Good day, and welcome to the Mylan Inc.'s First Quarter 2011 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Kris King. Please go ahead.
Thank you, Casey. 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 December 31, 2010, and in our SEC filings. You can access our Form 10-K 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 the financial performance prepared in accordance with GAAP. Please refer to today's press release, which is available on our website as it contains detailed GAAP to non-GAAP reconciliations of our actual first 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 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.
Robert J. Coury
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 fellow employees around the world. On behalf of the Board of Directors and our entire management team, I would like to once again thank each and every employee for their hard work, commitment and dedication to achieving our goals.
I would also like to send a special message to our employees in Japan, and thank them for their perseverance following the devastating earthquake and resulting tsunami that struck Japan in March. We are extremely grateful that all of our employees there were safely accounted for. Further, we are proud of the way the Mylan global family came together to support those affected by the disaster. We saw no significant impact to our facilities in Japan, and the hard work of our team on the ground and elsewhere allowed us to maintain the supply of essential medicines to patients throughout the country.
Our thoughts and prayers are with the people of Japan as they continue to recover from this disaster.
Now let me provide brief commentary on the past quarter and the state of our overall business. We are very pleased with our performance for the first 3 months of 2011, which was in line with our expectations in spite of the operational and nonoperational headwinds, which Heather and John will touch upon in more detail. As you saw from this morning's press release, we, again, delivered strong revenue and earnings per share growth of 12% and 22%, respectively, over the first quarter of 2010. Through the previous steps we have taken to strategically diversify our business, not only have we realized the benefits of a well-balanced platform, but we have put ourselves in a position to be able to better absorb the inherent dynamics of the global marketplace, while at the same time delivering accelerated revenue growth and strong bottom line performance. Furthermore, we see this trajectory continuing. We also believe that recent upgrades by the leading independent rating agencies only further validate our continued strong outlook for our business. On the policy front, we will continue to serve as a leader in our industry, play in a critical role in discussions with the FDA on globalization, as well as other important issues such as the earlier access to generic Lipitor for the consumers and payers. Even though we did not incorporate any financial benefit from the generic Lipitor in our 2011 guidance, we are disappointed in the court's ruling in granting the FDA's motion to dismiss our complaint. We fully intend to evaluate all available options to help facilitate a timely consumer access to generic versions of Lipitor.
Also in the quarter, we announced that we further strengthened our Board of Directors by welcoming 2 new members, Robert Cindrich and Heather Bresch. Heather, whom most of you know well, brings to our board a deep understanding of Mylan and an unmatched perspective in our industry. She has been instrumental in building the global platform we have today and is a driving force behind our success. In addition, Robert's prestigious tenure as a federal judge, his knowledge of the health care sector and his keen intellect will be valuable assets to Mylan as we face a continually evolving regulatory and legal landscape.
Finally, as you saw in our earnings press release, we announced today that our Board of Directors has authorized a share repurchase of up to $350 million in Mylan stock equity. As John will detail further, the decision to execute this buyback at this time reflects our disciplined effort to maintain a constant share count, especially in light of the recent appreciation of our share price. Our expectations for the remainder of the year, as well as our long-term growth targets are unchanged, and we continue to be even more excited about the opportunities that lie ahead.
With that, let me turn over the call to our President, Heather Bresch.
Thank you, Robert, and good morning, everyone. As Robert stated, we're very pleased with our first quarter results, which were right in line with our expectations and with our pledge to continue delivering strong bottom and top line performance. Our momentum continued to build as we generated total revenues during the first quarter of $1.45 billion compared to last year's first quarter total revenues of $1.29 billion, an increase of 12%. On the bottom line, we generated $0.44 of adjusted diluted EPS, a 22% increase over last year's first quarter result. We did exactly what we said we were going to do, even as we absorbed $0.03 versus the fourth quarter of 2010, resulting from a combination of share count dilution and a higher quarterly tax rate. Also worth noting is that we grew our adjusted EBITDA nearly 4% on a sequential basis despite headwinds in Europe. Indeed, Mylan's ability to absorb headwinds and consistently deliver profitable growth is precisely what we envisioned 3 years ago when we transformed the company by going global and creating an exceptionally strong operating platform.
Moreover, we remain very confident in all the 2011 growth metrics we shared in February, included our stated intention to launch more than 500 products during the calendar year. Given the timing of these launches and our ongoing effort to bring products in-house, we continue to expect a disproportionate benefit to sales and profitability in the second half of the year. I'd like to walk you now through the performance of the Generics business by region and then review our Specialty segment.
Starting with our Generics business in North America. Third-party net revenues for the first quarter were $674 million, up 22% from the comparable year-ago period. We enjoyed higher volumes due partially to our long-standing ability to reliably supply our customers during periods of market disruption. That said, I'd like to remind you that we're managing a portfolio of 270 products, each of which has unique competitive and market dynamics. During the first quarter, we also continued to launch new products, introducing a total of 11 of the 90 we anticipate introducing into the region this year.
Three of the launches were limited competition products. Recall that we expect to introduce a total of 15 such products by year-end. Two of the 3 launches, Nisoldipine ER and voriconazole tablets were first-to-file opportunities, as was our launch last week of letrozole tablets. In addition, we expanded into new dosage forms in therapeutic categories, launching our first ophthalmic solution, and we continue to benefit from the contribution of Bioniche Pharma, which most recently in early April launched the first and only pre-filled syringe brand or generic containing Octreotide Acetate Injection.
