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Tickers in this Article: BRL, TEVA, NVS
In late October, Barr Labs (NYSE:BRL) completed the acquisition of PLIVA, a large generic-drug manufacturer headquartered in Zagreb, Croatia. The acquisition made Barr the third-largest generic-drug manufacturer in the world behind Teva Pharmaceuticals (Nasdaq:TEVA) and Novartis (NYSE:NVS).

Barr is now encountering the realities that come with any major acquisition. The company is in stage two of the three-stage acquisition process which most companies go through. How it handles these growing pains will tell investors a lot about the future of the company. (For further reading, check out The Basics of Mergers And Acquisitions.)

Stage One
The first stage of an acquisition is a time of great expectations. For Barr, management saw access to new markets expanding its reach to more than 30 countries from what had been primarily a focus on just the United States.

The company looks to leverage PLIVA's existing products within its distribution and client network. Finally, the manufacturing facility in Zegreb, Croatia offers Barr a low cost operation that should help improve margins and profits.

Basically, this is the stage in which the management team was selling the merits of the acquisition to current and potential investors.

Stage Two
In the second stage an acquisition, management realizes the work that must be accomplished and the cash that must be invested to achieve its high expectations. As many companies have discovered, each new product and market has its own unique issues that must be overcome.

The PLIVA acquisition is now in stage two, and Barr is beginning to see the work it has ahead of it. For example, the European Union has different criteria for drug approval than the United States, making the introduction of new drugs more difficult. Also, newly introduced drugs can take longer than expected to gain acceptance, requiring higher investment in marketing and sales.

While there are great benefits in a low-cost operation in Croatia, Barr must first be willing to upgrade the new manufacturing facilities to meet its own standards as well as those of the EU. Further problems could occur if the upgrading process costs more, or takes longer than expected; however, it still holds great promise for the company in the long run.

Finally, while combining the sales of both companies will surely increase revenues, this does not guarantee that there will be actual sales growth. Growing sales from this merger will come from successful integration of the product line, focusing on the best opportunities and then organizing all responsible parties to execute the strategy.

Stage Three
In the third and final stage of an acquisition the company must assess the initial results and create a plan for the future. Soon Barr management will have to reveal if the PLIVA acquisition met expectations.

If it failed, the company will still move forward, but ultimately its growth will be held back by these integration problems. In this case, expect 2007 revenue to be $2.45 billion and earnings per share of $2.95.

On the other hand, if Barr is able to make the acquisition of PLIVA work, then it will be able to grow revenue and profit as anticipated, and investors will benefit. If all goes well, revenues are expected to reach $2.55 billion in 2007 and $2.8 billion in 2008. Earnings per share for 2007 of $3.30 are possible, with $3.65 in 2008.

The acquisition of PLIVA places Barr Laboratories at a crucial junction. The question is: Will Barr make the right moves and achieve success or will it encounter unexpected problems and fail?

Before committing to Barr, it may be prudent to wait to see how the company is progressing when it releases first-quarter earnings in May, 2007.

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