UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission file number 1-9114

MYLAN LABORATORIES INC.

(Exact name of registrant as specified in its charter)

1500 Corporate Drive
Canonsburg, Pennsylvania 15317
(Address of principal executive offices)
(Zip Code)

(724) 514-1800

(Registrant’s telephone number, including area code)

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 twelve 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 [X] NO [   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [X] NO [   ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

MYLAN LABORATORIES INC. AND SUBSIDIARIES

FORM 10-Q
For the Quarterly Period Ended
June 30, 2004

INDEX

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MYLAN LABORATORIES INC. AND SUBSIDIARIES

See Notes to Condensed Consolidated Financial Statements

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MYLAN LABORATORIES INC. AND SUBSIDIARIES

See Notes to Condensed Consolidated Financial Statements

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MYLAN LABORATORIES INC. AND SUBSIDIARIES

See Notes to Condensed Consolidated Financial Statements

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MYLAN LABORATORIES INC. AND SUBSIDIARIES

1.

General

     In the opinion of management, the accompanying unaudited condensed consolidated financial statements (interim financial statements) of Mylan Laboratories Inc. and subsidiaries (“Mylan” or “the Company”) were prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q; therefore, as permitted under these rules, certain footnotes and other financial information included in audited financial statements were condensed or omitted. The interim financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the interim results of operations, financial position and cash flows for the periods presented.

     These interim financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2004.

     Certain prior year amounts were reclassified to conform to the current year presentation. Such reclassifications had no impact on reported net earnings, earnings per share or shareholders’ equity.

     The interim results of operations for the three months ended June 30, 2004, and the interim cash flows for the three months ended June 30, 2004, are not necessarily indicative of the results to be expected for the full fiscal year or any other future period.

     On October 8, 2003, the Company effected a three-for-two split of its common stock. All share and per share amounts have been adjusted for all periods to reflect the stock split.

2.

Revenue Recognition and Accounts Receivable

     Revenue is recognized for product sales upon shipment when title and risk of loss transfer to the Company’s customers and when provisions for estimates, including discounts, rebates, price adjustments, returns, chargebacks and other promotional programs are reasonably determinable. No revisions were made to the methodology used in determining these provisions during the three months ended June 30, 2004. Accounts receivable are presented net of allowances relating to these provisions. Such allowances were $271,737 and $264,170 as of June 30, 2004, and March 31, 2004. Other current liabilities include $29,080 and $27,924 at June 30, 2004, and March 31, 2004, for certain rebates and other adjustments that are payable to indirect customers.

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3.

Balance Sheet Components

     Selected balance sheet components consist of the following:

4.

Earnings per Common Share

     Basic earnings per common share is computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed by dividing net earnings by the weighted average number of common shares outstanding during the period adjusted for the dilutive effect of stock options and restricted stock outstanding. The effect of dilutive stock options on the weighted average number of common shares outstanding was 6,856,000 and 5,908,000 for the three months ended June 30, 2004 and 2003.

     Options to purchase 244,300 shares of common stock were outstanding as of June 30, 2004, but were not included in the computation of diluted earnings per share for the three months then ended because to do so would have been antidilutive.

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5.

Intangible Assets

     Intangible assets consist of the following components:

     Amortization expense for the three months ended June 30, 2004, and 2003 was $4,550 and $4,685 and is expected to be $14,354, $13,995, $13,512, $13,182 and $12,176 for fiscal years 2006 through 2010, respectively.

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6.

Comprehensive Earnings

     Comprehensive earnings consist of the following:

     Accumulated other comprehensive earnings, as reflected on the balance sheet, is comprised solely of the net unrealized gain on marketable securities, net of deferred income taxes.

7.

Common Stock

     As of June 30, 2004 and March 31, 2004, there were 600,000,000 shares of common stock authorized with 303,823,934 and 303,553,121 shares issued. Treasury shares held as of both June 30, 2004 and March 31, 2004 were 35,129,643.

     In May 2002, the Board of Directors approved a Stock Repurchase Program to purchase up to 22,500,000 shares of the Company’s outstanding common stock. During the three months ended June 30, 2003, the Company purchased 2,519,000 shares for approximately $70,866. The Stock Repurchase Program was completed on November 18, 2003.

8.

