Summary of BARR PHARMACEUTICALS INC

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis addresses material changes in the results of operations and financial condition of Barr Pharmaceuticals, Inc. and subsidiaries for the periods presented. This discussion and analysis should be read in conjunction with the consolidated financial statements, the related notes to the consolidated financial statements and Management's Discussion and Analysis of Results of Operations and Financial Condition included in the Company's Annual Report on Form 10-K for the year ended December 31, 2007, and the unaudited interim condensed consolidated financial statements and related notes included in Item 1 of this report on Form 10-Q. 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.
Merger Agreement with Teva Pharmaceutical Industries On July 17, 2008, the Company entered into a definitive Agreement and Plan of Merger (the "Merger Agreement") with Teva Pharmaceutical Industries Ltd. ("Teva"), pursuant to which, at closing, the Company will become a wholly-owned subsidiary of Teva.
Pursuant to the terms of the Merger Agreement and subject to the conditions thereof, stockholders of the Company will be entitled to receive $39.90 in cash and 0.6272 ordinary shares of Teva for each share of the Company's common stock. The Teva shares will trade in the United States in the form of American Depositary Shares, evidenced by American Depositary Receipts. Also, each outstanding stock option and stock appreciation right relating to the Company's common stock (other than those stock options held by non-employee directors) will be converted into an amount in cash per share subject to such stock option or stock appreciation right equal to the excess of $66.50 over the exercise price per share.
The Merger Agreement may be terminated under certain circumstances, including if the Company's Board of Directors determines to accept an unsolicited superior proposal prior to approval of the merger by the Company's stockholders, provided that Teva has first been given three business day's prior notice, and the opportunity to negotiate in good faith to make such adjustments to the terms and conditions of the Merger Agreement such that the new proposal would no longer constitute a superior proposal. If the Merger Agreement is terminated by the Company under certain circumstances, the Company will be required to pay Teva a termination fee of $200 million.
Consummation of the merger is subject to various other conditions, including
(i) approval of the merger by the Company's stockholders, (ii) expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iii) receipt of all required approvals by the Canada Competition Bureau and the European Commission applicable to the merger, (iv) receipt of all required approvals under any antitrust laws applicable to the merger in certain other jurisdictions where failure to obtain such approvals would reasonably be expected to have a material adverse effect on the Company and its subsidiaries, taken as a whole, or an effect of similar magnitude (in terms of absolute effect and not proportional) on Teva and its subsidiaries and (v) other customary closing conditions.
Supply and Licensing Agreement with Bayer Schering Pharma, AG On June 24, 2008, we entered into supply and licensing agreements with Bayer relating to Bayer's Yasmin® and Yaz® products. Under the terms of these agreements, Bayer will supply us with the generic version of these products for launch prior to the expiration of the patents protecting these products and we will have responsibility to market, sell and distribute the products in the U.S. under the Barr Laboratories label. On June 26, 2008, we launched Ocella®, our generic version of Yasmin. We expect to launch our generic version of Yaz on July 1, 2011, or earlier in certain circumstances. In return, the Company will pay Bayer defined sales based royalties related to these two products.

