Good day everyone and welcome to today’s Mylan’s 2010 first quarter earnings conference call. Today’s conference is being recorded and now it is my pleasure to turn the conference over to Mr. Dan Crookshank, Mylan’s Vice President of Global Investor Relations. Please go ahead, sir.
Thank you, Kelsey. 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; John Sheehan, Executive Vice President and Chief Operating Officer Rajiv Malik, and Senior Vice President, Corporate Controller and Principal Accounting Officer, Dan Rizzo.
During today’s call, including the Q-and-A, we will be making forward-looking statements, including those relating to our anticipated business levels, our future earnings, our planned activities, our anticipated growth and other expectations and targets 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 Annual Report on Form 10-K for the year ended December 31, 2009 and in our other Securities and Exchange Commission filings. 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 call, we will be referring to certain actual and projected financial metrics of Mylan on an adjusted basis, which are non-GAAP measures. It should be noted that non-GAAP financial measures such as adjusted revenues, adjusted gross margin and adjusted diluted EPS should be used only as a supplement to, not as a substitute for or as a superior measure to measures of financial performance prepared in accordance with GAAP.
Please refer to today’s earnings press release, which is available on our website as it contains detailed GAAP to non-GAAP reconciliations of our actual 2010 and 2009 first quarter results, including the allocation of each reconciled item to specific income statement line items.
Before I turn the call over to Robert, let me also remind you that the material in the call, with the exception of the participant questions, is the property of Mylan and cannot be recorded or rebroadcast without Mylan’s expressed written permission.
With that I’ll now turn the call over to Robert.
Thank you, Dan. Welcome everyone and thank you for taken the time to join us today. I’d especially like to welcome and thank our employees around the world for another great quarter. The phenomenal execution and continued dedication for Mylan’s core values combined with the exceptional leadership provided by our senior management team that made it possible for us to report yet another strong quarter results.
I’m behalf of the Board of Directors and our Executive Management team I’d like to thank each and everyone of your contribution. I’d also like to take a moment and welcome John Sheehan this morning as all of you know we've announced John’s appointment as Executive Vice President and Chief Financial Officer on our last call and today he joined us for the first earnings report here with Mylan. Welcome John.
Early this morning we reported adjusted diluted and earnings per share $0.36 and reaffirmed our 2010 guidance of the $1.50 to $1.70. These strong results of set the stage for yet another exceptional year at Mylan and they reflect the positive momentum that continues to build from 2009. While this quarter came in slightly better than expected looking forward and as we had guided on our last earnings call, we expect the second quarter results to come in at a comparable level with the majority of our 2010 growth coming in the second half of this year.
Before I turn the call over to our President Heather Bresch, I would like to make another brief comment about the historic healthcare legislation enacted recently in Washington. Even though the reforms did have a financial impact on Mylan, this impact has been fully absorbed in our guidance.
With that said we also anticipate incremental positives due to the passage of this legislation beginning in 2014 when more than 30 million uninsured Americans begin to receive healthcare benefits.
I’ll look forward to answer in your questions. Now let me turn the call over to Heather.
Thank you, Robert. Good morning everyone. As Robert stated Mylan is off to a great start for the year. We are very please with our first quarter results and remain on track to achieve the 2010 guidance we reported in February and are reiterating today. During the first quarter we generated total revenues of $1.29 billion compared to last years first quarter adjusted revenues of $1.18 billion an increase of almost 10% and approximately 4% on a constant currency basis.
On the bottom line solid execution in all areas of our business allowed us to generate $0.36 of adjusted diluted EPS and 9% increased over last years first quarter result. Before moving to the performance of our businesses I wanted to tough briefly on our gross margin in R&D expenditures for the quarter. As our results in both areas fell outside of our full year guidance ranges.
Our adjusted gross margin for the quarter was approximately 46% compared to our full year guidance range of 47% to 49%. As I mentioned on our last call we expect to see a larger contribution to gross margins from current year product launches, higher specialty business sales and synergy realization later in the year, mainly in the second half. As such we continue to expect to meet this element of our guidance.
R&D expenditures total $60 million or nearly 5% of revenues. Similar to last year we fully expect R&D expenditures to rise in quarters 2 through 4 such that we also will meet the element of our guidance; more over our R&D output remain strong. We currently have more than 1440 global product submissions pending approval, more than 300 of which were filed during the first quarter, further we still are targeting more than a 1000 submissions in 2010.