Stock Option Plans

     On July 25, 2003, Mylan shareholders approved the Mylan Laboratories Inc. 2003 Long-Term Incentive Plan (“the 2003 Plan”). Under the 2003 Plan, 22,500,000 shares of common stock are reserved for issuance to key employees, consultants, independent contractors and non-employee directors of Mylan through a variety of incentive awards including: stock options, stock appreciation rights, restricted shares and units, performance awards, other stock based awards and short-term cash awards. Upon approval of the 2003 Plan, the Mylan Laboratories Inc. 1997 Incentive Stock Option Plan was frozen and no further grants of stock options will be made under that plan.

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     In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation and SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123, the Company accounts for stock option plans under the intrinsic-value-based method as defined in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation:

9.

Segment Reporting

     Segment net revenues represent revenues from unrelated third parties. For the Generic and Brand Segments, segment profit represents segment gross profit less direct research and development, selling and marketing and general and administrative expenses. Corporate/Other includes certain general and administrative expenses, such as legal expenditures, litigation settlements and non-operating income and expense.

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     The following table presents the results of operations for each of the Company’s operating segments:

10.

Contingencies

Legal Proceedings

(Dollar amounts in this Note 10 are as stated)

     While it is not possible to determine with any degree of certainty the ultimate outcome of the following legal proceedings, the Company believes that it has meritorious defenses with respect to the claims asserted against it and intends to vigorously defend its position. An adverse outcome in any of these proceedings could have a material adverse effect on the Company’s financial position and results of operations.

Omeprazole

     In fiscal 2001, Mylan Pharmaceuticals Inc. (“MPI”), a wholly-owned subsidiary of the Company, filed an Abbreviated New Drug Application (“ANDA”) seeking approval from the Food and Drug Administration (“FDA”) to manufacture, market and sell omeprazole delayed-release capsules, and made “Paragraph IV” certifications to several patents owned by AstraZeneca PLC (“AstraZeneca”) that were listed in the FDA’s “Orange Book”. On September 8, 2000, AstraZeneca filed suit against MPI and Mylan Laboratories Inc. (“Mylan Labs”) in the U.S. District Court for the Southern District of New York alleging infringement of several of AstraZeneca’s patents. MPI filed a motion for summary judgment as to all claims of infringement, and the summary judgment motion remains pending. On May 29, 2003, the FDA approved MPI’s ANDA for the 10 mg and 20 mg strengths of omeprazole delayed-release capsules and, on August 4, 2003, Mylan Labs announced that MPI had commenced the sale of omeprazole 10 mg and 20 mg delayed-release capsules. AstraZeneca then amended the pending lawsuit to assert claims against Mylan Labs and MPI, and filed a separate lawsuit against MPI’s supplier, Esteve Quimica S.A. (“Esteve”), for unspecified money damages and a finding of willful infringement which could result in treble damages, injunctive relief, attorneys’ fees, costs of litigation and such further relief as the court deems just and proper.

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     In November 2002, MPI filed suit in the U.S. District Court for the District of Delaware against Kremers Urban Development Company (“KUDCo”) and several other companies affiliated with Schwarz Pharma AG (the “Schwarz Pharma Group”) alleging KUDCo and the Schwarz Pharma Group are infringing U.S. patent 5,626,875 (the “‘875 Patent”) in connection with KUDCo’s manufacture and sale of omeprazole capsules in the U.S. KUDCo and the Schwarz Pharma Group asserted defenses and counterclaims in that action alleging the inventors listed on the ‘875 patent are not the actual inventors of the invention described therein, and further seeking money damages alleging the infringement action was not proper. On August 7, 2003, KUDCo and an individual filed a lawsuit against MPI and Esteve in the U.S. District Court for the District of Columbia asserting claims that were not asserted in the Delaware action.

     During the first quarter of fiscal 2005, a settlement was agreed to with respect to the cases involving MPI, KUDCo and the Schwarz Pharma Group, and these lawsuits have been dismissed, with prejudice. Under the settlement, MPI received a payment of $37,500,000, a portion of which represented the reimbursement of legal expenses.

