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#Good day, ladies and gentlemen, and welcome to the Mylan First Quarter Earnings Call.
(Operator Instructions) As a reminder, this conference is being recorded.
I would like to introduce your host for today's conference, <UNK> <UNK>, Head of Global Investor Relations.
Ma'am, you may begin.
Thank you, Gareth.
Good morning, everyone.
Welcome to Mylan's First Quarter 2017 Earnings conference Call.
Joining me for today's call are Mylan's Chief Executive Officer, <UNK> <UNK>; President, <UNK> <UNK>; Chief Commercial Officer, Tony <UNK>; and Chief Financial Officer, Ken <UNK>.
During today's call, we will be making forward-looking statements on a number of matters, including our financial outlook and 2017 guidance.
These forward-looking statements are subject to risks and uncertainties that could cause future results or events to differ materially from today's projections.
Please refer to the earnings release we submitted to the SEC on Form 8-K earlier this morning, which is also posted on our website, for a fuller explanation of those risks and uncertainties and the limits applicable to the forward-looking statements.
In addition, we will be referring to certain actual and projected financial metrics of Mylan on an adjusted basis, which are non-GAAP financial measures.
We will refer to these measures as adjusted and present them in order to supplement your understanding and assessment of the financial performance.
Non-GAAP measures should not be considered a substitute for or superior to financial measures calculated in accordance with GAAP.
The most directly comparable GAAP measures as well as reconciliations of the non-GAAP measures to those GAAP measures are available in our first quarter earnings release, which I just mentioned and which can be found at our website at newsroom.
mylan.com.
Let me also remind you that the information discussed during this 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.
An archived copy of today's call will be available on our website and will remain available for a limited time.
With that, I'd like to turn the call over to <UNK>.
Thanks, <UNK>, and good morning, everyone.
Thank you for joining today's call.
Mylan's first quarter results mark the start of what we believe will be another great year of performance for our company.
On the top line, we generated total revenues of more than $2.7 billion, a year-over-year increase of 24%.
And on the bottom line, we delivered adjusted net earnings of $500 million or $0.93 per adjusted diluted share, a year-over-year increase of 22%.
Not only is this a strong performance as the quarter goes, it also once again demonstrates the resiliency of the global platform we've built and our ability to absorb both our industry's natural volatility as well as additional headwinds related to particular products and/or markets.
Over the past few years, our strategic acquisitions and ability to truly integrate Mylan have allowed us to transform ourselves into a highly differentiated and diversified organization, as evidenced by our geographical reach, our broad portfolio, our extensive pipeline and our ability to expand the world's access to high-quality products.
This organization enables our unique go-to-market approach in country, optimizing our brand, branded generic, generic and OTC products.
In fact, it's precisely this unique profile and approach of how ---+ to how we now run and drive our businesses that led us to change our reporting from product-focused segments to geography-focused segments.
For these reasons, we remain confident in our ability to meet our full year adjusted EPS guidance range of $5.15 to $5.55, which is not dependent on any one product.
Our strong first quarter results are set against the backdrop of a global debate regarding health care, and to a degree, unprecedented here in the U.<UNK> The current debate continues to focus both on how health care is delivered as well as its price.
And we're encouraged by the recent multiple actions of players across multiple industries to help reduce the burden to patients.
As a leading generics company, Mylan has a 55-year history of providing access and serving as part of the backbone of health care systems around the world to help supply affordable medicine, and we fully intend to keep doing our part to deliver health for a better world.
I'd like to take this opportunity on behalf of Mylan's board and our entire leadership team to thank all of our employees around the world for their outstanding teamwork and execution during the quarter and for their continued commitment to serving all of our stakeholders around the world.
In addition, we continue to build our bench strength, and I'd like to welcome Dan <UNK>lagher, who joined Mylan last month as our Chief Legal Officer.
His extensive experience in regulatory matters, financial markets and corporate legal affairs and governance makes him an excellent addition to our senior leadership team and further depth to our already strong legal organization.