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Agreement with Allergan, Inc.
On May 5, 2008, we entered into an agreement with a subsidiary of Allergan, Inc. related to Allergan's Sanctura® product that PLIVA divested in 2005 to Esprit Pharma, which has since been acquired by Allergan. Under the terms of this agreement, Allergan paid us $53.0 million, extinguishing any future payment obligations related to Sanctura. This $53.0 million payment was recorded in alliance and development revenue during the three months ended June 30, 2008 and will not be repeated in future periods.
Business Activities
During the three months ended June 30, 2008, sales of our generic products were $556.9 million, accounting for 83% of our total product sales. North America accounted for $340.1 million, or 61%, of our generic product sales while the rest of world ("ROW") accounted for $216.8 million, or 39%. Sales of our proprietary products were $118.0 million, accounting for 17% of our total product sales. In addition, we recorded $93.0 million of alliance and development revenues during the quarter and $10.7 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 the six months ended June 30, 2008, sales of our generic products were $1,025.8 million, accounting for 83% of our total product sales. North America accounted for $601.3 million of our generic product sales while the ROW accounted for $424.5 million. Sales of our proprietary products were $213.7 million, accounting for 17% of our total product sales. In addition, we recorded $125.3 million of alliance and development revenues during the six months and $21.8 million of other revenues.
During the six months ended June 30, 2008, we generated $169.0 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.
We recorded earnings of $0.73 per diluted share for our first half of 2008. We expect our earnings per share in the second half of 2008 to be higher than in the first half. Further, we expect that our fourth quarter earnings will be significantly higher than our third quarter earnings due to several reasons including (a) higher sales of Ocella (b) expected higher sales of Azithromycin due to the seasonality of the product (c) the expected launch of a new generic product in our fourth quarter, and (d) a lower tax rate in the fourth quarter as compared to our third quarter, resulting from our expectation that the U.S. research and development tax credit will be re-enacted in the fourth quarter and applied retroactively to January 1, 2008.
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 a portion of 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 has led to volatility of our reported net earnings in prior periods and may lead to further volatility in the future. Despite the potential for increased earnings volatility, we still use such instruments to offset the economic risk from foreign exchange rate fluctuations.
For purposes of discussing results on a comparable basis below, we will refer to all total increases and decreases in US dollars, and often quantify the amount of those changes that are due to changes in foreign currency exchange rate fluctuations.
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.

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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 355 sales representatives that promote directly to physicians six of our products - SEASONIQUE®, Enjuvia™, Mircette®, ParaGard®, Plan B™ and Amniscreen - and two products under our co-promotion agreement with Abbott 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®, which was the first and largest selling extended-cycle oral contraceptive in the U.S., and SEASONIQUE, also an extended-cycle oral contraceptive, and through product acquisitions, including ParaGard, the only non-drug loaded intrauterine contraceptive ("IUC") currently on the market in the U.S., in November 2005; Mircette, a well established 28-day oral contraceptive, in December 2005; Plan B, an emergency oral contraceptive product in 2004; 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.

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   Results of Operations
Comparison of the Three and Six Months Ended June 30, 2008 and June 30, 2007
   The following table sets forth revenue data for the three and six months
ended June 30, 2008 and 2007 (dollars in millions):

                                               Three Months Ended                                Six Months Ended
                                                    June 30,                                         June 30,
                                                                 Change                                             Change
                                    2008        2007          $          %          2008          2007           $          %
Product sales:
Generic products:
Oral contraceptives                $ 155.4     $ 116.0     $  39.4        34%        $247.9     $   229.2     $  18.7         8%
Other generics                       401.5       367.6        33.9         9%         777.9         726.4        51.5         7%

Total generic products               556.9       483.6        73.3        15%       1,025.8         955.6        70.2         7%
Proprietary products                 118.0       102.3        15.7        15%         213.7         191.3        22.4        12%

Total product sales                  674.9       585.9        89.0        15%       1,239.5       1,146.9        92.6         8%
Alliance and development revenue      93.0        36.4        56.6       155%         125.3          61.5        63.8       104%
Other revenue                         10.7        11.5        (0.8 )      -7%          21.8          22.0        (0.2 )      -1%

Total revenues                     $ 778.6     $ 633.8     $ 144.8        23%     $ 1,386.6     $ 1,230.4     $ 156.2        13%

