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Mylan Inc. (NASDAQ:MYL)

Q3 2008 Earnings Call

October 30, 2008 10:00 am ET

Executives

Robert J. Coury - Vice Chairman and CEO

Heather Bresch - EVP and COO

Ed Borkowski - EVP and CFO

Dan Crookshank - VP, IR

Analysts

Greg Gilbert - Merrill Lynch

Ken Cacciatore - Cowen and Company

Rich Silver - Barclays Capital

Frank Pinkerton - Banc of America

Randall Stanicky - Goldman Sachs

Elliot Wilbur - Needham & Company

Marc Goodman - Credit Suisse

Ronnie Goll - Bernstein

David Moskowitz - Caris & Company

Operator

We are about to begin Mylan's third quarter fiscal 2008 earnings Call. As a reminder today's conference is being recorded. For opening remarks and introductions I would like to turn the conference call over to Dan Crookshank, Mylan's Vice President of Global Investor Relations.

Dan Crookshank

Welcome to Mylan's 2008 third quarter earnings conference call. As Cynthia mentioned, I'm Dan Crookshank, Mylan's Vice President of Global Investor Relations. Joining me for the call today are Mylan's Vice Chairman and CEO, Robert J. Coury; our Chief Operating Officer, Heather Bresch; and Chief Financial Officer, Ed Borkowski.

During today’s call including in Q&A we will be making forward-looking statements including those related to our anticipated business levels, our future earnings, our planned activities and other expectations for future periods. Note that these statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Because these statements are forward-looking, they inherently involve risk and uncertainties and accordingly our actual results may differ materially from those expressed or implied by such forward-looking statements.

Factors that could cause or contribute to such differences include, but are not limited to: the risk factors set forth in our quarterly report on Form 10-Q for the quarter ended June 30, 2008 and in our other Securities and Exchange Commission filings. You can access our Form 10-Q and other SEC filings through the SEC website at www.sec.gov and we encourage you to do so.

In addition, during the conference call we will be referring to certain results and projections of Mylan that are non-GAAP measures. It should be noted that the non-GAAP measures, such as adjusted diluted EPS, should be used only as a supplement to, not as a substitute for, or as a superior measure to, measures of financial performance prepared in accordance with GAAP.

Before I turn the call over to Robert, let me also remind you that we are conducting a live webcast of this mornings call and that the webcast and related presentation slides can be accessed on our website at www.mylan.com. In addition the webcast will be available for replay on our website for up to seven days following the conclusion of today's call.

Please note the material in the call with the exception of the participant questions is the property of Mylan and cannot be recorded or rebroadcast without Mylan's express written permission.

Now I'd like to turn it over to Robert.

Robert Coury

I thank all of you on the call for taking the time to join us this morning. We also would like to welcome and thank all of our employees around the world who continue to make such significant contributions to the exceptional results we are reporting here today.

As we announced earlier this morning Mylan report adjusted EPS of $0.23 per share for the third quarter. Once again this is another quarter in which we have exceeded expectations and raised full-year guidance. These results were driven by a very strong overall operational performance and solid business fundamentals. I specially want to mention the very positive contribution of Dey made to this quarter's results.

Since we rebased this business in February, Dey continues to exceed our every expectation. As we noted previously due to the seasonality of EpiPen, we have anticipated and are forecasting that Dey will show an unfavorable swing from Q3 to Q4 of approximately $0.06 to $0.08 per share, which is the principal driver to the sequential change.

For the year, however, we expect Dey will exceed our previous expectation of $0.01 to $0.02 per share and will now contribute approximately $0.07 to $0.08 per share for the year.

As we enter 2009, with the continued ramp-up of performance the launch of Depakote ER, and even factoring in additional competition on Fentanyl, we believe we are poised to enter the New Year with significant earnings momentum. In addition to the increased guidance for 2008, which we raised to $0.64 to $0.67 per share, I'm pleased to reaffirm our previously stated forecast to 2009 and 10 respectively despite the currency head winds.

Returning to our third quarter performance, I want to personally thank our operating managers around the world and particularly the two members of our senior management team who are joining me here today. Heather and Ed both of whom continue to demonstrate strong leadership while delivering solid results will discuss in more detail the operating and financial highlights for the quarter.

Before they do however, I would like to comment briefly on the macroeconomic environment. I trust all of you by now have had a good understanding of the strength of our balance sheet, our liquidity position, and our ability to deal through the current capital crunch, especially when considering that Mylan has no need to tap the capital markets in the foreseeable future. As you know we completed a transaction earlier this month that, while not required, only further cushion our balance sheet.

Ed, will provide additional details regarding our capital structure in just a few minutes. Ultimately we expect our strong operating fundamentals and results to be fully reflected in our share price, but as you are aware, this is an unprecedented time in the equity markets, where we see securities being sold indiscriminately.

In the current environment, a company's fundamentals aren't necessarily part of the investment equation, but the equity markets eventually will recover and once they do the markets will again focus and rely on the underlying fundamentals that drive a company's earnings potential. When that occurs we believe Mylan's shareholders will become major beneficiaries.

Today we believe we are well on our way of reaching the true underlying base earnings potential this newly combined platform will eventually yield. I look forward to answering your questions shortly, but for now I will turn the call over to our Chief Operating Officer, Heather Bresch; who will take you through the operational review of the business.

Heather Bresch

Thank you, Robert and good morning everyone. As Robert mentioned we had an outstanding quarter. Our results reflect strength of Mylan's global platform and clearly demonstrate our ability to successfully integrate our businesses while at the same time achieving a high level of operating excellence. This morning, I want to briefly update you on our integration and synergy activities then provide some additional detail about our operating results.

With regard to integration and synergies we continue to meet our objectives. We remain on pace to achieve our 2008 synergy goal of $100 million. We are also on track to meet our target of $300 million by the end of 2010 and we continue to find additional opportunities as we go.

As I have stated previously most of our work needs to be completed by the first quarter of '09 in order to have enough regulatory time for approval, and we are on track if not slightly ahead of that goal. We continue to increase our operational effectiveness by capitalizing on efficiencies in virtually every aspect of our business, and we're also continuing to find ways to reduce our cost of goods by leveraging global scale for HCI and finished dosage forms.