Now I’d like to walk you thorough the performance of our generic business by region and then our specialty segment. Staring with our generic business in North America, third-party revenues for the first quarter were $560 million unchanged from adjusted third-party revenues reported from North America in the comparable year ago period.
This result is notable in that during last year’s first quarter, we launched divalproex ER, a product that enjoyed 180 days of exclusivity. Though we launched fewer products than expected during the quarter due to longer than anticipated delays, in FDA approvals our revenues benefited, from new products launched in the U.S. over the last 12 months including lansoprazole and clindamycin-benzoyl peroxide gel.
The new products contributed approximately $55 million in the first quarter revenue. Further as of April 27, we have launched about half of the dozen limited competition product we expect to introduce by year end.
Our Canadian business also was a contributor with double-digit year-over-year revenue growth for the quarter. As we stated many times the portfolio of countries we manage in Europe is very diverse and dynamic and we continually look for opportunities to maximize its performance.
With that said, in EMEA third-party revenues were $411 million increased $56 million or 16% over the last years first quarter adjusted third-party revenues of $355 million. Revenues were affected favorably by foreign currency translation reflecting a weaker U.S dollar.
On a constant currency basis operational growth in EMEA with 9% year-over-year, that operational result was led not only by continued growth in France, but also in several other countries across the region including Italy, Spain and U.K., and which experience double digit growth. These gains more than offset lower revenues in several markets including the commoditized German market, primarily due to the ongoing implementation of tenders.
In France we had a strong quarter absorbing a well anticipated price cut. In addition our hospital unit delivered strong performance we command market share of 32% in the French generics market overall and 33% in the hospital segment
In Italy our result were affected possibility by some very successful launches in higher product volumes as a result we had captured a disproportionate share the current upside in Italy, further evidence of the opportunity we have to grow in that high potential generics market.
In addition our performance in Spain as an example of our ability to read and react to changing market conditions on a real time basis. As you may know the Spanish government announced during the first quarter then an average price cut of 25% we go into effect in the second quarter.
However we still manage to deliver higher revenues year-over-year as a result of successful product launches. We will continue to adapt our business inline with market changes, so as remain very efficient and competitive in an environment where we expect to see increased generic utilization.
Moving on to Asia-pacific region for the first quarter traditionally our lightest, we delivered very solid result. Total third-party revenues return on $37 million up 27% over ’09s first quarter third-party revenues of a $187 million. Operational revenue growth accounted for 11% of this increase while favorable changes in currency rate contributed to the remainder.
In Australia however local currency revenues declined brightly as we continued to experience irrational and unsustainable pricing by competitor. In addition we continued to remain sensitive to any additional government action on healthcare that might affect the generic industry. Nonetheless we will continue to optimize our business in this market so as to remain our leadership position.
In Japan we saw mid single-digit local currency revenue growth year-over-year, which included the impact Biennial Government price reductions are begin to affect our business in March. Also in the region our Matrix business delivered another quarter of year-over-year double-digit growth primarily responsible with higher sales of its expanding line of ARV finished dosage form products.
Finally, our Specialty segment Dey continued to perform well. Total revenues increased 33% year-over-year for the quarter to $101 million, a result that excludes inter company revenues up $17 million associated with the transfer in last year’s fourth quarter of Dey’s generic products to our Mylan pharmaceutical division. Including this product Dey’s revenues rose 20%.
Dey’s third-party revenues for the quarter were $85 million and increase of more than 30% when excluding from last year’s first quarter revenues associates with the transfer generic I just mentioned. Including those product Dey’s third-party revenues rose 7%.
Dey’s growth came from higher EpiPen auto-injector sales, which resulted from market expansion in a higher price point on the next generation of the product, we began marketing in October. Also contributing today’s performance was continued growth Perforomist and incremental sales of EMSAM, which Dey began marketing during last year’s second quarter.
In summary, I would like to reiterate that we are very pleased with our first quarter performance and remain very confident in our ability to achieve our 2010 guidance metrics, as well as our long-term growth target.
With that I will turn the call over to John.
Thanks, Heather and good morning everyone. This morning I would like to walk you through our first quarter 2010 financial results, while at the same time reminding you of our unchanged 2010 financial guidance metrics. I’ll conclude by briefly reviewing our capital structure and liquidity position.
Before doing so though I’d like to start up by saying that on extremely excited to be here at Mylan and working with each of you as the company’s new CFO. I look forward to meeting many of you in the investment community as I get out on the road over the next weeks and months at industry conferences and other up coming investor events.