Product Sales
Generic Oral Contraceptives
During the three months ended June 30, 2008, sales of our generic oral contraceptives ("Generic OCs") were $155.4 million, up $39.4 million, or 34% as compared to the prior year period. The year-over-year increase is primarily due to $45.0 million of sales from the June 2008 launch of Ocella, our generic version of Bayer's Yasmin. This increase was partially offset by lower sales across most of our other Generic OCs due to lower demand resulting from a change in our customer mix, as well as lower sales on certain products including Apri which was $3.6 million lower and Sprintec, which was $3.3 million lower compared to the prior year.
During the six months ended June 30, 2008, sales of our Generic OCs were $247.9 million, up $18.7 million, or 8% as compared to the prior year period. The year over year increase is due to the launch of Ocella, as discussed above. This increase more than offset declines in several other Generic OC products due to lower demand due to the change in customer mix and lower pricing. These factors resulted in lower sales of several products in our portfolio including Aviane of $8.5 million, Apri of $6.8 million and Sprintec of $6.7 million, in addition to an overall net decline on certain other products.
We continue to expect sales in calendar 2008 to exceed 2007 levels principally due to contributions from Ocella. We expect sales of Ocella to more than offset continued lower sales of across most of our other Generic OC products due to lower market share and lower pricing as well as the expected decline in sales of Kariva, the generic version of our proprietary Mircette product, when the patent on Mircette expires in October 2008.
Other Generic Products
During the three months ended June 30, 2008, sales of our other generic products ("Other Generics") were $401.5 million, up from $367.6 million in the prior year period, an increase of $33.9 million, reflecting higher sales in the U.S. and higher sales in our European and ROW markets. The increase in our European and ROW markets is primarily attributable to a $31.5 million favorable impact from changes in foreign currency exchange rates. In addition to exchange rate fluctuations, higher sales in our Central and Eastern Europe markets, including Russia, more than offset lower sales in Croatia and Poland.
During the current period, we also recorded $6.2 million of higher U.S. sales of Vitamin D related to higher demand and also recorded $5.6 million in sales of Alendronate in the U.S., which we launched in February 2008, and sales of $6.9 million from our September 2007 acquisition of ORCA in Germany. Partially offsetting these increases were lower U.S. sales of Ondansetron of $6.1 million and net decreases across several of our Other Generics due to declines in price and/or volume.

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During the six months ended June 30, 2008, sales of Other Generics were $777.9 million, up from $726.4 million in the prior year period, an increase of $51.5 million. Changes in foreign currency exchange rates accounted for $59.4 million of the increase. Higher sales of Fentanyl of $10.7 million due to higher volume, and contributions of $23.6 million from the launch of Alendronate in 2008 and from our acquisition of ORCA. These increases were partially offset by lower U.S. sales of Ondansetron of $16.0 million due to lower volume and lower prices due to new competition, and lower sales across several of our Other Generics due to declines in price and/or volume.
We expect sales of our Other Generics for 2008 to increase significantly compared to 2007 in large part due to the current weakness in the U.S. Dollar compared to its value in 2007.
Proprietary Products
During the three months ended June 30, 2008, sales of our proprietary products were $118.0 million, an increase of $15.7 million, or 15%, as compared to the prior year period. This increase was partially due to a $6.4 million increase in sales of Diamox benefiting from higher pricing and a year-over-year increase in unit sales due to supply issues in the prior year. In addition, we recorded a $5.5 million increase in sales of SEASONIQUE and a $3.9 million increase in sales of ParaGard, both due to an increase in demand sales and pricing. These increases combined with other increases of our proprietary products more than offset a $5.5 million decrease in sales of SEASONALE.
During the six months ended June 30, 2008, sales of our proprietary products were $213.7 million, an increase of $22.4 million, or 12%, as compared to the prior year period. This increase was primarily due to a $17.1 million increase in sales of SEASONIQUE due to higher demand, an $8.9 million increase in sales of Diamox, a $7.3 million increase in sales of ParaGard and a $5.9 million increase in sales of Plan B OTC/Rx, all due to higher prices and volume. These increases more than offset a $12.3 million decrease in sales of SEASONALE due to the impact from generic competition and a $4.6 million decrease in sales of Adderall IR due to lower volume.
We anticipate sales growth in our proprietary segment during the second half of 2008 reflecting an expected acceleration in demand for Plan B and SEASONIQUE along with continued higher demand for ParaGard in the third quarter.
Alliance and Development Revenue
During the three months ended June 30, 2008, we recorded $93.0 million of alliance and development revenue, up from $36.4 million in the prior year period. This $56.6 million increase was principally due to a $53.0 million payment from Allergan, as discussed above. In addition, revenues earned under our license and development agreement with Shire increased by $10.4 million as compared to the same period in the prior year, reflecting reimbursements of research and development costs we incurred. Offsetting these increases was a decrease of $6.9 million in revenues from our profit-sharing arrangement with Teva on generic Allegra caused by declining sales of Allegra.
During the six months ended June 30, 2008, we recorded $125.3 million of alliance and development revenue, up from $61.5 million in the prior year period. This increase of $63.8 million, was principally due to the $53.0 million one-time payment from Allergan discussed above. In addition, revenues earned under our license and development agreement with Shire increased by $12.4 million reflecting higher reimbursements of research and development costs we incurred.
Other Revenue
We recorded $10.7 million and $11.5 million of other revenue during the three months ended June 30, 2008 and 2007, respectively, and $21.8 million and $22.0 million of other revenue during the six months ended June 30, 2008 and 2007, respectively. This revenue is primarily attributable to non-core operations, which includes our diagnostics, disinfectants, dialysis and infusions business.