Now I'll turn to a review of our operating activity for the quarter. Before commenting specifically on each region and division let me begin with a broader observation. Our operating results clearly reflect the benefits of running a global platform and maintaining a truly robust product portfolio.

We are not relying on any one market or on a narrow band of products, which is inline with the expectations we had set when we created the new Mylan. Our scale and efficiencies enable us to compensate for regional seasonality issues, competitive pressures, or specific market variables. As a result, we are seeing more growth opportunities while achieving greater operating and earnings stability, again exactly what we envisioned.

Now let me comment on our individual operations with North America first. We're extremely pleased with the third quarter results for the region, which once again exceeded our expectations. The fundamentals of the business and our current product mix remain very strong. Revenue continues to improve, principally due to new product introductions during the course of the year and the broad diversity of our overall portfolio.

Fentanyl also contributed significantly to earnings, as we have noted our guidance regarding this product has been conservative and had incorporated the potential for competition in the second half of '08 and in calendar year '09. Its worth noting that we are still the only manufacturer selling all five strengths of Fentanyl and the only manufacturer never to have had a recall, supply, or back order issue regardless of the market landscape.

On the regulatory front, we are on track to submit a total of approximately 70 ANDAs by the end of the year. Currently we have 112 ANDAs pending FDA approval, representing nearly $75 billion in branded sales, and of those 23 are potential first to file opportunities representing more than $13 billion in branded sales.

Finally, I would remind you that we will be monetizing Levetiracetam this quarter and launching Dava Pro's ER no later than January 1st. We have high expectations for these products.

Now to EMEA. Even with challenging market conditions in certain European markets, the EMEA business was strong and results continue to be in line with our '08 guidance. Market share continues to improve in a number of countries, including France, Germany, and Italy. EMEA, also gained from the first full quarter of results from our central eastern European operations. As I have noted, while we are beginning from a relatively small base, we certainly are well positioned for profitable revenue growth in the future.

These favorable results were offset in part by pricing pressure in the UK, Portugal, and the Netherlands. Going forward we expect to see additional generics volume growth in EMEA as patents expire, populations continue to age and governments seek relief from mounting healthcare deficits and rising costs. I also would note that our rebranding activities in EMEA are progressing very well.

In Asia Pacific, Australia and Japan continue to experience the effects of industry changes, namely the price cuts enacted by the pharmaceutical benefit scheme in Australia and incentives for generic utilization in Japan. We have adapted Alphapharm’s business in Australia to reflect the new market environment.

Discounts were higher than anticipated, but we have adjusted and right sized the business accordingly. We expect the market environment to improve as incentives introduced in August increased utilization begin to pull through. The Japanese market for generics continues to expand as a result of the government's pro-generic promotion.

Mylan Seiyaku is capturing new opportunities in its market by recruiting 100 new sales representatives, opening several new sales offices and commissioning a new distribution center which enables us to complete next-day deliveries to almost anywhere in the country.

As Robert noted, our specialty business Dey is performing extremely well. Dey's EpiPen continues to perform and is an important product in our portfolio. As of the end of September, EpiPen has a 97% market share. During the quarter, it benefited from strong seasonal demand in the US and in expanding marketplace. Performance revenues were strong doubling from the prior quarter and exceeded our revised forecast for a second straight quarter.

Turning to Matrix, we continue to be pleased with the progress we're making on API vertical integration. This remains one of the biggest drivers of cost reduction in the company. Third-party API sales also were solid and met our expectations. Matrix ARV, API, and finished dosage form franchise continues to expand and current products are performing well. For example, Tenofovir remains the only generic in the markets outside of the United States and sales volume is expected to grow.

Before I turn the call over to Ed, I want to reiterate how pleased we are with our results. Despite turbulent economic challenges, we continue to demonstrate the ability to meet and exceed our operational commitment and adapt effectively to changing market dynamics. I believe this will serve us well during the remainder of the year as our new guidance suggests.

Clearly, we are having a very solid year and are building a lot of momentum heading into '09. We are absolutely committed to becoming the leanest and most efficient generics company in the world and I believe we are well on our way to achieving that goal.

Now, I’d like to turn the call over to Ed.

Ed Borkowski

I will now walk you through the details and drivers of our third quarter financial results, update you on the status of our capital structure and liquidity position, and provide a complete picture of our updated full year 2008 financial guidance.

In some instances, during my review, I will refer to specific financial metrics that have been prepared on an adjusted basis, the basis upon which we’ve developed all elements of our financial guidance. This is consistent with our prior communications and is a more meaningful depiction of our results when evaluating Mylan’s performance.

As a reminder, the adjusted basis amounts net of tax exclude the following items: purchase accounting related charges including amortization of purchase intangible assets and the inventory step-up. Integration related and other non-recurring expenses, the recognition of previously deferred revenues related to the sale of our rights to Bystolic and non-cash interest expense related to the amortization of a bond discount on the cash convertible notes we issued last month.

We’ve also provided to you in this morning's earnings release a reconciliation of GAAP net earnings and diluted EPS to the corresponding non-GAAP adjusted basis amounts. I would like to remind you the results of the Dey business for this quarter and the full year are fully incorporated into our 2008 adjusted basis actual and projected financial results.

Let me begin by taking you through several of our headlined third quarter financial metrics. First, adjusted total company revenues totaled $1.2 billion. This amount which excludes $455 million of previously deferred revenues related to the sale of our rights to Bystolic was slightly higher than comparable second quarter revenues of $1.19 billion. Note that Fentanyl represented 6.3% of adjusted total company revenues absent the negative effect of the strengthening dollar adjusted total company revenues would have increased by an additional percentage point.

Second, adjusted diluted EPS totaled $0.23. This better than expected performance was fueled by our North America generics business and by Dey which contributed $28 million of segment profitability. The effect of the strengthening US dollar on the sequential improvement in adjusted diluted EPS was not significant.

Third, driven by the strong quarterly earnings, operating cash flow for the quarter improved significant from quarter two coming in at $87 million.

