bargaining agreements in Croatia, the Czech Republic, Germany and Poland.

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     We believe that our relations with our employees are good.
INSURANCE
     Our insurance coverage at any given time reflects market conditions, including cost and availability, existing at the time it is written, and the decision to obtain insurance coverage or to self-insure varies accordingly. If we were to incur substantial liabilities that are not covered by insurance or that substantially exceed coverage levels or accruals for probable losses, there could be a material adverse effect on our financial statements in a particular period.
     We maintain third-party insurance that provides coverage, a portion of which is subject to specified co-insurance requirements, for the cost of product liability claims arising during the current policy period, which began on October 1, 2007 and ends on September 30, 2008, up to an aggregate amount of $75.0 million. For claims related to products distributed in North America, we have retained liability for the first $25.0 million of costs incurred while claims related to products distributed outside of North America are subject to per claim and aggregate retentions of $1.0 million and $5.0 million, respectively.
     In addition to the above programs, we also have obtained extended reporting periods under previous policies for certain claims asserted during the current policy period where those claims relate to remote and prior occurrences. The applicable retentions and dates of occurrence under the previous policies vary by policy.
     ENVIRONMENTAL
     We believe that our operations comply in all material respects with applicable laws and regulations concerning the environment. While it is impossible to predict accurately the future costs associated with environmental compliance and potential remediation activities, we do not expect compliance with environmental laws to require significant capital expenditures nor do we expect such compliance to have a material adverse effect on our consolidated financial statements.

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     ITEM 1A. RISK FACTORS
     The statements in this section describe the major risks to our business and should be considered carefully. In addition, these statements constitute our cautionary statements under the Private Securities Litigation Reform Act of 1995.
     Our disclosure and analysis in this Form 10-K contain some forward-looking statements that set forth anticipated results based on management’s plans and assumptions. From time to time, we also provide forward-looking statements in other materials we release to the public as well as oral forward-looking statements. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “target,” “forecast” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective products or product approvals, potential acquisitions, future performance or results of current and anticipated products, sales efforts, expenses, foreign exchange rates, the outcome of contingencies, such as legal proceedings, and financial results.
     We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements.
     We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our reports on forms 10-Q and 8-K filed with the SEC. Also note that we provide the following cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to our businesses. These are factors that, individually or in the aggregate, we think could cause our actual results to differ materially from expected and historical results. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties.
Our success depends on our ability to successfully develop and commercialize additional pharmaceutical products
     Our future results of operations depend, to a significant degree, upon our ability to successfully commercialize additional generic and proprietary pharmaceutical products. With respect to our generic products, we must develop, test and manufacture these products, as well as prove that our generic products are bioequivalent to their branded counterparts. With respect to our proprietary products, we must complete typically lengthy clinical studies that prove the safety and efficacy of our proprietary products. All of our products must meet and continue to comply with regulatory and safety standards and receive regulatory approvals. We may be forced to withdraw a product from the market if health or safety concerns arise with respect to the product. The development and commercialization process, particularly with respect to proprietary products, is both time-consuming and costly and involves a high degree of business risk. Our products currently under development, if and when fully developed and tested, may not perform as we expect, necessary regulatory approvals may not be obtained in a timely manner, if at all, and we may not be able to successfully and profitably produce and market such products. Delays in any part of the process or our inability to obtain regulatory approval of our products could adversely affect our operating results by restricting or delaying our introduction of new products. Our ability to introduce and benefit from new generic products may depend upon our ability to successfully challenge patent rights held by branded companies. The continuous introduction of new products is critical to our business.

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Impact on our revenues and profits as competition is introduced
     We attempt to select our generic products based on the prospects for limited competition from competing generic companies. We do so because we believe that the more generic competitors that market the same generic product, the lower the revenue and profitability we will record for our product. Therefore, if any of our currently marketed products or any newly launched generic product are subject to additional generic competition from one or more competing products, our price and market share for the affected generic product and our operating results as a whole could be dramatically reduced. As a consequence, unless we successfully replace generic products that are declining in profitability with new generic products with higher profitability, our business could be adversely affected.
     Upon the expiration or loss of patent protection or regulatory exclusivity periods for one of our branded products, or upon the “at risk” launch by a generic manufacturer of a generic version of one of our branded products, we can lose the major portion of sales of that product in a very short period, which can adversely affect our business. If we do not continue to successfully replace proprietary products through internal development or acquisition, our revenue and profits will decline.
Resolving Paragraph IV patent challenges
     Our operating results have historically included significant contributions from products that arise from the success we have had from our patent challenge activities. However, the success we have had in the past from challenging branded companies’ patents, whether through court decisions that permit us to launch our generic products or through settlements, may not be repeated in the future due to the following:
    legislation currently pending in Congress that, if passed as currently written, could significantly limit the ability of brand and generic companies to settle patent litigation under the Hatch-Waxman Act;
 
    “patent reform” legislation proposals that would make it more difficult to invalidate patents or render them unenforceable;
 
    an increase in the number of competitors who pursue patent challenges could make it more difficult for us to be the first to file a Paragraph IV certification on a patent protected product;
 
    a branded company’s decision to launch an authorized generic version of a product will reduce our market share and lower the revenues and gross profits we could have otherwise earned if an authorized generic were not launched;
 
    claims brought by third parties, including the FTC, various states’ Attorneys General and other third-party payers challenging the legality of our settlement agreements could affect the way in which we resolve our patent challenges with the brand pharmaceutical companies; and
 
    the efforts of brand companies to use legislative and regulatory tactics to delay the launch of generic products.
Impact of “At Risk” Launches
     There are situations in which we have used our business and legal judgment and decided to market and sell products, subject to claims of alleged patent infringement, prior to final resolution by the courts, based upon our belief that such patents are invalid, unenforceable or would not be infringed. This is referred to in the pharmaceutical industry as an “at risk” launch. One such example of this is our “at risk” launch of Fexofenadine hydrochloride 30 mg, 60 mg and 180 mg tablets, the generic versions of Sanofi-Aventis’ Allegra® tablets, together with Teva, as discussed above. The risk involved in an “at risk” launch can be substantial because, if a patent holder ultimately prevails, the remedies available to such holder may include, among other things, damages measured by the profits lost by the holder, which are often significantly higher than the profits we make from selling the generic

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version of the product. Should we elect to proceed in this manner we could face substantial damages if the final court decision is adverse to us. In the case where a patent holder is able to prove that our infringement was “willful”, the definition of which is subjective, such damages may be trebled.
Uncertainty associated with pharmaceutical pricing, reimbursement and related matters
     Increasing expenditures for health care have been the subject of considerable public attention in almost every jurisdiction where we conduct business. Both private and governmental entities are seeking ways to reduce or contain health care costs. In many countries in which we currently operate, pharmaceutical prices are subject to regulation. In the U.S., numerous proposals that would effect changes in the U.S. health care system have been introduced or proposed in Congress and in some state legislatures, including the enactment in December 2003 of expanded Medicare coverage for drugs, which became effective in January 2006. Similar activities are taking place throughout Europe. We cannot predict the nature of the measures that may be adopted or their impact on the marketing, pricing and demand for our products.
Managed Care Trends
     The trend toward managed healthcare in the U.S., the growth of organizations such as HMOs and MCOs, and legislative proposals to reform healthcare and government insurance programs could significantly influence the purchase of pharmaceutical products, resulting in lower prices and a reduction in product demand. Such cost containment measures and healthcare reform could affect our ability to sell our products and may have a material adverse effect on us. Additionally, reimbursements to patients may not be maintained and third-party payers, which place limits on levels of reimbursement, may reduce the demand for, or negatively affect the price of, those products and could significantly harm our business. We may also be subject to lawsuits relating to reimbursement programs that could be costly to defend, divert management’s attention and could have a material adverse effect on our business.
Government Regulation
     We are dependent on obtaining timely approvals before marketing most of our products. Any manufacturer failing to comply with FDA or other applicable regulatory agency requirements may be unable to obtain approvals for the introduction of new products and, even after approval, initial product shipments may be delayed. For example, on May 8, 2006, prior to the acquisition, PLIVA received a warning letter from the FDA that raised numerous concerns regarding our manufacturing facility in Zagreb, Croatia, and in connection with that letter, the FDA imposed a temporary hold on approvals of ANDAs for products produced at this facility which has since been lifted. The FDA also has the authority, in certain circumstances, to revoke drug approvals previously granted and remove from the market previously approved drug products containing ingredients no longer approved by the FDA. Our major facilities, both in the U.S. and outside the U.S., and our products are periodically inspected by the FDA, which has extensive enforcement powers over the activities of pharmaceutical manufacturers, including the power to seize, force to recall and prohibit the sale or import of non-complying products, and to halt operations of and criminally prosecute non-complying manufacturers.
     In Europe, the manufacture and sale of pharmaceutical products is regulated in a manner substantially similar to that in the United States. Legal requirements generally prohibit the handling, manufacture, marketing and importation of any pharmaceutical product unless it is properly registered in accordance with applicable law. The registration file relating to any particular product must contain medical data related to product efficacy and safety, including results of clinical testing and references to medical publications, as well as detailed information regarding production methods and quality control. Health ministries are authorized to cancel the registration of a product if it is found to be harmful or ineffective or manufactured and marketed other than in accordance with registration conditions.
     Data exclusivity provisions exist in many countries worldwide, including in the European Union, although their application is not uniform. Similar provisions may be adopted by additional countries or otherwise strengthened. In general, these exclusivity provisions prevent the approval and/or submission of generic drug applications to the health authorities for a fixed period of time following the first approval of a novel brand-name product in that

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country. As these exclusivity provisions operate independently of patent exclusivity, they may prevent the approval and/or submission of generic drug applications for some products even after the patent protection has expired.
Product Manufacturing
     Difficulties or delays in product manufacturing, including, but not limited to, the inability to increase production capacity commensurate with demand, or the failure to predict market demand for, or to gain market acceptance of approved products, could adversely affect future results.
Dependence on Third Parties
     We rely on numerous third parties to supply us with most of our raw materials, inactive ingredients and other components for our manufactured products and for certain of our finished goods. In many instances there is only a single supplier. In addition, we rely on third-party distributors and alliance partners to provide services for our business, including product development, manufacturing, warehousing, distribution, customer service support, medical affairs services, clinical studies, sales and other technical and financial services for certain of our products. Also, in Europe we often in-license products that are manufactured by others for us. Nearly all third-party suppliers and contractors are subject to governmental regulation and, accordingly, we are dependent on the regulatory compliance of these third parties. We also depend on the strength, validity and terms of our various contracts with these third-party manufacturers, distributors and collaboration partners. Any interruption or failure by these suppliers, distributors and collaboration partners to meet their obligations pursuant to various agreements or obligations with us could have a material adverse effect on our business.
     In addition, our revenues include amounts we earn based on sales generated and recorded by Teva Pharmaceuticals for generic Allegra, and Kos Pharmaceuticals for NIASPAN and ADVICOR. Any factors that negatively impact the sales of these products could adversely impact our revenues and profits.
Customer Consolidation
     Our principal customers in the United States are wholesale drug distributors and major retail drug store chains. These customers comprise a significant part of the distribution network for pharmaceutical products in the U.S. This distribution network is continuing to undergo significant consolidation as a result of mergers and acquisitions among wholesale distributors and the growth of large retail drug store chains. This consolidation may result in these groups gaining additional purchasing leverage and consequently increasing the product pricing pressures facing our business. Additionally, the emergence of large buying groups representing independent retail pharmacies and the prevalence and influence of managed care organizations and similar institutions potentially enable those groups to extract price discounts on our products. Our net sales and quarterly growth comparisons may be affected by fluctuations in the buying patterns of major distributors, retail chains and other trade buyers. These fluctuations may result from seasonality, pricing, wholesaler buying decisions or other factors.
Acquisitions
     We regularly review potential acquisitions of products and companies complementary to our business. Acquisitions typically entail many risks including difficulties in integrating operations, personnel, technologies and products. If we are not able to successfully integrate our acquisitions, we may not obtain the advantages that the acquisitions were intended to create, which may adversely affect our business, results of operations, financial condition and cash flows, and our ability to develop and introduce new products.
Integration of PLIVA
     We acquired PLIVA in October 2006. The acquisition involved the integration of two companies that had previously operated independently. There continues to be a number of operational and financial risks associated with this acquisition and related integration. The operational risks include, but are not limited to, the following:

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    the necessity of coordinating and consolidating geographically separated organizations, systems and facilities, including as they relate to disclosure controls and internal controls for purposes of regulations promulgated under the Sarbanes-Oxley Act;
 
    the successful integration of our management and personnel with that of PLIVA and retaining key employees; and
 
    changes in intellectual property legal protections and remedies, trade regulations and procedures and actions affecting approval, production, pricing, reimbursement and marketing of products.
     The financial risks include, but are not limited to, the following:
    our ability to satisfy obligations with respect to the $1.8 billion of debt outstanding as of December 31, 2007 that we incurred to help finance this transaction, a significant portion of which is at a variable rate of interest based upon LIBOR;
 
    charges associated with this transaction, including additional depreciation and amortization of acquired assets and interest expense which have impacted, and will continue to negatively impact, our net income;
 
    our ability to accurately forecast financial results is affected by a significant increase in the scope and complexity of our business;
 
    our international-based revenues and expenses are subject to foreign currency exchange rate fluctuations; and
 
    to the extent goodwill or intangible assets associated with the acquisition become impaired, we may be required to incur material charges to our earnings for those impairments.
     If management is unable to successfully integrate the operations and manage the financial risks, the anticipated benefits of this acquisition may not be realized and it could result in a material adverse effect on our operations and cash flow.
We have substantial indebtedness which requires us to apply a substantial portion of our cash flows from operation to service our indebtedness.
     In connection with our acquisition of PLIVA, we incurred significant debt. As of December 31, 2007 our total outstanding debt was $2.1 billion. Our current indebtedness requires us to apply a significant portion of our operating cash flows to service our indebtedness which may prevent us from:
    making additional product acquisitions;
 
    completing additional business combinations;
 
    investing in all contemplated capital projects;
 
    securing additional debt;
 
    having a competitive advantage over our competitors that have less debt; and

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    having the ability to invest larger portions of our excess cash flow from operations in marketable securities.
Volatility in interest rates, commodity prices and credit markets may adversely affect our financial condition, result of operations or cash flows
     The current volatility in interest rates, commodity prices and credit markets could affect the following items:
    our ability to invest in higher earning marketable securities in both the short-term and long-term markets;
 
    our ability to raise additional liquidity due to credit concerns in the capital markets;
 
    our ability to liquidate certain investments under our marketable securities portfolio (including auction-rate securities) due to credit concerns in the capital markets; and
 
    our exposure to the volatile interest rate market and the inability to secure favorable interest rates.
We are subject to risks associated with doing business outside of the United States
     Our operations outside of the U.S. are subject to risks that are inherent in conducting business under non-U.S. laws, regulations and customs. The risks associated with our operations outside the U.S. include:
    changes in non-U.S. medical reimbursement policies and programs;
 
    multiple non-U.S. regulatory requirements that are subject to change and that could restrict our ability to manufacture and sell our products;
 
    compliance with anti-bribery laws such as the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions, as discussed in further detail below;
 
    different local product preferences and product requirements;
 
    trade protection measures and import or export licensing requirements;
 
    difficulty in establishing, staffing and managing non-U.S. operations;
 
    different labor regulations;
 
    changes in environmental, health and safety laws;
 
    potentially negative consequences from changes in or interpretations of tax laws;
 
    political instability and actual or anticipated military or political conflicts;
 
    economic instability, inflation, recession, and interest rate or foreign currency fluctuations; and
 
    minimal or diminished protection of intellectual property in some countries.
     These risks, individually or in the aggregate, could have a material adverse effect on our business, financial condition, results of operations and cash flows.

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We are subject to the restrictions imposed by the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws
     The U.S. Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that have experienced governmental corruption to some degree, and in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. We cannot assure you that our internal control policies and procedures always will protect us from reckless or criminal acts committed by our employees or agents. Violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our financial condition, results of operations and cash flows.
Changes in foreign currency exchange rates may adversely affect our results
     We are exposed to a variety of market risks, including the effects of changes in foreign currency exchange rates and interest rates. As a result of our PLIVA acquisition, sales in non-U.S. markets now represent a significant portion of our net sales. Therefore, when the U.S. dollar strengthens in relation to the currencies of the countries where we sell our products, such as the Euro or Croatian Kuna, our U.S. dollar reported revenue and income will decrease. Changes in the relative values of currencies occur from time to time and, in some instances, may have a significant effect on our operating results.
Cost and Expense Control/Unusual Events
     Growth in costs and expenses, changes in product mix and the impact of acquisitions, divestitures, restructurings, product withdrawals and other unusual events that could result from evolving business strategies, evaluation of asset realization and organizational restructuring could create volatility in our results. Such risks and uncertainties include, in particular, the potentially significant charges to our operating results for items like in-process research and development charges and transaction costs.
Legal Proceedings
     As described in “Legal Proceedings” in Part I, Item 3 of this report, we and certain of our subsidiaries are involved in various patent, product liability, consumer and commercial litigations and claims; government investigations; and other legal proceedings that arise from time to time in the ordinary course of our business. Litigation is inherently unpredictable, and unfavorable rulings do occur. An unfavorable ruling could include money damages or, in some rare cases, for which injunctive relief is sought, an injunction prohibiting the Company from manufacturing or selling one or more products. Although we believe we have substantial defenses in these matters, we could in the future incur judgments or enter into settlements of claims that could have a material adverse effect on our results of operations in any particular period.
Availability of Product Liability Insurance
     Our business inherently exposes us to claims relating to the use of our products. We sell, and will continue to sell, pharmaceutical products for which product liability insurance coverage may not be available, and, accordingly, if we are sued and if adverse judgments are rendered, we may be subject to claims that are not covered by insurance, as well as claims that exceed our policy limits. Additional products for which we currently have coverage may be excluded in the future. In addition, product liability coverage for pharmaceutical companies is becoming more expensive and increasingly difficult to obtain. As a result, we may not be able to obtain the type and amount of coverage we desire on commercially reasonable terms.
Exposure to Environmental Laws and Regulations
     We are subject to numerous environmental protection and health and safety laws in the countries where we manufacture and sell our products or otherwise operate our business. Such laws and regulations govern, among other things:

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    the generation, storage, use and transportation of hazardous materials;
 
    emissions or discharges of substances into the environment;
 
    investigation and remediation of hazardous substances or materials at various sites; and
 
    the health and safety of our employees.
     We may not have been, or we may not at all times be, in compliance with environmental and health and safety laws. If we violate these laws, we could be fined, criminally charged or otherwise sanctioned by regulators. Environmental laws outside of the U.S. are becoming more stringent and resulting in increased costs and compliance burdens.
     Certain environmental laws assess liability on current or previous owners or operators of real property for the costs of investigation, removal or remediation of hazardous substances or materials at their properties or at properties at which they have disposed of hazardous substances. Liability for investigative, removal and remedial costs under certain federal and state laws is retroactive, strict and joint and several. In addition to clean-up actions brought by governmental authorities, private parties could bring personal injury or other claims due to the presence of, or exposure to, hazardous substances. We have received notification from the U.S. Environmental Protection Agency and similar state environmental agencies that conditions at a number of formerly owned sites where we and others have disposed of hazardous substances require investigation, clean-up and other possible remedial action and may require that we reimburse the government or otherwise pay for the costs of investigation and remediation and for natural resource damage claims from such sites.
     There can be no assurance that the costs of complying with current or future environmental protection and health and safety laws, or our liabilities arising from past or future releases of, or exposures to, hazardous substances will not exceed our estimates or adversely affect our business, financial condition, results of operations and cash flows or that we will not be subject to additional environmental claims for personal injury or clean-up in the future based on our past, present or future business activities.
Managing Rapidly Growing Operations
     We have grown significantly over the past several years, extending our processes, systems and people. In particular, our acquisition of PLIVA has significantly added to the scope and complexity of our operations. We have made and continue to make significant investments in global enterprise resource systems and our internal control processes to help manage the increased scope and complexity of our business. We must also attract, retain and motivate executives and other key employees, including those in managerial, technical, sales and marketing and support positions to support our growth. As a result, hiring and retaining qualified executives, scientists, technical staff, manufacturing personnel, qualified quality and regulatory professionals and sales representatives are critical to our business and competition for these people can be intense. If we are unable to hire and retain qualified employees and if we do not continue to invest in systems and processes to manage our growth, our operations could be adversely impacted.
Changes in Laws and Accounting Standards
     Our future results could be adversely affected by changes in laws and regulations, including changes in accounting standards, taxation requirements (including tax-rate changes, new tax laws and revised tax law interpretations), competition laws and environmental laws in countries that we operate.
Terrorist Activity
     Our future results could be adversely affected by changes in business, political and economic conditions, including the cost and availability of insurance, due to the threat of future terrorist activity in the U.S. and other parts of the world and related U.S. military action overseas.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
     Not applicable.

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ITEM 2. PROPERTIES
     The following table lists the principal facilities owned or leased by us as of December 31, 2007 and indicates the location and principal use of each of these facilities:
                 
            Owned/    
Location   Sq. Feet   Leased   Principal Usage(s)
Montvale, NJ
    142,500     Leased   Administrative
Woodcliff Lake, NJ
    90,000     Leased   Administrative
East Hanover, NJ
    280,000     Leased/Owned   Manufacturing; Warehousing; Administrative. (18,500 sqft owned)
Pomona, NY
    181,000     Owned   R&D; Laboratories; Administrative; Manufacturing; Warehousing
North Tonawanda, NY
    23,500     Leased   Manufacturing
Cincinnati, OH
    305,000     Owned   Manufacturing; Laboratories; Packaging; Warehousing; Administrative
Bala Cynwyd, PA
    39,000     Leased   Proprietary R&D; Administrative
Forest, VA
    20,000     Owned   Adenovirus Facility
Forest, VA
    407,000     Owned   Administrative; Warehousing; Packaging; Distribution
Washington, D.C.
    8,700     Leased   Government Affairs
Brno, Czech Republic
    453,200     Owned   Manufacturing; API; Warehousing; Engineering; R&D; Administrative
Zagreb, Croatia, PbF
    1,277,900     Owned   Administrative, Manufacturing, Packaging, R&D, API, Warehousing
Zagreb, Croatia, Vukovarska
    175,500     Owned   Administrative Headquarters
Zagreb, Croatia, SM
    579,300     Owned   API; Biologics; Warehousing
Zagreb, Croatia, HL
    96,700     Owned   Manufacturing; Packaging, Warehousing
Zagreb, Croatia, Jagićeva
    18,000     Owned   Administrative
Radebeul, Germany
    8,300     Owned   Administrative
Krakow, Poland
    948,500     Owned   Manufacturing; Warehousing; Engineering; Administrative
     We have invested significantly over the last few years to increase our respective production, laboratory, warehouse, distribution, manufacturing and R&D capacity. We believe that our current facilities are in good condition and are being used productively. We constantly assess our ongoing investments in property, plant and equipment to ensure that our facilities are adequate for us to meet the expected demand of our pipeline products and to handle increases in current product sales.

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ITEM 3. LEGAL PROCEEDINGS
Litigation Settlement
     On October 22, 1999, we entered into a settlement agreement with Schein Pharmaceutical, Inc. (now part of Watson Pharmaceuticals, Inc.) relating to a 1992 agreement regarding the pursuit of a generic conjugated estrogens product. Under the terms of the settlement, Schein relinquished any claim to rights in CENESTIN in exchange for a payment of $15.0 million made to Schein in 1999. An additional $15.0 million payment is required under the terms of the settlement if CENESTIN achieves total profits, as defined, of greater than $100.0 million over any rolling five-year period prior to October 22, 2014. We believe that it is probable that this payment will be earned at some point during the next two years, most likely during 2008. As a result, we have recorded a contingent liability as of December 31, 2007 in the amount of $13.7 million, representing an estimated pro-rata amount of the liability incurred as of December 31, 2007.
Pending Litigation Matters
     We are involved in various legal proceedings incidental to our business, including product liability, intellectual property and other commercial litigation and antitrust actions. We record accruals for such contingencies to the extent that we conclude a loss is probable and the amount can be reasonably estimated. Additionally, we record insurance receivable amounts from third party insurers when appropriate.
     Many claims involve highly complex issues relating to patent rights, causation, label warnings, scientific evidence and other matters. Often these issues are subject to substantial uncertainties and therefore, the probability of loss and an estimate of the amount of the loss are difficult to determine. Our assessments are based on estimates that we, in consultation with outside advisors, believe are reasonable. Although we believe we have substantial defenses in these matters, litigation is inherently unpredictable. Consequently, we could in the future incur judgments or enter into settlements that could have a material adverse effect on our results of operations, cash flows or financial condition in a particular period.
     Summarized below are the more significant matters pending to which we are a party. As of December 31, 2007, our reserve for the liability associated with claims or related defense costs for these matters is not material.
     Patent Matters
     Fexofenadine Hydrochloride Suit
     In June 2001, we filed an ANDA seeking approval from the FDA to market fexofenadine hydrochloride tablets in 30 mg, 60 mg and 180 mg strengths, the generic equivalent of Sanofi-Aventis’ Allegra tablet products for allergy relief. We notified Sanofi-Aventis pursuant to the provisions of the Hatch-Waxman Act and, in September 2001, Sanofi-Aventis filed a patent infringement action in the U.S. District Court for the District of New Jersey — Newark Division, seeking to prevent us from marketing this product until after the expiration of various U.S. patents, the last of which is alleged to expire in 2017.
     After the filing of our ANDA, Sanofi-Aventis listed an additional patent on Allegra in the Orange Book. We filed appropriate amendments to our ANDAs to address the newly listed patent and, in November 2002, notified Merrell Pharmaceuticals, Inc., the patent holder, and Sanofi-Aventis pursuant to the provisions of the Hatch-Waxman Act. Sanofi-Aventis filed an amended complaint in November 2002 claiming that our ANDA infringes the newly listed patent.
     On March 5, 2004, Sanofi-Aventis and AMR Technology, Inc., the holder of certain patents licensed to Sanofi-Aventis, filed an additional patent infringement action in the U.S. District Court for the District of New Jersey — Newark Division, based on two patents that are not listed in the Orange Book.

