Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Robert J. Coury - Vice Chairman and CEO

Heather Bresch - Executive Vice President and Chief Operating Officer

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

Dan Crookshank – Vice President of Investor Relations

Analysts

Ken Cacciatore - Cowen and Company

Randall Stanicky - Goldman Sachs

Gregory Gilbert - Merrill Lynch

Marc Goodman - Credit Suisse

Rick Dover [ph] – Lehman Brothers

Ronnie Goll [ph] – Bernstein

David Moskowitz - Caris & Company

David Buck - Buckingham Research

[Indiscernible] - UBS

Michael Tong - Wachovia Capital Markets, Llc

Mylan Inc (MYL) Q2 2008 Earnings Call August 6, 2008 10:30 AM ET

Operator

Welcome to the Mylan second quarter 2008 earnings conference call. (Operator Instructions) For opening remarks and introductions I would like to turn the conference over to Dan Crookshank, Vice President of Investor Relations.

Dan Crookshank

Good morning everyone and welcome to Mylan’s 2008 Second Quarter Earnings Conference Call. I’m Dan Crookshank, Mylan’s new Vice President of Investor Relations. I am extremely proud and excited to be here as part of the Mylan team and I am very much looking forward to establishing a close working relationship with all of you over the coming days and weeks ahead.

Joining me here for today’s call are Vice Chairman and CEO, Robert J. Coury; Chief Operating Officer Heather Bresch; and Chief Financial Officer Edward Borkowski.

During today’s call including in Q&A we will be making forward-looking statements including those related to our anticipated business levels, our future earnings, our planned activities and other expectations for future periods. Note that these statements are mad 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 riskf factors set forth in our quarterly report n Form 10-Q for the quarter ended March 31, 2008 and in our other Securities and Exchange Commission filings. You can access our Form 10-Q and other SEC filings through the SEC website at www.sec.gov and we encourage you to do so. In addition, during this call we will be referring to certain results and projections of Mylan that are on non-GAAP measure. It should be noted that non-GAAP measures, such as adjusted diluted EPS, should be used only as a supplement to, not as a substitute for, or as a superior measure to, measures of financial performance prepared in accordance with GAAP.

Before I turn the call over to Robert, let me also remind you that we are conducting a live web cast of this call which will be available for replay on our website at www.mylan.com 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.

Robert Coury

Welcome everyone, good morning and thank you for taking the time to join us this morning. We also would like to welcome and thank all our employees around the world who have made such a significant contribution to the positive results we are reporting here today.

I know our board of directors wants to particularly thank our senior management team worldwide for their extraordinary effort, not only for this quarter, but for all the work required to reach the performance levels we obtained to this point.

As we announced earlier this morning, Mylan reported adjusted earnings per share of $0.16 for the second quarter, a result driven by strong operational performance. It’s a performance that continues to build on a positive momentum we’ve established and reflects the value we anticipated when we created this global platform. Based on the strength of our operations, our integration successes and the momentum of three consecutive quarters of strong results, we have decided to raise the range of our earnings guidance for the year to $0.47 to $0.53 per share.

I also will note that these adjusted results exclude the improved quarterly performance of Dey, because as we announced previously, we are reviewing strategic alternatives for this business including its potential sale.

The process related the activity surrounding Dey remains ongoing and because of that we are in a very sensitive time I the process and would appreciate and hope that you would understand it would be inappropriate for me to comment any further at this time.

In a few minutes Heather and Ed will provide you with additional information on the quarter, but first I’d like to comment on what we anticipate for the remainder of ’08 and why we continue to be optimistic about our future.

The integration of our global generics platform continues to progress as we planned and we’re realizing the benefits we expected. I am extremely confident in our ability to reach out multi-year synergy objectives, in fact I continue to be optimistic that we will find additional synergies beyond the $300 million and I am equally confident that the integration risk associated with our new global company are substantially behind us. We now have a platform with the people, the processes and the information to help maximize the opportunities ahead of us.

With that said, complacency has never been a word in Mylan’s vocabulary. As I have stated many times, we are absolutely committed to making all the tough decisions required to protect and enhance our earnings growth going forward. With a platform of this scope and size, this will always be an ongoing commitment.

Thus far this year, even beyond our integration efforts, we have already acted in several ways to strategically leverage our global platform and expand our already robust product portfolio. For example, we have exercised and closed on our option with Merck to acquire Central Eastern Europe [inaudible] generics businesses, which gives us access to additional areas with significant growth opportunities. We collaborated with India based NATCO to globally market and distribute a generic of Copaxone(R) a product with extraordinary worldwide potential an most recently completed a development and supply agreement with India based Family Care. Through this arrangement we have met yet another long-standing commitment by expanding our portfolio to create a new women’s health care franchise. This franchise will add 22 oral contraceptive products with the option to add more in the future, making us a major competitor it he marketplace.