As most of you maybe aware following 20 years at KPMG, I then spent the last seven years at Delphi Automotive most recently our CFO. As we are very aware the automotive industry experienced nothing sort of the most challenging times ever over the past several years. Although difficult I sound my experiences leading Delphi through a significant re-organization extremely rewarding and valuable as I proactively looked or in my next profession challenge.
As I consider the opportunity to join Mylan, I was very impressed with the growth prospects of the generics and specialty pharmaceutical sector. The soundness of Mylan's growth strategy that was put in motion 2.5 years ago and the significant progress the team has made on executing against that strategy and making that strategic vision become a reality, it was simply an opportunity I could not pass up.
After my first 30 days on the job here at Mylan I’ll tell you that I am fully energized and excited to be in a position to meet a completely different set of challenges. Challenges related to long-term growth, I am especially excited to be working with Robert, Heather, Rajiv and the rest of the leadership and employees of Mylan to deliver on the long-term growth target that we recently set for ourselves.
Over the past few months, you’ve heard Robert comment from the time-to-time about its high level of confidence in the continued solid execution of the companies finance organization well he searched for a new CFO. Well let me tell you during my first 30 days here at Mylan, I’ve come to fully understand and appreciate exactly where Robert settlement has been coming from.
My initial observations are that I’ve inherited a strong, seasoned and highly capable team of finance professionals across the organization. This well established solid finance infrastructure will no doubt proved to be invaluable in allowing me to focus not just on finance, but also being a strong business leader and value-added partner in the successful operation of our global businesses.
Now, moving on to my review of the first quarter financial result. As Dan mentioned earlier, I'm going to be referring to actual and projected financial metrics that have been prepared on an adjusted basis. These are non-GAAP financial measures. We present these non-GAAP financial measures because they are prepared on the same basis as used by our management and our Board of Directors in evaluating the performance of our business.
This morning's earnings release includes a complete reconciliation from our GAAP to non-GAAP financial measures for our first quarter 2010 and 2009 results. Our earnings release is available on our website and I encourage you to take a look at it, as the nature and amounts of the adjustments included in the reconciliation changes from period-to-period.
In summary, the more significant items that are excluded in coming to our adjusted basis results for the 2010 first quarter, our purchase accounting amortization of $72 million, integration and other expenses of $12 million, imputed interest expense related to our convertible debt of a $11 million and the net tax benefit related to the excluded items of approximately $33 million. (Inaudible) Robert and Heather sentiment on the quarter we are off to a very solid start to the New Year.
Let me start at the top of the income statement. Total revenues for the quarter were $1.29 billion, an increase of nearly 10% over last year's first quarter total adjusted revenues of $1.18 billion. Revenues in the current quarter were favorably impacted by approximately six percentage points related to the affect of foreign currency translation reflecting the weaker US dollar.
Importantly and as Heather made reference too earlier excluding the significant decline in revenues related to divalproex sodium ER, which was expected our year-over-year revenue growth rate would have been much higher. For the full year we do continue to project total revenues in the range of $5.45 to $5.75 billion.
Looking at our operating profitability measures adjusted gross margin for the quarter was approximately 46% compared to our full-year guidance range of 47% to 49%. This margin is lower than the first quarter of 2009 as a result of the loss of exclusivity and divalproex in the second half of 2009. However sequentially it was higher by two percentage points compared to our Q4, 2009 adjusted gross margin.
As Heather mentioned in her remarks we continue to fully expect our operating performance and gross margins to improve as the year progresses, particularly in the second half. Adjusted R&D expenses for the quarter were $60 million or approximately 5% of revenues.
While the spending is consistent with our first quarter of 2009 spending level it is lower than our full-year guidance range of 6% to 7% of revenues. Our projects remain on target and we are planning for higher levels of spending over the remainder of the year. Adjusted SG&A expenses were $245 million for the quarter or 19% of revenues, in the middle of our 18% to 20% full-year guidance range.
Our first quarter adjusted EBITDA was $323 million, if you combine this results with our expectation for generating higher levels of rev earnings later in the year we see ourselves on track to meet our adjusted EBITDA guidance in the range of $1.4 to $1.6 billion for the full year.
Now, let me move to a couple of our non-operating financial metrics. First quarter 2010 interest expense adjusted to exclude imputed interest on our convertible debt with $63 million. As you know a short-term floating interest rates continued to be an historic lows.