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     In June 2004, the court granted us summary judgment of non-infringement as to two patents. On March 31, 2005, the court granted us summary judgment of invalidity as to a third patent. Discovery is proceeding on the five remaining patents at issue in the case. No trial date has been scheduled.
     On August 31, 2005, we received final FDA approval for our fexofenadine tablet products. As referenced above, pursuant to the agreement between Teva and us, we selectively waived our 180 days of generic exclusivity in favor of Teva, and Teva launched its generic product on September 1, 2005.
     On September 21, 2005, Sanofi-Aventis filed a motion for a preliminary injunction or expedited trial. The motion asked the court to enjoin Teva and Barr from marketing their generic versions of Allegra tablets, 30 mg, 60 mg and 180 mg, or to expedite the trial in the case. The motion also asked the court to enjoin Ranbaxy Laboratories, Ltd. and Amino Chemicals, Ltd. from the commercial production of generic fexofenadine raw material. The preliminary injunction hearing concluded on November 3, 2005. On January 30, 2006, the Court denied the motion by Sanofi-Aventis for a preliminary injunction or expedited trial. Sanofi-Aventis appealed the Court’s denial of its motion to the United States Court of Appeals for the Federal Circuit. On November 8, 2006, the Federal Circuit affirmed the District Court’s denial of the motion for preliminary injunction.
     On May 8, 2006, Sanofi-Aventis and AMR Technology, Inc. served a Second Amended and Supplemental Complaint based on U.S. Patent Nos. 5,581,011 and 5,750,703 (collectively, “the API patents”), asserting claims against us for infringement of the API patents based on the sale of our fexofenadine product and for inducement of infringement of the API patents based on the sale of Teva’s fexofenadine product. On June 22, 2006, we answered the complaint, denied the allegations, and asserted counterclaims for declaratory judgment that the asserted patents are invalid and/or not infringed and for damages for violations of the Sherman Act, 15 U.S.C. §§ 1.2.
     On November 14, 2006, Sanofi-Aventis sued Barr and Teva in the U.S. District Court for the Eastern District of Texas, alleging that Teva’s fexofenadine hydrochloride tablets infringe a patent directed to a certain crystal form of fexofenadine hydrochloride, and that we induced Teva’s allegedly infringing sales. On November 21, 2006, Sanofi-Aventis filed an amended complaint in the same court, asserting that our fexofenadine hydrochloride tablets infringe a different patent directed to a different crystal form of fexofenadine hydrochloride. On January 12, 2007, we moved to dismiss the suit against Barr Pharmaceuticals, answered the complaint on behalf of Barr Laboratories, denied the allegations against it, and moved to transfer the action to the U.S. District Court for New Jersey. On September 27, 2007, the U.S. District Court for the Eastern District of Texas granted our motion to transfer the case to the U.S. District for New Jersey and denied Barr Pharmaceutical, Inc.’s motion to dismiss as moot.
     Sanofi-Aventis also has brought a patent infringement suit against Teva in Israel, seeking to have Teva enjoined from manufacturing generic versions of Allegra tablets and seeking damages.
     If Barr and/or Teva are unsuccessful in the Allegra litigation, Barr potentially could be liable for a portion of Sanofi-Aventis’ lost profits on the sale of Allegra, which could potentially exceed our profits earned from our arrangement with Teva on generic Allegra.
     Product Liability Matters
     Hormone Therapy Litigation
     We have been named as a defendant in approximately 5,080 personal injury product liability cases brought against us and other manufacturers by plaintiffs claiming that they suffered injuries resulting from the use of certain estrogen and progestin medications prescribed to treat the symptoms of menopause. The cases against us involve our CENESTIN products and/or the use of our medroxyprogesterone acetate product, which typically has been prescribed for use in conjunction with Premarin or other hormone therapy products. All of these products remain approved by the FDA and continue to be marketed and sold to customers. While we have been named as a defendant in these cases, fewer than a third of the complaints actually allege the plaintiffs took a product manufactured by us, and our experience to date suggests that, even in these cases, a high percentage of the plaintiffs will be unable to demonstrate actual use of our product. For that reason, approximately 4,624 of such cases have been dismissed (leaving approximately 456 pending) and, based on discussions with our outside counsel, more are expected to be dismissed.

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     We believe we have viable defenses to the allegations in the complaints and are defending the actions vigorously.
     Antitrust Matters
     Ciprofloxacin (Cipro®) Antitrust Class Actions
     We have been named as a co-defendant with Bayer Corporation, The Rugby Group, Inc. and others in approximately 38 class action complaints filed in state and federal courts by direct and indirect purchasers of Ciprofloxacin (Cipro) from 1997 to the present. The complaints allege that the 1997 Bayer-Barr patent litigation settlement agreement was anti-competitive and violated federal antitrust laws and/or state antitrust and consumer protection laws. A prior investigation of this agreement by the Texas Attorney General’s Office on behalf of a group of state Attorneys General was closed without further action in December 2001.
     The lawsuits include nine consolidated in California state court, one in Kansas state court, one in Wisconsin state court, one in Florida state court, and two consolidated in New York state court, with the remainder of the actions pending in the U.S. District Court for the Eastern District of New York for coordinated or consolidated pre-trial proceedings (the “MDL Case”). On March 31, 2005, the Court in the MDL Case granted summary judgment in the Company’s favor and dismissed all of the federal actions before it. On June 7, 2005, plaintiffs filed notices of appeal to the U.S. Court of Appeals for the Second Circuit. On November 2, 2007, the Company and the other defendants filed a motion for summary affirmance, based on the Second Circuit’s decision in the Company’s favor in the Tamoxifen antitrust case. On November 7, 2007, the Second Circuit transferred the appeal involving certain parties to the United States Court of Appeals for the Federal Circuit, while retaining jurisdiction over the appeals of the other parties in the case. Briefing on the merits is now proceeding in the Federal Circuit. Merits briefing has not been scheduled or commenced in the Second Circuit, pending a ruling on the defendants’ motion for summary affirmance.
     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. The Court of Appeals reinstated the complaint on May 9, 2006 and the Wisconsin Supreme Court affirmed that decision on July 13, 2007, while not addressing the underlying merits of the plaintiffs’ case. The matter was returned to the trial court for further proceedings, and the trial court has stayed the case.
     On October 17, 2003, the Supreme Court of the State of New York for New York County dismissed the consolidated New York state class action for failure to state a claim upon which relief could be granted and denied the plaintiffs’ motion for class certification. An intermediate appellate court affirmed that decision, and plaintiffs have sought leave to appeal to the New York Court of Appeals.
     On April 13, 2005, the Superior Court of San Diego, California ordered a stay of the California state class actions until after the resolution of any appeal in the MDL Case. Plaintiffs have moved to lift the stay. The court has not ruled on the motion but has scheduled a further status hearing for March 7, 2008.
     On April 22, 2005, the District Court of Johnson County, Kansas similarly stayed the action before it, until after any appeal in the MDL Case.
     The Florida state class action remains at a very early stage, with no status hearings, dispositive motions, pre-trial schedules, or a trial date set as of yet.
     We believe that our agreement with Bayer Corporation reflects a valid settlement to a patent suit and cannot form the basis of an antitrust claim. Based on this belief, we are vigorously defending Barr in these matters.

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     Ovcon Antitrust Proceedings
      We have entered into settlements with the FTC, the State Attorneys General (as described below) and the class representatives of the indirect purchasers. Only the claims of the direct purchasers remain active in the litigation.
      Under the FTC settlement, the FTC agreed to dismiss its case against us, and we agreed to refrain from entering into exclusive supply agreements in certain non-patent challenge situations where we are an ANDA holder and the party being supplied is the NDA holder. The settlement was entered and the FTC's lawsuit against us was dismissed with prejudice on November 27, 2007.
      Under the State Attorneys General Settlement, the states agreed to dismiss their claims against us in exchange for a cash payment of $5.9 million and commitments by us not to engage in certain future conduct similar to the commitments contained in the FTC settlement. The State Attorneys General Settlement was finalized on February 25, 2008.
      In the actions brought on behalf of the indirect purchasers, we reached court-approved settlements with the class representatives of the certified class of indirect purchasers on behalf of the class. The settlements require us to pay $1.8 million to funds established by plaintiffs' counsel and to donate branded drug products to, among others, charitable organizations and university health centers.
      In the actions brought on behalf of the direct purchasers, on October 22, 2007, the Court granted plaintiffs' motion to certify a class on behalf of all entities that purchased Ovcon-35 directly from Warner Chilcott (or its affiliated companies) from April 22, 2004.
      In November 2007, we and the direct purchasers filed cross motions for summary judgment. No ruling has been made on the motions and no trial date has been set.
      During 2007, we recorded charges in the amount of $15.3 million related to these and other settlement offers in the Ovcon litigation.
     Provigil Antitrust Proceedings
     To date, we have been named as a co-defendant with Cephalon, Inc., Mylan Laboratories, Inc., Teva Pharmaceutical Industries, Ltd., Teva Pharmaceuticals USA, Inc., Ranbaxy Laboratories, Ltd., and Ranbaxy Pharmaceuticals, Inc. (the “Provigil Defendants”) in ten separate complaints filed in the U.S. District Court for the Eastern District of Pennsylvania. These actions allege, among other things, that the agreements between Cephalon and the other individual Provigil Defendants to settle patent litigation relating to Provigil® constitute an unfair method of competition, are anticompetitive and restrain trade in the market for Provigil and its generic equivalents in violation of the antitrust laws. These cases remain at a very early stage and no trial dates have been set.
     We were also named as a co-defendant with the Provigil Defendants in an action filed in the U.S. District Court for the Eastern District of Pennsylvania by Apotex, Inc. The lawsuit alleges, among other things, that Apotex sought to market its own generic version of Provigil and that the settlement agreements entered into between Cephalon and

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the other individual Provigil Defendants constituted an unfair method of competition, are anticompetitive and restrain trade in the market for Provigil and its generic equivalents in violation of the antitrust laws. The Provigil Defendants have filed motions to dismiss, and briefing has taken place with respect to these motions.
     We believe that we have not engaged in any improper conduct and are vigorously defending these matters.
     Medicaid Reimbursement Cases
     We, along with numerous other pharmaceutical companies, have been named as a defendant in separate actions brought by the states of Alabama, Alaska, Hawaii, Idaho, Illinois, Iowa, Kentucky, Massachusetts, Mississippi, South Carolina and Utah, the City of New York, and numerous counties in New York. In each of these matters, the plaintiffs seek to recover damages and other relief for alleged overcharges for prescription medications paid for or reimbursed by their respective Medicaid programs, with some states also pursuing similar allegations based on the reimbursement of drugs under Medicare Part B or the purchase of drugs by a state health plan (for example, South Carolina).
     In the Massachusetts case, the parties reached a settlement under which the Company denied any wrongdoing and the case was dismissed on October 9, 2007.
     The Iowa and New York cases, with the exception of the actions filed by Erie, Oswego, and Schenectady Counties in New York, are currently pending in the U.S. District Court for the District of Massachusetts. In the Iowa case, briefing on the defendants’ motions to dismiss is underway. In the consolidated New York cases, discovery is underway, but no trial dates have been set. The Erie, Oswego, and Schenectady County cases were filed in state courts in New York, again with no trial dates set.
     The Alabama, Illinois, and Kentucky cases were filed in state courts, removed to federal court, and then remanded back to their respective state courts. Discovery is underway. The Alabama trial court has completed the trial of a different defendant, with the remaining defendants to be tried thereafter but with the sequencing not yet known. The Kentucky trial court has scheduled the first trial to begin next year on May 19, 2009, but has not yet determined which defendant(s) will be tried.
     The State of Mississippi case was filed in Mississippi state court on October 25, 2005. Discovery was underway, but that case, along with the Illinois case and the actions brought by Erie, Oswego, and Schenectady Counties in New York, were removed to federal court on the motion of a co-defendant. Remand motions were granted on September 17, 2007, and thus the cases have returned to their respective state courts of origin, again with no trial dates set.
     The State of Hawaii case was filed in state court in Hawaii on April 26, 2007, removed to the United States District Court for the District of Hawaii, and remanded to state court. Discovery is underway. No trial date has been set.
     The State of Alaska case was filed in state court in Alaska on October 6, 2006. Discovery is underway. No trial date has been set.
     The State of South Carolina cases consist of two complaints, one brought on behalf of the South Carolina Medicaid Agency and the other brought on behalf of the South Carolina State Health Plan. Both cases were filed in state court in South Carolina on January 16, 2007. Briefing on the defendants’ motions to dismiss is underway. No trial date has been set.
     The State of Idaho case was filed in state court in Idaho on January 26, 2007. Discovery is underway. No trial date has been set.
     The State of Utah case was filed in state court in Utah on September 21, 2007. Defendants removed the case to federal court and moved to transfer the action to the U.S. District Court for the District of Massachusetts. The State has opposed both removal and transfer. No trial date has been set.
     We believe that we have not engaged in any improper conduct and are vigorously defending these matters.

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     Breach of Contract Action
     On October 6, 2005, plaintiffs Agvar Chemicals Inc., Ranbaxy Laboratories, Inc. and Ranbaxy Pharmaceuticals, Inc. filed suit against us and Teva Pharmaceuticals USA, Inc. in the Superior Court of New Jersey. In their complaint, plaintiffs seek to recover damages and other relief, based on an alleged breach of an alleged contract requiring us to purchase raw material for our generic Allegra product from Ranbaxy, prohibiting us from launching our generic Allegra product without Ranbaxy’s consent and prohibiting us from entering into an agreement authorizing Teva to launch Teva’s generic Allegra product. In an amended complaint, plaintiffs further asserted claims for fraud and negligent misrepresentation. The court has entered a scheduling order providing for the completion of discovery by December 8, 2008, but has not yet set a date for trial. We believe there was no such contract, fraud or negligent misrepresentation and are vigorously defending this matter.
     Other Litigation
     As of December 31, 2007, we were involved with other lawsuits incidental to its business, including patent infringement actions, product liability, and personal injury claims. Management, based on the advice of legal counsel, believes that the ultimate outcome of these other matters will not have a material adverse effect on our consolidated financial statements.
  Government Inquiries
     On July 11, 2006, we received a request from the FTC for the voluntary submission of information regarding the settlement agreement reached in the matter of Cephalon, Inc. v. Mylan Pharmaceuticals, Inc., et al., U.S. District Court for the District of New Jersey. The FTC is investigating whether Barr and the other parties to the litigation have engaged in unfair methods of competition in violation of Section 5 of the Federal Trade Commission Act by restricting the sale of Modafinil products. In its request letter, the FTC stated that neither the request nor the existence of an investigation indicated that Barr or any other company had violated the law.
      On February 13, 2008, the FTC filed an action against Cephalon in the U.S. District Court for the District of Columbia, claiming that Cephalon engaged in unfair methods of competition by entering into separate settlement agreements with us and three other generic companies concerning the Modafinil patent litigation. We were not named as a defendant in the litigation.
      We believe that our settlement agreement is in compliance with all applicable laws and intend to cooperate with the FTC’s investigation in this matter.
     On October 3, 2006, the FTC notified Barr it was investigating a patent litigation settlement reached in matters pending in the U.S. District Court for the Southern District of New York between Barr and Shire PLC concerning Shire’s ADDERALL XR product. On June 20, 2007, the Company received a Civil Investigative Demand, seeking documents and data. We are cooperating with the agency in its investigation.

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ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
     There were no matters put to the vote of our stockholders during the quarter ended December 31, 2007.
     PART II
ITEM 5.   MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a) Market for Barr’s Common Equity
     Our common stock is traded on the New York Stock Exchange under the symbol “BRL.” The following table sets forth the quarterly high and low share trading price information for the periods indicated:
                 
    High     Low  
Year Ended December 31, 2007:
               
First quarter
  $ 56.66     $ 45.77  
Second quarter
    55.10       45.41  
Third quarter
    57.25       49.49  
Fourth quarter
    58.38       50.59  
 
               
Transition Period
               
Three months ended September 30, 2006
  $ 59.25     $ 44.60  
Three months ended December 31, 2006
    53.89       47.52  
 
               
Fiscal year ended June 30, 2006:
               
First quarter
  $ 55.08     $ 45.00  
Second quarter
    63.60       53.53  
Third quarter
    70.25       60.83  
Fourth quarter
    64.51       47.24  
     As of February 15, 2008, we estimate that there were 1,467 holders of record of our common stock. We believe that a significant number of investors in our common stock hold their shares in street name. Therefore, the number of beneficial owners of our common stock is much greater than the number of record holders of our common stock.
     We have not paid any cash dividends on our common stock during 2007 or during the last two fiscal years and we do not anticipate paying any cash dividends in the foreseeable future.
(b) Recent Sales of Unregistered Securities
     In April 2005, holders of warrants to purchase an aggregate of 288,226 shares of our common stock, at $9.54 per share, exercised the warrants in full. As a result, we issued to the investors 288,226 unregistered shares of our common stock and received proceeds of $2,749,676. The issuance of the shares to the investors was based on the exemption from registration under Section 4(2) of the Securities Act.

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ITEM 6. SELECTED FINANCIAL DATA
     In September 2006, we changed our fiscal year from June 30th to December 31st. We made this change to align our fiscal year end with that of our subsidiary, PLIVA, and with other companies within our industry. The following tables set forth selected consolidated financial data for the year ended December 31, 2007, the Transition Period, the six months ended December 31, 2005 (unaudited), and the four-year period ended June 30, 2006. The data for the year ended December 31, 2007, the Transition Period and the four fiscal years ended June 30, 2006 have been derived from our audited financial statements. The data for the six months ended December 31, 2005 is unaudited and is being provided for comparison purposes. The results of operations of our PLIVA subsidiary are included from October 25, 2006.
                         
                    Six months  
    Year Ended             ended  
(in thousands, except per share data)   December 31,     Transition     December 31,  
Statements of Operations Data   2007     Period     2005  
Total revenues
  $ 2,500,582     $ 904,764     $ 635,956  
Earnings (loss) before income taxes and
minority interest
    207,835       (302,359 )     279,634  
Income tax expense
    64,546       34,630       101,507  
Net earnings (loss)
    128,350       (338,155 )     178,127  
Earnings (loss) per common share — basic
    1.20       (3.18 )     1.71  
Earnings (loss) per common share — diluted
    1.18       (3.18 )     1.66  
                 
    As of     As of  
    December 31,     December 31,  
Balance Sheet Data   2007     2006  
Working capital
  $ 970,854     $ 876,106  
Total assets
    4,761,627       4,961,862  
Long-term debt (1)
    1,781,692       1,935,477  
Shareholders’ equity (3)
    1,866,321       1,465,228  
                                 
(in thousands, except per share data)   Fiscal Year Ended June 30,  
Statements of Operations Data   2006     2005     2004     2003  
Total revenues
  $ 1,314,465     $ 1,047,399     $ 1,309,088     $ 902,864  
Earnings (loss) before income taxes and
minority interest
    522,948       329,876       194,440       262,715  
Income tax expense
    186,471       114,888       71,337       95,149  
Net earnings (loss)
    336,477       214,988       123,103       167,566  
Earnings (loss) per common share — basic
    3.20       2.08       1.21       1.69 (2)
Earnings (loss) per common share — diluted
    3.12       2.03       1.15       1.62 (2)
                                 
    As of June 30,  
Balance Sheet Data   2006     2005     2004     2003  
Working capital
  $ 921,663     $ 780,386     $ 670,601     $ 582,183  
Total assets
    1,921,419       1,490,306       1,333,269       1,180,937  
Long-term debt (1)
    7,431       15,493       32,355       34,027  
Shareholders’ equity (3)
    1,690,956       1,233,970       1,042,046       867,995  
  (1)   Includes capital leases and excludes current installments.
 
  (2)   Amounts have been adjusted for the March 16, 2004 3-for-2 stock split effected in the form of a 50% stock dividend.
 
  (3)   The Company has not paid a cash dividend in any of the above years.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Change in Fiscal Year
     On September 21, 2006, we changed our fiscal year end from June 30 to December 31. We made this change to align our fiscal year end with that of our subsidiary, PLIVA, and with other companies within our industry. We have defined various periods that are covered in the discussion below as follows:
    “2007” — January 1, 2007 through December 31, 2007
 
    “2006” — January 1, 2006 through December 31, 2006
 
    “Transition Period” — July 1, 2006 through December 31, 2006
 
    “comparable 2005 six months” — July 1, 2005 through December 31, 2005
 
    “fiscal 2006” — July 1, 2005 through June 30, 2006
 
    “fiscal 2005” — July 1, 2004 through June 30, 2005
 
    “PLIVA Stub Period” — October 25, 2006 through December 31, 2006
     All information, data and figures for “2006” were derived by combining the Transition Period along with the six-month period ended June 30, 2006. The six-month period ended June 30, 2006 relates solely to Barr’s financials. The Transition Period includes PLIVA’s results of operations from October 25, 2006 through December 31, 2006.
     All information, data and figures provided for the comparable 2005 six months, as well as fiscal 2006 and 2005, relate solely to Barr’s financial results and do not include the results of PLIVA, which we acquired on October 24, 2006. PLIVA’s results of operations are included from October 25, 2006 through December 31, 2006.
Executive Overview
     We are a global specialty pharmaceutical company that operates in more than 30 countries. Our operations are based primarily in North America and Europe, with our key markets being the United States, Croatia, Germany, Poland and Russia. We are primarily engaged in the development, manufacture and marketing of generic and proprietary pharmaceuticals. During 2007, we recorded $2.3 billion of product sales and $2.5 billion of total revenues.
     During 2007, sales of our generic products grew to $1.9 billion from $1.0 billion in 2006, accounting for 81% of our total product sales, while sales of our proprietary products grew to $438.3 million from $391.4 million in 2006, accounting for 19% of our total product sales. In addition, we recorded $121.9 million of alliance and development revenues during 2007 and $44.6 million of other revenues. Alliance and development revenues are derived mainly from profit-sharing arrangements, co-promotion agreements, and standby manufacturing fees and other reimbursements and fees we received from third parties, including marketing partners. Other revenues primarily are derived from our non-core operations which include our diagnostics, disinfectants, dialysis and infusions (“DDD&I”) business.
     During 2007, we generated $383.2 million of operating cash flows. Our operating cash flows are a significant source of liquidity, and we expect to utilize a significant portion of these operating cash flows to service our debt obligations as well as fund our capital needs during 2008.
  PLIVA Acquisition
     On October 24, 2006, we completed the acquisition of PLIVA d.d., headquartered in Zagreb, Croatia. Under the terms of our cash tender offer, we made a payment of approximately $2.4 billion based on an offer price of HRK 820 per share for all shares tendered during the offer period. The transaction closed with 17,056,977 shares being tendered as part of the process, representing 92% of PLIVA’s total share capital being tendered to us. Subsequent to

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the close of the offer period, we purchased an additional 390,809 shares on the Croatian stock market for $58.3 million, and own 98.1% of all shares of PLIVA as of December 31, 2007.
     For a detailed discussion of our PLIVA acquisition, see Item 1, “Business — Overview — PLIVA Acquisition” above.
  Generic Products
     For many years, we have successfully utilized a strategy of developing the generic versions of branded products that possess a combination of unique factors that we believe have the effect of limiting competition for generics. Such factors include difficult formulation, complex and costly manufacturing requirements or limited raw material availability. By targeting products with some combination of these unique factors, we believe that our generic products will, in general, be less affected by the intense and rapid pricing pressure often associated with more commodity-type generic products. As a result of this focused strategy, we have been able to successfully identify, develop and market generic products that generally have few competitors or that are able to enjoy longer periods of limited competition, and thus generate profit margins higher than those often associated with commodity-type generic products. The development and launch of our generic oral contraceptive products is an example of our generic development strategy.
     Until our acquisition of PLIVA, the execution of this strategy was focused predominantly on developing solid oral dosage forms of products. While we believe there are more tablet and capsule products that may fit our “barrier-to-entry” criteria, we have recently expanded our development activities, both internally through our acquisition of PLIVA and through collaboration with third parties, to develop non-tablet and non-capsule products such as injectables, patches, creams, ointments, sterile ophthalmics and nasal sprays.
     We also develop and manufacture active pharmaceutical ingredients (“API”), primarily for use internally and, to a lesser extent, for sale to third parties. We manufacture 23 different APIs for use in pharmaceuticals through our facilities located in Croatia and the Czech Republic. We believe that our ability to produce API for internal use may provide us with a strategic advantage over competitors that lack such ability, particularly as to the timeliness of obtaining API for our products.
     Challenging the patents covering certain brand products continues to be an integral part of our generics business. For many products, the patent provides the unique barrier that we seek to identify in our product selection process. We try to be the first company to initiate a patent challenge because, in certain cases, we may be able to obtain 180 days of exclusivity for selling the generic version of the product. Upon receiving exclusivity for a product, we often experience significant revenues and profitability associated with that product for the 180-day exclusivity period, but, at the end of that period, we experience significant decreases in our revenues and market share associated with the product as other generic competitors enter the market. Our record of successfully resolving patent challenges has made a recurring contribution to our operating results, but has created periods of revenue and earnings volatility and will likely continue to do so in the future. While earnings and cash flow volatility may result from the launch of products subject to patent challenges, we remain committed to this part of our business.
  Proprietary Products
     To help diversify our generic product revenue base, we initiated a program in 2001 to develop and market proprietary pharmaceutical products. We formalized this program through our acquisition of Duramed Pharmaceuticals in October 2001, and thereafter by establishing Duramed Research as our proprietary research and development subsidiary. Today, Duramed is recognized as a leader in the area of women’s healthcare. We implement our women’s healthcare platform through a substantial number of employees dedicated to the development and marketing of our proprietary products, including approximately 335 sales representatives that promote directly to physicians five of our products — SEASONIQUE®, Enjuvia™, Mircette®, ParaGard® and Plan B™— and two products under our co-promotion agreement with Kos Pharmaceuticals — Niaspan® and Advicor®. We have accomplished significant growth in proprietary product sales over the last several years through both internally-developed products, such as SEASONALE®, the first and largest selling extended-cycle oral contraceptive in the U.S., and through product acquisitions, including ParaGard, the only non-drug loaded IUC currently on the market in the U.S., in November 2005; Mircette, a well established 28-day oral contraceptive, in

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December 2005; and Adderall IR, an immediate-release, mixed salt amphetamine product that is indicated for the treatment of attention deficit hyperactivity disorder and narcolepsy, in October 2006.
  Foreign currency exchange rate fluctuations
     Our international revenues and expenses are subject to foreign currency exchange rate fluctuations. These results are first converted from local currencies into Croatian Kuna (“HRK”), and then converted from HRK into U.S. dollars (“USD”). In general, the HRK exchange rate follows the exchange rate fluctuations between the USD and the Euro. Depending on the direction of change relative to the USD, foreign currency values can increase or decrease the reported dollar value of our net assets and results of operations. While we cannot predict with certainty changes in foreign exchange rates or the effect they will have on us, we attempt to mitigate their impact through operational means and by using various foreign exchange financial instruments. We use foreign exchange financial instruments to hedge forecasted transactions even though none of the instruments are eligible for hedge accounting. Since our derivatives do not qualify for hedge accounting, the changes in fair value of these instruments are being measured each period and reported in other income (expense), which could lead to volatility of our reported net earnings. Despite the potential for increased earnings volatility, we still use such instruments to offset the economic risk from foreign exchange rate fluctuations.
  Discontinued Operations
     Since its acquisition of PLIVA on October 24, 2006, the Company has been evaluating PLIVA’s operations, and during the second half of 2007, has divested its non-core operations in Spain and Italy, and its animal health and veterinary business operated by Veterina d.d. As a result of these divestments, during 2007 we reclassified the combined amounts of these entities from continuing operations to discontinued operations. The total net loss from discontinued operations, including losses incurred on disposal, for the year ended December 31, 2007 and the Transition Period were $13.8 million and $1.8 million, respectively. These losses were higher in 2007, due to a full year of results incurred in 2007, as compared to 2006, which only included 68 days of activity subsequent to the Pliva acquisition.

