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Executives

Dan Crookshank - VP, Global IR

Robert Coury - Chairman and CEO

Jolene Varney - EVP and CFO

Heather Bresch - President

Rajiv Malik - EVP and COO

Analysts

Marc Goodman - UBS

Randall Stanicky - Goldman Sachs

Kim Chang [ph] - SPM Equity

John Boris - Citi

Chris Schott - J.P. Morgan

Greg Gilbert - Banc of America/Merrill Lynch

Scott Hirsch - Credit Suisse

Jim Dawson - Buckingham Research Group

Elliot Wilbur - Needham & Company

Rich Silver - Barclays Capital

Ken Cacciatore - Cowen and Company

Mylan Inc. (MYL) Q2 2009 Earnings Call Transcript July 30, 2009 8:30 AM ET

Operator

Good morning, everyone. We are about to begin Mylan’s 2009 second quarter earnings conference call. As a reminder, this morning’s call is being recorded. For opening remarks and introductions, I’d like to turn the conference over to Dan Crookshank, Mylan’s Vice President of Global Investor Relations. Please go ahead.

Dan Crookshank

Thank you, Laura. Good morning, everyone. Joining me for today’s call are Mylan’s Chairman and Chief Executive Officer, Robert J. Coury; President, Heather Bresch; Executive Vice President and Chief Financial Officer, Jolene Varney; and, Chief Operating Officer, Rajiv Malik.

During today’s call, including the Q&A, we will be making forward-looking statements including those related to our anticipated business levels, our future earnings, our planned activities, and other expectations for future periods. Note that these statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Because these statements are forward-looking, they inherently involve 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 risk factors set forth in our quarterly report on Form 10-Q for the quarter ended March 31st, 2009, and in our other SEC filings. You can access our Form 10-Q and other SEC filings through the SEC Web site 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’s been 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 press release, which contains detailed reconciliations from our GAAP basis to our non-GAAP basis adjusted net income, adjusted diluted EPS, and adjusted EBITDA measures as well as the allocation of the reconciling items to specific income statement line-ups .

Before I turn the call over the call to Robert, let me also remind you, we are conducting a live webcast of this morning’s call, it can be accessed at our Web site at www.mylan.com. In addition, the webcast will be available for replay in our Web site for up to seven days following the conclusion of today’s call. Please note the material in the call, with the exception of the participant questions, is the property of Mylan and cannot be recorded or rebroadcast without Mylan’s written permission.

With that, I’ll now turn the call over to Robert.

Robert Coury

Thank you, Dan. Good morning, everyone, and thank you for joining us on today’s call. To all of our employees around the world, I would like to once again thank you for another great quarter. Your outstanding work and dedication continue to make it possible for us yet to report another strong quarter results.

First, I would like to comment briefly on the announcements we made yesterday related to our executive management team. On behalf of all of our employees and the Board of Directors, I would like to personally congratulate Heather Bresch on her appointment as President of Mylan, and Rajiv Malik on his appointment as chief operating officer. These well-deserved promotions reflect their strong track record and continued success in delivering results while executing flawlessly.

I would also like to welcome Tim Sawyer as Mylan’s Senior Vice President on Strategic Corporate Development. I’ve had the chance to observe Tim’s growth from an outsider’s perspective and I am extremely excited that he has now because a new member of our senior management team. I really believe Tim will hit the ground running and will be able to immediately contribute to our continued success.

This recent promotions, along with the recent hire of Jolene Varney as Mylan’s Chief Financial Officer, move us much closer to achieving my objective for 2009 of building up and deepening the bench (inaudible) of Mylan’s management team throughout the world.

Before discussing the business of the quarter and our outlook, I would like to address the matter, which was a short-term distraction this week. First, I would like to remind everybody of Mylan’s 48-year exemplary tract record and commitment to the highest quality standards within the industry. Although we have expanded our operations worldwide, Mylan, and especially our Morganton, West Virginia facility has always been recognized as the gold standard when it comes to quality. This said and without ever getting complacent, we will always remain dedicated and committed to upholding that longstanding tract record.

We must also be cognizant that there are some outside the company who attempt to speak on behalf of Mylan, to the point where statements that were made were purposely being mischaracterized in an attempt to further incite the overreaction that we witnessed earlier in the week. And they even go so far as to attempt to pit us against us the regulatory agency. This simply will not happen.

As I speak to you here today, let me be clear, we stand by everything said in the press release that we issued Tuesday of this week. That said, we absolutely respect the agency’s independent processes and appreciate their speed and diligence. Mylan has always enjoyed a quality and respectful relationship with the FDA.

Last Sunday, a highly irresponsible, sensational news article was published. We had a responsibility to our customers, employees, and more importantly, the millions of patients who utilize our products to assure them that the allegations in this article were false, misleading, and unfounded. After we pro-actively contacted the FDA, an inspector visited our Morgantown facility on Monday to conduct a for cause investigation into the validity of the article’s accusations. The agency was on site, reviewed the information, and concluded the inspection by conducting a close-out meeting on Tuesday. This inspection was closed with no 483 issues.

Lastly, you can rest assured that the quality of our products was never ever compromised in any way. Again, because we will respect the rest of the FDA’s process, we will not be taking or answering any questions on this matter during this call.

Now, to the business at hand, earlier this morning, we were extremely pleased to report our second quarter adjusted diluted earnings of 30% per share, results that once again exceeded our expectations. With that said, given the strength of our first half of the year combined with what we now see, which is a much stronger second half that we then -- what we originally anticipated, we are increasing our 2009 adjusted diluted EPS guidance to $1.13 to $1.20. The midpoint of this newly adjusted range represents the projected 45% increase over our 2008 adjusted diluted earnings per share of $0.80, further closing the gap between 2009 and 2010.

I would now like to take a few moments and just comment on one of the last prior standing commitments on which we promised to deliver, and that is the Mylan global biologic strategy. As I mentioned in the press release, when we announced our global biologic collaboration with Biocon Limited, Biocon is a first class, highly-respected organization with deep, deep scientific expertise and an excellent product development tract record. They also have a strong appreciation for complex regulatory requirement and maintain a state-of-the-art cost efficient and scalable manufacturing facilities. I am extremely pleased that we have now completed the first stage of our generic biologics initiative and secured the right partner in doing so.

While commercialization is still several years away, we always have anticipated and stated that Mylan would launch first, in major markets outside the United States. We also may launch products in certain less regulatory markets -- regulated markets even sooner.

With that said, I would to now turn the call over to Jolene Varney, Mylan’s new chief financial officer.

Jolene Varney

Thank you, Robert, and good morning, everyone. Before getting to our second quarter financial result and updated 2009 financial guidance, I’d like to start out by saying I’m excited to be here at Mylan. As I explored this opportunity, I quickly came to the conclusion that this was the perfect world for me to utilize my combination of finance, general management, and international experience. And just as important, it was a great fit for me culturally, with the opportunity to become part of the strong senior leadership team that Robert has assembled.

Since joining the company in early June, I’ve spent time traveling and meeting our teams in North America, UK, and Asia Pacific, with the primary focus on understanding our business, strategies, and processes; getting acquainted with member of the Mylan’s senior leadership team around the world; familiarizing myself with the generics business; and spending time with my finance organization.

Having done so, I’ve come away with what I believe are some important and very positive first impression. First, the growth potential in this industry, the generic industry is a growth industry. But more importantly, what I see in Mylan is a company that will be driving that growth.

Second, is my belief in our platform. With the combination of our global commercial footprint, focused R&D manufacturing capabilities, and the vertical integration provided by Matrix, we are well-positioned competitively and for the long term. My travel also allowed me to see firsthand how these pieces fit together and has given me confidence that we will achieve our goal of becoming the world’s most efficient global generics and specialty pharmaceutical company. And finally, people and culture, Mylan is all about a winning mindset and delivering results.

Now I’d like to speak specifically about my finance team. The depth of their business and technical knowledge and their commitment to detail has allowed me to come in and focus on learning the business and further defining how we as a finance organization can continue to add value to Mylan. Once again, I’m excited to be here and look forward to meeting and getting to know each of you in the investment community.

With that, let me now get to the business at hand and begin by reviewing our 2009 second quarter financial results. During my review, I will refer to specific financial metrics that have been prepared on an adjusted basis, the basis upon which we developed all elements of our financial guidance. As Dan mentioned earlier, please refer to the non-GAAP measure section of today’s earnings release for detailed reconciliation of these adjusted basis amount to our GAAP basis measure.

We had another very strong quarter of operation on financial performance that exceeded our expectations. This has given the confidence to raise our second half forecast and our full year 2009 guidance.

So starting on the top line, adjusted revenues for the quarter were $1.26 billion, a 6% increase over last year’s second quarter adjusted revenues of $1.19 billion. On a constant currency basis, our year-over-year gross and adjusted revenue was approximately 14%. For the first six months, adjusted revenues totaled $2.45 billion, up 8% over the $2.27 billion reported for the same period a year ago, about 17% on a constant currency basis.

Looking at our operational profitability measure, adjusted gross margins for the quarter was 47.3%. For the first six months of 2009, adjusted growth margin stands at 47.9%, near the upper end of our full year guidance range of 46% to 48%, and nearly 400 basis points higher than adjusted gross marrying reported for the first six months of last year. This was driven primarily by product mix integration synergies and additional operational efficiencies.

Adjusted R&D expense for the quarter was $55 million or 4.4% of adjusted revenues, below the low end of our full year guidance range of 5% to 6%. This represents a decrease of $24 million compared to last year’s second quarter adjusted R&D expense. This decrease is coming from integration synergy, additional efficiencies, and the timing of certain projects. For the first six months of 2009, adjusted R&D expense is $111 million, as compared to $120 million for the same period a year ago.

Adjusted SG&A cost for the second quarter were $259 million or 20.5% of adjusted revenue. For the first six months, adjusted SG&A cost were $488 million or 20% of adjusted revenues in line with our full year guidance range of 19% to 21%. As a result, adjusted EBITDA was $317 million for the quarter and $642 million for the first six months. This is $189 million higher than the $453 million of adjusted EBITDA reported for the first six months of last year.

Now, for a look at a couple of our non-operational financial metrics, second quarter cash interest expense was $68 million compared to $86 million for the same period a year ago. This improvement is due to a combination of the lower short term interest rate environment and accelerated repayments of the 2009 and 2010 bank term loan maturities. We now expect our full year cash cost of borrowing to be in the range of $280 million to $290 million compared to our previous guidance of $290 million to $300 million.

Our adjusted effective income tax rate for the second quarter was approximately 32%, including tax synergy which totaled approximately $10 million. For the first six months, our adjusted effective income tax rate was approximately 31% in line with our projected full year adjusted effective income tax rate range of 30% to 31% including tax synergy.

Bottom line, this metrics resulted in second quarter adjusted diluted EPS of $0.32, an increase of $0.12 or 60% compared to last year's second quarter adjusted EPS of $0.20. For the first six months, adjusted diluted EPS was $0.65 compared to $0.29 for the same period a year ago.

And finally, a look at our cash flow and balance sheet metrics. Excluding the first quarter of 2008, when we benefited from monetizing by Solex, we delivered record setting, operating cash flow of $210 million this quarter, bringing our year-to-date total to $336 million. This was principally driven by strong earnings and improved working capital performance.

Capital spending for the quarter was $22 million and stands at $53 million for the first six months of the year. Our liquidity position remains strong. In the second quarter, we purchased the majority of the remaining minority shares of Matrix for a $135 million. And we still ended the quarter with $460 million of unrestricted cash and marketable security. And as a reminder, we have reaped half prepaid through 2010 our scheduled term loan maturity.

The combination of our strong earnings generation and the impact of the early term loan repayment put us at approximately 2.9 times our last twelve-month covenant basis adjusted EBITDA. This ratio is comfortably below our year-end covenant threshold.

Now, I'd like to highlight the changes to our 2009 financial guidance. First, we are raising our revenue guidance range from $4.6 billion to $4.9 billion, up to $4.9 billion to $5.1 billion resulting from stronger second quarter revenues, our outlook for a stronger second half of the year, and the effect of the current exchange rate environment. To quantify, currency represents less than half of this increase.

We are also increasing, as well as narrowing, a number of our other financial guidance metrics. Adjusted EBITDA is expected to be in the range of $1.15 billion to $1.275 billion compared to our previous range of $1.075 billion to $1.27 -- $1.275 billion. We expect adjusted net income to be in the range of $500 million to $550 million, as compared for our previous range of $400 million to $500 million. And we've moved our adjusted diluted EPS guidance range to $1.13 to $1.20, well above our previous range of $1.00 to $1.10.

Based on the first six months, adjusted diluted EPS of $0.65, this implies EPS in the range of $0.48 to $0.55 in the second half of the year. We anticipate a fairly even distribution of EPS over the last two quarters.

Based on a strong performance I outlined, we are now projecting cash flow from operations to a range of $550 million to $625 million, as compared to our previous range of $450 million to $550 million.

And lastly, we expect our capital spending for the full year 2009 to be in the range of approximately $175 million to $200 million, as compared to our prior projection of approximately $200 million.

We have summarized and we'll make available on our Web site following this call a slide summarizing our updated 2009 financial guidance.

As Robert told you on our last conference call, we will not be updating or reaffirming quarterly our previously issued 2010 guidance. That said, at present we have not seen any material development that would warrant changes to the 2010 guidance. We understand investors are focused on the 2010 targets, particularly the specific building blocks around top line commercial targets for the generic business.

What I would like to do now is to turn it over to Heather who will provide these additional building blocks, as well as share additional details on our second quarter operational results. Heather?

Heather Bresch

Thanks, Jolene, and good morning, everyone. As Rob and Jolene said, Mylan enjoyed a very strong second quarter, a quarter that once again exceeded our expectations. As important, we believe the momentum we've continued to build during the first half of ‘09 and our outlook for the second half of the year positioned us extremely well to achieve our previously stated $0.20 EPS target and begin truly leveraging the immense commercial power of our operating platform.

With respect to our top line performance in ‘09, total adjusted revenues for the second quarter was better than projected, growing $14% on a constant warranty basis over the same period last year. All regions and businesses contributed to this improvement with our North America, EMEA, Matrix, and specialty franchises, each posting double-digit year-over-year growth.

This strong revenue trend combined with our heightened performance, expectations in the second half of the year, and a favorable effect of a currently weaker US dollar lead us to raise our projected ‘09 total revenues by $250 million, as measured from the midpoint of our new and premium (inaudible) branches.

As important, we are realizing synergies faster than expected. We called that in February, I said we would accelerate $40 million of additional integration related savings into this year, bringing our total expected synergies in ‘09 to $160 million. We now expect additional reduction, principally as a result of successful material sourcing negotiation, also completing the process of de-listing majors that will produce additional efficiencies.

We are now forecasting to realize synergies of $200 million in 2009. That makes us very comfortable that we will not only achieve, but exceed our cumulative synergy target of $300 million by the end of 2010.

Moreover, I'd like to emphasize that continually finding ways to drive down our cost is how we run the company day-to-day. Managing our expenses aggressively is clearly giving us the operational efficiency and flexibility we need to marry our infrastructure to the dynamics of the market we serve, and adapt to a rapidly changing industry.

I'd like to now walk you through each segment of our business to describe what drove our strong second quarter performance. I'll also offer additional color on our expectations for the second half of the year and then provide more visibility in the 2010.

Our North American generic region continue to perform very well during the second quarter, particularly in the US due to superb execution and our ongoing ability to capitalize on various market opportunities. The region's revenue totaled $533 million, up 18% over last year's second quarter. More than a $100 million of that amount came from new products mostly Divalproex ER.

In addition, sales of other products in our portfolio that face limited competition including Fentanyl remained strong. But our share of Fentanyl market stands now at about 50%. Its revenues exceeded our expectations during the quarter and on average, its pricing remained stable.

We also continue to seize opportunity to increase our volumes and capture additional share on certain products, for competitors face supply issues. Again, demonstrating the reliability and quality for which we always have been and continue to be well known.

Although we expect momentum to continue to the end of ‘09, North America revenue to lightly decline in the second half of the year due to the expiration on early August of the 180-day exclusivity period of the 500 milligrams (inaudible) of Divalproex. That said, by the end of this year, we expect to launch more than two dozen products with $7.2 billion on the brand market space, nearly ten of which should face limited competition.

In EMEA, revenues total $367 million during the second quarter. On a constant currency basis, that represents growth of about 10% year-over-year. That performance reflects our increasing ability to rationalize and apply our large and growing pipeline to capture share in a region where we continue to project growing rate of generic utilization.

France, our largest market in the region was a key contributor to EMEA strong second quarter performance. We saw a growth in both the retail and hospital market segments, thanks to higher volumes on existing products and new product launches. We also saw higher revenues in the UK and in central Eastern Europe.

Revenues fell in Germany, versus the prior year, due to the impact on prices of market tenders, and in Portugal because of government mandated price caps that took effect last October. Nonetheless, we expect higher revenue overall for EMEA in the second half of ‘09 due to continued growth and existing volumes to new launches.

In terms of product launches, we expect to introduce 50% more products in the second half of ’09, as compared to the first half of the year. And overall, our ‘09 launch count will reach approximately 400 across EMEA.

These twin growth engines will allow us to outpace price erosion and increase penetration. However, because third quarter sale typically slow for seasonal reasons, we expect revenues during that period to be slightly lower than those of the second quarter. As I've said before, we have always viewed Europe as the primary driver behind our synergy opportunities.

By integrating our API and finished dosage capabilities, we are creating a strong and stable platform capable of efficiently handling our large and growing pipeline. This platform will give us tremendous competitive advantage by allowing us to participate effectively in all kinds of markets, tender, branded, generic, and substitution.

Moving to our Asia Pacific region, second quarter revenues were $128 million, which increased slightly from the same period last year on a constant currency basis. This performance is encouraging because in Australia we're seeing further stabilization in that market place primarily for two reasons. One reason is incentive to offer to pharmacists by the government to increase generic utilization, which has climbed 8% over the last twelve months. The other reason is that irrational pricing has subsided considerably, as less disciplined participants are beginning to realize they can't give away their products indefinitely.

Moreover, in the aftermath of the ‘08 government mandated 25% price reduction, it's clear that our financial stability, ability to offer value-added services that helped pharmacists substitute more, and our reputation as a reliable supplier is proving to be very effective on both retaining and winning new business.

Our revenues in Japan were slightly higher as the rate of generic utilization continues to rise. They were at a very slow pace. To accelerate progress, additional measures have been introduced. For instance, local government has started distributing generic substitution cards to consumers. Approximately 30 million of these cards should be in consumer's hands by the end of September. In addition, we expect a number of the nation’s DPC hospitals to double. These hospitals have fixed fees for certain procedures a process that favors the use of less costly generic medicine.

Looking ahead, we continue to expect APAC revenues to rise at a measured pace throughout the rest of the year. In addition to product launches, the region historically generates higher revenues during the second half of the year than the first.

Turning now to Matrix, I'm pleased to report that they delivered yet another strong quarter of third party revenues, which totaled $117 million. On a constant currency basis, this represents year-over-year growth of approximately 29%, driven by strong sales of first line ARV finished dosage form products and third party API sales. We expect this favorable trend to continue during the second half of this year and as I said earlier, we look forward to realizing even more value for Matrix after its successful delisting.

Today, our specialty segment generated $120 million in adjusted third party revenues during the second quarter, a 14% increase compared to last year's second quarter. Responsible were higher year-over-year sales as performance in EpiPen.

EpiPen benefited, in particular, from our continued proactive effort to expand the size of its market, as well as seasonally strong summer sales. As you know we still anticipate marketing our next generic version of EpiPen later this year. Unlike our current version, this new product has patent protection associated with this legal protected auto-injector.

Before I move on to providing more visibility in 2010, I'd like to point out that, as Jolene stated, we were slightly under ‘09 ledger for R&D. However, we remain on track to submit approximately a thousand filings globally.

When we issued our guidance in February, a bridging of ‘09 to ‘10, and find constant currency revenue growths of about $700 million, adjusting our revised ‘09 revenue guidance to maintain a constant currency comparison to ’10, that increase now stands at about $550 million.

Here's the breakdown about figure. We expect approximately 75% of this amount to come from our generic segments. In the US alone, we anticipate launching approximately 45 products into a $14 billion brand marketplace. We believe about a dozen of these products should enjoy limited competition similar to our currently marketed products such as Paroxetine, Levothyroxine, and Transdermal Estradiol.

In EMEA we expected to launch about 400 products, several [ph] market formation in 27 countries. And in Asia-Pacific, we expect to launch more than 30 products. We expect about 25% of the $550 million to come from our Specialty and Matrix Segments. Major contributors in these businesses will include the sequential growth of performance, market expansion for EpiPen and strong sales of ARVs and third party API.

In summary, with each passing quarter, our visibility becomes clear. And hopefully, it is now very apparent that the strong revenue growth I’ve just discussed, the accelerating pace at which we’re achieving synergies, and our unrelenting commitment to control our destiny by aggressively managing our platform, so as to achieve its full commercial potential, give us tremendous comfort in our stated guidance.

As Robert stated many times, we believe 2010 is the true baseline and is representative of our newly combined platform from which we will grow. And I trust the information we’ve shared with you today about the number, potential value, and characteristics of our planned second half ‘09 and 2010 product launches enhances your visibility and strengthens your conviction.

With that, I’ll turn the call back over to Dan for Q&A.

Dan Crookshank

Thank you very much, Heather. Laura, we are now ready to open up the mic for questions.

Question-and-Answer Session

Operator

Thank you. Today’s question-and-answer session will be conducted electronically. (Operator instructions) And we will move to Marc Goodman with UBS.

Marc Goodman - UBS

Yes, good morning everybody. Can you give us a little more on what’s going on in France? It’s such an important market for you. We’ve heard from other people that there are some issues going on there with respect to growth that the government is still in?

Heather Bresch

Sure. As you say, France is one of our key drivers in Europe and we are actually holding right at 30%, 31% market share in France. And as I mentioned have several very important launches coming in the second half of this year, and then almost 400 launches next year throughout EMEA.

So we have, as there continues to be some pricing pressure, we have continued to have our volumes increased with the utilization slowly increasing. So overall, our business there is very strong. And as I mentioned, a lot of opportunity -- as we continue to accelerate our synergies and strengthen that platform of vertical integration.

Marc Goodman - UBS

Is the pricing pressure that you’re seeing there normal or is this an unusual year?

Robert Coury

I would say it’s more a transition that you would expect as a country in a -- moves more towards increased generic utilization. I would say France is probably one of the more responsible countries, certainly that we have seen, during this transition. I think that they have made a conscientious concerted effort not to flip the switch, but to transform, I think in a more responsible way, between the type of prices they think is appropriate and more importantly increase in their generic utilization.

Marc Goodman - UBS

Yes. Let me just ask one more question which is, you are part of the growth that you’re expecting obviously in the second half of the year and in the next year in the United States. Is new products getting approved and the FDA is obviously guiding their peak relative to, let’s say, a year ago or two years ago with timelines that need approvals. So have you factored in a little bit longer timelines for expected approvals in your guidance?

Heather Bresch

We have and we have factored in longer approval times. And now our total count is slightly under than what we had originally envisioned. The revenue that we’re generating from our current launch has exceeded our expectations. And we have factored in a relevant cushion as far as, not only in time, but probability waiting that product mix in the contribution that the different kind of products depending on the competition that they may or may not face in the market place.

Robert Coury

And because we have a portfolio market, we managed a portfolio. Again, the mix of that portfolio and what we see -- you are exactly correct, the FDA has slowed down. We have, up to this very call right here, have absolutely reduced the number of product approvals we anticipate. It’s just the fact that the product mix that the one’s we do anticipate have much higher volume.

Marc Goodman - UBS

Thanks.

Operator

We will move to our next question from Randall Stanicky with Goldman Sachs.

Randall Stanicky - Goldman Sachs

Great. Thanks, guys. Robert, just a couple of questions, first, conceptually, why not reaffirm 2010 given that that’s the baseline outlook and it sounds like you have still a lot of confidence around that?

And then did you guys provide the number of launches in the U.S, that you’re expecting? I know it was 60 before. And then finally, just a follow-up, Heather, can you talk about Fentanyl pricing, and do you expect it to remain stable over the near term? Thanks.

Robert Coury

Heather, go ahead on the products, Fentanyl.

Heather Bresch

Okay. You’re right, we had -- we brought down, as we had just said, we brought down the expected launches in 2010 to more around the 45 number, but again not revising our guidance revenue. And, as Robert mentioned, that product mix more than offsetting the products that we do think are prudent and what they'll generate.

And as far as Fentanyl, as I’ve said, it has -- we have seen stability in that pricing and holding at the 50% market share. There’s been a bit of pressure as market share has flung a little bit throughout the rest of the competitors, but really haven’t seen any swings and don’t really see anything in the near future.

Robert Coury

In terms of the 2010, Randall, I was hopeful that you can hear in the choice of words we’re using and the projection that we’re trying to highlight, it’s really much more technical. I’m trying from a habit point of view not to have every single quarter, us to reaffirm.

We have a very disciplined process and as we move towards the end of the year, then we will give an affirmative of what we foresee in ’10 and I will redo that and come back and issue that guidance. But if you’re feeling that the words that you’re hearing are extremely robust in terms of how we’re feeling about 2010, then you’re hearing correctly.

Randall Stanicky - Goldman Sachs

I think I understand where you’re at. Thanks very much.

Operator

We will move to our next question from Kim Chang [ph] with SPM Equity.

Kim Chang - SPM Equity

Hi, thanks. I think you talked a little bit about the difficulty of your product. That product has done incredibly well for you. And you talked about some of the other products that you do plan to launch in the back half of the year.

Could you give us a little bit more color on what types of products, I think about a dozen that you think you have limited access on? How much incremental revenue that you think you can get in the back half of the year from these products?

Heather Bresch

So first, let me just clarify. For the second half of ’09, I have said that we expected about half a dozen launches that should receive limited competition. For 2010, I’ve stated that about 45 launches and about a dozen of those will have limited competition. So just to make sure that we have our numbers aligned.

And as far as the limited competition, what I tried to do, because there’s discussion around the visibility in the 2010 and the amount of launches which we didn’t have, a large primary 180-day exclusivity driver, that when you look at the volume of launches that we’re putting into the marketplace along with the other things that we’ve outlined today, truly is the momentum for the rest of ’09 and going into 2010.

And I think that when you look -- I’d try to give some examples because of the proprietary nature of products that don’t face Paragraph IV competition implies we’re not talking about certain product names. But I try to give some examples of products that we enjoy limited completion on, like the Transdermal Estradiol, aPaxil, to give a little flavor of the kind of products Mylan has always developed.

We’ve always had the niche, hard to formulate, hard to manufacture products, as well as the commodity type product. And what we’re seeing in today’s market place, even some of the more commodity type products are facing limited competition because of certain supply disruptions. So not only are we benefiting from products that are traditionally harder to make or formulate, we’re also benefiting, from the volume standpoint, products that are just facing supply disruptions and we’ve been able to be opportunistic.

Kim Chang - SPM Equity

Just one follow-up, Heather. Are you baking-in some revenue for the Benicar, Hydrochlorothiazide, that product?

Heather Bresch

We have, we said this before in our guidance with Paragraph IV, we have this probability weighted -- 50% probability weighted on authorized generics. So there is a number, but we've said that it's fairly not material and we are--

Robert Coury

Very, very little; very little, all the way up to 2010. We don’t have -- there’s not a lot of Paragraph IV in there.

Kim Chang - SPM Equity

Okay, great. Thanks a lot.

Operator

We will move to our next question from John Boris with Citi.

John Boris - Citi

Thanks for taking the questions and congratulations on the quarter. Just, Robert, fist question just on synergy, is being this far into Merck KG&A acquisition in the $300 million target, can you maybe just talk a little bit about some of the pushes and pulls at the synergies and when you think things might be coming in better where you still have some challenges?

And then, a question on Matrix, I know you didn’t want us to ask many questions related to manufacturing, but there were some notice out there that WHO had issued -- the World Health Organization issued a notice of concern in the retro-viral therapies. Can you just address the manufacturing and API at Matrix and whether there’s any issue there? Thanks.

Robert Coury

Sure. Thanks, John for your kind comment. Let me just address WHO then I’ll have review that anything else you want to. That is brand new facility. It’s certainly not a very large one, a very small one. So from the materiality point of view, there’s not a lot coming out of there. It was just actually inspecting an approved by the FDA in April.

And the WHO, there was a couple of issues that arose in WHO. We feel very strongly that we have had dealt with those issues. We continue to work with the agency. I believe there’s an upcoming meeting. One has to do with the brand new HVAC system that’s there. And Rajiv, would you like to highlight anything else?

Rajiv Malik

I think probably I’d call it pretty well. On both bases, we are working very closely with the agency and we will have soon this behind us.

Robert Coury

And the types of our products that are made to the APIs is basically --

Rajiv Malik

APIs, I think there’s a lot of --

Robert Coury

Thanks, Rajiv. Heather, would you like to address this issue?

Heather Bresch

Sure. John, as far as the synergies go, as I stated, we have now in ’09 not only accelerated more synergies into nine from ten, but also has found additional. As I stated, we continue to enhance our operational efficiency, so now we’re reaching right at about $200 million for ’09. And the primary driver behind the acceleration is around negotiations about our volume leveraging, this platform leveraging from supplier based on that API and finish those which form front, as well as continued vertical integration.

We’ve had some of our transfer products come in sooner than a shorter time period than we had allowed for. So just on all fronts from a cost of goods perspective has been able to truly capitalize and leverage the scale. And like I said, it certainly bridges our $300 million cumulative number that we are going to definitely meet, if not exceed for 2010.

John Boris - Citi

Thanks.

Operator

And now for our next question. It’s from Chris Schott from J.P. Morgan.

Chris Schott - J.P. Morgan

Great, thank you. Maybe first on the R&D side, you’ve had now two quarters in this 4% to 4.5% range. And we’re now seeing the higher sales expectation for the year. Can you tell us a little bit more on what specifically is going to drive that ratio higher, as compared with the rest of the year, or should we just look at the 5% to 6% range as a conservative forecast at this point?

Heather Bresch

No. I think, as we talked about it in the last quarter, there’s certainly a lot of timing that has to play with studies, bio-studies, how they fall into your range. Typically, what we have seen historically that the R&D, more of that spend has been on the second half of the year, so it’s not a flat straight line number.

So we are still -- we are on track with all of our filings. We have actually-- the synergy’s obviously from the R&D from the platform perspective, have continued to meet if not exceed a bit on that front as well, which has also helped us to be a little bit under on our spend. But as far as our overall budget for the year, we’re still tracking pretty close, slightly under but fairly close. And like I said, all our projects are on track.

Chris Schott - J.P. Morgan

Great. If I could, just one quick follow up. What are your thoughts at this point on brand generic settlement legislation? How likely do you see a near term bill in your view and just what would the implications be in the industry if such a bill were to come to fruition? Thanks.

Heather Bresch

So I would say that unfortunately or fortunately, Harvey [ph], when I look at it, there’s nothing near term. I don’t believe it’s going to happen in Congress, as you know, the House recesses after tomorrow and the Senate recesses next week for the summer.

So, as they come back into the fall, I think that there is such a push obviously for the healthcare reform. I think it’s going to be truly, truly a roll of the dice, whether the patent settlement ends up becoming a part of the healthcare reform. I think we’re going to have to wait and see what unfolds during recess and what the agenda looks like when they get back into town.

Chris Schott - J.P. Morgan

Great. Thank you.

Operator

For our next question, we will move to Greg Gilbert with Banc of America/Merrill Lynch.

Greg Gilbert - Banc of America/Merrill Lynch

Thank you. Good morning. First, for Heather, given what will hopefully be a long life for the EpiPen franchise, can you remind us on the duration of your agreement with King Meridian, and whether you’re in the process of enhancing that or extending it?

Robert Coury

I don’t think we’ve ever talked about that, but it’s certainly a long term agreement. And we’re always in discussion in terms of -- with not just that agreement, but other agreements in terms of extending the agreement. But it’s a long way off, Greg.

Greg Gilbert - Banc of America/Merrill Lynch

Okay. And my follow-up is for you, Robert. Beyond the obvious -- the obvious importance of delivering on the financial goals you’ve already set and executing on the biologics strategy that you announced, what are you’re most important corporate objectives over the next couple of years from here? And as part of that, do you expect the industry to continue to need to consolidate? And how do you expect to participate in that, in one way or another? Thank you.

Robert Coury

Greg, when I come out with the -- when we talk about 2010 and beyond, I think that will be a more appropriate time. As you know, with the generic biologics collaboration that we now have in place, it really, really completes all of the prior commitments I’ve made to date. That was the last one that was outstanding. And I believe that we’ve acquired all the assets necessary.

And I do believe, rather than concentrate on anything more at this time in terms of what to add on, I believe the -- it’s in the best interest of all of our shareholders and stakeholders for us to stay continued focus on executing on what we have. There’s a tremendous amount of more growth. And I told you that my emphasis will now be much more on driving the earnings potential of the assets that we’ve accumulated. And we’re very excited to do that.

With that said, I have said publicly that entering into the emerging markets from a commercial side, that India will be a next target of mine, entering into the commercial markets. I do not see an acquisition necessary to be able to do that. We already have a footprint there. That will be the next natural step in India. We’re very excited. I don’t have any of that in my numbers. And I don’t believe that that’s long term. That’s a long way off in terms of adding contribution immediately.

On the other hand, China is a market I’m extremely interested in. That one is a little bit further off. But we have facilities there in China, and I fully expect to leverage that opportunity in that very, very powerful platform over there.

Greg Gilbert - Banc of America/Merrill Lynch

Do you have any comments on the consolidation part of the question, Robert? Thanks for your answer.

Robert Coury

I actually do see more consolidation. Probably more so around the world than I even do here more in the United States. I think we’ll see some more here in the United States, but I think that there is just a lot of -- I just hear a lot of buzz, a lot of buzz about a lot of activity. Everybody’s looking.

And I think it would probably help and, I think even accelerate, if the healthcare reform issues -- what’s going to be the final outcome? What changes are there going to be? I do think people are focused on that as well. In my opinion, I think you’ll see probably more activity towards the end of this year, rather than during the summer months here.

Greg Gilbert - Banc of America/Merrill Lynch

Thanks.

Operator

Our next question comes from Scott Hirsch with Credit Suisse.

Scott Hirsch - Credit Suisse

Hi there, guys. That would seem to indicate that there was some -- the economic instability in Central Eastern Europe playing a role there. And given your leverage to France, are you guys expecting stabilization in Central Eastern Europe? Or are you expecting continued instability?

Robert Coury

The beauty about our Central Eastern Europe platform is that we are very, very small over there right now. Sometimes I often say this, there’s actually an advantage of not being first. Because you have an opportunity to navigate your way through, take a look at the current issues that are faced in a particular market, and then develop a strategy to work within -- what you see existing presently.

I think we’re exactly in that position and I expect to fully take advantage. Because we’re just in the beginnings of what I’ll say, our next largest growth segment will be Central Eastern Europe for our whole European operations.

Scott Hirsch - Credit Suisse

All right. And then, just as a follow-up on your comments on Biocon, can you just give us a little clarity of where you see the real capabilities going -- I know they’ve been an insulin company. And do they have a deal with Bayer at all, or are you guys pretty much have a universal partnership with them?

Robert Coury

I think Biocon, first and foremost, has very, very strong relationships with the brand pharmaceutical companies all over the world. If you’ve ever visited their facilities, you will find a first rate, first class, top notch facility. It’s very, very impressive. Because at Mylan, we don’t -- if you take a look at our facilities -- we’ve brought a lot of you through there. The equipment to have a -- process things, they truly are, I believe, one of the quality standards in India.

So our collaboration -- their strength is in the characterization of complex molecules. Their characterization is -- they can do very large scale up manufacturing. And so, in conjunction with our regulatory input and partnership, as well as our global commercial market footprint, I think that’s the combination. That’s the collaboration that I think is unique, and hopefully, will become the envy in that space.

Scott Hirsch - Credit Suisse

Great. Thank you.

Operator

Our next question comes from David Buck with Buckingham Research Group.

Jim Dawson - Buckingham Research Group

Hi. It’s Jim Dawson for David Buck. You got into this a little bit, but what’s the outlook for European growth for the remainder of the second half of ’09 and into 2010? Can you give a little more color on that?

Heather Bresch

I had mentioned that we actually are looking to have 50% more launches in the second half of the year throughout Europe, with a total of about 400 launches, that, totaling about 400 launches in ’09, throughout all of the EMEA.

Several of those are at market formation. So we see a very strong pipeline coming in. And as you know, they have a little seasonality in Q3 with the summer months so we see Q3 being a little lower and then Q4 ramping back up.

Jim Dawson - Buckingham Research Group

Okay. And then you talked about this as well a little bit, but just in 2010, what launches specifically, are going to offset the (inaudible) opportunity that you had in this year, in 2009?

Heather Bresch

As I stated, it’s the sheer volume of launches. We have about a half a dozen launches of limited competition in the second half of ’09, as well as, for all of ’10 I said about 45 launches, with about a dozen of those having limited competition. So it’s the sheer volume of launches, and of course, the acceleration of our synergies and so forth, coming in. From what revenues grossed coming to the bottom line, as well as the synergies, and cost of goods, and everything else that we’ve talked about, is really what gives that momentum and carries through to 2010.

Jim Dawson - Buckingham Research Group

Okay. Thank you.

Operator

Our next question comes from Elliot Wilbur with Needham & Company.

Elliot Wilbur - Needham & Company

Just first real quickly, you mentioned in the press release, pricing erosion offsetting the favorable impact of new product launches, and I’m just wondering if that’s standard, boiler plate language, and if you see anything other than a 5% rate of erosion that you talked about or have talked about in the past?

And then secondly, on the Biocon venture, Robert, at what point in time are we going to get some more detail in terms of the range of initiatives that are involved there? And specifically thinking about that endeavor, obviously the relative cost is expected to be lot higher than the standard development cost for regular generic products. I’m wondering how we should be thinking about the incremental spend there, relative to your historical R&D guidance? And any detail you can provide there in terms of how that’s going to be split, whether it’s 50-50 or there’s some milestone based R&D arrangement there? Thanks.

Robert Coury

Thank you, Elliot. First of all, rest assured that even what we’ve talked about in ’10, that our joint venture -- our collaboration, I don’t see anything really affect it on a short term basis. And I think that the better plan is -- and I don’t want to steal the thunder of Dr. Patrick Vink. He has worked with me extremely closely, over the last two years, roughly. And we have scoured the Earth, let’s just say. And I actually, literally mean that, in terms of visiting all these companies before we ended up with Biocon.

I think what we will do for you, given that this is much more long term in nature from a fiscal point of view, I think that Patrick Vink -- and we ought to have a day in which he can come in for the analysts, for the investor base, and really lay off a separate plan for our biologic strategy.

And again, I won’t steal his thunder. But the thing you should recall, I’ve been giving guidance how we were going to go about doing this, my first priority in terms of how I wanted to enter into this space. And I said that I would be extremely fiscally responsible. And I think we did exactly -- this collaboration is almost exactly -- from day one when I was asked many times, “How are you going to get into the space?”

This collaboration truly represents the very essence of what I’ve envisioned from day one. And we’re very excited because it’s an opportunity to really join into the space, but in a way where we can optimize the bottom line and be balanced about the type of investment that’s necessary.

Heather Bresch

And just to go back to your first question on erosion, we do see it. And as I mentioned, our volumes and some of the opportunistic market plays that we’ve been able to do due to supply disruptions, that has definitely offset erosion. And we do still factor it in, right about the range that you had mentioned in that 5% to 7% range.

Operator

We will move to our next question with Rich Silver with Barclays Capital.

Rich Silver - Barclays Capital

Good morning. And first, thanks very much for providing an additional detail on the drivers of growth. They’re very helpful.

Robert Coury

Thank you.

Rich Silver - Barclays Capital

Secondly, you mentioned the 400 launches in the EMEA this year. And I assume these are all new launches, these are not site transfer type products. Is that correct, Heather?

Heather Bresch

That is correct. They’re just new launches throughout all the countries in Europe.

Rich Silver - Barclays Capital

Okay. And can you give us any sense on how that number might compare to what -- a rough number for next year?

Heather Bresch

Yes. I gave. It’s right about 400 next year, as well. So it’s right about the same amount this year as next year. But there’s a little bit different product mix. As you know, there are some larger products coming off patent and have market formation. So it’s about the same number but a little bit different mix as far as driver in revenue growth.

Rich Silver - Barclays Capital

Okay. And most of my questions have been answered. One follow-up, what is the status of the Copaxone filing, which given that your expectation of a 2011 launch and given the time line for 30-month stays, we would assume that that would have been launched -- would have been filed by now.

Robert Coury

Rich, we were flipping coins here, guessing whether or not you would actually ask that question or not. And I want you to know that I lost. But as promised, we did submit the application in late June.

Rich Silver - Barclays Capital

Okay. Thanks very much.

Robert Coury

You’re welcome.

Operator

We have time for one more question. And our last question will come from Ken Cacciatore with Cowen and Company.

Ken Cacciatore - Cowen and Company

Thanks. Good morning, guys. I have two questions. The first is, Robert, how do give us confidence in what happened in Australia in terms of the pricing hit from the government? How do we look at -- or historically, how should we prepare? Is this every couple of years, every three years, it can happen at any time, or may not happen again? That’s my first question. So how we get a little bit of conviction in those Australian figures?

And then on the brand acquisition strategy, is that something that you’re more focused on? I know you were saying you feel fairly good about the assets you have, and obviously, we would agree with you. But is there some ability to maybe exploit the good things going on at day and at near term as opposed to maybe more acquisitions in the generics space?

Robert Coury

Sure. Let me start of in Australia. I think the first thing you should get comfortable with is -- I just don't -- I don't care what -- and be careful. It really doesn’t matter what changes at this point. It’s not material, okay? I think there are a lot more upside at this point now that we rebased, then what we have at downside. And even with downside, it’s just not material to our overall numbers. And so from a numbers point of view, I think you could be comfortable with that.

In terms of predictability, in terms of what the government is going to do, I think -- one thing I will never try to do is to predict any government. I think no matter what the -- no matter what historically has been, I believe we’re in an environment that I think the government will do what it thinks it needs to do at any given time. And then I’ll let Heather comment on a few more on Australia before I comment on the brand and day.

Heather Bresch

The only thing I’d add, Ken, is that with what they did -- if you remember, when they did that price cut, they also put incentives. And as I’ve mentioned, in the last 12 months, that generics utilization rate has grown in Australia, a good 8%, almost 10%. So I think that one thing is that that has been working with that utilization rate, and working with the government to show that that’s a much more sustainable model than just the heavy price decrease.

Robert Coury

And in terms of the brand on the specialty side, I am glad you asked that because I should have added that to my concentration. I do believe that -- and I am looking to focus on adding additional products to the day organization. But they will be much more product acquisitions, rather than company acquisitions.

Ken Cacciatore - Cowen and Company

Great. Thanks. And Robert, just on your Copaxone comment, can you let us know whether the FDA has accepted the filing, or a time line in which we would know whether the agency’s accepted the filing?

Robert Coury

Rich, or I’m sorry, Ken. Because of the -- where we are, I would much prefer to update you on an ongoing basis. As I’ve mentioned, the application has been submitted in June -- late June. And I will update you accordingly.

Ken Cacciatore - Cowen and Company

Great. Thank you.

Dan Crookshank

Okay, Laura. Thank you very much. On behalf of the Mylan management team, we thank you. And several of us will be available throughout the day to take additional questions and answers. Thanks.

Operator

This does conclude today’s conference. Thank you all for your participation.

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Source: Mylan Inc. Q2 2009 Earnings Call Transcript
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