While we roll out these products in the US first, we have an option to enter certain additional markets including Australia and Japan where Mylan has a significant presence. We expect to begin filing ANDAs over the next few months and begin commercialization by 2010. Finally, we continue to add to our already outstanding, talented management team and we will continue to add members to that management team as we continue to leverage and enhance the value of the new Mylan.

With that said I would now like to turn the call over to Heather, our Chief Operating Officer, who will take you through the operational and review of our businesses.

Heather Bresch

We are pleased that we now have three strong sequential quarters behind us and we’re optimistic that we will continue this performance for the remainder of the year. Let me begin by providing highlights of our integration efforts and commenting on our progress against our synergy target.

For the first six months of the year we have realized nearly half of our synergy target of $100 million for ’08 and we remain confident that we will continue to find additional opportunities that allow us to meet our current goal of $300 million by the end of 2010. Our integration efforts are progressing well. We remain on track with our finished dosage transfers, R&D site optimization and our product cost reduction initiatives. Finally I would like to note that we expect to complete the separation of all the Merck generics businesses from their former Merck parent by October 1. We have been able to accomplish this work while improving our results and meeting our integration targets.

Now let me review our business operations beginning with North America.

The North America business this quarter was especially strong due to launches of paroxetine ER, felodipine ER and four additional molecules in addition to the continued strong performance of fentanyl. We also just recently launched nesodapine [ph] and as expected we received approval shortly after the patent expired. This is another example of a first to market product in which we currently face no competition. We have 93ANDAs pending in the United States targeting approximately $66 billion in brand of sales. Of those, 22 are potential first to file opportunities representing approximately $12 billion in brand of sales.

We are on track to submit approximately 70 ANDAs in ’08 and looking ahead we have incorporated the competitions resupply of fentanyl into our revised EPS projection beginning later in the third quarter. We are also looking forward the exclusive launch of lebaterathetum [ph] on the fourth quarter. Additionally we expect to see continued strong volume in our base business.

Turning to Matrix: We are pleased with our record results. We see strong growth for the ARV franchise, especially in the finished dosage for business which just launched late in ‘07. Additionally third party APR sales are meeting our expectations and Matrix continues to support the vertical integration of the Mylan and Merck businesses. We expect Matrix growth to continue through the remainder of the year.

Our Europe, Middle East and Africa businesses are performing as expected. As we anticipated many markets remain highly regulated and governments continue to pressure pricing. These include government led pricing reductions in France, which took effect in April, continued pricing pressure in the UK and a recent tender in the Netherlands. We believe our historical experience in the United States combined with our new global platform positions us with the strength necessary to work through these market challenges.

Looking ahead we are improving our position in mature markets. We have strong and leading positions in the growing Southern European markets such as France and Portugal, and we now have new opportunities in our recently acquired Central Eastern European generics businesses which are small, but growing quickly. These businesses include Poland, Hungary, Slovakia, Slovenia, and the Chezk Republic.

Further, we have anticipated the pricing impact I have noted for the rest of the year as well as the normal seasonality effects we see in the third quarter in Europe. Given our strong presence through out the region we have the ability to adapt to the dynamic pharmaceutical markets of each individual country.

In Asia Pacific we have seen the region recover from Q1 seasonality as well as the de-stocking issue in Australia which we described previously. The pharmaceutical industry in both Australia and Japan are undergoing unprecedented change. We have seen Australia partially recover from the de-stocking we experienced; however we continue to be cautious due to the uncertainties surrounding the government mandated 25% price reduction against most generics. Consequently, we anticipate a rebound in customer demand during the second half of the year.

Additionally the Australian government is incentivizing the use of generics for the first time, beginning August 1. We expect this to be another driver that will increase the generic substitution rate and volume during the remainder of the year as customers reevaluate their approach to generics.

Given Alphapharm’s strong brand and leadership position in the market, we expect to be able to benefit from the aggressive actions undertaken by the government. As we have noted previously, in Japan government generic utilization targets and revised prescription forms which allow for generic substitution went into effect April 1. As a result, our Japanese subsidiary, Mylan Seiyaku the largest international generics player in the market already has begun to see increased volumes, a trend which we expect to continue during the second half of the year.

As our performance indicates, we continue to execute on our business plan exceedingly well, our operating results are strong, we are hitting our integration and synergy targets and we are optimistic about the remainder of the year.

Edward Borkowski

I would like to walk you through the details and drivers of our second quarter financial results, update you on the status of our capital structure and provide some additional thoughts about the earnings guidance increase Robert mentioned earlier.

