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Mylan Inc (NASDAQ:MYL)

Barclays Global Healthcare Conference

March 13, 2013 8:00 am ET

Executives

John D. Sheehan - Chief Financial Officer and Executive Vice President

Analysts

Douglas D. Tsao - Barclays Capital, Research Division

Douglas D. Tsao - Barclays Capital, Research Division

Good morning, everybody. I think we'll get started. The appointed hour is here. I know there'll be people still turning in because I think many people enjoyed the social scene at Miami Beach last night.

So -- but I'm Doug Tsao. I see a lot of familiar faces, certainly from yesterday but -- and also through the years. I cover U.S. specialty pharmaceuticals here at Barclays.

I'm very pleased to start off the second day of the conference with John Sheehan, the CFO from Mylan, which is a name that has been in the news quite a bit in the last few weeks, certainly in spec pharma sort of -- especially with the very meaningful acquisition that they announced on -- a couple of weeks ago.

So John, perhaps maybe, I don't know if you want to take a couple of minutes to talk about the Agila transaction and what you see sort of that accomplishing for Mylan, as well as sort of the perspective as you look ahead to sort of 2013 and where the company is today.

John D. Sheehan

Yes, no. Thanks very much, Doug, and very much appreciate the opportunity to be here with you in Miami.

As Doug indicated, we did, last week -- 2 weeks ago, excuse me, in conjunction with our year-end earnings call, announced the acquisition of Agila, which is an Indian specialty -- sorry, injectables pharma company. And this is a very significant transaction for us.

If you go look at Mylan's history with respect to institutional and injectables, we first got into that part of the market in 2010 in conjunction with our acquisition of Bioniche. Before that, we had small parts of the business around the globe, as well as a small unit dose packaging business here in the U.S. So that when you combine the Bioniche business that we have had here in the United States now with Agila, which has about 122 ANDAs pending with the FDA, 80 products, injectables, that we're able to take those products and their pipeline and to use that with our commercial operations around the world, especially here in the United States, where Agila had really only scratched the surface, we believe that this acquisition will make us one of the top players in the injectables business on a global basis. So we think the acquisition is a tremendous opportunity for us to expand into the injectables market, which is, as you know, a higher-margin part of the industry.

And a couple of other points I would make, why is Agila attractive to us? When you look at the manufacturing network that they have in India, many of their facilities are FDA-compliant. They've -- very high quality. We've spent a lot of time in their manufacturing facilities, making sure that we understood the quality of their manufacturing processes. Because this is a part of the industry had that has had its issues with respect to quality.

In addition to that, their R&D capabilities are some of the best in the industry, we believe. And so that when you combine that with Mylan's already strong R&D capabilities, our regulatory approval process capabilities, we believe that those combinations, so another factor that was very important in the acquisition.

And then lastly, I would point out is the Brazil business that they have. They have a presence in Brazil, and that's a market that we, as Mylan, have not been previously in. And so if we're able to take their business in Brazil or we intend to take their business in Brazil and to then build out the product portfolio with Mylan's breadth of product portfolio and that we believe that, that is a platform that we can grow in the Brazilian market and in the Latin American market in general.

So I think those are all some of the highlights or the positives of why we believe the Agila acquisition was the right acquisition for Mylan in 2013.

Douglas D. Tsao - Barclays Capital, Research Division

John, I think there's a little sort of question in terms of the valuation that you paid for the business. And certainly, how Agila themselves perhaps offer a framework independently of the company. I was surprised, I thought you could perhaps, you could sort of address it in how you were looking at this and the returns that could be generated and why you paid what you ultimately paid.