He will prove invaluable as we maximize our many opportunities.
With that, I'll now turn the call over to <UNK>.
Thank you, <UNK>, and good morning, everyone.
As <UNK> noted, we have continued to see growth across all of our regions, with very strong double-digit growth in Europe and Rest of World and solid performance in North America.
We also continue to see growth from our global key brands around the world.
As in previous recent quarters, the pricing environment remains a topic of much discussion throughout our industry.
We are pleased that as a result of our diversity from a product, channel and geographic perspective, our expectations for the global pricing environment are unchanged, and we are still predicting mid-single-digit price erosion globally for the year.
This quarter, we actually saw price erosion in the low single digits on a global basis while price erosion in our U.<UNK> generics business was in the mid-single digits.
Looking ahead in the U.<UNK>, we have several meaningful first-to-market products that launched in 2016 that have come off their exclusivity periods, which will cause fluctuations and skew year-over-year comparisons in the coming quarters.
This being said, excluding these products from our future outlook, we expect that our U.<UNK>-based business will continue to maintain annualized erosion in the mid-single digits.
Let me reiterate again that we continue to believe we will see mid-single-digit price erosion for our global business for the remainder of the year, including all products.
With respect to EpiPen, the authorized generic continues to gain traction and now represents almost 40% of the epinephrine auto-injector market.
Additionally, we have seen market growth pick up to more than 10% year-over-year for the category.
The AG also continues to have the lowest wholesale acquisition cost of any epinephrine auto-injector on the market.
That said, competitive activity in this space continues to be robust, and our overall shares declined from last year.
You are aware of the worldwide recall of 20-plus lots of EpiPen by the manufacturer, Pfizer's Meridian Medical Technologies.
We quickly implemented a voucher program for patients to replace any impacted product and successfully been executing on this program.
We, in partnership with our customers, continue to communicate to impacted patients and replace their product as efficiently as possible while ensuring these patients have no additional out-of-pocket costs.
We also note that Meridian Medical Technologies is contractually responsible for the recall cost.
We continue to be very pleased with the contribution from the assets we have acquired, which have even further strengthened our broad portfolio offering for our customers.
For example, during the first quarter, we completed our acquisition of Cold-EEZE as we continue to expand our OTC business.
Cold-EEZE is now Mylan's largest U.<UNK> consumer health care brand, and we look forward to serving this loyal customer base and supporting this well-known brand.
With that, I will turn the call over to Ken.
Thanks, Tony, and good morning, everyone.
Let me add a little more detail on our financial results.
First quarter revenues grew to $2.7 billion, and that's an increase of 24% over the first quarter of last year.
This increase included growth in third-party net sales of 5% in our North America segment, 53% in our Europe segment and 34% in our Rest of World segment.
The key drivers to these increases were net sales from the acquisitions of Meda and the Renaissance Topicals Business, which totaled approximately $607 million in the quarter.
These increases were partially offset by an $86 million net decrease in the combination of sales, driven by the impact of new product launches and lower volume and pricing on existing products.
For the quarter, we continue to experience global generic price deflation in the low single digits.
As <UNK> mentioned, net sales from our North America segment reached $1.2 billion and grew by 5%, up approximately 20% excluding EpiPen Auto-Injector.
Net sales from acquisitions contributed approximately $182 million of the sales growth, and partially offsetting this increase was a net decrease in sales from the combination of new product launches and lower volume and pricing on existing products.
In addition, segment profitability increased 3%.
Net sales in our Europe segment increased by approximately $308 million or 53%.
The acquisition of Meda contributed approximately $338 million of the sales growth, and this increase was partially offset by a net decrease in sales from the combination of new product launches and lower volume and pricing on existing products as well as the unfavorable impact of foreign currency translation of approximately 4%.
Segment profitability in Europe increased approximately 88% year-over-year.