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Comparison of the Year ended December 31, 2007 and December 31, 2006
     The following table sets forth revenue data for 2007 and the comparable year 2006 (unaudited) (dollars in millions):
                                 
    Year Ended December 31,  
                    Change  
    2007     2006     $     %  
Generic products:
                               
Oral contraceptives
  $ 459.1     $ 444.0     $ 15.1       3 %
Other generics
    1,436.7       608.9       827.8       136 %
 
                         
Total generic products
    1,895.8       1,052.9       842.9       80 %
Proprietary products
    438.3       391.4       46.9       12 %
 
                         
Total product sales
    2,334.1       1,444.3       889.8       62 %
Alliance and development revenue
    121.9       131.3       (9.4 )     -7 %
Other revenue
    44.6       7.5       37.1       495 %
 
                         
Total revenues
  $ 2,500.6     $ 1,583.1     $ 917.5       58 %
 
                         
Product Sales
Generic Products
     Sales of our generic products were $1.9 billion during 2007, up from $1.0 billion during 2006. Of this $842.9 million increase, the most significant increase was an increase of $774.7 million attributable to sales by our PLIVA subsidiary, as well as increases attributable to internal growth and acquisitions made during 2007. Our internal growth was largely due to ten new product launches during 2007 which contributed $22.1 million of product sales. In addition, contributions totaling $18.1 million were the result of our acquisition of four generic injectible products from Hospira, Inc., and our September 2007 acquisition of O.R.C.A. pharm GmbH (“ORCA”), a privately-owned specialty pharmaceutical company focused on the oncology market in Germany.
     During 2007, sales of our generic oral contraceptives (“Generic OCs”) were $459.1 million, an increase of $15.1 million over 2006. The increase included $6.1 million of sales of Trilegest, which was launched in October 2007, and an $18.9 million increase in sales of Kariva, our generic version of Mircette, due primarily to higher prices. In addition, we recorded approximately $3.5 million of higher sales of Jolessa during 2007, which was launched in late 2006. These increases were partially offset by a total decrease of $12.4 million in sales of Sprintec and Tri-Sprintec due to lower selling prices. We expect that sales of Kariva will decline significantly in the second half of 2008, as compared to the first half of 2008, as a result of potential competition when the patent on our Mircette product expires in October 2008. In addition, we expect that competition will continue to result in lower selling prices causing our Generic OC revenues to decrease.
     During 2007, sales of our other generic products (“Other Generics”) were $1.4 billion, an increase of $827.8 million over 2006. This increase was mainly due to $774.7 million of higher sales attributable to products acquired through our PLIVA subsidiary, including sales of Azithromycin of $128.1 million, in addition to $18.1 million from products acquired through acquisition, as noted above. Our 2007 results include a full year of Fentanyl Citrate, our generic version of Cephalon’s ACTIQ, versus only one quarter in 2006 which contributed $57.9 million of the total increase. These increases were partially offset by a decrease of $21.9 million in sales of Desmopressin due to lower pricing.
Proprietary Products
     During 2007, sales of our proprietary products were $438.3 million, up from $391.4 million during 2006. This total increase of $46.9 million was comprised of the following items that were included in our full year results in 2007 as compared to a partial period in 2006: (1) a $47.5 million increase in sales of our dual-label Plan B emergency contraceptive OTC/Rx (over the counter “OTC”), which was launched in November 2006; (2) a $19.4

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million increase in sales of SEASONIQUE, our second generation extended cycle oral contraceptive, which was launched during the quarter ended September 30, 2006; (3) a $25.0 million increase of sales of Adderall IR, which we acquired from Shire and launched in October 2006; and (4) $25.7 million of incremental sales of products acquired as part of the PLIVA acquisition. Partially offsetting these increases were lower unit sales of SEASONALE, which was down $49.6 million, or 66% from 2006 due to a full year of competition from a competitor’s generic version that was launched during the quarter ended September 30, 2006. Additionally, other non-promoted products declined $25.6 million in 2007 as compared to 2006. We expect further increases in sales of SEASONIQUE, Plan B and ParaGard to drive proprietary product sales growth approximately 20% in 2008 over 2007.
Alliance and Development Revenue
     During 2007, we recorded $121.9 million of alliance and development revenue, as compared to $131.3 million during 2006. The decrease was caused by $19.2 million of lower revenues from our profit-sharing arrangement with Teva on generic Allegra, and $8.2 million of lower royalties we earn under our co-promotion agreement with Kos. These declines were partially offset by an increase of $11.3 million in royalties and other fees received under our agreements with Shire plc., and $4.2 million of higher reimbursements and fees we earn from development of the Adenovirus vaccine.
  Teva
     Teva’s 180-day exclusivity period on generic Allegra ended on February 28, 2006. By the end of December 2007, there were two additional competing generic Allegra products on the market. We are aware of other companies that have filed ANDAs with Paragraph IV certifications for generic Allegra. Competition for generic Allegra has and may continue to cause Teva’s Allegra revenues to decrease. Accordingly, our royalties may decline further in future periods.
  Kos
     Royalties we earn under our co-promotion agreement with Kos are based on the aggregate sales of Niaspan and Advicor in a given quarter and calendar year, up to quarterly and annual maximum amounts. The annual cap increases each year through 2009, then remains constant for the remaining term of our arrangement, which ends in July 2012 unless extended by either party for an additional year. The royalty rate and our promotion-related requirements declined in 2007 compared to 2006, and now remain fixed throughout the remaining term of the agreement. Due to sales realized by Kos during 2007, we achieved our maximum annual royalty of $37.0 million for 2007. We believe that sales of Niaspan and Advicor will remain strong in 2008 and that our royalties in 2008 will be substantially similar to those we earned in 2007.
  Shire
     In August 2006, we entered into a series of agreements with Shire plc. Under one of those agreements, we granted Shire a license to obtain regulatory approval and market in certain specified territories SEASONIQUE and five other products in various stages of development, in exchange for (1) an initial $25.0 million payment for previously incurred product development expenses and (2) reimbursement of future development expenses up to a maximum of $140.0 million over an eight-year period, not to exceed $30.0 million per year. During 2007, we recorded $14.1 million of revenues from this arrangement based on the percentage of research and development activities performed during 2007. We expect these revenues will increase in 2008 as we increase spending on the related development projects.
  Adenovirus Vaccine
     Alliance and development revenues also include reimbursements and fees we receive from the U.S. Department of Defense for the development of the Adenovirus vaccine. We have substantially completed the development and clinical trials related to the Adenovirus vaccine and, as a result, expect that the reimbursements and fees we earn from its development to decrease in 2008.

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Other Revenue
     We recorded $44.6 million of other revenue during 2007 compared to $7.5 million for 2006. The increase compared to the prior year period is related to a full year reporting of other non-core revenues from our PLIVA subsidiary, primarily our DDD&I business.
Cost of Sales
     The following table sets forth cost of sales data, in dollars, as well as the resulting gross margins expressed as a percentage of product sales (except ‘‘other’’, which is expressed as a percentage of our other revenue line item), for 2007 and 2006 (dollars in millions):
                                   
    Year Ended December 31,  
                    Change  
    2007     2006     $     %  
Generic products
  $ 1,008.8     $ 448.8     $ 560.0       125 %  
 
                           
Gross margin
    47 %     57 %                  
 
                                 
Proprietary products
  $ 138.2     $ 114.3     $ 23.9       21 %  
 
                           
Gross margin
    68 %     71 %                  
 
                                 
Other revenue
  $ 24.1     $ 12.0     $ 12.1       100 %  
 
                           
Gross margin
    46 %     -60 %                  
 
                                 
Total cost of sales
  $ 1,171.1     $ 575.1     $ 596.0       104 %  
 
                           
Gross margin
    51 %     60 %                  
     Cost of sales components include the following:
    our manufacturing and packaging costs for products we manufacture;
 
    amortization expense (as discussed below);
 
    profit-sharing or royalty payments we make to third parties, including raw material suppliers;
 
    the cost of products we purchase from third parties;
 
    lower of cost or market adjustments to our inventories; and
 
    stock-based compensation expense relating to employees within certain departments that we allocate to cost of sales.
     Prior to December 31, 2006, we included amortization expenses related to acquired product intangibles in selling, general and administrative expenses (“SG&A”) rather than cost of sales. As discussed in our Transition Report for the six-month period ended December 31, 2006, we revised our presentation of amortization expense to include it within cost of sales rather than SG&A. We have adjusted our discussion regarding the year ended December 31, 2006 presented below to reflect this change.
     Generics: During 2007, our generics segment cost of sales increased by $560.0 million. This increase in generic products cost of sales was due to both increased total generics product sales of $843.0 million along with greater material and production costs associated with these increased product sales. Additionally, during 2007 there were higher amortization charges of $79.4 million offset by a $23.6 million reduction in expenses related to the stepped-up value of inventory acquired from PLIVA, as compared to 2006.

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     In addition to the charges noted above, our generic product sales mix changed as compared to 2006 which negatively impacted our overall margins. In general, our gross margins of acquired products through the acquisition of PLIVA are lower than margins we previously earned, partially due to these products having associated intangible amortization expense. During 2007, generic product sales of acquired products represented 50.9% of total generic product sales as compared to 17.4% of total sales for 2006. As a result of a higher proportion of sales of acquired generic products, our generic gross margins decreased from 57% in 2006 to 47% in 2007.
     Proprietary: During 2007, our proprietary segment cost of sales increased by $23.9 million as compared to 2006 due to both a $46.9 million increase in proprietary sales and a $3.6 million net increase in product amortization expense and inventory step-up, thereby reducing margins for our proprietary products from 71% to 68%. The increase in product amortization expense relates to a full year period of expense relating to the five proprietary products we acquired through the PLIVA acquisition. The margin decline is also a result of lower sales of higher margin products, including a year-over-year decline of $49.6 million in sales of SEASONALE, which now faces generic competition, and a $9.7 million decline in sales of Mircette, which we acquired in December 2005. Lower sales of these higher margin products were more than offset by higher sales of promoted and non-promoted products which, in general, have lower margins than SEASONALE and Mircette, resulting in an overall lower gross margin for the year. Also reducing proprietary margins was a $13.7 million charge related to a product royalty contingency agreement for our Cenestin product.
Selling, General and Administrative Expense
     The following table sets forth selling, general and administrative expense data for 2007 and 2006 (dollars in millions):
                                   
    Year Ended December 31,  
                    Change        
    2007     2006     $     %  
Selling, general and administrative
  $ 763.8     $ 441.5     $ 322.3       73 %  
 
                           
Charge included in general and administrative
  $ 15.3     $ 22.5     $ (7.2 )     -32 %  
 
                           
     Selling, general and administrative expenses increased by 73% in 2007 when compared to 2006. Of this $322.3 million increase, approximately $261.9 million is directly attributable to the full year reporting of our PLIVA subsidiary. The remaining increase relates to: (1) higher legal, accounting and other consulting fees of $20.0 million; (2) integration costs of $12.0 million from the PLIVA acquisition; (3) increased information technology expenses of $11.0 million; (4) increased selling and marketing expenses relating to the promotion of our proprietary products in the amount of $12.0 million; and (5) increased personnel costs of $10.6 million including expatriate charges, offset by a $7.2 million decrease in litigation charges.
Research and Development
     The following table sets forth research and development expenses for 2007 and 2006 (dollars in millions):
                                   
    Year Ended December 31,  
                    Change        
    2007     2006     $     %  
Research and development
  $ 248.4     $ 180.9     $ 67.5       37 %  
 
                           
Write-off of acquired in-process research and development
  $ 4.6     $ 380.7     $ (376.1 )     -99 %  
 
                           

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     Research and development increased by $67.5 million in 2007 over 2006. Of this increase $63.6 million is directly attributable to a significant increase in research and development activities since the acquisition of PLIVA, as compared to 68 days of incremental PLIVA activities in 2006.
     Write-off of acquired in-process research and development (“IPR&D”), which resulted from the PLIVA acquisition, was $4.6 million in 2007 as compared to $380.7 million in 2006.
Interest Income
     The following table sets forth interest income for 2007 and 2006 (dollars in millions):
                                 
    Year Ended December 31,  
                    Change  
    2007     2006     $     %  
Interest income
  $ 33.4     $ 25.7     $ 7.7       30%
 
                         
     The increase in interest income for the year ended December 31, 2007 is due to higher interest rates and higher average daily cash and marketable securities balances during these periods as compared to the prior year periods.
Interest Expense
     The following table sets forth interest expense for 2007 and 2006 (dollars in millions):
                                 
    Year Ended December 31,  
                    Change  
    2007     2006     $     %  
Interest expense
  $ 158.9     $ 34.6     $ 124.3       N/M  
 
                         
     The increase in interest expense for year ended December 31, 2007 as compared to 2006 is due to a full year of interest expense on the $2.6 billion of debt the Company incurred in connection with the PLIVA acquisition (both to finance the acquisition and pre-existing debt of PLIVA). During 2007, we repaid $615.7 million of the acquisition debt. As a result, we expect interest expense to decline in 2008 compared to 2007.
Other Income (Expense)
     The following table sets forth other expense for 2007 and 2006 (dollars in millions):
                                 
    Year Ended December 31,  
                    Change  
    2007     2006     $     %  
Other income (expense)
  $ 20.7       ($55.2 )   $ 75.9       138%  
 
                         
     Other income (expense) increased by $75.9 million for the year ended December 31, 2007 as compared to 2006. The increase was primarily a result of recording a $59.0 million reduction in the value of our foreign currency option related to the PLIVA acquisition during the year ended December 31, 2006. This reduction in fair value included the changes in the exchange rate between the Dollar and the Euro. Additionally, in the year ended December 31, 2007, we recorded (1) $13.7 million over the prior year period related to net foreign currency gains, including hedging activities, (2) the unwinding of treasury lock derivatives resulting in a reclassifying of a $3.5

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million net gain from accumulated other comprehensive income to other income (expense) and (3) a gain of $3.2 million related to dissolving a captive insurance fund.
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 2007 and 2006 (dollars in millions):
                                 
    Year Ended December 31,  
                    Change  
    2007     2006     $     %  
Income tax expense
  $ 64.6     $ 119.6     $ (55.0 )     -46%
 
                         
Effective tax rate
    31.1 %     -202.5 %                
     The Company’s effective tax rate for 2007 was 31.1%. The rate was positively impacted by new tax legislation in Germany enacted in September 2007 reducing the statutory corporate tax rate from 39% to 30% effective January 1, 2008. The change reduced our deferred tax liability and income tax provision by approximately $9.6 million during the September quarter. In addition, the rate was positively impacted by $4.2 million related to completion of certain state and foreign tax examinations. For 2008 we expect our effective tax rate to increase to the low 40% range.
     The Company’s effective tax rate for 2006 was negatively impacted due to the write-off of $380.7 million of acquired IPR&D arising from the PLIVA acquisition, which lowered earnings, and was non-deductible for tax purposes. This resulted in the Company having a tax expense during 2006 despite a pre-tax loss.

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     Comparison of the six months ended December 31, 2006 and December 31, 2005
     The following table sets forth revenue data for the Transition Period and the comparable 2005 six months (dollars in millions):
                                 
            Six Months        
            Ended        
    Transition     December 31,     Change  
    Period     2005     $     %  
Generic products:
                               
Oral contraceptives
  $ 235.8     $ 191.2     $ 44.6       23%
Other generic
    394.6       225.1       169.5       75%
 
                         
Total generic products
    630.4       416.3       214.1       51%
Proprietary products
    200.9       140.4       60.5       43%
 
                         
Total product sales
    831.3       556.7       274.6       49%
Alliance and development revenue
    65.9       79.3       (13.4 )     -17%
Other revenue
    7.5             7.5       100%
 
                         
Total revenues
  $ 904.7     $ 636.0     $ 268.7       42%
 
                         
Product Sales
Generic Products
     Sales of our generic products were $630.4 million during the Transition Period, up from $416.3 million during the comparable 2005 six months. Of this $214.1 million increase, the most significant increase was attributable to sales of approximately $183.1 million by our newly acquired subsidiary, PLIVA, as well as increases attributable to internal growth, largely due to new product launches. During the Transition Period, we had four significant product launches that contributed approximately $100 million of the total increase including Fentanyl Citrate (generic ACTIQ, for cancer pain management), Jolessa (generic SEASONALE, an extended-cycle oral contraceptive that we launched after a competitor launched its generic version of our proprietary SEASONALE product), Balziva (generic Ovcon 35, an oral contraceptive) and Ondansetron ODT (generic Zofran ODT, to prevent nausea and vomiting), a product acquired in the PLIVA acquisition. The increase from new product launches and from PLIVA product sales were partially offset by declines in our Other Generics discussed below.
     During the Transition Period, sales of our Generic OCs were $235.8 million, an increase of $44.6 million over the comparable 2005 six months. This 23% increase was positively impacted by strong sales from the launches of Balziva and Jolessa, which totaled $29.5 million, and a 22% or $7.3 million increase in sales of our Kariva product due to an increase in both volume and price.
     During the Transition Period, sales of our Other Generics were $394.6 million, up from $225.1 million during the comparable 2005 six months, an increase of $169.5 million. This 75% increase was mainly due to the incremental sales attributable to products acquired through the PLIVA acquisition, as discussed above, along with our launch in September 2006 of Fentanyl Citrate, our generic version of Cephalon’s ACTIQ, and the launch of Ondansetron ODT in December 2006. These two product launches accounted for approximately $70 million of the total increase in sales of other generics. Partially offsetting these increases were lower sales of our inline other generic products, principally a $44.7 decline in sales of Desmopressin. We launched Desmopressin in July 2005 with 180 days of exclusivity as a result of a successful paragraph IV patent challenge. In March 2006, following the expiration of the exclusivity period, sales of Desmopressin declined significantly due to the introduction of competing generic products.
Proprietary Products
     During the Transition Period, sales of our proprietary products increased 43% to $200.9 million, up from $140.4 million during the comparable 2005 six months. This total increase of $60.5 million over the comparable 2005 six months included: (1) the launch of our dual-label Plan B emergency contraceptive OTC/Rx (over the counter

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“OTC”) in November 2006 which added approximately $11 million of incremental product sales during the quarter; (2) $14.6 million of sales recorded from the launch of SEASONIQUE, our second generation extended cycle oral contraceptive, during the quarter ended September 30, 2006; (3) a total of $34.1 million of incremental product sales from full period contributions from ParaGard and Mircette, which we acquired in November 2005 and December 2005, respectively; and (4) $12.2 million of sales of Adderall IR, which we acquired from Shire and launched in October 2006. Partially offsetting these increases were lower sales of SEASONALE, which were down 48% from the comparable 2005 six months due to Watson’s launch of a generic version during the quarter ended September 30, 2006, and our subsequent launch of Jolessa, our own generic version, resulting in lower SEASONALE unit sales.
Alliance and Development Revenue
     During the Transition Period, we recorded $65.9 million of alliance and development revenue, down from $79.3 million during the comparable 2005 six months. The decrease was caused by a $31.2 million decline in revenues from our profit-sharing arrangement with Teva on generic Allegra, which began in September 2005, partially offset by an increase of $9.9 million in royalties and other fees received under our agreements with Kos Pharmaceuticals relating to Niaspan and Advicor and an increase of $5.5 million in fees we receive for the development of the Adenovirus vaccine.
Other Revenue
     We recorded $7.5 million of other revenue during the Transition Period. This revenue is primarily attributable to non-core operations including our animal health and agrochemicals business, which predominantly consists of generics, feed additives, agro products and vaccines, as well as our DDD&I business. These are businesses acquired through the PLIVA acquisition, and as such, there are no comparable operations for the comparable 2005 six months.
Cost of Sales
     The following table sets forth cost of sales data, in dollars, as well as the resulting gross margins expressed as a percentage of product sales (except ‘‘other’’, which is expressed as a percentage of our other revenue line item), for the Transition Period and the comparable 2005 six months (dollars in millions):
                                 
            Six Months        
            Ended        
    Transition     December 31,     Change  
    Period     2005     $     %  
Generic products
  $ 306.6     $ 138.3     $ 168.3     122%
 
                         
Gross margin
    51 %     67 %                
Proprietary products
  $ 56.2     $ 33.8     $ 22.4     66%
 
                         
Gross margin
    72 %     76 %                
Other
  $ 6.5     $     $ 6.5     100%
 
                         
Gross margin
    13 %     0 %                
Total cost of sales
  $ 369.3     $ 172.1     $ 197.2     115%
 
                         
Gross margin
    56 %     69 %                
     Cost of sales components include the following:
    our manufacturing and packaging costs for products we manufacture;

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    amortization expense (as discussed further below);
 
    the write-off of the step-up in inventory arising from acquisitions, including PLIVA;
 
    profit-sharing or royalty payments we make to third parties, including raw material suppliers;
 
    the cost of products we purchase from third parties;
 
    lower of cost or market adjustments to our inventories; and
 
    stock-based compensation expense relating to employees within certain departments that we allocate to cost of sales.
     In prior periods, we included amortization expense in selling, general and administrative expenses rather than cost of sales. During the Transition Period, we revised our presentation of amortization expense to include it within cost of sales rather than SG&A. We have adjusted all historical periods presented in this discussion to reflect this change.
     Cost of sales on an overall basis, increased 115% over the comparable 2005 six months primarily related to the $274.6 million of higher product sales, plus certain items arising from the acquisition of PLIVA. These items from the PLIVA acquisition included amortization expense of $17.9 million related to intangible assets and $56.8 million in cost of sales of the stepped-up value of inventory acquired from PLIVA and sold during the period. As part of purchase price allocation for the PLIVA acquisition, we stepped-up the book value of inventory acquired to fair value by $89.6 million as of October 24, 2006. The stepped-up value is recorded as a charge to cost of sales as acquired inventory is sold. As a result of these expenses and amortization charges, overall gross margins decreased from 69% for the comparable 2005 period to 56% in the Transition Period.
     In our generics segment, cost of sales increased in large part due to a 75% increase in total Other Generics sales, as described above, and $17.9 million of higher amortization expense arising primarily from product intangibles created as a result of the PLIVA acquisition. When combined with the charge related to the step-up in inventory described above, these increases in cost of sales resulted in a decrease in our generics margins from 67% to 52%. Partially offsetting this decrease in gross margins was the impact from higher sales of our Generic OCs and the launch of Fentanyl Citrate, as discussed above, during the Transition Period, which had above-average margins when compared to many of our other generic products.
     In our proprietary segment, cost of sales increased both due to a 43% increase in proprietary sales and an $11.0 million increase in product amortization expense, thereby reducing margins for our proprietary products from 76% to 72%. The increase in product amortization expense relates to a full six-month period of expense relating to our November 2005 acquisition of FEI Women’s Health, LLC. Product amortization expense and the inventory step-up charge related to the five proprietary products we acquired through the PLIVA acquisition were not material.
Selling, General and Administrative Expense
     The following table sets forth selling, general and administrative expense data for the Transition Period and the comparable 2005 six months (dollars in millions):
                                 
            Six Months        
            Ended        
    Transition     December 31,     Change  
    Period     2005     $     %  
Selling, general and administrative
  $ 259.0     $ 126.4     $ 132.6       105%
 
                         
     Selling, general and administrative more than doubled in the Transition Period from the comparable 2005 six months. Of this $132.6 million increase, approximately $88.2 million was directly attributable to the PLIVA acquisition, including both operating and integration expenses. These expenses included, but were not limited to:

