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Mylan Inc. (NASDAQ:MYL)

Q1 2009 Earnings Call Transcript

April 30, 2009 10:00 am ET

Executives

Dan Crookshank – VP of Global IR

Robert Coury – Vice Chairman and CEO

Heather Bresch – EVP and COO

Ed Borkowski – EVP and CFO

Bryan Byala – SVP and Treasurer

Analysts

Randall Stanicky – Goldman Sachs

Chris Schott – JPMorgan

Caius Christoe – Morgan Stanley

Marc Goodman – UBS

Greg Gilbert – Bank of America and Merrill Lynch

Ken Cacciatore – Cowen and Company

Rich Silver – Barclays Capital

Elliot Wilbur – Needham & Company

David Moskowitz – Caris & Company

Operator

We are about to begin. Welcome to Mylan's 2009 First Quarter Earnings Conference Call. As a reminder, this morning's call 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. Please go ahead.

Dan Crookshank

Thank you Teresa. Good morning everyone.

Joining me for today's call are Mylan's Vice Chairman and CEO, Robert J. Coury; Chief Operating Officer, Heather Bresch; Chief Financial Officer, Ed Borkowski, Executive Vice President and Head of Global Technical operations, Rajiv Malik, and Senior Vice President and Treasurer, Brian Byala.

During today’s call, including the Q&A, we will be making forward-looking statements including those relating 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 annual report on Form 10-K for the year ended December 31, 2008, and in our other Securities and Exchange Commission filings. You can see or you can access our Form 10-K and other SEC filings through the SEC website at www.sec.gov and we encourage you to do so.

In addition, during this conference call we will be referring to certain results and projections of Mylan that are non-GAAP measures. It should be noted that 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. Please refer to today's earnings release which contains detailed reconciliations from our GAAP basis measures to our non-GAAP basis adjusted net income, adjusted diluted EPS, and adjusted EBITDA measures.

Now before I turn the call over to Robert, let me also remind you that we are conducting a live webcast of the call that 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 that the material in the call with the exception of the participant questions is a property of Mylan and cannot be recorded or rebroadcast without Mylan's express written permission.

I'd now turn the call over to Robert.

Robert Coury

Thank you, Dan. Welcome everyone and thank you for taking the time to join us this morning. I would like to especially thank and welcome all of our employees around the world for another fantastic quarter. Our outstanding execution and continued dedication combined with our senior management team's exceptional focus on leadership have made it possible for us to report yet another quarter of strong results.

As we previously mentioned our growth for 2009 and 2010 is all about execution on our stated objectives. The results of our performance this quarter continued to demonstrate the value we have always envisioned from the combination of the strategic global assets that we have assembled. And as I have said many times before, I continue to believe that 2010 truly represents the baseline in which a new Mylan can grow from.

Operational excellence at Mylan has become a way of life for each and every one of our employees and I believe you will continue to benefit from their ongoing discipline and exceptional commitment. Early this morning, we reported an adjusted diluted earnings per share of $0.33 for the first quarter, results that once again exceeded our expectations and clearly demonstrated the momentum we created in 2008 continues to carry over into 2009. As a result of this momentum and the strength that we continue to see in our underlying business, we are raising the lower end of our guidance we reported in February by $0.10. The new midpoint of our adjusted range of a $1 to $1.10 now represents a 31% increase over last year's earnings per share of $0.80.

I would now like to take a minute and briefly comment on our previously announced intention to purchase the outstanding interest of Matrix Laboratories and de-list the company from the Indian stock exchange. As we stated earlier, Mylan's Board of Directors has approved an indicative price of up to 150 rupees per share for the acquisition of Matrix's outstanding shares. This morning I am extremely pleased to report that Matrix's shareholders have voted overwhelmingly to support these de-listing efforts. With that said, I would like to remind you that there are still several steps that still need to take place and that this is not a transaction that necessarily needed to get done.

Mylan controls more than 75% of Matrix's voting rights which gives us all the control necessary to run all aspects of that business unlike many other multinationals with investments in India. On the other hand, if we can complete the transaction, it will not only be accretive but it will also provide Mylan with additional enhanced flexibility to manage our global operations.

Before I turn the call over to our chief operating officer, Heather Bresch, and since it will be Ed Borkowski's last conference call, I would like to once again thank him for this dedication and commitment to Mylan over the past seven years and again wish him all the best. Although I'm not able to announce Ed's replacement at this time, I'm extremely pleased with the way the search process continues to go. And I am equally as pleased and impressed with the quality of the number of candidates that we are seeing today. I look forward to answering your questions but now let me turn the call over to Heather to take you through an operational review.

Heather Bresch

Thank you, Robert, and good morning everyone. As Robert mentioned, we're off to a very strong start this year. Through superb execution, adjusted revenues and gross margins are up, as we realize the synergies we planned and continue to find additional opportunities to operate our global assets even more efficiently. This resulted in another quarter of strong financial performance from the top line all the way to the bottom line where we delivered adjusted diluted earnings per share of $0.36.

Behind the scenes we are also off to an excellent start on our internal operational metrics including product approval, launches and global submission. Overall, our solid operational performance during the first quarter has not only set the stage for another outstanding year in 2009 but it is also feeling the powerful sustainable momentum that will allow us to continue delivering well into the future.

