Welcome to Mylan's Fourth Quarter and Year-End 2012 Earnings Conference Call and Webcast. Hosting the call today from Mylan is Ms. Kris King, Vice President, Global Investor Relations.
Today's call is being recorded and will be available for replay beginning February 28 at 8 a.m., Eastern Time. The dial-in number is (800) 585-8367 or (404) 537-3406 for international callers, with pin number 94045069. For those listening to the rebroadcast, the statements on today's call are as of February 27, 2013. [Operator Instructions]
It is now my pleasure to turn the floor over to Kris King. You may begin.
Thank you, Paula. Good afternoon, everyone. Welcome to Mylan's Fourth Quarter and Year-End 2012 Earnings Call. Joining me for today's call are Mylan's Chief Executive Officer, Heather Bresch; President, Rajiv Malik; and Chief Financial Officer, John Sheehan.
During today's call, including the Q&A, we will be making numerous forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements often may be identified by the use of words such as may, will, could, should, would, project, believe, anticipate, expect, plan, estimate, guidance, trends, forecasts, potential, intend, continue, pursue and variations of these words or comparable words.
Our forward-looking statements made today include, among others, statements relating to anticipated business levels; trends in some European countries; planned launches of and anticipated exclusivity periods for new products; our ability to achieve forecasted full year results while absorbing the impact of negative pricing pressures; expectations for capital expenditures; expectations for R&D, SG&A and other spending; our guidance range, future earnings, planned activities, anticipated growth and other expectations and targets for future periods. Because these statements are forward looking, they inherently involve risks 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 factors set forth under forward-looking statements in our recent press releases related to earnings and Agila, both dated February 27, 2013, as well as the risk factors set forth in our report on Form 10-Q for the period ended December 30, 2012, and in our other SEC filings. You can access our Form 10-Q and other SEC filings, including our press releases which we filed on Form 8-K, through the SEC website at www.sec.gov, and we strongly encourage you to do so.
In addition, during this call, we will be referring to certain actual and projected financial metrics of Mylan on an adjusted basis, which are non-GAAP financial measures. It should be noted that non-GAAP measures, such as adjusted revenue, adjusted gross margin and 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 Generally Accepted Accounting Principles or GAAP.
Please refer to today's earnings press release, which is available on our website, as well as on the SEC site, as it contains detailed reconciliations of the non-GAAP financial measures we use to our fourth quarter results prepared in accordance with GAAP.
Before I turn the call over to Heather, let me also remind you that 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 expressed written permission.
With that, I'll now turn the call over to Heather.
Thank you, Kris, and good afternoon, everyone, and thanks for joining us. First, sorry for any inconvenience on our documents crossing. We just had a technical difficulty on our end. So hopefully, as you now have seen in our -- today's press releases, we have a lot of great news to cover with you.
I'll begin by providing an overview of the Agila transaction. I'll then touch on highlights of our outstanding performance during '12 and provide guidance for 2013. I'll turn the call over to Rajiv, who will provide additional insight about Agila and what the transaction means for us. John will take you through our 2012 financial results, provide additional color on 2013 and discuss the transaction terms and financial impact of the Agila transaction. I'll make a few concluding comments, and then we'll open the line to take your questions.
We're very excited to announce this afternoon that we've signed a definitive agreement to acquire Agila Specialties, the injectables business of Strides headquartered in Bangalore, India. We believe Agila is a truly unique asset in the very attractive injectable space and have agreed on a base purchase price of $1.6 billion in cash for this business. The addition of Agila to our existing injectables platform will create a new global leader in this fast-growing market segment and accelerate our progress toward becoming a top 3 player in injectables. This transaction will double our injectables business in the first full year following closing, significantly accelerate our path to bring our Institutional business into $1 billion franchise and is expected to fuel additional significant long-term growth well beyond $1 billion.
We expect the acquisition to be accretive to our adjusted diluted earnings per share following closing, which is expected to occur in the fourth quarter of this year, subject to regulatory approvals and certain closing conditions. We anticipate that the acquisition will immediately accelerate our revenue and earnings growth as we expect Agila to grow at significantly higher rates on the top and bottom line than Mylan's planned CAGR as we integrate the company into our global operations.
Following this transaction, we expect to maintain a financial profile well within our investment grade parameters, providing us with ample financial flexibility to execute on other opportunities and accelerate our long-term growth targets and continue to maximize shareholder value.
As you can see here on Slide 5, the acquisition of Agila delivers on several of the strategic growth drivers we set out for you during our Investor Day last year. First, this transaction will create an R&D and manufacturing powerhouse in sterile injectables. Agila's very broad product portfolio and deep pipeline, which is complementary to Mylan's existing portfolio, adds significantly to our capabilities in injectables, and it is the result of best-in-class R&D and an industry-leading track record of product filings and approvals.
Agila also brings us one of the most diversified, highest-quality and state-of-the-art injectables manufacturing bases in the industry. Overnight, this acquisition will grow our current capacity by more than 50x. This will allow us to vertically integrate our injectables platform, enhance margins and accelerate our pursuit of additional product opportunities and partnerships to facilitate long-term growth. Now more than ever, leadership is needed in this very important space as some current market leaders are experiencing significant quality issues resulting in supply disruptions and product shortages. In fact, the FDA recently estimated that sterile injectables accounted for 80% of drug shortages in the U.S., and that 43% of the shortages were attributable to quality and manufacturing problems. This presents a substantial opportunity for Mylan as the transaction creates critical mass from a portfolio perspective and high-quality capacity to fill this void.
Agila also will strengthen our commercial presence worldwide and allow us to leverage a much broader portfolio of injectable products across our global platform. Further, this transaction will help fulfill our commitment to geographic expansion by giving us entry into key high-growth emerging markets, such as Brazil. This expansion into new markets is another step towards achieving our mission to provide 7 billion people access to high-quality medicine. Additionally, by creating such a strong injectables platform, we have enhanced our ability to leverage our future biogenerics portfolio and pursue other high complex injectable opportunities. This emphasis is consistent with the industry's evolution and present focus on business diversification and biosimilar strategies. Rajiv and John will provide greater detail on the Agila business shortly. With that, let me now turn to our results for 2012.