Similar to last quarter and unless I indicate otherwise, I’ll compare our current quarter results to the quarter ended March 31. 2008, a sequential comparison. This will be more useful than a year-over-year comparison as total company results for both sequential quarters include the combined results of the Legacy, Mylan, Matrix, and Merck generics businesses. Additionally will refer, in some instances, to specific income statement line items on an adjusted basis, which is the basis upon which all elements of our financial guidance have been developed. We believe this to be a more meaningful depiction of our operational results when evaluating Mylan’s performance and as a reminder, the adjusted basis amounts, net of tax, exclude the following items: purchase accounting related charges including amortization of intangibles and the inventory step-up, integration and other non-recurring expenses, the results of our day business, and the recognition of previously deferred revenues related to the sale of our rights to buy Stolick [ph]. There is a reconciliation of our GAAP earnings available to common shareholders and diluted EPS to the non-GAAP basis adjusted amounts contained in this morning’s earnings release.

To begin I would like to reiterate Rob and Heathers assessment regarding our overall performance for the quarter as strong as our businesses around the world continued to execute well and realize the benefits we expected to see from the integration of the Matrix and the Merck Generics platforms.

Now, let me first take you through several of our headline metrics, metrics which I believe clearly demonstrate how well we are executing on our integration plan and our current business opportunities. Starting on the top line total company revenues increased 12% over the prior quarter with each of our three reporting segments contributing to that increase. Revenues from the generics segment increased by 9% while the Matrix and specialists segments grew revenues to third parties by 19% and 37% respectively.

Excluding the results of the specialty segment, which is the day business, as well as the deferred by stolick revenues recognized during each quarter, revenues for the generics and Matrix segments increased sequentially by $93 million or nearly 10% to $1.09 billion. The favorable effect of a weaker US dollar during the quarter accounted for about 2.5 points of this revenue growth.

Next looking at our operational performance on a GAAP basis, second quarter earnings from operations was $74 million compared to a loss of $372 million in the prior quarter. On an adjusted basis second quarter earnings from operations increased $39 million or 25% to $193 million compared to last quarters $154 million. This significant growth was fueled primarily by the successful launch of new products and our ability to maintain a greater than 50% market share for fentanyl through out the quarter.

The benefits we continue to accrue from integration related synergies, principally from the rationalization of R&D activities ,also contributed to the improved sequential performance and to the last headline financial metric, diluted EPS, driven by the combination of the strong revenue growth and solid operating performance that I’ve noted, adjusted diluted EPS increased from $0.09 to $0.16. The effect of the weaker US dollar on this improvement was insignificant. Further, had we included Dey in our adjusted results, it would have added approximately $0.04 to our second quarter diluted EPS.

Now, as I did last quarter, let me give you more detail on the performance trends of each of our business segments.

In the generics segment second quarter revenues were $993 million, a $0.09 increase over the prior quarter, 8% if you exclude the favorable impact of the bystolic revenues. Regionally quarter one to quarter two’s sequential trends in the generics segment were as follows: North America contributed $462 million or an increase of 18% over quarter one revenues of $392. EMEA revenues were $390 million for the current quarter compared to first quarter revenues of $389 and Asia Pacific generated revenues of $141 million or a 9% increase over first quarter revenues of $129. The 18% improvement in North America revenues was driven by new product launches as well as higher sales of fentanyl. Fentanyl sales represented approximately 7% of the total generic segment revenues in the quarter.

In EMEA, as Heather discussed earlier, the impact of anticipated price reductions I certain countries across the region were essentially offset by strong product volumes and favorable currency fluctuations and in Asia Pacific the government mandated changes implemented in Japan to increase generic utilization I that market as well as the reversal of the seasonal slow down and partial recovery of the de-stocking we experienced in Australia in quarter one led to the 9% sequential increase in revenues.

We were also pleased with the second quarter performance of Matrix. Third party revenues increased 19% to $105 million from $88 million in the prior quarter due to growth in the anti retroviral franchise with higher sales in both finished dosage form and API products. Specialty also had a very good quarter as third party revenues increased $29 million to $106 million driven principally by seasonal demand and market share gain for the EpiPen product.

To complete my review of the income statement I would like to quickly touch on our gross margin trend this quarter. Excluding purchase accounting related amortization the bystolic revenues an $9 million of the integration and other nonrecurring expenses that are included in the cost of goods, second quarter gross profit was $525 million for a gross margin of 44% compared to gross profit of $471 million, also a gross margin of 44% in the first quarter. The positive impact of favorable product mix with a greater proportion of North America’s sales related to new products and fentanyl offset the impact of price declines in EMEA.

Last quarter I provided the break out of the integration and other non-recurring expenses by income statement line item. For the second quarter in addition to the $9 million included in cost of sales that I just mentioned, $26 million of these expenses are in SG&A and $1 million are included in R&D. Our operating expenses are essentially on track with our guidance as a percent of sales. We continue to closely monitor these areas and are confident we can leverage the scale of our platform and appropriately control cost growth in these areas.

Before concluding with guidance let me comment briefly on our current capital structure picture and our year-to-date cash flow performance: first our capital structure.

