Heather Bresch - President
John Sheehan - Chief Financial Officer and Executive Vice President
Robert Coury - Chairman and Chief Executive Officer
Kris King - Executive Director of Investor Relations
Ronny Gal - Sanford C. Bernstein & Co., Inc.
John Boris - Citigroup Inc
David Buck - Buckingham Research
Richard Silver - Barclays Capital
Elliot Wilbur - Needham & Company, LLC
Michael Faerm - Crédit Suisse AG
Shibani Malhotra - RBC Capital Markets, LLC
Gregory Gilbert - BofA Merrill Lynch
Christopher Schott - JP Morgan Chase & Co
Randall Stanicky - Goldman Sachs Group Inc.
Marc Goodman - UBS Investment Bank
Frank Pinkerton - SunTrust Robinson Humphrey, Inc.
Mylan (MYL) Q4 2010 Earnings Call February 24, 2011 10:00 AM ET
Good day, and welcome to the Mylan Laboratories Inc. Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] I will turn the conference over to your host, Ms. Kris King. Please go ahead, ma'am.
Thank you, Halley. Good morning, everyone. Joining me for today's call are Mylan's Chairman and Chief Executive Officer, Robert J. Coury; President, Heather Bresch; and Executive Vice President and Chief Financial Officer, John Sheehan.
During today's call, including the Q&A, we will be making forward-looking statements including those relating to our anticipated business levels, our future earnings, our planned activities, 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 report on Form 10-K for the period ended September 30, 2010, and in our SEC filings. You can access our Form 10-Q and other SEC filings through the SEC website at www.sec.gov, and we strongly encourage you to do so.
In addition, during this call, we will be referring to certain actual and projected financial metrics of Mylan on an adjusted basis which are non-GAAP 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 measure 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 third quarter results, including the allocation of each reconciled line 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 a 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, Kris. Hello, everyone, and thank you for joining us today. Before we get started, I'd like to welcome and recognize all of our employees around the world. Specifically, I'd like to send a special message to our employees in Australia and New Zealand where devastating natural disasters have occurred recently. We are grateful that no members of the Mylan family were harmed physically. However, many of them were affected. Our thoughts and prayers are with them and their loved ones.
At Mylan, all of our employees have continually embraced the many changes and opportunities our company and industry have provided them and delivered exceptional results once again. On behalf of the board of directors and our entire management team, I would like to thank each and every one of them.
As you know, our growth over the past three years was driven predominantly by our successful integration, rationalization of three separate businesses. 2010 marks the end of an important period, and I'm extremely pleased with our performance last year despite significant headwinds throughout the entire industry.
Mylan delivered solid revenue growth of 8% over the prior year and strong earnings per share growth of 24%. I'd now like to make reference to Slide 3, which depicts our track record of consistent growth since our transformation.
On a compound basis over the entire three-year period, we have achieved an annual growth rate of 10% top line and 42% bottom line. I'd like to point out that although our earnings over the past three years have varied quarter-by-quarter as I expect they will continue to do so in the future, overall, we expect to continue to grow on the trajectory that you see before you.
In fact as we ended 2011, I believe that Mylan has reached a new inflection point. Over the next three years, we expect to continue not only to deliver strong bottom line performance but top line expansion as well. We anticipate that our revenue growth will accelerate significantly as we leverage the assets that we have put in place, including the largest product pipeline in the history of our company, combined with our powerful global commercial platform.
We have built a platform on which we can now capitalize our strong earnings momentum and deliver sustainable growth over the short, medium and longer term. As a result, we remain fully committed to our growth rates of 15% top line and 20% bottom line CAGR by the end of 2013.
For 2011, we also reiterate our previously stated target of $2 of adjusted diluted earnings per share, which is the midpoint of our $1.90 to $2.10 guidance range. As in the past and when appropriate, we will adjust our guidance throughout the year as we gain even greater visibility into all the other opportunities before us.
Now looking forward to other activities. You can expect in addition to maximizing what we already have in place, Mylan will continue to look at M&A opportunities that meet both our financial and strategic criteria, such as filling gaps in our portfolio in therapeutic categories or dosage forms similar to what we have achieved through our acquisition of Bioniche Pharma.
On an industry level, where Mylan plays a critical leadership role, I continue to expect additional consolidation in various markets. In that regard, Mylan will only participate in those opportunities that meet our primary objective of enhancing our already strong growth trajectory.
Let me close by saying that Mylan has never been in a stronger position to take advantage of the significant opportunities that lie ahead. And even with the impressive growth to date, I truly believe that Mylan will continue to be the best growth story in the industry looking forward.
With that, I'll now turn the call over to our Chief Financial Officer, John Sheehan.
Thank you, Robert. I'd like to begin by walking you through our fourth quarter and full year 2010 financial results which, as Robert indicated, represented a strong finish to a great year. I will then provide an update on our capital structure and liquidity position and finally present our financial guidance for 2011.
As Kris mentioned earlier, I'm going to be referring to actual and projected financial metrics than prepared on an adjusted basis. These are non-GAAP financial measures. This morning's earnings release includes a complete reconciliation from our GAAP to non-GAAP financial measures for our fourth quarter and full year 2010 and 2009 results. Our earnings release is available on our website, and I encourage you to review it.
Let's turn now to Slide 5 where I will discuss in detail how we delivered on our objectives. First, and most importantly, we met each of our key financial targets for 2010 and delivered year-over-year top line constant-currency growth of 7% and bottom line adjusted EPS growth of 24%. We also met the other commitments we announced in May 2008 and continued delevering through strong earnings, cash flow generation and the prepayment of debt.
Since the close of the former Merck Generics acquisition, we significantly reduced our leverage ratio from 5.4x at December 31, 2007, to 3.7x at the end of 2010. We also made significant progress in extending our debt maturity profile as I will discuss in more detail later.
In addition, we converted our preferred shares at the minimum conversion rate, a testament to our strong stock performance since the issuance of the preferred stock. We also delivered on our ongoing commitment to fill gaps in our product portfolio, including those related to delivery systems, dosage forms and therapeutic categories.
For example, we completed the acquisition of Bioniche Pharma in September 2010, the acquisition of this high-quality Specialty Injectable business was immediately accretive to adjusted diluted EPS and gives us critical mass in the U.S. injectables market as well as providing a platform for Biogenerics.