We continue to forecast adjusted interest expense for the year to be in the range of $280 to $300 million, which continues to consider the potential for higher short-term interest rates and potentially a higher level of interest expense should we opportunistically execute on the long-term debt refinancing transaction this year. Income taxes; our first quarter adjusted effective income tax rate was 29% inline with our full-year projection for an adjusted effective income tax rate in the range of 28% to 30%.
In summary first quarter adjusted net income was $158 million or $0.36 per share. I believe you’re all aware, but let me say it. In calculating our adjusted diluted EPS, the impact of assuming the conversion of our preferred shares into a 125 million common shares was more dilutive than the 35 million quarterly preferred dividends. Therefore, adjusted diluted EPS for the first quarter is calculated based on an average outstanding diluted share count of 437 million shares.
As you all are aware and we were pleased with, the performance of our stock price in the first quarter was strong. Depending on the market value of our common stock going forward, our average outstanding diluted share count could increase over the final three quarters of the year due to further dilution from stock option and other potentially dilutive financial instruments such as warrants related to our convertible debt obligation. Our unchanged full-year adjusted diluted EPS guidance range of $1.50 to $1.70 does consider the potential for a higher average diluted share count.
Turning to our cash flow metrics, our first quarter cash flow from operations was $241 million, this amount includes $99 million income tax refund related to capital losses previously realized on internal reorganizations. Excluding the benefit of these refund cash from operations was $142 million, compared to $126 million in last year’s first quarter.
We do continue to project full-year operating cash flow in the range of $725 million to $825 million, excluding certain one-off items. First quarter capital spending was $20 million and similar to 2009, but was less than one quarter of our expected annual spend. Based on anticipated projects timing, we do expect spending to increasing Q2 and continued to project capital spending in the range of about $250 million for the full-year.
Now, let me turn to our capital structure and liquidity position. As most of you are aware, this past December, we repaid our 2011 maturities on our bank term loans, which totaled $196 million and as a result, we have no meaningful long-term debt maturities until the first quarter of 2012.
From a covenant perspective, the level of our senior secured debt is approximately 2.6 times, our last 12 months covenants basis adjusted EBITDA. This is well below our March 31, 2010 covenant threshold of four times and also comfortably ahead of our December 31, 2010 threshold of 3.5 times. At the end of the quarter, we had approximately $550 million of unrestricted cash and marketable securities compared to just over $400 million at December 31.
Our balance sheet in this morning's earnings release indicates the strong performance of our stock price in the first quarter also had on the effective increasing the value of the cash conversion feature of our cash convertible notes, which increased our long-term debt balance at the end of the first quarter.
This convergence feature is mark-to-market at the end of each period and reflected in that recorded long-term debt balance, there was an equal and offsetting assets that is recorded in the other asset section of our balance sheet related to a financial instrument hedge we have in place in order to offset the value of the bonds conversion features.
Excluding this and unamortized discounts related to both of our convertible note issuances. The balance of our long-term debt was $4.70 billion at March 31, compared to $4.8 billion at December 31, 2009. This difference relates to the impact on our euro denominated debt of the decline in the value of the euro between the two balance sheet dates. In closing, let me once again say, I believe we’re off to a very solid start to the year.
That concludes my remarks, I’ll turn the call back over to Dan and I look forward to the Q-and-A. Dan.
Thank you very much, John
Kelsey, we’re now ready to open up the line for questions.
Question and Answer Session
(Operator Instructions) We’ll go first to Chris Schott with JPMorgan
Chris Schott - JPMorgan
My first question is, can you just elaborate or just give us your latest thoughts on the current FDA OGD environment, and just as the implications in terms of how many launches you’re now targeting for 2010? I just had one quick follow-up after that.
I’ll give you high level comment and Heather maybe you want to follow-up, but I guess the way I would describe it is, this is what we’re seeing is not I think something that’s acute in any particular company. It’s more systemic in this way, even though the OGD is kind of reorganizing itself with some of the some of the announcements that they work.
Some of the backlog and some of the product approvals, we look at what's going on there more from a timing perspective. For example, some of the products to we anticipated to get actually approved in the first quarter has actually been delayed and we anticipate those approvals just to roll forward.
So you would think on one hand that that would be a negative, but really on the other hand, because this is more of a systemic issue with the FDA, the OGD in particular as a whole within the industry, some of the other products that we have in our portfolio that we anticipated competition, we didn't get either. So the two kind of offset on another and what you have is a rolling forward scenario where again this is simply maybe a timing issue and nothing more than that. Heather.