As of the end of the quarter we continued to carry $5.3 billion in total debt, essentially unchanged from the end of the first quarter as our required quarterly debt repayments were minimal. Interest expense for the quarter declined by $4 million compared to the prior quarter as short-term borrowing rates, which applied to our un-hedged floating rate debt, fell during that period. We are still forecasting a blended interest rate of approximately 6.5% for the full 2008 fiscal year and with respect to our cash flow performance we generated $162 million of operating cash flow during the first six months of the year as the positive impact of the cash proceeds received from the sale or our rights to buy stolick [ph] were partially offset by higher levels of working capital used to support our growth.

The primary drivers of the increased investment in working capital included higher inventory levels which were essentially in line with our forecasted production plans and higher accounts receivable balances which were driven by the combination of our revenue growth and the timing of customer payments.

We believe a substantial portion of these working capital investments are temporary, therefore we remain confident in our full year projection for operating cash flow to be approximately $110 to $150 million, excluding the bystolic proceeds.

Capital expenditures for the first six months of 2008 were $71 million. We now expect to invest between $200 and $225 million for the full year.

Finally, our income statement guidance: as noted in our release and reiterated by Rob we have both raised and narrowed our full year 2008 adjusted diluted EPS guidance range, which now stands at $0.47 to $0.53 compared to our previous guidance range of $0.40 to $0.50. The other elements of our 2008 full year guidance remain unchanged from our guidance issued in May. In order to provide you with some visibility into how we see the balance of the year unfolding, our expectation is for the fourth quarter to be stronger than the third due to the expected seasonal weakness in EMEA and the anticipated return of fentanyl competition in quarter three and the anticipated launch in North America of lebateracetum [ph] in quarter four.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ken Cacciatore with Cowen and Company.

Ken Cacciatore - Cowen and Company

I have a question on the guidance and I know Rob and Ed you guys both touched on this, but could you give us a feel for how the Duragesic competition is now starting to play out again with Sandoz and in your guidance are you assuming it comes back to pre removal levels or do you assume that you’re going to be able to hold onto some of your shares? So if you could give us some context around that.

Then Ed on SG&A, I’m trying to understand where to remove the $35.8 million of expenses that you indicate on the adjustment how much of that should come out of SG&A and get a sense going forward where that line item is going.

Heather Bresch

On fentanyl our current share is still holding at about 56% and that certainly fluctuates between the different strengths. We have not seen Sandoz return on the 12.5 or the 25 since the recall, Watson has come back a little bit on the 100 mg share, but overall we still see strong performance and as far as for the rest of the year, as I mentioned we did factor in supply coming back at the end of this quarter through the fourth quarter.

Edward Borkowski

On the SG&A front there was $26 million of sort of non-recurring integration related costs for an SG&A, $1 million in R&D. SG&A will increase on the balance of the year, I think, as we indicate before when we changed our guidance back in May, one of the things we said was that SG&A was going to increase. We expect that to rise during the balance of the year.

Ken Cacciatore - Cowen and Company

Okay and Robert you mentioned on Dey you don’t want to speak to much about the process, but can you just give us a sense of timing, is it still consistent to what you spoke about in the past, the end of this year?

Robert Coury

Yes, everything is going exactly according to plan. We just had a deadline here for the second rounds of bids and we’re in some pretty sensitive times right now, so I prefer just to leave it at that but the timing is exactly on to what we predicted.

Operator

Your next question comes from Randall Stanicky of Goldman Sachs.

Randall Stanicky - Goldman Sachs

Robert you made an announcement this morning about the oral contraceptives, can you just talk a little bit about how that is going to play out and is that all generic products or is this an opportunity to start getting a little more involved in the branded part of the world?

Robert Coury

Certainly this morning the meat on the bones was all generic oral contraceptives, but if you go back and do a background on family care, I can only tell you that they are a world class organization and they have a true female health care franchise in all areas, including injectable contraceptives, tubal ligation ring and they have IUDs, so I do believe that this is just a beginning with family care, but the deal announced this morning is all generic oral contraceptives and we do look forward to expanding that.

Randall Stanicky - Goldman Sachs

Then would you be bringing those onto the market? I assume there is a portfolio effect before you would come onto the market but are you going to file together or sort of as they come? How should we think about the filing strategy there?

Robert Coury

This is something that I’ve been working on for quite some time. This is really the last of the big ones that I, I have been dealing with this for some time. You should know that from a development point of view we have already incorporated this into our numbers and we do expect commercialization to come in on ten. I was asked many times, do you plan on coming with one or two products? We believe that the strength in the oral contraceptive market is to have a portfolio. That’s what we went after and that’s what you should expect from us, is a portfolio of products.

Randall Stanicky - Goldman Sachs

Heather, the $36 million in integration costs, as you think about your full year target that you talked about last quarter, I think it was $117 million and some increase in SG&A through out the rest of the year is that on track and then for the 2008 synergy opportunity is everything going as planned as you think about the distribution through out the year on that front?