Paclitaxel

     In June 2001, Tapestry Pharmaceuticals, Inc. (formerly NAPRO Biotherapeutics Inc.) (“Tapestry”) and Abbott Laboratories Inc. (“Abbott”) filed suit against Mylan Labs, MPI and UDL Laboratories Inc. (“UDL”), also a wholly-owned subsidiary of the Company, in the U.S. District Court for the Western District of Pennsylvania alleging that the manufacture, use and sale of MPI’s paclitaxel product, which MPI began selling in July 2001, infringes certain patents owned by Tapestry and allegedly licensed to Abbott. During the first quarter of fiscal 2005, all parties agreed to a settlement of this case and the lawsuit has been dismissed, with prejudice. MPI has agreed to pay $9,000,000 pursuant to the settlement.

Pricing and Medicaid Litigation and Investigations

     Mylan Labs, along with a number of other pharmaceutical manufacturers, was named as a defendant in four lawsuits filed in the state courts of California in which the plaintiffs allege the defendants unlawfully, unfairly and fraudulently manipulated the reported average wholesale price of various products, allegedly to increase third-party reimbursements to others for their products. All four of these cases have been voluntarily dismissed by the plaintiffs against Mylan Labs.

     On September 26, 2003, the Commonwealth of Massachusetts sued Mylan Labs and 12 other generic drug companies alleging unlawful manipulation of reimbursements under the Massachusetts Medicaid program. The lawsuit identifies three drug products sold by MPI and seeks equitable relief, attorneys’ fees, cost of litigation and monetary damages in unspecified sums.

     On June 26, 2003, UDL and MPI received requests from the U.S. House of Representatives Energy and Commerce Committee requesting information about certain drug products sold by UDL and MPI, in connection with the Committee’s investigation into pharmaceutical reimbursement and rebates under Medicaid. Several states’ Attorneys General (“AGs”) have also sent letters to MPI, UDL and Mylan Bertek Pharmaceuticals, Inc., a wholly-owned subsidiary, demanding

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that those companies retain documents relating to Medicaid reimbursement and rebate calculations pending the outcome of unspecified investigations by those AGs into such matters. In addition, in July 2004, Mylan Labs received subpoenas from the AGs of California and Florida in connection with civil investigations purportedly related to Mylan’s price reporting and marketing practices regarding various drugs.

Other Litigation

     The Company is involved in various other legal proceedings that are considered normal to its business. While it is not feasible to predict the ultimate outcome of such other proceedings at this time, the Company believes that the ultimate outcome of such other proceedings will not have a material adverse effect on its financial position or results of operations.

11.

Subsequent Event

(Dollar amounts in this Note 11 are as stated)

     On July 23, 2004, the Company entered into an Agreement and Plan of Merger (“Agreement”) to acquire King Pharmaceuticals, Inc. (“King”) in a stock-for-stock transaction. King is a branded pharmaceutical company headquartered in Bristol, Tennessee.

     Under the terms of the Agreement, each of King’s shareholders will receive .9 shares of Mylan common stock for every common share of King held upon closing. At July 22, 2004, King had approximately 241,400,000 shares of common stock issued and outstanding, which would translate into approximately 217,300,000 shares of Mylan’s common stock being issued to the King shareholders. In addition, at July 22, 2004, King had approximately 6,700,000 outstanding options, which would translate into approximately 6,000,000 shares of Mylan’s common stock being reserved upon closing for exercise of such options after the date the acquisition is consummated. The Agreement contains a provision whereby if the acquisition is not completed, either party may be obligated to pay a termination fee of $85,000,000 under certain limited circumstances.

     The acquisition, which was approved by the Boards of Directors of Mylan and King, is subject to regulatory approvals, customary closing conditions and approval by the respective companies’ shareholders. The transaction is anticipated to close by the end of calendar year 2004 and will be tax-free to shareholders of both companies.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

     The following discussion and analysis addresses material changes in the results of operations and financial condition of Mylan Laboratories Inc. and Subsidiaries (“the Company”, “Mylan” or “we”) for the periods presented. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements, the related Notes to 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 fiscal year ended March 31, 2004, and the unaudited interim Condensed Consolidated Financial Statements and related Notes included in Item 1 of this Report on Form 10-Q (“Form 10-Q”).

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     On October 8, 2003, the Company effected a three-for-two split of its common stock. All share and per share amounts have been adjusted for all periods to reflect the stock split.