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    PLIVA’s selling, general and administrative expenses for the PLIVA Stub Period of approximately $88.2 million, including the sales force costs associated with approximately 1,400 incremental global sales representatives and other general and administrative expenses associated our worldwide operations;
 
    professional fees of $6.8 million associated with the integration activities; and
 
    incremental legal and audit fees of $3.1 million related to the acquisition.
     Other increases in general and administrative expenses during the Transition Period included an increase in information technology costs of $9.3 million, reflecting higher depreciation costs and $2.4 million related to the integration of our SAP enterprise resource planning system, a $6.0 million payment to a raw material supplier during the Transition Period and an $8.4 million net benefit related to the Mircette transaction that reduced general and administrative expenses in the comparable 2005 six months. These net increases were partially offset by proceeds of $5.2 million received in connection with the FTC-ordered sale of two products in connection with the PLIVA acquisition.
     Other increases in selling and marketing expenses include incremental marketing activity totaling $28.4 million principally to support the launch of SEASONIQUE, the continued marketing of our ENJUVIA product and a full period of marketing and sales force costs related to our ParaGard product, which we acquired in November 2005.
Research and Development
     The following table sets forth research and development expenses for the Transition Period and the comparable 2005 six months (dollars in millions):
                                 
            Six Months        
            Ended        
    Transition     December 31,     Change  
    Period     2005     $     %  
Research and development
  $ 106.8     $ 66.0     $ 40.8     62%
 
                         
Write-off of acquired IPR&D
  $ 380.7     $     $ 380.7     n/a
 
                         
     Research and development increased by $40.8 million in the Transition Period over the comparable 2005 six months primarily due to an increase of $16.0 million in costs associated with clinical trials and bio-studies and the inclusion in the comparable 2005 six months of a $5.0 million reimbursement of previously incurred costs under a third party development agreement which reduced expenses in that period.
     Write-off of acquired in-process research and development (“IPR&D”), which resulted from the PLIVA acquisition, was $380.7 million in the Transition Period.
Interest Income
     The following table sets forth interest income for the Transition Period and the comparable 2005 six months (dollars in millions):
                                 
            Six Months        
            Ended        
    Transition     December 31,     Change  
    Period     2005     $     %  
Interest income
  $ 15.7     $ 8.9     $ 6.8     76%
 
                         

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     The increase in interest income for the Transition Period was due to higher interest rates and cash and marketable securities balances during the period as compared to the comparable 2005 six months.
Interest Expense
     The following table sets forth interest expense for the Transition Period and the comparable 2005 six months (dollars in millions):
                                 
            Six Months        
            Ended        
    Transition     December 31,     Change  
    Period     2005     $     %  
Interest expense
  $ 34.1     $ 0.3     $ 33.8       11267 %
 
                         
     The increase in interest expense for the Transition Period was primarily due to interest on borrowings outstanding under our new credit facilities that were drawn in connection with the acquisition of PLIVA.
Other (Expense) Income
     The following table sets forth other expense for the Transition Period and the comparable 2005 six months (dollars in millions):
                                 
            Six Months        
            Ended        
    Transition     December 31,     Change  
    Period     2005     $     %  
Other (expense) income
    ($73.0 )     ($0.6 )     ($72.4 )     12067 %
 
                         
     Other expense increased to $73.0 million in the Transition Period primarily as a result of $69.3 million of losses we recorded upon the sale or settlement of foreign currency option and forward contracts entered into in connection with the acquisition of PLIVA. Since our offer was denominated in Kuna, the Croatian currency, these contracts were purchased in order to protect against fluctuations in the USD/Kuna exchange rate, effectively locking in the U.S. dollar value of our offer. Furthermore, these contracts helped guarantee our ability to deliver the required Kuna to tendering shareholders. Because these contracts were put in place to hedge a business combination, they did not qualify for hedge accounting and all associated gains or losses were required to be recognized in our statement of operations during the Transition Period.
Income Taxes
     The following table sets forth income tax expense and the resulting effective tax rate stated as a percentage of pre-tax income for the Transition Period and the comparable 2005 six months (dollars in millions):
                                 
            Six Months        
            Ended        
    Transition     December 31,     Change  
    Period     2005     $     %  
Income tax expense
  $ 34.6     $ 101.5     $ (66.9 )   -66%
 
                         
Effective tax rate
    -11.5 %     36.3 %                

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     The effective tax rate for the Transition Period was -11.5%, as compared to 36.3% for the comparable 2005 six months, primarily due to the write-off of $380.7 million of acquired IPR&D arising from the PLIVA acquisition, which lowered reported earnings, and was non-deductible for tax purposes. This resulted in the Company having tax expense for the Transition Period despite a pre-tax loss.
     The federal research and development credit was suspended as of December 31, 2005. In December 2006 it was reinstated retroactively beginning after January 1, 2006. The effective rate for the Transition Period included a favorable effect of the reinstatement from the time the credit was suspended at December 31, 2005 through the end of the Transition Period.
     During the Transition Period the Company also recorded a favorable release of the tax reserve related to the expiration of the statute of limitations associated with certain acquisition costs for a prior domestic acquisition.

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Comparison of the fiscal years ended June 30, 2006 and June 30, 2005
     The following table sets forth revenue data for the fiscal years ended June 30, 2006 and 2005 (dollars in millions):
                                 
    Twelve Months Ended June 30,  
                    Change  
    2006     2005     $     %  
Generic products:
                               
Oral contraceptives
  $ 399.4     $ 396.6     $ 2.8     1%
Other generic
    439.4       354.8       84.6     24%
 
                         
Total generic products
    838.8       751.4       87.4     12%
Proprietary products
    331.0       279.3       51.7     19%
 
                         
Total product sales
    1,169.8       1,030.7       139.1     13%
Alliance and development revenue
    144.7       16.7       128.0     766%
 
                         
Total revenues
  $ 1,314.5     $ 1,047.4     $ 267.1     26%
 
                         
Product Sales
     Product sales for the fiscal year ended June 30, 2006 (“fiscal 2006”) increased 13% over product sales for the fiscal year ended June 30, 2005 (“fiscal 2005”), resulting from increases in sales of both generic and proprietary products. Generic sales increased in large part due to contributions from Desmopressin, which was launched at the beginning of fiscal 2006, combined with continued strong sales of two of our generic oral contraceptive products, Tri-Sprintec and Kariva. Proprietary sales increased in part due to contributions of products acquired during fiscal 2006 as well as higher sales of promoted in-line products, including SEASONALE and Plan B.
Generic Products
     For fiscal 2006, sales of Generic OC products increased 1% to $399.4 million from sales of $396.6 million in fiscal 2005. Sales in this category benefited from strong performances from Tri-Sprintec and Kariva. Tri-Sprintec sales increased 20%, driven in part by market-share gains during the second half of fiscal 2006, while sales of Kariva were up 32% due both to an increase in market share and higher pricing. We believe that Tri-Sprintec’s market share gains were the result of supply shortages encountered by one of our competitors, which was remedied.
     Somewhat offsetting the strong performances by Tri-Sprintec and Kariva was the impact of increased pricing pressure from competition on certain of our other products, including Aviane and Apri, as well as the ongoing decline in consumer demand for several Generic OC products that occurs when brand companies cease promotional activities after a generic is launched. These factors more than offset continued increases in the generic substitution rates for nearly all of our Generic OC products.
     For fiscal 2006, sales of Other Generics increased 24% to $439.4 million from $354.8 million in fiscal 2005, driven by strong performances from Desmopressin and Didanosine. Desmopressin was launched in July 2005, and recorded approximately $107.7 million of sales during fiscal 2006. Didanosine was launched during the middle of fiscal 2005, and saw sales increase 47% year-over-year. Desmopressin sales, which were favorably impacted in the first half of fiscal 2006 by rapid generic substitution, declined sharply in the second half due to the launch of two competing generic products.
     These increases were partially offset by lower sales of Mirtazapine, Claravis and Warfarin Sodium, as well as the continued decline in both price and demand for certain of our other generic products. Mirtazapine sales were lower due to further price declines and a loss of market share. Claravis sales were lower throughout fiscal 2006 due in large part to the decline in the overall compound usage and lower prices. As discussed in previous filings, sales of Claravis and other isotrentinoin products indicated for the treatment of severe acne have been negatively affected by the implementation effective January 1, 2006 of iPledge, an enhanced risk management program that is designed to

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minimize fetal exposure to isotrentinoin that has also led to reduced product use. Sales of Warfarin Sodium declined due to lower prices, more than offsetting higher unit volume due primarily to an increase in our market share.
Proprietary Products
     For fiscal 2006, proprietary product sales increased 19% to $331.0 million from $279.3 million in fiscal 2005. This increase was driven by (1) a 14% increase in sales of SEASONALE, (2) the inclusion of sales of the ParaGard IUD and of the Mircette oral contraceptive, which we acquired in November 2005 and December 2005, respectively, (3) the launch of ENJUVIA during the fourth quarter of fiscal 2006 and (4) higher volume and pricing for our Plan B emergency contraceptive product. Partially offsetting these increases were lower sales of our LOESTRIN/LOESTRIN FE oral contraceptive products and our Cenestin hormone therapy product, due in part to customer buying patterns.
     SEASONALE sales reached $100 million during fiscal 2006, up 14% from fiscal 2005 sales. Higher prices for SEASONALE during fiscal 2006 more than offset lower customer shipments, which were attributable to customer buying patterns during the fourth quarter of fiscal 2006. During fiscal 2006, consumer demand for SEASONALE grew, as prescriptions increased 30% compared to fiscal 2005.
Alliance, Development and Other Revenue
     During fiscal 2006, alliance, development and other revenue totaled $144.7 million compared to $16.7 million in the prior year. The substantial increase was driven by our profit sharing arrangement with Teva, which began in September 2005 and represented 65% of such revenues in fiscal 2006, and an increase in royalties under our agreements with Kos, under which we began earning royalties in the fourth quarter of fiscal 2005.
     Teva’s 180-day exclusivity period on generic Allegra ended on February 28, 2006. By the end of June 2006, there were two additional competing generic Allegra products on the market, resulting in a decrease to Teva’s revenues. Additionally, our royalty percentage decreased following the expiration of the exclusivity period on February 28, 2006, further reducing the amount we earned.
Cost of Sales
     The following table sets forth cost of sales data, in dollars, as well as the resulting gross margins expressed as a percentage of product sales, for fiscal 2006 and fiscal 2005 (dollars in millions):
                                 
                    Change  
    2006     2005     $     %  
Generic products
  $ 286.0     $ 264.8     $ 21.2     8%
 
                         
Gross margin
    66 %     65 %                
 
                               
Proprietary products
  $ 91.9     $ 52.6     $ 39.3     75%
 
                         
Gross margin
    72 %     81 %                
 
                               
Total cost of sales
  $ 377.9     $ 317.4     $ 60.5     19%
 
                         
Gross margin
    68 %     69 %                
     Cost of sales components include the following:
    the cost of products we purchase from third parties;
 
    our manufacturing and packaging costs for products we manufacture;
 
    profit-sharing or royalty payments we make to third parties, including raw material suppliers;
 
    lower of cost or market inventory provisions; and

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    stock-based compensation expense relating to employees within certain departments that we allocate to cost of sales.
     As discussed above, during the Transition Period, we revised our presentation of amortization expense to include it within cost of sales rather than SG&A. We have adjusted all historical periods presented in this discussion to reflect this change.
     Overall gross margins for fiscal 2006 declined to 67.7% from 69.2% in fiscal 2005. Cost of sales increased 19% year-over-year primarily due to (1) the inclusion of $8.1 million of stock-based compensation expense that was not present in fiscal 2005, (2) $20.7 million of charges to write off the step-up to fair value of ParaGard inventory acquired from FEI in November 2005 and (3) $12.4 million of higher product amortization expense. As of June 30, 2006, the entire amount of the step-up adjustment had been charged to cost of sales as the units acquired on the date of acquisition had been sold.
     Margins on our generic products increased slightly in fiscal 2006 due to strong sales of Desmopressin and Didanosine, both of which had higher margins than the average margin of our other generic products. The margin increase related to these products was slightly offset by the first-time inclusion of stock-based compensation expense in cost of sales.
     Proprietary margins for the year ended June 30, 2006 were negatively impacted by the $20.7 million inventory step-up charge described above, the inclusion of stock-based compensation expense and an increase in intangible amortization of $12.4 million.
Selling, General and Administrative Expense
     The following table sets forth selling, general and administrative expense data for fiscal 2006 and 2005 (dollars in millions):
                                 
                    Change  
    2006     2005     $     %  
Selling, general and administrative
  $ 308.8     $ 285.2     $ 23.6     8%
 
                         
Charges included in general and administrative
  $ 14.1     $ 63.2     $ (49.1 )   -78%
 
                         
     Selling, general and administrative expenses increased 8% in fiscal 2006 primarily due to: (1) $26.4 million in higher selling and marketing costs associated with our proprietary product portfolio, largely attributable to the launch of ENJUVIA during the fourth quarter and personnel costs associated with the additional sales representatives acquired in the FEI acquisition, (2) $13.4 million in stock-based compensation that was not included in the prior year, (3) higher information technology costs of $12.5 million relating to the integration of our SAP enterprise resource planning system, and (4) a $6.5 million increase in legal costs, which more than offset the charges as described below.
     Charges included in general and administrative expenses for fiscal 2006 and 2005 were as follows:
     Fiscal 2006:
     On December 2, 2005, after receiving the requisite approvals, we entered into a definitive agreement with Organon and Savient to acquire the exclusive rights to Mircette for $152.8 million (see Fiscal 2005 charges below). Based on final valuations of the assets acquired, we recorded an additional charge in fiscal 2006 of $0.8 million (bringing the total charge to $64.0 million) for the difference between amounts recorded as a probable loss at June 30, 2005 and the final loss amount. We also incurred transaction costs during fiscal 2006 (primarily legal and accounting fees) of $1.8 million. Additionally, we received $11.0 million from a third party as partial reimbursement of the $64.0 million charge recorded in conjunction with this transaction. The $11.0 million reimbursement, together with the additional settlement charge of $0.8 million and the transactions costs of $1.8 million, were all classified as

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selling, general and administrative expenses and resulted in a net benefit of $8.4 million to selling, general and administrative expenses for fiscal 2006.
     General and administrative expenses also included a payment of $22.5 million in settlement of an anti-trust case related to Warfarin Sodium.
     Fiscal 2005
     On June 15, 2005, we entered into a non-binding letter of intent (“LOI”) with Organon (Ireland) Ltd., Organon USA and Savient Pharmaceuticals, Inc. to acquire the NDA for Mircette, obtain an exclusive royalty free license to sell Mircette and Kariva in the U.S. and dismiss all pending litigation between the parties in exchange for a payment by us of up to $155 million. Because the transaction included, as one of its components, a payment in settlement of litigation, it was presumed under GAAP to give rise to a “probable loss,” as defined in Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies.” Based on valuations of the assets we acquired and total estimated payments, we recorded a charge of $63.2 million as of June 30, 2005 to reflect the proposed litigation settlement.
Research and Development
     The following table sets forth research and development expenses for fiscal 2006 and 2005 (dollars in millions):
                                 
                    Change  
    2006     2005     $     %  
Research and development
  $ 140.2     $ 128.4     $ 11.8       9%  
 
                         
     The increase in research and development expenses costs was due to (1) an increase of $9.5 million in costs associated with clinical trials, (2) the inclusion of $5.6 million of stock-based compensation that was not similarly included in fiscal 2005 and (3) an increase of $5.6 million in raw material costs. These increases were offset by a reimbursement of $5.0 million for previously incurred costs under a third party development agreement and a $4.0 million decrease in costs associated with bioequivalents studies supporting our generic product activities.
Other Income (expense)
     The following table sets forth other income for fiscal 2006 and 2005 (dollars in millions):
                                 
                    Change  
    2006     2005     $     %  
Other income (expense)
  $ 17.2     $ 3.9     $ 13.3       341%  
 
                         
     Other income increased to $17.2 million in fiscal 2006 from $3.9 million in fiscal 2005 primarily as a result of a $10.3 million gain in the value of our foreign currency option related to the PLIVA acquisition. This gain was the result of fluctuations and volatility in the exchange rate between the Dollar and the Euro.
     Additionally, we recorded a net gain during fiscal 2006 of $5.2 million related to our equity investment in two venture funds, compared to a loss of $0.8 million during fiscal 2005.
Income Taxes
     The following table sets forth income tax expense and the resulting effective tax rate stated as a percentage of pre-tax income for fiscal 2006 and 2005 (dollars in millions):
                                 
                    Change  
    2006     2005     $     %  
Income tax expense
  $ 186.5     $ 114.9     $ 71.6       62%  
 
                         
Effective tax rate
    35.7 %     34.8 %                

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     The effective tax rate for fiscal 2006 was slightly higher than the statutory rate of 35% due to the expiration of the federal research and development tax credit on December 31, 2005, which was only partially offset by the favorable impact arising from the completion of several tax audits, the change of the mix in income between various taxing jurisdictions and the enactment of favorable tax legislation in certain jurisdictions.

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Liquidity and Capital Resources
Overview
     Our primary source of liquidity has been cash from operations which entails the collection of accounts and other receivables related to product sales, and royalty and other payments we receive from third parties in various ventures. Our primary uses of cash include financing inventory, research and development programs, marketing and selling, servicing our debt obligations, capital projects and investing in business development activities. In 2008, operating cash flows will be a significant source of liquidity, while debt service costs will be a significant use of cash in addition to the activities described above.
     The following table highlights selected measures of our liquidity and capital resources as of December 31, 2007 and 2006 (dollars in millions):
                                 
    December 31,     December 31,     Change  
    2007     2006     $     %  
Cash & cash equivalents, short term marketable securities
  $ 534.5     $ 905.7     $ (371.2 )     -41%  
Debt/Capital lease obligations:
                               
Short-term
    298.1       742.2       (444.1 )     -60%  
Long-term
    1,781.7       1,935.5       (153.8 )       -8%
Working capital
    970.9       876.1       94.8         11%
Cash flow from operations
  $ 383.2       213.3       169.9         80%
Ratio of current assets to current liabilities
    2.25 : 1       1.7 : 1                  
  Operating Activities
     Our operating cash flow for 2007 was $383.2 million, reflecting net earnings of $128.4 plus the add back to earnings of significant non-cash adjustments including depreciation and amortization of $297.8 million and stock-based compensation expense of $27.8 million. These components of our operating cash flows were partially offset by an increase in deferred income taxes of $71.4 million. In addition to these adjustments, our operating cash flows were also positively impacted by a $10.3 million net decrease in working capital since December 31, 2006. This decrease was due in large part to the collection of accounts receivables which were slightly offset by an increase in inventory levels and a net decrease in accounts payable and other accrued liabilities.
  Investing Activities
     Our net cash provided by investing activities was $198.3 million during 2007. The major components of our investing activities that generated positive cash flow in 2007 were higher net proceeds from sales of marketable securities of $384.2 million and net proceeds from the sale of discontinued operations of approximately $34.1 million, as discussed below. These cash flows were used in part to pay down debt as discussed in financing activities.
     During the second half of 2007, we completed the sale of our operations in Italy and Spain and our Animal Health business. Through these sales we generated approximately $34.1 million of net proceeds. In addition to these cash proceeds, in connection with the sale of our Spanish subsidiary we received a note receivable in the amount of $13.7 million payable by the purchaser in installments during 2008.
      Our investing activities in 2007 also reflected cash expended in connection with acquisitions made during 2007 totaling $89.8 million, including $36.4 million used to acquire additional PLIVA shares, $32.1 million cost associated with the purchase of ORCA and $21.3 million of other product acquisitions.

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     During 2007, we made investments in capital expenditures of $123.4 million. Our investments in capital include upgrades and expansions to our property, plant and equipment and technology investments. These investments will expand our production, laboratory, warehouse and distribution capacity in our facilities and were designed to help ensure that we have the facilities necessary to manufacture, test, package and distribute our current and future products.
     We expect that our capital investments in 2008 will be between $150 million and $175 million, and possibly increase further during 2009. A significant amount of these investments will be in support of a new biopharmaceutical manufacturing facility in Croatia, as well as other investments in our manufacturing facilities in Europe. In addition, we expect continued investment in facilities and information technology projects supporting global quality initiatives to ensure that we have a platform to properly manage and grow our global business.
  Financing Activities; Credit Facilities
     Net cash used in financing activities during 2007 was $577.5 million which includes $724.2 million of principal repayments we made on long-term debt, $615.7 million of which was related to our PLIVA acquisition. These debt repayments, discussed further below, were partially offset by proceeds from other long-term debt of $100.1 million and proceeds of $36.1 million from the exercise of warrants and employee stock options and share purchases under our employee stock purchase plan.
     During 2006, we entered into $2.8 billion senior unsecured credit facilities (the “Credit Facilities”) that consisted of a $2.0 billion five year term facility, a $500 million 364-day term facility and a $300 million revolving credit facility. A summary of these Credit Facilities as of December 31, 2007 is as follows:
    Five-Year Term Facility: We initially borrowed the entire $2.0 billion available under this facility, which bears interest at LIBOR plus 75 basis points (5.58% at December 31, 2007), and matures in October 2011. During 2007 we made principal repayments of $200.0 million and had an outstanding principal balance of $1.8 billion as of December 31, 2007.
 
    364-Day Term Facility: We initially drew down $415.7 million of the $500.0 million available under this facility, which was set to mature on October 23, 2007. Using cash on hand, we repaid this facility in full during 2007.
 
    Revolving Credit Facility: No amounts were drawn at December 31, 2007, as such, the entire $300.0 million facility remains available.
     As of December 31, 2007, we had total debt outstanding of $2.1 billion. This is comprised of $1.8 billion due under our Five-Year Term Facility and $271.0 million held at our PLIVA subsidiary, which is discussed in greater detail in Note 11 of our consolidated financial statements.
     As noted above, during 2007, we received proceeds of approximately $36.1 million from the exercise of warrants and employee stock options and share purchases under our employee stock purchase plan. We expect proceeds from future stock option exercises to decline over time, due in part, to our decision to issue employees stock appreciation rights (“SARs”), rather than stock options. Upon exercise of a stock option the Company receives proceeds equal to the exercise price per share for each option exercised. In contrast, the Company will not receive cash proceeds when a SAR is exercised because the employee receives a net number of shares. While the Company will continue to receive proceeds from any remaining options that are exercised, the amount of such proceeds is difficult to predict because the proceeds are highly dependent upon our stock price, which can be volatile.
     Auction Rate Credit Market
     Included within our available-for-sale debt securities are market auction debt securities restricted to highly rated municipal securities. Our typical practice has been to continue to own the respective securities or liquidate the holdings by selling those securities at par value at the next auction, which generally ranges from 7 to 35 days after purchase. The market auction debt securities investments are investment grade (A rated and above) municipal

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securities and are insured against loss of principal and interest by bond insurers whose AAA ratings are under review.
     Subsequent to December 31, 2007, the recent uncertainties in the credit markets have prevented us and other investors from liquidating holdings of market auction debt securities in recent auctions because the amount of market auction debt securities submitted for sale has exceeded the amount of purchase orders. On December 31, 2007, we held $218.9 million in market auction debt securities.
     In 2008, we decided to liquidate our holdings in market auction debt securities and not reinvest in market auction debt securities in order to intentionally reduce exposure to these instruments. As of February 29, 2008 we had $43.0 million in market auction debt securities. All of these securities have not been liquidated due to failed auctions and $14.9 million of the failed market auction debt securities are associated with our balances at December 31, 2007. Of this amount, $2.0 million has a future redemption date and we will receive cash for par value in March 2008. Despite these failed auctions, there have been no defaults on the underlying securities, and interest income on these holdings continues to be received on scheduled interest payment dates. As a result, we now earn premium interest rates on the failed auction investments. If the issuers of these securities are unable to successfully close future auctions and their credit rating deteriorates, we may be required to adjust the carrying value of these investments.
     Based on our ability to access our cash and other short-term investments, our expected operating cash flows and our other sources of cash, we do not anticipate that the lack of liquidity on these investments will affect our ability to operate our business as usual.
     Sufficiency of Cash Resources
     We believe our current cash and cash equivalents, marketable securities, investment balances, cash flows from operations and undrawn amounts under our $300.0 million revolving credit facility are adequate to fund our operations, service our debt requirements, make planned capital expenditures and capitalize on strategic opportunities as they arise.
Contractual Obligations
     Payments due by period for our contractual obligations at December 31, 2007 are as follows (dollars in millions):
                                         
    Payments due by period  
            Less than 1                    
    Total     Year     1 to 3 Years     4 to 5 Years     Thereafter  
Long-term debt
  $ 2,077.3     $ 297.2     $ 466.1     $ 1,313.3     $ 0.7  
Capital leases
    2.5       0.9       0.8       0.6       0.2  
Operating leases
    102.4       17.0       28.6       22.5       34.3  
Purchase obligations (1)
    122.8       121.7       1.1              
Venture fund commitments (2)
    12.5       12.5                    
Annual interest on debt
    335.8       104.7       174.9       56.2        
Milestone obligations
    44.1       32.8       11.3              
Other long-term liabilities
    22.2       9.3       4.9       8.0        
 
                             
Total
  $ 2,719.6     $ 596.1     $ 687.7     $ 1,400.6     $ 35.2  
 
                             
(1)   Purchase obligations consist mainly of commitments for raw materials used in our manufacturing and research and development operations.
 
(2)   Payments related to our venture fund commitments are payable when capital calls are made.
      The contractual obligation table above does not include income tax liabilities recorded in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 48 “Accounting for Uncertainty in Income Taxes: an Interpretation of FASB Statement No. 109.” We have not yet entered into substantive settlement discussions with taxing authorities and therefore cannot reasonably estimate the amounts or timing of payments related to uncertain tax positions. See Note 14 for information on income taxes.