Finally, an indicative of the strong operational performance delivered by our businesses, adjusted EBITDA totaled $277 million for the quarter and now stands at $730 million for the first nine months of the year. Note that we have included a detailed reconciliation from GAAP net earnings to adjusted EBITDA in today's earnings release.

I’d now like to comment on our gross margin and other operating expense trends. Our measurement of these trends excludes integration and other non-recurring expenses. For the third quarter, these expenses totaled $27 million of which $3 million are included in cost of sales, $20 million in SG&A, and $4 million in R&D. For the nine months, $17 million, $66 million, and $8 million of the $91 million in total year-to-date integration and other non-recurring expenses are included in cost of sales SG&A and R&D respectively.

So looking first at gross margins; adjusted gross margin for the third quarter improved to 46.9% from 44% in the second quarter excluding the impact of the Bystolic revenues, the $105 million of purchase accounting related amortization and the $3 million of integration and other non-recurring expenses. For the first nine months of the years our adjusted gross margin was 45%, and we expect our full year adjusted gross margin to approximate 45% to 46%.

Adjusted SG&A expense as a percent of adjusted revenues was 21.2% in the third quarter and 20.8% for the first nine months of the year excluding the integration and other nonrecurring costs. We now expect the comparable full year results to be in the range of 21 to 22%.

Adjusted R&D expense as a percent of adjusted revenues was 5.9% in the third quarter and 6.7% for the first nine months of the year excluding the integration and other nonrecurring costs. We now expect the comparable full year results to be about 6.5% to 7%.

Now let me turn to our capital structure and liquidity position. Due to what we believe to be unwarranted concern regarding Mylan's ability to debt our debt obligations, to fund our other capital requirements and meet our credit agreement covenants, I wanted to spend a few minutes here this morning outlining the facts beginning with a recap of several recent capital structure related actions.

These actions only serve to further strengthen the capital structure and liquidity position which I firmly believe was already on very solid ground. I would also note that we considered an evaluated these actions well before the current credit crisis began.

First, in early September, we issued $575 million in cash convertible notes which are due in 2015 and pay interest at a fixed cash coupon rate of 3.75%. This action was aimed at further laddering out the maturities of our debt beyond the 2012 to 2014 period as well as reducing and fixing another increment of our cash borrowing cost.

The $463 million in net proceeds from the notes were used to immediately pay off all 300 million of our outstanding borrowings under our senior secured revolving credit facility while the remaining proceeds are expected to be used during the fourth quarter to pay down our US dollar bank term loans.

In addition, this transaction enabled to us to reduce the level of debt subject to our leverage ratio covenants under our secured debt agreement as the borrowings under the revolver were included in the covenant calculations while the convertible debt which is unsecured is not. Our outstanding borrowings subject to the credit agreement leverage ratio covenant totaled $4.1 billion at September 30th.

The second action which we took earlier this month was to complete $500 million in interest rate swaps to fix the interest rate on an additional portion of our term loan borrowings at an all-in rate of 6.03%. With this transaction aimed at opportunistically reducing our exposure to floating interest rates, we have now executed $2 billion of interest rate swaps at a weighted average rate of 6.55%; $500 million of which expire in March 2010 with the remainder locked in until the end of 2010. These actions are consistent with our continued proactive and systematic approach to managing and optimizing all elements of our capital structure.

Now I’d like to address the area of debt compliance. Specifically, our senior secured leverage ratio which places a ceiling on the ratio of our total senior secured debt to our covenant basis last 12-month adjusted EBITDA.

First, as I stated a moment ago, the secured debt balance subject to the covenant was $4.1 billion at September 30th. Second, the adjusted EBITDA measure used for the covenant calculation is essentially the same adjusted EBITDA measure we provide for financial guidance purposes plus the value of yet to be recognized business integration synergies related to actions that have already been completed which we estimate to be approximately $50 million at September 30th and we are projecting to be between $75 million and $100 million as of the end of the year.

Therefore, as of September 30th, we expect our leverage ratio to be about 4.1 times, well below the 6.5 times ceiling required by the covenant. Looking to December 31st, we're projecting our leverage ratio to be about 4.0 to 4.1 times, again, well within the covenant requirement of 5.25, which we are required to meet at December 31st, as well as for the next three quarters.

As you can see, we are well positioned to meet our covenant requirements for the foreseeable future. Overall, we are extremely pleased with our capital structure and liquidity position. Approximately 60% of our $5.3 billion in long-term debt is at fixed rates. Of the remaining $2.1 billion of our long-term debt currently at floating interest rates approximately 1.2 billion is denominated in Euros. This provides us with a natural edge against currency rate fluctuation related to a portion of our non-US operating earnings.

US dollar LIBOR and Euro LIBOR rates, the basis for the rates at which our floating rate debt is set have dropped significantly from their highs earlier this month. In this regard, I’d note that earlier this week we reset the rates on a majority of our unswapped floating rate borrowings for a three-month duration, and that the applicable US dollar LIBOR and Euro LIBOR rates were 25 basis points and 15 basis points lower respectively than where they were when we last reset the rates in September.

We continue to be very comfortable with our forecast for an all-in total cash cost of borrowing of about 6.5%. It is also important to note that the spread over indicative LIBOR rates used to determine our floating interest rates for the tranche A term loans declined to 300 basis points from 325 basis points in April. In addition, the spread over LIBOR on our revolver also declined from 275 to 250 basis points, and going forward as our leverage ratios continue to improve, the spread over LIBOR on the tranche A terms loans and the revolver also will continue to decline.

Our minimum required debt repayments are approximately $20 million in quarter four, $115 million in 2009, and $155 million in 2010. Finally, we currently hold more than $700 million of unrestricted cash and marketable securities, and we have access to $750 million committed revolving credit facility.

So in summary, we have no near-to-medium term requirements to access the credit markets. We continue to enjoy the flexibility to proactively manage our capital structure on our own timetable as opportunities present themselves. We have well over $1 billion in immediate liquidity available to us in the form of cash and untapped credit commitments and we are very well positioned operationally to deliver the earnings and operating cash flows necessary to manage and service our debt into the future.