John D. Sheehan

Sure. So we paid $1.6 billion, and quite honestly, we think the purchase price is both fully appropriate and a really good deal. The Agila business is growing significantly, dramatically. And when you combine -- it's -- when you look at the Agila business, it's not what Agila has done on a historic basis that's important. It's what is it going to do in the future with a combined Mylan platform. Because that's what we bought. We bought the future. We didn't buy the past. And so when -- as we indicated on, in response to questions in our earnings call a couple weeks ago, we believe that the price we paid is fully appropriate with industry multiples for injectables transactions. I was asked specifically about 13 to 15 is somebody's view of what industry multiples were, and I didn't disagree with that. But it isn't about whether it's 13, 14, 15, whatever it is. It's how we're going to take that platform, combine it with Mylan and accelerate the growth of the combined group. We have an Investor Day coming up this coming August 1, and -- because this transaction won't close until the fourth quarter. So it's not about 2013 for Mylan. It's about '14 and beyond. And so we'll provide a '14 and beyond view as part of our Investor Day. And we think that's the right time to really highlight what this acquisition will do for the combined group.

Douglas D. Tsao - Barclays Capital, Research Division

And just to -- not to dwell on this point, but was it, sort of like that 2014, 2015 performance that you were basing your valuation off of?

John D. Sheehan

Yes, absolutely. Absolutely. It certainly wasn't 2012.

Douglas D. Tsao - Barclays Capital, Research Division

And then, I think probably somewhat overshadowed was the 2013 outlook that you provided. I'm just sort of curious in terms of what you see as some of the key moving parts, as well as perhaps sort of your perspective as we start the year, sort of the cadence of the earnings number in terms of how we should be thinking about our modeling.

John D. Sheehan

Yes. So we indicated that for 2013, that we saw revenue being in the $7 billion to $7.4 billion range. The -- obviously, 2012 was a very strong year for Mylan and for the industry in general. And so versus the last several years, the growth is not as strong, but that's been anticipated for some time. That's not new news. From an EPS perspective, growing the midpoint of our guidance range $2.75 to $2.95, midpoint $2.85, versus the $2.59 that we reported for 2012. So still very strong, very good bottom line growth, also demonstrates the operating leverage of our business, where we see the gross margin increasing again. We increased our guidance range for 2013, our margins to 49% to 51%. And so we've been seeing a constant growth in our margins over the last 4, 5 years, and that demonstrates the operating leverage we have in the business. You also asked about the cadence of earnings. We did indicate on the call that we saw the first quarter earnings to be in the $0.60 to $0.62 per share range. We -- the third quarter is our strongest quarter of the year. That's where the EPIPEN, our Specialty branded product, EPIPEN sales are the strongest. And then we saw the second and fourth quarters being very similar to each other. So -- but from a quarterly perspective here in the first quarter, $0.60 to $0.62. That's down a little bit from the fourth quarter. We had a lower tax rate in Q4 than we'll have in Q1. And in Q2 -- Q1 2012, there was also the Escitalopram launch, which also made that a very strong quarter.

Douglas D. Tsao - Barclays Capital, Research Division

And then you sort of touched on the EPIPEN franchise. And one question I had is like how much, when I think about the step up in the gross margin guidance, is associated with EPIPEN versus just broader overall operating leverage in the business, as well as a lot of the sort of operational improvements that you've made, as well as -- especially in Europe, where there's been a lot of costs taken out of the business.

John D. Sheehan

Right, right. It's a combination of both. When you look -- as we've said publicly and I've talked about a lot, so the EPIPEN is manufactured for Mylan by Meridian, which is a subsidiary of Pfizer. So the EPIPEN, although a branded product, doesn't have full-branded margins associated with it. The margins are better than the Mylan corporate average. So certainly the growth of EPIPEN has contributed to our growth in margins over the last years. But in addition to that, our overall business, our Generics business, had -- through the continued vertical integration of our business, almost all of our new products today are manufactured internally by Mylan using Mylan API, the raw ingredients that go into the pharmaceuticals. So that it is that continued vertical integration of the business, which was part of the strategy of the Merck and Matrix acquisitions in the 2007 timeframe, that has led to the gross margin increase.

Douglas D. Tsao - Barclays Capital, Research Division

And then in terms of EPIPEN, a couple sort of questions about some of the seasonality of the product, as well as you did have a competitive launch by Sanofi with the Auvi-Q product and sort of what your perspectives are, and feedback in terms of people trying to read the tea leaves of the scripts early on and sort of your perspective on initiatives you've done to retain share.