Net sales from our Rest of World segment increased by approximately $146 million or 34%.
This increase was driven largely by an acquisition of Meda, which totaled approximately $87 million.
In addition, higher volume from existing products, primarily in our antiretroviral franchise, plus an increase in new products more than offset ongoing pricing headwinds.
Net sales in this segment were favorably impacted by approximately 3% due to the impact of foreign currency translation.
Segment profitability in Rest of World increased approximately 159% in the quarter.
Adjusted gross margins for the first quarter of 2017 were 53%.
That's down less than 60 basis points from the prior year, primarily due to the impact from the launch of the EpiPen Auto-Injector authorized generic, as well as additional competition and partially offset by the contributions from prior year acquisitions.
Moving on to our operating expenses.
On an adjusted basis, R&D declined to $151 million, equating to approximately 6% of revenues, which was in line with our expectations.
SG&A expense, also on an adjusted basis, increased to $592 million, primarily as the result of selling and marketing costs from the acquired businesses.
However, SG&A expense as a percentage of revenues declined by 1.3 percentage points to approximately 22% of sales as increased revenues from the acquired businesses and benefits of Mylan integration were realized in the quarter.
Our adjusted tax rate was 17.5% for the first quarter of 2017, which was also in line with our expectations.
Adjusted net earnings increased by $114 million to $500 million in the quarter, and adjusted diluted EPS was $0.93 compared to $0.76 in the prior year quarter.
Turning to cash flow and liquidity.
Adjusted cash provided by operating activities was strong at $536 million for the first 3 months of the year compared to $202 million for the prior year.
The increase in the current quarter was mostly driven by favorable timing of working capital, including receivables, due to the December launch of the EpiPen authorized generic.
We have no amounts outstanding on our accounts receivables securitization or revolving credit facility.
At the end of Q1 2017, our debt to adjusted EBITDA leverage ratio declined to approximately 3.7x as compared to 3.8x at the end of 2016.
On a net debt to adjusted EBITDA basis, we were at 3.5x at the end of the first quarter.
We're fully committed to our investment-grade rating and to reducing our debt, as evidenced by our voluntary prepayment of $550 million on our 2016 term loans during the first quarter.
We have no significant near-term debt maturities and remain committed to moving towards our long-term average target leverage ratio of approximately 3x EBITDA.
We have the financial flexibility to achieve this goal while still deploying capital for strategic acquisitions.
As you can see, we started off the year strong, and we're very pleased with our operational and financial results for the first 3 months of the year.
We remain committed to our previously communicated full year 2017 adjusted EPS guidance range of $5.15 to $5.55, which keeps us on track to realizing our $6 adjusted EPS goal in 2018.
In terms of phasing, we continue to see the relative percentage contribution from the first half of 2017 to be consistent with the percentage contribution of the first half of 2016.
With that, we'll now open the call for questions.
Okay, <UNK>.
Thanks.
I'll start off, and then <UNK> or Tony can chime in.
<UNK>t, I think this is no different than the consolidation we've seen over the last several years.
When you look at our customer base, the consolidation, especially on a global ---+ from a global perspective, what we've said then and remains true today is that consolidation is really a benefit to a company like ours at Mylan.
Given our portfolio, our breadth and our geographical reach, our ability to not only supply the level of demand that is needed but to be able to do so on a global basis.
And I think what we've seen is the continued strength as these customers have consolidated our ability to really leverage our entire portfolio as well as our pipeline.
We've got some important products coming, and what I would say is I can appreciate some of the players that are in one country or geographically landlocked or from a product perspective, not being able to meet some of the supply and demand needed on a global basis.
So I think this further underscores Mylan's differentiated and diversified platform and is allowing us to meet and exceed, quite honestly, what we have done in the past with some of these players as they're looking at a different business model.
Thanks, <UNK>.
And <UNK>, yes, historically, we've seen consolidation, and the consolidation of businesses and aggregating these models together have some affect on erosion.