Currently, Mylan has 165 ANDAs pending FDA approval that represent almost $100 billion in annual brand sales, and 46 of these ANDAs are potential first-to-file opportunities, representing nearly $26 billion in annual brand sales.
In EMEA, we delivered third-party net revenues of $389 million, a 4% decline over last year's first quarter result of $407 million. On a constant currency basis, our revenues also fell 4%. The decrease was mainly the result of unfavorable market conditions and more aggressive-than-expected pricing in a number of our European countries, particularly in Germany, the U.K. and Portugal. This was partially offset by strong results in Italy and Spain. In France, our results were essentially flat year-over-year. We successfully launched Esomeprazole, one of our most important launches of the year in France and Italy. We also continue to realize the benefits of increased vertical integration, as more than half of our EMEA approvals now are internally sourced. Our commitment to continue internalizing products throughout 2011 only strengthens our confidence in the second half of the year and in our ability to withstand market pressure and grow profitably in the region. Further, we remain on track to meet our goal of internalizing 70% of the former Merck Generics portfolio by the end of 2013.
We believe that while the entire industry is facing near-term pressure in Europe, we remain uniquely positioned to bring our global scale and leadership position into the region's countries, enabling us to either maintain or grow profitable market share.
Moving on to the Asia-Pacific region, we delivered solid results during the first quarter. Third-party net revenues were $276 million, up 17% over 2010's first quarter third-party revenues of $236 million. On a constant currency basis, sales in APAC increased 10% year-over-year. Our growth in APAC continue to be driven primarily by higher third-party revenues at Matrix, which achieved double-digit sales increases at both ARV finished dosage form and API. Among our ARV launches during the quarter were 2 innovative pediatric formulations.
As Robert mentioned, we were fortunate that our employees and business were not more severely affected by the disaster in Japan. We were able to maintain our operations, execute product launches and capitalize on overall growth in the market, where generic utilization stands now at about 22% to 23%. In Australia, our sales and profitability remained on track, and we continue to enjoy a strong leadership position.
Finally, our Specialty segment, Dey, continued to deliver. Dey's third-party net revenues for the first quarter were $97 million, an increase of 17% over the same period last year. Double-digit growth from our EpiPen Auto-Injector and Perforomist drove the increase. Dey remains well positioned to continue benefiting from market expansion. Just to recap, we continue to see how our global platform is bringing the benefits of scale into each market we serve and allowing us to compete effectively and efficiently. As you've come to expect from Mylan, we have delivered and we continue to look forward to an even brighter future, as we leverage our exceptional platform for profitable growth through 2013 and beyond.
With that, I look forward to answering your questions, and I'll turn the call over to John.
Thank you, Heather. I would like to begin by walking you through our first quarter financial results for 2011, which, as Robert indicated, was a great start to what we believe will be a very strong year. I will also provide an update on our capital structure and liquidity position.
As Kris 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 those used by our management and Board of Directors to evaluate 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 2011 and 2010 results.
Our earnings release is available on our website, and I encourage you to review it.
As I walk through the various components of our first quarter results, I will periodically remind you of our 2011 guidance metrics, which we announced during last quarter's earnings presentation.
Starting at the top of the income statement. Total revenues for the quarter were $1.45 billion, an increase of 12% over last year's first quarter revenues of $1.29 billion. Year-over-year, first quarter revenue growth on a constant currency basis was approximately 11%. The 1% favorable effects of foreign currency translation primarily reflects a weaker U.S. dollar in comparison to the Australian dollar, the Japanese yen, the British pound, the Indian rupee and the Canadian dollar. In comparison to the euro, though, the U.S. dollar was slightly stronger for the first quarter of this year. Our 2011 full year guidance, with respect to total revenue, is between $6.1 and $6.4 billion.
Looking at our operating profitability measures. Adjusted gross margin for the first quarter was a little over 47% compared to approximately 46% in the prior year. This increase is primarily the result of new product launches and favorable product mix in North America, and the contribution from Bioniche Pharma in our Generics segment, as well as favorable pricing on EpiPen in our Specialty segment. Our current quarter adjusted gross margin is within our 2011 guidance range of 47% to 49%. Adjusted operating income was $339 million for the first quarter of 2011, an increase of 19% over adjusted operating income from the same period in the prior year. This is the result of the favorable gross profit that I previously discussed, combined with prudent levels of spending on R&D and SG&A. R&D and SG&A expenses for the first quarter of 2011 were $74.7 million and $267.6 million, respectively, and both on an adjusted basis. As a percentage of sales, R&D was 5.2%, within our guidance range of 5% to 6%. And SG&A was 18.5%, also within our range of 18% to 20%.
Adjusted EBITDA for the first quarter of 2011 was $386 million and is forecasted to be between $1.55 billion and $1.75 billion for the full year.
Now let me move onto a couple of our consolidated nonoperating financial metrics. Adjusted interest expense for the first quarter of 2011 was $73 million. Despite higher overall debt balances, as a result of our 2010 note offerings, we benefited from lower than expected short-term interest rates. As of March 31, 2011, 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 fixed to floating rate borrowings.