I would now like to conclude by updating our 2008 financial guidance and briefly comment on today's reaffirmation of our 2009 and 2010 adjusted diluted EPS guidance. In addition to the impact of the strong third quarter results, and several product-specific assumptions mentioned by Heather earlier, the updated guidance incorporates the following key assumptions.

We continue to expect the segment profitability of Dey to be negative in the fourth quarter due to the seasonality of EpiPen and an increased level of marketing activity around Perforomist. The stronger US dollar is expected to drive about a $0.01 sequential decline in EPS mainly against the Aussie dollar.

Our full year total cash interest cost is now expected to be about $350 million to $360 million slightly higher than our previous expectations principally as a result of the decision to retain Dey. We are now forecasting a full-year adjusted basis effective tax rate of about 38%, excluding the impact of approximately $50 million of tax-related synergies, and at the upper end of our previous range of 36 to 38.

Given these assumptions, here is our guidance. For your benefit we posted an accompanying slide on our webcast. We now expect full year adjusted total company revenues to be in the range of $4.55 billion to $4.65 billion, excluding the revenues related to the monetization of Bystolic.

Note the Dey’s expected full year revenues are factored into the guidance for the first time and as the guidance also takes into consideration the negative impact of a stronger US dollar. We now expect full year adjusted EBITDA to in the range of $910 million to $960 million. Full-year adjusted net income is expected to be in the range of $325 million to $350 million. And we are now projecting adjusted diluted earnings per share of $0.64 to $0.67.

To update you on two additional items that are not on the slide; first, we continue to project full year operating cash flow to be in the range of $110 million to $150 million, excluding the after-tax proceeds related to the monetization of the Bystolic product. We expect improved working capital performance to be a contributor to our fourth quarter operating cash flow.

Second, following $100 million of capital expenditure investments for the first nine months of the year, we are now forecasting full-year CapEx of between a $150 million and $175 million as compared to our previous forecast of $200 million to $225million.

Finally, one additional item before I turn it back to Dan. As I have said before, we'll be coming out with a more detailed look at our '09 and '10 guidance early in '09, when we report on our 2008 fourth quarter. I would like to add that our reaffirmed earnings guidance of $0.90 to about $1.10 for ’09 and $1.50 to $1.70 for 2010 includes the effect of the recent strengthening of the US dollar.

In summary, we continue to be excited by the earnings growth potential of the new global Mylan platform. That concludes my prepared remarks and I'll turn the call over to Dan to start the questions.

Question-and-answer Session

Operator

Thank you, sir. (Operator Instructions). We will take our first question from Greg Gilbert with Merrill Lynch. Please go ahead.

Greg Gilbert - Merrill Lynch

Thanks. Good morning. My first one Ed, is on gross margin. Can you talk about some of the drivers that led to such an improvement versus the second quarter level? I believe you talked about a two-point improvement, and how sustainable those factors are?

Ed Borkowski

Sure. I think there are a couple of things. I think between the higher fentanyl sales in the quarter, the other product launches that we had in the quarter on the generic side, and also don't forget the Dey side as well with performance continuing to grow as well as the strong quarter for EpiPen, those are really the components that drove the quarter.

Greg Gilbert - Merrill Lynch

My second question, Ed, is on currency. You touched on in this your last comment there, but can you talk about what your assumptions are for '09 there and walk us through your exposure and to what extent you are naturally hedged?

Ed Borkowski

There is a couple things I think with currency, obviously currency continues to fluctuate on a daily basis practically and we obviously don't rerun the numbers on a daily basis. We have rerun '09 on the more recent, let's say stronger dollar numbers, and we do get a fairly nice protection from the Euro LIBOR borrowings that we have. It does mute the effect. What I will say is, we have been able to accommodate, let's say those currency headwinds, if you will within our ranges as we also continue to look at our business as it develops, as it unfolds, so in terms of currency we have updated them, and we believe at this point in time we have been able to include them or incorporate them into our guidance as it stands.

Greg Gilbert - Merrill Lynch

We'll get that revenue guidance in early '09?

Ed Borkowski

That's correct.

Greg Gilbert - Merrill Lynch

Thanks.

Operator

We will take our next question from Ken Cacciatore with Cowen and Company. Please go ahead.

Ken Cacciatore - Cowen and Company

Hi, good morning guys. Just a couple of questions, but first there's been some concern on Keppra launch timing and whether you can secure your own approval. Can you just talk about in the case that you cannot secure your own approval? Are there any provisions there? Also on fentanyl, just maybe an early read on Teva's introduction into the marketplace and how you see the market playing out. I understand your guidance and sounds as it could be conservative, but maybe some of the dynamics that are playing out early on in that introduction?

Heather Bresch

Sure Ken. As far as Levetiracetam goes as you know that the settlement for us, the terms of that are confidential, but I did that's why I stressed in my comments that we will be monetizing that in the fourth quarter.

Robert Coury

And are very confident that we will secure our own approval as well.

Heather Bresch

As far as the fentanyl goes, you are right, we have continued to say we had competition for the second half of '08 as well as going into '09. As far as any noise out there with the Teva launch, all I can say is at this point in time we really haven't seen product in the channels.

Ken Cacciatore - Cowen and Company

Okay. Thank you.

Operator

We will take our next question from Rich Silver with Barclays Capital. Please go ahead.

Rich Silver - Barclays Capital

Yes. Good morning. Ed, do you think you could just further elaborate on the hedging that you are expecting for '09 in the face of the stronger dollar? As you had said, you reaffirm guidance, even though you expected to have a pretty strong head wind on currency. Then also, anticipation of '09 is some of the weakness in particularly the ex-US countries, and how that might affect demand for your product?

Ed Borkowski

Well, I think a couple things Rich. When we come forth on our '09, I think we'll provide more details in terms of the exact dynamics of what '09 exactly looks like. What we did was we reassessed our guidance in terms of given where we are with the current currency situation.

I think you have been seeing the last couple quarters progression in terms of the currency affect in our actual results which have been about, let's say less than a penny or about a penny, so far gives you some, I guess, indication of what that affect is.