What we continue to see though is that we have this differentiated platform with a diverse portfolio of products, best-in-class service levels and the inclusion of new products into this mix in terms of always adding to what we've had.
So we're excited to service McKesson, Walmart and all our customers, and we want to be more to them in the future.
So I think that scale, along with our geographic overlap, plays a very important role into our success in that business.
And I would just add that we have taken into consideration this alliance into our projections.
And I just ---+ that reminded me, <UNK>t.
I don't think we can underscore this enough.
We mentioned this at Investor Day but the continuity of our management team.
I mean, we've been together over a decade, working with these customers and bringing that leadership.
And I think as we look at all what's happening externally and the environment around us, that's continued to play a critical role in our ability to leverage our business.
So let me take the easy one first, which is Copaxone, and just talk about our readiness.
Yes, you will expect us to be in a state of readiness from the manufacturing point of view ---+ from commercial manufacturing point of view, in anticipation of these target action dates.
Regarding generic Advair, so let me reiterate that this submission was done in complete accordance to the products that we've guided and pre-agreed protocols, and we have not been asked to do any additional clinical endpoint or device-related studies at this juncture.
What we have been asked is now that some of the studies, especially the device-related studies, we have now been asked to analyze and report our findings of our study against a newly issued industry draft guidance for (inaudible) human factor studies, draft guidance.
So that's what we want to go back and discuss with the FDA and we can get this meeting any day.
We have been waiting for this meeting, and it can happen any moment or any day, and we can only comment upon the potential impact of this CRL once we have these discussions behind us.
So that's what we are waiting for before we comment upon any impact on timing.
All right.
Well, Jami, I first have to jump in and just to say thank you for the acknowledgment on transparency.
As we've said, I know we've ---+ many of us have had many discussions and we told you ---+ I personally said that, look, I want to continue to try to give the right visibility into this business so that's what we're here to do.
We've got a lot of moving pieces and parts.
We're trying to be reflective of how we're running and driving this business, which is completely leveraging all of these channels from generics brands and branded generics and OTCs and how we're leveraging those in countries.
So I really appreciate your recognition of that, and we're going to continue to do so.
And the one thing I'll just say on EpiPen and I'll let Ken get into some of the financials is that as we said on Investor Day, Jami, we anticipated a big change in EpiPen, and we knew that it would continue to be a mix of ---+ between the AG and the brand, and we continue to see that conversion.
But the reality is people had a very strong loyalty to the brand EpiPen and it's continued to be an education to let them know that it's the same product.
But what I will say about EpiPen is it's what we expected, and obviously, that continues to be in to the guidance that we reiterated this morning.
Yes, I'll also say thank you for the comment because we are truly ---+ the way we put the release together and including providing you a number for North America, excluding EpiPen, would still allow you to have that visibility into what's going on with the EpiPen product.
With that number, you've done the math, you can model it.
You're kind of right in the ballpark.
As far as projecting out the year, we don't give any quarterly kind of run rate on EpiPen.
But as <UNK> said, what happened in the quarter was very consistent with what we expected.
The recall did occur.
We disclosed both in the Q and in our commentary that the cost of the recall is recoverable.
That has driven a little bit of change in trend in some of the sales number but nothing of significance.
But to reiterate, we said at Investor Day that year-over-year EpiPen profitability at the operating profit level will be down $400 million year-over-year, a huge number.
$500 million at the gross profit level, offset by some reduction in spending in sales and marketing.
And that's exactly where we're moving through right now.
So you've done the math, you're right in the right ballpark, and everything is exactly how we expected it.
As far as new products, we said we'd have about $850 million contribution this year year-over-year for new products, and at this point in time, we're working towards that road map.
It's a long list of products and whether it be at the low end, the mid, we're generating those new product launches in order to drive the $850 million.
All right, Gregg.
Thanks.
I'll start and I'll let <UNK> take on the product.