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     In addition to the above, we may be obligated to make potential “milestone” payments to third parties as part of licensing and development programs. The aggregate amount of these potential milestone payments total approximately $12.5 million. These amounts relate to several third parties and such amounts generally become due and payable only upon the achievement of certain developmental milestones, including the receipt of regulatory approval for certain products. Because it is uncertain if and when these milestones will be achieved, we have not attempted to predict the period in which such milestones would possibly be incurred, if at all, nor have such contingencies been recorded on our consolidated balance sheet.
Off-Balance Sheet Arrangements
     The Company does not have any material off-balance sheet arrangements that have had, or are expected to have, an effect on our financial statements.
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 provisions for estimated reductions to gross product sales; (2) revenue recognition and provisions of alliance and development revenue; (3) inventories; (4) income taxes; (5) contingencies; (6) acquisitions and amortization of intangible assets; (7) derivative instruments; and (8) foreign currency translation and transactions. Although we believe that our estimates and assumptions are reasonable, they are based upon information available at the time the estimates and assumptions were made. We review the factors that influence our estimates and, if necessary, adjust them. Actual results may differ significantly from our estimates.
Revenue Recognition and Provisions for Estimated Reductions to Gross Product Sales
     We recognize revenue from product sales when title and risk of loss have transferred to our customers and when collectibility is reasonably assured. This is generally at the time products are received by the customer. From time to time the Company provides incentives, such as trade show allowances or stocking allowances, that provide incremental allowances to customers who in turn use such incremental allowances to accelerate distribution to the end customer. We believe that such incentives are normal and customary in the industry. Additionally, we understand that certain of our wholesale customers anticipate the timing of price increases and have made and may continue to make business decisions to buy additional product in anticipation of future price increases. This practice has been customary in the industry and would be part of a customer’s “ordinary course of business inventory level.”
     We evaluate inventory levels at our wholesale customers, which account for approximately 50% of our sales, through an internal analysis that considers, among other things, wholesaler purchases, wholesaler contract sales, available end consumer prescription information and inventory data from our largest wholesale customer. We believe that our evaluation of wholesaler inventory levels as described in the preceding sentence, allows us to make reasonable estimates for our applicable reserves. Further, our products are typically sold with sufficient dating to permit sufficient time for our wholesaler customers to sell our products in their inventory through to the end consumer.
     Upon recognizing revenue from a sale, we simultaneously record estimates for the following items that reduce gross revenues:
    returns and allowances (including shelf-stock adjustments)
 
    chargebacks
 
    rebates
 
    managed care rebates
 
    Medicaid rebates
 
    prompt payment discounts and other allowances

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     For each of the items listed above other than managed care and Medicaid rebates, the estimated amounts serve to reduce our accounts receivable balance. We include our estimate for managed care and Medicaid rebates in accrued liabilities. A table showing the activity of each reserve, based on these estimates, is set forth below (dollars in millions):
                                         
            Current     Current              
            provision     provision     Actual        
            related to     related to     returns or        
            sales     sales     credits in        
    Beginning     made in the     made in     the current     Ending  
    balance     current period     prior periods     period     balance  
Year Ended December 31, 2007
                                       
 
                                       
Accounts receivable reserves:
                                       
Returns and allowances
  $ 89.8     $ 76.2     $ 6.5     $ (70.1 )   $ 102.4  
Chargebacks
    69.7       740.3       (3.5 )     (740.8 )     65.7  
Rebates
    70.7       270.9       4.6       (267.8 )     78.4  
Cash discounts
    12.6       53.3             (55.1 )     10.8  
 
                             
Total
  $ 242.8     $ 1,140.7     $ 7.6     $ (1,133.8 )   $ 257.3  
 
                             
 
                                       
Accrued liabilities:
                                       
Managed care rebates
  $ 8.3     $ 10.0     $ (0.2 )   $ (11.7 )   $ 6.4  
Medicaid rebates
  $ 16.0     $ 22.1     $ (5.0 )   $ (20.2 )   $ 12.9  
 
                                       
Six months ended December 31, 2006
                                       
 
                                       
Accounts receivable reserves:
                                       
Returns and allowances
  $ 53.1     $ 59.7     $ 4.0     $ (27.0 )   $ 89.8  
Chargebacks
    44.3       255.4       (1.0 )     (229.0 )     69.7  
Rebates
    32.2       120.7       (0.2 )     (82.0 )     70.7  
Cash discounts
    7.7       22.4             (17.5 )     12.6  
 
                             
Total
  $ 137.3     $ 458.2     $ 2.8     $ (355.5 )   $ 242.8  
 
                             
 
                                       
Accrued liabilities:
                                       
Managed care rebates
  $ 10.4     $ 10.1     $ 0.3     $ (12.5 )   $ 8.3  
Medicaid rebates
  $ 13.2     $ 21.7     $     $ (18.9 )   $ 16.0  
 
                                       
Fiscal year ended June 30, 2006
                                       
 
                                       
Accounts receivable reserves:
                                       
Returns and allowances
  $ 52.7     $ 59.8     $ 0.2     $ (59.6 )   $ 53.1  
Chargebacks
    44.9       386.0       (0.9 )     (385.7 )     44.3  
Rebates
    37.8       164.5       (3.2 )     (166.9 )     32.2  
Cash discounts
    7.1       40.4             (39.8 )     7.7  
 
                             
Total
  $ 142.5     $ 650.7     $ (3.9 )   $ (652.0 )   $ 137.3  
 
                             
 
                                       
Accrued liabilities:
                                       
Managed care rebates
  $ 7.5     $ 20.5     $ (1.0 )   $ (16.6 )   $ 10.4  
Medicaid rebates
  $ 10.1     $ 29.0     $     $ (26.9 )   $ 12.2  

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Returns and allowances — Our provision for returns and allowances consists of our estimates of future product returns, pricing adjustments, delivery errors, and our estimate of price adjustments arising from shelf stock adjustments (which are discussed in greater detail below). Consistent with industry practice, we maintain a return policy that allows our customers to return product within a specified period of time both prior and subsequent to the product’s expiration date. The primary factors we consider in estimating our potential product returns include:
    the shelf life or expiration date of each product;
 
    historical levels of expired product returns; and
 
    the estimated date of return.
     Shelf-stock adjustments are credits issued to our customers to reflect decreases in the selling prices of our products. These credits are customary in the industry and are intended to reduce a customer’s inventory cost to better reflect current market prices. The determination to grant a shelf-stock credit to a customer following a price decrease is at our discretion rather than contractually required. The primary factors we consider when deciding whether to record a reserve for a shelf-stock adjustment include:
    the estimated launch date of a competing product, which we determine based on market intelligence;
 
    the estimated decline in the market price of our product, which we determine based on historical experience and input from customers; and
 
    the estimated levels of inventory held by our customers at the time of the anticipated decrease in market price, which we determine based upon historical experience and customer input.
Chargebacks — We market and sell products directly to wholesalers, distributors, warehousing pharmacy chains, mail order pharmacies and other direct purchasing groups. We also market products indirectly to independent pharmacies, non-warehousing chains, managed care organizations, and group purchasing organizations, collectively referred to as “indirect customers.” We enter into agreements with some indirect customers to establish contract pricing for certain products. These indirect customers then independently select a wholesaler from which to purchase the products at these contracted prices. Alternatively, we may pre-authorize wholesalers to offer specified contract pricing to other indirect customers. Under either arrangement, we provide credit to the wholesaler for any difference between the contracted price with the indirect customer and the wholesaler’s invoice price. Such credit is called a chargeback. The primary factors we consider in developing and evaluating our provision for chargebacks include:
    the average historical chargeback credits; and
 
    an estimate of the inventory held by our wholesalers, based on internal analysis of a wholesaler’s historical purchases and contract sales.
Rebates - Our rebate programs can generally be categorized into the following four types:
    direct rebates;
 
    indirect rebates;
 
    managed care rebates; and
 
    Medicaid rebates.
     The direct and indirect rebates relate primarily to the generic segment of our business whereas our managed care rebates are solely associated with the proprietary segment of our business. Medicaid rebates apply to both of our segments. Direct rebates are generally rebates paid to direct purchasing customers based on a percentage applied to a direct customer’s purchases from us. Indirect rebates are rebates paid to “indirect customers” which have purchased our products from a wholesaler under a contract with us. Managed care and Medicaid rebates are amounts owed based upon contractual agreements or legal requirements with private sector and public sector (Medicaid) benefit providers, after the final dispensing of the product by a pharmacy to a benefit plan participant.
     We maintain reserves for our direct rebate programs based on purchases by our direct purchasing customers. Indirect rebate reserves are based on actual contract purchases in a period and an estimate of wholesaler inventory subject to an indirect rebate. Managed care and Medicaid reserves are based on expected payments, which are driven

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by patient usage, contract performance, as well as field inventory that will be subject to a managed care or Medicaid rebate.
Prompt Pay Discounts — We offer many of our customers 2% prompt pay discounts. We evaluate the amounts accrued for prompt pay discounts by analyzing the unpaid invoices in our accounts receivable aging subject to a prompt pay discount.
Revenue Recognition and Provisions of Alliance and Development Revenue
     We have agreements with certain pharmaceutical companies under which we receive payments based on sales or profits associated with the applicable products. Our two most significant of these agreements are those with Teva regarding generic Allegra and with Kos Pharmaceuticals regarding Niaspan and Advicor. Revenue from these agreements is recognized at the time title and risk of loss pass to a third party and is based on pre-defined formulas contained in our agreements, and under our arrangement with Teva, adjusted for shelf-stock provisions needed to state our revenues on a basis consistent with our other revenue recognition policies. The estimates we make to adjust our revenues are based on information received from our partner, whether Teva or Kos, as well as our own internal information. Selling and marketing expenses we incur under our co-promotion agreement with Kos are included in selling, general and administrative expenses.
Inventories
     Inventories are stated at the lower of cost or market and consist of finished goods purchased from third party manufacturers and held for distribution, as well as raw materials, work-in-process and finished goods manufactured by us. We determine cost on a first-in, first-out basis.
     We capitalize the costs associated with certain products prior to receiving final marketing approval from the regulatory authorities for such products (“pre-launch inventories”). For our generic products, each filing submission is made with the expectation that: (i) the applicable regulatory authority will approve the marketing of the applicable product, (ii) we will validate our process for manufacturing the applicable product within the specifications that have been or will be approved by the regulatory authority, and (iii) the cost of the inventory will be recovered from the commercialization of our product. Typically, we capitalize inventory related to our proprietary products based on the same expectations as above, but we do not begin to capitalize costs until the NDA is filed or in the case of components to a NDA product, the product development process has progressed to a point where we have determined that the product has a high probability of regulatory approval. The accumulation of pre-launch inventory involves risks such as (i) the applicable regulatory authority may not approve such
product(s) for marketing on a timely basis, if ever, (ii) approvals may require additional or different testing and/or specifications than what was performed in the manufacture of such pre-launch inventory, and (iii) in those instances where the pre-launch inventory is for a product that is subject to litigation, the litigation may not be resolved or settled to our satisfaction. If any of these risks were to materialize and the launch of such product were significantly delayed, we may have to write-off all or a portion of such pre-launch inventory and such amounts could be material. For the year ended December 31, 2007 and the six-month period ended December 31, 2006, lower of cost or market provisions for inventory obsolescence were not material to our net earnings (loss). At December 31, 2007 our capitalized “pre-launch inventories” were $27.3 million.
     We review our inventory for products that are close to or have reached their expiration date and therefore are not expected to be sold, for products where market conditions have changed or are expected to change, and for products that are not expected to be saleable based on our quality assurance and control standards. In addition, for our pre-launch inventory, we take into consideration the substance of communications with the applicable regulatory authority during the approval process and the views of patent and litigation counsel. In evaluating whether inventory is properly stated at the lower of cost or market, we consider such factors as the amount of product inventory on hand, estimated time required to sell such inventory, remaining shelf life and current and expected market conditions, including levels of competition. We record lower of cost or market provisions for inventory obsolescence as part of cost of sales.

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Income Taxes
     Our effective tax rate is based on pre-tax income, statutory tax rates and available tax incentives (e.g.-deductions or credits) in the various jurisdictions in which we operate. The effective tax rate also includes the impact of changes to our FIN 48 liability. This rate is applied to our operating results.
     Tax regulations require certain types of income and expense to be included in the income tax return in different periods from when they are reported in the financial statements. As a result, effective tax rates are frequently different in the financial statements and income tax returns. Some of the differences are permanent, such as tax-exempt interest income, while others are temporary, such as depreciation expense. Deferred tax assets generally represent items that can be used as tax deductions or credits in future years for which tax benefits have already been recognized in the financial statements. We establish valuation allowances for our deferred tax assets when the amount of expected future taxable income is not likely to support the use of these deductions or credits. Deferred tax liabilities generally arise when taxable income is recognized in the financial statements before the tax return, when expenses have been deducted in the tax return before the financial statements and, when the book basis exceeds the tax basis of acquired assets.
     In accordance with APB 23, incremental taxes have not been provided on undistributed earnings of our international subsidiaries as it is our intention to permanently reinvest these earnings in the respective businesses. At December 31, 2007, we have not provided for U.S. or foreign income or withholding taxes that may be imposed on a distribution of such earnings. The amount of unremitted earnings and unrecognized deferred tax liabilities for temporary differences related to investments in these non-U.S. subsidiaries is not practicable to estimate.
     In the ordinary course of business there is inherent uncertainty in quantifying income tax positions. We assess income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting dates. For those tax positions with a greater than 50% likelihood of being realized, we record the benefit. For those income tax positions where it is more-than-likely-than-not that a tax benefit will not be sustained, no tax benefit is recognized in the financial statements. When applicable, associated interest and penalties are recognized as a component of interest expense.
Contingencies
     We are involved in various patent, product liability, commercial litigation and claims, government investigations and other legal proceedings that arise from time to time in the ordinary course of our business. We assess, in consultation with counsel, the need to accrue a liability for such contingencies and record a reserve when we determine that a loss related to a matter is both probable and reasonably estimable. Because litigation and other contingencies are inherently unpredictable, our assessment can involve judgments about future events. We record anticipated recoveries under existing insurance contracts when collection is reasonably assured.
     We utilize a combination of self-insurance and traditional third-party insurance policies to cover potential product liability claims on products sold on or after September 30, 2002, and we have obtained extended reporting periods under previous policies for claims arising on products sold prior to September 30, 2002.
Acquisitions and Amortization of Intangible Assets
     We account for acquired businesses using the purchase method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Our consolidated financial statements and results of operations reflect an acquired business after the completion of the acquisition and are not restated. The cost to acquire a business, including transaction costs, is allocated to the underlying net assets of the acquired business in proportion to their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Amounts allocated to acquired in-process research and development are expensed at the date of acquisition. Intangible assets are amortized based on sales over the expected life of the asset. Product amortization expense is included in the cost of sales expense line item of the statement of operations. When we acquire net assets that do not constitute a business, no goodwill is recognized.
     The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations. Accordingly, for significant items, we typically obtain assistance from third party valuation specialists. Useful lives are determined based on the expected future period of benefit of the asset, which considers various characteristics of the asset, including projected cash flows. We review goodwill for impairment annually or more frequently if impairment indicators arise.
     As a result of our acquisitions, we have recorded on our balance sheets goodwill of $286 million and $276 million, as of December 31, 2007 and 2006, respectively. In addition, as a result of our acquisition of product rights

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and related intangibles and certain product licenses, we have recorded $1,483 million and $1,471 million as other intangible assets, net of accumulated amortization, on our balance sheets as of December 31, 2007 and 2006, respectively.
Derivative Instruments
     We use derivative instruments for the purpose of hedging our exposure to foreign exchange and interest rate risk. Our derivative instruments include interest rate forwards and swaps, forward rate agreements and foreign exchange forwards and options.
     FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities as amended and interpreted (“SFAS 133”), requires companies to recognize all of their derivative instruments as either assets or liabilities in the statement of financial position at fair value based on quoted market prices or pricing models using current market rates. The accounting for changes (i.e., gains or losses) in the fair value of a derivative instrument depends on whether the instrument has been designated and qualifies as part of a hedging relationship and on the type of hedging relationship. For derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. The designation is based upon the nature of the exposure being hedged.
     For a derivative instrument that is designated and qualifies as a fair value hedge (i.e., an instrument that hedges the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item are recognized in the same line item associated with the hedged item in earnings.
     For a derivative instrument that is designated and qualifies as a cash flow hedge (i.e., an instrument that hedges the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings.
     For all hedging activities, the ineffective portion of a derivative’s change in fair value is immediately recognized in other income (expense). For derivative instruments not designated as hedging instruments, the gain or loss is recognized in other income (expense) during the period of change. However, we believe that such non designated instruments offset the economic risks of the hedged items.
     Our treasury policies do not allow for holding derivative instruments for trading purposes.
Foreign Currency Translation and Transactions
     Foreign Currency Translation — In view of the international nature of our business and the fact that a significant part of our business is transacted in U.S. dollars our financial statements continue to be presented in U.S. Dollars. Other significant currencies that are applicable to our operations include the Croatian Kuna (“HRK”), the Euro, the Polish Zloty, the Czech Krona, and the UK Pound.
     Monthly income and cash flow statements of all of our subsidiaries expressed in currencies other than U.S. dollars are translated into U.S. dollars at that month’s average exchange rates and then are combined for the period totals, whereas assets and liabilities are translated at the end of the period exchange rates. Translation differences on functional currencies are recorded directly in shareholders’ equity as cumulative translation adjustments.
     Foreign Currency Transactions — Outstanding balances in foreign currencies arising from foreign currency transactions other than the functional currencies are translated at the end-of-period exchange rates. Revenues and expenses for each month are translated using that month’s average exchange rate and then are combined for the period totals. The resulting exchange differences are recorded in the income statement.

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Recent Accounting Pronouncements
     In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157 (“SFAS 157”), Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosure about fair value measurements. The statement is effective for fiscal years beginning after November 15, 2007. Although we will continue to evaluate the application of SFAS 157, management does not currently believe that the adoption of SFAS 157 will have a material effect on our consolidated financial statements.
     In February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), The Fair Value Option for Financial Assets and Financial Liabilities, providing companies with an option to report selected financial assets and liabilities at fair value. The statement’s objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. Generally accepted accounting principles have required different measurement attributes for different assets and liabilities that can create artificial volatility in earnings. SFAS 159 helps to mitigate this type of accounting-induced volatility by enabling companies to report related assets and liabilities at fair value, which would likely reduce the need for companies to comply with detailed rules for hedge accounting. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The statement requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the Company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which they have chosen to use fair value on the face of the balance sheet. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Although we will continue to evaluate the application of SFAS 159, management does not currently believe that the adoption of SFAS 159 will have a material effect on our consolidated financial statements.
     In June 2007, the EITF issued EITF Issue 07-3 (“EITF 07-3”), Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities. EITF 07-3 addresses the diversity that exists with respect to the accounting for the non-refundable portion of a payment made by a research and development entity for future research and development activities. The EITF concluded that an entity must defer and capitalize non-refundable advance payments made for research and development activities and expense these amounts as the related goods are delivered or the related services are performed. EITF 07-3 is effective for interim or annual reporting periods in fiscal years beginning after December 15, 2007. The adoption of EITF 07-3 will not have a material effect on our consolidated financial statements.
     In December 2007, the FASB issued SFAS No. 141(R) (“SFAS 141(R)”), Business Combinations (revised), replacing SFAS 141 Business Combinations. This new statement requires additional assets and assumed liabilities to be measured at fair value when acquired in a business combination as compared to the original pronouncement. SFAS 141(R) also requires liabilities related to contingent consideration to be re-measured to fair value each reporting period, acquisition-related costs to be expensed and not capitalized and acquired in-process research and development to be capitalized as an indefinite lived intangible asset until completion of project or abandonment of project.
SFAS 141(R) requires prospective application for business combinations consummated in fiscal years beginning on or after December 15, 2008. This statement does not allow for early adoption. We are currently evaluating the impact that adopting this statement will have on our consolidated financial statements.
     In December 2007, the FASB issued SFAS No. 160 (“SFAS 160”), Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51(“ARB No. 51”). This amendment of ARB No. 51 requires noncontrolling interest in subsidiaries initially to be measured at fair value and then to be classified as a separate component of equity. This statement is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008. This statement does not allow for early adoption, however, application of SFAS 160 disclosure and presentation requirements is retroactive. We are currently evaluating the impact that adopting this statement will have on our consolidated financial statements.
     In December 2007, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 07-1 (“EITF 07-1”) Accounting for Collaborative Arrangements. EITF 07-1 affects entities that participate in collaborative arrangements for the development and commercialization of intellectual property. The EITF affirmed the tentative conclusions reached on (1) what constitutes a collaborative arrangement, (2) how the parties should present costs and revenues in

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their respective income statements, (3) how the parties should present cost-sharing payments, profit-sharing payments, or both in their respective income statements, and (4) disclosure in the annual financial statements of the partners. EITF 07-1 should be applied as a change in accounting principle through retrospective application to all periods presented for collaborative arrangements existing as of the date of adoption. EITF 07-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008. We are currently evaluating the impact that adopting EITF 07-1 will have on our consolidated financial statements.
Effects of Inflation; Seasonality
     Inflation has had only a minimal impact on our operations in recent years. Similarly, our business is generally not affected by seasonality.
Forward-Looking Statements
     The preceding sections contain a number of forward-looking statements. To the extent that any statements made in this report contain information that is not historical, these statements are essentially forward-looking. Forward-looking statements can be identified by their use of words such as “expects,” “plans,” “will,” “may,” “anticipates,” “believes,” “should,” “intends,” “estimates” and other words of similar meaning. These statements are subject to risks and uncertainties that cannot be predicted or quantified and, consequently, actual results may differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties include, in no particular order:
    the difficulty in predicting the timing and outcome of legal proceedings, including patent-related matters such as patent challenge settlements and patent infringement cases;
 
    the difficulty of predicting the timing of FDA approvals;
 
    court and FDA decisions on exclusivity periods;
 
    the ability of competitors to extend exclusivity periods for their products;
 
    our ability to complete product development activities in the timeframes and for the costs we expect;
 
    market and customer acceptance and demand for our pharmaceutical products;
 
    our dependence on revenues from significant customers;
 
    reimbursement policies of third party payors;
 
    our dependence on revenues from significant products;
 
    the use of estimates in the preparation of our financial statements;
 
    the impact of competitive products and pricing on products, including the launch of authorized generics;
 
    the ability to launch new products in the timeframes we expect;
 
    the availability of raw materials;
 
    the availability of any product we purchase and sell as a distributor;
 
    the regulatory environment;
 
    our exposure to product liability and other lawsuits and contingencies;
 
    the cost of insurance and the availability of product liability insurance coverage;
 
    our timely and successful completion of strategic initiatives, including integrating companies and products we acquire and implementing our new enterprise resource planning system;
 
    risks associated with doing business outside the United States, as discussed in Risk Factors above;
 
    fluctuations in operating results, including the effects on such results from spending for research and development, sales and marketing activities and patent challenge activities; and
 
    other risks detailed from time-to-time in our filings with the Securities and Exchange Commission.
     We wish to caution each reader of this report to consider carefully these factors as well as specific factors that may be discussed with each forward-looking statement in this report or disclosed in our filings with the SEC, as such factors, in some cases, could affect our ability to implement our business strategies and may cause actual results to differ materially from those contemplated by the statements expressed herein. Readers are urged to carefully review and consider these factors. We undertake no duty to update the forward-looking statements even though our situation may change in the future.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
     We are exposed to market risk for changes in interest rates and foreign currency exchange rates. We manage these exposures through operational means and, when appropriate, through the use of derivative financial instruments.
Interest Rate Risk
     Our exposure to interest rate risk relates primarily to our investment portfolio of approximately $534.5 million and borrowings under our credit facilities of approximately $1.9 billion. Our investment portfolio consists principally of cash and cash equivalents and market auction debt securities primarily classified as “available for sale.” The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we maintain our portfolio in a variety of high credit quality debt securities, including U.S., state and local government and corporate obligations, commercial paper and money market funds. Over 96% of our portfolio matures in less than three months, or in the case of market auction rate securities, is subject to an interest-rate reset date that occurs within 90 days. Subsequent to December 31, 2007, the recent uncertainties in the credit markets have prevented us and other investors from liquidating holdings of market auction debt securities in recent auctions because the amount of market auction debt securities submitted for sale has exceeded the amount of purchase orders. On December 31, 2007, we held $218.9 million in market auction debt securities and all but $14.9 million of which has been liquidated in 2008 to date. Despite these failed auctions, there have been no defaults on the underlying securities, and interest income on these holdings continues to be received on scheduled interest payment dates. As a result, we now earn premium interest rates on the failed auction investments. If the issuers of these securities are unable to successfully close future auctions and their credit ratings deteriorate we may be required to adjust the carrying value of these investments. The carrying value of the investment portfolio approximates the market value at December 31, 2007 and the value at maturity.
     We manage the interest rate risk of our net portfolio of investments and debt with the use of financial risk management instruments or derivatives, including interest rate swaps and forward rate agreements. See Note 4 to the Company’s consolidated financial statements included in Item 8 of this report for a detailed presentation of the Company’s financial risk management instruments.
     During the year ended December 31, 2007, a 10% increase in interest rates would have increased the net interest expense of our combined investment, debt and financial risk management portfolios by $5.4 million.
Foreign Exchange Rate Risk
     A significant portion of our revenues and earnings are generated internationally in various currencies. We also have a number of investments in foreign subsidiaries whose net assets are exposed to currency translation risk. We seek to manage these exposures through operational means, to the extent possible, by matching functional currency revenues and costs and functional currency assets and liabilities. Exposures that cannot be managed operationally are hedged using foreign exchange forwards, swaps, and option contracts. See Note 4 to the Company’s consolidated financial statements included in Item 8 of this report for a detailed presentation of the Company’s financial risk management instruments.
     As of December 31, 2007, a 10% depreciation in the value of the U.S. dollar would have resulted in a decrease of $13.1 million in the fair value of the Company’s foreign exchange risk management instruments. These movements would have been offset by movements in the fair value in the opposite direction of the underlying transactions and balance sheet items being hedged.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
     Our financial statements are filed together with this Form 10-K. See the Index to the Consolidated 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.

