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Mylan Inc. (NASDAQ:MYL)

Q1 2008 Earnings Call

May 8, 2008 5:00 pm ET

Executives

Robert J. Coury - Vice Chairman of the Board & Chief Executive Officer

Edward J. Borkowski - Chief Financial Officer & Executive Vice President

Heather Bresch - Chief Operating Officer & Executive Vice President

Didier Barret - President, Europe, Middle East and Africa (EMEA)

Rajiv Malik - Executive Vice President & Head of Global Technical Operations

Analysts

Ken Cacciatore – Cowen and Company

Randall Stanicky – Goldman Sachs

Gregory Gilbert – Merrill Lynch

Ronnie [inaudible] – Bernstein

Marc Goodman – Credit Suisse

Brandon Henry – UBS

[David Bunk] – Buckingham Research

Rich Silver – Lehman Brothers

Frank Pinkerton – Banc of America Securities

Operator

Good afternoon everyone. I’d like to welcome you to Mylan’s first quarter earnings conference call. This afternoon we will hear sequentially from Vice Chairman and CEO, Robert Coury; Chief Financial Officer, Ed Borkowski; Heather Bresch, our Chief Operating Officer; and Didier Barret, President of Mylan’s Europe and Mideast Africa region. We also have with us Rajiv Malik, Head of our Global Technical Operations.

During today’s call including during the Q&A we will make forward-looking statements including with regard to our anticipated business levels, our future earnings, our planned activities and our other expectations for future periods. 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 transition report on Form 10-KA for the period ended December 31, 2007 and in our other filings with the Securities And Exchange Commission and we encourage you to refer to those. You can access our Form 10-KA and other filings through the SEC’s website at www.SEC.gov.

Earlier this afternoon, Mylan issued a press release which contained financial results for the quarter ended March 31, 2008. This press release is available on our website at www.Mylan.com. Additionally we are conducting a live webcast of this call which will be available on our website after the conclusion of today’s call for up to seven days. Please note 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 express written permission.

Now here’s Robert.

Robert J. Coury

Welcome everyone and I want to thank you all for taking the time the join us this afternoon. I also would like to say hello and thanks to all of our Mylan employees around the world for their hard work, dedication and continued support.

Ed will take you through the numbers in a few minutes but first I would like to comment briefly on some of the highlights of our quarter and our three year financial guidance. Overall I am pleased with the first quarter’s performance. Our adjusted EPS of $0.09 was right in line with our expectations. These results were driven by strong performance of all three of our regions. Our outlook for the US business still the largest pharmaceutical market in the world is strong. This outlook is supported by our continued ability to be rewarded for our manufacturing excellence. Our product portfolio remains one of the largest and most balanced portfolio within our industry balanced between the more difficult to formulate and more difficult to manufacture products as well as the lower barrier to entry products. In addition we have a robust pipeline especially in the number of first-to-file product offerings which we anticipate will be the most in our history.

Our confidence in the US market is further supported by the opportunities in our portfolio expansion. We’ve identified many products that we can add to our existing portfolio in the US as a result of our Merck acquisition. We continue to be encouraged by some of our current products including Fentanyl, Levothyroxine, Oxybutynin as well as our most recently launched products, Felodipine ER and Ropinirole. Overall I am enthusiastic about the future prospects in our US business.

Beyond the US I am also particularly pleased with the EMEA region which continues to perform extremely well. Didier will discuss this region in more detail during his prepared remarks. With regard to Asia Pacific we continue to enjoy our clear number one position in Australia. Further we continue to be every excited about the growth prospects we see in the Japanese pharmaceutical market. Although I believe that the Japan market will need its time to mature we are extremely well positioned to capture our share of growth as generic utilization increases.

Before I give you a range of the earnings guidance, let me say that we based our guidance on the knowledge and insights we have gained after now owning the Merck Generics asset for two full quarters. We took into consideration both the additional costs and investments that we need to make to ensure our future growth. In that respect I am very confident in our numbers. Our adjusted ranges for EPS guidance for 08, 09 and 2010 are as follows, $0.40 to $0.50 for 2008, $0.90 to $1.10 in 2009 and $1.50 to $1.70 in 2010. The guidance also reflects some of the challenges we’ve already faced particularly with the Dey business and the tough decisions we’ve made to address them. You can see how decisively we’ve acted in making those decisions such as what we have communicated with respect to the Dey as well as our infrastructure rationalization and you will hear today how we are targeting additional resources to mature the growth of our global operations.

Before Ed discusses the guidance in more detail I’d like to cover three key points which I believe are important to keep in mind when thinking about Mylan’s future. First, our Global Generics business is performing extremely well and I see no major barriers to the continued solid performance, a performance that clearly validates the benefits that we’ve anticipated and expected when we created the new Mylan. Second, we continue to do a tremendous amount of work to ensure that we achieve our synergy goals. I am extremely confident in our ability to reach these objectives. In fact since we’ve acquired Merck we have continued to identify additional synergistic opportunities and we believe there are still opportunities to exceed our current goals going forward. And finally, we have built a superb management team with industry leading expertise in virtually every aspect of our business. We couldn’t have achieved what we have without the extraordinary talent that we have assembled.

We recently completed our first global management meeting in which we brought together our top 25 senior leaders from around the world. I can’t tell you how impressed I was by the level of knowledge, cooperation and more importantly the commitment of these senior level executives demonstrated as part of the new Mylan culture. You will continue to hear about my commitment to deepening our best strength by adding new management talent to this already strong team. The bottom line is that we have our arms around this business. The pieces are in place. We’re positioned for excellent future growth. Our responsibility is to ensure that we are investing in the business and making the appropriate decisions that create both near term and long term value. That’s our job, that’s what we believe and that’s what we will do well.

Now I’d like to turn the call over to Ed.

Edward J. Borkowski

Good afternoon everyone. As Robert noted I will be reviewing with you our first quarter financial results and providing an update to our earnings guidance for fiscal 2008 through 2010. It is important to highlight that this quarter includes the results of Merck Generics which we’ve been including since October 2nd, 2007 and those Matrix that we have been including since January of 2007. The comparable prior year quarter includes only Mylan and Matrix.