Operationally, we delivered on our objective of realizing cumulative annual recurring synergies in excess of $350 million by the end of 2010. While we won't be quantifying our real-life synergies going forward, we expect to continue leveraging the efficiency in our global platform in 2011 and beyond.
We also met our goal of extending our product portfolio. We've made more than 1,000 submissions globally and launched approximately 500 products, 12 of which were limited competition offerings in the U.S. We now manufacture 45% of the former Merck Generics portfolio internally, and we remain on track to increase that figure to 70% of the portfolio by the end of 2013 further enhancing our cost competitiveness.
Lastly, we continue to diversify our portfolio as a result of the luminous product launches in each of our regions around the world.
Turning to our income statement and beginning with Slide 6 in the presentation. Total revenues for the fourth quarter were $1.43 billion. Net revenues for the quarter were $1.42 billion, an increase of 7% over last year's fourth quarter net revenues of $1.34 billion. Year-over-year fourth quarter growth in net revenues on a constant-currency basis was approximately 8%. The unfavorable effect of foreign currency translation primarily reflects a weaker euro in comparison to the U.S. dollar, partially offset by the strengthening of other currencies primarily the rupee, the yen and the Australian dollar.
For the full year, net revenues were $5.4 billion, an increase of 8% over prior year net revenues of $5.02 billion. Total revenues of $5.45 billion were at the low end of our guidance range of $5.4 billion to $5.6 billion. The effect of foreign currency translation had a favorable impact of less than 1%.
Looking at our operating profitability measures, adjusted gross margin for the fourth quarter was approximately 47% compared to 44% in the prior year. The three percentage point increase in adjusted gross margin is primarily the result of new product launches in North America, and to the lesser extent, the inclusion of the results of Bioniche Pharma.
For the year, adjusted gross margin was also approximately 47%, the low end of our full year guidance range of 47% to 49% and in line with our expectations and guidance from our Q3 earnings call. In the prior year, adjusted gross margin was 46%. Our prior year margin benefited from Paragraph IV exclusivity on divalproex in the first half of 2009. Excluding this favorable pricing, our 2009 margin would have been approximately 45%.
The increase in year-over-year adjusted gross margin was primarily driven by new product launches, favorable volume in North America, favorable pricing on EpiPen in our Specialty segment and manufacturing cost savings as we continue to drive API costs down, repatriate FDF in-house and ship more and more of our new product launches through internal production.
This increase in our 2010 margin was realized despite a number of headwinds, including unfavorable pricing in Europe and APAC as a result of government action and competitive pressures, higher-than-anticipated competition on several products and the delay in product launches that have been planned for 2010 and higher inventory anticipated inventory write-downs in both Europe and Japan.
Now let me move on to a couple of non-operating financial metrics. Adjusted interest expense was favorably impacted by lower-than-expected short-term interest rates and fell just below our guidance range of $280 million to $300 million. As of December 31, 2010, the average rate on all of our outstanding borrowings was approximately 5.5%. We continue to use interest rate swaps in order to maintain a debt portfolio that we believe is an optimal ratio of 6:2 floating rate borrowings.
Consistent with this approach, in January 2011, we entered into additional derivatives where we swapped a portion of our fixed rate debt to variable. Our full year adjusted income tax rate was 27%, which resulted in an effective tax rate for the quarter of 24%. Our full year effective rate is also just below our forecasted range of 28% to 29%. We anticipate that this full year effective tax rate is sustainable going forward.
Fourth quarter adjusted net income was $197 million or $0.45 per share and full year adjusted net income was $707 million or $1.61 per share. In calculating our adjusted diluted EPS, the impact of assuming the conversion of our preferred shares was more dilutive than the quarterly preferred dividends in both periods. Therefore, adjusted diluted EPS was calculated based on an average outstanding diluted share count of approximately 439 million shares for both the quarter and calendar year.
With respect to our outstanding share count going forward, depending on the market value of our common stock, our average outstanding diluted share count could increase further due to additional dilution from stock options and other potentially dilutive financial instruments such as our convertible debt obligations and related warrants. Additional dilution occurs if our average stock price for any quarter exceeds $20 per share. As always, we include any such potential dilution in our forecasted results which I will touch upon later in my 2011 guidance discussion.
Turning to our cash flow and leverage metrics, Slide 7 of the presentation. Our GAAP cash flow from operations was approximately $195 million [ph] in the fourth quarter and $931 million for the full year. These strong results include certain items that resulted in a net increase in operating cash flow of approximately $150 million. The favorable items included the receipt in the first quarter of a $99 million income tax refund, cash received for deferred revenue and lower income taxes paid as a result of anticipated tax benefit on indemnified litigation. These favorable items were partially offset by payments made in 2010 with respect to AWP litigation settlements.
Excluding these items, results in full year cash from operations of approximately $781 million, which we believe is a better measure of our cash from operations and fall slightly above the midpoint of our $725 million to $825 million guidance range. This strong operating cash flow performance, excluding the favorable items noted above, led to free cash flow in 2010 of approximately $450 million after deducting $193 million of capital expenditures and $139 million of preferred dividends.
As I'll discuss shortly, while our guidance anticipates strong continued growth in operating cash flow excluding special items, our 2011 GAAP operating cash flow may be reduced relative to 2010 by up to $250 million or more through the several significant items, including the reversal of the 2010 timing items that I just mentioned, along with the tax refund received which increased 2010 operating cash flow by approximately $150 million. Also any cash settlements related to our litigation accruals, including the $113 million recorded in the fourth quarter of 2010 and any cash settlements of amounts due to Merck KGaA related to the anticipated tax benefit on the indemnified litigation.
Fourth quarter and year-to-date capital spending was $97 million and $193 million, respectively. In addition, we've spent approximately $6 million in the quarter and $16 million in the full year for a finished dosage manufacturing facility in India, which under U.S. GAAP is considered a purchase of a business. As such, total spending was at the low end of our range of $200 million to $250 million for the full year.