I’ll just add to our numbers specifically, we haven't readjusted what we had set for the year, which was I think 45 to 50 approvals in the U.S., and as I mentioned, we already have about six of the limited competition approval that we’ve revived. So to Robert’s point, definitely some delays from the timing issue given where we are in the year. So early on we still see them coming in and like I said it haven’t changed our forecast for the year.
Chris Schott - JPMorgan
Then just as a follow-up question, can you just elaborate a little bit on the benefit you saw in the quarter based on competitors supply interruptions and just can you give us a little bit of your thoughts on the willingness of your customers to potentially move back to these players, once these supply interruptions are resolved. Some of these share gains you’re seeing now, do you believe these are sustainable share gains in some of these markets?
I would prefer not to try to point to any benefits that Mylan is receiving off of the back or some of the issues that some of the other companies are having. I think at Mylan, we’re just staying concentrated on delivering a high quality, a high volume of supply in that supply chain and I actually it’s a mistake to try to give a graph of target, any benefits that we’re deriving off of on the backs of some others that might be suffered.
I do think that there is a higher appreciation. I’ve said this in the past, from the customers. I think we’re seeing that higher appreciation for a constant, again a high quality supply and I think that, I don’t think anything I can tell you there’s certainly nothing that has materially stood out, but we do see and have seen over the last several quarters, some appreciation from the customers in terms of their activities, interviews are the players within this sector.
Our next question will come from Randall Stanicky with Goldman Sachs.
Randall Stanicky - Goldman Sachs
Can you help us understand the gross margin trajectory? How much of that is going to be new product geographic versus cost synergies, as when you go at back half and then Robert, can you just quantify the reform impact from an EPS perspective? Thanks.
Sure, let me go first and let me just say that your reform impact, I’m not going to classify as material, but if you take a look at the calculation with the higher rebate and what have you, obviously we had some financial impact, but enough where we felt very comfortable again giving the robustness that we see ahead of us, we felt very comfortable that could absorb that impact in terms of the guidance that we give and the targets that we set forth, until we start to see benefits in the 2014 plus range, and Heather on the gross margin?
Yes and I think Randell keep in mind, I think there’s three important parts to the gross margin improvement there, and certainly we still forecasted current product launches that we expect to happen there’s a specialty business as we continue to have performance uptake through the year that certainly as a driver as well then to your points at synergies. So as we look at the repatriation, some of the vertical integration, file transfers that as you know just keep rolling in year-after-year that have been more coming in at the back, it’s the combination of all three of those that are really driving the second half of the year.
Randall Stanicky - Goldman Sachs
Can you just help us to understand, what I’m trying to understand is how much is that linked to product approvals versus synergies, which you probably have a much better line of sight into?
First of all, let me start off by saying that the first quarter did not come as any surprise to us at all. Quite frankly, if you look at quarter four, to quarter one in 2010, it’s exactly what we’ve anticipated. If you recalled, in the last quarter I looked at the fourth quarter as we entered in the 2010 I said, I want you to look at or slide it into 2010 and then looking at the back end as really the upward trajectory.
So and because we done give quarterly guidance, we give annual guidance, I want to stress that, we don’t give quarterly guides, we give annual guidance. I don’t believe very responsible to try to look at a quarter and judge with the guidance that we given over the year, because of this trajectory that I’ve told you, but to your point and an excellent question, I think that there is actually a strong combination and I don’t want to put too much weight on one versus the other.
I will tell you that, we have a voluminous amount of product launches that we see at the later part of the year, but we also rundle to your point that DC continued lower cost of goods savings also coming into that gross margin plan.
And moving on to Gregg Gilbert with Banc of America/Merrill Lynch.
Gregg Gilbert - Banc of America/Merrill Lynch
First for John, can you review your debt maturities and how you planned to deal with them, and give us the specific share count you’re using for EPS for this year’s guidance? Then a follow-up for Rob and Heather, from an M&A perspective, at this point, are you more focused on generic opportunities or opportunities to fold some brand assets in today or otherwise support our branded strategy?
Before I turn it over to John, in term of the overall debt maturities as we stated Gregg, we are looking, we basically satisfied any requirements prior to 2012 and really our focuses in 2014, the $3 billion that we have coming due in 2014, and there’s been our stated intension to basically tap the capital markets in an opportunistic way in order to stager off that maturity from 2014 to something that we believe it’s a little more responsible and prudent.