It was, as we expected, our best year-to-date. On the top line, we generated $6.8 billion, an increase of 14% on a constant currency basis compared to the prior year. And on the bottom line, we delivered $2.59 in adjusted diluted earnings per share, which was an increase of 27% over the prior year. Further, I'd like to mention that we ended the year on a very strong note, achieving during the fourth quarter year-over-year double-digit constant currency revenue growth in every one of our regions, as well as in our Specialty division. Indeed, our strong performance, plus our long-standing commitment to financial discipline, strong capital structure and ability to generate significant free cash flows, is why both Moody's and S&P upgraded our company's credit rating to investment grade late last year. Their actions only further enhance our financial flexibility and ability to execute on our growth strategy more efficiently.
I'd like to highlight some of our operational achievements this year. EpiPen remains an important growth driver for our business as we continue to focus on enhancing access to this product. One example of our efforts is to expand people's access to our products is a program called EpiPen4Schools, which offers 4 auto-injectors to schools across the U.S. that have qualified. Since we've started the program, more than 20,000 schools nationwide have ordered a total of more than 43,000 EpiPen 2-Paks. Overall, the percentage of people at risk for anaphylaxis who carry an EpiPen rose from 7% in 2011 to 10% in 2012, an increase of 24% in the estimated number of patients who filled a prescription.
We also announced a license agreement, giving Pfizer the exclusive rights to market and sell EpiPen in Japan, which we believe will help accelerate the awareness and growth of this product. Such efforts helped our Specialty division generate a 46% increase in revenues compared to 2011. To further enhance and expand our geographic reach, we announced we would team with Pfizer to establish an exclusive long-term strategic collaboration for our Generics business in Japan as a way of driving our sustained growth in the world's second largest pharmaceutical market. The collaboration builds upon each company's highly complementary strength and quality assets. The partnership went into effect on January 1 of this year.
As notable, we successfully launched commercial operations in India, starting with a comprehensive portfolio of ARVs. We are currently preparing for additional launches in other therapeutic categories, such as women's health, oncology and respiratory. Home to more than 1 billion people, the nation is an important market and part of our growth strategy going forward.
Further, we continue to fight the good fight against HIV/AIDS. We introduced new products and established licensing agreements to continue making treatment more accessible. Our commitment to this very important cause surely is amongst the many reasons Mylan was selected during the year by key government health organizations in India and South Africa as a leading supplier of antiretroviral products.
2012 also saw a continued portfolio expansion as we launched approximately 600 products globally and expanded many therapeutic categories in major markets such as oral contraceptives in the U.S.
Finally, 2012 was also notable for the industry-leading role we played in advancing 1 quality standard. In July, U.S. President Barack Obama signed a landmark legislation that we believe will lead a significantly enhanced safety and security of the global supply chain, leveling the playing field by holding all manufacturers supplying drugs in the U.S. to the FDA standard and improve timely access to high-quality, affordable generic drugs.
While our performance in 2012 truly was remarkable, I'd like to point out that it caps off, as you can see on Slide 7, a 5-year period during which we delivered compounded annual growth of 10% in adjusted revenues, 16% in EBITDA and 34% in earnings per share. This outstanding track record is precisely why we're excited about and have such confidence in our ability to achieve our goal of doubling the size of the company and achieving $6 per share by 2018.
Slide 8 displays a decade-long look at our EPS performance, reflecting past results and future targets. Note that our 2018 target of $6 per share represents a compound annual growth rate of 22%, obviously, with some years growing faster than others.
I'd like to take this opportunity on behalf of the Board of Directors and our entire management team to acknowledge and thank our employees around the world, whose unwavering dedication to Mylan's cause has made such performance possible. With that, I'd like to turn now to our expectations for 2013 on a stand-alone basis.
We look forward to discussing Mylan's longer-term outlook during our Investor Day event, which we will host on August 1 in New York. We expect our top line this year to increase by almost 6% compared to 2012, with a guidance range of $7 billion to $7.4 billion. As for the bottom line or adjusted EPS, we expect it to grow by about 10% this year, with a guidance range of $2.75 to $2.95. We view both of these growth trajectories as significant, coming off a record 2012. Our guidance includes an additional stock buyback this year of up to $500 million. As we continue to generate strong cash flows, returning value to our shareholders through share buybacks remains an important ongoing part of our cash deployment strategy.
Our 2013 guidance also includes a significant increase in R&D investment, with Slide 9 showing a level of spend that is planned to double that of 2009 and become much more diversified. We fully expect this heightened investment to pay dividends in the future, just as yesterday's investments helped fuel the outstanding growth we've achieved today. Our investment is expected to directly benefit our growth initiatives, such as respiratory, biogenerics and specialty, all of which focus on high barriers-to-entry products.
With respect to respiratory, we continue to have very positive meetings with the FDA, the most recent being in December, where we were able to reaffirm our roadmap to a substitutable generic Advair by 2016.
As for biogenerics, we continue to invest in our global platform, which will meet unmet needs and help address the enormous economic burden borne by those battling disease and by health care systems around the world. We're also expanding our commercial operations in South Africa and announced this week that we are launching our ARV portfolio in that country, which has the world's largest HIV/AIDS population.
Finally, we continue to see generic utilization rise around the world as governments recognize the vital role these products can play in sustainable, containing health care costs. Last year, for instance, we saw growth in utilization in every European market we serve, including significant growth in France. Having now posted 2 consecutive quarters of growth in our EMEA region, we think this trend bodes well.
With that, I'd like to now turn the call over to Rajiv.
Thank you, Heather. We are very excited about the acquisition of Agila and about the powerful injectables leader we are creating by combining Agila with our existing capabilities in this segment. As Heather already touched upon, Agila is an excellent strategic fit for Mylan, delivering on several of our strategic growth drivers and further positioning us to achieve our long-term target.
As you will see over the next few slides, Agila will significantly expand Mylan's injectable portfolio pipeline, contracting capacity and technical capabilities. Through its broad geographic reach, Agila will accelerate achievement of Mylan's strategic goal to have critical mass in emerging markets. The transaction also strengthens our institutional channel presence worldwide and gives us a robust platform to leverage future opportunities from biogenerics and other high-value complex injectable products.
