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Tickers in this Article: BRL, MYL, TEVA
In 2006, Barr Pharmaceuticals (NYSE:BRL) acquired generic drug-maker Pliva - now it looks like that move is about to pay off.

Pliva gave Barr entry into the world of generic drugs. With billions of dollars in brand-name drugs set to lose patent protection in the next few years, Barr is well positioned for the future. Right now its sales are growing and margins are starting to expand.

Pliva Acquisition
The acquisition of Pliva brought Barr more than 1,200 products from 320 molecules. Pliva operates in Croatia, Czech Republic, Poland, Germany and Russia, all of which are important and fast growing markets. In addition, this acquisition brings to Barr several facilities in the region, especially when Barr is hoping to create low cost manufacturing operations. If Barr is successful in this goal, it will create an important competitive barrier for the company as it competes in the generic drug market.

The acquisition of Pliva required Barr to include a charge of $32.3 million for the six months ended June 30, 2007, relating to the increased value of the inventory it acquired. When combined with generally lower margins on sales of Pliva products, the overall gross margin decreased to 50.5% for the six months ending June 30, 2007, down from last year's margin of 66.4%. As Barr improves the operation of Pliva, margins should increase back to pre-acquisition levels at least. This will significantly contribute to cash generation and profit growth.

Generic Opportunities
According to medical-information company Skyscape, $10 billion worth of brand-name drugs will lose patent protection each year for the next several years. This should create a bonus for the generic manufacturers such as Barr Pharmaceuticals. The key for the generic firms is being able to be first to market with a generic form of a drug, as this gives the company six months of exclusive sales before other generic manufactures can sell a competing drug.

Barr has 31.4% of the generic oral contraceptive market in the U.S. This gives the company a strategic advantage that they are able to exploit. (To learn more on the FDA, drug patents and the drug pipeline, see our Biotech Industry Handbook.)

To continue to develop the generic market, Barr challenges the patents of existing drugs in court. When these challenges succeed, Barr is able to then sell a generic formulation of the drug on the market, with the six months of exclusivity. Of course, Barr isn't the only generic manufacturer to pursue this solution, as Teva (Nasdaq:TEVA) and Mylan Labs (NYSE:MYL) offer significant competition.

One of the strategic objectives of Barr is to create a low-cost manufacturing operation in the U.S. and Europe. The company is working to establish the facilities in Croatia, Czech Republic and Poland to be highly productive operations that can provide Barr with a key low cost manufacturing competitive advantage. Barr is also are restructuring its operations in the U.S. to enable the company to be the low-cost producer of generic drugs. If successful, this will enhance the company's ability to drive profit and generate cash in a highly competitive market.

Growing Sales
For the six months ending June 30, 2007, Barr's total revenue grew 81.1%, driven by sales of generics, which grew by 119%. The dramatic jump in sales for the most recent periods as compared to the same period ending June 30, 2006 is primarily due to the acquisition of Pliva.

The increase in generic pharmaceuticals was mainly due to $244.4 million of sales attributable to Pliva products, including sales of Azithromycin amounting to $22.1 million. Contraceptives grew by 6.1%, below last year's growth rate. The slower rate of growth in the contraceptives category is a worry as this has been a key driver of growth for Barr.

Sales from the rest of the world contributed $363.2 million, up from $2.9 million before the Pliva acquisition. Expect the company to grow these sales substantially as they introduce new products from the current Barr line as well as develop new products for these markets. In addition the company is integrating the product lines from Pliva, and it expects sales to improve as its sales force becomes more familiar with the products.

The Bottom Line

Barr Pharmaceuticals is about to see solid payback from its acquisition of Pliva as it becomes a more significant global player in both the generic and proprietary drug markets. Investors should see Barr expand both its top and bottom line over the next several years, as it expands the number of products it markets and improves its operating margins. Provided the company's operating strengths hold up, the stock would be quite attractive should the price dip down in the short-term.

For related reading, check out Measuring The Medicine Makers.

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