As you know, we completed a number of capital markets transactions during 2010, which resulted in net proceeds of approximately $2.4 billion. In addition to partially funding our acquisition of Bioniche Pharma, the bond issuances were done in accordance with our objective of extending the maturity profile of our outstanding indebtedness. Approximately $2.1 billion of the proceeds from the 2010 issuances plus cash on hand was used to prepay existing indebtedness under our credit facility.
As a result of these prepayments as you'll see on Slide 8, we significantly improved our debt maturity position. We continue to have no meaningful long-term debt maturities until the $600 million due under our convertible notes in the first quarter of 2012, which we currently intend to repay with available cash at that time. Additionally, our prepayments made during 2010 have reduced our 2014 maturities from $3.1 billion to $1.2 billion.
The balance of unrestricted cash and marketable securities on our December 31 balance sheet approximated $690 million. Notwithstanding our acquisition of Bioniche Pharma, during 2010, we reduced our leverage ratio from 4x to 3.7x, another positive step in our goal of achieving a long-term leverage ratio of 3:1 or less. We also continue to expect to generate approximately $4 billion of cumulative operating cash flow from 2010 through 2013.
All in all, I am very pleased with our solid fourth quarter and full year performance. We delivered a strong finish to what we've said all along would be a strong second half of 2010. We are well positioned and well capitalized to meet all of our stated objectives and quite frankly, very excited for the opportunities that lie ahead for Mylan in 2011 and beyond.
With that, I'd now like to discuss our financial guidance for 2011 which can be seen on Slide 9. I am pleased to present adjusted diluted EPS guidance for 2011 in the range of $1.90 to $2.10 per share. In order to arrive at this guidance range, we are providing the following income statement line item guidance metrics, all of which are on an adjusted basis with the exception of total revenues.
Total revenues of between $6.1 billion and $6.4 billion. Heather will provide you with further color on our projected year-over-year revenue growth in just a few minutes. Gross margins between 47% and 49%, R&D between 5% and 6% of total revenue and SG&A of between 18% and 20% of total revenue. Each of these operating metric ranges are both consistent with our 2010 guidance ranges and in line with our actual 2010 results.
Using these guidance metrics, we project adjusted EBITDA of between $1.55 billion and $1.75 billion. We expect our adjusted effective tax rate to be between 26% and 28%, and net income to be between $840 million and $940 million.
In addition to the above, we are providing the following additional adjusted 2011 guidance metrics: operating cash flow, excluding special items as noted earlier, of $800 million to $900 million; GAAP operating cash flow of $550 million to $650 million; cash interest expense of $290 million to $310 million; and capital expenditures of between $250 million and $300 million as we continue to ramp up in order to fuel our growth.
Finally, we are projecting an average diluted share count of between 440 million and 450 million shares. A few additional comments on our 2011 guidance. The euro foreign exchange rate used in developing our guidance was $1.35. Please see our earnings release for a table of the other Key Foreign Exchange Rates Used. With respect to Paragraph IV filings, all unsettled products are in our guidance at a probability rating of 50%, and it includes the impact of an authorized generic.
And finally, while we do not provide our full year guidance on a quarterly basis, you should expect our Q1 performance being light and earnings ramping up as the year progresses. In conclusion and in short, I joined Mylan as the company was building a substantial amount of momentum and have had the opportunity to participate in recent activities, which have helped shaped Mylan into the company that it is today.
With nearly one year under my belt, I can truly say that I am very confident in our future and extremely pleased to be a part of this phenomenal growth story. That concludes my remarks, and I'll turn the call over to Heather to provide further insights into 2011 and beyond. Heather?
Thank you, John, and good morning, everyone. As you can turn our investment pieces remain compelling, and we're very excited about continuing to deliver additional shareholder value in the years to come. With a strong track record behind us, we believe Mylan is very well positioned to transition from a growth phase driven by rationalizing operations in capturing synergies, one focused on maximizing our commercial platform for sustainable top and bottom-line growth.
During my prepared remarks today, I'll touch briefly on 2010 performance of our Generics segment and our Specialty division and discuss our growth drivers for 2011 and beyond. I'll also provide you with additional visibility into our top-line growth assumptions driving our guidance this year.
Here on Slide 10, you'll see information about our North America regions in our Generics segment. During 2010, these operations delivered third-party revenues from the fourth quarter of $648 million, up 22% from last year's fourth quarter results of $533 million. The increase was mainly the result of nearly 60 product launches in North America as well as the contribution for Bioniche.
Pricing was in our base business. It was relatively stable as compared to the prior year. New product revenue of approximately $75 million was derived primarily from product launched earlier in '10, including valacyclovir and limited competition products such as Clonidine and Minocycline. In total, we launched 12 limited competition products during the year as expected.
Currently, we have 170 ANDAs pending FDA approval, representing nearly $98 billion in annual brand sales. 45 of these pending ANDAs are potential first-to-file opportunities, representing more than $24 billion in annual brand sales.
Looking ahead to 2011, we expect to launch approximately 90 new products in North America. This figure includes 15 products, which we believe will face limited competition in the U.S., three of which have been launched to date. The generic versions of Sular, Precose and Vfend, which we launched last week, was 180 days of exclusivity.
Our launches also include fixed date certain generic product launches from the U.S. market targeting $5.5 billion in brand sales. Four of these are resettlement, Generic Femara, our first-to-file which we plan to launch in the second quarter, Generic Effexor XR in June, and Generic Caduet and Solodyn in November.
In addition to products, we will launch through disclosed settlement opportunities. We anticipate making two other date certain launches including the generic versions of Levaquin and Uroxetrol in June and July, respectively. By the end of 2011, we also plan to begin rolling out our oral contraceptive portfolio. In total, we anticipate launching approximately 22 oral contraceptives in the U.S. over the next 2.5 years through our collaboration with Famy Care.
In 2012, we look forward to 13 days certain product launches in North America, targeting $23.7 billion in brand sales. These include five based on previous settlement, four of which are first-to-file opportunities. Generic Provigil and Generic Actos are shared first-to-file opportunities, launching in April and August, respectively. Generic Clarinex 5mg is a shared first-to-file opportunity with 180 days of exclusivity launching in July. Actoplus Met is a sole first-to-file opportunity with 180 days of exclusivity launching in December.
Another settlement I would like to highlight is Alphapharm's agreement with Forest, whereby Mylan will be the authorized generic to Forest's Lexapro, a $2.7 billion product that we plan to launch in the U.S. two weeks prior to pediatric exclusivity expiration in March of '12.
Moreover, there are eight additional opportunities or eight additional products of which we have a degree of launch timing certainty due to patent expiration, pediatric exclusivity expiration or first-to-file 180-day expiration, those seeing the generic versions of Zyprexa, Plavix, Singulair, Singulair Chew, Avalide, Diovan HCT, Avandia and Atacand HCT. We also believe our Copaxone remains well on track for approval before our 30-month stay expires on March of 2012.
On Slide 11, you'll see information about our Generics segment within EMEA. During 2010, these operations delivered third-party net revenues of $397 million, falling 17% versus last year's fourth quarter results of $477 million. However, on a constant-currency basis, the operational performance in EMEA declined 10% year-over-year. Without normalizing for non-reoccurring event, even with strong year-over-year growth in several key markets, the business was not able to offset broad price pressure in greater-than-expected destocking in the fourth quarter.
Looking ahead, we anticipate making about 360 country level launches in 2011, among them will be our important launch of Esomeprazole, the generic form of Nexium, in the first half of the year. Of the 360 launches, more than 200 will occur at the first half of the year, contributing the stronger second half sales.
We also plan to continue streamlining our operations to reduce cost encounter, changing market dynamics in the region. We remain on track to achieve a 70% internal production rate of the former Merck Generics portfolio by 2013. In addition, in Europe alone, we expect the percentage of internally manufactured launches to rise from 15% in 2010 to more than 50% from 2011.
Finally, we continue to see significant opportunity from increasing generic utilization rates throughout Europe.
Turning now to our Asia Pacific region. You can see on Slide 12 that our Generics business delivered third-party net revenues of $305 million, up 13% over last year's fourth quarter revenue of $269 million. On a constant-currency basis, sales rose about 7%. Nature proved again the primary driver, delivering double-digit growth through sales of API and ARV finished dosage product.
During 2010, Matrix received 116 ARV approvals, representing 21 different products and 24 different countries. In 2011, we expect to launch about 50 products in Australia, New Zealand and Japan. Additionally, we anticipate making more than 50 country-level product launches through Matrix and our ARV portfolio, further extending our impressive range of finished-dosage-form ARVs, including those that are Tenofovir-based and innovative co-packs.
Moving on to Dey Pharma, our specialty segment, contributed third-party net revenues of $75 million in the current quarter, up 33% over the same period last year. The primary driver of our growth was domestic sales of EpiPen which were strong compared to the fourth quarter of '09. Just as a reminder, sequentially, Dey is down Q4 from Q3 due to the seasonality of EpiPen.
Recently revised guidelines for the diagnosis and management of food allergy issued by the National Institute of Allergy and Infectious Diseases confirmed that the risk of anaphylaxis is significantly underrecognized and underdiagnosed. We believe that increasing awareness of the avoidable potentially fatal consequences of anaphylaxis will continue to expand in the market and ensure that those at risk have access to this very important product.
We expect continued growth in our Specialty segment in '11 and beyond from our EpiPen and Perforomist franchises. We also continue to look for products that complement our current platform.
Looking out further, we expect to launch Dey's combination nebulized products for the maintenance treatment of COPD in 2015. This product combines two well-known compounds and is expected to enter Phase III clinical trial this year.
Slide 13 provides you with additional visibility and for our top-line growth assumptions for this year. Note that this is in 2008, '09 and '10, the components of our assumptions are dynamic, and where we start may not be where we end up. However, our track record of managing our businesses to absorb risk and monetize opportunities that's why we feel very confident in our ability to achieve our stated guidance.
Starting at the left, you can see that the FX rate seen in our guidance are not materially different from 2010. As we move to the right on the chart, our base business continues to stabilize and grow as a result of the high volume of product launches we made over the past few years. We fully expect that companywide higher volume and an enhanced mix will significantly offset price erosion.
With respect to pricing, we expect erosion in the U.S. in the mid-single digits just as we've seen over the last several years. We also assume slightly higher price erosion in Europe. With respect to the volume and mix of our base business, we look forward to continued strong contribution from Dey and Matrix. We also will benefit from a full year contribution from Bioniche Pharma. Moreover, in addition to reaping the reoccurring benefits of our larger strong rebate, we also look to enjoy the full year impact of key launches made in the third quarter of 2010, including valacyclovir, Clonidine, Tacrolimus and Minocycline which we now supply internally.
At this point in the chart, we are left with only an approximate delta of $400 million to reach the midpoint of our 2011 guidance. We fully expect to address this sale by launching more than 500 new products globally this year, including the many opportunities discussed earlier. It's worth noting that more than 300 of these launches will occur in the first half of this year providing us with the disproportionate benefit of sales during the second half.
In short, the sheer volume of opportunities in 2011, in addition to the pricing and volume dynamic, move us to our targeted midpoint of $6.25 billion and third-party settled revenues for 2011. These sales reflect our assumption that approximately 13% year-over-year constant-currency growth in our Generics segment, and approximately 20% year-over-year growth in our Specialty segment. I trust this additional visibility we've conveyed is appreciated.
I'd like to close this morning by echoing Robert's comments that we have never been more excited about our growth potential as well as the industry. Perhaps the most important reason for our confidence is the quality, passion and drive of Mylan's employees around the world. I'd like to take this opportunity to thank them for making Mylan the world-class company we are today and for the results we expect to deliver in the future. That concludes my prepared remarks.
Operator, please start the Q&A.
[Operator Instructions] We'll take our first question from Chris Schott with JPMorgan.
Christopher Schott - JP Morgan Chase & Co
Just a question on Europe, can you just talk a little bit more about your expectations for top line growth in Europe in 2011 as well as your outlook for key countries, particularly France? I appreciate the price erosion color you gave. But do you expect that Europe will grow in line with your overall Generic business in 2011? And if I can slip a quick second question here, sorry if I missed it, but I believe Lipitor wasn't on the list of the 2012 launches. Is that an opportunity for next year? And just general thoughts about the Lipitor situation will be appreciated.
So I'll start with maybe your last question, we announced the settlement on Lipitor really because of the settlement, there's nothing more that we've added at this time. But as I've said over the past couple of months, I think that how the Lipitor market formation ends up evolving will probably still be quite different than anyone anticipates.
As far as Europe goes, you know look as I said in my remarks, Q4 certainly took a harder hit to the pricing pressure throughout Europe, France included Spain, that I would say that was probably the hardest hit because they had -- because the price cuts were delayed. There was even more of an acceleration from a destocking perspective at the pharma. So coming off of that, we absolutely anticipate growth this year. We see some important launches as I mentioned estimate result of the very important launch for brands in Italy, and also to keep in mind, the number of internal launches we're going to make. So not only just the sheer volume of over 350 but the amount that we're producing internally certainly helped drive that cost benefit and that margin in line with the ranges that we've given.
I think maybe just to add, overall, I just want to remind everybody since Europe is always a key highlight in terms of the questions and the reports that are being written, let me just remind everybody from the strategy that we've started. What we've done prior to the expanding globally was simply to go out and gain and garner global scale. What we have always told you is that, for example, each market, each region is driven a little bit differently. For example in Europe, you've heard me say that in Europe you need to do an awful lot to get a little bit. In the United States, you need to do very little to get an awful lot because simply how large the market is. So going forward, if you think about what we've told you, if you take the global scale that we have now created, incrementally, when you see North America continuing to grow at an accelerated pace the way it is because it is benefiting from the global scale. Every little bit of global scale that we were able to bring to the United States in the largest market in the world had given us this massive expansion, and the opportunities are not going to stop in the United States. And I fully expect that North America will continue to grow and outpace, because of a very little bit to get an awful lot, on a going-forward basis which leaves now the opportunity of Europe.
Europe is a very fragmented market. I think you're going to see a lot of oscillation in Europe. But nothing that's going on in Europe is unexpected in terms of each country's varying by degree at how much they want to accelerate going after, let's just say, pharmaceutical pricing reductions in order to play a part in their own healthcare system. So given the opportunity of Europe is really vast, given the fact that it's such a young generic pharmaceutical market and given that generic utilization is going to continue to increase over there, unless for some reason the Europeans stop taking pharmaceutical prescription products, which I don't see in my lifetime, then we are really seeing the powerful machine that we have now put in place. And as I said, 2010 going to 2011 is now the base year of our growth. And if you see the growth trajectory, we fully anticipate again going forward North America to outpace some of these other markets, while we absolutely see the growth in Europe, and we are probably in one of the best positions to garner that growth as generic utilization increases. But you will have those oscillations. Next question, operator.
Our next question comes from Randall Stanicky with Goldman Sachs.
Randall Stanicky - Goldman Sachs Group Inc.
Just a question on gross margins for 4Q. The U.S. business is stronger. Specialty was stronger. You had a full quarter of Bioniche, and you had some softness in EMEA. So can you just help us understand this q-over-q pullback in the gross margin and how we should read that going forward relative to your 47% to 49% range? And then John, if you could just characterize for us what a lighter Q1 relative means to the $0.45 number this quarter?
So as far as gross margin goes, look, I think you have to keep in mind as I pointed out the seasonality of EpiPen. So while we have a strong quarter for Dey in Q4, sequentially, as I said it's down. And so obviously, that's a large driver and a driver to the margin. Also as I said, we had broader pressure and the destocking issues that were heavier in Q4. So obviously, that not only impacts revenue but it also impacts the margin. But I'd say overall, Q4 still came in line at the low end of our range and came in line of that where we were for this year.
And I think timing of our launches too has somewhat of an effect as well, whether they come late in the quarter or early in the quarter.
I think we had said in the Q3 earnings call that we saw the full year at the low end of our guidance range. With respect to what does Q1 and light mean, I guess how I would expand on that a bit would be to say that Q1 would be at or near our fourth quarter results and not more than. That's how I guess I would describe it, Randall.
Our next question comes from John Boris with Citi.
John Boris - Citigroup Inc
For Robert, you gave some commentary around M&A opportunities. And I guess on a geographical basis, can you maybe just give us a little bit of color on where you think you'd like to be better positioned geographically going forward through M&A? And then also you mentioned that certain therapeutic categories and certain dosage forms are important. Can you maybe just elaborate on that and whether M&A is included or excluded in the 2013 number that you provided? And then just one for John on the 45% of products that have been repatriated in Europe, what has been the gross margin benefit from that repatriation from the 45%? And, can you help quantify what the gross margin benefit will be when you take that from 45% up to 70%?
I think first on the M&A. In terms, I see a little different, really, in each region. I think in the United States, you could expect more of a product portfolio, again, addition both in therapeutic categories and dosage forms such as ophthalmics, liquids, things of that sort. I think in Europe, what I would like see in Europe, if and when the opportunity provides itself, is I'd like to establish more critical mass. I think in some of the places in Europe, I would look for opportunities that would present itself there.
In terms of -- I've always stated that in Japan, for example, I think that if I find the right opportunity in Japan, I think to bolt on to our existing restructured platform that we've kind of worked on in 2010, I would absolutely continue to be wide open for the right opportunity.
In terms of India, as you know, we are beginning the process of launching the commercial side of our business in India, and we'll be talking more about that as we continue to build. We've opened up offices in Mumbai. We've established a foothold, and I fully intend on looking at opportunities. They don't need to be very large but just enough to kind of catapult, let's just say, a little bit of the infrastructure I like to see in place down there on the commercial side.
In terms of the other markets, they really are geographic expansion. Even though we have our eyes, and say, for example, Brazil I've have always talked to you about Brazil as a real opportunity. I don't really see that in the forefront, and the most important thing that I think is need to be made clear on the M&A. This company has no intention, no intention on doing M&A that is going to hinder our trajectory. We are very, very sensitive. We have very strict criteria in terms of what we're looking for from the financial side: first and foremost, strategic; secondarily, because as I've been saying, I have most of everything one could ever need to succeed in this industry, and I would look at M&A from that perspective. John?
With respect to the benefit from the repatriation activity, I guess what I would say first of all is that the gross margin benefit varies significantly depending upon what the terms are, the previous in-licensing arrangement that we would have. And one other point that you have to keep in mind is that as we repatriate those products and we have the lower cost, that gives us the opportunity to be able to grow our market share. I do believe that you're seeing the benefit of the repatriation activities within, for example, the year-over-year increase in gross margins that we had for the business as a whole and in the Generics segment.
And on a going-forward basis, I believe you'll continue to see those gross margin benefits. And right at the current time, I think we're comfortable that the 47% to 49% guidance range that we've provided, and the fact that we're at the low end of it now. It will be a contributing factor for our team.
And I think, lastly to that point, you need to be reminded and I think we spoke about this when we first done Matrix, using Amlodipine as an example, the enhanced gross margins that we get by repatriation is also very, very much reflected in our ability to maintain and grow market share. Without that enhancement of gross margin benefit, then we could be facing tighter competition than what we would be facing otherwise. So it really is a very much of a key factor for us to maintain a competitive level.
Next, we'll hear from David Risinger with Morgan Stanley.
I just wanted to ask about EMEA. I noticed that in the press release you mentioned the lack of a significant product launch in EMEA in the fourth quarter. Was there something specific you had assumed when you predicted constant-currency growth on the third quarter call for fourth quarter EMEA revenue year-over-year, and if that just slipped into the first quarter? And then just to follow on to that is when do you expect EMEA to grow constant currency year-over-year? Are you expecting that in 2011? Or is it too early to say given all the price pressure?
Yes. So let me start with the Q4. With reference there as the Clopidogrel launch that we have in Q4 of '09. So certainly that wasn't something that we didn't know about when we talked in Q3. But we only called it out to say that's why I said in my remarks that you normalize, that was a large, large launch. And so it certainly had a contributing factor to Q4 '09 being larger than normal, even though Q4 is typically the largest quarter of the year. So what that affected that Q3 since the Q3 call for Q4 was what I mentioned which was just broader and deeper pricing cuts than anticipated. And the destocking issue was much more accelerated at the pharmacy level.
So as far as growth, we certainly see growth this year in Europe. As I mentioned, second half being stronger than the first half just due to being able to benefit from the launches that they're going to have in the first half of this year. So one, we have Esomeprazole in the first half of this year which is going to be another quite large launch for us. But additionally, we have over 200 products that are going to be launched throughout Europe in the first half of the year. So the second half of the year, sales will certainly benefit from those launches. So we certainly anticipate growth in the EMEA region this year, year-over-year on a constant-currency basis.
So let's move on to our next question from Ronny Gal with Sanford Bernstein.
Ronny Gal - Sanford C. Bernstein & Co., Inc.
Two quick ones, the first one, I understand your point about the currency impact in general. But John, can you give us an idea about the currency impact on operating profits? Was there actually an operating profit effect here by currency? Or are we really looking at the baseline of the business up to the price decline? And second, in keeping your R&D at 5% to 6% of revenue which is an increase given the revenue trajectory, but I'm wondering if you budgeted there for beginning some clinical trials from biosimilar, is this something that you have to do sooner or later? When do you see that coming in, and how big will that be in terms of impact on R&D?
Let me just say that from a biosimilar perspective in terms of the budget, the R&D that we rolled out all the way to 2013 fully incorporates all the clinical work that we anticipate to do for biosimilar. So all the way to 2013, it's already been calculated in the trajectory in the numbers that we've given you. John?
Yes, just like FX didn't play a big role year-over-year on the top line. Quite honestly, Ronny, it's not playing a big role in the operating profit line either.
Our next question comes from Frank Pinkerton with SunTrust.
Frank Pinkerton - SunTrust Robinson Humphrey, Inc.
Robert, can you just speak to manufacturing? We've had some competitors around the world seeing more stringent, I guess, what are really inspections globally, and where do you see the FDA on the manufacturing front? And then can you just give us an update on your filing for generic back soon?
Sure. I'll start. And Heather, I'd like you to add in since it's near and dear to what you're working on with the FDA. But as a whole, I can tell you that we fully expect as we've anticipated, as we've been asking the FDA, since we've gone global, to really have one global GMP system that, as we say, the world has gone global but the FDA is domestic. And we've seen, what we'll call, the inconsistencies in terms of the intervals of inspection, we realized that the FDA was really understaffed. And from a financial perspective, this is why we've introduced the user fees. But I do expect that the FDA will continue tightening its range. I do think they're actually doing a very, very good job in terms of stepping it up. We see the efforts already. As a matter of fact, we have -- even ourselves, even with our strong quality track record, we don't expect to be exempt from the FDA's continuation of being stringent. But we believe and firmly stand behind that the tighter their standards are, even though we will have our bumps in the road, the more that benefit is going to ignore especially to a Mylan. We're very, very confident about that, and that's why we're working very closely with them. We do think it's in the best interest of all. Heather, do you want to add anything more in terms of manufacturing?
I think that the prolific approach and the user fees that we are adjusting and advocating with the FDA is literally to do what Robert just said which was have one quality standard for the products that are being sold in the United States no matter where they are made in the world.
We'll hear from Greg Gilbert with Bank of America Merrill Lynch.
Gregory Gilbert - BofA Merrill Lynch
First for Rob and one for Heather. Rob, curious how you're spending most your time these days given the strong team you have in place, and what you see are the next big corporate steps for the company beyond execution on the existing business. And for Heather, following up on the user fee comments, what's your best prediction on when user fees for Generics will be implemented? And what could be the actual benefits to Mylan and the industry be? I realize we're early days here but curious on your thoughts.
I think, Greg, in terms of the top line, before I answer that question, it was a complex question I think I need to answer. I think what Heather said in the prepared remarks that we are like in a very strong position, we are sitting very, very well in terms of our approval. And I don't know what more to say to convey to you other than our 30-month stay is up on March of 2012, and we've fully expect to have our approval by then.
In terms of -- Greg, as the company continues to evolve, continue to grow, as you know, expanding the management team has probably been first and foremost one of the biggest drivers for me. I continue to opine on the entire management team around the world and continue to land in those various countries and make sure that as far as way as Australia -- they're not even that far away. So I think I'm going to continue to expand the management team, broaden, deepen the bench strength of the management team. We have begun at the beginning of last year a globalized succession plan for the entire company. It's a process that has been well underway for over a year. It's one that we're going to continue to work on. I think it's critically important for an institution of this size that we have a formal plan in place. I think there's a tremendous amount of opportunity for other executives out there as we continue to expand where companies are letting people go. We continue to expand and are looking for more talent. We are looking to as dynamic and as much as we have grown, we're also looking to grow and be dynamic in the talent that we bring on. Heather?
Well, as far as the user fee goes, look, I'm optimistic that now that we have the industry unified around this holistic plan willing to pay to play, so to speak, here in the U.S. market. We start negotiations with the FDA this Monday the 28. They have actually put I would say as pretty aggressive, but realistic time frame of June that we'd like to have a proposal. I think that it is going to have to be a legislative fix because we're looking to actually change status and regulations, this would not look like a PDUFA-type bill from my perspective.
And I would hope that we could have a bill introduced in '11 and then take effect in '12. And we're fully confident that, that is going to be a phase and approach you can't make these dramatic structural changes overnight. But we believe that, that phasing hopefully will begin in 2012. And I think the benefits are going to be for the industry, for the consumer here in the United States, and that's ensuring a safer global supply chain. To FDA's own admission, they don't have the resources to do that today. So yes, I think that benefit will continue to enter the industry and the people here in the United States that they're going to get safe and effective products, like I said, no matter where they are produced.
And in terms of the strategic direction of the company, I think by now, you guys, what we put in place for you is really about as clear as a map as I think you can have in terms of visibility. And we also, I will continue to telegraph for you as best as I can when I can in terms of what else do I see out there in front? Because the large portion of my thinking is always looking at what's next, what's next? And so I think over the next three years, I told you this before, we have pretty much everything one would need. But yes, I do think there are going to be opportunities that are going to come up and only those opportunities that we feel that can enhance what we've already put in place. The map is there, and the future growth is right before us.
Our next question comes from Shibani Malhotra with RBC Capital.
Shibani Malhotra - RBC Capital Markets, LLC
Just on the broad one on the industry, I guess Robert and John and Heather, actually, if you can give us your opinion on some of the economic legislative things that are going on right now particularly as it relates to authorized Generics and talk of potentially banning these. And also your view on how you think the patent settlement landscape is likely to play out over the next couple of years, and this is something we need to be more focused on? And then just a quick clarification question, the Baxter ER case, just if you can give us an understanding of where we are with that, is that just complete right now with giving allowed to put in their generic, and then anything we should be looking for on the 37.5 mg dose and with the situation around that?
So first on legislation. As you know, we have been the primary advocate and leaders trying to push through authorized generic legislation that was reintroduced this month for this Congress. And look, I remain optimistic that the more discussion, particularly around patent settlement, our view has always been that if you fix the authorized Generics, you're going to see a lot less of the patent settlements than you did with authorized Generics. It's just the fact, if you look at a numbers before 2004, there was not nearly the amount of patent settlements that there are today. So we believe there is a direct linkage to that. And like I said, authorized Generics was reintroduced this Congress. And as far as the patents settlement bill goes, the industry, we've been very vocal. But that is absolutely not a fair practice for this industry to eliminate the settlement ability between the brand and the generic industry. So I don't believe it's got much support at this point in time in Congress. As far as Paxil goes, it's not over, we're in the middle of that litigation and therefore, can't say a whole lot more than that.
But at this point since with its current Paxil, but to me, it's just all upside from here.
And we're still holding over 70% market share.
Our next question comes from Marc Goodman with UBS.
Marc Goodman - UBS Investment Bank
Heather, you have mentioned some comments about Spain. But could you also just take us through some of the other key countries for you in the fourth quarter, how they performed like what happened in Australia and Japan and France and U.K., Germany, to specifically in the fourth quarter, were these declining? Are they increasing in revenues year-over-year? What's happening there?
Yes, I mean, we have like I said Spain definitely was hit, and we see that fill coming back. I would say the good news right now when I give you the 2011 fill for Europe is that we do see opportunities. I think that we've made a very balanced approach. As I said we took higher price erosion throughout Europe in 2011, and we think we've accounted for what we know as today as price shock. I don't think anybody can anticipate but certainly, what all has been rolled out for '11 has been incorporated. And with that, we're showing significant growth for Europe this year. I think that when you look at places like Germany, for us, as you may have seen, the AOK was delayed and is now going to be put out for rebid because we, Mylan, pursuit litigation around the fact that the AOK tender was not done according to the guidelines. And so therefore, we were able to win in the courts and have that redone. So we're looking forward to again we see opportunity around the tender business in Germany, especially as we continue to internalize products and put us in this position to compete much more in this competitive markets. U.K. continued to be a good market for us. There are reforms going on their right now really doesn't affect the Generics business. It's similar to the healthcare reform that happened here in the United States. And Italy has probably the most robust growth. We see utilization continue to pick up there, and so Italy has just done extremely well. And as far as France, obviously, our largest market, it's great. We show growth like I said, Esomeprazole we're launching in France first half of this year which is going to be a big launch for us in France. And so all in all, the business is I would say healthy. And as far as our being able to manage, like the internal products, cost of goods, infrastructure, rationalization to marry up with the market dynamics, it's just a longer lead time as Robert said done here in the United States.
I think the real story you're being told, Mark, is over last two years, specially over the last six quarters, all these dynamics that we talk about in Europe have all begun long ago. And the real story here is that what we have been doing at one point in time, Mylan legacy managing a portfolio of products I've always told you we're now managing a portfolio of countries. And I think what you're seeing in the story is that we basically have a pretty good system in terms of a probability weighting, the benefits and risks of managing all these countries by meeting or exceeding our targets that we put out there in the earnings per share. That's why Heather in her prepared remarks that even in 2011, we're giving you all this visibility. But yes, we're up probably weighting even with all that visibility, what we start with and certainly, this has happened in 2009. It's happened in 2010. What we start with at the beginning of the year as we juggle the voluminous amount of moving parts, and what we end with the probability weighting kicks in and yet we're still able to manage the business and meet our stated targets.
Our next question comes from Richard Silver with Barclays Capital.
Richard Silver - Barclays Capital
Robert, on a Copaxone, just so we understand correctly. The assumption you said is for an approval in 2012. Is the assumption also that Sandoz's 180-day exclusivity will have expired that would allow you to launch? And what sort of probability are you building into that 2012 plan for the product?
Second question is just on the U.S. constraint in the fourth quarter. Can you provide a little bit more detail on what drove that strength and whether that's a good base to be using going forward?
So first on the Copaxone. Because of the way you ought to look at the Copaxone is certainly we're going to have the -- let's just say that tenants of the program by then because we still have the litigation. And I think a lot of the -- there's been way too much emphasis. And I think purposely it may be designed so by others to put emphasis on the regulatory pathway. I don't really think that ought to be your focus. I think the real focus here and you should be paying more attention to is the litigation, is the court case. I think that there's a lot more jeopardy here in my opinion than any of this regulatory discussion. And I think that, that's we should emphasize your time because I think the litigation aspect of this is going to be really the predominant driver around timing, not so much the regulatory. So we're extremely confident about that. Heather?
As far as the U.S. goes, as I mentioned in my remarks, we had Q4 launches and our launches in the second half of the year that definitely are part of our base going forward all side with their Clonidine, Minocycline, some of these limited competition launches. So certainly, it's definitely the base looking at going forward. With that being said, as John mentioned, Q1 being a little wider. It's a lot of timing of the launches that we have coming. So we see the U.S. opportunity growing throughout the year as far as our guidance goes.
And just to be fairly responsive, we have very little in our numbers in terms of Copaxone.
Next we'll hear from Michael Faerm with Crédit Suisse.
Michael Faerm - Crédit Suisse AG
In terms of your outlook for generic utilization in Europe, what kind of change are you seeing now in the marketplace that could increase that, increase the incentives to use Generics? And just a quick one on tax, what's driving the reduction on your guidance, and why is that sustainable?
So I would say, we see Italy, we absolutely have seen utilization have taken Italy, and we continue to see that. In Spain, we've seen some reimbursement changes to put more emphasis on the pharmacy reimbursement. As may know, Spain is a very divided market as far as prescription, branded, generic and substitution. And we've seen the substitution market growing at a faster rate in Spain, which is very good as far as that sustainable cost reduction for the healthcare system versus these one-off price drops. So we definitely see Spain substitution picking up, Italy utilization picking up, and we see France. We still say, there's a lot of upside to France. There are only about 23%, 24% overall generic utilization, and we continue to see the health authorities they're looking for an increased way to expand that list and incentivize pharmacists.
I think second half of your question was with respect to tax rate, which was a slight down to 27% for the full calendar year during the fourth quarter. The reduction really was the result of standard tax planning that we're doing on an ongoing basis combined with in December of 2010, the President signing the tax extenders bill that continued certain preference or tax provisions. And some of those were retroactive and certainly provided us with an opportunity and a benefit. And as I said in my prepared remarks, we see the full year 2010 tax rate to be 27% to be sustainable and within our guidance range of the 26% to 28%.
Our next question comes from David Buck with Buckingham Research.
David Buck - Buckingham Research
First question just for Asia Pacific, can you talk a little bit, Heather, on the performance of Australia versus Japan, and maybe where Matrix is now in terms of relative contribution with the antiretroviral because this is growing? And secondly, what's the assumption in the guidance in the longer-term outlook for waiting time at the FDA and also some of the commodity products where you've seen some supply issues and share gains, what's the assumption for those products? And then finally for Robert, you mentioned M&A is something strategic you'd be looking at going forward. Can you talk about whether you think that the European or other regions' pricing issues have led to any of the [ph] coming down?
If you don't mind, let me get the reverse. In terms of the M&A, David, I think it's very insightful on your part. It's what I’ve expected that's going to occur. I do think that as the market in Europe continues to contract from a pricing perspective, I do believe it's going to put pressure and squeeze some of the smaller to midsize players to be able to maintain and compete on a longer-term basis. So I do think I expect that the multiples will come down in Europe that, that's basically one of the opportunities I think that might present itself to us. And I have no rush, I mean there is just no rush. I think just sit back and just be extraordinarily patient. We're in a position that we can strike and strike quickly. So I think that we will take our time, and again, in a very disciplined way, making sure that we meet our leverage, coverage ratios that we promised to achieve. I think that there will be opportunities.
In terms of the FDA time frames, I think we have already -- I tried to give you that answer and one of my last responses, I think it was about the manufacturing. And what we've seen the FDA, we've already actually -- I think even a year ago, we've actually built in more probability time frame. We've actually built in more time frames for our approval in our projections as a result of some of the anticipation work that the FDA's going to do. Heather, do you want to add anything to that?
No, like what I said we've already -- as far as our assumptions have build in longer, longer review times the FDA, I think as far as supply disruptions, our assumptions aren't that far off as far as what we've seen in the last couple of years. As I mentioned as you have seen on the slides, we see mid to single-digit declines from a price perspective. But like I said, we see volumes offsetting that price decline. And certainly, the market disruption issues and supply issues that we've seen, we definitely have seen volumes year-over-year growth for our U.S. business. But I can't say anything disproportionate to any one of those supply issues. But just overall, I think it reflects, as I said, the strength of our base business.
Our final question comes from Elliot Wilbur with Needham & Company.
Elliot Wilbur - Needham & Company, LLC
In looking at the delta between the high end of 2011 revenue guidance and the low end, would it be fair to assume that the majority of the delta would be accounted for by higher realization of some of the Q4 opportunities in the U.S. versus potential upside in Europe and other factors?
Yes, I mean, I think as we've said, we probability weight those opportunities and have an authorized Generic in there. But it's certainly depending how those invest coming to be can change that dynamic. And as I said, we have 15 months of competition launches that we believe will happen this year, depending on how those evolve throughout the year that also contribute.
I would not say that you could ever pick one bucket of potential upside. I think we have the range between the low and the high end, I think are a number of opportunities, even the potential of garnering more market share, for example, like some of our market launches around the world versus what we've budgeted for. So again, there's a lot of balancing acts that we have that will call probability weighting. And I think so far, we've demonstrated with the voluminous amount of variables that we have to manage. Our commitment to meet our stated earnings per share targets is really where our focus is, and that's really how we've been managing the business.
With that, operator, if you could bring the call to the close, please?
Absolutely. Thank you so much. This does conclude today's conference. We thank you all for your participation.
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