For the quarter, our commercial operations generated total adjusted revenues of 1.18 billion. Compared to last year's first quarter, this represents an increase of 10% on a reported basis and approximately 20% on a constant currency basis, as all of our businesses delivered performance at or better than expectations.

North America genetics once again led the way generating significantly higher year-over-year adjusted revenues while revenues from our EMEA and APAC generic regions were as expected both lower due to the effects of a currently stronger US dollar. Yet despite the stronger dollar, Matrix again posted a solid quarter delivering good growth in third-party revenue. Our Dey specialty segment also performed well and delivered another solid quarter of improving results.

Taking a look at each region and business in more detail, let me start with North America, where we simply continue to hit on all cylinders. Our substantial year-over-year increase in adjusted revenues this quarter was driven by a host of new product launches over the past 12 months, including Paroxetine ER, Levetiracetam, Felodipine, Ropinirole and Divalproex ER. We expect to continue to benefit from our strong market position on most of these products throughout the remainder of the year, as well as from market exclusivity on the 500 milligram strength of Divalproex ER through the beginning of August.

In addition, Fentanyl remained a consistent contributor to our performance this quarter despite the entry of an additional competitor into the market in last year's fourth quarter. Our market share continues to stay above 50%. Going forward, our projections continue to factor a lower market share and additional price erosion versus what we experienced in 2008.

In EMEA and APAC, our first-quarter revenues on a local currency basis were essentially flat compared with the same period of last year, once again in line with our expectations. EMEA compared to the prior period, higher revenues in France, Spain and Belgium, as well as incremental revenues contributed by our central and eastern European countries were offset by increased rebate pressure in Germany, government price reductions in Portugal, and continued pressure in the UK.

In Asia Pacific, revenues were affected by government mandated price cuts that took effect last year occurring in April in Japan and in July in Australia. Despite these cuts, we are see encouraging signs of market stabilization in Australia as product volumes have increased year over year. In Japan, we saw volumes and revenues rise. Recall that both countries introduced incentives last year to increase the utilization of generic products and we're pleased to see that those actions appear to be having the desired effect. Also note that the first quarter is typically a seasonally slow period in Australia and Japan and as such we expect higher revenues during the next three quarters.

At Matrix, first quarter revenues grew at double-digit rate year-over-year. Driving the increase was the continued expansion of Matrix antiretroviral franchise. The expansion included higher sales of ARV API, sales of first line finished those forms, which we introduce after last year's first quarter and the sales of second line finished dosage forms. We're very proud of our ARV franchise which recently won a UNITAID bid to be CHAI's primary supplier of five second line and seven pediatric HIV/AIDS treatment.

And lastly our Dey specialty business delivered another solid quarter. Continued growth from performers and slightly higher EpiPen sales were partially offset by lower sales of DuoNeb which experienced greater generic competition during the first quarter than it did during the same period last year. EpiPen's performance as is customary reflects the seasonally slow fall and winter sale periods in the US. We continue to be excited about the opportunities for EpiPen both in the US and around the world and continue our sales and educational outreach efforts to expand its market. In addition, we are pleased with how performance is doing and expect continued growth in this product. Further, our restructuring efforts at Dey are running right on schedule and we plan to open our new commercial office in New Jersey in mid-May.

In summary, our outstanding execution and very solid across the board top line performance allowed us to deliver strong adjusted gross margin and our integration synergies and other operational efficiency actions continue to bear fruit as our R&D and SG&A expenses remained well in check. Ed will walk you through each of these metrics in the moment, but in closing, I would like to emphasize how very pleased I am with the performance of all of our businesses this quarter and thank all of our employees around the world who made it possible.

With that, I would like to turn the call over to Ed.

Ed Borkowski

Hello, everyone.

I would like to begin by walking you through our first-quarter financial results. I will then turn the call over to our Treasurer, Brian Byala, who will provide you with an update on our capital structure and liquidity position and then I will finish up with a discussion on today's update to our 2009 financial guidance. During my review, I will refer to specific financial metrics that had been prepared on an adjusted basis, the basis upon which we develop all elements of our financial guidance. Please refer to the non-GAAP measure section of our of today's earnings release for a detailed reconciliation of these adjusted basis amounts to our GAAP basis measures.

As Rob and Heather mentioned, 2009 is off to a great start as continued solid execution across the company led to another quarter of strong financial results and contributed to several positive adjustments to our 2009 financial guidance. Starting on the top line, total company adjusted revenues for the quarter were $1.18 billion, a 10% increase over last year's first quarter. Excluding the effect of a currently stronger US dollar, year-over-year growth in adjusted revenues would have been approximately 20%. Note that current quarter adjusted revenues excludes approximately $29 million of previously deferred revenues related to the termination of certain product development agreements. We continue to project total revenues for the full year to be in the range of $4.6 billion to $4.9 billion.

Looking at our operational profitability measures, adjusted gross margin for the quarter was 48.5%, above the upper end of our full-year guidance range of 46% to 48%, and approximately 450 basis points higher than last year's first quarter adjusted gross margin of 43.9%. This improved performance was driven by our strong US product mix that Heather mentioned earlier, the favorable effect of the integration of the acquired Merck assets, and other operational efficiency actions, as well as continued solid execution from our global commercial operations and technical platforms.