John D. Sheehan

Sure. There actually is a lot of tea leaves reading going on at the moment. And the interesting thing is that when people think about the seasonality of the product, they mostly think about the third quarter. Back-to-school season, that's traditionally been EPIPEN's strongest quarter. We're actually seeing, here in 2013, an additional seasonality, I'll use the word phenomenon. And that is, is that in the first quarter of 2012, we saw very strong growth in scripts for EPIPEN year-over-year. And that coincided with a very warm winter in the United States last year. Allergy season started much earlier and as a result, there was an early increase in the EPIPEN scripts. If you look -- go back and look to the first quarter of last year, was the strongest year-over-year growth in scripts for EPIPEN that ever -- that we ever had. And this has been a much colder winter in 2013 than 2012, especially in the Northeast, which is the strongest market for EPIPEN. And as a result, the -- while the growth in EPIPEN -- the script growth in EPIPEN has absolutely slowed, it's as much, quite honestly, the result of the comparator being the first quarter of last year than anything else. We're still very pleased with the overall growth in the market. In fact, every region in the United States, other than the Northeast, is growing year-over-year for EPIPEN at the moment. You mentioned the Auvi-Q launch. That really isn't affecting the script growth that much. Yes, they've garnered a little over 2% market share. That was fully expected on our part. And when you factor that in with the EPIPEN, actually, the market itself is flat for the seasonality reason that I said a few moments ago, for no other reason than that. So we're still extremely bullish on EPIPEN. We think that it's going to be a great year. And I think that folks who are watching the scripts have to take into consideration the warm winter we had last year.

Douglas D. Tsao - Barclays Capital, Research Division

And have you seen anything from Sanofi's initial marketing strategy that was a surprise in terms of their go-to-market sort of approach?

John D. Sheehan

No. I think that when you look at what they have been selling on, they have been selling on the risk of anaphylactic shock, and that this is a very much underappreciated risk, and -- which is exactly what we at Mylan have been preaching for some time now. And as you know, the Auvi-Q is not a substitutable product. It is a 505(b)(2). And as a result, it's not substitutable. So they're out selling and talking to doctors and allergists, pediatricians, et cetera, about the risks of anaphylactic shock. And we believe that when they do that, it grows the overall market and Mylan and EPIPEN benefits. So I think they're selling exactly the same way we are, and that's a benefit to us.

Douglas D. Tsao - Barclays Capital, Research Division

Okay. And then, Lidoderm was a product that you had sort of talked about as a very strong opportunity. The company has a strong history in transdermal. I know there was some news recently in terms of your opportunity to bring the -- in terms of the timing, to bring the product to market. Perhaps provide a little bit of an update for all of us as to where it is, where it's -- what's been going on.

John D. Sheehan

Yes. So I guess I'll start, number one, by saying that absolutely nothing has changed with respect to Lidoderm from our perspective. What Doug is referring to is that earlier this week, a judge in Delaware did reinstate the 30-month stay associated with EPIPEN -- excuse, EPIPEN -- with Lidoderm, that had been vacated as a result of the litigation with Endo being dismissed. The 30-month stay that was reinstated is the original 30-month stay that expires in mid-July of this year. And quite honestly, we've never said that we were bringing the product to market before or we'd be in a position to bring the market to product before the third quarter anyway. So we don't see that the judge's ruling, which, by the way, we don't actually agree with, but I'll leave that particular point aside here, that it affects us in any way. As you know, we've said it many times, we don't believe that anybody holds exclusivity with respect to Lidoderm. And as a result, that upon the expiration of the 30-month stay, to the extent that the judge's order remains, that we would be in a position to bring that product to market later this year.

Douglas D. Tsao - Barclays Capital, Research Division

And so just given the Agila transaction, we didn't spend as much time going through some of the -- what was in and what wasn't included in guidance. How much of a factor or contributor to your 2013 outlook is a potential Lidoderm launch?