Heather Bresch

First on your question about the expenses, especially as far as integration, it is on track and even, as Ed pointed out, when we came back I May laying out the higher SG&A as well as one time costs on the integration for the year I think we are going to be right in line with what we projected. I think as far as our synergy targets, as I said, we realized almost half of the $100 million and are on track to hit the $100 million for ’08 as well as all the activity around the product transfers that I spoke about, we are even a little ahead of schedule as far as the filings go that allow us to realize the synergies in 2010 on the manufacturing front.

So we’re hitting on all the targets.

Operator

Your next question comes from Gregory Gilbert with Merrill Lynch

Gregory Gilbert - Merrill Lynch

Heather are there any additional significant launches in your’08 guidance for US generics other than the one you called out?

Robert Coury

That’s the large one lebaterasetum [ph] yes.

Gregory Gilbert - Merrill Lynch

Then on Matrix can you talk a little bit more about the strength there and whether it’s sort of partially one time in nature i.e. should sales ramp down in the back part of the year relative to the Q2 level?

Heather Bresch

No actually we see it even ramping up in the second half of the year and continuing. The ARV franchise, as I mentioned, especially on the Finnish dosage form side that really just launched the end of ’07, we have been very successful in some of the recent tenders through Unitate, WHO and the PEPFAR program. We see that continued, we’re excited about the bill that was just signed into law by the president for PEPFAR, which went to $48 billion for this program, $15 billion of that specifically for treatment around HIV and AIDS so the API and the finished dosage were around ARV especially, we see remaining strong, as well as their third party API contract.

Edward Borkowski

Let me just add to that. What you’re seeing today as far as this quarter being the first quarter, we believe, of many quarters to see an extremely positive momentum. When we first bought Matrix what we said for the first few quarters was that we needed to basically turn the corner, because we’ve basically changed their business model from a stand-alone company to now one as we call it, to support, as the hub of the world, our global commercial platform. We made all the necessary adjustments, we made all the necessary investments, we strategically put all the right infrastructure in place, and now we’re beginning to yield to those benefits.

One last asset I have to deal with there, because it’s the only overlapping asset we had since the Merck to Europe’s acquisition is the Docpharma asset. As you know Matrix, as a stand-alone company, prior to us coming in acquire Docpharma in order to have its own finished dosage form capabilities in Europe and beyond.

Well of course now with the Merck acquisition that was the only overlapping country, it’s the only asset I have yet to figure out how we’re going to deal with combined with what we’ve already got and then I believe strongly, you’re going to start to see some of the real benefits of what we think Matrix can yield.

Gregory Gilbert - Merrill Lynch

Then a big picture question for you Robert, do you personally believe there is renewed interest among big pharma companies to add generic businesses to their models beyond the DHE [ph] run back to deal we’ve seen already?

Robert Coury

Yes and again I don’t want to speak for other company’s but I have very strong views. I don’t think that the diachi rambaksi [ph] is a transaction I would look to as a model. I have difficulty with that particular combination but I do see others that make quite a bit of sense and so that’s kind of where I stand.

Operator

Your next question comes from Marc Goodman with Credit Suisse.

Marc Goodman - Credit Suisse

Barbara can you talk about the biogenerics strategy a little bit, how many companies you’ve spoken to, the quality of those companies and then second can you talk about the strategy with the Copaxone(R) product. Is the idea here to bring this product into the United States into Europe and what are your thoughts on the timing of when you can bring a product into the US and Europe.

Edward Borkowski

As far as the bio, Patrick Vink and I are working fairly closely together. He is a pretty senior executive; he’s not one that needs to be babysat. He is the CEO of our Switzerland operation and he has been traveling around the world and the companies that he is engaging with, some we have spoken to in the past, others he has brought to the table, but all are extremely high quality in this area. If you do a background check on Patrick himself and look at the work he’s done with Novartis in this particular arena, you’ll find, I mean I give Sandoz and Novartis a tremendous amount of credit for the pathway that they have established for all of us generic companies. They have put an extraordinary amount of resources towards this and they deserve the credit. But I do think that Patrick a senior executive coming from that team and for us to leverage his experience and certainly the quality.

Our strategy is to keep a, there is a three prong approach. You have the regulatory side, you’ve got the manufacturing side and you’ve got these complex molecules that need to be defined from a science perspective. We think Patrick, in the Europe area, will be stationed out of Europe for the regulatory markets biologics both in Europe and in the United States where you have the two regulatory markets.

We also see a tremendous amount of opportunity in unregulated markets, but if we established a stance right off the bat for the regulatory markets we believe that the unregulated markets are just going to be a natural follow through.

We believe that manufacturing has a strong opportunity to come from, again, the India based regions, we see a lot of opportunity down there. So the combination between a leveraging an existing, as I always said, players in the bio similar arena who are already in the market place and predominantly in the unregulated markets and for Patrick and his team, that will be established in Europe, to bring a regulatory overlay to that particular platform and help them turn the corner and lift their GNP standards for the regulatory markets, we believe it’s going to be our entrée into the bio similar market both here and abroad.