Adjusted R&D expense for the quarter was $55 million or 4.6% of adjusted revenues, slightly below the low end of our full year guidance range of 5% to 6%. This represents a decrease of $26 million compared to last year's first quarter adjusted R&D expense due to achieved integration related synergies, the favorable timing of certain R&D projects in the current year, and the favorable effect of a currently stronger US dollar. Adjusted estimate cost for the first quarter were $229 million or 19.4% of adjusted revenues towards the lower end of our full-year guidance range of 19% to 21% and essentially flat compared to the same period a year ago. As with our R&D expenses, current quarter SG&A costs also reflect the favorable impact of a currently stronger US dollar.

Adjusted EBITDA came in at $326 million for the quarter, $127 million higher than the 199 million of adjusted EBITDA we reported for the same period last year, putting us on track to achieve our full-year adjusted EBITDA guidance in the range of 1.075 to $1.275 billion.

Now taking a look at a couple of a non-operational financial metrics, cash interest expense for the first quarter was $75 million compared to $91 million in last year's first quarter, reflective of the proactive actions taken throughout 2008 to further optimize our capital structure as well as a currently favorable short-term interest rate environment. And our adjusted effective income tax rate was approximately 30% including the benefit of tax synergies which totaled about $16 million in the quarter. We continue to expect our full-year adjusted effective income tax rate to be about 30% to 31% including the expected benefits of tax synergies.

Adjusted diluted EPS was $0.33. This represents an increase of $0.24 over last year's first quarter adjusted EPS of $0.09 and was driven by a combination of the factors I just highlighted. Note also that in calculating our adjusted diluted EPS, the impact of assuming the conversion of our preferred shares into 152.8 million common shares was more dilutive than the $35 million preferred dividend. As such, adjusted diluted EPS for the quarter is calculated based on an average outstanding share count of 458 million shares.

And finally a quick look at our cash flow metrics for the quarter. We generated $126 million in operating cash flow for the quarter and remain on track toward achieving our full-year operating cash flow projections of $450 million to $550 million. Our capital expenditures were $31 million for the quarter and we continue to expect CapEx to approximate $200 million for the full year.

Now I would like to turn the call over to Brian who will provide you with an update on our capital structure and liquidity position.

Bryan Byala

Thank you, Ed, and good morning everyone.

Let me start off by saying that our capital structure, liquidity and cash flow position is extremely healthy. In December 2008, we repaid all 2009 scheduled amortization term loans to the amount of $114 million. In the first quarter of this year, we reviewed our financial position and cash flow projections and felt comfortable and further repaid all 2010 scheduled term loan amortization to the amount of $154 million. Our liquidity position is at its strongest since the acquisition of the former Merck generic business. We have no significant debt maturities until 2012 and we project that we will be able to repay those with cash on hand and has generated through that period.

Even after the first quarter repayments, we ended the quarter with 493 million in unrestricted cash and marketable securities. And as Ed mentioned, we continue to forecast full year cash flow from operations in the $450 million to $550 million range. As a result of our repayments and our earnings generation, our senior secured debt levels have fallen to approximately 3 times our last covenant base of adjusted EBITDA which was well below both our March 31 covenant threshold of 5.25 times and the upcoming December covenant threshold of 4.0 times.

In terms of interest expense, we continue to benefit from the impact of the falling rate environment and our floating rate debt. Early on the quarter, we executed an additional interest rates swap agreement on 200 million euros of our euro denominated term loan borrowings, fixing the interest rate on this amount of our borrowings at 5.38% through March 30, 2011. We currently project an all in weighted average cash interest cost of 5.5% for 2009.

In summary, our liquidity and capital structure is in a very strong position to continue to support the growth of the company. Now let me turn the call back over to Ed.

Ed Borkowski

Thanks Brian.

I will conclude by touching upon the two elements of our 2009 financial guidance that we are announcing revisions to today, our cash cost of borrowing and our adjusted diluted EPS. First with respect to our borrowing costs, as Brian just mentioned, we are now expecting our overall weighted average cash cost of borrowings for 2009, including the annual amortization of previously paid debt financing fees to be approximately 5.5% or cash interest cost in the range of $290 million to $300 million. This compares to our previous guidance assumptions of 5.75% to 6% or a cash borrowing cost of about $310 million.

And with respect to our adjusted diluted EPS guidance, as Rob mentioned earlier, we are raising the lower end of our guidance range by $0.10. Our updated full year adjusted diluted EPS guidance range now stands at $1 to $1.10 as compared to our previous range of $0.90 to $1.10. As to our guidance for the remainder of the year, consistent with what we said in February, we still expect the first half of the year to be stronger than the second half. And as we move sequentially from quarter one to quarter two, we expect adjusted diluted EPS to be impacted by higher R&D spending and the expected loss of exclusivity on Levetiracetam and the 250 milligrams strength of Divalproex, all three of which favorably impacted our first quarter results. All other elements of our full-year 2009 financial guidance, most of which I have already mentioned, remain unchanged from the guidance we announced on February 19.

And that concludes my review. I will turn the call back over to Dan to start the Q&A session. Thank you.

Dan Crookshank

Thanks Ed. Teresa, we are now ready to open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). Our first question is from Randall Stanicky with Goldman Sachs.

Randall Stanicky – Goldman Sachs

Great. Thanks for the question. Just a two-part question. First Robert, can you just talk about 2010 outlook, are you still comfortable with that range, and are the components of that guidance range generally still the way we should be thinking about that? And then secondly, with the $0.33 this quarter, you have Depakote exclusivity through mid year, obviously first half stronger than second, but can you just talk about the full year and some of the triggers in the back half that can actually lift numbers above the range that you have given?