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   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 three and six months ended June 30, 2008 and 2007 (dollars in millions):

                              Three Months Ended June 30,                   Six Months Ended June 30,
                                                     Change                                      Change
                          2008        2007         $         %        2008        2007         $         %
 Generic products       $  307.3     $ 246.7     $ 60.6       25 %   $ 543.7     $ 509.8     $ 33.9        7 %

 Gross margin               44.8 %      49.0 %                          47.0 %      46.7 %

 Proprietary products   $   36.2     $  22.9     $ 13.3       58 %   $  66.7     $  52.8     $ 13.9       26 %

 Gross margin               69.3 %      77.6 %                          68.8 %      72.4 %

 Other revenue          $    9.4     $   5.4     $  4.0       74 %   $  17.9     $  11.7     $  6.2       53 %

 Gross margin               12.1 %      53.0 %                          17.9 %      46.8 %

 Total cost of sales    $  352.9     $ 275.0     $ 77.9       28 %   $ 628.3     $ 574.3     $ 54.0        9 %

 Gross margin               48.5 %      54.0 %                          50.2 %      50.9 %

Cost of sales components include the following:
• our manufacturing and packaging costs for products we manufacture;

• amortization expense;

• 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;

• net realizable value adjustments to our inventories; and

• stock-based compensation expense relating to employees within certain departments that we allocate to cost of sales.

Generics: Generic segment cost of sales for the three months ended June 30, 2008 were $60.6 million higher than in the prior period due to increases in unit sales and foreign currency rates. During the three months ended June 30, 2008, our generics gross margins decreased from 49.0% to 44.8% reflecting increased sales of lower margin products including Ocella, one of our highest selling generic products, which currently carries a margin well below the margins we earn on our other Generic OC products. Our margins were also lower compared to the prior year period due to lower absorption of fixed costs as production levels were lower than in the prior year period. In addition, our gross margins were negatively impacted by the weakness of the U.S. Dollar compared to its value in the prior year.
Generic segment cost of sales for the six months ended June 30, 2008 were $33.9 million higher than the prior period due to increases in unit sales and foreign currency rates (net of an inventory step-up charge of $32.2 million recorded in the prior period for the sale of inventory obtained in the PLIVA acquisition). During the six months ended June 30, 2008, our generics gross margins increased slightly to 47.0% from 46.7% compared to the prior year period. Our gross margins during the current period were negatively impacted by the expected lower margin earned from Ocella, as discussed above, and higher production related costs including higher inventory provisions and lower absorption of fixed costs, discussed above. In addition, gross margins were negatively impacted by the weakness of the U.S. Dollar compared to its value in the prior year.
Proprietary: Proprietary segment cost of sales for the three months ended June 30, 2008 were $13.3 million higher than in the prior period due to increases in unit sales. During the three months ended June 30, 2008, our

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proprietary gross margins decreased from 77.6% to 69.3% compared to the prior year period, resulting from higher amortization costs in total and as a percentage of proprietary product sales during the three months ended June 30, 2008, and a slightly unfavorable mix of lower margin products during the current quarter.
Proprietary segment cost of sales for the six months ended June 30, 2008 were $13.9 million higher than in the prior period due to increases in unit sales. During the six months ended June 30, 2008, our proprietary products margins decreased from 72.4% to 68.8% compared to the prior year period, resulting from higher product amortization expense as noted above and a similar unfavorable mix of lower margin products during the six month period.
During the period ended June 30, 2008, all remaining profit-sharing and royalty obligations due to third parties for Cenestin, Diamox, Ziac, and Zebeta were achieved based on the applicable profit milestones. As a result, the gross margins from these products in future periods will be higher than margins earned historically. . . .