But given even with the further drops that we've seen, we've been able to, when we looked at our numbers, looked at our forecast for next year, and given these even lower rates which were just a few days ago, which now are obviously a little higher, or better today, relative to earnings. We were able to essential reaffirm within our guidance range, and I think that's how I'd like to leave it.

Robert Coury

Is just further demonstrates, Rich, our underlying confidence in our earnings per share going forward because it wasn't a minor swing, it was a major swing the headwinds with the currency exchange with the strengthening of the dollar in such an accelerated basis. So, that's why we're pointing that out, just like we did the last time we increased guidance. We did the exact same thing. We’ve even updated the guidance again against these headwinds. So again that should demonstrate our confidence in what we think our earnings potential are on a going forward basis. I think it would also help in terms of how our debt, the tranches, explain that natural hedging we have in place going into '09.

Ed Borkowski

We’ve talked obviously about this before, Rich, and I think both publicly and on these calls, but certainly the way we established or structured our capital structure with approximately the 1.2 billion of euro-denominated borrowings that provides a natural hedge to at least a portion of our euro-denominated earnings therefore, significantly reducing the exposure we have on currency, and I think that what you really you are seeing here is a result of that and also as we continue to project, we enjoy that benefit and we'll continue to enjoy that into next year since we are not going to be repaying that debt in the near future.

Robert Coury

I mean I think overall, the bottom line, we do not see changes in the currency rates really materially affecting our numbers at all. Just because how we are structured and we are very confident about that especially in renewing our guidance today after the major swing in the dollar. As far as the European operations and our ability to continue to adjust and I'll have Heather comment in a minute, let me just say that we continue to see that same trend that we’ve been seeing in the European markets with the governments moving to all countries trying to move much more towards lower healthcare costs and generics again just like in the US seems to be the very natural solution.

But we’ve not only forecasted this and not only have prepared in this terms of how we probably weighted our forecast going forward, we do anticipate increased generic utilization and we are absolutely posturing our platform to get our disproportionate share of that increased utilization as we go forward.

Where we're most fortunate than even most companies who are domestic in Europe and who have established themselves in Europe, coming from the United States, when you have to compete at the level that we have to compete here, and you take our practices and bring them over there, we are preparing ourselves to deal in tender markets around the world.

If such markets aren’t tender markets, then it's all that much more up side to us, but we are very, very much focused by the vend 2010. After we get through the regulatory thresholds that we need to get through in terms of really aligning the combination of the these three powerful platforms, we will be the leanest most cost efficient generic pharmaceutical platform within the industry. We fully expect to get our disproportionate share of the growth of generics across the word. Heather, do you want add anything?

Rich Silver - Barclays Capital

Go ahead, sorry. I just had a couple more. Go ahead, Heather, sorry.

Heather Bresch

I was just going to say, as you said I mean our business over there is just very well positioned. One, to enjoy the increase in utilization that we think will continue in a lot of those markets and the market that have moved to the tender model. I think our ability to improve our cost of goods and that's something that we have been very much focused on since the beginning of the acquisition and continue to find opportunities to do. So, it will be extremely beneficial for us in all markets.

Robert Coury

Then I would say given Europe is really, it's easy to use the word Europe, but it's a very fragmented market. There are many, many countries many, many, many markets that were in over there. The good news for us is France is a huge market for us, and one other things that we do not forecast in France because they do carry their disproportionate weight over in Europe. We don't see France moving as fast.

We see cost reductions in France but we don't see them moving their model. Based on what their model was today, we don't see that moving certainly in the very near future. We do think they are going to be more competitive and ask for more cost reductions, but I don't see the model changing like you've seen, say in Germany and in some of the other areas, Rich.

Rich Silver - Barclays Capital

Okay. Just a couple more; on Dey, can you provide performance revenues in the quarter and what was the year-over-year growth on EpiPen?

Ed Borkowski

We haven't been breaking out specific product detail, Rich.

Robert Coury

But I think something might help him, because I don't think the IMS data is really accurately reflecting what has happened in performance. Heather, do you want to comment?

Heather Bresch

Yes, just quickly, I don’t know. Most people have access to the retail market that IMS provides, and one thing that I would just caution is that it doesn't include any of the national homecare or the mail order except retail.

So when you look at the entire marketplace, performance has enjoyed about a 17% growth since its launch a year ago, which even exceeded the BROVANA growth to-date, which I think has been about 11%. So, all-in-all when you look at all retail and national home health care, since our re-launch the positioning of that product, as we said continues to exceed.

I think with EpiPen, it continues to be a very solid product and historically has always, Q4 has always been reflected by the seasonality. Still a little bit in Q1 with Q2, then Q3 really being the peak for the year for EpiPen sales.

Rich Silver - Barclays Capital

Okay. Then just couple more on the North American business. Pricing pressure on the business excluding Duragesic, can you comment? That seemed to be, at least relative to our estimate, a little weak. Then what does monetizing Keppra mean?

Robert Coury

I think monetizing and the ability to receive remuneration for that opportunity, remuneration and monetization, I think, the two are equivalent, Rich. I think you understand we have an agreement, we can't get into the details, but obvious we're confident we are going to get our own product approved when we should have it, but again, I think we're sending a signal that our agreement is such that we are confirming that we are going to monetize that opportunity within this quarter.

Heather Bresch

As far as the rest of the product mix goes, I have continued to say, we're enjoying an extremely strong product mix outside of fentanyl in the United States when you look at things that our underlying business, Paxil, Nisoldipine, Ropinirole, we continue to have products very favorable product mix. So while certainly there's deviations throughout the quarters or the months, given any particular drug and its seasonality, our product mix overall is strong, and we really don't see, we're still in that 5% to 6% range of our base business.

Robert Coury

Yes. And Rich, I'm not sure we're seeing what you are seeing in terms of the pricing. We are not seeing or feeling what you are making reference to, and I guess we could take that offline. I'd like to know what you are looking at because we feel relatively very solid in our US operations. Next question please?

Operator

We will take our next question from Frank Pinkerton with Banc of America.