We continue to project our full year adjusted effective income tax rate to be between 26% and 28%, and for the first quarter of 2011, it was 27%. We continue to believe that our full year effective tax rate is sustainable going forward. First quarter adjusted net income was $197 million or $0.44 per share. In calculating our adjusted diluted EPS, because our average stock price for the first quarter of $22.73 exceeded $20, our diluted share count included additional dilution from certain of our convertible debt obligations. This resulted in a share count for the first quarter of 2011 of 448 million shares versus the approximately 440 million shares used in both the first and fourth quarters of 2010. This higher share count had an unfavorable effect of approximately $0.01 on Q1 2011 reported adjusted EPS.
In addition, as a result of reducing in Q4 2010 our full year 2010 effective income tax rate of 27%, our fourth quarter 2010 effective tax rate was approximately 24% as compared to our first quarter 2011 tax rate of 27%. On a sequential basis, this higher quarterly tax rate had an unfavorable impact on our first quarter 2011 EPS of about $0.015. Therefore, it is important to note that, as a result of the higher share count in Q1 2011 as compared to both Q1 and Q4 2010 and the higher Q1 2011 effective tax rate as compared to Q4 2010, Mylan's adjusted EPS of $0.44 per share in Q1 2011 absorbed $0.01 per share year-over-year and almost $0.03 per share sequentially.
With respect to our outstanding share count going forward, depending upon the market value of our common stock, our average outstanding diluted share count could increase further due to additional dilution from our convertible debt obligations and related warrants and additional dilution from our stock options. As it relates to the former, if the price of our common stock for a quarter were to average $25, the share count to be used in the calculation of GAAP diluted EPS would be approximately 10 million shares higher than the dilution from stock options alone.
If the average price of our common stock were to remain at $25 for the remainder of this year, it would have an unfavorable impact on our diluted EPS of approximately $0.04 for the full year. We note that this dilution has generally not been taken into consideration in analyst and investor models. In order to offset the impact that this dilution could have on our diluted EPS, and to do our part to maintain discipline with respect to the number of outstanding shares, we announced earlier today that our Board of Directors has approved a share repurchase plan that will allow us to repurchase up to $350 million of our equity. This share repurchase plan will be financed with our available cash on hand and should be completed by the end of our second quarter.
In addition to mitigating the dilutive impact of our convertible debt obligations and related warrants, we believe that this share repurchase program represents an effective and prudent use of our company's assets. We believe that we will be able to complete this share repurchase with no significant impact on our deleveraging strategy, including our goal of achieving a gross debt to adjusted EBITDA ratio of approximately 3:1.
Additionally, because of our proven ability to generate strong positive cash flows, we will remain in a position where we have adequate financial resources available for the right business development opportunities.
Turning to our cash flow metrics. Our GAAP cash flow from operations for the first quarter of 2011 with the use of cash of approximately $46 million. This was primarily the result of the timing of payments, including interest on bonds and the annual incentive compensation payments, combined with an increase in accounts receivable due to higher sales and the timing of collection of cash receipts, and an increase in inventory in response to anticipated demand. Additionally, certain of the special items that we discussed at the time of providing 2011 cash flow guidance did, in fact, result in current quarter cash outflows, including litigation settlements accrued for at year end. Excluding special items, our operating cash flow for the quarter was a cash inflow of approximately $14 million. We are still forecasting our full year 2011 operating cash, excluding special items, to be within our guidance range of $800 million to $900 million. The balance of our unrestricted cash and marketable securities on our March 31 balance sheet approximated $640 million.
First quarter capital spending was $41 million, and we continue to forecast full year spending to be within our guidance range of $250 million to $300 million. As all of our 2011 maturities under our credit facility were paid in 2010, we have no significant repayments of debt in the current quarter and 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.
The ability of our operational strength to allow us to enhance and delever our balance sheet and to extend our debt maturity profile has not gone unnoticed by the investment community. As we've previously reported, during the quarter, Mylan's credit rating was upgraded by both S&P and Moody's. Our current rating, a Ba2 from Moody's and BB+ from S&P, position us just one notch below our ratings prior to our initial incurrence of debt, in conjunction with the acquisitions of the Matrix and Merck Generics businesses.
Looking forward, we expect our Q2 top and bottom line results to be very similar to those of the first quarter before seeing an acceleration in EPS during the second half of 2011. This is similar to how our 2010 financial results developed.
In conclusion, our first quarter came in line with our expectations despite operational and nonoperational headwinds. We continue to stay true to our commitment of high quality and reliable supply, while effectively managing our businesses through competitive and regulatory headwinds in markets throughout the world. And as such, we continue to be well positioned for the remainder of 2011 and especially beyond.
That concludes my remarks, and I'll turn over the call to the operator for Q&A. Casey?
[Operator Instructions] We'll take our first question from Randall Stanicky with Goldman Sachs.
Randall Stanicky - Goldman Sachs Group Inc., Research Division
Great. And the question is it seems like the theme this quarter, again, was a strong North America result with some softness in, or some headwinds in Europe still. Can you talk about maybe some of the trajectory of when we'll see Europe start to improve and grow from a constant currency perspective? And then, Robert, a lot of your peers have been getting more aggressive on the Specialty side. Does that make you any more interested in adding some capabilities there?