For the current quarter our adjusted diluted earnings per share was $0.09. Adjusted diluted EPS excludes the following items, a non-cash goodwill impairment charge of $385 million related to our Dey business, approximately $118 million of non-cash amortization expense related to the purchased intangible assets and the inventory step up associated with our recent acquisitions, approximately $29 million of one time items related to the acquisition and integration of Merck Generics such as professional and consulting fees, $3 million of other revenue related to Bystolic and approximately $56 million of income tax effect related to the above items.

During the quarter two significant events occurred, the non-cash charge for the goodwill impairment related to Dey as a result of the announcement of the potential sale of that business and the Bystolic for $370 million in cash. Related to Bystolic we had previously received $100 million in milestone payments and deferred the revenue pending product launch. As a result of revenue recognition accounting guidance Mylan is amortizing the $370 million plus the $100 million or $470 million of deferred revenue ratably through 2020 and $3 million is included in other revenue for the three months ended March 31st, 2008. We have excluded these amounts from our guidance and our first quarter adjusted EPS.

Now let me turn to the review of the quarter. Total revenues for the current quarter were $1.07 billion which include revenues of $630 million from Merck Generics. Our Generics segment reported revenues of $910 million and on a regional basis the segment sales were as follows, North American $392 million, EMEA $389 million and Asia Pacific $129 million. Our Specialty segment primarily Dey reported total revenues of $90 million of which $77 million represented sales to third parties. Our Matrix segment reported total revenues of $103 million of which $88 million represented third party sales.

Our press release issued earlier today includes a discussion of our financial results for the current quarter compared to last year’s comparable period. However for purposes of this call I would like to discuss our results in comparison to the quarter ended December 31, 2007 since both of these periods included a full quarter of results from Mylan, Matrix and Merck Generics. Consolidated revenues decreased by $81 million from the fourth quarter 07. The majority of this decrease was in the Generic segment with the remainder in the Specialty segment. Within the Generic segment the North American Asia Pacific regions reported sales decreases partially offset by increase in sales in the EMEA region which Didier will comment on later.

The primary reason for the sales decrease in North America involves actions taken by our largest wholesale customers to reduce their levels of inventory during the quarter. We believe that this de-stocking had an impact on quarterly sales of approximately $55 million. Partially offsetting this decrease was an increase in Fentanyl sales from the prior quarter. This increase was realized even after the entrance into the market of additional generic competition in August of 07. Mylan has gained significant share of the generic Fentanyl market following the mid-February recalls by several of our competitors. We currently hold approximately 50% of the generic market versus approximately 37% earlier in the quarter and overall pricing for the product has been stable.

In Asia Pacific the current quarter represented the first full quarter of sales under a strategic partnership with one of Australia’s leading wholesalers and distributors. Sequentially sales were lower in the current quarter due to de-stocking as we continued to work with our customers to adapt their buying patterns to this new arrangement. We believe that under this new arrangement we are in a position to better service the needs of our customers and look forward to the benefits that we believe this strategic partnership will bring to our company.

Within the Specialty segment sales of DuoNeb decreased as a result of generic competition on the product. As we expected multiple generic competitors entered the market in December of 07 and January of 08. Therefore the current quarter is the first in which the full impact of the increased competition was felt. Partially offsetting this decrease however are our growing sales of Epephen. Gross profit for the three months ended March 31st 08 was $350 million and gross margins were 33%. However excluding purchase accounting related items current quarter gross margins were 44%. By comparison gross margins for the quarter ended December 31st, 2007 also adjusted to exclude purchase accounting related items were 41%. The strong contribution from Fentanyl in the current quarter as discussed previously was one of the key drivers of the increase in gross margins.

Our operating loss for the current quarter was $372 million. Excluding items related to purchase accounting and the non-cash goodwill impairment charge our earnings from operations would have been $132 million For the quarter ended December 31st 07 earnings from operations were $119 million which also excludes purchase accounting related items and the write off of in process R&D. This represents an increase in the current quarter of approximately $13 million or approximately 11% driven primarily by lower SG&A expense partially offset by the impact of lower revenues as noted above. A decrease in both payroll and payroll related costs as well as a decrease in costs associated with the acquisition and integration of Merck Generics are primarily responsible for this variance.

Now I’d like to recap our capital structure and please turn to Slide IV and walk you through our thought processes and regarding our approach to leverage and manage our debt. Our total debt as of March 31st was approximately $5.2 billion and unrestricted cash and short term investments totaled approximately $747 million. This amount includes the $370 million of pre-tax proceeds received from the sale of Bystolic in February of 08. the $5.3 billion of total debt includes the following, $2.9 billion in US dollar term borrowings, $1.4 billion in Euro term borrowings, $600 million in a convertible note and $300 million drawn under the revolving credit facility. Of the US term borrowings we have fixed $1.5 billion through interest rate swaps. In our revised guidance we’re assuming a blended 6.5% interest rate across the $5.3 billion of debt.

Our goal is to reduce our leverage ratio below three times our total debt to adjusted EBITDA by the end of 2010. I’d like to remind you that although interest rates have dropped significantly since October 3rd we had used a forward-LIBOR curve to forecast interest expense. Therefore we already had modeled lower interest rates which is why we’re not benefiting as much from the rate declines. Finally cash flow from operations for the quarter excluding the proceeds of Bystolic and the non-recurring expenses we incurred during the quarter was slightly negative. We expect cash flows to increase during the year due to new product launches and the realization of synergies. We are forecasting cash flow from operations to be approximately $110 million to $150 million and with the Bystolic proceeds cash flows would be $440 million to $470 million..

Now let me take you through our updated three year guidance. As Robert already has noted our adjusted ranges for adjusted EPS guidance for 08, 09 and 10 are $0.40 to $0.50, $0.90 to $1.10 and $1.50 to $1.70 respectively. While these numbers are lower than our previous guidance they do reflect the strong performance of our Global Generics business. We’re particularly pleased with our EMEA operations which are clearly performing very well. We’re also pleased with the progress we’re making on realizing our targeted synergies. Before I get into the detail let me address the two most important changes affecting our guidance between our October outlook and now, the removal of Dey and its previously anticipated contributions and the higher G&A expense. Please see Slide V.