Frank Pinkerton - Banc of America

Thank you for taking the questions. Robert, can you please speak to employees in Europe and how we're doing there? Any turnover and any additions that need to be made or natural headcount reductions you are looking for in '09 with the synergy numbers?

Robert Coury

Yes. Again, you can't get done what we have accomplished in such a short period of time. This is really a celebration of really the one year anniversary, and if you think about what we have accomplished and the size and the magnitude of what we brought on, it's just remarkable, and I must tell you, you can't get done, we've gotten done without a very strong, solid aligned management team and morale of all the employees.

This is not happening by just a few people at the top. We have, I would tell you, 139 to be exact, I would consider to be solid, solid leaders, independent strong leaders responsible for very important functions that, when brought together and rolled up. I mean, we have literally succeeding and putting together a global overlay on top of across the globe these individual platforms. It's just jelling. It's just jelling in a very beautiful way, and each quarter it gets better and better. Our information is better and better. Our reporting functions are even better and better. And this is what you should expect.

I mean we're still a very young brand new global platform, and when we first done this transaction, I've asked, I've said from day one this is a three-year play. It's panning out exactly that way as we continue to build quarter-over-quarter and really trying to truly get to our view the true underlying base earnings that this platform represents.

The good news is as far as the employees are concerned, we are not seeing a lot of turnover, and the ones that we are seeing are the ones that, quite frankly, are the ones that we want to see. We don’t have, we don't forecast any additional material changes, but let me just tell you because of our commitment, because of our absolute commitment to meet the earnings growth that we put forth. As I told you our activities have been nothing more, nothing less than simply curtailed to executing.

This is purely an execution play and our growth in our earnings per share of the next two years is going to come predominantly from our ability to execute on the efficiencies. There's still a lot more to yield here. But we're keeping ourselves nimble and we're not going to be blind sided. For example, even in Australia, as the markets change, we've made the commitment that our platform, we're in a position to right side and quickly adjust. So, we're growing, we're jelling and yet we're still flexible to make all the necessary changes in order to protect our earnings growth over the next two years.

Frank Pinkerton - Banc of America

Okay, great. Then just as a follow-up and a couple questions here on the fentanyl patch. Number one, should we think of the matrix design in these patches as being a different product even though it has the same reference product as a reservoir patch. Is there any historical precedent in the FDA removing the referenced product while keeping a matrix patch type product maybe on the market that would be safer? Thank you.

Heather Bresch

Look, I think that we have been extremely vocal since the introduction of our patch, but we believe the matrix technology takes unnecessary risk out of the marketplace, because of its inability to leak. It doesn't that have potential. Our labeling reflects that. So going down a path is safer or not safer is certainly I don't think appropriate. I do think looking at the risk profile and the fact that our patch cannot leak is what the matrix affords over the reservoir patch.

I think as far as any actions the FDA takes it would not be prudent on our to try to speak on behalf of FDA, but obviously I think that between the recalls and the supply issues and shortages that again we've been, as I said, the only manufacturer out there that has had no issues since our launch on no matter what the marketplace demanded.

Operator

We will take our next question from Randall Stanicky with Goldman Sachs. Please go ahead.

Randall Stanicky - Goldman Sachs

Great. Thanks for the question. Robert there has been fairly high profile FDA challenges from a sizable non-US competitor. Can you just talk about any share gains that you have seen here and if you have how sticky is that? Then I have a quick follow-up.

Robert Coury

I'd like to have Heather if you don’t mind comment on that.

Randall Stanicky - Goldman Sachs

Sure.

Heather Bresch

Sure. Hi, Randall. Look, I think that overall to our business, sure there is some opportunity in specific products. They are like an ISO trend knowing for us. But I think overall, you know, we don't see a major impact to our business. As I said our product mix continues to be very strong, and I don't see any disproportionate, and where that may go.

I think that the FDA, and as far as the company and what's going forward, I think will continue to be a large issue going into next year, and from a policy perspective, as to changes that may be able to be afforded, but like I said, as far as our North America business, very strong.

Robert Coury

I guess the only thing I would add, Randall to that, because I would not want to look at, other companies without mentioning when they have these shortcomings. I would not want you in your modeling to think, or wait a minute this is like a one-time benefit for Mylan.

If you go back to our history, Randall, and go back quarter-over-quarter, you’ll find not just that one situation that the one company is having but really over Mylan's lifetime, and especially over the last two or three years. We have always been that company to fill those voids when these things occur within the industry from one company to the next, to the next, to the next.

So it seems to be that Mylan, has this consistent opportunity to adjust because of how we're postured to always be that backfill, always be that company to fill that void. I think that what's going on here is just another one of those phenomenon's but nothing extraordinary as Heather has mentioned.

Randall Stanicky - Goldman Sachs

Okay, I got it. Then a final question, can you just give us an update on your generic oral contraceptive on Copaxone and timelines?

Robert Coury

Yes. The oral contraceptives, we continue to develop the portfolio, we're very confident that we're going to be shortly at the end of the year, at the early part of the turn of the year, but around that time frame when we begin the major submissions that we foresee. As far as Copaxone is concerned, I can't even begin to tell you how pleased I am about where we are in terms of our own development program.

I do see again very shortly around the same time frame our ability to submit that into the regulatory agency. I must tell you I'm still beyond confident that here in the US I look for a 2011 launch and actually in other markets as I stated earlier, I do foresee earlier launches in other market as early as possibly 2010.

Randall Stanicky - Goldman Sachs

What are you thinking in terms of the agency's urgency in approving your generic OCs? In terms of a time line should we think about fairly standard generic time lines?

Robert Coury

I would say standard for the OC market. That's what I would say. I would say standard poor the OCs versus others. Yes, I would, that's what I want to tell you. I don't think there should be any difference.

Operator

We will take our next question from Elliot Wilbur with Needham & Company. Please go ahead.

Elliot Wilbur - Needham & Company

Hi. Good morning. First question, I wanted to go back to the increase in full year EPS guidance, $0.17 low end and $0.14 at the high end. I understand $0.07 to $0.08 of that is related to Dey, but I didn't quite catch what some of the other factors were that lead to the upward revision. I want to make sure I fully understand those.