Turning now to Slide 11. Let me give you a brief overview of this unique asset. As you may know, Agila is a global pure-play injectable platform operating in the liquid injectables, lyophilized injectables, pre-filled syringes, Minibag and ophthalmic. The business has a very broad product portfolio and pipeline, driven by a strong R&D, a proven regulatory track record and a differentiated high-quality manufacturing network. Currently, approximately 40% of Agila's revenues come from U.S., and we believe we can leverage our considerable presence in this market to maximize this business. More than 1/4 of company's revenue come from Brazil, a market that Mylan has been looking at for some time. The balance of Agila's revenue comes from Europe, Australia and other established and developing markets.
I would like to note that Agila has a number of key partnerships, including with Pfizer, Sagent, Aspen and Apotex. However, the majority of Agila's business is unpartnered, especially in the key depths [ph] of the world market, such as Brazil. We look forward to continuing these agreements. However, the business gate [ph] for this transaction is not impacted by the continuation of these partnerships. With or without the partnerships, we see significant revenue and earnings growth potential from this business in combination with Mylan's global platform.
Leading up to this acquisition, Mylan has made significant progress building our injectables platform through various activities, including the acquisition of Merck KGaA generic business, our Bioniche acquisition and our recent manufacturing expansion through the facility acquisition from SMS, in addition to our biologics and recently announced insulin analog collaborations both with Biocon. As you can see from the chart on the right side of Slide 12, Mylan is already positioned as a top 4 player in the injectables market. We believe that the acquisition of Agila helps to fill significant gaps in our injectables business in terms of manufacturing capacity and technical capabilities. With the injectables market expected to grow at a compound annual growth rate of 13% from 2011 to 2017, outpacing most other dosage forms, addressing these gaps was strategically important. With Agila, we believe we are well-positioned to achieve a top leadership position in injectables. And as Heather already noted, with this acquisition, we will meaningfully accelerate achievement of our target to create $1 billion Institutional franchise.
As you can see on Slide 13, Agila has an impressive global portfolio and a track record of successfully developing filings and receiving approval for injectable products, driven by their best-in-class R&D platform. In fact, Agila is far and away the market leader in terms of ANDA approval over the last 5 years and its approval time that FDA have run well ahead of injectable's industry average. Agila has a strong pipeline of 349 applications pending approval, in addition to 307 global regulatory approvals already received. We expect to even further bolster this R&D output as we integrate Agila. Agila will bring us approximately an additional 350 scientists focused on injectables, complementing the strong team we already have in place. Together, we'll have comprehensive capabilities across vials, pre-filled syringes, ampoules, lyophilization, Minibags, cytotoxics and antibiotics. This transaction also will make Mylan a significant player in advanced new technologies of the future such as microspheres, liposomes, nanosuspensions, and gel-forming implants.
What truly distinguishes Agila from other injectable players is its high-quality manufacturing base. We have spent a lot of time at Agila sites and have been very impressed with the quality of their facilities, processes, technology and people and believe it has one of the best sterile manufacturing infrastructures [ph] globally. Agila's quality history is underscored by their inspection history, and it's also worth noting that these facilities are regularly audited by Agila's multi-national partners as well.
While Mylan has 2 high-quality manufacturing facilities in Ireland and India, we still rely on third-party manufacturers for a number of our products. With the addition of Agila's 9 manufacturing facilities, our combined network will have adequate capacity and capability to supply vials, ampoules, pre-filled syringes, ophthalmic, lyophilization products, cytotoxics, controlled substances, [indiscernible] antibiotics, including penicillin, cephalosporin and penem. Agila has 6 facilities in India, 2 in Brazil and 1 in Poland. Each of these facilities are U.S. FDA-approved. Seven are approved by regulators in Europe and Brazil, and their sites also have been approved by various regulators from other regions. Agila also has 1 facility under construction in Singapore, which is expected to come online in 2015 and will give us the ability to manufacture Minibags and bags.
This broad manufacturing infrastructure will be another differentiator for us. It will allow us to vertically integrate our injectable business, enhance our margin. Our expanded manufacturing capabilities also will accelerate our ability to pursue new product opportunities and give us additional flexibility to fill market demand arising from supply disruptions. As Heather touched upon, the injectables space continues to face supply issues resulting from manufacturing problems at certain leading injectable companies. We believe it's possible that increased inspect in equity [ph] resulting from recently inactive [indiscernible] may uncover additional weaknesses in the industry's global supply chain. This underscores why we see such an opportunity to be a high-quality leader in this space, building on our exceptional quality reputation and why Agila is such a unique asset.
Agila also will strengthen our commercial footprint and allow us to enter into a number of new markets on our own or through partnerships while leveraging the power of the global Mylan platform around the world.
Agila currently sells their broad product portfolio into more than 70 countries, including high-growth emerging markets, and Mylan's commercial footprint currently covers 140 countries and territories. We estimate that approximately 70% of regulated markets' injectable portfolio demand could be covered by our combined portfolio. Let me touch now upon a few of the key markets that are significantly enhanced by this combination.
In the U.S., we'll have a significantly expanded portfolio in injectables, which will allow our injectable business to become even more meaningful to our customers. Agila will increase Mylan's ANDAs from 55 to 116 and [indiscernible] the ANDAs pending with the FDA from 24 to 136. Given our strength in the U.S. market, we believe we can drive meaningful additional growth from our combined injectables business. This transaction also will enhance our position in Canada, Europe, Australia and New Zealand and allow us to leverage our strong commercial presence in these markets.
In Japan, we see the potential to enhance Pfizer-Mylan collaboration with the addition of a broader pipeline of injectable products. In emerging markets, our aim has been to achieve scale in these regions over the next several years, and this transaction will help us accelerate achievement of that goal.
As previously mentioned, we are very excited about Agila's strong presence in Brazil. Brazil is a difficult market to penetrate for a number of reasons, such as the need for local manufacturing. Agila's presence in this growing market was one of the reasons this asset was so attractive to us. We see this transaction as a launching pad in Brazil that we can build off by bringing the broader Mylan portfolio into that market.
To conclude, Agila is an exceptional asset in the injectables space with exciting growth prospects. However, we believe that the real opportunity from this transaction is what we will do with this asset when it is combined with the Mylan engine.
Now John will discuss our 2012 financials and 2013 outlook in more detail, as well as provide more detail on Agila's transaction terms.
John D. Sheehan
Thank you, Rajiv, and good afternoon, everyone. Today, I'm going to be referring to financial metrics that have been prepared on an adjusted basis. These are non-GAAP financial measures, and I refer you back to Kris' comment at the beginning of today's call regarding our use of adjusted measures.