Our October guidance assumed Dey would contribute approximately $0.25 to 08 earnings. We also boosted our G&A expense by $0.10 in 08 which reflects the additional resources we determined to support our global infrastructure principally IT and other corporate functions. As you may recall we did include certain Paragraph IV opportunities in our guidance which are probability weighted at 50% and included an authorized generic competitor. Our 2008 guidance included approximately $0.15 in Paragraph IV opportunities which will now not occur. Additionally our partner has revised estimates for the sale of Bystolic which resulted in a $0.04 reduction. We also benefited from a revision of currency rates and our capital structure which included the lower interest rates. Each of these benefits contributed an additional $0.07. Remember although interest rates have fallen since our October discussion that benefit has been offset by an increase in shares due to our November equity offering as well as the higher mandatory convertible and related dividend.

The adjustments to our previous 2009 and 2010 earnings guidance are primarily driven by Dey and increased G&A expense as you see in the Slide. I’d like to make an important point about the guidance, yes, we’re disappointed by the impact of Dey’s performance in our guidance and clearly the G&A expense was increased but our fundamental rationale as to why we acquired the Merck Generics business remains in tact and is reflected in the strong top line and bottom line growth we expect. Our Global Generics business is meeting our expectations and the performance of the company continues to validate the long term benefits we expected when we created the new Mylan.

I’d also like to review the key modeling assumptions we use to arrive at the projections. Consistent with our October forecast we built our projections based on a methodology which includes conducting a bottom up product-by-product review of our business. We take into consideration historical business trends, current market conditions and expected future competitive dynamics. We’re basing our sales growth projections on new product development and Paragraph IV launches, increased API supply at Matrix and growth in its ARB business, growth in our core generics business, particularly in France, Germany, Japan and Australia, and additional launches in Europe where we expect to benefit from being first-to-market and with new hospital launches. As we have done historically we also assume inherent revenue and profit erosion in the base US generics business of approximately 4%.

We include Paragraph IV challenges at a 50% probability with an authorized generic assumed for each product at launch. We continue to add significant Paragraph IV opportunities to our portfolio. As you know we have settled both Paxil CR and Levetiracetam both of which will be launched no later than the fourth quarter of 2008. I would note that while we’re very excited about the Paragraph IV opportunities we’re adding to our portfolio, Paragraph IVs are not expected to be a major contributor to achieving our financial goals.

We continue to see capital expenditures to be approximately $750 million over the next three years. The funds will be principally used to invest in new manufacturing facilities, equipment and IT infrastructure. In 2008 we project spending $230 million versus the $250 million we had initially projected. The difference is due to optimization of capital spending in manufacturing and R&D along with changes in our IT plans related to the Merck Generics business. Instead of building new systems we decided to carve out and use existing Merck systems. There was approximately $100 million in one time capital expenditures needed to achieve our integration synergies which is included in the $750 million. Finally our guidance assumes that we will receive the proceeds from the potential sale of Dey during the fourth quarter of 2008. As I’ve mentioned to you previously we will use those proceeds to pay down debt.

Now some more details on the guidance. Please see Slide VI. We see the same growth drivers for each of the three years. We expect our Global Generics business to achieve strong top line growth of 15% annually. Additionally we expect to achieve an EPS growth [kagar] from 08 to 10 of more than 50% due to the implementation of synergies, increased operating leverage and financial de-leveraging. Let me take you through a more detailed look at these numbers.

Revenue is projected to increase from between $4.3 billion to $4.6 billion in 08, to $5.8 billion to $6.1 billion in 2010. This growth is due to new product introductions and strong generic penetration throughout our markets. We forecast gross profit margins to be in range from between 41% and 43% in 08 to between 42% and 44% in 2010. This result averages approximately four percentage points less for the three years than the forecast we provided you in October. The decrease is due principally to the exclusion of Dey and the reclassification of distribution costs of two percentage points from G&A to gross margins to conform Merck Generics presentation to Mylan’s. The increase in margin in 2010 is due in large part to the realization of synergies from our API and manufacturing integration. While the reclassification improves our G&A percentage against revenue the improvement is offset partially by the additional expenses we’ve discussed earlier.

We believe that our cost structure remains highly competitive. In fact we see SG&A as a percentage of revenues decrease by 2010 as we carefully manage our costs while revenues increase. Our R&D guidance as a percentage of revenue remains unchanged and as we mentioned in October we believe these amounts will enable us to continue to grow our already robust product pipeline well into the future. As we noted in October and is still the case projected synergies and strong operating growth result in compound annual growth and adjusted EBITDA of 30% growing from between $750 million and $900 million in 2008 to between $1.27 billion and $1.47 billion in 2010. In addition to our substantial revenue growth the synergies we’re generating from the integration also contribute significantly to EBITDA growth rates particularly in 2010 when we expect them to contribute an additional $150 million.

Both our targeted amounts and the timing of the synergies remain on track. I’ve been impressed by how all of our teams are quickly implementing these activities and specifically the work our Global Tech Ops groups is doing to achieve our goals. Our one time costs to achieve these synergies have increased from $156 million to $228 million. The increase is primarily due to higher costs of rebranding the Merck business around the world. With respect to income taxes over this outlook period our overall global effective tax rate exclusive of incremental tax planning benefits is currently anticipated to be 36% to 38% for 2008 and 34% to 36% for 2009 and 2010. The anticipated 2008 effective rate exclusive of incremental tax planning benefits is about two percentage points higher than the rate we anticipated back in October principally as a result of a change in the overall mix of our forecasted earnings. The 2009 and 2010 anticipated effective rates exclusive of incremental tax planning benefits are consistent with our previous expectations. The tax planning benefits that are incremental to the previously noted effective rates remain in the $50 million to $70 million range over the outlook period which is also consistent with our previous expectations.

In summary our revenue growth and increasing synergies along with planned tax savings and the effects of de-leveraging contribute to our adjusted EPS growing from between $0.40 and $0.50 in 2008 to between $1.50 and $1.70 in 2010. Adjusted EPS excludes one time costs to attain synergies, intangible amortization and other purchase accounting and non-recurring expenses. The adjusted EPS includes stock compensation expense and the impact of either the preferred dividend or the common shares upon conversion which is ever more dilutive.

That concludes my remarks and I’ll turn the call over to Heather.

Heather Bresch

As our guidance indicates our outlook for our Global Generics business is strong. As our integration progresses and our strategy is deployed we are beginning to see many opportunities for profitable growth. Our enhanced scale, vertical integration capacity and proven commercial execution positions us to succeed despite the pressures of any one specific market such as price reductions, customer inventory reduction initiatives and continued downward pressure on cost of goods. As we’ve stated many times the acquisition of Merck Generics allowed us to diversify geographically and operationally and therefore we are no longer solely dependent on the US market or any one product as we were last year.