     This Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2004, and the Company’s other SEC filings and public disclosures. This Form 10-Q may contain “forward-looking statements”. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include, without limitation, statements about the Company’s market opportunities, strategies, competition and expected activities and expenditures, and at times may be identified by the use of words such as “may”, “will”, “could”, “should”, “would”, “project”, “believe”, “anticipate”, “expect”, “plan”, “estimate”, “forecast”, “potential”, “intend”, “continue” and variations of these words or comparable words. Forward-looking statements inherently involve risks and uncertainties. Accordingly, actual results may differ materially from those expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the risks described below under “Risk Factors” in this Item 2. The Company undertakes no obligation to update any forward-looking statements for revisions or changes after the date of this Form 10-Q.

Overview

     Mylan’s financial results for the three months ended June 30, 2004, included net revenues of $339.0 million, net earnings of $82.0 million and earnings per diluted share of $0.30. Consolidated revenue growth of 2% over the same prior year period was driven primarily by new generic products and increased volume on existing generics.

     Generic Segment net revenue increased by 5% or $12.5 million to $267.7 million, while gross profit remained stable. Generic operating income decreased primarily as a result of additional spending in research and development. Brand Segment net revenues decreased by 6% or $4.9 million to $71.3 million primarily due to lower sales of Amnesteem®. Despite the decrease in sales, the Brand Segment realized increased gross profit, gross margins and operating income. The completion in the fourth quarter of fiscal 2004 of the Phase III clinical studies for nebivolol, a product for the treatment of hypertension, resulted in lower Brand Segment research and development expenses in the first quarter of fiscal 2005.

     On a consolidated basis, gross profit, gross margins and operating income remained stable. Included in the consolidated results for the first quarter of fiscal 2005 were net gains on legal settlements which amounted, net of tax, to approximately $0.06 per diluted share. Concurrent with these net gains, and included as a component of general and administrative expenses, were increased legal expenses relating to these and other pending lawsuits in which the Company is involved. Net gains on legal settlements of approximately $0.05 per diluted share were included in net earnings in the first quarter of the prior year. Excluding these items, diluted earnings per share were $0.24 in the first quarter of fiscal 2005 compared to $0.25 in the prior year.

     Late in the first quarter of fiscal 2005, Mylan’s levothyroxine sodium tablets were approved as the generic version of Abbott Laboratories’ Synthroid®. Mylan had previously marketed levothyroxine sodium tablets as

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the generic equivalent of Jerome Stevens Pharmaceuticals’ Unithroid®. Additionally, in July 2004, Mylan received approval from the Food and Drug Administration (“FDA”) to market levothyroxine sodium tablets as a bioequivalent and therapeutically equivalent (i.e., AB-rated) product to Jones Pharma Inc.’s Levoxyl® Tablets. Beginning in the second quarter of fiscal 2005, Mylan will be the first company to offer levothyroxine sodium tablets as AB-rated to Levoxyl, Unithroid and Synthroid. Also during the second quarter, Mylan plans to launch Apokyn™, which has been approved for the acute, intermittent treatment of hypomobility, “off” episodes associated with advanced Parkinson’s disease. Apokyn has been studied as an adjunct to other medications.

     On July 23, 2004, the Company entered into an Agreement and Plan of Merger (“Agreement”) to acquire King Pharmaceuticals, Inc. (“King”) in a stock-for-stock transaction. King is a branded pharmaceutical company headquartered in Bristol, Tennessee. The acquisition of King, which reported net revenues for the year ended December 31, 2003, in excess of $1.5 billion, unites Mylan’s core strengths in manufacturing, science, compliance and intellectual property management, with King’s well-developed sales and marketing infrastructure and portfolio of branded products.

     Under the terms of the Agreement, each of King’s shareholders will receive. 9 shares of Mylan common stock for every common share of King held upon closing. At July 22, 2004, King had approximately 241.4 million shares of common stock issued and outstanding, which would translate into approximately 217.3 million shares of Mylan’s common stock being issued to the King shareholders. In addition, at July 22, 2004, King had approximately 6.7 million outstanding options, which would translate into approximately 6.0 million shares of Mylan’s common stock being reserved upon closing for exercise of such options after the date the acquisition is consummated.

     The acquisition, which was approved by the Boards of Directors of Mylan and King, is subject to regulatory approvals, customary closing conditions and approval by the respective companies’ shareholders. The transaction is anticipated to close by the end of calendar year 2004 and will be tax-free to shareholders of both companies.

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Results of Operations

     The following table illustrates the financial results for the consolidated company and by operating segment:

Segment Results (in thousands)