As I stated also in the past, the guidance fully anticipates, our ability to tap those markets and any negative arbitrage that we can at least anticipate right now has also, in terms negative arbitrage in the interest rates. I had also been fully incorporated into our guidance, John do you want to add anything.
So, I think the two parts to your question were in term of existing repayment schedule. As I said my remarks, we really don’t have any significant maturity repayments until early 2012 and in ‘12 we’re looking at approximately $800 million, $200 million ’13 and then as I’m sure, you’re already aware a significant amount in 2014 over $3 billion. Second half of your question related to the share count that we’re using and as I said again in my remarks the first quarter amount was 437 million shares and the amount that’s baked into our guidance quite honestly as not materially different in that.
We don't anticipate using that this time our share count lower than that. I think that, correct me if I’m wrong, but I think the threshold was $17, a share were we had – really where that crossover occurred. So we don't anticipate for the rest of this year to be using anything less than the fully diluted share count to taken into consideration, the number of shares that will be added when the mandatory convert comes do in November and then the other part of the question, Heather?
Yes, sure. On the opportunities, obviously as we continue to say we certainly are looking that complimentary products to add to the day portfolio, as well as generic opportunities whether it’s other therapeutic categories or dosage form such as injectable, ophthalmic as we’ve discussed, things that we would add to those number of the footprint.
Elliot Wilbur with Needham & Company has the next question. Actually, Elliot has removed himself from the queue.
So we’ll move to Marc Goodman with UBS.
Marc Goodman - UBS
Two questions, first on France, can you give us a flavor for what the government has done with respect to the price cuts and things like that? Second of all in France, did you mention that was one of the countries that grew double-digits or not, there, because you threw a bunch of countries there, and I wasn't sure whether France was in there?
Then the other question has to do with the gross margin. Kind of just give us a sense of the site transfers that you've had planned from the beginning. How many have you done, or just give us a percentage of the way that you’re through the process, and where you’ll be at the end of the year and then just the FX impact on the gross margin in the quarter?
So first, I think you asked about Spain, is that correct the price cut that we mentioned in France. Okay the France one is as you know, as is typical in most of the countries the price negotiation though with government and there is typical the one-time local price cut that happens, so that France as I stated was anticipated as part of our guidance and so forth and we intended to still maintain our market leadership position. So that was all anticipated.
Marc Goodman - UBS
Was that like 5%?
We didn’t get into an average it doesn’t go across the board it depends whether your products on the repertoire list, not on the repertoire list. So there it’s not just overall, it’s blended, but it was fully anticipated. As far as…
The other question was on gross…
Marc Goodman – UBS
Well, before you move into the gross margin, just a double-digit, because you reeled off a bunch of countries that did and I wasn’t sure if France was in there?
No, not on double-digits on the growth in the countries was Italy, Spain and the UK.
In the gross margin question Marc?
Marc Goodman – UBS
Well, there were two. One was the FX impact and then the site transfers?
Yes, the site transfers. So, Marc as we had said a while ago all the work not I think it averaged about 165 transfers that we completed actually the first of ’09 getting into the all the regulatory queue and obviously that’s what’s now been rolling in the end of ’09 and we’ll continue to roll and intend, but I can’t tell you ever broken out the percentage of have those fallen an expect our guidance, obviously absorbed them, certainly leading to that second half trajectory that we’ve talked about, the majority of those being in and obviously through the end of 2010, all of those now will been absorbed in.. So, certainly the majority of those are in the last half of this year, will then be completed for all like I said the 165 transfers that we’ve talked about through the synergies.
Marc Goodman – UBS
John on the FX on the gross margin.
Go ahead, Dan. I will let Dan respond.
The FX impact on gross margin dollars is roughly comparable to the impact you are seeing on the revenue side, but more importantly at a percentage gross margin percentage, which is a slight negative impact on gross margin percentage, but not significant, because it’s affecting sales and cost of sales in almost be go in opposite directions?
And moving on to John Boris with Citi.
John Boris - Citi
First question just has to do with the Japanese market and the price cuts by annual price cuts that they take there. What was the wholesaler behavior like in the quarter? Did they not buy product and can you just give any comment on what generic volumes are actually doing in the Japanese market and then I have one follow-up?
So just to the two parts of that, the Biennial obviously again this is something well anticipated and known throughout the market there in the players, so the patterns of the inventory. We didn’t see any extraordinary phenomenon on any front with the Japanese price cut. As far as the volume go, they are still holding around that 19% to 20% generic utilization rate, we haven’t seen any significant move one way or the other on that front.