While our US business continues to be very strong our EMEA business rivals it in terms of revenues and contribution to our future growth. While our corporate G&A is expected to be higher than we had anticipated the benefits we are reaping puts us in a unique and highly advantageous position focused on one thing, winning in our current and future markets. For example we have internally developed a Best in Class Global portfolio management and new product selection process. This unique proprietary process provides us with confidence in securing synergies beyond 2010 by maximizing the value and velocity of our global pipeline.

Before moving into synergies let me provide you with a quick update on integration efforts in projects. On the API front we have successfully begun renegotiating better pricing, qualified alternate API suppliers and continue to make progress on vertically integrating products with Matrix API. As far as progress on manufacturing optimization we are on pace to complete 70 product transfers in 2008 representing 163 strengths. These actions will allow us to achieve our targeted manufacturing synergies by 2010. In R&D we have successfully eliminated the 61 redundant products between Mylan and Merck’s pipeline and in relation to optimizing the three R&D sites we announced last quarter we have already successfully completed the necessary product transfers at two of these sites and the third is on schedule to be completed by October 1st.

Now I’d like to give you greater granularity on how we are tracking on the synergy front and have laid out this detail for you on Slide VII. As you recall in Investor Day we were projected adjusted EBITDA synergies of approximately $100 million in 08 ramping up to approximately $300 million by the end of 2010. Now given our anticipated sale of Dey we have adjusted our Investor Day targets to strip out synergies related to the Dey business. Based on our current tracking of synergies we are still on track to hit our $100 million in synergies in 2008. We are accelerating our 2009 synergies by $13 million bringing forward certain vertical integration projects and our latest estimate for synergies by the end of 2010 is approximately $275 million. As Ed mentioned we are investing in our corporate infrastructure at a higher rate across all three years than we projected in October to full support our new global platform.

However, we are finding synergies in other areas to help offset this higher level of investment allowing us to maintain our synergy target in 08 and 09. I’m confident we will continue to find opportunities that will allow us exceed our new target of $275 million by the end of 2010. As you can see our one time costs are significantly higher in 2008. A large portion of this increase is due to accelerating as well as increasing our rebranding effort. This investment is critical to our long term success and truly globalizing the Mylan brand.

Now let me give you an operational overview of our business. I’d like to start my review of our global operations with our North American market where we maintain a market leader and where we fill the largest generic market in the world. Showcasing the continued strength and breadth of our business in the US is the fact that our average market share from the 176 products in our portfolio was over 40% for the quarter ending December 07. As you know Mylan’s success in North America has historically been based on four primary factors, a high success rate among first-to-files, our expertise in difficult to formulate manufactured products, the competitive strength of our broad diversified product line and industry leading customer service and reliability. Over the last 12 months through our Matrix and Merck Generics acquisitions we have fueled our US business in each of these areas. As Ed mentioned we expect our growth in the US to continue as we realize the benefits of our vertical integration and enhanced pipeline. Vertical integration allows us to maintain an even ad market share through lower cost goods.

Second, we have expanded our pipeline substantially which will position us for many more product launches going forward compared to what you have seen from us historically. Currently we have approximately 80 [inaudible] pending at the FDA which includes 21 first-to-files. Mylan’s total US submissions grew from 25 in 2006 to 37 in the nine months ending December 31st, 2007 and in 2008 we are projecting a total of 70 submissions in the United States which includes four potential first-to-file opportunities which were submitted in the first quarter of 08. As is evident by these numbers we are seeing productivity, efficiencies in additional financial synergies.

With regard to Fentanyl we continue to derive the benefits from increased distribution of our Matrix patch resulting from instability of supply of the reservoir patch. As far as our Matrix division we see Matrix as a whole being a significant driver of our growth over the next three years. Over the last 12 to 18 months Matrix has diversified from being solely an API supplier to building their own internal finished dosage form capability. Matrix is now well positioned to monetize this ARV franchise both on the API and finished dosage form front.

In Asia Pacific region we continue to solidify our undisputed leadership position in Australia. We are leveraging the very strong Alphapharm brand in new ways in order to derive growth. For instance we have just launched a new initiative in the OTC marketplace. OTC is an exciting part of the market as it is not subject to government pricing and it benefits from strong brand recognition. We are also well positioned for additional growth in generics following the upcoming August government reforms in Australia which will include for the first time a pharmacy incentive to dispense generics. We have a new distribution and supply partnership with the wholesaler, ATI, which is going very well and already allowing us to win new accounts. As we have discussed, we see Japan as a key driver in this region. During Q1 we celebrated the launch of Mylan [ceyactu] which was very well received and timely as major government legislation encouraging increased generic utilization in Japan commenced in April. Mylan is the fourth largest generic company in Japan and the largest international company in the country. Japan is a high barrier to entry market for a number of reasons and we have a very broad product portfolio with over 500 products on the market which makes us well positioned to take advantage of market opportunities.

Our Europe, Middle East and Africa business is agile quick to adapt to evolving market conditions, well diversified and is beginning to see the benefits of integration with Mylan. As Didier is joining us on the call today I will defer to him to provide you with the specific operating highlights in the region. However let me go over just a few key points. EMEA saw strong product slow in Q1 and we anticipate that to continue for the remainder of the year. It’s impressive to note that at the quarter ended March 31st we achieved 68 product approvals in 21 countries for a total of 173 new licenses. We look forward to this continuing to ramp up as we plan on receiving just under 400 additional approvals across Europe by year end that will equate to almost 1,000 new licenses.

We are well underway with our large scale rebranding initiative throughout the region. The branding of Mylan is extremely critical and should not be underestimated in many of these European markets which are brand sensitive.

Now let me turn the call over to Didier who will provide a bit more detail on our progress on our EMEA and how the integration with Mylan has strengthened our business.

Didier Barret

Good afternoon everyone. Let me start by saying that the integration incorporation with Mylan corporate is working very well at every level of organization. So let’s move on now to the results and outlook of the EMEA region the most diverse region within the Mylan group and one which encompasses all the possible market models we see around the globe. The one which is exposed to all the initiatives within Mylan group such as separation, TSA, integration and rebranding. We are living that on a day-to-day very intensively with a lot of dialog and corporation within the new Mylan which is accelerating the integration.