The second one on Copaxone, Copaxone is truly a worldwide opportunity. Take a look at Copaxone, look at its sales, especially Central Eastern Europe and I’m telling you there is more growth left to that product in Russia. I think Russia is a huge opportunity for continued growth in Copaxone, but it’s a worldwide program that we have, obviously you have different rules in the United Stated in terms of how we can enter. I see us practically entering other markets in the world even prior to the United States.

I do believe that we are well underway and far along in terms of approaching the time frame to file our ANDA, there is a lot of work being done on that. I really don’t see us coming to the markets to the US until approximately 2011. We think it’s going to be a huge growth catalyst for us in 2011 and beyond, as far as the United States is concerned.

Marc Goodman - Credit Suisse

So the filing is something that will happen by year-end you think?

Edward Borkowski

We hope so.

Operator

Your next question comes from Rick Dover [ph] with Lehman Brothers.

Rick Dover [ph] – Lehman Brothers

Ed maybe you addressed this question before. I’m just trying to get a better sense of how the breakouts on expenses for day flow through the P&L?

Edward Borkowski

We haven’t broken out the expenses but we did say I think they made about $19 million for the quarter, which was obviously better than expected relative to the efforts around EpiPen, the increased market share there, but to Robs point earlier on, we haven’t broken out a lot of that detail in terms of what day.

Robert Coury

The bottom line, we rebased Dey in such a way that the most positive thing that’s going on right now with Dey is after we re-base them they basically are hitting and even exceeding the new projection targets and I think that’s what’s really giving it the lift.

Rick Dover [ph] – Lehman Brothers

Should we assume that Dey is still definitely for sale or is it possible that with the improved profitability that the sale of Dey is maybe off the table as an option?

Edward Borkowski

I think what you should assume is exactly what we’ve said. I mean obviously we are deep in a process of looking at divesture. And what I have said all along is obviously we would take the proceeds from the divesture and we would repay debt, so you can do your math: if the number that we expect to get for Dey, because as I said I am not going to allow anyone simply to steal the asset from us; we know the asset well, especially now.

The asset after rebasing is a positive contributor. If you take a look at the interest reduction since we told you already we’re going to take cash and repay debt and you take a look at what we expect and you do the multiplier, then certainly I would fully expect that the cash that we expect to get for Dey is going to be better for our shareholders in terms of going forward than running the operations and adding the earnings that we’re now seeing through Dey in our earnings in our operations going forth.

That, at the end of the day, is what you should expect of me, it is what I’ve been consistent about and it’s exactly where we are.

Rick Dover [ph] – Lehman Brothers

Just one last one on the $100 million in synergies and you were having, then halfway through that. Is the breakout still going to be as you outlined in May that roughly $80 million of the $100 million is looking like it’s going to come from R&D?

Heather Bresch

Yes, what we wrote out in May as far as the break out is still exactly what we’re tracking to and as we have said, the R&D being the predominant of this year, because of no regulatory hurdles to achieve, the R&D synergy.

Operator

Your next question comes from Ronnie Goll [ph] with Bernstein.

Ronnie Goll [ph] – Bernstein

Just looking at the SG&A trend I think you’ve gotten it early to a little bit more than a billion of SG&A in ’09, are we still tracking after you kind of had a chance to run the business little bit, to roughly the same number?

Second around the biogeneric area, as you are beginning to flush out your plans, what kind of investment will that require over the next three years to actually develop the business in that area? Just kind of like a ballpark figure of how we should think about this cost of participating in that business?

Robert Coury

On the SG&A if you look at what we put out in May for ’09, I think that range that you’re in, say $900 to $1 billion is probably approximately right I terms of SG&A I think for that. We are certainly working to improve that, but you are in the range of what we put out there.

Edward Borkowski

On the biogenerics, I have stated and I can’t state it enough, I am extremely EPS sensitive. As I mentioned in my opening remarks, the integration risk is substantially behind us. This is really an execution play from this point going forward and it is our ability to deliver the earnings potential that this platform has and certainly at these levels it’s not that difficult to add to earnings growth from where we are now.

Our job is to excrete the maximum amount of an earnings that this new platform has the potential to derive and that’s basically what you guys are looking for us to do. So, in the biogenerics side, because it is a very costly venture you can bet that because of the remarks I just made that I am extremely sensitive of not eating into our earnings per share as a result of this strategy.

I already have ideas and strategies to ensure that I minimize the impact of the promises that we made in terms of the earnings per share and already executing on those strategies by some of the steps that we’re taking. This is not a short-term play. I don’t see the regulatory markets opening up over the next three to four years, so therefore how I am posturing our biogeneric bio similar play, I fortunately have that time to be careful how we grow that particular segment of our business and that’s what you can expect from me.