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ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
     We maintain disclosure controls (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 as amended (the “Exchange Act”)) and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chairman and Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives.
     At the conclusion of the period ended December 31, 2007, 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, as defined in Rule 13a-15(e) of the Exchange Act, were effective.

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Internal Control Over Financial Reporting
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
     Management is responsible for establishing and maintaining adequate internal control over financial reporting for Barr Pharmaceuticals, Inc. (the “Company”). We maintain internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America.
     Because of its inherent limitations, any system of internal control over financial reporting, no matter how well designed, may not prevent or detect misstatements due to the possibility of collusion or improper override of controls, or that misstatements due to error or fraud may occur that are not detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
     Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007 using criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). This assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Based on this assessment, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2007, based upon the COSO framework criteria.
     The Company’s internal control over financial reporting as of December 31, 2007 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears herein.
     February 29, 2008

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Barr Pharmaceuticals, Inc.
Montvale, New Jersey
We have audited the internal control over financial reporting of Barr Pharmaceuticals, Inc. and subsidiaries (the “Company”) as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2007 of the Company and our report dated February 29, 2008 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 29, 2008

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Changes in Internal Controls
     On October 24, 2006, we completed our acquisition of PLIVA d.d. As allowed by SEC guidance, we excluded the PLIVA business from our 2006 assessment of internal controls over financial reporting. In 2007, we extended our compliance program under the Sarbanes-Oxley Act and the applicable rules and regulations under such Act to include significant PLIVA locations. This program included the design and implementation of internal controls over financial reporting at the former PLIVA companies.
     The changes in our internal control over financial reporting that occurred that have materially affected, or can be reasonably likely to materially affect, our internal control over financial reporting, are described above.
ITEM 9B. OTHER INFORMATION
     None.

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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
     Certain information regarding our directors and executive officers will be set forth in the sections titled “Election of Directors,” “Executive Officers” and “Security Ownership of Certain Beneficial Owners and Management — Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement for our Annual Meeting of Stockholders scheduled for May 15, 2008 (the “Proxy Statement”) and is incorporated herein by reference.
     Code of Business Conduct and Ethics
     We have adopted a Code of Business Conduct and Ethics (the “Code”) that applies to all Barr companies, their officers, directors and employees. This Code and the charters of the Audit, Compensation, and Nominating and Corporate Governance committees are posted on our website at www.barrlabs.com. We intend to post any amendments to or waivers from the Code on our website.
ITEM 11. EXECUTIVE COMPENSATION
     The information called for by this item is incorporated herein by reference to the material under the captions, “Compensation Discussion and Analysis,” “Executive and Director Compensation” and “Compensation Committee Report” in the Proxy Statement.
     The material incorporated herein by reference to the material under the caption “Compensation Committee Report” in the Proxy Statement shall be deemed furnished, and not filed, in this Report on Form 10-K and shall not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, as a result of this furnishing.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
     A description of the security ownership of certain beneficial owners and management, as well as equity compensation plan information, will be set forth in the sections titled “Ownership of Securities” of the Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
     A description of certain relationships and related transactions will be set forth in the section titled “Certain Relationships and Related Transactions” of the Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
     A description of the fees paid to our independent registered public accounting firm will be set forth in the section titled “Independent Registered Public Accountants” of the Proxy Statement and is incorporated herein by reference.

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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
     (a) a) Financial Statement Schedules:
          See the Index on page F-1 below.
     (b) Exhibits
     
2.1
  Agreement and Plan of Merger, dated as of December 31, 2003 between Barr Pharmaceuticals, Inc., a Delaware corporation, and Barr Laboratories, Inc., a New York corporation (1)
 
   
2.2
  Asset Purchase Agreement dated November 20, 2003 between Endeavor Pharmaceuticals, Inc. and Barr Laboratories, Inc. (2)
 
   
2.3
  Agreement and Plan of Merger, dated February 6, 2004, among Duramed Pharmaceuticals, Inc., WCC Merger Sub, Inc. and Women’s Capital Corporation (3)
 
   
2.4
  Purchase Agreement dated as of October 14, 2005, by and among Duramed Pharmaceuticals, Inc., Copper 380T, FEI Women’s Health, LLC and the individuals listed on the signature pages thereto. (21)
 
   
3.1
  Amended and Restated Certificate of Incorporation of the Registrant (1)
 
   
3.2
  Restated By-Laws of the Registrant (1)
 
   
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 there under does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis.
 
   
4.2
  Note Purchase Agreement dated November 18, 1997 relating to $10 million of Series A Senior Notes due November, 2004 and $20 million of Series B Senior Notes due November, 2007 (4)
 
   
4.3
  Credit Agreement (five-year facilities), dated July 21, 2006, among the Company, certain of its subsidiaries, Bank of America, N.A., as Administrative Agent, Banc of America Securities LLC, as Lead Arranger and Book Manager, and certain other lenders. (23)
 
   
4.4
  Credit Agreement (364-day facility), dated July 21, 2006, among the Company, certain of its subsidiaries, Bank of America, N.A., as Administrative Agent, Banc of America Securities LLC, as Lead Arranger and Book Manager, and certain other lenders. (23)
 
   
10.1
  Lease, dated February 6, 2003, between Mack-Cali Properties Co. No. 11 L.P. and Barr Laboratories, Inc. (5)
 
   
10.2
  Amended and Restated Employment Agreement with Bruce L. Downey, dated as of March 13, 2006 (22)
 
   
10.3
  1993 Stock Incentive Plan (7)
 
   
10.4
  Amended and Restated Barr Pharmaceuticals, Inc. Non-Qualified Deferred Compensation Plan, dated as of February 27, 2008
 
   
10.5
  1993 Employee Stock Purchase Plan (8)
 
   
10.6
  1993 Stock Option Plan for Non-Employee Directors (9)
 
   
10.7
  2002 Stock and Incentive Award Plan (10)
 
   
10.8
  2002 Stock Option Plan for Non-Employee Directors (10)
 
   
10.9
  Supply Agreement for Ciprofloxacin Hydrochloride dated January 8, 1997 (11)

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10.10
  Proprietary Drug Development and Marketing Agreement, dated March 20, 2000, between Barr Laboratories, Inc. and Dupont Pharmaceuticals Company (12)
 
   
10.11
  Amended and Restated Barr Pharmaceuticals, Inc. Excess Savings and Retirement Plan, dated as of February 27, 2008
 
   
10.12
  Amended and Restated Employment Agreement with Paul M. Bisaro, dated as of March 13, 2006 (22)
 
   
10.13
  Amended and Restated Employment Agreement with Carole S. Ben-Maimon, dated as of October 24, 2002 (6)
 
   
10.14
  Amended and Restated Employment Agreement with Timothy P. Catlett, dated as of February 19, 2003 (14)
 
   
10.15
  Amended and Restated Employment Agreement with William T. McKee, dated as of August 19, 2005 (6)
 
   
10.16
  Amended and Restated Employment Agreement with Fredrick J. Killion, dated as of August 19, 2005 (6)
 
   
10.17
  Amended and Restated Employment Agreement with Salah U. Ahmed, dated as of February 19, 2003 (14)
 
   
10.18
  Amended and Restated Employment Agreement with Christine A. Mundkur, dated as of February 19, 2003 (14)
 
   
10.19
  Amended and Restated Employment Agreement with Catherine F. Higgins, dated as of February 19, 2003 (14)
 
   
10.20
  Employment Agreement with Michael J. Bogda, dated as of May 15, 2003 (14)
 
   
10.21
  Duramed 1988 Stock Option Plan (15)
 
   
10.22
  Duramed 1991 Stock Option Plan for Nonemployee Directors (16)
 
   
10.23
  Duramed 1997 Stock Option Plan (17)
 
   
10.24
  Duramed 2000 Stock Option Plan (18)
 
   
10.25
  Duramed 1999 Nonemployee Director Stock Plan (19)
 
   
10.26
  Employment Agreement with G. Frederick Wilkinson, dated as of January 5, 2006 (20)
 
   
10.27
  Employment Agreement between Zeljko Covic and PLIVA d.d. dated March 21, 2007 (24)
 
   
10.28
  Letter Agreement, dated October 5, 2006, made between Barr Pharmaceuticals, Inc. and Carole Ben-Maimon, amending certain provisions of her Amended and Restated Employment Agreement (6).
 
   
10.29
  Release of Claims, dated October 5, 2006, made by Carole Ben-Maimon in favor of Barr Pharmaceuticals, Inc. and its subsidiaries and affiliates (6)
 
   
10.30
  Settlement agreement, dated March 21, 2007, made between PLIVA d.d. and Zeljko Covic (24)
 
   
10.31
  Amendment to the March 13, 2006 Employment Agreement with Bruce L. Downey, dated December 21, 2007
 
   
10.32
  Barr Pharmaceuticals, Inc 2007 Stock and Incentive Award Plan (25)
 
   
10.33
  Barr Pharmaceuticals, Inc 2007 Executive Officer Incentive Plan (25)
 
   
21.0
  Subsidiaries of the Company
 
   
23.1
  Consent of Deloitte & Touche LLP
 
   
23.2
  Consent of KPMG Hungária Kft.

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31.1
  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 2002
 
   
31.2
  Certification of William T. McKee pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
32.0
  Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
(1)   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.
 
(2)   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 December 31, 2003 and incorporated herein by reference.
 
(3)   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.
 
(4)   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.
 
(5)   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.
 
(6)   Previously filed with the Securities and Exchange Commission on October 10, 2006 as an Exhibit to the Registrant’s Current Report on Form 8-K and incorporated herein by reference.
 
(7)   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.
 
(8)   Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant’s Registration Statement on Form S-8 No. 33-73700 and incorporated herein by reference.
 
(9)   Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant’s Registration Statement on Form S-8 Nos. 33-73698 and 333-17351 incorporated herein by reference.
 
(10)   Previously filed with the Securities and Exchange Commission as an Appendix to the Registrant’s Proxy Statement relating to the 2002 Annual Meeting of Stockholders and incorporated herein by reference.
 
(11)   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.
 
(12)   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.
 
(13)   Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant’s Annual Report on Form 10-K for the year ended June 30, 2000 and incorporated herein by reference.
 
(14)   Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant’s Annual Report on Form 10-K for the year ended June 30, 2003 and incorporated herein by reference.
 
(15)   Previously filed with the Securities and Exchange Commission as an Exhibit to the Duramed Pharmaceuticals, Inc. Proxy Statement relating to the 1993 Annual Meeting of Stockholders and incorporated herein by reference.

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(16)   Previously filed with the Securities and Exchange Commission as an Exhibit to the Duramed Pharmaceuticals, Inc. Proxy Statement relating to the 1998 Annual Meeting of Stockholders and incorporated herein by reference.
 
(17)   Previously filed with the Securities and Exchange Commission as an Exhibit to the Duramed Pharmaceuticals, Inc. Proxy Statement relating to the 1997 Annual Meeting of Stockholders and incorporated herein by reference.
 
(18)   Previously filed with the Securities and Exchange Commission as an Exhibit to the Duramed Pharmaceuticals, Inc. Proxy Statement relating to the 2000 Annual Meeting of Stockholders and incorporated herein by reference.
 
(19)   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.
 
(20)   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, 2006 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 December 31, 2005 and incorporated herein by reference.
 
(22)   Previously filed with the Securities and Exchange Commission on March 20, 2006 as an Exhibit to the Registrant’s Current Report on Form 8-K and incorporated herein by reference.
 
(23)   Previously filed with the Securities and Exchange Commission on July 26, 2006 as an Exhibit to the Registrant’s Current Report on Form 8-K and incorporated herein by reference.
 
(24)   Previously filed with the Securities and Exchange Commission on May 10, 2007 as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 and incorporated herein by reference.
 
(25)   Previously filed with the Securities and Exchange Commission on June 29, 2007 as an Exhibit to the Registrant's Registration Statement on Form S-8 and incorporated herein by reference.

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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.
         
Date: February 29, 2008  BARR PHARMACEUTICALS, INC.
 
 
  By:   /s/ Bruce L. Downey    
    Bruce L. Downey    
    Chairman of the Board and Chief 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
  Chairman of the Board and Chief Executive Officer   February 29, 2008
 
Bruce L. Downey
   (Principal Executive Officer)    
 
       
/s/ William T. McKee
  Vice President, Chief   February 29, 2008
 
William T. McKee
   Financial Officer and Treasurer
   
 
  (Principal Financial Officer and
   
 
  Principal Accounting Officer)    
 
       
/s/ Harold N. Chefitz
  Director   February 29, 2008
 
Harold N. Chefitz
       
 
       
/s/ Richard R. Frankovic
  Director   February 29, 2008
 
Richard R. Frankovic
       
 
       
/s/ James S. Gilmore III
  Director   February 29, 2008
 
James S. Gilmore III
       
 
       
/s/ Peter R. Seaver
  Director   February 29, 2008
 
Peter R. Seaver
       
 
       
/s/ George P. Stephan
  Director   February 29, 2008
 
George P. Stephan
       

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PART IV
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
     
    Page
  F-2
  F-3
  F-4
  F-5
  F-6
  F-7
  F-8
  S-1

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Barr Pharmaceuticals, Inc.
Montvale, New Jersey
We have audited the accompanying consolidated balance sheets of Barr Pharmaceuticals, Inc. and subsidiaries (the “Company”) as of December 31, 2007 and 2006 and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year ended December 31, 2007, the six month period ended December 31, 2006 and the years ended June 30, 2006 and 2005. Our audits also included the financial statement schedule listed in the Index at Item 15A. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We did not audit the financial statements of PLIVA d.d. (a consolidated subsidiary) (“PLIVA”) as of December 31, 2006 and for the period from October 25, 2006 to December 31, 2006, which statements reflect total assets constituting 58% of consolidated total assets as of December 31, 2006 and total revenues constituting 23% of consolidated revenues for the six month period ended December 31, 2006. Those statements, before the effects of the retrospective adjustments for the discontinued operations discussed in Note 3 to the consolidated financial statements, were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for PLIVA, before the effects of the retrospective adjustments for discontinued operations discussed in Note 3 to the consolidated financial statements, as of December 31, 2006 and for the period from October 25 to December 31, 2006, is based solely on the report of the other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of Barr Pharmaceuticals, Inc. and subsidiaries at December 31, 2007 and 2006, and the results of their operations and their cash flows for the year ended December 31, 2007, the six month period ended December 31, 2006 and the years ended June 30, 2006, and 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, based on our audits and (as to the amounts included for PLIVA) the report of the other auditors, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 15 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standard No. 123(R), “Share-Based Payment,” effective July 1, 2005. As a result, the Company began recording fair value stock-based compensation expense for its various share-based compensation programs in the year ended June 30, 2006.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 29, 2008 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
February 29, 2008

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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
PLIVAd.d. (a subsidiary of Barr Pharmaceuticals, Inc):
We have audited, before the effects of any retrospective adjustments for discontinued operations, the consolidated balance sheet of PLIVA d.d. and subsidiaries as of December 31, 2006, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for the period from October 25, 2006 through December 31, 2006. The 2006 consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2006 consolidated financial statements, before the effects of any retrospective adjustments for the discontinued operations, present fairly, in all material respects, the financial position of PLIVA d.d. and subsidiaries as of December 31, 2006 and the results of their operations and their cash flows for the period from October 25, 2006 through December 31, 2006, in conformity with U.S. generally accepted accounting principles.
We were not engaged to audit, review, or apply any procedures to the retrospective adjustments for the discontinued operations and, accordingly, we do not express an opinion or any other form of assurance about whether such retrospective adjustments are appropriate and have been properly applied. Those retrospective adjustments were audited by a successor auditor.
/s/ KPMG Hungária Kft.
Budapest, Hungary
March 1, 2007

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BARR PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
                 
    December 31,     December 31,  
(in thousands, except share and per share data)   2007     2006  
Assets
               
Current assets:
               
Cash and cash equivalents
  $ 246,492     $ 231,975  
Marketable securities
    288,001       673,746  
Accounts receivable, net
    496,636       511,136  
Other receivables
    86,048       67,462  
Inventories
    501,207       426,270  
Deferred income taxes
    74,183       82,597  
Prepaid expenses and other current assets
    57,618       35,925  
Current assets of discontinued operations
          58,888  
 
           
Total current assets
    1,750,185       2,087,999  
 
               
Property, plant and equipment, net
    1,115,904       1,004,418  
Deferred income taxes
    39,808       37,872  
Marketable securities
    16,542       8,946  
Other intangible assets, net
    1,483,422       1,471,493  
Goodwill
    285,955       276,449  
Other assets
    69,811       63,740  
Long-term assets of discontinued operations
          10,945  
 
           
Total assets
  $ 4,761,627     $ 4,961,862  
 
           
 
               
Liabilities and Shareholders’ Equity
               
 
               
Current liabilities:
               
Accounts payable
  $ 152,099     $ 137,361  
Accrued liabilities
    290,094       271,402  
Current portion of long-term debt and capital lease obligations
    298,065       742,191  
Income taxes payable
    37,082       21,359  
Deferred tax liabilities
    1,991       8,266  
Current liabilities of discontinued operations
          31,314  
 
           
Total current liabilities
    779,331       1,211,893  
 
               
Long-term debt and capital lease obligations
    1,781,692       1,935,477  
Deferred tax liabilities
    193,039       221,259  
Other liabilities
    103,090       84,326  
Long-term liabilities of discontinued operations
          2,581  
 
               
Commitments & contingencies (Note 19)
               
 
               
Minority interest
    38,154       41,098  
 
               
Shareholders’ equity:
               
Preferred stock, $1 par value per share; authorized 2,000,000; none issued
           
Common stock, $.01 par value per share; authorized 200,000,000; issued 110,783,167
and 109,536,481 at December 31, 2007 and December 31, 2006
    1,108       1,095  
Additional paid-in capital
    681,689       610,232  
Retained earnings
    1,006,341       877,991  
Accumulated other comprehensive income
    277,873       76,600  
Treasury stock at cost: 2,972,997 shares
    (100,690 )     (100,690 )
 
           
Total shareholders’ equity
    1,866,321       1,465,228  
 
           
 
               
Total liabilities, minority interest and shareholders’ equity
  $ 4,761,627     $ 4,961,862  
 
           
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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BARR PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
                                         
    Year Ended     Six Months Ended     Six Months Ended        
    December 31,     December 31,     December 31,     Year Ended June 30,  
(in thousands, except per share data)   2007     2006     2005     2006     2005  
                    (unaudited)                  
Revenues:
                                       
Product sales
  $ 2,334,136     $ 831,351     $ 556,643     $ 1,169,783     $ 1,030,672  
Alliance and development revenue
    121,858       65,882       79,313       144,682       16,727  
Other revenue
    44,588       7,531                    
 
                             
Total revenues
    2,500,582       904,764       635,956       1,314,465       1,047,399  
 
                                       
Costs and expenses:
                                       
Cost of sales
    1,171,099       369,323       172,067       377,902       317,434  
Selling, general and administrative
    763,784       259,030       126,305       308,765       285,244  
Research and development
    248,453       106,758       66,006       140,158       128,384  
Write-off of acquired in-process research and development
    4,601       380,673                    
 
                             
 
                                       
Earnings (loss) from operations
    312,645       (211,020 )     271,578       487,640       316,337  
 
                                       
Interest income
    33,359       15,720       8,904       18,851       11,449  
Interest expense
    158,882       34,115       255       711       1,773  
Other income (expense), net
    20,713       (72,944 )     (593 )     17,168       3,863  
 
                             
 
                                       
Earnings (loss) before income taxes and minority interest
    207,835       (302,359 )     279,634       522,948       329,876  
 
                                       
Income tax expense
    64,546       34,630       101,507       186,471       114,888  
Minority interest (loss) gain
    (1,164 )     629                    
 
                             
Net earnings (loss) from continuing operations
    142,125       (336,360 )     178,127       336,477       214,988  
 
                                       
Discontinued operations
                                       
Net loss from discontinued operations
    (13,164 )     (1,795 )                  
Net loss on disposal of discontinued operations
    (611 )                        
 
                             
Net loss from discontinued operations
    (13,775 )     (1,795 )                  
 
                             
Net earnings (loss)
  $ 128,350     $ (338,155 )   $ 178,127     $ 336,477     $ 214,988  
 
                             
 
                                       
Basic:
                                       
Earnings (loss) per common share — continuing operations
  $ 1.33     $ (3.16 )   $ 1.71     $ 3.20     $ 2.08  
Loss per common share — discontinued operations
    (0.13 )     (0.02 )                  
 
                             
Net earnings (loss) per common share — basic
  $ 1.20     $ (3.18 )   $ 1.71     $ 3.20     $ 2.08  
 
                             
 
                                       
Diluted:
                                       
Earnings (loss) per common share — continuing operations
  $ 1.31     $ (3.16 )   $ 1.66     $ 3.12     $ 2.03  
Loss per common share — discontinued operations
    (0.13 )     (0.02 )                  
 
                             
Net earnings (loss) per common share — diluted
  $ 1.18     $ (3.18 )   $ 1.66     $ 3.12     $ 2.03  
 
                             
 
                                       
Weighted average shares — basic
    107,212       106,377       104,219       105,129       103,180  
 
                             
 
                                       
Weighted average shares — diluted
    108,631       106,377       106,984       107,798       106,052  
 
                             
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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BARR PHARMACEUTICALS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
For the Year Ended December 31, 2007, Six Months Ended December 31, 2006, Years Ended June 30, 2006 and 2005
(in thousands, except shares)
                                                                 
                                    Accumulated                        
                    Additional             Other                     Total  
    Common Stock     Paid     Retained     Comprehensive     Treasury Stock     Shareholders'  
    Shares     Amount     in Capital     Earnings     Income / (Loss)     Shares     Amount     Equity  
Balance, June 30, 2004
    104,916,103     $ 1,049     $ 377,024     $ 664,681     $       420,597     $ (708 )   $ 1,042,046  
Comprehensive income:
                                                               
Net earnings
                            214,988                               214,988  
Unrealized loss on marketable securities, net of tax of $320
                                    (561 )                     (561 )
 
                                                             
Total comprehensive income
                                                            214,427  
Tax benefit of stock incentive plans and warrants
                    56,212                                       56,212  
Issuance of common stock for exercised stock options and employees’ stock purchase plans
    1,136,141       11       18,506                                       18,517  
Issuance of common stock for exercised warrants
    288,226       3       2,747                                       2,750  
Purchases of common stock
                                            2,552,400       (99,982 )     (99,982 )
 
                                               
Balance, June 30, 2005
    106,340,470     $ 1,063     $ 454,489     $ 879,669     $ (561 )     2,972,997     $ (100,690 )   $ 1,233,970  
Comprehensive income:
                                                               
Net earnings
                            336,477                               336,477  
Unrealized gain on marketable securities, net of tax of $106
                                    184                       184  
 
                                                             
Total comprehensive income
                                                            336,661  
Tax benefit of stock incentive plans and warrants
                    29,026                                       29,026  
Stock-based compensation expense
                    27,092                                       27,092  
Issuance of common stock for exercised stock options and employees’ stock purchase plans
    2,838,738       29       64,178                                       64,207  
 
                                               
Balance, June 30, 2006
    109,179,208     $ 1,092     $ 574,785     $ 1,216,146     $ (377 )     2,972,997     $ (100,690 )   $ 1,690,956  
Comprehensive income:
                                                               
Net earnings (loss)
                            (338,155 )                             (338,155 )
Currency translation adjustment
                                    76,850                       76,850  
Unrealized gain on marketable securities, net of tax of $21
                                    105                       105  
 
                                                             
Total comprehensive loss
                                                            (261,200 )
Unrealized gain on pension and other post retirement benefits, net of tax of $11
                                    22                       22  
Tax benefit of stock incentive plans and warrants
                    10,615                                       10,615  
Stock-based compensation expense
                    13,926                                       13,926  
Issuance of common stock for exercised stock options and employees’ stock purchase plans
    357,273       3       10,906                                       10,909  
 
                                               
Balance, December 31, 2006
    109,536,481     $ 1,095     $ 610,232     $ 877,991     $ 76,600       2,972,997     $ (100,690 )   $ 1,465,228  
Comprehensive income:
                                                               
Net earnings
                            128,350                               128,350  
Cumulative net loss on derivative financial instruments designated as cash flow hedges, net of tax benefit of $6,448
                                    (10,868 )                     (10,868 )
Currency translation adjustment
                                    210,730                       210,730  
Unrealized gain on marketable securities, net of tax of $108
                                    744                       744  
 
                                                             
Total comprehensive income
                                                            328,956  
Unrealized gain on pension and other post retirement benefits, net of tax of $304
                                    667                       667  
Tax benefit of stock incentive plans and warrants
                    10,358                                       10,358  
Stock-based compensation expense
                    27,750                                       27,750  
Issuance of common stock for exercised stock options and employees’ stock purchase plans
    1,246,686       13       33,349                                       33,362  
 
                                               
Balance, December 31, 2007
    110,783,167     $ 1,108     $ 681,689     $ 1,006,341     $ 277,873       2,972,997     $ (100,690 )   $ 1,866,321  
 
                                               
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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BARR PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
                                         
    Year Ended     Six Months Ended        
    December 31,     December 31,     Year Ended June 30,  
(in thousands)   2007     2006     2005     2006     2005  
    (unaudited)  
CASH FLOWS FROM OPERATING ACTIVITIES:
                                       
Net earnings (loss)
  $ 128,350     $ (338,155 )   $ 178,127     $ 336,477     $ 214,988  
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
                                       