Quarter one 08 which was in fact our second full quarter as part of the new Mylan was a record quarter for the EMEA. We achieved sales of $389 million an increase of 33% versus prior year, 17% local currency and 6% of both quarter four 07. We saw strong EMEA double digit sales growth in many core markets including France, Germany, Italy and Portugal. In France we remain the clear marketer with an exceptionally strong year-on-year growth in the quarter driven by first-to-market new product launches in both the retail and hospital sector. We continue to gain market share improving by more than one percentage point in quarter one 08 compared to quarter four 07.

In Germany we also achieved excellent growth reflecting our success in securing contracts with health insurers and the significant extra volume this agreement generates. Our volume has grown three fold in the span of a year and we now have contracts covering 80% of the total insured population in Germany which is by the way one of the best performances in Germany in term of coverage. A year ago we ranked number seven of the German generics market. Over the last 12 months we have doubled the size of our business and now we’re ranked number five.

In Italy we have also experienced very solid growth propelled by our strengths with new product launches and despite increasing discounts as the markets move to pharmacy driven markets and originators continue to cut prices in generic entry. We have anticipated these dynamics in the market and adjusted our strategy accordingly. In January 08 we brought six new major products to market at patent of and successfully increased volume of over 60% in one month alone and 39% for the quarter as a whole. IMS performance is good on those key launches as we have ranked as market leader on five of them and by the way the sixth one is close to being.

In the UK sales in Q1 08 have grown close to double digits over the same quarter 07 though below quarter four 07. This was due in particular to over supply in the market which has forced price down plus the impact of reduced stock holding levels from a major customer. Lastly, in Spain sales were lower than Q1 07 due to price increase implementation early this year despite a double digit increase in volume over the same period. We continue to strengthen our presence at the pharmacy level and the specialty prescription level which are two key market drivers where we also very, very well positioned.

Looking forward we continue to see growth potential in the EMEA region. Generic penetration remains low in many major markets including France, Spain, Italy. This low penetration presents a tremendous opportunity for growth especially as we have strengthened our portfolio and vertical integration as part of the new Mylan. Many markets as planned anticipated remains highly regulated and governments continue to put regular pressure on pricing. In itself that situation maintains a hybrid to entering into the European market which we know well and which is beneficial to us. Mylan EMEA is extremely well positioned within all the core markets of Western Europe to successfully capture the growth and we will also shortly be bringing the former business of Merck in Central Eastern Europe back under our control as Heather has just mentioned.

I am extremely confident about our growth prospects for the next three years for many reasons. First, our excellent positioning in Europe, we have a strong and improving position in major markets such as Germany, UK and Holland, we have a strong and leading position in the growing Southern European markets such as France, Spain, Italy, Portugal and Belgium and now we have new opportunities in Central East Europe with new business which are still small but growing fast and with all the attributes for success. For all those reasons I strongly believe as part of the new Mylan we are in one of the very best positions to capture market growth opportunity across the region.

The second reason of big confidence is we have a clear and viable strategy. We are aggressively developing the generic business in EMEA either short term through organic growth only while considering potential business development activities. We remain strong and flexible meeting a high level of customer service and demand while leveraging the new Mylan group assets. Let me take this opportunity to give you some concrete example about that. First, [inaudible] due to vertical integration we have been able to cut our cost of goods in half which in certain situations is critical to secure volume in markets like you know such as UK and Holland and which in most of the European markets fall directly to the bottom line and improve P&L. This is one example of one product and this is only the beginning.

We expect to have many more products like that in the region. Another example that Heather has touched upon is the product portfolio process. A lot of people in the EMEA region are actively contributing and benefiting from this global Mylan process from which we will get the benefits in some expanded product range and also product access markets leveraging again group presence and power.

Lastly, we are transitioning from Merch Generics to Mylan and establishing one of the strongest brands in the pharmaceutical industry. Third and last reason but not least in terms of confidence for the future is really a strong, stable and cohesive team. The dedication and motivation of staff remains extremely high and indeed Mylan is clearly conceived as an attractive place to work. These are not just words. I’m seeing that every day. We are retaining all key staff and I’m happy to report that through all the sale and integration process. And we have completed also important recruitments for country heads, finance leads, marketing and sales and many of the functions over the last few months. We strongly believe we have the best team in the industry.

To conclude Mylan in EMEA is a robust business ideally positioned to maximize the opportunities in the region with clear strategies to achieve our goal and with a strong team of talented individuals to lead us forward. We will continue to deliver industry leading organic growth and strong profitability across our diverse markets. As part of the new Mylan we have great confidence that we will successfully execute our plan and deliver on our strategy in the short but also the medium and long term. I would like to speak on behalf of myself and of my team in saying that we were excited as you noticed during Investor Day about our prospects when we first learned that we were joining Mylan but we are even more excited today after six months of being part of this new great company.

Now let me turn it over to Robert.

Robert J. Coury

Over the past two years have spent a tremendous amount of energy getting our arms around the new Mylan. Throughout this process each member of our management has remained focused on creating a strong platform to produce shareholder value. Going forward I assure we will continue this focus as we execute our business plan and lastly as part of our commitment to increasing our communication with investors in addition to the upcoming conferences we plan to make a concerted effort to meet with as many of you as possible during the second quarter.

Now I’d like to open the call up for questions.

Question-And-Answer Session

Operator

(Operator Instructions) First we’ll hear from Ken Cacciatore – Cowen and Company.

Ken Cacciatore – Cowen and Company

Question for you on the guidance, I don’t have access to the slides unfortunately. I just wanted to know I think you said it basically assumed the divestiture of Dey in Q4, if that’s correct but just looking at the Q1 numbers, if you annualize what you did in Q1, you’re basically on the low end of the range and on the bottom line we’re already at $0.36 and that’s obviously without any new product launches and I’m assuming that Dey is break even to a loss. I understand there’s going to be higher G&A, but is there anything else going on that is also in the guidance or is the way I’ve calculated the numbers correct? I’m trying to understand why in the back half of the year we should have some nice new product launches, why we’re not seeing a little bit higher magnitude coming out of that? And then as well if you could give us an update on [depacodear], maybe discuss a little bit about the ongoing negotiations if that’s the right term to use here, if that’s what’s going on, give us a little bit of insight as to what’s going on there?