Then for Ed, the $50 million reduction in CapEx spending for this year, are those expenses going to be pushed into next year, or is that some form of permanent savings? Then with respect to LIBOR rates in terms of thinking about quarter-to-quarter interest fluctuation, what should we be using in terms of the LIBOR duration, meaning one, three, or six months? Thanks.

Robert Coury

Okay. The first question, on the earnings, I try to be, Elliott, I try to be clear in my opening remarks by giving you the major driver Q3 to Q4. So if you take $0.07 to $0.08 off of the 23 you roughly get to $0.15, $0.16, due to the swing let just say on the EpiPen. So when you get to that $0.15 to $0.16 and then you take a look a little bit of the excess benefit of fentanyl and then you factor in competition going forward, that is exactly where you get your excess. Everything else is solid.

That's why I quickly mentioned about when you look at first quarter of '09 and you look at what we have right in front of us between the launch of Depakine the continuation of the growth of performance and EpiPen sales even returning. We're heading into '09 with very strong momentum.

As far as the 50 million is concerned I'd like to comment on that. What we are seeing here, it's not a one time phenomenon. I think we appropriately forecasted early on again making sure that we provide the necessary balance in terms of our CapEx. But what we are seeing, and what we're actually able to ascertain is even more efficiencies by working with what we got versus anything new in some circumstances. So actually this is not going to be a one time. I think in 2009, I think, Ed, correct me, we think we were at 250 originally or something. We're bringing that down to about 200 right?

Ed Borkowski

Yes, I think right now, we would estimate 200. Nothing has changed in terms of our commitment to do what we need to do relative to in our business.

Robert Coury

Right. But the point is that it is permanent, we are seeing the CapEx coming down and I feel comfortable with you using that in your model as far as the LIBOR. Why don't you address the LIBOR?

Ed Borkowski

We ended up most recently setting at the end of October at a three-month LIBOR rate for three months, so we fixed for the next three months near the end of the October rates, which I think were around which bring us, we’re around 3.3, 3.38 plus the spread.

Elliot Wilbur - Needham & Company

Okay. Would that be on both the US and euro tranches, three months…?

Robert Coury

Yes.

Elliot Wilbur - Needham & Company

All right, thank you.

Operator

Then we'll take our next question from Marc Goodman with Credit Suisse. Please go ahead.

Marc Goodman - Credit Suisse

First question is can you talk about just some of the dynamics in the three important European countries for your France, the UK, and Germany and especially the UK you brought up some issues that are going on there?

Then second of all, in the press release, I just want to be clear, you said that there were new product in the US that was 60 something some odd million, I forgot the exact number, I just wanted to make sure those are just products that were launched in the quarter. So that would be Risperdal, and then the Sular. It does not include Plendil, which was launched in the prior quarter just want to make sure I’m clear on that.

Robert Coury

Just to comment on the countries, I think it's very important to ground people that these countries, their contribution to our bottom line is almost de minimis, especially when you talk about the UK, and even in Germany, remember, we started out with nothing in Germany and are growing in Germany. So, it's not like that's a country that we had high volume, we're going to go off the cliff in terms of these tenders, whether we get them or whether we don’t.

These countries again in terms of our bottom line are not really material, so let's start there. What we are doing, we are trying to provide you really a lot of clarity in terms of just the overall trends of what we see because we are now in the business of managing countries rather than managing a particular portfolio. As far as the new products, Heather, do you want to comment on that, the 60 million…?

Heather Bresch

70 million that we had in there.

Robert Coury

Yes. That’s really products that launched in the last 12 months, and that would include things like paroxetine and felodipine and ropinerol those are some of the key products that are in there.

Marc Goodman - Credit Suisse

Okay. So it was last 12 months. Can you just talk about the UK specifically? You guys referred to pressures going on there. Can you specifically talk about that?

Heather Bresch

I think in the UK there's constant pricing pressure in the UK. As you know, it is the most aggressive market in Europe as far as tenders and bidding, and really I've just, before that it’s the United States with price controls. So, that is always, has been for long time the most aggressive mark in Europe. I think as Robert said, it's not a very large business for us at all, and as far as Germany goes, we're growing from a small base, and we're still projecting growth in that business, and France, as you mentioned, is our largest business in Europe, and as we mentioned earlier, we see that fairly stable. We don't see big swings or big movements from the government and how their reimbursements model works. They are in the relatively low generic utilization county. They are in the high teens. So again, we see a lot of opportunity for continued up side for that market for us.

Operator

We'll take our next question from Ronnie Goll with Bernstein. Please go ahead.

Ronnie Goll - Bernstein

Good morning and thank you for taking my question. First, Ed, given the focus on cash generation, can you just give us a rough break down of EBITDA to your three main segments, the specialty, OUS, and US businesses? Not looking for particular percentages, but it's like 80%, US; 20, Europe; zero, specialty; 50-30-30, just rough idea where you guys fall.

Ed Borkowski

I'm sorry. You’re asking for what?

Ronnie Goll - Bernstein

Roughly how does the business break down between your major business segments?

Robert Coury

Unfortunately, your telephone, we're not…

Ronnie Goll - Bernstein

I'm sorry. Let me try this again. Is that better now?

Ed Borkowski

Go ahead. Please talk slowly.

Ronnie Goll - Bernstein

All right, thank you. So Ed, I was just wondering if you could, given the focus on cash generation, let us how EBITDA roughly breaks down between the specialty, OUS, and US businesses.

Ed Borkowski

The cash break down between specialty and the other US businesses. Just trying to think how I can do this. Because we don't break down necessarily the cash flow but we do have disclose the operating earnings of those entities, from North America and around the world. I don't know that I have them in that front of me.

Ronnie Goll - Bernstein

Just in rough terms. Is most of the EBITDA coming from the US? Is it 20%? Is it 80%? Where does it fall?

Ed Borkowski

Well, I would think that…

Heather Bresch

I think he is looking for a break down between US and Europe.

Ed Borkowski

I would say is, listen, I think generally, you can see this, I think, in terms of some of our past finds, I don't have the exact numbers in front of me but I think roughly the majority comes from the US. The next largest portion is from Europe, and then the smallest portion is coming from Asia-Pacific. So, if you thought about that it that way, and I think if you look at our Q and then how we sort of report our earnings on that basis, you will be able to pick that up.