Depreciation and amortization
    297,819       72,536       25,347       61,757       40,510  
Deferred revenue
    (6,658 )                        
Minority interest
    901       (629 )                  
Stock-based compensation expense
    27,750       13,926       13,894       27,092        
Excess tax benefits from stock-based compensation
    (10,358 )     (10,615 )     (24,622 )     (29,026 )      
Deferred income tax (benefit) expense
    (71,438 )     (35,219 )     28,311       34,739       7,100  
Provision for losses on loans to Natural Biologics
                            1,050  
Loss (gain) on sale of divested products
    512       (5,200 )                  
Loss (gain) on derivative instruments, net
    9,730       75,888             (10,300 )      
Loss on sale of discontinued operations
    611                          
Other
    (8,969 )     (2,916 )     (647 )     (8,768 )     2,480  
Tax benefit of stock incentive plans and warrants
                            39,846  
Write-off of in-process research and development associated with acquisitions
    4,601       380,673                    
Changes in assets and liabilities:
                                       
(Increase) decrease in:
                                       
Accounts receivable and other receivables, net
    47,228       (12,500 )     (66,024 )     (85,652 )     36,678  
Inventories
    (32,162 )     40,354       14,825       24,598       12,614  
Prepaid expenses
    (16,321 )     (6,648 )     (4,513 )     (2,929 )     6,396  
Other assets
    3,165       8,004       29       (2,318 )     6,978  
Increase (decrease) in:
                                       
Accounts payable, accrued liabilities and other liabilities
    (37,449 )     17,824       (71,240 )     (43,340 )     1,169  
Income taxes payable
    45,875       16,023       11,269       25,009       (6,774 )
 
                             
Net cash provided by operating activities
    383,187       213,346       104,756       327,339       363,035  
 
                                       
CASH FLOWS FROM INVESTING ACTIVITIES:
                                       
Purchases of property, plant and equipment
    (123,358 )     (33,667 )     (36,045 )     (61,000 )     (55,225 )
Proceeds from sales of property, plant and equipment
    2,846       11,245       1       3       68  
Proceeds from sale of discontinued operations
    34,096                          
Acquisitions, net of cash acquired
    (89,780 )     (2,301,630 )     (378,128 )     (378,430 )     (46,500 )
Purchases of derivative instruments
                      (48,900 )      
Settlement of derivative instruments
    (7,414 )     (12,576 )                  
Purchases of marketable securities
    (2,086,699 )     (2,159,934 )     (960,438 )     (2,120,480 )     (1,220,869 )
Sales of marketable securities
    2,470,903       2,082,007       1,124,641       2,108,979       1,152,485  
Investment in debt securities
    (2,000 )     (3,000 )                  
Other
    (318 )     338       (3,018 )     (6,647 )     (6,990 )
 
                             
Net cash provided by (used in) investing activities
    198,276       (2,417,217 )     (252,987 )     (506,475 )     (177,031 )
 
                                       
CASH FLOWS FROM FINANCING ACTIVITIES:
                                       
Principal payments on long-term debt and capital leases
    (724,181 )     (30,027 )     (4,733 )     (5,468 )     (20,004 )
Proceeds from long-term debt
    100,115       2,440,703                    
Payment of deferred financing fees
          (23,580 )                  
Purchase of treasury stock
                            (99,982 )
Excess tax benefits from stock based compensation
    10,358       10,615       24,622       29,026        
Proceeds from exercise of stock options, employee stock purchases and warrants
    36,126       14,306       42,559       64,207       21,267  
Other
    50                          
 
                             
Net cash (used in) provided by financing activities
    (577,532 )     2,412,017       62,448       87,765       (98,719 )
 
                             
Effect of exchange-rate changes on cash and cash equivalents
    10,586       (593 )                  
 
                             
Increase (decrease) in cash and cash equivalents
    14,517       207,553       (85,783 )     (91,371 )     87,285  
Cash and cash equivalents at beginning of period
    231,975       24,422       115,793       115,793       28,508  
 
                             
Cash and cash equivalents at end of period
  $ 246,492     $ 231,975     $ 30,010     $ 24,422     $ 115,793  
 
                             
SUPPLEMENTAL CASH FLOW DATA:
                                       
Cash paid during the period:
                                       
Interest, net of portion capitalized
  $ 179,526     $ 6,245     $ 97     $ 351     $ 1,458  
 
                             
Income taxes
  $ 88,583     $ 52,807     $ 75,180     $ 126,723     $ 74,711  
 
                             
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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BARR PHARMACEUTICALS, INC. AND SUBSIDARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for share and per share amounts)
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation and Other Matters
     Barr Pharmaceuticals, Inc. (“Barr” or, the “Company”), is a Delaware holding company whose principal subsidiaries, Barr Laboratories, Inc., Duramed Pharmaceuticals, Inc. (“Duramed”) and PLIVA d.d. (“PLIVA”) are engaged in the development, manufacture and marketing of generic and proprietary pharmaceuticals.
     The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include all companies that Barr directly or indirectly controls (meaning it has more than 50% of voting rights in those companies). Investments in companies where Barr owns between 20% and 50% of a company’s voting rights are accounted for by using the equity method, with Barr recording its proportionate share of net income or loss for such investments in its results for that period. The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries, after elimination of inter-company accounts and transactions. Non-controlling interests in the Company’s subsidiaries are recorded net of tax as minority interest.
     On October 24, 2006, the Company completed the acquisition of PLIVA (See Note 2). As of that date, the PLIVA assets acquired and liabilities assumed were recorded at their respective fair values. The Company’s results of operations for the six months ended December 31, 2006 include PLIVA’s revenues and expenses from October 25, 2006 through December 31, 2006.
     On September 21, 2006, the Company changed its fiscal year end from June 30 to December 31. The Company refers to the period beginning January 1, 2007 through December 31, 2007 as “2007,” the period July 1, 2006 through December 31, 2006 as the “Transition Period”, the period beginning July 1, 2005 through June 30, 2006 as “fiscal 2006” and the period beginning July 1, 2004 through June 30, 2005 as “fiscal 2005.” All information, data and figures provided in this report for fiscal 2006 and 2005 relate solely to Barr’s financial results and do not include PLIVA.
     Certain amounts in the Transition Period, fiscal 2006 and 2005 financial statements have been reclassified to conform to the presentation for 2007. Certain amounts in the Transition Period have been reclassified as discontinued operations and as assets and liabilities of discontinued operations. See Note 3 for further details.
(b) Use of Estimates in the Preparation of Financial Statements
     The preparation of financial statements in conformity with GAAP requires management to make estimates and use assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are often based on judgments, probabilities and assumptions that management believes are reasonable but that are inherently uncertain and unpredictable. As a result, actual results could differ from those estimates. Management periodically evaluates estimates used in the preparation of the consolidated financial statements for continued reasonableness. Appropriate adjustments, if any, to the estimates used are made prospectively based on such periodic evaluations.
(c) Foreign Currency Translation and Transactions
     Foreign currency translation
     The consolidated financial statements are presented in United States Dollars (“USD”), rounded to the nearest thousand. The functional currency of the Company is the USD.
     Monthly statements of operations and cash flows of all of the Company’s subsidiaries that are expressed in currencies other than USD are translated at that month’s average exchange rates and then are combined for the period totals, whereas assets and liabilities are translated at the end of the period exchange rates. Translation differences are recorded directly in shareholders’ equity as cumulative translation adjustments.

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     Foreign currency transactions
     Outstanding balances in foreign currencies are translated at the end of period exchange rates. Revenues and expenses for each month are translated using that month’s average exchange rate and then are combined for the period totals. The resulting exchange differences are recorded in the statement of operations.
(d) Revenue Recognition
     The Company recognizes product sales revenue when title and risk of loss have transferred to the customer, when estimated provisions for product returns, rebates, including Medicaid rebates, chargebacks and other sales allowances are reasonably determinable, and when collectibility is reasonably assured. 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. Medicaid rebates are presented as an accrual net of allowances relating to these provisions. Cash received in advance of revenue recognition is recorded as deferred revenue.
     Alliance and development revenue includes: reimbursements relating to research and development contracts, licensing fees, royalties earned under co-promotion agreements and profit splits on certain products. The Company recognizes revenues under: (1) research and development agreements as it performs the related research and development; (2) license fees over the life of the product license; and (3) royalties under co-promotion agreements and profit splits as described below.
     The Company is party to agreements with certain pharmaceutical companies under which it receives payments based on sales or profits associated with the applicable products. The most significant of these agreements are with Teva regarding generic Allegra and Kos regarding Niaspan® and Advicor®. Alliance revenue is earned from these agreements at the time the Company’s third-party partner’s record sales and is based on pre-defined formulas contained in the agreements, and under the Company’s arrangement with Teva, adjusted for shelf-stock provisions needed to state the Company’s revenues on a basis consistent with its other revenue recognition policies. The estimates the Company makes to adjust its revenues are based on information received from its partner, as well as its own internal information. Of total alliance and development revenue, approximately 70%, 79%, 92%, 92% and 39% was earned from the alliances with Teva and Kos, on an aggregate basis, for the year ended December 31, 2007, for the six months ended December 31, 2006 and 2005 (unaudited) and for the fiscal years ended June 30, 2006 and 2005, respectively. Receivables related to alliance and development revenue are included in other receivables in the consolidated balance sheets. Selling and marketing expenses incurred under the co-promotion agreement with Kos are included in selling, general and administrative expenses.
     Other revenue primarily includes certain of the Company’s non-core operations, as well as consulting fees earned from services provided to third parties. The Company’s non-core operations include its diagnostics, disinfectants, dialysis, and infusions business. Consulting fees are recognized in the period in which the services are provided.
(e) Sales Returns and Allowances
     At the time of sale, the Company simultaneously records estimates for various costs, which reduce product sales. These costs include estimates for price adjustments, product returns, chargebacks, rebates, including Medicaid rebates, prompt payment discounts and other sales allowances. In addition, the Company records allowances for shelf-stock adjustments when the conditions are appropriate. Estimates for sales allowances such as product returns, rebates and chargebacks are based on a variety of factors including actual return experience of that product or similar products, rebate arrangements for each product, and estimated sales by our wholesale customers to other third parties who have contracts with the Company. Actual experience associated with any of these items may be different than the Company’s estimates. The Company regularly reviews the factors that influence its estimates and, if necessary, makes adjustments when it believes that actual product returns, credits and other allowances may differ from established reserves.
(f) Stock-Based Compensation
     The Company adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 123 (revised 2004), (SFAS No. 123(R)) Share-Based Payment, effective July 1, 2005. SFAS 123(R) requires the recognition of the fair value of stock-based compensation in net earnings. The Company has four stock-based employee compensation plans, two stock-based non-employee director compensation plans

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and an employee stock purchase plan, which are described more fully in Note 15. Stock-based awards grated to date consist of stock options, stock appreciation rights and the employee stock purchase plan. Stock options and stock appreciation rights are granted to employees at exercise prices equal to the fair market value of the Company’s stock at the dates of grant. Generally, stock options and stock appreciation rights granted to employees fully vest ratably over the three years from the grant date and have a term of 10 years. Annual stock options granted to directors vest and are generally exercisable on the date of the first annual shareholders’ meeting immediately following the date of grant. The Company recognizes stock-based compensation expense over the requisite service period of the individual grants, which generally equals the vesting period. Prior to July 1, 2005, the Company accounted for these plans under the intrinsic value method described in Accounting Principles Board (“APB”) Opinion No. 25 (“APB 25”), Accounting for Stock Issued to Employees, and related interpretations. Under the intrinsic value method, no stock-based employee compensation cost was reflected in net earnings. For purposes of pro-forma disclosure, stock-based compensation expense for awards granted prior to July 1, 2005 is measured on the grant date fair value as determined under the provisions of SFAS 123, Accounting for Stock-based Compensation. See Note 15 for further details.
(g) Research and Development
     Research and development costs are expensed as incurred. These expenses include the costs of the Company’s research and development efforts, acquired in-process research and development, as well as costs incurred in connection with the Company’s third party collaboration efforts. Pre-approved milestone payments due under contract research and development arrangements that are paid prior to regulatory approval are expensed when the milestone is achieved. Once the product receives regulatory approval, the Company records any subsequent milestone payments as intangible assets.
(h) Advertising and Promotion Costs
     Costs associated with advertising and promotions are expensed in the period in which the advertising is used and these costs are included in selling, general and administrative expenses. Advertising and promotion expenses totaled approximately $106,765 for the year ended December 31, 2007, $50,819 and $28,406 for the six-months ended December 31, 2006 and 2005 (unaudited) and $59,240 and $52,006 for the fiscal years ended June 30, 2006 and 2005, respectively.
(i) Income Taxes
     Income taxes have been provided using an asset and liability approach in which deferred tax assets and liabilities are recognized for the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is provided when, based on available evidence, it is more-likely-than-not that a portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for changes in enacted tax rates and laws.
     In the ordinary course of business there is inherent uncertainty in quantifying income tax positions. The Company assesses income tax positions and records tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting dates. For those tax positions with a greater than 50% likelihood of being realized, we record the benefit. For those income tax positions where it is more-likely-than-not that a tax benefit will not be sustained, no tax benefit is recognized in the financial statements. When applicable, associated interest and penalties are recognized as a component of interest expense.

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(j) Earnings Per Share
     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:
                                         
    Year Ended     Six Months Ended     Fiscal Year Ended  
    December 31,     December 31,     June 30,  
    2007     2006     2005     2006     2005  
(table in thousands, except per share data)           (unaudited)
Numerator for basic and diluted earnings (loss) per share Net earnings (loss) from continuing operations
  $ 142,125     $ (336,360 )   $ 178,127     $ 336,477     $ 214,988  
Net loss from discontinued operations
    (13,775 )     (1,795 )                  
 
                             
Net earnings (loss)
  $ 128,350     $ (338,155 )   $ 178,127     $ 336,477     $ 214,988  
 
                             
 
                                       
Denominator: Weighted average shares — basic
    107,212       106,377       104,219       105,129       103,180  
 
                                       
Earnings (loss) per common share — continuing operations
  $ 1.33     $ (3.16 )   $ 1.71     $ 3.20     $ 2.08  
Loss per common share — discontinued operations
    (0.13 )     (0.02 )                  
 
                             
Earnings (loss) per common share — basic
  $ 1.20     $ (3.18 )   $ 1.71     $ 3.20     $ 2.08  
 
                             
 
                                       
Denominator: Weighted average shares — diluted
    108,631       106,377       106,984       107,798       106,052  
 
                                       
Earnings (loss) per common share — continuing operations
  $ 1.31     $ (3.16 )   $ 1.66     $ 3.12     $ 2.03  
Loss per common share — discontinued operations
    (0.13 )     (0.02 )                  
 
                             
Earnings (loss) per common share — diluted
  $ 1.18     $ (3.18 )   $ 1.66     $ 3.12     $ 2.03  
 
                             
 
                                       
Calculation of weighted average common shares — diluted
                                       
 
                                       
Weighted average shares — basic
    107,212       106,377       104,219       105,129       103,180  
Effect of dilutive options
    1,419             2,765       2,669       2,872  
 
                             
Weighted average shares — diluted
    108,631       106,377       106,984       107,798       106,052  
 
                             
Not included in the calculation of diluted earnings per-share because their impact is antidilutive:
                                       
Stock options outstanding
    384       1,833       23       66       84  

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     During the year ended December 31, 2007, the six-months ended December 31, 2006 and 2005 (unaudited) and the fiscal years ended June 30, 2006 and 2005, there were 1,246,686, 357,273, 2,000,494, 2,838,738 and 1,136,141 shares respectively, issued in the aggregate upon exercise of stock options and under the Company’s employee stock option plans.
(k) Cash and Cash Equivalents
     Cash and cash equivalents, for the purpose of the balance sheet and the statement of cash flows, consist of cash on hand and balances with banks, and highly liquid investments with insignificant risk of changes in value and original maturities of three months or less from the date of acquisition.
(l) Investments in Marketable Securities, Debt and Equity Method Investments
     Investments in Marketable Securities and Debt
     The Company’s investments in short-term marketable securities primarily consist of commercial paper, money market investments, market auction debt securities, municipal bonds and federal agency issues, which are readily convertible into cash. The Company also invests in long-term marketable securities, including municipal bonds. Investments that the Company has the ability and intent to hold until maturity are classified as “held to maturity.” Held to maturity investments are recorded at cost, adjusted for the amortization of premiums and discounts, which approximates market value. Investments that are acquired principally for the purpose of generating a profit from short-term fluctuations in price are classified as “trading.” Trading securities are recorded at fair value, with resultant gains or losses recognized in current period income. Debt securities and other marketable securities are classified as “available for sale.” Available for sale securities are recorded at current market value with offsetting adjustments to shareholders’ equity, net of income taxes. The cost of investments sold is determined by the specific identification method.
     Venture Funds and Other Investments
     Investments in which the Company has significant influence over operating and financial policies of the investee are accounted for under the equity method of accounting. Under this method the Company records its proportionate share of income or loss from such investments in its results for the period. Any decline in value of the equity method investments considered by management to be other than temporary is charged to income in the period in which it is determined.
     The Company makes investments, as a limited partner, in venture capital funds as part of its continuing efforts to identify new products, technologies and licensing opportunities. The Company accounts for these investments using the equity method of accounting.
(m) Inventories
     Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out (“FIFO”) basis. In evaluating whether inventory is stated at the lower of cost or market, management considers such factors as the amount of inventory on hand, estimated time required to sell such inventory, remaining shelf life and current and expected market conditions, including levels of competition. The Company records as part of cost of sales write-downs to lower of cost or market.
(n) Credit and Market Risk
     Financial instruments that potentially subject the Company to credit risk consist principally of interest-bearing investments and trade receivables. The Company performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral from its customers.
(o) Fair Value of Financial Instruments
     Cash, Accounts Receivable, Other Receivables and Accounts Payable — The carrying amounts of these items are a reasonable estimate of their fair value.

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     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.
     Debt — The estimated fair values of the Company’s debt approximated $2,076,442 and $2,676,998 at December 31, 2007 and 2006, respectively. These estimates were determined by discounting anticipated future principal and interest cash flows using rates currently available to the Company.
(p) Derivative Instruments
     The Company uses derivative instruments for the purpose of hedging its exposure to foreign exchange and interest rate risk. The Company’s derivative instruments include interest rate forwards and swaps, forward rate agreements and foreign exchange forwards and options.
     FASB Statement No. 133 (“SFAS 133”), Accounting for Derivative Instruments and Hedging Activities requires companies to recognize all of their derivative instruments as either assets or liabilities in the balance sheet at fair value based on quoted market prices or pricing models using current market rates. The accounting for changes (i.e., gains or losses) in the fair value of a derivative instrument depends on whether the instrument has been designated and qualifies as part of a hedging relationship and on the type of hedging relationship. For derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. The designation is based upon the nature of the exposure being hedged.
     For a derivative instrument that is designated and qualifies as a fair value hedge (i.e., an instrument that hedges the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item are recognized in the same line item associated with the hedged item in earnings.
     For a derivative instrument that is designated and qualifies as a cash flow hedge (i.e., an instrument that hedges the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings.
     For all hedging activities, the ineffective portion of a derivative’s change in fair value is immediately recognized in other income (expense). For derivative instruments not designated as hedging instruments, the gain or loss is recognized in other income (expense) during the period of change. However, the Company believes that such non-designated instruments offset the economic risks of the hedged items.
(q) Property, Plant and Equipment
     Property, plant and equipment is recorded at cost, including the allocated portion of the purchase price arising from the PLIVA acquisition. Depreciation is recorded on a straight-line basis over the estimated useful lives of the related assets (3 to 20 years for machinery, equipment, furniture and fixtures and 5 to 45 years for buildings and improvements). Amortization of capital lease assets is included in depreciation expense. Leasehold improvements are amortized on a straight-line basis over the shorter of their useful lives or the terms of the respective leases, with such amortization periods generally ranging from 2 to 10 years. Maintenance and repairs are expensed as incurred and conversely renewals and betterments are capitalized.
(r) Acquisitions and Related Amortization Expense
     The Company accounts for acquired businesses using the purchase method of accounting, which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. The Company’s consolidated financial statements and results of operations reflect an acquired business after the completion of the acquisition and are not restated. The cost to acquire a business, including transaction costs, is allocated to the underlying net assets of the acquired business in proportion to their respective fair values. Any

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excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Amounts allocated to acquired in-process research and development are expensed at the date of acquisition. Intangible assets are amortized based generally on projected sales over the estimated useful life of the asset. Amortization expense is included in the cost of sales expense line of the statement of operations. When the Company acquires net assets that do not constitute a business, no goodwill is recognized.
     The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company’s results of operations. Accordingly, for significant items, the Company typically obtains assistance from third party valuation specialists. Useful lives are determined based on the expected future period of benefit of the asset, which considers various characteristics of the asset, including projected cash flows.
(s) Asset Impairment
     The Company reviews the carrying value of its long-lived assets for impairment annually or whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. Fair value is defined as the market price. If the market price is not available, fair value is estimated based on the present value of future cash flows.
     The Company reviews goodwill for impairment annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment testing of goodwill compares the fair value of the Company’s reporting units to their carrying value. There has been no impairment of goodwill recorded.
(t) Contingencies
     The Company is involved in various patent, product liability, commercial litigation and claims, government investigations and other legal proceedings that arise from time to time in the ordinary course of its business. The Company assesses, in consultation with counsel and in accordance with SFAS 5, Accounting for Contingencies, the need to accrue a liability for such contingencies and record a reserve when it determines that a loss related to a matter is both probable and reasonably estimable. The Company’s assessment of contingencies involves judgments about future events which are inherently unpredictable. The Company records anticipated recoveries under existing insurance contracts when collection is reasonably assured.
(u) Pensions and Other Post Employment Benefits
     In connection with the acquisition of PLIVA, the Company acquired and maintains defined benefit plans and other post-retirement benefits for employees of PLIVA. The Company’s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods. The benefit is discounted to determine its present value. Discount rates are based on the market yields of high-quality corporate bonds in the country concerned. The funded status for each plan is recognized in the Company’s consolidated balance sheets.
     For defined contribution plans, the Company pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. Once the contributions have been paid, the Company has no further payment obligations. The regular contributions constitute net periodic costs for the year in which they are due and as such are included in staff costs.
(v) Restructuring
     When recording acquisitions, the Company may review the associated operations and implement plans to restructure and integrate. For restructuring charges associated with a business acquisition that are identified in connection with an acquisition, the related costs are recorded as additional goodwill as they are considered to be liabilities assumed in the acquisition. All other restructuring charges, all integration costs and any charges related to our pre-existing businesses impacted by an acquisition are included the appropriate operating expense line item of our consolidated statement of operations.