Robert Coury

Yes. I will go to a high-level and then it Heather wants to comment on top of that, she can as well. In terms of 2010, 100% everything still intact. As I stated in the past, on every single quarterly conference call, we are not going to just keep reiterating ten, I'll keep on 9.9 and I will give 10 at the appropriate time, but every thing we put out on in February 2010, everything all intact. That is as I said, Randall, that year to me is really the baseline year for this company.

And all metrics that we have – that we are counting on in terms of rolling into 2010 are all the exact same metrics, nothing has changed. And as far as this year and the $0.33, look I am extremely pleased with the execution and what continues to be a lot of momentum, a lot of wind behind ourselves in terms of the underlying operations and resultant performance. But because of the launch of Divalproex and because of our R&D timing of our expense, the way we offset those two, we are still very comfortable with where we are for now.

Do I think that there are upside opportunities? Yes. I'm not going to kid you, no, I think there are some upside opportunities. Lifting the bottom end of the guidance substantially as I promised I would the last time and tightened the range we think is the appropriate thing to do. I still believe the guidance that we have out there for 2009 is a responsible guidance, but yes, there can be some potential upside, and if there is, obviously as we roll out quarter to quarter, we will give you more transparency on that. Heather, do you want to add anything else to that?

Heather Bresch

Maybe only a couple – two other things that affected I think first quarter as well. We had factored in competition on the 250 mg strength of Divalproex , it ended up coming to fruition in Q1, and we continue to have that competition factored into going forward. And as well as I mentioned Fentanyl, we continue to factor in more competition. So those are another couple of factors that I think went into Q1 and the rest…

Randall Stanicky – Goldman Sachs

Heather, I mean can you maybe just comment a little bit for whether what type of competition some of these products roll off of exclusivity, how conservative are you thinking in terms of your numbers around the competitive landscape?

Heather Bresch

Divalproex after exclusivity we certainly show it being a very highly competitive commodity type product. So really I would see it going off a cliff as far as pricing and so forth, I think that we did the responsible – done the responsible with that. So I think some of our products that have continued to sustain favorable market share and not have that kind of competition, we continue to see holding on to the share, like our Oxybutynin, Paroxetine, Nifedipine, some of our stronger products. But Divalproex, certainly we have factored in to be very commoditized.

Randall Stanicky – Goldman Sachs

Congratulations on the quarter.

Robert Coury

Thank you Randall.

Operator

Thank you. And our next question is from Chris Schott with JPMorgan.

Chris Schott – JPMorgan

Great, thank you. Just some of your thoughts on some of the FDA manufacturing inspections and the impact they have had on the industry and your competitors? Do you think we have seen an end to this kind of round of setbacks across the industry? And maybe allow those lines, can you talk a little bit about the kind of US generic pricing trends you have been seeing in your business relative to what it is been over the past several years? Thanks.

Heather Bresch

Maybe first I will just touch upon your question on the foreign inspections. I don't think that we have seen the end of this. I think that due to the regulations and the fact that factories outside the United States I think that the last statistic was they were inspected every eight years. I think that that is something certainly FDA efforts have ramped up and need to continue to ramp up and as it is policed and as it is in enforced I think we will continue to flesh out operations appropriately and we obviously very much support that the standard across the world should be the same standard that is here in the United States.

As far as the pricing environment, we continue to have a very, very strong base business. I have said before that I think it is hard to look at every company the same, everyone's product mix is different. Our product mix right now is a very favorable mix with some products that we have high sustainability for market share as well as price. And so our base business is very strong and we see that holding through 2009.

Chris Schott – JPMorgan

Okay, great. And I just wanted to follow up, just thinking longer term about your business when you look at your geographic footprint right now and some of the markets and countries where I think you don't have a presence or you have got a smaller presence, could you elaborate a little bit on some of the key markets that when you kind of think strategically of where you are heading are of I guess of high interest in terms of either acquisitions or kind of further growth? Thanks.

Robert Coury

Yes. I can tell you that we look at each region we have a separate strategic business plan for each region in terms of our growth strategy. I can tell you in Asia-Pacific I continue to be very bullish about. I see a tremendous amount of opportunity and really an opportunity to leverage our already existing infrastructure that exists over there. I think there is much more that can be done there with our key position in Japan, the number of molecule, I think that more and more people are realizing the difficulty to penetrate that very difficult market.

But I would say that in Asia-Pacific, the other opportunities I see clearly in addition to our strong position in Japan and Australia, quite frankly I would like to see ourselves in China in the next 2 to 3 years. I'm very much focused on – I have just come back and visit our China facility, I am very impressed with what I see there. I love the infrastructure in terms of how it has been supported and the Matrix organization in terms of its intermediates. But that commercial market over there is a real opportunity and I will be focusing on entering into the retail market on that side and I think again a strong opportunity for entry point is a relationship with an existing China, a very large China pharmaceutical company that is already here. I think there's a lot of muscle we can bring to them and there's a lot of value they can bring to us with their already existing infrastructure.

Another market in the Asia-Pacific I think it's just a natural for us to begin to get into is and India. I think right now we have only used India as a platform from a manufacturing, from a finished dosage form R&D, and I really believe that the retail commercial market in India is a real opportunity for us for growth. Again, we already have these assets in place, it is about really leveraging what we have already got, so I'm pretty excited about Asia-Pacific.