Robert Coury

I think that's probably why we don't see currency swings bring material to us as we look forward. That's predominantly why.

Ronnie Goll - Bernstein

Second question, around Depakote ER, one question I have is, you obviously are going to be the only one of the 500 milligram dose, but there might be more competitors on the 250 milligram which implies lower pricing on that does and I'm just wondering if managed care organizations do have the freedom of essentially giving patients two 250 pill instead of one 500 when there's a script for a 500 milligram pill, is there like a legal or some sort of another barrier that prevents them from doing that?

Heather Bresch

No, there's certainly nothing from a legal point that patients or doctors can prescribe however they want to prescribe. I would first go back to your comment about the market overall. As you know, Depakote DR launched this summer and there I know was some concern with that with the genericizing of that marketplace or where the marketplace and we have not seen that all. Abbott has done a great job continuing to hold on to the Depakote ER marketplace.

As you mentioned, we are exclusive on the 500 and have always factored in competition because there's other settlements around that product that we're not privileged to and our exclusivity was based on the 500 as well as coming to market with the 250 January 1st as well.

As far as how doctors prescribe, I think that overall, the generic medications provide the ability for patients to take their medicine, and I think that's what we're seeing in this economic environment. I've had a lot of questions about do we see scripts down and so forth. In the generics, we really have not and I hope that this is one time in our country that the generic medicines more than ever provide the patient's ability to take not only their whole prescription but be able to take it accurate and according to the label.

Robert Coury

Cynthia, we'll take one more call.

Operator

We will take our next question from David Moskowitz with Caris & Company.

David Moskowitz - Caris & Company

Great, thanks for getting me in. I appreciate it. So, back to currency headwinds, so you guys have hedges in place, you have the interest rate on your euro debt and your cost infrastructure and international markets. But besides that, are there any other improvements in the business that you can point to that is helping you offset the currency headwinds in specific?

Also, on the revenue guidance that you guys have given, I understand you guys are defending the EPS targets that you have given, but on the revenue guidance, would you say that is under pressure with respect to the currency headwinds?

Then I just also wanted to ask about the gross margin. You guys mentioned the products and the product mix, but also in your prepared remarks you talked about Matrix having an impact. So, I would like to try and understand what Matrix is doing for you on the gross margin line? Thanks.

Ed Borkowski

Well, let me just talk about, I guess, currency. Currency on a revenue line would be affected. There's no real effective way for us to hedge that. So, yes, on the revenue line for, when we come out with '09 and what not, there could be dynamics there not barring any change in any other product mix or what not that may occur as well.

Robert Coury

As far as the operations are concerned, there's nothing really outstanding except a continuation of strengthening in the underlying operations that basically is going to run through whatever the currency exchange rates are in any given time.

As far as Matrix is concerned, Matrix continues. The more and more we vertically integrate, they continue to help us both on the back end in terms of our cost of goods, but even more importantly, I have often said, it's not really the enhanced gross margin you make by being a vertical integrated company. That's really not material.

Where the real materiality comes in is it’s an ability on the commercial side, be able to bid your products and be able to put products on the market that's going to stay on the shelf. It's those commercial dollars that’s really where Matrix has continuing and on a continuing basis enhancing our overall gross margins.

David Moskowitz - Caris & Company

Got it. But you did say in your prepared remarks that it is lowering the cost of goods. So is that fair to say and is there any way to quantify what Matrix might have had on your business, let's say on a year-over-year basis?

Robert Coury

Yes, I mean as I said all along, and I've got this question ever since we've purchased Matrix. We fully expect, and we're starting to realize now that the regulatory approvals are coming through, you are even seeing some of the filings coming through on our products, the number of references to drug master files are much more than they ever have been by our ability to vertically integrate our own products which is improving our cost of goods.

But I have often said you can't look at Matrix and somehow add some gross margin improvement overall to the business, because nobody is 100% vertically integrated, but in those products that are vertically integrated with our portfolio, we are getting an improvement but nothing to from a materiality point of view. Here is where it is material. Where it is material is on the commercial side. I say this often and often again, for example, Amlodipine. We're still enjoying a great share, market share within the marketplace. There's a tremendous amount of competitors. The truth is without Matrix we would not have amlodipine on the market. We would not be able to afford to have amlodipine on the market. So every single quarter after we lost our exclusivity every single dollar of contribution, thanks to Matrix, 100% of that dollar contribution has come from Matrix. So there were many examples that are like that and that's really where the benefit is, was, is and will be.

Heather Bresch

Maybe the only thing I’d add to that obviously we've talked a lot about our synergies, especially the 300 million bolus that will come in 2010 again a lot of that coming from whether it was product transferring and the API vertical integration. So certainly a big benefit that we have discussed and we do. We're still on track and I’ll see that coming through in 2010 as a result of our Matrix –

Ed Borkowski

The last thing you might be seeing also in contribution of gross margin again on commercial side. My statement really made reference to the US. That I would not be in the market in the US and that's a factual statement. But there are other markets around the world that Matrix, API is referenced and which is it not as competitive.

So the fact is that, where I did not need that vertical integration because I was already making substantial gross margin, let's just say on other markets around the world, on Norvasc, on the amlodipine. It was able to even improve those gross margins further. Where I didn't that have same level of competition.

So all in all that's really what you should be looking at Matrix. It's much more material on the commercial side than it really is even in the improved cost of goods side.

Operator

This will conclude today's question and answer session. Mr. Crookshank, I will turn the conference back over to you for closing comments.

Dan Crookshank

Thank you very much, Cynthia. On behalf of the Mylan team here I would like to thank everyone for joining us on today’s call. If you have any additional questions, Ed, Chris, and I will be happy to take them for you offline. Once again thanks for participating.

Operator

Ladies and gentlemen, this will conclude today's Mylan's third quarter fiscal 2008 earnings conference call. We thank you for your participation and you may disconnect at this time.

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Source: Mylan Inc. Q3 2008 Earnings Call Transcript
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