John D. Sheehan

So with respect to Lidoderm, as with all products, we risk-adjust the product. Yes, what we -- I think we have had a very strong track record of is doing what we say we're going to do. And I think my obligation, our obligation at Mylan to you is to take the positives and the negatives that we see or the risks and the opportunities we see in our business and to provide you balanced guidance. And that's -- so that whether a Lidoderm is approved or not approved, if product X is approved or not approved, if Europe does better or worse, or EPIPEN does better or worse, that we still meet that guidance. And so long-winded answer to your question to say that EPIPEN -- excuse me, Lidoderm is -- I keep wanting to say that -- Lidoderm is included in our guidance on a risk-adjusted basis, taking into consideration the risks that we may not be there. But just like all other -- so positives and negatives are going to happen. And if you look at -- out over the last 5 years, we've consistently met or exceeded our guidance.

Douglas D. Tsao - Barclays Capital, Research Division

And then sort of turning back, perhaps a little bit in relation to the Agila transaction, in terms of where you, the capability of the company's capital structure today, the sort of financing of that transaction and what that affords the company to do going forward in terms of M&A, which I think on the call, you did sort of highlight. You thought you still had some capacity, even after this transaction, to continue to look opportunistically.

John D. Sheehan

Yes, yes. So we -- there's a lot of questions in there. So if I start with capital structure, we completed the year at a gross debt-to-leverage ratio of 2.7:1. As you know, our long-term target for leverage is 3:1. And as a result of this Agila transaction, we would expect that we will close out 2013 in the 3.3:1 range. And we -- within the confines of our investment grade credit rating, and we are 100% committed to maintaining that investment grade credit rating, we certainly have additional capacity to do another -- additional transactions, right opportunities, whether they be M&A, additional share repurchase programs, whatever we believe is appropriate or our board believes is appropriate, at that point in time, to build additional shareholder value. The -- in terms of capacity, if you just look at it from an average 12x multiple, the capacity is probably to do as much as close to another Agila transaction. I'm not saying we're going to do another Agila transaction, but it's probably close to that if we really wanted to push the envelope, which, that's not necessarily where our heads are at, but we're always looking for opportunities. I think the other question you asked was the financing associated with the Agila transaction. We -- as we indicated on the call, we did enter into a bridge loan with Morgan Stanley, plus we have our own revolving credit facility availability. So that we -- we have committed financing to be able to finance the transaction. We would expect later this year to go out and not to use the revolver up, or the bridge, but to finance the transaction. Subsequent to the announcement of the transaction, we did enter into forward interest rate locks for a significant portion of the overall financing amount, at rates which leads me to be very confident that we would be able to finance the Agila transaction at under 4%.

Douglas D. Tsao - Barclays Capital, Research Division

And when you think about your capacity to do another Agila-sized deal, with the sort of injectables piece being taken cared of, of sorts...

John D. Sheehan

That's a risk in my saying we could do something else with this next question.

Douglas D. Tsao - Barclays Capital, Research Division

What interests you in terms of the -- would it be the generic side, the specialty side, sort of a complement to EPIPEN or...

John D. Sheehan

Yes. Certainly Agila does a lot of things for us, right? I mean, we've talked in the past about expansion into emerging markets. We got Brazil as part of the Agila transaction. We -- but there are other emerging markets that could be of interest. On the Specialty branded side, if there was something that added to our product portfolio for our Specialty business, that certainly would be of interest. And I guess, I -- so those are some of the places, emerging markets, increased product portfolio here in the United States, add to the Specialty franchise, complementary products to the Specialty franchise. But I also want to make sure that I don't overstate that we have always been very focused on integrating our acquisitions and doing a very strong job of getting out of those acquisitions, what we thought we could -- what we bought them for. And so we're not going to just simply say, "Okay, got this deal done, now let's move on to the next one." It's about making sure we do Agila right.

Douglas D. Tsao - Barclays Capital, Research Division

And do you have sort of an interest still in pursuing other alternative dosage forms?

John D. Sheehan

Absolutely, absolutely. Continuing to expand. The dosage forms, one of the charts we showed in our Investor Day is how our R&D network had grown, and we will continue to grow out the dosage forms.

Douglas D. Tsao - Barclays Capital, Research Division

Okay. Great. Well, I think we are now out of time, but we will [indiscernible].

John D. Sheehan

Thanks very much, Doug. I appreciate it. Thank you, everybody.

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