Barred by Debt

Fortunately for investors in Barr Labs (NYSE: BRL), the fourth quarter of last year will be the last in which year-over-year comparisons of revenue are difficult because of its acquisition of Pliva in 2006.

While the top lines may not be comparable, the bottom lines certainly are, and the picture continues to look bleak. Adjusted earnings per share slipped to $0.79 in the fourth quarter, compared to $0.83 in the year-ago quarter.

The problem is that the Stock Advisor pick took on a lot of debt to finance the Pliva acquisition, and while it's paid back a fourth of its loan so far, the company still paid more than $35 million in interest this quarter. If you compare that to Barr's $32 million in net income for the quarter, you can really see the potential for the company if it weren’t so debt-laden. If the capital markets ever calm down, Barr should be able to refinance some or all of the remaining loan into long-term loans with lower interest rates.

The good news is that, as with Mylan's (NYSE: MYL) expansion, Barr's presence in more countries allows for the in-house production of products that previously wouldn't have had high enough sales to justify the R&D and legal investment. In fact, the company is expecting to file 40 Abbreviated New Drug Applications this year, many of which are on drugs that Barr claims have invalid patents.

The year 2008 looks a little better for Barr. It shares the exclusive rights to the generic version of Merck's (NYSE: MRK) blockbuster osteoporosis drug Fosamax with Teva Pharmaceuticals (Nasdaq: TEVA). It also has a few significant patent challenges that could result in revenue boosts over this year and beyond, if it's able to win the lawsuits and launch generic versions of products such as oral contraceptives Yasmin and Tri-cyclen Lo. On the other side of the patent lawsuits, it also has the potential to make money from royalties as it defends its patent on Seasonale from infringers Watson Pharmaceuticals (NYSE: WPI) and Novartis (NYSE: NVS).

Judging from Barr's anemic stock price last year, investors are clearly disappointed in how long it's taking to see the benefits from the Pliva acquisition. But I think patient investors should get what they've been waiting for in the coming years.