Robert J. Coury

I’ll take the first part and then Heather can comment on the other as well. Basically what you saw also in the first quarter is we [inaudible] some de-stocking both in the US and in Australia that did affect our revenue results and that a fair amount of our opportunities, particularly Paxil CR and Levetiracetam are in the second half of the year, or the latter part of the year that aren’t in there that would accelerate both the revenue and then also the earnings trajectory that we’re projecting. So those really are on this new product introduction later on as well as synergies and the fact that the first quarter we did have that de-stocking had affect on us. But I think also just to add the opportunities that occurred well may be there at the end of the year I think there are those opportunities that are still potentially intact and could improve where we are. We wanted to be forward that given that that will be [inaudible] for six months that we basically provide some guidance that we can live with and stick with going forward.

Heather Bresch

As far as depacodear goes our litigation is still ongoing, however, we are in negotiation settlement discussions.

Operator

Next we’ll hear from Frank Pinkerton – Banc of America.

Frank Pinkerton – Banc of America Securities

Can you give us an update on any turnover in Europe and how the management is there? And then also remind us are there any stake packages in place for those employees?

Robert J. Coury

I think as you heard, Frank, from Didier all senior management is in tact. We have employment contracts with those certain management with believe it or not difficult in Europe but even with non-competes in order to protect our number one asset and Didier do you want to comment any more on that? In terms of the packages, do you want to comment?

Didier Barret

In terms of packages, in terms of the company deal of the team nothing will be done to lose anybody but I feel a strong, strong commitment and one example is the feedback I had from the big meeting we are participating to the leadership in the US with core Mylan operation, a lot of people from Europe were there, the feedback has been really fantastic. Not only the commitment is there, the packages are there but also the results in the various markets I think speak for themselves in terms of commitment and progress of the team.

Frank Pinkerton – Banc of America Securities

If I can just follow up, I was impressed with most of your results but in Asia it looked like sequentially at least there was a little down tick in revenue. I know you talked about Australia and how you’re continuing to do distribution agreements to solidify the market share there but is there any reason on seasonality that we should think of or something else by Asia ticked down sequentially?

Robert J. Coury

Let me just address in Australia there is a lot of moving dynamics in Australia and because of our very secure number one position we are moving with those dynamics. As Heather mentioned we launched an over-the-counter initiative there. In Australia we have 95% of all generic molecules, we have in our portfolio. As Heather mentioned expansion is going to become, we’ll come from Australia by our ability to add additional products to this very powerful platform that has the full reach of all of Australia. Remember that’s a market that’s still a pretty much a brand market. I believe we’re much more known as a brand down there than we even are a generic but we are very excited about the opportunities we see as we continue that market. Heather, do you want to add anything?

Heather Bresch

Maybe the only thing I would say, we’ve seen as we saw in the United States and a little bit in the EMEA, we did see especially moving to this new distributor through API again some reduction in inventory of a couple of weeks. That had some affect on the market and again the business though as Robert just indicated, very strong and still a very strong outlook for the rest of the year, opportunities coming and a lot of initiatives undergoing not only in Australia but also obviously in Japan.

Operator

Next we’ll hear from Randall Stanicky – Goldman Sachs.

Randall Stanicky – Goldman Sachs

Just a couple questions, first, Ed, can you maybe just help us reconcile. If we’re looking at 08, 09 and taking the midpoint of the revenue now versus previous, it looks like we’re down $300 million to $400 million per year on the cost structure just taking the midpoints of your percentage ranges, it’s a pretty similar number of close to 180 if I’ve done my math right for both years. Given the sale of Dey implied late this year can you give us a little bit of reconciliation in terms of how to think about the impact of Dey from now until when it leaves the P&L going forward?

Robert J. Coury

That does reflect the absence of Dey, if you will, from those numbers. I think we indicated earlier in February and it’s still true for this year, Dey is essentially break even for the year.

Randall Stanicky – Goldman Sachs

In terms of looking at the $0.20 guidance then if we took the midpoint of the change, about $00 million on top line and a similar amount on EBITDA that reflects Dey and then is there is, there’s a little of change in synergies, is there anything else that’s meaningful to changing that number?

Robert J. Coury

Importantly, frankly when I look back and we look at the guidance once you take Dey out the rest of those moving items that we talked about, I think really puts us at the low end of our original guidance, right around there. I think that’s probably indicative too in part that all those things are things that we’re supposed to manage in terms of the business and Dey was really the factor that drove it down.

Randall Stanicky – Goldman Sachs

In terms of the above the line impact it’s largely Dey, we can back into the numbers if we do. Is that fair to say that the key change is Dey?

Robert J. Coury

Yes.

Randall Stanicky – Goldman Sachs

And then can I just ask one more? Heather, in terms of the costs to achieve synergies I’m looking at 2008 it’s bumped up quite a bit. I think it’s up $85 million to $117 million if I recall correctly and that puts it at a negative net synergy, if you will, for 2008. Can you help us understand what’s in that number and get us comfortable if that goes away as we move into 09?

Heather Bresch

As you heard me mention as well as Didier the rebranding effort is really something that we not only accelerated but increased our spend. As you know many of the markets across Europe that carry the Merck Generics name today we are transitioning those and are being accepted widely as the new Mylan brand. But as you look at the advertising, a lot of those being the branded generics marketplaces and really brand sensitive with physicians and so forth the spend to really make sure that we properly transition the Mylan name as well as have continuity and not miss a beat in our commercial operations we just consider to be very, very important and strategic so that is due to a majority of the expense in 08 and the rest as we’ve mentioned there was some IT, one time cost so forth and IT infrastructure and some other integration, consulting costs that really led to that number that truly are one time to achieve the synergies.

Randall Stanicky – Goldman Sachs

So that $85 million increase, that effectively is cash out the door this year but once you’ve spent it, it doesn’t recur going forward?

Heather Bresch

That’s correct.

Robert J. Coury

That is correct, Randall, and just to add one last point. I would look at the rebranding strategy, one of the things that we were extremely sensitive and we learned, it’s almost like the pre-marketing launch of a brand product here in the United States. If you think about all the pre-marketing activity you need to do before you actually launch your brand product, that’s exactly how I would look at this expense for the rebranding. We have to be extremely sensitive about putting the investment in up front before we actually changed a name and make sure the docs and the pharmacist clearly understand who Mylan is, Mylan’s history, Mylan’s quality. These are very critical aspects of being successful in a name change so that’s why we decided to increase the spend and it is a one time.