Ronnie Goll [ph] – Bernstein

It sounds like you’ve done some thinking about what would work and what wouldn’t. How would you look at the profitability or the potential kind of like the early part of the bacterial based products versus some of the later antibody based products that people have been talking about in the Phillips [ph] genetics so we are looking at of for us being roughly profitable or the early ones going to be less and therefore you choose not to participate?

Robert Coury

I would prefer not to get into our particular strategy. I can only tell you that we are very sensitive about what particular products that we’re going to go after. We believe that there are some products that it just doesn’t make sense getting into the game at this juncture. It’s like chasing your tail and with the number of competitors that we already see in the marketplace worldwide and the number that we anticipate to continue to come into the marketplace on some of these products, that’s probably not what you should expect us to focus our attention on.

We will be focusing our intention of what we see the future to be and then I’ll leave it at that.

Operator

Your next question comes from Caris & Company’s David Moskowitz.

David Moskowitz - Caris & Company

It appears that we are benchmarking EPS without the Dey business, yet you guys continue to report at a top line with Dey, so I guess the first question is was the top line guidance that you’ve given for this year $4.3 to $4.6 billion include Dey and then can you also extrapolate that out into the out years?

Edward Borkowski

The revenues, the guidance that we put out did exclude Dey. I think I gave the with and with out at least on the revenue increase, with and without Dey being 12% and 10%. The guidance excluded Dey.

David Moskowitz - Caris & Company

The felodipine the sular [ph] generic that you just got approval for, can you talk about when and if you expect to have the 10 mg strength and number two can you talk about some particular strategies with regard to trying to penetrate that market given that Syel [ph] has done a pretty good job in terms of converting most of that franchise over to it’s new Sular [ph] version.

Heather Bresch

We do have the 10 mg in development, so that’s all. We don’t typically put out pipeline or when we expect to be at market, but it is in development. As far as the new Sular strength it is what right now about 60/40 of them converting to the new strength. We felt good about certainly being the only generic on the market being able to work with managed care and pharmacy to continue, because the inventory is still out there on the old strength.

So, like I said, of total scripts a out 40% is still on the milligrams that we got approved and we’ll just have to see how the market pans out but we’re confident that we’ll be able to not only hold onto that but certainly also hold some of the older prescriptions.

David Moskowitz - Caris & Company

So you think that should be a particularly strong product in the model that I’m running here?

Heather Bresch

Relatively speaking it’s not a very large product, so I wouldn’t look at the driver [interposing}.

Edward Borkowski

We are comfortable with the projections that we have for that particular molecule.

David Moskowitz - Caris & Company

I have one last question is on the erosion of generics in the US on a year-over-year basis x the mark business?

Robert Coury

When you look at it you obviously add amlodipine in the prior numbers so excluding that I would say we are essentially on track with what we projected, it is probably in the mid single digits, about 5, 6%.

Operator

Your next question comes from David Buck with Buckingham Research.

David Buck - Buckingham Research

On the announcement today, Robert, can you give some sense of the timing for x US commercialization of the oral contraceptives and a rough profit split that you have, are you keeping 30%, 50%, 60% of the economics?

For Heather, can you give an update on just the remaining site transfers, where you are in that process in getting towards the $300 million, how many to be done this year and where we are on the process?

For either Robert or Ed, just an annualized dollar number for the Central Eastern Europe countries.

Heather Bresch

I’ll answer your question on the product transfers. We are on track. We have said that we anticipated to do about 70 this year, that would represent about 163 strength and we even see perhaps exceeding that a little bit, maybe closer to 75. All of that needed to be completed by first quarter of ’09 for us to realize our 20/10 synergies so we are well within our goal of achieving that.

Edward Borkowski

For Central Eastern Europe it is relatively a small region right now. That’s why we are projecting substantial growth in that particular area. We don’t break out exactly what they are, but it’ relatively small.

As far as the profits, we’re not disclosing any financial terms with our deal, but as far as the rest of the markets outside the US, I think very soon after the US, just because I know the regulatory filings that we’re going to have to go through in some of these other markets, EMEA and what have you and we are well underway of submitting our ANDAs here.

I think that if not 2010 I would say that 2011 would be fair into the rest of the other markets.

David Buck - Buckingham Research

The seasonality in the EMA regions, can you give us some better sense of what you would expect for the third quarter?

Edward Borkowski

The month of August I ‘m not sure anybody works in Europe, with all due respect. It is just at time that everyone goes on vacation.

David Buck - Buckingham Research

Understood, but are you expecting that to lead to the 10% sequential drop, the 5% is there any range?

Edward Borkowski

I’m not going to say in percentages but we certainly have anticipated that we have seen it in historical patterns. It is just something in that business, in that particular region, because again people do shut down. Factories shut down, people do shut down and so you try to build your inventory a little bit for that time frame, but yes we do expect a dip in that quarter for that reason.

Just like in Australia, over there you get that seasonality in January. We have actually told you that we have experienced that. You get that in January, that is kind of their weak time because it is their summer and then in Europe it is in August.