John Boris - Citi
Then just back to a question that was asked earlier on healthcare reform. Can you just provide some commentary on what percent of your revenue in the U.S. is exposed to Medicaid and to the 340-B provision?
It’s even more minimal since Medicare Part-D, because dual eligible were taken out and moved into Medicare Part-D. So I believe that Medicaid population is now right under 10%.
We will now have Ann Trimble with Barclays Capital.
Ann Trimble - Barclays Capital
It’s Ann Trimble for Rich Silver. Could you discuss the reason behind the sequential decline in EMEA revenues?
If you look, obviously there’s some seasonality in the product and just buying pattern as you’re going into holiday months and so forth coming into the first quarter. So there’s nothing extraordinary, we certainly had year-over-year growth when we look at quarter-over-quarter in the EMEA. So, sequentially again there’s nothing out of the ordinary if you look Q4 year-over-year as well.
Ann Trimble - Barclays Capital
Then as a quick follow-up, could you elaborate on your comments on the Spain price cuts and timing of the expected impact?
I am sorry. Can repeat it please.
Ann Trimble - Barclays Capital
Could you elaborate on your comments on the Spain price cuts and timing of the expected impact?
As I said, it was 25% and we are obviously, as I mentioned have been able to not only now anticipate and absorbed that as well as we’ve had on quite of you successful product launches and increase volume uptake, which has been able to have the offset 25% price cuts.
We’ll now hear from Ronny Gal with Bernstein.
Ronny Gal - Bernstein
First, about the refinancing of the debt, I guess what would be the impact of this during the year, and roughly in the year, did you assume it to happen? Just to understand the impact if this refinance will not take place this year?
Ronny, as we mentioned we have been confidently looking that, what we considered to be opportunistic moment for Mylan to tap the markets and when we think that we reached that point, we will certainly make the announcement and then so to that point, we can’t really predict exactly what the impact would be in terms to any arbitraries in terms of the interest rate, all in interest rates that we pay now versus any impact on the interest rate that we may pay.
Once we tap the markets and understand what we’re going to end up within terms of the overall yield, but let me just say that we can easily at least and what we already have done is pay attention to the broader markets to some of the deals that have gone off, look at some of the rates that they’ve ended up with, look at what our are all-in rate is, and I think fairly and practically predict that there will be some negative arbitraries and we fully have incorporated that into our 2010 guidance.
Ronny Gal - Bernstein
Yes, I understand, but I was just wondering what you’ve modeled, if you can break that down for us, once the news hits, we can actually assess it for ourselves?
Understood, and I was going to add here to Robert that, we thought about two separate factors, one being the refinancing that Robert was referring to, and then combined to fact that there is certainly risk for interest rates increasing and we didn’t specifically think about a particular time when we would be doing that refinancing transaction nor can we predict exactly when interest rates are going to rise, so we took those two factors into consideration in thinking about that 280 to 300 as an appropriate number for full-year interest expense.
We’ll hear from David Buck with Buckingham Research.
Jim Dawson - Buckingham Research
Yes, hi it’s Jim Dawson for David Buck. You got into this a little bit, but can you talk about the expectation for the European business forward and any pricing changes which we aware of?
What we have forecasted obviously growth overall for EMEA. And other than the pricing that I spoke about this morning (inaudible) and the ones that we’ve anticipated I right now don’t know anything else that’s coming to the year.
But as we mentioned many, many times, overall and longer term we do expect there to be a continuation of price cuts within that region and we’ve fully have incorporated that into not only our guidance, but evening our targets, but the opportunity for us is to balance that with the increase in volumes that we anticipate strictly as a result of the lower cost of the pharmaceutical products as a whole, especially the generics through increased generic utilization, but most importantly in addition, I have to tell you again we do not view some of the markets over in Europe is being the most efficient markets when it comes to the pull though effect of generics and generic utilization as a whole.
So we look at that as an opportunity and as the markets continue and these countries continue to decide to reduce its prices, it basically comes directly up against the actual infra structure in the current models that are in place. So you can fully expect as we continue to monitor each country, as they make -- each of them make their decision about what type of pharmaceutical model they want to have for their country, whether or not they want to support a higher infrastructure cost or whether or not they want a different type of pull through effect.
We on the other hand as management will manage each one of those countries and right size the infrastructure according to what the government wants in terms of that particular region, so we are not concerned at all but overall, we are certainly not concerned in our ability to deliver what we have feel appropriate targets that we set ourselves, but overall I think you should all anticipate a continuation of price cuts going forward as we look out in the whole EMEA section.
Jim Dawson - Buckingham Research
Okay and just had one more on got in difficult just a little bit as well early on the call, but regarding the supply disruptions you mentioned in your release. Can you talk about you have benefited -- and can you quantified that from increased sales and/or increased gross margins and in the first quarter and also talk about what you are seeing in the current quarter being the second quarter and how much of that is a factor in accelerating second half growth?
As I mentioned before, Jim, I don’t even think it’s even appropriate. First of all I don’t see, I can tell you write off the bad there is nothing material that I can even pint to say somehow we’re getting some hick up benefit from on the backs of another company selling. I think that you Mylan continues to keep its head down and to continue to march forward in our quest to deliver very very high quality volumes and I think that value of our consistent content supply chain is becoming more and more appreciated by customers.
I would not and I think it’s again inappropriate to point that we’re somehow better fitting, I don’t see anything material that I can even point to right now, but I just think it’s a longer term trend that will basically bleeds it’s way in. If we are going to benefit from some of the disruptions that others have had, I see it more of a bleed-in rather than this roller coaster, high, low quarter-over-quarter. I just think it’s not when I’m seeing and certainly not the way we are driving our business. I think that the increases that we are seeing are increases that have come in over period of time and we just don’t see that ending, we see that more and more the way we see ourselves working with our customer base and the appreciation that they are showing us in return, we just see that continuing over a longer haul not anything over a short period of time.
I’m moving on to Michael Tong with Wells Fargo
Michael Tong - Wells Fargo
Just maybe a little bit more big-picture question. We’ve talked a lot about the Generics business, but I’m just wondering what’s your thought process behind your Specialty business, going forward, in terms of growing that business and what’s your thoughts about how you go about growing it?
Well, I’m pretty excited about what we actually already have in terms of the growth prospects of the assets that were currently managing; obviously I have very distinct strategic plans to growing the business, but those plans and the robustness of my vision and thinking of what I see that business could ultimately be. It’s certainly being offset to mediate it -- certainly been offset and mitigating by the financial discipline that has been set forth here at Mylan.
I would love to have a lot of things, I love to do a lot of things, but as I promised in the past, I’m not going to do anything that’s going to jeopardize the earning growth that we set for, that we have outlined and I will tell you with that said, I still see business development opportunities where we are aggressively looking and continue to look where we can look at whether it's a product or product portfolio or anything that we think that would be complimentary, that would be add-ons to that business, but again not at the behest of jeopardizing the earnings growth that we set forth earlier.
Michael Tong - Wells Fargo
And if I can have one follow-up for John, did I hear you correctly about the interest expense outlook for the year? Does it include or exclude the accretion or the imputed interest from your converts?
It excludes, the number, the 280 to 300 excludes.
One final question that will come from Ken Cacciatore with Cowen & Company.
Ken Cacciatore - Cowen and Company
Quick question back on France. Some of our industry contacts indicate that Mylan was the most aggressive in terms of pricing in that marketplace. So just trying to understand beyond kind of what is being set from the government perspective, if you could give a little commentary if that is true. If it is true, you are the market leader, I'm trying to understand contextually what may be going on competitively there that has you kind of acting as the most aggressive in the pricing dynamics.
Thank you, Ken, for the question. That way I would characterize it and quite complimentary to the leadership of Didier and France as well as Didier’s leadership in every other country, I’d like to actually, hoping the question was that Mylan was the most aggressive in managing it’s business. As Mylan is the most aggressive in managing its business in every single market as you know the dynamics of the generic marketplace are changing at rapid speed and so if that's what you’re hearing on the outside then Kudos to Didier for containing to manage as aggressively as he should be doing.
Not being the most aggressive necessarily in the market, but a constant balance between pricing levels versus volumes versus market share versus there are many, many, many variables that a leader must take into consideration as dynamic at the generic industry is. And I’m extremely pleased with the results that he put up in the first quarter, so again thank you for the question and it’s a high compliment to Didier and his team.
Mr. Crookshank, I will turn it back to you for closing or additional remarks.
Great, we all will be available as the day goes on for follow-up conversation as you like. And that said, thank you once again for joining the Mylan team for the conference call.
Thank you. Again, ladies and gentlemen that concludes our conference for today. We thank you all for your participation.
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