Didier Barret

And if I may report just to reinforce what Rob is saying the first steps of the rebranding are doing very, very well. We have changed the name of the different corporation early this year. It has been extremely well accepted so the whole thing is well on track and I’m very pleased that Mylan as a corporation has really well understood the need to invest in the rebranding. I think that’s really a strength of the corporation.

Operator

Next we’ll hear from Greg Gilbert – Merrill Lynch.

Gregory Gilbert – Merrill Lynch

I have three questions, I’ll ask them up front. First for Robert, how is the Dey sales process going and do you care to share any assumptions on proceeds? Second, for Heather, where are channel inventories in the US in terms of weeks at this point and where do you expect them to go from here? And maybe a little more color as to what drove that, whether it was normal or abnormal in terms of their behavior. And last, for Ed, where on the P&L are the $28.6 million in non-recurring expenses? And perhaps can you offer what a good interest rate on cash is at this point?

Robert J. Coury

As far as the Dey process we are still in the infancy and as you can probably imagine in this process I would not want to telegraph anything to the potential purchasers. I could tell you that we have tremendous amount of interest and activity underway but let me leave it at that so I can allow the process to be full and thorough.

Edward J. Borkowski

Right now some of these retailers have been probably been over two, two and a half, in that range. They’ve brought it down to under one and a half at this point, Greg, and that happens from time to time as their focus changes and unfortunately this is one quarter where they took it pretty quick. I think that puts them roughly in line, some of them back in line with some of the others that we have. We haven’t gone into specifics but it’s under one and a half months right now.

Gregory Gilbert – Merrill Lynch

For retailers and wholesalers, Ed?

Edward J. Borkowski

Primarily wholesalers, Greg.

Gregory Gilbert – Merrill Lynch

The non-recurring, the $28.6 million, where does that show up in the P&L?

Edward J. Borkowski

Listen, the bulk of it is in SG&A, about $20 million. Then there’s $6 million in COGs and $3 million in R&D. Interest on invested is I think around 4%.

Operator

Next we’ll hear from Ronnie [inaudible] – Bernstein.

Ronnie [Inaudible] – Bernstein

Just three quick questions, first, you mentioned that you’re including Paragraph IV challenges in your forecast, I notice you’ve got a couple of composition [inaudible]. Can you give us an idea how you account for those? We those [inaudible]. Second, you’ve mentioned the Bystolic’s guidance will come down. About how much currently is Bystolic of let’s say the guidance if you care to share that? And third just a technical question, I was unable to find your slides on your website, if you can let us know where we can find them?

Robert J. Coury

On the Paragraph IV, let me just say that I think what we stated in our guidance over the next three years, we have very little in the Paragraph IV. We are in the process of building tremendously that Paragraph IV portfolio that we have. What do we have, Heather? I think you said 21?

Heather Bresch

We have 21 pending with the FDA, but as Rob said they’re minimal.

Robert J. Coury

And four potential we filed just this quarter, but in our guidance we’re relying very little on the Paragraph IV in the next three years. And then what was the second question?

Edward J. Borkowski

Bystolic in terms of royalties. You know we haven’t disclosed what those are and obviously as part of our, we’ve included it in our revenues for the next three years. I think based upon the revisions that we’ve got the appropriate forecast for that product. As you can imagine we don’t necessarily break out product by product on our revenues.

Robert J. Coury

As far as the slides that you didn’t see, I was just told that it’s on the webcast and should be posted. It will be posted right after the call, Ronnie, so you can get caught up with those.

Operator

Next we’ll hear from Marc Goodman – Credit Suisse.

Marc Goodman – Credit Suisse

Just to continue on with the Paragraph IV why 50% risk adjusted? Is that your historical track record and what happened to the ones that you were supposed to make? I think you said $0.15 in 08 but you’re no longer going to make that. So what products did we lose and I’m just curious how, I’m sure I understand how you say that you’re not really going to make a lot of money from Paragraph IVs in your guidance but you have 50% risk adjusted in there. I’m just trying to rectify that. Second question is on the product transfers you mentioned 70 in 08. What can we expect in 09, 10 or is that it? And then can you comment on Duragesic sales and what’s happening with the biotech strategy?

Robert J. Coury

Let me take the first. Marc, if you go back and look again when we first took office and basically doubled the Mylan legacy the investment in R&D we went after and had a substantial portfolio. Back then it was the largest Paragraph IV opportunity portfolio that Mylan ever had in its history and I believe if you take a look at our track record we’ve monetized a substantial portion of that, filled in a tremendous amount of credibility in terms of which Paragraph IV opportunities that we go after. We are very selective, we believe in intellectual property, we just don’t go after any intellectual property. So if you take a look at the historical track record of our monetization actually I believe we’ve done better than what we’re projecting going forward. So the Paragraph IV 50% has been marked. The historical ratio properly weighted that we’ve used, that we use the same Paragraph IV 50% throughout the last few years in our projections of Paragraph IVs and what you’re seeing in the variations, I believe the one product you’re talking about that we lost was to [Paramate] and I think what you’re seeing in terms of why you’re looking forward and saying wait a minute, if it’s not going to mean that much it all comes down to the molecule and the size of molecule. So dependent upon the size of molecule and which molecule we’re going after is how we probability weight a launch of a Paragraph IV or at some opportunity we believe we can monetize that Paragraph IV and remember all of those are even with an authorized generic. So that has been our historical pattern and we’re very, very pleased with that track record. Heather, what about the launches beyond 08? Rajiv, do you want to.

Rajiv Malik

I think the question was what product transfers. So to capture the synergies of 2010 I think a couple of product transfers could be over in 2008 whereas additional [inaudible] products will get transferred in the first quarter of 09.

Marc Goodman – Credit Suisse

I’m sorry, additional 30 in the first quarter of 09?

Rajiv Malik

Yes.

Marc Goodman – Credit Suisse

And then we’re done?

Rajiv Malik

Yes.

Robert J. Coury

Heather, do you want to take Duragesic?

Robert J. Coury

What was the question on Duragesic?