At Mylan, we have made strong commitments to manage our business in a balanced way to meet and often exceed our financial objectives, and we did just that in 2012. Slide 17 shows you a comparison between our achieved results for 2012 and the original guidance that we announced on last year's fourth quarter call. From a top line perspective, our total revenues were near the low end of our guidance range of $6.8 billion to $7.2 billion. Absent the unfavorable effect of changes in foreign exchange rates, however, we would have reported sales closer to the midpoint of our range. Adjusted EBITDA was $1.9 billion compared to our original forecast of $1.75 billion to $1.95 billion, placing us near the top of our estimated range. And finally, our adjusted diluted EPS was $2.59, at the very top of our updated guidance. It should also be noted that the unfavorable shift in foreign exchange rates, which negatively impacted our sales, also had a net negative impact on our bottom line of approximately $0.05.
As this slide also shows, our growth in earnings, both EBITDA and EPS, has exceeded our revenue growth, demonstrating the positive operating leverage of our business. The fourth quarter 2012 was a strong finish to what truly was Mylan's most successful year-to-date from a financial perspective. In addition to the results highlighted on this Slide 17, let me just call out each of our region's realized fourth quarter double-digit year-over-year constant currency revenue growth, including Europe, a positive sign that the economic woes that have plagued that region may be abating.
For the full year 2012, adjusted gross margins were 50% as compared to 48% in the prior year and at the high end of our 2012 guidance range. Our adjusted operating cash flows for the full year 2012 were $1.1 billion, the first time our operating cash flow has exceeded $1 billion in any year. This compares to our original guidance for full year 2012 adjusted operating cash flow, the midpoint of which was approximately $950 million. And finally, capital spending in 2012 came in at $305 million, at the low end of our original guidance range of $300 million to $400 million. I'll discuss our capital structure in more detail shortly.
2013 will yet be another strong year for Mylan. In the U.S., we are anticipating a high volume of new product launches, and we expect to once again be agile enough to quickly seize new supply opportunities when they become available. In addition, favorable changes to the regulatory environment, including increased resources to expedite product reviews and greater oversight with respect to manufacturing, as well as an anticipated more stable pricing environment resulting in part from continued consolidation within the industry, are just 2 of the favorable macroeconomic factors that we see in 2013.
Outside of the U.S., we continue to see the benefit of measures taken by foreign governments to reduce their health care costs and, at the same time, bolster generic utilization. Programs such as the pharmaceutical convention in France, as well as the move to INM [ph] prescribing in Italy, should continue to have short- and long-term positive impacts on our business. All of these factors, both domestically and abroad, are expected to help shape 2013 into the next successful chapter of the Mylan story.
After weighing all of these factors, as shown on Slide 18 and included in today's press release, we are projecting 2013 adjusted diluted EPS of between $2.75 and $2.95 per share, a 10% increase at the midpoint over 2012 on revenues of between $7 billion and $7.4 billion. We are also projecting adjusted EBITDA for 2013 of between $1.9 billion and $2.1 billion.
Some additional highlights include: adjusted operating cash flow, which is at forecast at between $1.1 billion and $1.2 billion, with capital spending anticipated to be between $300 million and $400 million, resulting in projected free cash flows in the range of $700 million to $800 million for 2013.
Our 2013 guidance excludes any contribution from the Agila acquisition announced today as it is not expected to close until the latter part of 2013. Our 2013 guidance does include the stock buyback announced today of up to $500 million, which will be completed during the year.
As seen on Slide 19, one of the ways in which our results for 2013 will be accomplished will be through the launch of new products. This includes both planned 2013 launches, as well as the full year impact of our 2012 launches, which, combined, are expected to contribute revenues of approximately $1 billion.
In addition to new products, our growth in 2013 will be fueled by the core strength of our diverse global business. Our Specialty franchise and our Indian operations are both expected to continue to contribute double-digit sales growth. Meanwhile, European sales are also expected to grow double digits, primarily as a result of increased generic utilization in certain markets, including France and Italy. And we anticipate single-digit revenue growth in North America after excluding the impact of Escitalopram, which was launched during 2012.
Finally, we will continue to execute against our strategic drivers, with continued planned investment in our biogenerics, respiratory and specialty platforms.
Slide 20 represents a projected bridge between our actual revenues for 2012 of $6.8 billion and the midpoint of our 2013 guidance range of $7.2 billion. As you may recall, earlier in 2012, we had revised our 2013 revenue target to $7.5 billion, which is outside of our guidance range announced today. The primary reason for this is the continued unfavorable impact on sales of certain foreign currency exchange rates. Had rates remained consistent, as compared to those used to calculate our target 2013 revenue in the prior year, the midpoint of our new range for 2013 would have been $100 million to $200 million higher and represented an increase of 7% to 9% over 2012 actuals.
As I mentioned, new products, both those launched in 2013 and the full year impact of those launched in 2012, will be the key top line drivers of our forecasted increase in sales. Our base business is expected to grow mainly as a result of the continued strong performance of our Specialty franchise. Our Generic business is also forecast to contribute to 2013 revenue growth, with favorable volume offsetting single-digit price erosion in the U.S. and Europe.
Slide 21 shows a projected bridge between our actual 2012 adjusted diluted EPS of $2.59 and the midpoint of our 2013 guidance range of $2.85. Our forecasted growth in earnings and EPS includes higher levels of operating expenses, primarily a significant increase in our research and development investment. We continue to invest heavily in R&D related to our respiratory and biologics platforms, including our COMBO product, all of which we are confident should yield considerable benefits in the future. We are forecasting an increase in R&D spending during 2013 of approximately $80 million to $100 million or $0.15 to $0.19 per adjusted diluted share. This increased spending in R&D will partially offset the impact of the growth in sales and the gross margin expansion, the latter of which is due in part to cost savings initiatives throughout the world. In addition, our 2013 EPS will be negatively affected by pressure on our adjusted effective tax rate but aided by a lower share count as a result of the 2 share repurchase programs completed in 2012 and, to a certain extent, the one announced today.
With respect to the first quarter of 2013, we expect that adjusted EPS will be in the range of $0.60 to $0.62, which, similar to the start of 2011 and 2012, is slightly lower than the fourth quarter of 2012, both operationally and as a result of the higher effective tax rate. Our third quarter of 2013 is expected once again to be the strongest, and we are forecasting our second and fourth quarters of 2013 to be very similar to each other.
As I'll discuss shortly, the acquisition that we announced today was made possible by the financial flexibility afforded us through our current capital structure, and the robust operating cash flows of our -- our platform continues to generate. First and foremost, we were pleased that in November, both Moody's and Standard & Poor's upgraded our credit rating to that of investment grade, the first time in Mylan's history that we have been awarded this rating by both agencies.
Additionally, the transaction announced today keeps us well within our investment grade criteria while leaving us with additional capacity. Our adjusted leverage ratio as of December 31, 2012, was 2.7:1, below our long-term target ratio of 3:1 and down significantly from 2009. As I've indicated in the past, we remain committed to our 3:1 long-term growth leverage ratio target. And when our leverage exceeds that target, as it will slightly as a result of the Agila transaction, we remain committed to de-leveraging within an 18-month time frame in line with our long-term target.
During the fourth quarter, after our credit upgrade, we completed the issuance of $750 million of 10-year senior notes. Proceeds from this issuance were used to repay amounts borrowed under our revolving credit facility and our accounts receivable securitization facility. This transaction, which was issued with a highly favorable coupon of 3 1/8%, allowed us to take advantage of low interest rate and further extend the maturity of our debt portfolio. As of the end of the year, we have no substantial maturities until 2015.
During 2012, we completed 2 stock buyback programs, purchasing approximately 41 million shares for a total of $1 billion, further emphasizing our commitment to increasing shareholder value. Also, given the underlying operational strength of the company, we were able to complete these buybacks and still reduce our leverage ratio over the course of 2012. During 2012, we generated additional shareholder value through our increasing return on invested capital, as well as our outperformance of our share price against multiple benchmarks. In fact, beginning in 2013, the financial metrics used to measure performance for our long-term equity incentive plan will be ROIC and Mylan's relative TSR.
To summarize, our fourth quarter provided a strong finish to the very strong year that we said we'd deliver, another example of our proven ability, time and again, to manage our business through a variety of industry and market headwinds while producing top and bottom line growth for our shareholders. We look forward to doing more of the same in 2013 and beyond.
Now let me turn to Agila. First, let me say that not only is this a strategically significant transaction for Mylan, it is also a very financially compelling transaction, consistent with Mylan's stated acquisition strategy and financial commitments. We anticipate that the acquisition will be immediately -- will immediately accelerate our revenue and earnings growth as we expect Agila to grow at significantly higher rates on the top and bottom line than Mylan's planned CAGR, as we integrate the company into our global operations. While synergies are not the key driver of this deal, there is the potential for synergies with our existing business from R&D rationalization and lower cost of goods sold, resulting from vertical integration of certain Mylan products. Further, we expect the transaction to have a greater than 10% return on invested capital by the third full year from closing, well in excess of our weighted average cost of capital and will increase after that.
In terms of financing the transaction, Mylan has obtained a commitment letter from Morgan Stanley for a new $1 billion senior unsecured bridge term loan, in connection with the planned transaction. This bridge, together with internal sources, including available cash and existing lines of credit, is expected to be sufficient to finance the transaction. We expect pro forma leverage of approximately 3.3x upon closing of the transaction, which is well within the parameters of our current investment grade credit rating. This has been reaffirmed through our recent discussions with our rating agencies. As a result, we have room for further accretive acquisitions, and we'll continue to look for opportunities that create further value for our shareholders. We also remain committed to maintaining our investment grade credit rating.
Finally, as previously noted, the transaction is expected to close in the fourth quarter of 2013, subject to regulatory approval and certain closing conditions.
Now let me turn back the call to Heather for her closing remarks.
Thank you, John. And just to close, Mylan's outstanding track record in the industry of leading by example. Over the past 5 years, we've built a global operating platform that we believe is unparalleled in terms of scale, diversity, flexibility and depth of expertise. Moreover, we have repeatedly demonstrated our ability to leverage this platform to develop and launch high-quality products, absorb headwinds, respond quickly to market opportunities around the world and meet or exceed our financial targets. With the addition of Agila, we continue to demonstrate our commitment to business diversification while growing our current platform at a double-digit rate and executing on our strategic growth drivers. We now look forward to applying our leadership in the injectables space just as we have done for oral solid dosage forms and transdermal products, by example. We're confident that with our diverse portfolio, our commitment to quality and our workforce, which is second to none, we will continue to deliver long-term growth and outstanding value to our shareholders.
With that, I'd like to now turn the call over to the operator for questions.
[Operator Instructions] Our first question comes from the line of Jami Rubin of Goldman Sachs.
Jami Rubin - Goldman Sachs Group Inc., Research Division
John, if you could just provide a little bit more financial color around the Agila business, how should we think about revenues, how should we think about EBITDA contribution. And Rajiv, you talked about the partnerships that are already in place. What is the proportion of revenues from Agila that are impacted by partnerships? And how do I think about that in terms of building my model? And then, John, if you could answer the question about your share buyback program. I know that you bought back $500 million in shares in 2012. Has this second buyback program that you announced last year, has that been used up yet? Have you actually bought back that $500 million or is that to be used sometime in 2013?
John D. Sheehan
So I guess that was all 1 question, Jami. So I'll -- I think in my prepared remarks, I did indicate that the share buyback that we announced in November was completed. So that is done. With respect to the Agila business, that business has been growing at significant rates, and we expect it will continue to grow at significant rates. But I think the really important thing is not what it's been doing as a stand-alone part of Strides but what it's going to do combined with the Mylan platform. We have only just started to scratch the surface and the combined Mylan-Agila platform we see as accelerating our growth in the company overall but specifically in the injectables business. We'll get into more detail with respect to the financials of the business when we come to our Investor Day that's planned for August 1 of this year, Jami.
Jami Rubin - Goldman Sachs Group Inc., Research Division
Can I just follow up, John?
John D. Sheehan
Jami Rubin - Goldman Sachs Group Inc., Research Division
Yes. Okay. I just -- I'm a little bit confused because during the quarter, you had $412 million diluted shares, which was no change from the third quarter despite the $500 million buyback. So I'm just curious...
John D. Sheehan
We didn't announce the share repurchase program until mid-November, as you may recall. So obviously, on a weighted average basis, which is what GAAP requires, the share repurchase did not have any real impact in the fourth quarter.
So let me just -- first, maybe I'll tee up real quick, Jami. I think you asked about partnerships, I'll let Rajiv weigh in. I think what John's pointed out that, obviously, what the business has done and how they've done it on a stand-alone basis is certainly impressive from a growth trajectory perspective. But now, more importantly, it's strategically how we view this with -- for our current platform, as well as continuing with some of the partnerships, as well as now we think it provides us the avenue to even add additional strategic partnerships.
And as for this issue [ph], I think, currently, approximately 2/3 of business is partnered business and 1/3 is on stand-alone business. But going further, the ratio goes the other way around, like it will be -- in the next couple of years, it will be 2/3 on Mylan's business and 1/3 around partner business.
[Operator Instructions] Your next question comes from Douglas Tsao of Barclays.
Douglas D. Tsao - Barclays Capital, Research Division
Congratulations on the deal. I was just hoping you could perhaps provide some history in terms of how long you've been engaged in just looking at this asset. And, obviously, what other thing -- were you always focused on the injectables platform? Exclusively -- or because, obviously, you talked about making a strategic acquisition for some time. Have you always been focused on injectables? And was it, in particular, the Strides business?
Sure. So as -- I think as you just stated, we've been pretty vocal about the fact that -- especially in our Q3 call, stating that we've been very active. Our strong cash position and where we've accelerated our ability to pay down debt put us in a very attractive space to be looking at all kinds of assets. So while we have certainly been looking at things that would complement our current generics platform, obviously, injectables was something that, with our Bioniche acquisition, kind of got our foot in the door. And we have repeatedly said that critical mass around the injectables space was very important for us and we also saw as an important precursor for our global biologics platform. So we're looking and are still looking at lots of things to complement our current portfolio and companies in the Specialty division to other dosage forms and therapeutic categories. So that's how I would address your question. So we think, again, this is a great -- it's going to be a great asset and acquisition to really accelerate our growth initiatives.
Your next question comes from David Risinger of Morgan Stanley.
David Risinger - Morgan Stanley, Research Division
So just to follow up, I'll make a statement and then you can correct me if I'm wrong. But it seems like you're not providing the historical financials on the acquisition. If you can provide any color on the historical financials, that would be helpful. But then, separately, on the Specialty revenue growth for 2013, I think it's [indiscernible] but are you looking for 30% revenue growth for your Specialty segment in 2013?
John D. Sheehan
So I think on the second one first, the chart does indicate that we expect the Specialty segment to grow 30% in 2013. That is correct, David. And I guess with respect to the financials, the Agila business has historically been a part of Strides, and there is some financial information out there with respect to the Agila business. But what's really important is what the business is going to be going forward. Because when you combine it with the global Mylan platform, that's where we see the real benefits and the growth accelerating from. And so -- and that's what we look forward to providing you with more details about in our Investor Day this coming August. And so I think that's probably the best way to focus on the business.
And I think just to add to that, I would say, similarly, as you look at -- when we did the Matrix acquisition, what we said back then is what we would be able to do when combined with that platform and what it would mean to Mylan. And I think you should think about this transaction very similarly since we see that kind of benefit coming across our entire global platform.
Your next question comes from Marc Goodman of UBS.
Marc Goodman - UBS Investment Bank, Research Division
Yes. Can you give us some more color on your key businesses in Europe, France and Italy and the U.K.? I saw in the press release the growth rates. So can you just go into a little more detail in those markets? Like were you gaining market share? How did you grow so much volume versus price? Just give us a sense of were there are a lot of new product launches. Or what were the key there?
Sure. So as I've said in my remarks, we've seen generic utilization grow in every market that we serve in Europe. So I think, finally, governments have realized that just taking price cuts doesn't change behavior or give you sustainable health care containment -- cost containment. So I think what we're seeing is that more governments are putting incentives in place to increase generic utilization, to have a much more sustainable containment. And so we've seen certainly volume growth, market share growth in those key markets, you mentioned France, Italy, especially. And we absolutely see volume offsetting continued price erosion. I think that we'll continue and we certainly anticipate further price, but we absolutely see growth continuing. And like we said, the last 2 quarters boding very well for, hopefully, what the future holds for Europe.
Your next question comes from Chris Schott of JPMorgan.
Christopher T. Schott - JP Morgan Chase & Co, Research Division
Just coming back to Agila, can you just talk about -- I understand you're not going to give us much on the financials historically, but when you talk about the benefit you could see from this combined business, when should we think of that really being visible in Mylan's P&L? Is it something that takes a year? Does it take 3 years? Does it take 5 years? [indiscernible] if you come back to the Matrix example, I think that did take some time to really start to show up and benefit Mylan's business. And the second question, if I could just maybe slip in, does your gross leverage calculation for year-end '13, does that include pro forma EBITDA from Agila? And if it does, can you at least give us that EBITDA number that was included in that calculation?
Okay. So I'll start with when we should see benefit: literally, within the first full year. I mean, as I said, it's going to double our current injectables business in the first full year after closing. So we see this as immediately being accretive. And as John noted that having significant growth rates exceeding ours, our CAGR growth rate. So I think we see immediate, accretive, and like I said, this is the first full year.
John D. Sheehan
So with respect to the gross leverage ratio of 3.3x that I mentioned in my prepared remarks and was on the slide, that is pro forma, including the Agila transaction. The Agila transaction isn't expected to close until Q4. And therefore, when you consider that EBITDA that will be for 1 quarter or less in comparison to consolidated Mylan, it's not really adding a whole lot.
Your next question comes from Greg Gilbert of Bank of America.
Gregory B. Gilbert - BofA Merrill Lynch, Research Division
And first, John, thanks for the color on the return profile of the acquisition going beyond just accretion. I appreciate that. I have a question for Rajiv on the Agila pipeline. Of those ANDAs that are pending from Agila, can you talk about roughly what split is already partnered versus unencumbered? And maybe another cut would be, how many of those molecules are sort of already genericized markets as opposed to ones where you might be approved upon generic market formation?
Yes. So as I said, that we have a pending -- and that's about 136 between Mylan and Agila. And if I just take Agila, 122, it's unencumbered. And that's for the next couple of years, if I just take '13 and '14 approvals and give you an idea about the ratio, about 30 ANDAs are unencumbered and about 19 are encumbered. So you take that ratio and you can use that ratio for the -- so out of 120, almost 75 ANDAs are unencumbered and about 45 ANDAs are encumbered.
And I think just, Greg, further to define the pipeline and paragraph 4 and stuff like that, as John said, we certainly -- come Investor Day, we'll be able to give a lot more color around the combination both from a financial, as well as the pipeline perspective and what we see, as we said, the acceleration of our own target around the injectables business and get some more transparency around that.
Yes. And just to add to that, a combined portfolio between Mylan and Agila will cover almost the 70% of a landscape, which is out there in the injectables space.
Your next question comes from Jason Gerberry of Leerink Swann.
Jason M. Gerberry - Leerink Swann LLC, Research Division
Just to -- I guess the insulin analog deal, just curious, obviously, Pfizer kind of walked away from that asset. Just kind of curious what your thoughts are on development timeline associated with that program, specifically, Lanthis [ph], the most high value target there.
We did what Mylan exactly does. We did our own work. We did spend a lot of time with the Biocon team to understand the science and understand the depth of the science we still have already covered. And we believe very confident that these products can be further pursued and brought to the market. And based on that confidence, I think we had gone -- we cannot comment on why Pfizer walked away, but we made this call based on what we found in our due diligence process.
And maybe I will just add. If you think about our Advair opportunity, I think that if you think about what Pfizer is focused on and where their core strengths are, as we said, as they develop that device, and as I said, we've reaffirmed with the FDA our ability, our pathway to a substitutable generic Advair, it's where, as Rajiv said, where Mylan's core competencies kick in. And I would say you could think [ph] insulin around in that same way.
Your next question comes from Ronny Gal of Bernstein.
The first one is just a little bit far off from the cost issue. I'm getting my email flooded with email of people asking me. So what valuation basis you used to make this acquisition? So [indiscernible] certain numbers from you. You obviously had to do some sort of a financial analysis in your own mind based on some year, based on some projection to convince you that this is an asset you should buy. Can you just give us any idea about the framework and what kind of number did you get out of that? And second, regarding your R&D, I'm glad to see that you're raising it. The question is, are you raising it enough? If you're taking on an insulin project, you're developing a few biosimilars, you're clearly going to have some work to do with respiratory. Is this -- is $500 million going to be enough? Are you spending as much as you should to make the numbers next year? Or are you really funding all the projects you should? That is, is there more room to raise the R&D even further to accelerate some of those programs?
John D. Sheehan
Do you want to start...
Yes, I'll start with your last question. Hopefully, what was able to come through when you look at our historical track record around R&D, and, obviously, our -- the growth in the -- what we have produced as a result over the last 5 years should hopefully show our ability to invest at the right levels and to the right products. And I think that as you look going out, obviously, as I'm sure you realize, the biologics and Advairs and so forth are multi-year projects. So I can assure you that we have -- as we look out to our $6 target in 2018, that certainly fully incorporates spending the right levels of R&D throughout those years to bring those products to the market.
John D. Sheehan
So I think on your first question, Ronnie, first of all, Agila's business has been growing substantially and is projected to grow -- continue to grow significantly. And we did bottoms-up due diligence over a long period of time. And we looked at what we believe that asset can grow at. We also looked at what the asset can do in Mylan's hands. And I guess what I would say to you in the bottom line is that we paid what we believe is a very good price for and is comparable to other injectable transactions that have taken place.
Your next question comes from Elliot Wilbur of Needham & Company.
Elliot Wilbur - Needham & Company, LLC, Research Division
Congratulations on the transaction as well. John, I guess -- I mean, there are numbers out there on the Agila business that have been published by Strides and granted they're not under U.S. GAAP, there maybe some things that you may not be able to recognize there. But based on the last results that were put out, that business was doing about $280 million in revenue, with $100 million in EBITDA on an annualized basis using 3Q numbers. And I think what is going to happen here is people are going to look at those numbers and say, "Wow, this transaction looks pretty expensive on a historical basis." But given what is going on in that business and what Strides has talked about historically, I mean, this is really a 2014 transaction. And I would assume that those numbers could potentially double by that period. So I just -- I think it's not really helping shareholders to not have some idea of what you guys were looking at in terms of the forward-looking numbers on the business. So maybe if you could just comment on the historically numbers at least and whether or not that's a reasonable base to start thinking about what could happen in 2014.
John D. Sheehan
Look, Elliot, I acknowledge that there are -- that Strides, there is financial information. I indicated earlier in the call, there's financial information out there for Strides, and that Agila is the largest portion of Strides. And I think you're 100% right. It isn't what the business has done historically because it is growing at substantial rates, not just double digit but at very substantial rates and so is what the asset is going to do in 2014 that we were looking at. And we will lay out the financial information with respect to what this asset will do with -- when the Mylan -- as part of the Mylan global platform later this year in our Investor Day, which will still be well before the acquisition closes. And in response to a previous question, I did indicate that the acquisition price we paid is comparable with other injectable acquisitions.
And I think multiples as well.
John D. Sheehan
And that's what I really meant by that, yes.
Your next question comes from the line of Gary Nachman of Susquehanna Financial Group.
Gary Nachman - Susquehanna Financial Group, LLLP, Research Division
How much overlap does Agila have with your portfolio? Any concerns from an FTC standpoint that some divestitures may be required? And what are the additional $250 million in payments tied to? If you can comment on that, that would be great.
Let me go ahead with the overlap first. It's very insignificant. We did have some divestitures, but they're very insignificant.
John D. Sheehan
So with respect to the additional payments, it's subject to satisfaction of certain conditions by Strides before closing or shortly thereafter. However, to the extent that the $250 million or some part of it becomes payable, there would be additional EBITDA that would be associated with the -- with those additional payments that would come with the business. So it is -- the EBITDA and the additional payments would be tied to each other.
Your next question comes from the line of Randall Stanicky of Canaccord Genuity.
Randall Stanicky - Canaccord Genuity, Research Division
Just maybe a question. If you just confirm that the EBITDA margins are above your corp average? And Rajiv, I'd be interested to see, how much margin upside is there when that business moves from 2/3 partnered to 1/3 partnered?
Well, I mean, I'll start, I guess, just kind of at the more macro level. I think, obviously, when we look at vertical integration, again, just as you've seen, our margins constantly tick up year-after-year. I think you should expect, especially what we consider this to be, even a higher barrier to entry and the dynamics of the injectable market is in right now, but we certainly see those margins very attractively.
John D. Sheehan
And, yes, I can confirm that the EBITDA margins of the Agila business are in excess of the average for Mylan.
Your next question comes from the line of Michael Tong of Wells Fargo.
Michael Kallai Tong - Wells Fargo Securities, LLC, Research Division
John, I was wondering if you can clarify for me just 1 thing. When you talk about your gross leverage, it was 3.3x projected year-end 2013 based on pro forma EBITDA. And in response to Chris' question, you also said that the EBITDA contribution from Agila is relatively minor, but that's not pro forma. So can you clarify what EBITDA you're actually using to come up with the 3.3?
John D. Sheehan
The EBITDA for Agila in relation to the $2 billion of EBITDA that Mylan has, the historical EBITDA of Agila is not that significant to be impacting the calculation.
Your next question comes from Ken Cacciatore of Cowen and Company.
Ken Cacciatore - Cowen and Company, LLC, Research Division
Just a lot of numbers. I'm just trying to work through them. I just wanted to understand, for 2013, just looking at your guidance, is operating income expected to essentially be flat? And then I was just wondering, strategically, going forward, with this generic acquisition, are we -- should we be thinking now going forward a pivot towards brand? Is that where you want us to think about future acquisitions? Do you feel like you've done enough here in terms of doing a great job of consolidating in the generic industry?
So I'll start with your last question. I would say that there is still plenty of room in the generic space. Firstly, right now, the most important market in the United States. But I would say there's so many dosage forms and therapeutic categories that we don't have critical mass around. So I would assume that we're looking at anything that would continue to complement our current portfolio in that way. And, obviously, our Specialty division, as we've said, is something that we're continuing to invest in. So we're still going to be looking at acquisition opportunities across the whole spectrum of our business.
John D. Sheehan
So I'll answer your question with respect to earnings growth by focusing you on EBITDA. We generated $1.892 billion of EBITDA in 2012, and our guidance range for 2013 is $1.9 billion to $2.1 billion. So there is definitely growth. And I really want to point out that, that is after growing our R&D by $80 million to $100 million year-over-year. So we are both growing this business and investing in the future through the higher R&D. And we really tried to bring that out in our prepared remarks.
Your next question comes from Tim Chiang of CRT Capital.
Timothy Chiang - CRT Capital Group LLC, Research Division
Heather, you gave some guidance figures for price erosion in the U.S. and EMEA. I'm particularly interested in the EMEA for 2013. Is there some sea change event that's going on in Europe at this point that gives you more comfort that price erosion is going to be in the single digits this year?
Yes. I think as I stated earlier, that what we see with the generic utilization increasing and not insignificantly in our markets, especially in France, that we see volumes helping to offset the pricing pressure. So, yes, we have single digit in there, but keep in mind that, that's with volume offsetting. So I think that we definitely have confidence and see this mix between volume and price with the utilization increases across Europe.
Your next question comes from Louise Chen of Guggenheim.
Louise Alesandra Chen - Guggenheim Securities, LLC, Research Division
My question is on what your thoughts on the competitive dynamics and the generic injectable space with regards to pricing, the increased FDA scrutiny. And as some of these larger players come back to the market, what do you think your competitive advantages are relative to those other players?
I would say that we absolutely see that, that's part of the attractiveness in why the timing is so perfect, I think, for us to be able to establish a leadership position in this space at this time. I think as you see the discussions [ph] that have happened, as I said, over 45% of the drug shortages have been attributed to these quality and manufacturing issues, that there's just an opportunity for someone to step in with quality-reliable supply. And so I think as we establish ourselves, as we have in the solid oral dosage and many other market forms, as you're able to establish that reliability and supply is extremely important to customers. So while -- as we've said, there's certainly other large players in this arena that I'm sure will come and go and have their volatility, but that's why we see a huge opportunity for us to gain a leading position in this industry. And I would say that I absolutely believe that the GDUFA legislation that was passed last year will absolutely continue to bring much more scrutiny to these facilities that are supplying drugs [ph] into the U.S., and that will continue to [indiscernible] to our benefit.
Our last question comes from David Buck of Buckingham Research Group.
David G. Buck - The Buckingham Research Group Incorporated
I'll try to be brief. First, for Heather or John, just on the revenue assumptions for this year, it looks like for generics to be up 3%, I think you're assuming down U.S. generic sales. And I just was curious whether you're assuming reported sales being up in Europe and reported sales being up in Asia Pacific with the current exchange rate on the yen having weakened. And then just a quick couple for Agila. Can you talk a little bit about, Rajiv, what level of scrutiny do you feel the Agila business has had in terms of FDA inspections? Is it similar frequency to what you expect to be seen from the U.S.-based companies? Or has it been less frequent? And then, John, I know you don't want to give numbers, but there's some guides out there. You said multiple is similar to previous transactions. Can you confirm it somewhere in the 13x to 15x EBITDA range? And that's it.
John D. Sheehan
Yes. So I -- with respect to 2013 revenue growth, they -- I think I indicated in my prepared remarks that the North American business would -- the North American Generics business would grow in 2013, excluding the impact of Escitalopram, which, as you certainly know, was a very large launch in 2012. And, yes, I can confirm that the Asia Pacific and European businesses are growing in 2013.
And regarding the facilities, I think that's been one of the key area where we have spent a lot of time -- that's captured in my script. And these are some of the brand-new assets. All of these sites have gone through FDA -- 7 sites, out of -- 8 sites have gone through FDA approval. There have been -- some of these have been inspected multiple times. Quality, as with their very strong inspection track record, was one of the key area which impressed us. And more than that, every other day, because of the multinational partners, they have been instructed by various partners across the year. So, in fact, if I have to pick up the 1 differentiating area, this is their manufacturing asset diversified base and very strong capabilities are in this space.
John D. Sheehan
And I guess just to answer your last question, David, with respect to the market comparables for other injectables acquisitions, I don't disagree about the 13x to 15x being the range -- a range of what those types of transactions have occurred at.
So thank you, everyone, and we'll look forward to talking to you soon.
John D. Sheehan
Thank you. This does conclude today's teleconference. Please disconnect your lines at this time, and have a wonderful day.
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