David Buck - Buckingham Research

So the trend last year is that sort of a guide to look at?

Edward Borkowski

Yes.

Operator

Your next question comes from Ricky Goldwasser of UBS.

[Indiscernible] of UBS

Hi this is [indiscernible] filling in for Ricky. I have a question on the AOK tender business in Germany; they were disclosed that together with Pleba [ph] they want about 50% of the previous tender. Can you talk about what percentage was captured by Merck Generics and if you would on when you expect the next tender to resume and what percentage you hope to capture.

Robert Coury

That’s a very, very, very competitive environment and I wasn’t sure what company other than Pleba [ph] that you mentioned. Can you mention that again?

[Indiscernible] of UBS

Sure, they were on their last—.

Robert Coury

Cheva [ph], Cheva [ph] okay. Look ,we have certainly in this last tender gotten I would say more than our fair share, that’s why we’ve seen growth in our position in Germany and I believe we have even mentioned that. I see the next tender coming up I think in the next four or five months if I’m not mistaken, there is another tender coming up and it’s an extremely competitive environment but as you know we are very well positioned to, you know if you take a look at our experiences here in the United States dealing with the, and I’ve said this all along, probably one of the most highly competitive markets and you bring that experience coupled with our scale now that we’ve created, we believe that we are best positioned to continue to get our disproportionate share in some of these tenders as the markets over there move much more towards this type of activity.

[Indiscernible] of UBS

So it is fair to assume that it is in your’09 guidance?

Edward Borkowski

We have given our ’09 guidance, but we certainly have anticipated this type of activity.

Operator

Your last question comes from Michael Tong - Wachovia Capital Markets, Llc

Michael Tong - Wachovia Capital Markets, Llc

Rob not withstanding your previous comments about the Dey operations; it looks to me like the operating margin for Dey is about your corporate margin right now. Does it make sense to sell it or why not try to grow that business? And then secondly do you believe that market share is an important competitive advantage in the US as evidenced by Teva taking another step forward by the acquisition of Barr?

Edward Borkowski

Teva’s acquisition of Barr is I think a win, win, win, win, win. I congratulate Schlomo [ph] I think he’s done an excellent job in executing on that. I think it’s good for Teva. I want to congratulate Bruce Donning and I’m going to miss Bruce Donning, I hope he will still in some way contribute to the industry; he has done a phenomenal job and contributed a lot. I think it was a good deal for him. I also think it is an extremely good deal for the industry.

We have talked about additional consolidation, we have talked about capacity, I think it’s a great win even from a my own perspective and many fronts. Not only do you have another competitor and capacity off the table and lets just figure that Teva will get it’s disproportionate share, 70%, 80% of what Barr’s volume was. There is still 20% or 30% of that volume that needs to be spread around and if you take a look from an investment point of view, borrow is roughly at about a $% million market cap. That capital needs to be deployed else where and we think that we’re in an extremely good position as being one of the major players left right now, to be able to deploy that capital, so w think it’s a win, win, win, win all the way around.

In terms of market share, I again have stressed many time the Philo concept, being first into the market and last off the shelf. That last off the shelf is maintaining market share, but you cannot just be the last off the shelf and maintain the market share with out doing the second most important thing and I should say in parallel and that is driving your cost of goods down.

We are in the process right now of continuing to drive our cost of goods down to the lowest common denominator that we think is practically attainable while the market shifts, while the pricing pressures continue, in order to maintain our gross margin. Sometimes markets move faster than your ability to drive your cost of goods down and in other places we’re able to drive our cost of goods down faster than markets move against us, so it’s one big balancing act and certainly a lot more manageable given the global scale that we have, versus the volatility that we had to deal with in being just a US domestic market.

Michael Tong - Wachovia Capital Markets, Llc

Then your thought process on the Dey operating margin?

Edward Borkowski

I thought maybe my answer might have answered this, but I do think that what you’re saying is exactly what I see and I have always seen. But if I get the right price and the price is right and I look at there is a number of variables and I can repay debt, which we are very, very committed to de-lever, I have told you that many, many times, and I can reduce our interest expense and I think that from a shareholder value point of view, if I think that reducing that debt does a better job overall for our shareholders as we look forward, versus the earnings trajectory that I know see after we rebased a day, that’s at the end of the day, you are going to want me to make the right decision for maximization of shareholder value.

Right now, unbelievable, but Dey is accretive and truthfully I see it continuing to be accretive as we look out in terms of he projections. As I have said we have hit and even exceeded our quarterly projections and our new rebasing. This quarter looks exactly the same way, it looks strong and I am very, very encouraged.

In the bidding process I am making it very clear, I make it clear to them, I’m making it clear to you, the number needs to be right. If the number is not right you better believe that we are well positioned to run this and to add to our earnings growth as we look forward.

Robert Coury

I would like to let you know that Ed, Chris and I will be available to take additional questions off line as we go forward.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Mylan Inc Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts