Mylan Management Discusses Q3 2012 Results - Earnings Call Transcript

 |  About: Mylan Inc (MYL)
by: SA Transcripts


Welcome to Mylan's Third Quarter Earnings Conference Call and Webcast. Hosting the call today from Mylan is Ms. Kris King, Vice President, Global Investor Relations. Today's call is being recorded and will be available for replay beginning at 1 p.m., Eastern Time. The dial-in number is (800) 585-8367 or (404) 537-3406 for international callers, with pin number 36921750. [Operator Instructions] It is now my pleasure to turn the floor over to Kris King. You may begin.

Kris King

Thank you, Maria. Good morning, everyone. Welcome to Mylan's Third Quarter 2012 Earnings Call. Joining me for today's call are Mylan's Chief Executive Officer, Heather Bresch; President, Rajiv Malik; Chief Operating Officer, Hal Korman; and Executive Vice President and Chief Financial Officer, John Sheehan.

During today's call, including the Q&A, we will be making numerous forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements often may be identified by the use of words such as may, will, could, should, would, project, believe, anticipate, expect, plan, estimate, guidance, trends, forecasts, potential, intend, continue and variations of these words or comparable words.

Our forward-looking statements may today, including, among others, statements relating to anticipated business levels; trends in some European countries; planned launches of and anticipated exclusivity periods for new products; our ability to achieve forecasted full year results while absorbing the impact of negative pricing pressures; expectations for capital expenditures; expectations for R&D, SG&A and other spending; our guidance range, future earnings, planned activities, anticipated growth and other expectations and targets for future periods, including our expectations regarding the fourth quarter and for 2012 overall. 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 factors set forth under Forward-looking Statements in our recent earnings press release dated October 25, 2012, as well as the risk factors set forth in our report on Form 10-Q for the period ended June 30, 2012, and our other SEC filings. You can access our Form 10-Q and other SEC filings, including our earnings press release, which we filed on Form 8-K, through the SEC website at, and we strongly encourage you to do so.

In addition, during this call, we will be referring to certain actual and projected financial metrics of Mylan on an adjusted basis, which are non-GAAP financial measures. It should be noted that non-GAAP measures, such as adjusted revenue, adjusted gross margin and adjusted diluted EPS, should be used only as a supplement to, not as a substitute for, or as a superior measure to measures of financial performance prepared in accordance with Generally Accepted Accounting Principles or GAAP.

Please refer to today's earnings press release, which is available on our website as well as on the SEC website, as it contains detailed reconciliations of the non-GAAP financial measures we use to our third quarter results prepared in accordance with GAAP.

Before I turn the call over to Heather, let me also remind you that the material in the call, with the exception of the participant questions, is the property of Mylan and cannot be recorded or rebroadcast without Mylan's expressed written permission.

With that, I'll now turn the call over to Heather.

Heather Bresch

Thank you, Kris, and good morning, everyone, and thank you for joining us today. I'm pleased to announce that Mylan has once again delivered an outstanding quarterly performance marked by double-digit growth on both the top and bottom lines.

Our third quarter constant currency revenues rose 20% year-over-year to $1.8 billion, and our adjusted diluted earnings per share grew 51% to $0.83. I'd like to note that we did more this quarter than we did in all of 2008 with essentially the same assets. This only further highlights the power of our organic growth capabilities. Of course, these milestones could only have been achieved through the hard work, dedication and commitment of all of our employees. On behalf of the Board of Directors and our entire management team, I would like to thank all of them.

Now with 3 very successful quarters behind us this year, we are raising our 2012 adjusted EPS guidance range to $2.50 to $2.60 per share. We also are reaffirming our 2013 target of $2.75 per share and our longer-term target of at least $6 per share in 2018. We expect to provide detailed guidance for 2013 in February when we release our fourth quarter and year-end results. We will discuss our longer-term outlook in July during our Investor Day event, which we will host in New York.

Our ability to deliver consistently strong results, take swift advantage of opportunities and become ever more efficient, all while mitigating risk and absorbing economic headwinds and price cuts, give Mylan a unique profile in this industry. With that said, our expectation of continued growth will come from a combination of things: first, from the continued organic growth of our very strong and powerful existing platform; second, from executing against the strategic growth drivers we outlined during our Investor Day; and third, and importantly, from our ability to continue generating significant free cash flows, which allowed us to accelerate our deleveraging and get to our current 2.6:1 debt-to-EBITDA, well below our target. Therefore, we are actively looking at a number of ways to use our increasing financial flexibility to help us accelerate our longer-term targets and enhance shareholder value.

Against this backdrop, I'd like to walk you now through Mylan's outstanding third quarter performance, which was characterized by strong double-digit revenue growth in our Specialty, North America and Asia Pacific businesses and a return to growth in Europe. In addition, our gross margin increased nearly 400 basis points year-over-year to 52%.

Starting with North America Generics business, we reported third-party net revenues of $831 million, a year-over-year increase of 19% at constant currency. Driving the increase were new product launches during the quarter, which contributed to $258 million and included Valsartan HCTZ in September with 180 days of exclusivity, Modafinil in August and pioglitazone and pioglitazone Metformin also in August, and both with 180 days of exclusivity. The launches offset lower pricing and volume on existing products.

As of the end of the third quarter, we had introduced 47 new products this year in the U.S., including 17 that were first-to-file or limited competition. In Canada, as of the end of the third quarter, we had launched a record 22 new products, revenue from which contributed to favorable year-over-year sales growth in that market.

In addition, revenues from our Institutional business grew by nearly 25% on a constant currency basis during the quarter with new products and higher volumes responsible for most of the growth.

In Europe, we reported third-party net revenues of $326 million, a year-over-year increase of 3% at constant currency. Many of our European markets realized increased sales, an encouraging sign that the region may finally be turning a corner. In addition, I'd note that as of the second quarter, the latest period for which data are available, generic utilization has risen year-over-year in the 19 European countries where we do business. As of the end of the third quarter, Mylan executed 200 country product launches in Europe during the year. These launches, along with favorable volumes on existing products, were the primary drivers of our improved performance during the third quarter. The higher product volumes included double-digit growth in France, Italy and Spain, which offset some lower pricing resulting from government mandates and competitive conditions.

France saw the most significant revenue increase in absolute terms as local currency sales rose 9% compared to last year's third quarter. In addition to new product launches, revenues benefited from the recently signed pharmaceutical convention, which contributed to a 7% point increase in substitution among repertoire-listed products from May to August. We also are seeing growth in the French generics market overall in volume and value, and we remain the market leader.

We observed similar trends in Italy where new products and higher volumes more than offset the impact of government-mandated price reductions. I'd also note that Italy's government has passed a law requiring general practitioners to prescribe INN products for patients starting new treatments for chronic and acute conditions. Italy is one of the fastest-growing generic markets in Europe, and we are the country's fastest-growing major player.

In Asia Pacific, we reported third-party net revenues of $339 million, a year-over-year constant currency increase of 21%. Our Mylan Lab subsidiary in India, along with Japan and New Zealand, all experienced higher third-party sales. India accounted for the majority of the increase due to significant sales growth of finished-dosage-form ARVs and significant growth in API.

In Australia, where we continue to maintain our leadership position, sales were lower operationally due mainly to steep price cuts made by the government during the year.

Sales in Japan rose as higher volumes, mainly in the distributor channel, and new product launches offset NIH pricing cuts that took effect during the first quarter. In addition, we continue to see increased generic utilization.

Also during the third quarter, we announced an exclusive long-term strategic collaboration with Pfizer to drive sustained growth for our combined Generics business in Japan. This unique partnership, unprecedented in our industry, leverages the core strength of both organizations and creates a powerful platform that we expect will be a leader in Japan in terms of scale, scope and quality.

Our Specialty segment, we reported third-party net revenues of $294 million, a year-over-year increase of 37%. Sales of EPIPEN in the U.S. accounted for most of the increase with a growth of more than 50% compared to the same period in 2011. Our third quarter is essentially the strongest for sales of this product, and our growth this quarter came off a very strong quarter last year.

I'd also note that we continue to see our efforts around market expansion pay off. Through the first 9 months of 2012, the percentage of at-risk individuals in the U.S. who have filled a prescription for EPIPEN auto-injector has risen from 7% to 10%. More importantly, the growth potential for this franchise remains significant.

As I move on now to some of our other drivers of growth through 2018, I'd like to reinforce that each driver in our broad basket of opportunities is weighted based on its unique risk-reward profile and projected long-term contribution. Our success and ability to achieve our targets doesn't depend on any one driver, and instead, our success is based on the global scale and leverage we have created and our ability to invest and execute on these opportunities.

With respect to our global Institutional business, we continue to grow and expand our relationships with key customers and invest in the future of this franchise. A few weeks ago, we agreed to purchase an oncology manufacturing facility in India from SMS Pharmaceuticals. The facility will produce active pharmaceuticals and finished dosage forms and begin commercial operation as soon as the FDA completes its inspection, which is expected to occur in the next few months. The transaction should close early in the first quarter of 2013.

With respect to geographic expansion, we launched commercial operations in India in August, entering the market with a comprehensive portfolio of ARV products for the treatment of HIV/AIDS. We also were selected as a leading supplier of ARV drugs to India's National AIDS Control Organization. I'd note that both of these developments also support our ARV growth driver. And in addition to our expansion into India, we are poised to establish a physical presence shortly in Thailand.

Portfolio diversity is another important growth driver, and we remain excited about the women's health care franchise we are establishing in partnership with Famy Care. During the third quarter, we launched 2 oral contraceptives in Germany. We also launched one this week in Canada. And in addition, we have 34 oral contraceptives pending approval with the FDA and expect commercialization to begin in next year's first quarter.

With respect to our biologics driver, we have continued to advance the development of our 5 lead products. We have held positive meetings with the authorities in the U.S. and Europe to discuss our biologics programs. In addition, we are pleased to report that we initiated our first global Phase III clinical trial on Herceptin in October.

Clearly, Mylan continues to operate and grow from a position of great strength, and we look forward to leveraging that strength further to deliver even more value to our shareholders. With that, I'll now turn the call over to John, and I will look forward to responding to your questions.

John D. Sheehan

Thank you, Heather, and good morning, everyone. This morning, I'm going to be referring to financial metrics that have been prepared on an adjusted basis. These are non-GAAP financial measures. I refer you back to Kris' comments at the beginning of today's call regarding our use of adjusted measures.

Let me start by saying by any measure, the third quarter of 2012 was an exceptional quarter for Mylan. I would like to highlight upfront some of our financial accomplishments.

Quarterly revenue of $1.8 billion, the highest amount of revenue in any quarter in our company's history, and revenue grew on a constant currency basis in every region of the world including Europe.

Adjusted diluted earnings per share of $0.83, more than we earned in all of 2008 and were achieved while continuing to invest in new product development and sales and marketing initiatives.

Adjusted operating cash flow of $469 million, the most ever for our company in one quarter, and free cash flow of $424 million, which allowed us to repay borrowings during the quarter of $459 million.

And to the end of the quarter -- and to end the quarter with a gross leverage ratio of 2.7:1, or 2.6:1 when you consider an additional $100 million of borrowings, which we repaid in early October.

On the heels of this strong quarter, we are once again increasing our range of EPS guidance for the full year 2012. We're now projecting adjusted diluted EPS of between $2.50 and $2.60 per share, increased from our previous range of $2.45 to $2.55 per share. We are also revising upward our free cash flow expectations for 2012. We now expect adjusted operating cash flow to be approximately $1 billion in 2012, which is at the very upper end of our 2012 operating cash flow guidance range of $900 million to $1 billion.

Additionally, as a result of the timing and rationalization of some of our capital programs, our gross capital spending in 2012 is now anticipated to approximate $300 million. The net of these 2 amounts represents our current 2012 free cash flow expectation of approximately $700 million, or $100 million higher than the midpoint of our previously communicated expectations.

Our remaining guidance metrics for 2012 remain unchanged, and I'll walk through each of them in a few minutes. And our targets for 2013 and beyond remain unchanged.

In February, in conjunction with our fourth quarter call, we will provide detailed 2013 financial guidance, which reflects recent developments and our most up-to-date outlook.

So Mylan has never been better positioned as a company. Today, we possess an unmatched vertically integrated footprint, a broad and growing product portfolio with a robust pipeline of future new product launches and longer-term strategic growth drivers such as our respiratory and biologics platforms.

Additionally, though, Mylan possesses today the financial flexibility to take advantage of shareholder value accretion opportunities. With our current leverage ratio now meaningfully below our long-term target of 3:1 and our growing EBITDA, today we have over $4 billion of financial flexibility for earnings accretive transactions. That said, Mylan will never do a transaction merely for the sake of a transaction or only for financial reasons. Any transaction must also be the right transaction strategically. Further, we remain committed to our 3:1 long-term gross leverage target. And if we increase our leverage above this target, we would be committed to deleveraging within an 18-month time frame.

With that introduction, let me now get into the details and walk you through our financial results for the third quarter and first 9 months of 2012. I will also provide an update on our capital structure and liquidity position.

Starting at the top of our income statement, total adjusted revenues for the quarter were approximately $1.8 billion, an increase of 14% over last year's third quarter revenues of approximately $1.6 billion. Year-over-year revenue growth on a constant currency basis was approximately 19%. The 5% unfavorable effect of foreign currency translation primarily reflects a stronger U.S. dollar in comparison to each of the other functional currencies of our major operations mainly in Europe and India.

Our top line growth was driven by higher volumes on a consolidated basis, including significant amounts from our 2012 new product launches as well as favorable sales volumes in Europe and Asia Pacific, which served to more than offset the unfavorable impact of lower pricing throughout the world. In fact, driven by higher volumes and new product introductions, each of the countries in Europe in which we have significant operations, with the exception of Germany, turned in favorable year-over-year constant currency sales growth.

For the first 9 months of 2012, total adjusted revenues were approximately $5.1 billion, an increase of 10% over revenues from the first 9 months of 2011, or 14% on a constant currency basis. As a reminder, our guidance range for total revenues for the full year 2012 is between $6.8 billion and $7.2 billion. Recognizing current exchange rates and using them to forecast the remainder of the year, we expect to be near the low end of this guidance range as a result of the unfavorable impact of changes in foreign exchange rates. On a constant currency basis, however, we are projecting to be closer to the midpoint of the range.

Looking at our operating profitability measures. Adjusted gross margin for the 2012 third quarter at 52% was above our guidance range of 48% to 50% and represented an increase over the same prior year period of nearly 400 basis points. This increase was driven by new product launches and favorable volume and pricing on our EPIPEN auto-injector, partially offset by lower margin on existing products. The current quarter also saw margin improvement from our Indian subsidiary, where sales and gross profit benefited from the effects of a stronger dollar as compared to the rupee as a significant portion of its sales are denominated in U.S. dollars.

For the 9 months ended September 30, 2012, adjusted gross margins were 50% as compared to 48% in the prior year. We currently expect to be at the upper end of our gross margin guidance range for the full year.

Adjusted operating income was $513 million for the third quarter of 2012, a 32% increase from Q3 2011 and up 29% from the second quarter of 2012. The year-over-year increases, which is primarily the result of the favorable gross profit, was realized in spite of increased levels of investment in both R&D and SG&A.

R&D expense for the quarter on an adjusted basis was $104 million, or approximately 5.8% of total revenues, and up approximately 51% from the prior year. This increase was mainly a result of ongoing spending with respect to our respiratory and biologics program, including clinical studies.

At the same time, SG&A, also on an adjusted basis, was $324 million for the quarter, or approximately 18% of total revenues, and up approximately 5% over the prior year. The increase in SG&A in the current quarter is due in large part to increased selling and marketing in our Specialty franchise. Also contributing to the year-over-year increase were higher payroll and related costs as we continue to build out our infrastructure platform in certain targeted areas.

For the 9-month period, adjusted R&D expense was $277 million, up 28% over the prior year. As a percentage of revenues, R&D expense to date for 2012 is 5.5%. Our guidance range for R&D expense for the full year is between 5.5% and 6.5% of total revenues, and we continue to believe that the full year spend will be at or slightly below the midpoint of our guidance range.

SG&A expense on an adjusted basis for the 9 months ended September 30, 2012, was $964 million, an increase of nearly 10% and within our full year guidance range of 18% to 20% of total revenues.

Adjusted EBITDA was $567 million and $1.4 billion for the 3- and 9-month periods ended September 30, 2012, respectively. We expect to be near the middle to upper end of our guidance range of $1.75 -- of $1.75 billion to $1.95 billion for the full year.

Moving on to our consolidated, nonoperating financial metrics. Adjusted interest expense for the third quarter of 2012 was $61 million. We continue to benefit from low short-term interest rates. As of September 30, 2012, the average rate on all of our outstanding borrowings was approximately 5%. We continue to use interest rate swaps in order to target a long-term 70-30 fixed-floating debt portfolio, which we believe is an optimal ratio.

Adjusted interest expense for the 9-month period was $183 million and is forecasted to be at the low end of the guidance range of $245 million to $265 million for the full year.

Our adjusted effective tax rate in the current quarter was 26% compared to 27% a year ago. Our full year 2012 tax rate range is between 26% and 27%, and we continue to believe that we will be at the lower end of this range for the calendar year 2012.

Third quarter adjusted net income was $341 million, or $0.83 a share, a 51% increase from our Q3 2011 adjusted diluted EPS of $0.55 per share. For the 9 months, adjusted net income was $820 million, or $1.94 per share, a 28% increase over the same prior year period.

As I mentioned previously, our guidance range for adjusted diluted EPS is now $2.50 to $2.60 per share. Our estimate of diluted shares for the full year is approximately 420 million.

Turning to our cash flow metrics. Cash flow from operations on an adjusted basis, which takes into account the special items which are outlined in our press release, was approximately $818 million for the year-to-date period and a very strong $469 million for the quarter. Our GAAP cash flow from operations for the current quarter and year-to-date period was a very strong cash inflow of $460 million and $652 million, respectively, and left us with unrestricted cash and marketable securities totaling $366 million. As noted earlier, we are forecasting our full year 2012 adjusted operating cash flow to be approximately $1 billion, the high end of our guidance range.

We have been very focused throughout 2012 on operating working capital. On a constant -- on constant currency net sales growth of 19% in the third quarter and 14% through the first 9 months of 2012, we have been able to limit the growth in our operating working capital to approximately 9%, exclusive of FX impacts, as we continue to bring operational efficiencies to our global platform.

Third quarter capital spending was $61 million, bringing the total for the year-to-date period to nearly $160 million. And as a result of the timing of planned expenditures, we expect full year capital expenditures to approximate $300 million.

As I mentioned before, these updated estimates yield a current free cash flow estimate of $700 million for the year, which is $100 million stronger than our previously communicated expectation as we continue to generate an increasing amount of cash flow from our global platform.

To summarize, our third quarter exceeded even our high expectations and, as anticipated, positions us for a very strong finish to 2012. Our strong track record for organic growth, coupled with the long-term growth drivers which Heather discussed, and our significant financial flexibility all translate into what should be an exciting 2013 and beyond for Mylan.

That concludes my remarks. I'll turn the call over to the operator for Q&A. Maria?

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Marc Goodman of UBS.

Marc Goodman - UBS Investment Bank, Research Division

Yes, hi, a couple of questions. First, on the U.S. business, which obviously had a fantastic quarter, there were just a lot of launches. And given Diovan and Actos, I actually would have thought revenues would have been even a little higher. So maybe you can just comment on some of the launches there and just the absolute amount of the way we should be thinking about that. Second, Europe, obviously great news there. Can we talk about profitability and how that has changed throughout the year and what you're doing there to increase profitability? And then third, can you just talk about the Institutional business a little bit more? How many new products should we be expecting to launch out of that? And how big a business are you looking to build there?

Heather Bresch

Sure. So Marc, I'll start with the U.S. So I guess I'd like to first start off by saying against our estimates, our U.S. business performed right in line with where we thought it would be. So while we absolutely had a significant amount of launches that we forecasted and projected at the beginning of the year, that '12 would be a great year for our U.S. Generics business. I think that if you look at the timing of the launches throughout the quarters, and some of that pull-through even from launches we had earlier in the year, so all I can tell you is that absolutely performed in line with where we thought it would. We think it still is showing strength in the base business as well as our continued launches that we have for the remainder of the year. So from our perspective, U.S. business, hitting on all cylinders. Europe profitability, I think as we have talked about in the past that we constantly, through this entire macroeconomic situation throughout Europe, have balanced our top and bottom line growth. You've heard me quarter after quarter coming and saying we weren't going to chase the bottom, that there's been irrational behavior and that we would continue to hold steady and control what we can control. So in this period of time, we've done just that. We've continued to increase the profitability around our cost of goods by continuing to vertically integrate and be 100% responsible for our global supply chain. We've continued to make sure that we're structured in the right way with some of the evolving businesses and as they are continuing to change in the different countries. And I think most importantly, and why I wanted to point out in my script, that in all the countries we're doing business, we see an increase in generic conversion. And I think that should be the brightest spot of all because what it shows is that governments very much are beginning to recognize the long-term sustainability that generic utilization brings versus a onetime price cut. So we've seen additional initiatives in Italy, we've seen additional initiatives in France that are bringing those back up. So from my perspective, we certainly have always maintained the need to balance profitable and revenues. I think that our results this quarter are paying off from how we're operating our business in Europe. And lastly, on the Institutional side, in February, we showed our Institutional business being an important strategic growth driver for us. We are continuing to invest in that business. We have numerous launches. We're continuing to very much accelerate our own internal R&D pipeline around this businesses globally. So all I can say is that we certainly are continuing to invest and continue to see this as a very important growth driver for us in the future.


Our next question comes from Jami Rubin of Goldman Sachs.

Jami Rubin - Goldman Sachs Group Inc., Research Division

Heather, both you and John, I think, were the most clear about the company's increased appetite for pursuing an accretive deal given the increased financial flexibility of the balance sheet. I'm wondering if you can just -- am I reading that right? In previous conference calls, we've talked about options on the table to enhance shareholder value: share buybacks, bringing down debt, strategic deals. But what I'm hearing from you today is I think a more outspoken commitment or desire to pursue something strategic. And then secondly, I'm very intrigued with the partnership that you signed with Pfizer in Japan, and I'm wondering if you could put some numbers around that, what you see in terms of revenue potential over the next 5 years and what that means to your bottom line? And is this the type of partnership that you see could be replicated in other countries, such as emerging markets where, again, Pfizer doesn't have the AND capabilities that you have and you don't have the feet on the ground that Pfizer has?

Heather Bresch

Okay, sure. So look, I think to your first question, hopefully you see that as our continued commitment to be transparent. When I -- what I spoke of in my opening remarks was a combination, if you'll remember. I said of us continuing to execute on our existing platform, continuing to execute against the growth drivers we pointed out. And then obviously, the last point was to looking at ways that we're going to use our increased financial flexibility. And I think, as you have seen, that has been a combination, and I think it will continue to be. There's a lot of ways to increase shareholder value, and I think what you can rely on is that we're looking at all of them. And we certainly are looking at any and all compelling acquisitions that would allow us to continue to deliver or accelerate the trajectory that we're already on. I mean, when you look at what we have put out there with our own assets at this time, a 15% CAGR in 2018 is an impressive growth target out there. And I think that as -- this financial flexibility just gives us all that much more ability to accelerate not only that growth but, like I said, in many different ways. As far as Japan goes, look, I think it's an unprecedented deal in our industry. I think it truly does take the core competencies of both of our organizations, and we believe that 1 plus 1 will equal 3-plus. It's about really leveraging the scale and scope and the quality of what we both bring to the table. So while we don't get into putting numbers out there around individual countries, I think you certainly can expect that we believe that this is accretive to our current stand-alone Generics business as well as accretive to their stand-alone Generics business, and that's why the rationale of this deal made all the sense in the world. And I very much believe that it could be a model in other countries where the troops on the ground are important, the brand is important, but having the breadth and the quality of a pipeline is equally as important. And that's where this makes all the sense in the world and very much could make sense in other countries as we move forward.


Our next question comes from the line Shibani Malhotra of RBC Capital Markets.

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

Just going back to Jami's question on potential acquisitions and ways to enhance shareholder value, you did mention that you aren't going to do anything just for the sake of doing a deal. Can you talk about the kind of things you are looking for? And just expand on what you meant by that? Are you finding valuations too high? Or is it -- are you just not finding what you're looking for at the moment? And then second, a question on fenofibrate. You got the capsules approved a couple of days ago. Can you just give us your expectations around the launch of that product, including whether or not you had sufficient sort of quantities for the market?

Heather Bresch

Okay, sure. Thank you, Shibani. As far as acquisitions go, I think as we've laid out, certainly we don't do any acquisition just to do an acquisition and have not had a gun to our head to do an acquisition. I think what you hear us saying is that we continue to now generate significant free cash flows and have increased flexibility and are looking at all compelling acquisitions. And that could be anything that to be complementary to our current platform. So whether you look at the Specialty side, geographies, dosage form, therapeutic categories -- I mean, we have a voluminous number of different ways to continue to accelerate this growth trajectory and we're looking at all of them, as well as in combination to share repurchasing programs. I mean, I think that the great news is when you look at the kind of cash we have on hand, we have a lot of different ways to get at least to that $6 in 2018 and continuing to show that kind of growth year-over-year that we've, I think, now, hopefully, have shown that track record of producing year-over-year. So like I said, you're right, we're not just looking at a transaction for transaction's sake, but we certainly are in a position to be looking at all the compelling ones. And as far as your product question, yes, it was a good launch for us. But as you know, we're well beyond any single product launches, especially one of that size. I can tell you we executed on it. And it's just one of many that we've had this year and will have over the next several. Okay, thank you.


[Operator Instructions] Our next question will come from the line of Ronny Gal of Sanford Bernstein.

Aaron Gal - Sanford C. Bernstein & Co., LLC., Research Division

John, question on the CapEx. In the past, you talked about some leverage in the CapEx as we go from 2012 to 2014. Looking at the guidance for next year versus this year, still 7% to 8% growth in earnings at a minimum. How should we think about the CapEx? Should we grow linearly? Or should we have a step-up, a further step-up in the -- sorry, not the CapEx, in the cash -- in the free cash flow generation?

John D. Sheehan

So Ronny, I think that this -- I think that what you saw happen or you saw the results in this quarter was the cash flow generation, the strength of this global platform to generate and throw off cash. And also, as you could see, we reduced our expectations for capital spending for the year from $350 million to $300 million, the combination of those 2 increasing the free cash flow by $100 million and allowing us to bring our leverage down to 2.6x after paying $100 million back in the first week of October. To be honest with you, I don't really want to give future expectations as to what 2013 or 2014 is going to be. That's not the purpose of the call today. But what I can tell you, and it's demonstrated by the working capital efficiency that we've had here in 2013, is that our global operating teams are intensely focused on generating cash and then for our ability to put that cash back to work in the business for the benefit of our shareholders. And I think that for today, I'll leave it there.

Heather Bresch

Okay, thank you.


Our next question comes of the line of David Risinger of Morgan Stanley.

David Risinger - Morgan Stanley, Research Division

John, I was hoping that you could just walk us through the financials associated with that partnership with Pfizer and just help us understand how that impacted the revenue in Asia Pacific in the quarter and how it will impact things going forward just so that we can tease out whether there was an incremental positive from that deal in the September quarter that is noticeable in the financials and whether that will continue or whether it's really not noticeable in the financials.

John D. Sheehan

You don't -- you won't have to tease it out because although we announced the formation of the partnership, David, the partnership will actually be become -- begin operating here around the end of this year, early next year so that there was no impact of the partnership in our third quarter results. What you see in our Asia Pacific results represents the organic growth of our operations in Asia Pacific and will most likely be that way for Q4 2012 also.


Our next question comes from Greg Gilbert of Merrill Lynch.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Heather, with the third quarter in a row of improving growth rates in Europe, are you ready to predict positive growth for that segment going forward? It sounds like your qualitative comments are quite bullish, too. And then, is there any doubt that your WELLBUTRIN XL generic product is fine in light of Teva Impax's issues? I think this is obviously important for Mylan and the broader public trust in generics and the trade, et cetera.

Heather Bresch

Sure. Thanks, Greg. So look, I think as far as Europe is concerned, we have seen continued improvement, and we don't really foresee that stopping. I mean, quite honestly, I think that when you compare everything, as I said, conversion rates increasing, our leadership position in our most important countries, I think, where we see -- obviously still see competitive pressures -- but see that volume offsetting that. Those are all the kind of things that certainly, we, from our measurements and what we're looking for, is important. And we start to see all 3 of those things hitting, and, like I said, we do foresee that continuing. So that's kind of is as far as I'm willing to go with my crystal ball. But I can tell you we're excited about the direction Europe is moving and see that continuing. As far as WELLBUTRIN, look, I think that it's very important to understand that this is a one-off issue and it really does not speak to the generic industry. I will say it speaks to the pharmaceutical industry overall. As you know, from time to time, as FDA continues to gather data and look at data, there are times where they've taken brand products off the market as well as changing guidelines and changing specs. So this is something that's constantly going on within the FDA in looking and working with companies. I think in this particular instance, it was certainly related to patient safety. FDA made a judgment call years ago around the 300 milligram. And when -- the data today that they're looking at has caused them to get to a different place. Certainly, we don't see this impacting our product and believe this was certainly in relation to just one in particular formulation. So I would tell you that our industry is alive and well, and I don't really see this having any impact on that whatsoever. Thank you.


Our next question comes from Elliot Wilbur of Needham & Company.

Elliot Wilbur - Needham & Company, LLC, Research Division

Question for you, Heather, around your pending application for generic version of Lidoderm. Endo management made some very pointed comments about their perceived or their perceptions around your ability to obtain approval for their product based on its nonaqueous nature and the possibility of some excipient and adhesion issues. I'm assuming that you don't agree with that, but maybe you can just sort of comment a little bit on sort of their observations. And then with Watson now having obtained approval, still some ambiguity around the issue of exclusivity. The FDA made it very clear in the approval letter that Watson did not obtain approval within 30 months but did not actually make a decision on exclusivity. You said previously that you still thought generic Lidoderm was a possibility in terms of your ability to launch in 2013, and I'm just wondering if you still believe that to be the case based on anything new that's happening at the FDA with regard to the application and then based on the Watson approval.

Heather Bresch

Sure. So I'll start with Endo's comments. I guess what I would say, not only do I not agree with them, I have to believe that their credibility should be extremely tarnished at this point. I mean, they said all the exact same things about Watson -- Watson was never going to be able to get their approval. They had all kinds of issues. And certainly, Endo was proven to be wrong. I think when you look at Endo trying to stress that based on their experience and expertise in this development, this is not their product. They have end-licensed it. So I think to talk about what kind of science is out there and who has the capability, I can assure you we are manufacturing and developing our own product, and I believe we do have the expertise and the track record with FDA to know and to be able to guide you guys, as we have been, about what we're capable of doing. So I -- that's what I would say about Endo's comments. And we absolutely continue to see this as a possible opportunity in the second half of the year. As you know, FDA historically doesn't make exclusivity decisions until they have to. And so we maintain our ability to get this product approved in 2013 and be able to manufacture the quantities needed. And like I said, we still absolutely believe we have the potential for this to be upside second half of '13. So thank you.


Our next question comes from Chris Schott of JPMorgan.

Christopher Schott - JP Morgan Chase & Co, Research Division

Just 2 quick ones here. The first was coming back to some of the earlier business development comments. I guess does the financial flexibility you're talking about here open up transactions that you might not have been able to pursue in the past, i.e. larger transactions? I was just trying to understand here if the scope of what you're looking at has changed or if this is just kind of coming back to some of the assets that you've considered before? The second question was on your Europe. It seems like we're finally seeing encouraging macro trends. Can you talk a little bit more about the competitive dynamics you're seeing in the market? I think Teva last quarter discussed a bit of a shift, focusing more on profitability versus share in Europe, and I'm just wondering if you're -- how you're seeing the overall competitive environment kind of shaking out.

Heather Bresch

So look, quickly on the acquisition, here's what I would say. I mean, Chris, obviously, we came out to a commitment with the Street over the last several years that we were going to be deleveraging and executing on the assets that we had. And I think that, that's what I think this quarter culminates in that activity, one showing what this platform can produce while at the same time accelerating our deleveraging capability. So certainly, what we're in a position now to do is definitely of size and scope. And as I said, I'll just revert back to saying a very compelling -- there's a lot of compelling opportunities out there, and we're looking at all of them. And just quickly on the environment in Europe. I guess what I would say is we've always stressed the profitability as well as market share, as well as revenue growth and balanced all of that. I can't speak to other companies perhaps being as balanced as in their commentary around Europe, but that's why I wanted to stress that I think that has definitely paid off for us not only to maintain leadership position but be able to execute and control what we can. And we see that now, especially for our business in Europe, turning that corner.


Our next question comes from the line of Gary Nachman of Susquehanna Financial Group.

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

Heather, on EPIPEN, anything you're doing differently to prepare for Sanofi's launch of Auvi-Q next month? And do you have a sense of what the pricing dynamics will look like with them in the market? And just what type of growth are you seeing in the market overall, if you could quantify that?

Heather Bresch

Sure. So first, I'd like to say that they -- that Sanofi has said they're not launching until 2013. But anyway, as far as it relates to -- look, I think when you have got a leadership position, like we do, at 98% of the market, our ability to build on that brand equity and make sure that we're continuing to stress the tried and true nature of EPIPEN, being around for over 20 years, delivering over 40 million scripts, and that's what -- that is our position in the marketplace. And as we've said before, another competitor coming to market in a sense then is just shared voice and increasing that awareness. I think that when you look at the -- what we have been doing to increase that awareness, as I said in my remarks, it's been paying off. We've now gone from where 7% of the people at-risk to now 10% of the people at-risk with an EPIPEN. So obviously, we still see tremendous growth and opportunity for this franchise and the disease state overall. So look, we're excited about EPIPEN, still have a lot that we're executing on and will be continuing to do so. Thank you.


Our next question comes from Michael Faerm of Credit Suisse.

Michael Faerm - Crédit Suisse AG, Research Division

Two quick questions, one on the respiratory pipeline. Can you just provide an update on the status of the COPD candidate, if and when we might see Phase II data? And then a general question on the North American Generics business. What are some of the key drivers that will propel growth next year as you move into a year with fewer launches than you've had this year?

Heather Bresch

Let me -- I'll quickly take the North America question. Look, I think that what we've continued to stress is that we're not about any 1 country, 1 product. It is about literally being able to optimize and leverage the -- our global scale and platform in every country we do business in, the United States not being any different. We have tremendous opportunities from our existing base business, the launches we did have this year, coupled with the launches we have next year. I mean over the last 5 years, we've not had the same number of launches every year, but we certainly have been able to show a trajectory and, like I said, we see that continuing. As for our respiratory business, Rajiv, do you want to...

Rajiv Malik

Yes. So regarding respiratory products, I think one is our COMBO, which is on the nebulization stage, which remains on track, and we will kick off our Phase III somewhere in the early next year, early 2013. And the second product, which is Advair, is also -- remains on track for '15, '16 global launches.


Our next question comes from Ken Cacciatore of Cowen and Company.

Ken Cacciatore - Cowen and Company, LLC, Research Division

Just wanted to go back to potential future acquisitions or strategic developments. Is it usually by asset that is available, either brand or generic? Or do you have a -- do you have something in mind and you focus on that? Or is it kind of what is available to you at that moment in time?

Heather Bresch

Ken, what I would say is as I -- hopefully, everyone has heard me now loud and clear on this call is that we certainly believe that there are many compelling opportunities out there and we're looking at all of them. And just believe that we've got a lot of ability to bring in a lot of different complementary assets to this business in this existing platform that we have. And I'd say that's what I have to say.

John D. Sheehan

And it may or may not be on the market.

Heather Bresch


John D. Sheehan


Heather Bresch

I mean, we're looking -- we're -- you should know we're not standing still and we're looking at everything. All right, Operator, thank you. Any more questions?


Our next question comes from David Buck of Buckingham Research.

David G. Buck - The Buckingham Research Group Incorporated

First one is on the Specialty business. Can you talk a little bit about what pricing was during the quarter? And then just on the settlement with Teva, can you talk about what your ability is to continue to pursue, if needed, the citizen [ph] petition route to make your case with the FDA on approval? And then just maybe for John, can you just talk about in terms of what you're looking at in terms of deals? Is there a commitment to not use any type of equity financing or convertible equity financing?

Heather Bresch

Okay. So quickly, listen. On EPI, we certainly had some pricing increases. We had 2 over the year. But, I mean, we certainly see, as I mentioned, volume increasing even more so than the price. As far as Teva and our settlement, we settled, just to be clear, on the IP litigation. We continue to believe they have significant hurdles to get an AB-rated product, and I can assure you we're continuing -- not only are we continuing to pursue that, but believe that there are, like I said, many hurdles and challenges for them to get an AB-rated product. John?

John D. Sheehan

And in terms of your question about M&A and currency that we would use in any transaction, I think it would be safe to assume that our focus is on use of cash for a transaction, as I pointed that out, in terms of the amount that we had available up to a ceiling of $4 billion or more. And so I think that use of a currency other than cash is not something we're currently focused on.


Our next question comes from Michael Tong of Wells Fargo Securities.

Michael Kallai Tong - Wells Fargo Securities, LLC, Research Division

Just one question, going back to business development. And as you look at how you evaluate different transactions, do you use any internal bar that -- or internal hurdles that you would compare a potential transaction like the type of accretion you would get from further deleveraging or share repurchases? Any color like that would be appreciated.

Heather Bresch

Well, Michael, I can assure you, we look at many, many, many parameters when looking at the sources and use of capital. And I can tell you that we have been doing that, and certainly, for any acquisitions, we'll be doing that going forward. Depending on what part of whether the platform, what kind of a transaction it is, what that contribution means, both near, medium and long term, I mean, all these things are taken into consideration as we compare them with other uses of capital. So I would say I would rest assured that we look at many, many different parameters and have many different things internally that we take into consideration.


Our final question comes from the line of Randall Stanicky of Canaccord Genuity.

Randall Stanicky - Canaccord Genuity, Research Division

I have a fairly straightforward one. It can be Heather or John. Can you just identify specifically some of the public U.S. generic opportunities in the next year? So obviously, Lidoderm is one of those. And then, Heather, as you look at your U.S. generic base, obviously you have an expansive pipeline. What technologies don't you currently have that you would have an interest in potentially acquiring or developing?

Heather Bresch

Thanks, Randall. As far as for detailed opportunities in 2013, I think, as we mentioned earlier, we'll be coming to you with that in February. I mean, I think, obviously, there are some very -- there's already a lot of public news out there around the opportunities that we have in 2013. But we certainly will be highlighting those more in February. And what was...

John D. Sheehan

The technology.

Heather Bresch

Oh, the -- here's what I would say. When you look at where our strengths lie -- solid oral dosage, extended release, patch technology -- I think we can continue to see an injectable space, that, that would be an area that we can continue to further increase therapeutic categories that we're in and so forth. Topicals, dermatologics, that's an area that we certainly could look and, obviously, where we've already investing in the respiratory. So I would think it's not even so much a matter of areas that we're not in at all but areas, again, that we can look to accelerate those positions and our positions within the U.S. marketplace. All right, well, thank you, everybody, for the call, and we look forward to talking to you in February.


Thank you. This does conclude today's teleconference. Please disconnect your lines at this time, and have a wonderful day.

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