So what I'd say about Europe, Randall, is that there absolutely was more aggressive pricing pressure throughout Europe. And as I'd mentioned, for us, particularly in Germany, U.K., Portugal, and like we said, France, flat year-over-year. What we are starting to see, that I believe will be kind of the change in that dynamic, is as some of these substitution markets continue to increase that generic utilization from more of a sustainable cost containment to these countries versus these onetime price cuts. So we do see, for some of the southern European countries like Italy, increasing its generic utilization up to about 11%, 12% now. Spain, starting to turn the corner with increased substitution. And Portugal, even though they took a deeper price cut and earlier than we had anticipated, what we see as a result of that is the government putting incentives in for substitution. So as we've continued to say, the race of us continuing to internalize products, lower our cost of goods, bringing this global scale into each of these countries, while we're educating the governments and they're starting to realize the sustainability of generic utilization, so I believe it's going to be over the next 12 to 18 months that you'd continue to see utilization increase especially in these, like I said, southern markets, and our ability to maintain in the more mature markets like U.K. and Germany as we bring our lower cost of goods to the marketplace
Robert J. Coury
I guess the only thing I would add to that, in terms of anticipation for the certainly the rest of 2011, I think these countries are going to come on. I would say Europe as a whole is going to continue to see pressure throughout 2011, and to Heather's point, these countries will come on at different times. Some countries will continue to decelerate. Some new countries will begin to decelerate. Some countries will rebound. We're seeing a mix a lot of things. But I would say, overall, the anticipation is for Europe to continue to decline in 2011 overall. That's what we see. Of course, offset by our diversification in the other regions in other markets. And this is, again, nothing that we haven't foresaw going back even 18 months to 2 years ago. Are we seeing a little bit more aggressiveness recently due to the financial crisis over there and due to some of the other external factors? Yes. But again, I think, and I'm extremely proud of the management team of Europe and really throughout to be able to manage through exactly what we've been preparing them for and what we've seen in advance. And that's why our overall guidance, Randall, is the most important thing you need to focus on, as we manage the voluminous amount of variables in this type of a business. In terms of the competitor you're speaking about, obviously, I don't render their business, but it's very interesting because my only commentary is like a flashback. It's a flashback of about 6 years ago when we led the industry, when we attempted to do the King transaction. And if you recall, when we did it back then, we didn't do it out of desperateness, and we didn't do it out of the fact that we have a landfill that we have to fill. I think today, I think the reaction of what Teva is doing is obviously -- I wish them all the luck, but they obviously have a huge shortfall that they have to fill. So I think that the rationale, the timing of Teva and what they're doing today versus what we looked at doing back then, 5, 6 years ago is a quite different atmosphere. We've always had division for that more balanced approach, and we will continue. I mean, our situation is we just don't need anything, quite frankly, over the next couple of years. We are very, very vigilant, as you could see what we're doing in terms of managing our business to hit our earnings per share. We are extremely committed to deliver that. I think our share repurchase announcement today only goes further to our discipline to ensure that what we say we're going to do is what we're going to do.
We'll take our next question from Marc Goodman, UBS.
Marc Goodman - UBS Investment Bank, Research Division
Yes, can you talk about the gross margin a little bit? Obviously, we understand what your guidance is, and how does it move up a little bit throughout the year? And then, just specifically France, can you just talk about the dynamic there? We've been hearing noise about just unusual pricing pressures in France up and beyond what would be expected, given the government changes in pricing? So can you just address France as well?
So I guess, let me start, Mark, on the gross margin point, and at 47%, the gross margin was at the low end of our guidance range of 47% to 49%. I think that in a number of forums, I've talked that I expect the gross margin to be on the lower end of that guidance range over the course of this year. I think that the gross margin varies each quarter, depending upon the mix of products that we sell. And that in addition to that, as we continue to repatriate products that were previously manufactured by third-party sources into our internal network, we gain operating efficiencies that will add to the margin. And I think over the course of 2011, you'll continue to see us in the general range that you've seen us here this quarter.
And just on your-- to your France point, what I would say is that look, and we've certainly experienced this in the United States and various other countries of the world. When you get into more of a hypercompetitive and you have competitors doing irrational things, so I think, that as you see the actions that the France government have taken, some price cuts, while we certainly anticipated price discounts, which you can't underestimate. It's how irrational some competitors will behave in the marketplace. I think what positions Mylan uniquely in France is our leadership position in that country married up with what we're able to now deliver from a lower cost infrastructure, as we internalize these products and really bring our global scale to bear. We are able to compete in that market and really with a more intelligent profitable share in mind.
We'll take our next question from Chris Schott with JPMorgan.
Christopher Schott - JP Morgan Chase & Co, Research Division
Great. Thanks very much. The first question I have is just, given the Generic Femara launch in April, I'm surprised we're not seeing a bit more sequential improvements in earnings in the second quarter. Can you just comment a little bit on the dynamics we should expect with 2Q? Second question was just obviously, we saw a very strong quarter in the North America business, I know it's a broad portfolio, but specifically, how are price and volume trends proceeding relative to your plan? And does a mid-single-digit price decline still makes sense, given the dynamics you're seeing? And if I can foot a very quick third question, obviously, just to be clear, what are you guys assuming for this year, assuming you complete the $350 million repro in the quarter and the stocks stays at $25?
Robert J. Coury
Well, let me respond to the quarter first, looking forward, and then you can take the share count. But I think, I would say that, yes, we had some opportunities and have some opportunities since the beginning of the year. But because we are guiding the second quarter very, very much like the first quarter, even with the opportunities as a way of balancing all of the other variables that we have to deal with, come [ph] the second half of the year, we have so many more opportunities, so many more product launches and so many more things that -- aspects of our business that we see materialize, we believe that those additional opportunities will far offset what we're seeing early in the year, and that's why we're being, I would say, responsible in terms of what the second quarter is going to look like versus the third and fourth quarter. Heather?
And I would just add, as you're looking at the North American business here in the United States particularly that, as I mentioned in my opening remarks, that we are managing a portfolio of 270 products. So certainly, as we've seen issues in the marketplace and we've been able to leverage our reliable supply, we've also seen a decrease that we certainly take into consideration. But you see Minocycline, Paroxetine ER, so significant products in some of our base businesses that have had the natural erosion that comes. With this generic industry, which is why we're dynamic and taking into consideration all the ups and downs, and us being uniquely positioned again to absorb the ups and downs.
Robert J. Coury
But to your point, I mean, I think you guys got it. Our North American operation is running on all cylinders. It's extremely, extremely strong. And that we very much look forward to those quarters. Once you have kind of sort of settled down, we don't need to offset other aspects of our business. We certainly look forward to maintaining that strength here and be able to add to our earnings per share and even accelerate what we've already have outlined. John, on the share?
Yes. With respect to the share count, as I indicated in my remarks, our objective would be to maintain the fully diluted share count at 440 million shares. As obviously this program is being implemented here, partly through the second quarter and partly through the calendar year, I think the share count for the calendar year will be slightly higher than 440 million. But that is our objective, Chris, is to stay at the 440 million level.
We'll take our next question from Ronny Gal with Bernstein.
It's actually Paul Stephano calling for Ronny. You mentioned in the press release that new products in North America contributed about $81 million. Would you be willing to disclose just what fraction of that, roughly speaking, came from the 3 limited competition products?
No. As we've said before, while we give the break out between new products in our base business, we certainly don't get into individual product contribution.
All right, fair enough. Well, let me ask then, on Europe, you've talked about a trend toward increased substitution of generics in Spain and Italy. But could you help us understand how that's actually taking place? In other words, how are these countries breaking through the barriers that have kept that from happening in the past, pharmacist incentive, et cetera?
Well, I'll start with...
Robert J. Coury
Two things, 2 words, Price and profit. The 2 piece. Well, I can tell you that very, very simply. Heather, you want to add?
Yes. I mean, what I would say is that governments are recognizing that they need to have incentives on the consumer side, as well as the pharmacy side, to drive substitution, and they're continuing to increase those incentives. So we've seen Italy go from 78% generic utilization up to '11 to '12. And we see Spain, while more complex with the different regions, we see several regions coming more to the substitution on the same basis, the incentives given to dispense generics.
So this is something that you expect to continue to gather steam?
Yes, we see the benefit of governments realizing the sustainability.
We'll take our next question from Rich Silver with Barclays Capital.
Richard B. Silver
Just back to the sequential forecast and just trying to better understand the reasons for this. Should we assume that the revenues overall will be flat? And if so, why would that be the case? Is it declining quarter-to-quarter or EMEA or EMEA and APAC and higher North American Dey? Just try to better understand the moving parts, and I have a second question.
Well, I mean, I think I'd start with saying, Rich, I think you've kind of answered your own question. There's a lot of moving parts. So as we -- let's start with our Dey segment, as you know, the seasonality of our EpiPen franchise, and so as we head into Q2, Q3, that being the strongest quarters, so as we're balancing all the moving parts, we have certain seasonality not only from EpiPen but certainly with our businesses geographically, there's seasonality in the business. So as you're looking at what quarters could be strong married up with the amount of launches, as Robert mentioned earlier, we see significant launches throughout the year. And as the year continues to ramp up, we get the contribution from the launches that are going to happen either the end of Q1 or in Q2 through that benefit of Q3 and Q4. So it's really the dynamics, the voluminous amount of launches, the seasonality of starting businesses offsetting other factors such as some of the pressure and stuff that we've talked about. So just all in all, it's what the balance in all of those netting out is-- why our guidance is where it is.
Robert J. Coury
Rich, if you go back, if you go back 6, 8, maybe 10 quarters, and if you take a look at, I think, we had a slide in the last conference call, you'll see a continuation of growth of this business that we've built and pulled together. You're starting to see a continuation of the growth that this business is now generating sequentially. And again, 2009, 2010, 2011, it's the same story.
Richard B. Silver
Okay. So then just focusing more on the full year, Robert, you had said that you expected the European business to be down year-over-year. Your guidance when you reported the fourth quarter was that it would be probably less than 13% year-over-year on a constant currency basis. So that's a pretty dramatic change. I just want to make sure we have the delta correct in terms of what you were guiding and then what you're guiding now.
Robert J. Coury
Yes, I don't think the delta -- I don't think there is a difference in delta. I think it's a difference in terminology. I think what I've said is that I fully expect the continuation of pressure throughout 2011. And I don't want to paint any pictures about what we're dealing with over there and what we're managing over there. As far as the numbers that we've given, we stand by the numbers that we've given, But I, overall, see a continuation of what we've been experiencing, say, for the last, maybe, a year and a half over there.
Richard B. Silver
So the 13% approximate constant currency growth year-over-year for the full year is still a number that you're comfortable with?
13% was for the Generic business as a whole. I don't believe that, that was the European region directly. I don't have the year-end slides in front of me, Rich, but we can review that together individually.
We'll take our next question from Elliot Wilbur with Needham & Company.
Elliot Wilbur - Needham & Company, LLC, Research Division
Not surprising, another question on Europe and obviously in the U.S., the cost structure of Generic business is pretty lean, it's probably less true in Europe in light of a couple of quarters of softer than expected performance, at least relative to street expectations. Robert, can you talk about how much ammunition you might have on the cost side to maybe bring things down a little bit in light of recent top line performance? And then second question, for John, one might argue that a more prudent use of discretionary fiscal capital would be to pay down debt, and it doesn't look like there's a dramatic difference in terms of what the bottom line impact would be assuming you could pay down debt outstanding at your kind of your average rate. So just a concern of what I'm hearing from clients this morning is that maybe the company is reaching a little bit, and you all sort of have this perceived over management of EPS with the share repurchase. Maybe you could just address that observation?
Robert J. Coury
Let me just show you that the answer is yes to the ammunition. We've obviously demonstrated we had quite a bit. And I said even at the end of 2010, I really don't see it ending. I do think it's a dynamic process, but we do have the ammunition, I think the biggest race, as I've said all along, is how much of that ammunition can we deliver versus how much price the European system and these countries want to take out of the system. So it's really a race and it's all timing. Everything is timing. Nothing has fundamentally changed in our overall view of the solid growth opportunity that we see in Europe on a longer term, and that's why we're guiding you with the EPS that we're giving you. And just before John, you answer on the -- I'm sorry, but I have to, just let me address this. Actually, to those, Elliot, to those clients of yours who are asking the question, quite frankly, this is an extremely disciplined and responsible approach, not just for the short term, but for the short, medium and long term. That's what's important because remember, we have forecast and we have projections, and quite frankly, there's no better opportunity, even though this absolutely is more accretive than maybe just simply paying down debt, and of course, as John stated in his prepared remarks, nothing is going to take away our commitment to achieving those goals as well with a strong cash flows that we have. But when you take a look in conjunction in balance of managing the overall business, we are extremely satisfied to be able to do this now to satisfy short, medium and long-term debt because of what we feel the potential of our security price going forward, which is only going to add to additional dilution. John, do you want to add anything to that?
Well, I think that number one, just to reiterate the point on the debt, we don't have any debt maturities that come due in 2011. The next maturity that we have is in the first quarter of 2012. That's the $600 million convertible note, and that's not prepayable. During the course of 2010, we paid down the significant amount on our 2014 maturities, and we're at a level in the 2014 maturities where I just don't feel like we need to be repaying those maturities at this point. And we absolutely see ourselves with a plan for reducing the overall gross debt to EBITDA to 3:1, as we move out to the repayment of that $600 million next year.
Robert J. Coury
And lastly, the most important point is our ability to continue to execute in our strategic business plans. So we believe we struck the right balance fulsome here in terms of the decision that we made here today.
We'll take our next question from Greg Gilbert with Bank of America.
Gregory B. Gilbert - BofA Merrill Lynch, Research Division
First, I'll ask my 2 upfront, Heather, how do you expect Lipitor to play off from here, assuming that the Ranbaxy shows up in November? How competitive do you expect it to be when Mylan launches 6 months later, and even longer term, how competitive do you think it'll be? And then I have one for Rob. I'm sure investors appreciate you're doing what you said you would do in terms of earnings per share and leverage, and maybe this is a high-class problem kind of question, but at what point do you start to feel that these metrics in a vacuum are not necessarily the only metrics that matter for long-term value creation? I'm thinking there's a part of you that's focused on delivering on promises made a few years ago and increasingly a part of you that wants to be opportunistic when capital is as cheap as it is with the global landscape changing the way it is. So if you could address that, I'd appreciate it.
Robert J. Coury
Let me go backwards a second. I mean, to that point, I think my entire senior management team will probably be in a better position to answer that because you've described quite, quite well what goes on in our managerial processes. We balance between our promise to deliver and all of the opportunities that are presented to us. We made a commitment. We gave a 3-year projection. I believe a lot of our investors have invested because of that commitment, and we intend on meeting that commitment. And I've stated and I continue to state that we are going to maintain a very strict discipline to hit those growth targets. I have said early on when we've given the commitment there especially at a time of where we are in the macroeconomic environment. There's not too many companies that are able to put on and state that they're able to deliver that type of growth. We went out there, and I said that we're going to meet it, so I do want to live up to that, to what we've said to the investors that we would do. Now with that said, look, if the opportunities we're reviewing constantly, and because we really don't need anything, as I've stated all along, I do think they're going to be opportunistic -- those opportunities that will be opportunistic. And when and if they come, and as we evaluate, between our promises of what we have and if we can enhance that and be able to improve even of what we said, I wouldn't hesitate in a heartbeat, and I do think some of those opportunities are going to come up, but don't think that for a second, Greg, and to your clients certainly, I think we've demonstrated we're not myopic. We don't live in a bubble, and certainly, the globe is available to us. And this is where I spent the great majority of my time. Heather?
And on your Lipitor question, I guess, I'd say what I've continued to say the last couple of quarters that this market is going to end up forming perhaps differently than anyone has contemplated. And I think, I hope that in light of everything that's been brought to the world's attention about Lipitor, that people don't really miss the point of what the intention was, which from the beginning, it was, as an industry, that certainly, that the FDA weighing the decision about Ranbaxy’s application, the sooner the better, for not only the public, the constituencies, the taxpayers because of the millions of dollars, tens of millions of dollars that are spent every day on this product and the ability to park exclusivity in this instance would not serve anybody well. So I think that to open it up for the industry as soon as possible was certainly our intentions from the beginning. I think with that being said, it also has unique dynamics around it because, as you know, there have been applications on file for 5, 6, 7, 8, 9 years without receiving tentative. So I think that it's not going to be certainly the hypercompetitive marketplace that people could have seen, but I do believe that it will be unique in how it rolls out. And all we can continue is that certainly with the congressional attention this has now received, I think that the public understanding, what's at risk here if that decision is not made, certainly, come June when the pediatric exclusivity expires, is really will be a win-win for everybody.
Robert J. Coury
And I firmly believe, regardless of the loss yesterday in the courtroom, I firmly believe that the FDA will ultimately do the right thing.
We'll take our next question from David Risinger with Morgan Stanley.
David Risinger - Morgan Stanley, Research Division
Thanks very much. I have a couple of questions. First, with respect to the second half ramp that you're expecting, maybe you could just speak to that in a little bit more detail, essentially, if we're looking at a second quarter that's roughly in line with the first quarter at $0.44, that would imply third quarter and fourth quarter EPS of about $0.56, so that's a pretty tremendous step up. If you could just help us get comfortable with that. And then the second question is, with respect to some of the European launches in France and Italy of Omeprazole and Nexium, I think that those are some pretty significant opportunities. I know that AstraZeneca has said that France is a $400 million branded market, but I just don't know the timing and how much of that market Mylan is going to capture versus competitors. So if you could weave that into your answer, that would be helpful.
Robert J. Coury
Sure. I'll take the first one. And just say that the answer to your first question about the second half, I can tell you that, go back and look at the prior year and go back and look at the year before that. The exact same variables, and I mean the exact same variables are in play, all the exact same variables. I see no change between the number of products that are going to come online towards the end of the year as we continue to build that and continue to start to monetize the benefits of our R&D builds in the past couple of years, the number of products and the timing of when they come online, I can tell you that nothing has changed. I would say, again, go back and look at 2010, and you'll see that the exact same -- the exact same metrics are in play. We are managing the exact same business and it really is all about timing. Heather?
And just to your question on launches, and as I mentioned, Esomeprazole is an important launch for us, which we launched at the end of the first quarter, at the very end. So we'll see how that market continues to shape up, but we've had very successful launches so far in Italy and France, and certainly just have then a sheer volume of numbers of other launches coming onboard. And as we've mentioned, this is our first year in Europe that over 50% of our launches are internally-sourced products. So it's that culmination of all those factors that, to Robert's point, especially in the European region, that's driving that second half growth.
Robert J. Coury
And I guess the last point that I would bring up, guys, is, remember, we are probability weighting and constantly probability weighting each and every quarter and continue to evaluate and reevaluate. And given that you would expect that your management team will do just this and then be able to come and deliver the visibility to all of you that we see and going back and look at our last, I don't know, is this 13 or 14 quarters of being able to bring that vision and visibility to you, by the way we see the business around the world, the way we manage the business around the world and what we are putting forth that we can deliver. And so meeting and/or exceeding is what we've been doing, and I think we have a fairly, a pretty damn tight process for a business that's certainly anything but exact.
We'll take our next question from Michael Tong with Wells Fargo Securities.
Michael K. Tong - Wells Fargo Securities, LLC, Research Division
Just a couple of questions here. One with respect to Europe, Certainly appreciate the challenges over there and what you're trying to do with integration. But Robert, can you speak to anything that you can do as a company that could drive top line growth in that region rather than trying to ride out the situation with synergies and integration cost cutting? And then secondly, as you think about longer-term within the generic industry, when this patent exploration cycle kind of winds down, where do you think Mylan would look like? This is probably an earlier question about M&A. Where do you think you're going to be playing in that environment?
Robert J. Coury
Sure. I mean, I think, the first thing I would tell you is, absolutely, there are opportunities, and we already have begun to implement programs that we think will do just that, Tim (sic) [Michael]. In terms of being able to drive top line, and I won't get into the specific details for competitive purposes, but absolutely. As you know, we're very, very hands-on, fairly, I would say, assertive, not aggressive, but a fairly assertive management team. And so we're over there constantly and working with the senior management over there, the various countries and the country hats and trying to respect and understand each individual market and the dynamics that drive those particular markets and put initiatives in place to do just exactly as in terms of what you said. In terms of what you guys call the patent cliff and beyond, I mean, that's a terminology I hear, I guess I respect, but when you're running a company and you're in our position, there's no such thing. I mean, it's a continuation. And as I said a long time ago and continue to maintain, we just don't see anything that we need. Our CAGR, the great preponderance of our growth is coming from our ability to execute organically. Now with that said, and to Greg Gilbert's comment, I mean, look, he's exactly right. It is a high-class problem. We have a high-class problem. And so why spend the great majority of my time, it's really, 2014 and beyond, and what comes next? So let me remind you of a couple of things. One, you got to look at -- I think the people had really, really begun the opportunity at Ranbaxy. Again, we're not the size of a Teva, and when I say that, when you take a look at the size of that opportunity, it's very, very meaningful. There's not going to be a lot of competition, and it will be meaningful to Mylan's bottom line. And then you take a look at our biosimilar opportunity and what we're doing there, I think that we've planned quite well, and I do see that these assets are going to roll in very opportunistically from a timing perspective. And then of course Dey. You take a look at Dey. I'm hopeful any day now to hear about the reexamination of our patent. I believe it will become public care shortly. I'm extremely confident that our patents are going to be upheld and people are going to need to answer to that. And I think that spells out opportunity. So when you take a look at what we already have in place for 2014 and beyond, given the size of company that we are, each one of these things I named are going to be meaningful and that doesn't even account for some of the additional activity that we continue to look at on a daily basis.
The only thing I would maybe just add, as we've said over the course of time, where, again, Mylan is uniquely positioned. If you look just at the U.S. business, the loan, we represent about 15% of the generic market place. So our ability to continue to identify therapeutic categories, dosage forms, just as we added Bioniche last year is a real opportunity to deliver meaningful growth to our North American operations, notwithstanding the patent cliff over '13 and '14.
We'll take our next question from Michael Faerm with Credit Suisse.
Michael Faerm - Crédit Suisse AG, Research Division
Thanks for taking the question. Could you update us on your plans for the oral contraceptive portfolio, the timing and how many products you plan to roll out and how big you could see that business eventually getting?
Yes. We see that coming in by the end of this year, starting to phase in. Overall, we've targeted about 25 products to bring into the marketplace over the next several years. And we really, again, just as I talked about Bioniche in the injectable space, that was an area that Mylan had not participated in earlier. So for us, it's just really continuing to add to our broad breadth and product portfolio delivery that we have here. And we see that as a franchise not just another gap that we're going to be able to deliver to our customers.
We'll take our last question from John Boris with Citi.
John T. Boris - Citigroup Inc, Research Division
Thanks for taking the questions. First question, when we look at your top 20 products by volume in the United States, one thing that strikes us as interesting is we see very stable market shares and stable pricing on top of that. One thing we're starting to see is some additional generic suppliers that were sidelined by current good manufacturing process issues beginning to reenter the market, which at least should continue to occur. As we see that unfolding, what is your customer base telling you about supply quality and higher price possibly for that supply relative to cheaper generics that are reentering the market? And then second question just has to do with Lipitor. You obviously felt compelled to take this into the courts against the FDA, which is quite unprecedented to sue the agency. What was it about Ranbaxy's application? What deficiencies in the application did you see or think that there might have been, that you felt compelled to sue the FDA over?
Robert J. Coury
Well, let me just comment and say that, look, there's an AIP process, and if there was a fraud, if there was a fraud, how do you correct the fraud? If a fraud has been committed, can you tell me how to correct the fraud? I think there's a lot of people that are not in a very pretty place right now that was accused of the same thing that basically, they too would like to correct it. So if there's a way to correct it, please let us know. And so I think that there's an AIP process, there's a legislative process, there's administrative power given to the FDA to deal with just that. So either there was or there's not that ultimately needs to come out, and if there was, how do you correct it? And if it can't be corrected, then you cannot hold the entire industry back and the consumers from benefiting and the taxpayers from benefiting from the largest product in the world. So please guys, remember this. This was not -- this is not like many, many other issues. This is not simply a Mylan issue. Yes, Mylan as a leader of the industry, and many, many, many times in the past we have been looked upon within the industry to lead the industry. This was an industry issue. This is not a Mylan and an FDA issue. And I do believe that the FDA is constrained. As I've said before, I believe ultimately, that they will come to the right place. But we, as a finished dosage form manufacturer, we have a business to run, we have lead times, we have to know. This is not something that -- and so basically we were looking for the only other outlet that's in place to balance the act, and that's the judicial system. And obviously, we saw their ruling. I even think that the judicial system was empathetic about exactly what our issue is. However, I think that they ruled specifically on the standing issue using from a pure legal perspective that had we have the stand -- and I even think that the opinion stated that had we have the standing, there should be a little bit different of an issue. So I think we've struck the right balance. We're going to continue to work with the FDA and continue to represent the industry and pushing for a result that can be supported by the fundamental facts and to continue to do what we've been in our business celebrating our 50th year to bring generics to the marketplace as quickly as we possibly can.
And just answer your question about our top products in the United States, I guess, again, I would just like to reiterate. Certainly, as I said, we've seen opportunities by continuing to be that reliable supplier when there's been market disruption. And yes, just as I called out, we've seen products where in our base business that competition has come back into the marketplace. So the first, I don't see that cycle ending. I think there's going to continue to be market disruptions and then they will continue to have people come back into the market after they fix their issues. But because I don't see that cycle ending, I would say that what we have seen is a continuation with our customer appreciating that reliable supply. And a behavior change in the sense that it's meaningful to them to have a reliable supply, the broad breadth that Mylan offers and our ability to service our customers day in and day out. So what I would say is, that's what we do see a continuation of, is that continued benefit of that appreciation of supply. And like I said, I certainly don't see, and I think our customers know that this cycle of market disruption doesn't look like it's ending anytime soon.
Robert J. Coury
And John, from a pure forecasting point of view because I really think--and you are hitting on all the right points. And I think you're focused right in the right place. But from a forecasting point of view, we just strongly believe that it's much more responsible, because of exactly what Heather said, it's going to come, it's going to go, and there will be cycles and sometimes we may benefit more from it, sometimes less. We should always be grounded that you'd never know when that supply returns. And so it's really, really a balancing act, John. But I don't -- I want to first of all, underscore I think you have definitely hit on the right things, but it really still is a balancing act, and there's not one or 2 things and there are many more variables for us to take into consideration. That's why our ability to give visibility and through our forecast to you all is the best way for us to guide you in what we see the business can produce and where the business is going.
With that, operator, we appreciate the support on the call. You can close the call out.
Thank you. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect.
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