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(w) New Accounting Pronouncements
     In September 2006, the FASB issued SFAS No. 157 (“SFAS 157”), Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosure about fair value measurements. The statement is effective for fiscal years beginning after November 15, 2007. Although the Company will continue to evaluate the application of SFAS 157, the Company does not currently believe that the adoption of SFAS 157 will have a material effect on its consolidated financial statements.
     In February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), The Fair Value Option for Financial Assets and Financial Liabilities, providing companies with an option to report selected financial assets and liabilities at fair value. The statement’s objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. Generally accepted accounting principles have required different measurement attributes for different assets and liabilities that can create artificial volatility in earnings. SFAS 159 helps to mitigate this type of accounting-induced volatility by enabling companies to report related assets and liabilities at fair value, which would likely reduce the need for companies to comply with detailed rules for hedge accounting. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The statement requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the Company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which they have chosen to use fair value on the face of the balance sheet. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Although the Company will continue to evaluate the application of SFAS 159, the Company does not currently believe that the adoption of SFAS 159 will have a material effect on its consolidated financial statements.
     In June 2007, the Emerging Issues Task Force (“EITF”) issued EITF Issue 07-3 (“EITF 07-3”), Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities. EITF 07-3 addresses the diversity that exists with respect to the accounting for the non-refundable portion of a payment made by a research and development entity for future research and development activities. The EITF concluded that an entity must defer and capitalize non-refundable advance payments made for research and development activities and expense these amounts as the related goods are delivered or the related services are performed. EITF 07-3 is effective for interim or annual reporting periods in fiscal years beginning after December 15, 2007. The adoption of EITF 07-3 will not have a material effect on the Company’s consolidated financial statements.
     In December 2007, the FASB issued SFAS No. 141(R) (“SFAS 141(R)”), Business Combinations (revised), replacing SFAS No. 141 (“SFAS 141”) Business Combinations. This new statement requires additional assets and assumed liabilities to be measured at fair value when acquired in a business combination as compared to the original pronouncement. SFAS 141(R) also requires liabilities related to contingent consideration to be re-measured to fair value each reporting period, acquisition-related costs to be expensed and not capitalized and acquired in-process research and development to be capitalized as an indefinite lived intangible asset until completion of project or abandonment of project. SFAS 141(R) requires prospective application for business combinations consummated in fiscal years beginning on or after December 15, 2008. This statement does not allow for early adoption. The Company is currently evaluating the impact of the adoption of this statement on its consolidated financial statements.
     In December 2007, the FASB issued SFAS No. 160 (“SFAS 160”), Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51 (“ARB No. 51”). This amendment of ARB No. 51 requires noncontrolling interest in subsidiaries initially to be measured at fair value and then to be classified as a separate component of equity. This statement is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008. This statement does not allow for early adoption, however, application of SFAS 160 disclosure and presentation requirements is retroactive. The Company is currently evaluating the impact of the adoption of this statement on its consolidated financial statements.
     In December 2007, the EITF issued EITF Issue No. 07-1 (“EITF 07-1”), Accounting for Collaborative Arrangements. EITF 07-1 affects entities that participate in collaborative arrangements for the development and commercialization of intellectual property. The EITF affirmed the tentative conclusions reached on (1) what constitutes a collaborative arrangement, (2) how the parties should present costs and revenues in their respective income statements, (3) how the parties should present cost-sharing payments, profit-sharing payments, or both in

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their respective income statements, and (4) disclosure in the annual financial statements of the partners. EITF 07-1 should be applied as a change in accounting principle through retrospective application to all periods presented for collaborative arrangements existing as of the date of adoption. EITF 07-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact of the adoption of this statement on its consolidated financial statements.
(2) Acquisitions and Business Combinations
Year Ended December 31, 2007
O.R.C.A. pharm GmbH
     On September 5, 2007, the Company acquired 100% of the outstanding shares of O.R.C.A. pharm GmbH (“ORCA”), a privately-owned specialty pharmaceutical company focused on the oncology market in Germany. In accordance with SFAS 141, Business Combinations, the Company used the purchase method to account for this transaction. Under the purchase method of accounting, the assets acquired and liabilities assumed from ORCA are recorded at the date of acquisition, at their respective fair values. The adjusted purchase price is $43,580 and includes cash paid of $32,128, minimum future payments of $11,306 due in 2008 and 2009, and $146 of accrued transaction fees. The Company may also be required to pay up to an additional $6,458 based on the achievement of defined performance milestones for 2007 and 2008. The operating results of ORCA are included in the consolidated financial statements subsequent to the September 5, 2007 acquisition date. As part of the preliminary purchase price allocation the Company has assigned fair values as follows:
         
Inventory
  $ 3,442  
Products acquired
    29,327  
Goodwill
    9,034  
Other assets
    5,880  
Liabilities
    (4,103 )
 
     
Total
  $ 43,580  
 
     
     The above purchase price allocation is preliminary and is based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed. Management believes the available information provides a reasonable basis for allocating the purchase price but the Company is awaiting additional information necessary to finalize the purchase price allocation. The Company expects to finalize the valuation and complete the purchase price allocation as soon as possible but no later than one year from the acquisition date. Under the guidance of SFAS 141, this acquisition is being treated as an immaterial acquisition. As an immaterial acquisition, pro-forma financial statements are not required to be presented.
Products Acquired from Hospira, Inc.
     On February 6, 2007, the Company acquired four generic injectible products from Hospira, Inc., which are Morphine, Hydromorphone, Nalbuphine and Deferoxamine. The Company entered into a supply agreement with Hospira covering all four products, and a product development agreement for Deferoxamine. The product acquisitions resulted from a Federal Trade Commission ordered divestiture of these products in connection with Hospira’s acquisition of Mayne Pharma Ltd.
     The Company recorded intangible assets in the amount of $12,000 related to the acquisition of the four products. The defined territory for these products includes all markets in the United States and its territories. These product rights are recorded as other intangible assets on the consolidated balance sheets and will be amortized based on estimated product sales over an estimated useful life of 10 years.
Six Months Ended December 31, 2006
PLIVA d.d.
     On October 24, 2006, the Company’s wholly owned subsidiary, Barr Laboratories Europe B.V. (“Barr Europe”), completed the acquisition of PLIVA, headquartered in Zagreb, Croatia. Under the terms of the cash tender

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offer, Barr Europe made a payment of $2,377,773 based on an offer price of HRK 820 (Croatian Kuna (“HRK”)) per share for all shares tendered during the offer period. Subsequent to the close of the offer period, Barr Europe purchased an additional 390,809 shares on the Croatian stock market for $58,309. The table below represents a reconciliation from October 24, 2006 to December 31, 2007:
                         
                    %  
Period   Shares     Cost     Acquired  
Shares tendered October 24, 2006
    17,056,977     $ 2,377,773       96.4 %
Shares purchased October 25 to December 31, 2006
    149,953       21,937       0.6 %
Transaction costs
          29,700       0.0 %
 
                 
Total as of December 31, 2006
    17,206,930       2,429,410       97.0 %
 
                 
Shares purchased January 1, 2007 to December 31, 2007
    240,856       36,372       1.1 %
Transaction costs
          664       0.0 %
 
                 
Total as of December 31, 2007
    17,447,786     $ 2,466,446       98.1 %
 
                 
     In accordance with SFAS 141, Business Combinations, the Company used the purchase method of accounting to account for this transaction. Under the purchase method of accounting, the assets acquired and liabilities assumed from PLIVA were recorded at their respective fair values.
     The fair values of the assets acquired and liabilities assumed net of cash acquired of $193,751 for PLIVA share purchases were as follows:
         
    Adjusted  
    Assets  
    and Liabilities  
    Assumed  
Current assets (excluding cash and inventories)
  $ 350,919  
Inventories (1)
    351,438  
Property, plant & equipment (2)
    752,397  
Identifiable intangible assets (3)
    999,921  
Other non-current assets, including deferred tax assets
    121,088  
In-process research & development (4)
    385,077  
Goodwill (5)
    200,229  
 
     
Total assets acquired
    3,161,069  
 
     
 
       
Current liabilities, excluding restructuring
    (346,732 )
Restructuring costs (6)
    (27,619 )
Deferred tax liabilities
    (285,964 )
Other non-current liabilities, including long-term debt (7)
    (189,241 )
 
     
Total liabilities assumed
    (849,556 )
 
     
Total minority interest
    (38,818 )
 
     
Net assets acquired
  $ 2,272,695  
 
     
Plus: cash acquired
    193,751  
 
     
Total Purchase price
  $ 2,466,446  
 
     
     (1) The fair value of acquired inventory was determined as follows:
    Raw materials — valued at current replacement cost.

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    Work in progress — valued at the expected selling price of the inventory less the cost to complete, cost of disposal and reasonable profit on the selling effort of the acquiring entity.
 
    Finished & merchandised goods — valued at expected selling price less the cost of disposal and a reasonable profit for the selling effort.
     (2) Fixed assets were valued at replacement cost, unless there was a known plan to dispose of an asset. Assets to be disposed of were valued at prevailing market rates, less cost to sell, or for no value, if to be abandoned.
     (3) Components of the fair value of acquired intangible assets are as follows:
             
            Weighted-average
            amortization period
            (Years)
Trade names
  $ 75,600     Indefinite
Existing products and product rights
    797,644     10
Land usuage rights
    88,053     99
Other intangible assets
    38,624     6
 
         
Total identifiable intangible assets
  $ 999,921      
 
         
     In valuing the trade names and related trademarks, the Company applied the relief-from-royalty method. The fair value of the existing products was determined based on the excess cash flow method, a form of the income approach. Other intangibles consist primarily of active pharmaceutical ingredient (“API”) intangible assets, contractual royalty payments, and contractual milestone payments. The fair value of API intangible assets was determined using the relief from royalty method. The fair value of contractual milestone and royalty payments were estimated using an income approach through a discounted cash flow analysis on a payment-by-payment basis.
(4) The fair value of the acquired in-process research and development (“IPR&D”) was based on the excess cash flow method on a project-by-project basis. This amount was written-off upon acquisition as research and development expense because the acquired products had not received approval from the applicable regulators, were incomplete and had no alternative future use.
(5) 100% of the goodwill has been assigned to the Company’s generic pharmaceuticals operating segment. None of the goodwill is deductible for income tax purposes.
(6) Included in accrued liabilities and other liabilities on the consolidated balance sheet are restructuring costs that impacted goodwill. These exit costs are associated with involuntary termination benefits for PLIVA employees and costs to exit certain activities of PLIVA and were recorded as a liability in conjunction with recording the initial purchase price (See Note 18).
(7) Debt was recorded at quoted market prices or management’s best estimate of fair value based on prevailing borrowing rates of PLIVA.
     As the acquisition was structured as a purchase of equity, the amortization of purchase price assigned to assets in excess of PLIVA’s historic tax basis will not be deductible for income tax purposes. The Company has finalized the valuation and completed the purchase price allocation for the PLIVA acquisition for the shares acquired to date.
Shire PLC Product Acquisition and Development Agreement
     On August 14, 2006, the Company entered into an arrangement with Shire PLC (“Shire”) consisting of a product acquisition and supply agreement for Adderall IR® tablets, a product development and supply agreement for six proprietary products and a settlement and licensing agreement relating to the resolution of two pending patent cases involving Shire’s Adderall XR®.
     Under the terms of the product acquisition agreement, the Company recorded an intangible asset in the amount of $63,000 related to the acquisition of Adderall IR. This product right will be amortized based on product sales over an estimated useful life of 15 years.

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     In addition, under the terms of the product development agreement, the Company received an upfront non-refundable payment of $25,000 and could receive, based on future incurred research and development costs and milestones, an additional $140,000 over the next eight years subject to annual caps of $30,000. In exchange for its funding commitment, Shire obtained a royalty free license to the products identified in the product development agreement in its defined territory (which is generally defined to include all markets other than North America, Central Europe, Eastern Europe and Russia). The Company recognizes revenue under the product development arrangement described above, including the $25,000 upfront payment, as it performs the related research and development. These amounts will be reflected in the “alliance and development revenue” line item in the Company’s consolidated statement of operations as costs are incurred over the life of the agreement. Included in other liabilities at December 31, 2007 is $22,422 of deferred revenue related to the above mentioned payments under the product development agreement. The Company also entered into purchase and supply agreements with Shire in conjunction with the product acquisition and product development agreements.
     The settlement and licensing agreement relating to Adderall XR grants the Company certain rights to launch a generic version of Adderall XR. The license is royalty-bearing and exclusive during the Company’s FDA granted six-month period of exclusivity and is non-exclusive and royalty-free thereafter.
Fiscal 2006 Acquisitions
FEI Women’s Health, LLC
     On November 9, 2005, the Company acquired all of the outstanding equity interests of FEI Women’s Health, LLC (“FEI”). FEI is the owner of the ParaGard® T 380A (Intrauterine Copper Contraceptive) IUC, which is approved for continuous use for the prevention of pregnancy for up to 10 years.
     In accordance with SFAS 141, Business Combinations, the Company used the purchase method of accounting to account for this transaction. Under the purchase method of accounting, the assets acquired and liabilities assumed from FEI were recorded at the date of acquisition, at their respective fair values. The purchase price plus acquisition costs exceeded the fair values of acquired assets and assumed liabilities. This resulted in the recognition of goodwill in the amount of $29,921. The total purchase price, including acquisition costs of $5,112 less cash acquired of $4,372, was $289,730. The consolidated financial statements issued after completion of the acquisition reflect these values. The operating results of FEI are included in the consolidated financial statements subsequent to the November 9, 2005 acquisition date.
     The fair values of the assets acquired and liabilities assumed on November 9, 2005 were as follows:
         
Current assets (excluding cash)
  $ 30,876  
Property and equipment
    1,955  
Intangible asset — ParaGard T 380A IUC
    256,000  
Goodwill
    29,921  
Other assets
    4,677  
 
     
Total assets acquired
  $ 323,429  
 
     
 
       
Current liabilities
    10,780  
Other liabilities
    22,919  
 
     
Total liabilities assumed
    33,699  
 
     
Net assets acquired
  $ 289,730  
 
     
     The purchase price has been allocated based on the fair value of assets acquired and liabilities assumed as of the date of acquisition.
     In accordance with the requirements of SFAS 142, Goodwill and Other Intangible Assets, the goodwill associated with the acquisition will not be amortized. The ParaGard T 380A IUC intangible asset will be amortized based on estimated product sales over its estimated 20-year life. Goodwill and the intangible asset resulting from this acquisition have been allocated to our proprietary reporting unit.

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Products from Organon Ltd., Organon USA Inc. and Savient Pharmaceuticals, Inc.
     On June 15, 2005, the Company entered into a non-binding Letter of Intent with Organon (Ireland) Ltd., Organon USA Inc. (“Organon”) and Savient Pharmaceuticals, Inc. (“Savient”) to acquire the New Drug Application (“NDA”) for Mircette®, obtain a royalty-free patent license to promote Mircette in the United States and dismiss all pending litigation between the parties in exchange for a payment by the Company of $152,750. At the time the Letter of Intent was signed, because the proposed transaction included, as one of its components, a payment in settlement of litigation, it was presumed under GAAP to give rise to a “probable loss,” as defined in SFAS 5, Accounting for Contingencies. Based on valuations of the assets the Company acquired and total estimated payments, the Company recorded a charge of $63,238 as of June 30, 2005 to reflect the litigation settlement.
     On December 2, 2005, the Company and Organon finalized the agreement that gave the Company exclusive rights to Mircette. The agreement also terminated the ongoing patent litigation regarding the Company’s generic version of Mircette, which is marketed under the trade name Kariva®. The agreement called for the Company to pay Organon $139,000 and Savient $13,750. Based on final valuations of the asset, the Company has recorded an intangible asset in the amount of $88,700 and recorded an additional charge of $813 for the difference between the estimated amounts recorded as a probable loss at June 30, 2005 and the final loss amount. The Company also incurred approximately $1,800 of additional legal and accounting costs related to the transaction. Additionally, the Company was reimbursed $11,000 from a third party for partial reimbursement of the Company’s recorded charge on this transaction. This reimbursement was reflected as a reduction of selling, general and administrative expenses.
(3) Discontinued Operations
     Since its acquisition of PLIVA on October 24, 2006, the Company has been evaluating PLIVA’s operations and has, as a result, divested certain non-core operations including its operations in Spain and Italy, and its animal health and veterinary business operated by Veterina d.d. (“Veterina”).
     On September 28, 2007, the Company sold 100% of the outstanding shares in Pliva Pharma, S.p.A., its Italian subsidiary, for $4,001. This resulted in a loss on the sale of $36.
     On October 5, 2007, the Company sold 100% of the ordinary shares in Veterina through a public offering in Croatia, for $35,827. This resulted in a gain on the sale of $1,790.
     On December 28, 2007, the Company sold 100% of the outstanding shares in PLIVA Pharma Iberia S.A., its Spain subsidiary, for $15,245, including installment payments of $13,678 payable during 2008. This resulted in a loss on the sale of $2,365.
     The Company’s operations in Spain and Italy were part of the generic pharmaceuticals segment. The Company’s Veterina business was a separate operating segment, which did not meet the quantitative thresholds for separate disclosure and, as such, was included in “other” in Note 20 below.
     The following combined amounts of the Company’s operations in Spain and Italy, and the Veterina business have been segregated from continuing operations and included in discontinued operations, net of taxes, and loss on sale of discontinued operations in the consolidated statement of operations, as shown below:

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    Year Ended     Transition  
    December 31, 2007     Period  
    Italy     Spain     Veterina     Total     Italy     Spain     Veterina     Total  
Revenues
                                                               
Generics
  $ 8,302     $ 24,232     $     $ 32,534     $ 2,803     $ 3,370     $     $ 6,173  
Other
                24,519       24,519                   5,466       5,466  
 
                                               
Total net revenues of discontinued operations
  $ 8,302     $ 24,232     $ 24,519     $ 57,053     $ 2,803     $ 3,370     $ 5,466     $ 11,639  
 
                                               
Gain (loss) before income taxes and minority interest
  $ (1,428 )   $ (8,239 )   $ (3,512 )   $ (13,179 )   $ (2,012 )   $ (396 )   $ 488     $ (1,920 )
 
                                               
 
                                                               
Gain (loss) on sale of discontinued operations
    (36 )     (2,365 )     1,790       (611 )                        
Income tax benefit
                15       15                   125       125  
 
                                               
Gain (loss) from discontinued operations- net of tax
  $ (1,464 )   $ (10,604 )   $ (1,707 )   $ (13,775 )   $ (2,012 )   $ (396 )   $ 613     $ (1,795 )
 
                                               
     The following combined amounts of assets and liabilities related to the operations in Spain and Italy, and the Veterina business have been segregated and included in assets and liabilities of discontinued operations on the Company’s consolidated balance sheet as of December 31, 2006:
         
    December 31,  
    2006  
Marketable securities
  $ 16  
Accounts receivable, net
    21,929  
Other receivables, net
    10,756  
Inventories
    26,141  
Prepaid expenses and other current assets
    46  
 
     
Current assets of discontinued operations
    58,888  
 
     
 
       
Property, plant and equipment, net
    5,781  
Deferred income taxes
    2,378  
Other intangible assets, net
    2,677  
Other assets
    109  
 
     
Long-term assets of discontinued operations
    10,945  
 
     
 
       
Assets of discontinued operations
  $ 69,833  
 
     
 
       
Accounts payable
  $ 18,761  
Accrued liabilities
    12,299  
Current portion of long-term debt and capital lease obligations
    254  
 
     
Current liabilities of discontinued operations
    31,314  
 
     
 
       
Long-term debt and capital lease obligations
    1,738  
Deferred tax liabilities
    636  
Other liabilities
    207  
 
     
Long-term liabilities of discontinued operations
    2,581  
 
     
 
       
Liabilities of discontinued operations
  $ 33,895  
 
     

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(4) Derivative Instruments
Interest Rate Risk
     The Company’s interest-bearing investments, loans and borrowings are subject to interest rate risk. The Company invests and borrows primarily on a variable-rate basis. Depending upon market conditions, the Company may fix the interest rate it either pays or receives by entering into fixed-rate investments and borrowings or through the use of derivative financial instruments.
     During 2007, as reflected in the table below, the Company entered into pay-fixed, receive-floating interest rate swap agreements effectively converting $800,000 of variable-rate debt under unsecured senior credit facilities to fixed-rate debt. The objective of the hedge is to manage the variability of cash flows in the interest payments related to the portion of the variable-rate debt designated as being hedged. With the hedge in place, the sole source of variability to the Company is the interest payments it receives based on changes in LIBOR. The swaps are accounted for in accordance with SFAS 133.
     Derivative financial instruments are measured at fair value and are recognized as assets or liabilities on the balance sheet, with changes in the fair value of the derivatives recognized in either net income (loss) or other comprehensive income (loss), depending on the timing and designated purpose of the derivative. When the Company pays interest on the portion of the debt designated as hedged, the gain or loss on the swap designated as hedging the interest payment will be reclassified from accumulated other comprehensive income into interest expense.
     These derivative instruments are designated as cash flow hedges with the related gains or losses recorded in other comprehensive income (net of tax) with an offsetting amount included in other non-current liabilities. The losses are $10,868 and $0 for the twelve months ended December 31, 2007 and the Transition Period, respectively. The Company estimates that approximately $5,192 of the net losses at December 31, 2007 will be realized into earnings over the next twelve months for the transactions that are expected to occur over that period.
     The terms of the interest rate swap agreements that are still in effect as of December 31, 2007 are shown in the following table:
                 
Notional                
Principal Amount   Start Date   Maturity Date   Receive Variable Rate   Pay Fixed Rate
$175,000
  Mar-30-07   Jun-30-08   90 day LIBOR   5.253 %
$125,000
  Jun-30-07   Jun-30-10   90 day LIBOR   5.4735 %
$100,000
  Jun-30-07   Jun-30-10   90 day LIBOR   5.3225 %
$100,000
  Sept-30-07   Sept-30-10   90 day LIBOR   4.985 %
$100,000
  Sept-30-07   Sept-30-09   90 day LIBOR   4.92875 %
$100,000
  Sept-30-07   Mar-31-09   90 day LIBOR   4.755 %
$100,000
  Sept-30-07   Sept-30-09   90 day LIBOR   4.83 %
     Foreign Exchange Risk
     The Company seeks to manage potential foreign exchange risk from foreign subsidiaries by matching each such subsidiary’s revenues and costs in its functional currency. Similarly, the Company seeks to manage the foreign exchange risk relating to assets and liabilities of its foreign subsidiaries by matching the assets and liabilities in the subsidiary’s functional currency. When this is not practical, the Company uses foreign exchange forward contracts or options to manage its foreign exchange risk.
     In connection with the PLIVA acquisition, the Company assumed foreign exchange forward contracts hedging economically forecasted transactions occurring at various dates through 2007 that were denominated in foreign currencies. At December 31, 2007, none of the Company’s remaining foreign exchange derivatives were eligible for hedge accounting, resulting in their changes in fair value being reported in other income (expense) as a loss of $9,451.
     All foreign exchange derivative instruments described above are measured at fair value and are reported as assets or liabilities on the balance sheet. Changes in the fair value are reported in earnings or other comprehensive

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income depending upon whether the risk management instrument is classified as a formal hedge pursuant to the guidelines outlined by SFAS 133. Economically, the gains or losses realized on these instruments at maturity are intended to offset the losses or gains of the transactions which they are hedging.
     The table below summarizes the respective fair values of the derivative instruments described above at December 31, 2007 and 2006, respectively:
                                 
    December 31, 2007     December 31, 2006  
    Assets     Liabilities     Assets     Liabilities  
Interest rate swap
  $     $ (17,316 )   $ 1,267     $ (443 )
Forward rate agreements
          (39 )     997       (163 )
Foreign exchange forward contracts
          (193 )     383       (106 )
 
                       
Total
  $     $ (17,548 )   $ 2,647     $ (712 )
 
                       
(5) Accounts Receivable, net
     The components of accounts receivable are as follows:
                 
    December 31,     December 31,  
    2007     2006  
Trade accounts receivable
  $ 741,092     $ 738,824  
Other trade receivables
    12,808       15,080  
 
           
Subtotal
    753,900       753,904  
Less: allowances
    257,264       242,768  
 
           
Accounts receivable, net
  $ 496,636     $ 511,136  
 
           
(6) Inventories
     The components of inventory are as follows:
                 
    December 31,     December 31,  
    2007     2006  
Raw materials and supplies
  $ 187,220     $ 160,384  
Work-in-process
    77,098       67,798  
Finished goods
    236,889       198,088  
 
           
Total inventories
  $ 501,207     $ 426,270  
 
           
(7) Property, plant and equipment, net
     The major categories of the Company’s property, plant and equipment are as follows:
                 
    December 31,     December 31,  
    2007     2006  
Land
  $ 107,216     $ 56,543  
Buildings and improvements
    597,051       526,034  
Machinery and equipment
    621,788       532,553  
Leasehold improvements
    14,174       12,726  
Construction in progress
    100,765       73,233  
 
           
 
    1,440,994       1,201,089  
Less: accumulated depreciation and amortization
    325,090       196,671  
 
           
Total plant, property and equipment, net
  $ 1,115,904     $ 1,004,418  
 
           

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     Depreciation expense was $127,727, $35,061, $16,966, $35,850 and $31,591 for the year ended December 31, 2007, for the six-months ended December 31, 2006 and 2005 (unaudited) and the fiscal years ended June 30, 2006 and 2005, respectively.
(8) Investments in Marketable Securities, Debt and Equity Method Investments
     Investments in Marketable Securities and Debt
     Trading Securities
     The fair value of marketable securities classified as trading at December 31, 2007 and 2006 was $3,674 and $3,718, respectively, which is included as a component of current marketable securities. Net gains (losses) for the year ended December 31, 2007 and the Transition Period were $980 and $(572), respectively, which are included as a component of other income (expense). Of such amount, $(36) is unrealized and relates to securities still held at December 31, 2007.
     Available-for-Sale Securities
     Available-for-sale equity securities include amounts invested in connection with the Company’s excess 401(k) and other deferred compensation plans of $11,759 and $10,293 at December 31, 2007 and 2006, respectively.
     Available-for-sale investments are carried at fair value; however equity securities that do not have readily determinable fair values, are measured at cost adjusted for impairment. The aggregate carrying values of equity securities that do not have readily determinable fair values were $298 and $150 at December 31, 2007 and 2006, respectively.
     Available-for-sale debt securities at December 31, 2007, includes $218,850 in market auction debt securities, $16,315 in commercial paper, $42,707 in municipal bonds, $2,559 in corporate bonds and $7,032 federal agency issues. The market auction debt securities and commercial paper have maturity dates ranging from January 2, 2008 to March 6, 2008. The municipal and corporate bonds and federal agency issues have maturity dates ranging from January 1, 2008 to February 1, 2010.
     Included within the Company’s available-for-sale debt securities are market auction securities debt securities restricted to highly rated municipal securities. The Company’s typical practice has been to continue to own the respective securities or liquidate the holdings by selling those securities at par value at the next auction, which generally ranges from 7 to 35 days after purchase. The market auction debt securities investments are investment grade (A rated and above) municipal securities and are insured against loss of principal and interest by bond insurers whose AAA ratings are under review.
     Subsequent to December 31, 2007, the recent uncertainties in the credit markets have prevented the Company and other investors from liquidating holdings of market auction debt securities in recent auctions because the amount of market auction debt securities submitted for sale has exceeded the amount of purchase orders. On December 31, 2007, the Company held $218,850 in market auction debt securities.
     In 2008, the Company decided to liquidate its holdings in market auction debt securities and not reinvest in market auction debt securities in order to intentionally reduce exposure to these instruments. As of February 29, 2008 the Company had $42,975 in market auction debt securities. All of these securities have not been liquidated due to failed auctions and $14,850 of the failed market auction debt securities are associated with the Company’s balances at December 31, 2007. Of this amount, $2,000 has a future redemption date and the Company will receive cash for par value in March 2008. Despite these failed auctions, there have been no defaults on the underlying securities, and interest income on these holdings continues to be received on scheduled interest payment dates. As a result, the Company now earns premium interest rates on the failed auction investments. If the issuers of these securities are unable to successfully close future auctions and their credit ratings deteriorate, the Company may be required to adjust the carrying value of these investments.

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     Based on the Company’s ability to access its cash and other short-term investments, its expected operating cash flows and its other sources of cash, the Company does not anticipate that the lack of liquidity on these investments will affect its ability to operate the business as usual.
     The realized gains (losses) from the sale of available-for-sale investments for the year ended December 31, 2007 and 2006 were $2 and $(17), respectively. The amortized cost, gross unrealized gains and losses recorded as a component of other comprehensive income, and estimated market values for available-for-sale securities at December 31, 2007 and 2006 are as follows:
                                 
    Available for Sale  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Market  
December 31, 2007   Cost     Gains     (Losses)     Value  
Debt securities
  $ 287,766     $ 120     $ (423 )   $ 287,463  
Equity securities
    12,424       1,086       (282 )     13,228  
 
                       
 
  $ 300,190     $ 1,206     $ (705 )   $ 300,691  
 
                       
 
                               
December 31, 2006