In EMEA, I can only tell you that there is a lot of instability right now, specially in central Eastern Europe in terms of the global economy and what have you. But pharmaceuticals are pharmaceuticals are pharmaceuticals, and I see a lot of opportunity in Central Eastern Europe and we will continue to focus on that particular region within Europe in terms of our future growth as we take Western Europe and again continue to preserve and enhance our market share in those particular markets. And I would say that's it .

Chris Schott – JPMorgan

Great. Thanks very much.

Operator

Thank you. Our next question is from Caius Christoe with Morgan Stanley.

Caius Christoe – Morgan Stanley

Good morning guys. First question is on guidance. With your preferred conversion rate pegged to your share price, you're currently assuming a share price of plus $17 in October 2010 in your 2010 guidance. Is there enough flexibility in 2010 to absorb the potential sort of $0.06 hit to guidance if your share price stays around $14? That's my first question and I will come back with two more.

Robert Coury

I mean I think that people have already been reflecting the additional shares this quarter being a great example. I think we used I think what I mentioned is a fully dilutive like 450 million shares. So we have already – there is – why don't you explain the two methods that we use from quarter to quarter?

Ed Borkowski

Listen, we don't get into the specifics of guidance and we have been providing guidance with a range. So you can assume that within the range we have got flexibility I would comment on to you about 2010.

Caius Christoe – Morgan Stanley

But 2010 assumes that minimum conversion rate, right?

Ed Borkowski

Right. And we have range of about 50 to about 70 out there and so I'm not going to comment about specific elements of our guidance but we have been within that range and I think relative to being able to achieve that, that additional dilution to the stock isn't up there and we have flexibility.

Caius Christoe – Morgan Stanley

Thank you, great. And then the two last questions, one, ex-US, it seems to me that Europe and Asia were sort of very weak even if you exclude currency and the currency just didn't shift around too much compared to fourth quarter of last year, can you expand a little bit more about sort of the weakness that we saw in Europe and in Asia Pacific and the outlook for 2009?

Robert Coury

Okay. I'm not so sure I would classify it as weakness. I would classify Europe first of all is a continuation of what I consider to be a market adjustment between government pressure for lower cost pharmaceuticals, a balance between that, and our ability to capture more market share, and the increased generic utilization throughout some of these regions. So I wouldn't consider it weakness, I have been expecting and saying all along that I continue to see that Europe will continue downward pressure in terms of top line probably for the next 12 months.

I think I have been saying 12 to 18, I will now say 12 to 15. But I think do think there'll be a leveling off there because it is like a changing playing field over there and each country has its own time to strike when and do its things and I think we have done a great job in navigating our way through, so I'm very, very pleased with what is going on in Europe over all. And also please remember in Europe with our particular business you know when I talk about EMEA quite frankly from a materiality point of view, it is really France, France and France. I don't want to – these other countries are great, but to me, they are not as material, but that is also what is exciting to us in terms of our longer-term outlook in Europe because you know it is much easier to grow a smaller platform that to grow a larger platform.

So we have a real strong anchor in France while we focused on growth in some of these other markets and our position in France is, it is quite strong in terms of the number one and number two. So I'm very happy with what I see there and I think what we see rolling out, what you're seeing rolling out is pretty much what we have expected, anticipated and again pleased with what I am seeing over there.

Asia-Pacific, again it is not that large. If you recall a year ago when Australia went off the deep end in terms of its changing environment in its pharmaceutical market, Heather's been predicting that we expect that we hit that wall and there should be a bounce back, we should start to see some strengthening, and is exactly what has panned out. So I am very pleased with what is going on over there. There's a lot of effort that we want to put in to Japan, it is still a long way for us to go. I want to really optimize and take advantage of the position that we are currently in there and capture our fair share of that – the increase in generic utilization over there, while expanding other potential markets. So I'm not sure I would classify it as weakness; I would say it is as expected.

Caius Christoe – Morgan Stanley

Okay. And one last little quick follow-up I guess on France there, I believe that maybe the French Doctor Union and National Health Fund came to an agreement on incentives, would you be able to give us an update there and I guess your thoughts on the expansion of the repertoire of the substitution list in France?

Heather Bresch

Yes. They did put some incentives in place for physicians to start writing or be incentivized to write generic scripts. I don't think we have seen much impact from that yet. I think that time will tell over the longer term that there has certainly been nothing reflected that that had much of an impact. And as far as the repertoire list, we are very hopeful there is some big product that will be coming off in 2009 and 2010 that we look forward to being on the repertoire and we continue to work very closely to get that expanded and I do believe that that is where really the growth in that market will come from the utilization rate going out with that list being expanded more so than physician incentives.

Caius Christoe – Morgan Stanley

Right. Thanks guys.

Operator

Thank you. And our next question is from Marc Goodman with UBS.

Marc Goodman – UBS

Hi. Can you give us a sense of what Duragesic did in the quarter, you guys always seemed to do that every quarter? And also I guess this time may be Depakote just because it was such an important part? And then secondly on expenses, can you help us understand the impact of currency on expenses? Thanks.

Heather Bresch

I will just hit adjusted Fentanyl first, so we have not broken that out over the last couple of quarters. Our portfolio and as we mentioned many times moving away from one country, one product to the portfolio of countries and products that we now manage. What I did mention is that we are holding on about 50% market share here in the United States and look for that to be a consistent throughout this year.

Marc Goodman – UBS

So was there any pricing pressure to your product?

Heather Bresch

We don't get into the pricing on individual products or discuss that.

Ed Borkowski

On the currency effect, we don't actually discuss line by line item, Marc, but I think on a sequential basis, currency had basically a de minimis or flat impact to us year on year it was just about $0.02

Marc Goodman – UBS

Thanks.

Operator

Thank you. And our next question is from Greg Gilbert with Bank of America/Merrill Lynch.

Greg Gilbert – Bank of America and Merrill Lynch

Thank you. To be fair to Marc I think you have provided Fentanyl percentage of revenue, so that would be great if you can provide that. Heather, any update on the timing or strategy for the new EpiPen product, are we still looking at around year end there?

Heather Bresch

Yes. We're still on track for year end, nothing has really changed on that front.

Greg Gilbert – Bank of America and Merrill Lynch

Okay. And you get plenty of questions on Fentanyl and Depakote ER, can you talk a little bit about the rest of your North American portfolio and your confidence there, Heather, other factors like manufacturing issues others are seeing that maybe helping you out there, just to shed a bit more light on how stable the non popular products in aggregate are?

Heather Bresch

Sure. Well a couple of the other on the product side, Paroxetine continues to be a strong contributor and we see that so that we don't have any paragraphs four filer out there on that product. So that and as I mentioned earlier Oxybutynin and Nifedipine, there is still a fundamental, the products that not only we launched last year, in the last 12 months, but just core business continued to remain very strong. And I do believe we continue to benefit on the volume side from that reliability of supply chain. I think on two fronts, not only the issue that have impacted some of the other ANDAs and filers, and their ability to support product.

I also think just the readiness of our ability to supply product. So we have benefited a little bit on two fronts, not only the manufacturing issues which as I mentioned earlier, I do believe as we continue, the US continues to step up its efforts, as far as enforcement around the world, it will continue to flush out bad seeds and bad actors on the manufacturing front, and as far as our ability with our location in the United States and the size of our facility and the capacity we have with about 30 billion to 35 billion units that we were able to do, just our readiness to be able to supply any kind of disruption in the marketplace has become beneficial and we have been able to seize on many opportunities over the last 12 months and I do see that continuing as well.

Operator

And Mr. Gilbert, did you have a follow-up question?

Greg Gilbert – Bank of America and Merrill Lynch

Yes, one last one Heather on, can you offer a prediction on legislation relating to patent settlements in authorized generics, do we need a bigger bill here, can one get through on a standalone basis? Thanks.

Heather Bresch

I think the – I think the patent bill has a lot of momentum. I think that if the Democrats get 60 votes in the Senate, it is going to gain a lot more momentum. So the good news to all of that is I am very hopeful and confident about our authorized generic language being in that bill and part of that bill and I think that is even increased possibility that that will get passed this year.

Greg Gilbert – Bank of America and Merrill Lynch

Thanks.

Operator

Thank you. And our next question is from Ken Cacciatore with Cowen and Company.

Ken Cacciatore – Cowen and Company

Thanks guys. First Ed thanks for all your help and obviously best wishes on your future endeavors. I wanted to ask Robert, trying to square a couple of your comments you have made. You said nothing in 2010 from a line item guide guidance perspective changes and of course you have 700 million units in the low end of the range, for the low end of the range improvement in revenue, but trying to square your commentary to Europe, and what you're seeing in terms of revenues, also factoring in that as Heather indicated Depakote ER as we all know will be hit in August, so you are going to be losing those nice contributor in 2009, so hoping you can help us get to how do we get that increased revenue to hit the 2010 top line numbers and some kind of granularity? Thank you.

Robert Coury

I will just think at the high-level and I will let Heather comment deeper if she would like, but at the high-level, please remember we are going to have more product launches in that year than ever in the history of this company. That is exactly what has been building, that is exactly why our queue has been building, it is what we been telling you all along that we're going to do. And everything seems to be right on schedule. Heather, do you want to…

Heather Bresch

And I would just say on your revenue point, Ken, for 2009 for this first quarter, we are right on our expectations from a revenue perspective. So we ride on until that momentum as Robert mentioned. There is a competitive effect not only from the product launches, the synergies as I said before for 2009 and 2010 as we put out our guidance, we factored in all of that was built into our budget down to every product, to the very, very bottom process. So very confident that I see this momentum, I see it is hitting right on expectations, and I see that carrying into 2010 as well as the bolus of synergies and everything that come together in 2010, you know it is an additional 150, 160 million that come in in 2010. As far as just for the second half of this year, we still have those synergies coming in, and even with Divalproex coming off, we have approximately 40 to 45 launches here in the US this year as well. So again it is a cumulative, it is not anyone product, but we do – our pipeline as Robert said is building, we are the highest we have ever had, so we see all of that factoring into us being right as expected on the revenue front.

Ken Cacciatore – Cowen and Company

And Robert maybe I misunderstood your commentary. Then overseas talking about taking a little bit longer and maybe not entirely sure what you're focusing on, but little bit longer, pricing a little bit worse than having it phase out and then grow. Obviously I think we are going to need to have Europe grow to hit those figures, so just a little bit of commentary around what you said and what you think you're going to be seeing next year?

Robert Coury

Again, Europe I think is a combination of things are occurring. I do continue to see top line pricing pressure and as I've stated all along, we do continue to see any ability to enhance. There'll be increased generic utilization; I do see end market continuing to increase market share, and also the number of products that we're launching in Europe are also again very large number next year. So there is a lot of competing factors there and we think we are extremely well positioned, not only to maintain, but to see growth in Europe as we look year-over-year. And also I have a lot of visibility over there as well in terms of making sure that we protect that bottom line. We are studying every single market over there, looking at the cost structure of every single market, making sure that the risk reward profile is intact, intact for today and intact for what we have in mind as we see couple of years down the road. So I think I have a lot of flexibility in Europe.

Ken Cacciatore – Cowen and Company

Great. Thank you.

Operator

Thank you. And our next question is from Rich Silver with Barclays Capital.

Rich Silver – Barclays Capital

Good morning.

Robert Coury

Hi, Rich.

Rich Silver – Barclays Capital

Just not to beat the dead horse on the outlook but I think it is certainly important that we get a little bit more granularity. Heather, maybe you can elaborate on the synergy part of the growth and you mentioned bolus, when should we really begin to see the lions share of the API synergies hit the P&L and even as much detail as beginning in what quarter? And then just as we look at the components of the growth in 2010, can you give us a better sense of how much in fact is coming from the new introductions versus just the synergies as you switch from third-party sourcing API to internal, assuming that those are the two key drivers of that growth as we look sort of finishing this year and into next year? And then just lastly on Germany and UK, are you seeing things sort of stable, do you see them further deterioration, just better sense of the trend in terms of pressures there?

Heather Bresch

Well, let's just start with synergies. The bolus as I mentioned before is due to the regulatory timeframe. Our first wave of synergies for R&D things that are in our control, the second wave has been regulatory timeframes as far as product transfers, site transfers, API alternate sourcing and all of those things having anywhere from 12 months to 18 months cork on them to get through the approval process. I think that's where I was able to pool up synergies into 2009, accelerate some benefit, was due to the fact that some on the negotiations front.

We had also said one of the factors in our synergy number was leveraging now our scale of volume, bringing our custom bases together, so we have been continuing to do that, and that has led to the acceleration of some coming forward into 2009. So you see that continuing in 2010. There is no certain month tat really comes in throughout the year because obviously the activity as we file these product has been continuous. So they will just roll in. It is just 2010 starting really in the first quarter of 2010, they start rolling in evenly throughout the year. So there is no one particular quarter or month that is heavy in the year.

Robert Coury

And there is no way, Rich, and I appreciate what you are asking, there is no way for us to isolate that value. What we can tell you is one of the reasons why we showed improvement in cost of goods is simply that is where we will screw [ph] into our commercial operations as right into those cost of goods. So it is not a separate line item but the strength in our gross profit margin is really coming a lot from the synergistic values that continue to roll in and a lot of it has to do with the API.

Heather Bresch

And as I mentioned before, we continue to have even additional operation efficiencies that we have identified and will be coming in in 2010. And as far as the product, there is not anyone product we don't have. We have said before paragraph four for the remainder of our guidance. We are not very material in the numbers. So it is really the volume that Robert spoke about. In the United States alone, we're forecasting approximately 60, which is like I said more than we have ever done in the history of our company. So it is really this activity on the synergy side and operational efficiencies as well as just the voluminous amount of product launches.

Rich Silver – Barclays Capital

Can you give us a sense of maybe the mix US versus non-US on these launches? And not in terms of necessarily numbers but products but just impact, relative impact US versus non-US on new launches in 2010?

Heather Bresch

I would say probably the best way to look at it is proportionate. Obviously the US market is the greatest market by far not only in our market share that we attain but obviously that return. So I would say it is proportionate to pretty much our business the way it is now. I wouldn't say we have – we have hundreds of launches that will be going out throughout the rest of the country – I mean the rest of the world. My 60 number was specifically here to the US. I think that impact will be proportionate to our business as it is today between North America and EMEA APAC.

Rich Silver – Barclays Capital

And the question I had about trends in particular in Germany and UK?

Heather Bresch

I mean as far as Germany goes, the AOK tender, the litigation that was going on back and forth, that settled out. It is now supposed to roll out June 1. I think it will be interesting to see kind of that get a quarter or so of that under our belt. So I think for the moment, Germany kind of is where it is, and we will see how that AOK tender rolls out. As far as UK, I think that there is just continued pressure, and so our efforts there is what – we've always said that opportunities in these markets which was the vertical integration fueling that product pipeline with our internally generated product and that volume.

Robert Coury

And I would just say, I think I would have to agree. I would say that Germany – I still think there is some things that need to be ironed out in Germany. And the UK has always been what the UK is. I think Germany has gone through really the substantial changes. But from a Mylan perspective, especially in Europe, because we started out so small in Germany and we weren't a major player there, but now becoming one, the impact of all those changes have a far less effect to us than it would say on some of the bigger players there who really were dependent upon the market. And also I would say for the UK, the real benefit of this, our ability to again gain scale is really bringing actually more muscle to these markets where we didn't have a lot of traction prior to us being able to bring this level of scale to these markets but now we're starting to see that we are getting that traction because of our ability to continue to produce at lower cost.

Operator

Thank you. Our next question is from Elliot Wilbur with Needham & Company.

Elliot Wilbur – Needham & Company

Hi thanks. Just perhaps for Ed, you provided some color on the deferred revenue acceleration in the quarter, I missed that during the prepared commentary and just wondering perhaps if you could review that and is that just sort of a one-time pull forward of numbers that were sort of already expected or is this going to be sort of kind of a new level that we should expect going forward? And then a follow up question, Robert, and perhaps Heather as well, there has been a lot of discussion or perhaps more accurate speculation about the possibility of a generic EpiPen appearance at some point in time, just wondering how should we think about that, what kind of help can you provide us in terms of thinking about what the hurdles may be and anything that you may have heard in terms of someone actually being in a position to come to market on the product anytime soon? Thanks.

Ed Borkowski

Now, the first one of the deferred revenue, Elliot, I did address it. It was simply due to some termination of some agreements, development agreements that we had, and it is essentially a one-time event, not a recurring item.

Heather Bresch

And as far as EpiPen goes, I have continued to say, we from all of our intelligence, I don't know of any generic that's anywhere near soon to come to market. As I've stated before, it's very difficult – has continued to be a very difficult to be AB rated to a device with a product, it has got to match identically and that is really the hurdle when you talk about a drug and device product such as EpiPen. So I don't anything new on know of anything else except I don't know of any generic coming to market and I believe that all that we have ever known is the 505(b)(2) route.

Robert Coury

Let me just had something. There has been so much commentary when I go to conferences, one on one, everything is about the EpiPen and I don't want to get again too far out in front but this reminds me, EpiPen, if you go back to when, I haven't heard this level of noise since you go back to when Ranbaxy said that they were coming. When Ranbaxy said they were coming, coming, coming, there was so much noise around a generic EpiPen, and that somehow they got into the market, I am sure it was designed that way, and everyone thought it was imminent. The next thing you know, Ranbaxy switches to a 505(b)(2), and no longer can get down the pathway of AB rated generic. And the main reason to remind you, Elliot, and some of your investors is again that once you get into – again, just for the sake of some of them, the difficulty from an ANDA route because of the formulation and the delivery device all at the same time.

Heather Bresch

Right. So there is no formal guidance from FDA. It's a case-by-case which always – that is what makes this more difficult, but the device and the drug have to meet identically. And so, as you know, we said that we're coming out with our needle protected EpiPen at the end of the year, and we're doing that for the CBE 30 route, which is just the 30 day approval from the agency. And then I think that will also put in another barrier to entry because that now that market preferential would be the needle protected device and drug of which we have IP and stuff around. So I just think it is a very, very difficult hurdle to get through, and so feel confident that EpiPen is in good shape.

Rich Silver – Barclays Capital

Thank you.

Operator

And our next question is from David Moskowitz with Caris & Company.

David Moskowitz – Caris & Company

Yes, thanks very much. A couple of questions, can you comment on the synergies that you guys expect to get from Dey this year as you are moving the business from west to east? I would love to understand the quantification of that and how that can help to improve earnings? And if you could talk about the contribution or drag on earnings from Dey this quarter would be great? Also if you could talk about pricing trends, I think you were asked about in some different way I guess about approvals, but if you could talk about the base business in particular, and how those pricing trends are looking with respect to the number of manufacturers, especially those that are having issues in the United States and other geographies?

And then lastly if you could talk specifically about some of these ex-US territories that have had price rollbacks and declines and all kinds of buzzers and whistles, that would be Australia, Japan, Germany, UK, and in particular do you think those rollbacks are going to recur, or are we going to start to annualize on those price rollbacks, where we start to see improvements in those businesses due to increasing volumes and perhaps price increases off of a baseline?

Robert Coury

It takes me about 14 hours nonstop from Pittsburgh to Tokyo, if you want to jump on the plane with me, you might be able to get the answers to all of these questions done at that time. But look, let me just tell you, and I mean that it will be a little – just a little facetious, I can't get in – let's start with the Dey synergies. We did not outline any particular number on any particular Dey synergy. As Heather mentioned in her prepared remarks extremely pleased with the first quarter results. All of – any synergies and any efficiencies that will yield from that, and don't forget there are one-time costs already incorporated into all the numbers that we have, that we have given. As far as pricing trends are concerned, Heather, do you want to just repeat what you have already told them? In terms of…

Heather Bresch

Again I say – I don't think you can one size fits all across the generic landscape. Here in the US, it's product mix. Our product mix has been very strong and see that continuing in 2009 and 2010 because of some of our products like Paroxetine, Nifedipine, Oxybutynin, Felodipine where we have benefited from very little competition and see that holding. So our base business is very strong. And as far as the ex-US on pricing pressure, again as Robert mentioned, we have certainly seen pricing pressure, Germany, UK, but we saw volume revenue up in France, Belgium, Spain. So when you look at overall I think that Europe was right in line with our expectations and I continue to see benefit from the France market which is our largest market.

Robert Coury

Yes. And I think you should hold on to again is that these other markets are not really material. That is where the opportunity of growth comes from and France is really our baseline country over there.

Dan Crookshank

Teresa, thank you very much. I think we are probably out of time for questions this morning, but a group of us will be available and will be following with other callers offline as the day goes on. So Teresa turn it back to you to close out the call.

Operator

Thank you. That concludes today's conference. Thank you for your participation.

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Source: Mylan Inc. Q1 2009 Earnings Call Transcript
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