Marc Goodman – Credit Suisse

You usually give us a flavor for Duragesic sales every quarter.

Robert J. Coury

They were approximately 6% of our total revenues and let me just make another point about Duragesic relative to our guidance. We have been I think relatively conservative with our guidance as we forecasted that the opportunity that we’ve had recently with the market, we’ve anticipated those competitors coming back later in the year and that also [inaudible] 09 and 10 having additional competitors even though we don’t know specific ones. But for modeling preferences we’ve continued to model that product relatively conservatively as we look forward.

Marc Goodman – Credit Suisse

And then the last one was on the biotech strategy.

Robert J. Coury

As you saw we hired probably one of the most premier people in that space, Patrick Vink. We are working very, very closely with him. That strategy is being developed as we speak. I think the thing that I want the investors [inaudible] we are extremely sensitive to business development activity, solution transactions. We are in a mode of driving earnings, that is our mode right now. We are going to stay focused on not allowing anything to get in the way of driving the earnings of these combined assets. That’s why we’ve made the strategic decision to focus on our core assets and to invest some of our non-core assets so I can keep management focused on continuing the execution and deriving the benefits out of these three mammoth platforms and that’s where we see a lot of our growth and as I develop more with Patrick in terms of the Mylan strategy biologics we’ll move forward with that.

Operator

Next we’ll go to Ricky Goldwasser – UBS.

Brandon Henry – UBS

What percentage of the Merck business is serviced by Matrix now and how does that compare to when Merck was a stand alone?

Heather Bresch

Right now as we talked about the regulatory environment as far as getting API [inaudible] there is lead time there. So there is very little actually current right now, minimal on the Matrix API front and as prior to the acquisition there was not any Matrix API in the Merck products.

Didier Barret

Maybe as an example, let’s take the [inaudible] example, [modibin] is one of the only I would say API which has delivered Matrix to our products and you have seen the result I am talking about so I’ll let you imagine the next few I would say years how it is going to be but for the time being not much over API.

Robert J. Coury

We have already identified and we’re now in the process of several other molecules already being looked at, referencing Matrix’s drug master files and we can give you an update as we go along.

Brandon Henry – UBS

When do you expect that business to move more toward API? 2009? 2010?

Robert J. Coury

As we stated because this is an execution play, both on a synergistic and regulatory, one of the regulatory is the references to the drug master files. That timeline roughly when we broke that down, it was roughly about anywhere from six to 12 months, Rajiv?

Rajiv Malik

In 09 we’ll see this starting to roll in.

Robert J. Coury

In 09 you’ll start seeing them roll in.

Heather Bresch

And that’s one of the reasons why I said in 09 13 million synergies were accelerated in our 09 number mainly due to vertical integration coming in sooner than we had anticipated.

Operator

We’ll next hear from David Bunk – Buckingham Research.

David Bunk – Buckingham Research

First for Ed I guess on the guidance you said that you assumed about a %5 price increase in the US. Has that been the experience that you’ve been seeing in the most recent quarter? Also can you give a sense of what the currency benefit was overall for the company and what was the growth rate for EMEA in particular without currency? For Didier, can you just comment on whether there was anything unusual in the growth we saw this quarter that may not recur and when do you expect there to be a bounce back if at all in the UK?

Edward J. Borkowski

On the currency, the currency was really not material at all in the quarter on currency side. As we’ve talked about before we do have a fair amount of debt in Euro denominated interest expense so that helps us hedge a lot of that and reduce a lot of our risk on currency around the world, particularly at our EMEA operations, the erosion. I would say, we use that for modeling purposes. I think that’s typical of what we’ve been seeing over the last year or so and we’ve used that, we feel comfortable with that based upon what we’ve seen. I would say it’s probably less than that in the first quarter just because of our product mix was quite good.

Didier Barret

Two comments about EMEA, the growth in dollars is 33%, the growth in Euro would be 17%. We had a good quarter but nothing I would unusual in the quarter, nothing exceptional. The is really the reflect of the good health of the business at the moment. As far as UK is concerned, as mentioned, Q1 was a little bit under pressure because of some elements in the market in particular over supply linked with close of the accounts in December and in March and also some of the probably the biggest player and customer in the UK have reduced inventory by half so these are the reasons of the situation in the UK which a little bit exceptional in this quarter.

David Bunk – Buckingham Research

And does that resolve in the June quarter for the UK?

Didier Barret

Yes.

Operator

We will take our final question from Rich Silver – Lehman Brothers.

Rich Silver – Lehman Brothers

I think most of my questions have been answered but I do have two more. In Asia Pacific you talked about the de-stocking. Would we expect the second quarter results to more closely resemble what we saw in the fourth quarter?

Heather Bresch

As far as kind of even as the mitigation plan for as I said it’s mainly due to the switching to the API to strip the new relationship that Alphapharm has. And we definitely are having and be putting incentives in place for our customers to buy larger bulk material so we definitely see that being mitigated over the next quarter.

Rich Silver – Lehman Brothers

Then in the UK, I’m sorry, in terms of dollars was that down sequentially?

Didier Barret

In fact the quarter was increasing, double digit growth in the UK for the first quarter.

Rich Silver – Lehman Brothers

No, that’s year-over-year.

Robert J. Coury

Yes.

Rich Silver – Lehman Brothers

I’m asking about quarter-over-quarter.

Didier Barret

Compared to quarter four 07 we are a little bit down for the reason I’ve explained earlier and we don’t expect that to continue.

Rich Silver – Lehman Brothers

Just again back to the question of local currency, you said for EMEA was up 17% in Euros and up 33% in dollars?

Didier Barret

Correct.

Rich Silver – Lehman Brothers

And on a sequential basis?

Didier Barret

This is year-on-year.

Rich Silver – Lehman Brothers

Fourth quarter to first quarter.

Didier Barret

On a sequential basis we are growing as mentioned, 6% compared to quarter four 07.

Rich Silver – Lehman Brothers

In Euros or dollars?

Didier Barret

In Euros.

Rich Silver – Lehman Brothers

And what about dollars?

Robert J. Coury

We haven’t really broken out by region the currency effect, Rich.

Rich Silver – Lehman Brothers

You just gave me year-over-year. We’re almost there.

Robert J. Coury

Well, I think we’re done.

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Source: Mylan Q1 2008 Earnings Call Transcript

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