I guess, Gregg, what I would say, I'm not sure how somebody gives guidance without talking about capital deployment, whether that's a business development opportunity.
So I think we were very clear and transparent at Investor Day of what we said for our assumptions leading to that $6 target that we continue to walk through over the last 5 years.
And that deployment of cash while maintaining our balance sheet, being able to bolt on important product acquisitions as we've done already this year and will continue to do so.
So look, we continue to be executing towards the road map that we laid out in <UNK>h, and we'll continue to update as appropriately.
But what we laid out on Investor Day is what we're executing against.
Yes, Gregg, on Advair, I mean, there is nothing in my watch you should hear that we don't feel comfortable about interpreting our data to the new guidance.
But we have a difference of opinion at a policy level that agency is applying a draft guidance as against a preapproved or pre-agreed protocol.
So that's what we are trying to discuss and negotiate with them because it's all as to the timing and the classification of the CRL.
Second, on Lantus, we are very much on track and you should expect to hear from us anytime now about our regulatory filing in U.<UNK>A.
It's too early for us.
We had sought a meeting, and we had been told that FDA is working on to grant us a meeting and very soon we'll hear from them.
And I want to ---+ I don't want to comment anything beyond that.
We should be able to, in a good position, to talk about it once we have this meeting behind us.
The Nashik is not limited to antiretrovirals.
Nashik is a global site and does produce some U.<UNK> products and some of the U.<UNK> launches.
Some of the U.<UNK> launches will be potentially impacted by that.
But as I confirm, they are not material to our overall Mylan's business.
There's no discussions in this complete response letter or a plan being made about this being not 505(j) or being about 505(b)(2).
And we don't see because it is exactly ---+ the product is exactly as per the guidance issued by the FDA.
It has been accepted as 505(j).
So I don't want to even think and comment about that because it's not real.
So I don't want to speculate on that.
Okay.
All right.
I would say we've exceeded on all fronts.
When we acquired the Abbott EPD Business, they were showing kind of a trajectory of a flat to declining business, and we said it's not about what the business is doing on a standalone but what we believe we can do with that business.
And I think we were able to show last year that we turned that to a flat to increasing in business.
And then as we look at bringing on Meda and Renaissance, we've continued to see our ability to leverage now the infrastructure around these countries that are allowing us to maximize the product that each of these acquisitions brought us, the Mylan legacy, the Abbott as well as now with Meda.
And so we continue to see our ability to get more out of that asset than they were doing on a standalone basis in conjunction with our existing businesses.
So yes, we couldn't be more pleased and I think we will continue to bear fruit the results and are really integrating Mylan and leveraging this platform we'll continue to show in our results.
And <UNK>, thank you for the question.
I actually should have answered that because it was in Jami's queue of questions a little bit earlier.
Yes, the componentry of the revenue guidance, we're reaffirming as well.
And <UNK>, our Vytorin launch has been impacted by the Nashik warning letter.
Okay, <UNK>.
I'll maybe take some at a high level and then others can chime in.
I'll start with the acquisitions.
Look, as we've done for this quarter and we will do this year is break out acquisitions and that contribution.
I think I'm not sure where your numbers ---+ or if those are old numbers, but what I will tell you again, it's what we're doing with the asset in combination.
So while we're breaking out for 1 year post acquisitions because that visibility on our legacy business to try to start now dissecting between the acquisitions, I don't think would be useful because it's really what we're being able to drive out of this asset in totality that is driving the results that you're seeing.
As far as Biocon, I don't believe we've given the contractual relationship.
What I can tell you, obviously, we have a very important partnership with Biocon and continue to be very happy with the performance, both in the products that are already approved and marketing and those that are in the pipeline.
So that continues to be a very important partnership.
And as far as price decline, I think Tony laid it out.
I don't know if there's any other visibility.
But I think that's why we try to give the dynamics around the fact that where you have a first-to-market opportunity and you're the only plan to market and then there's 5 or 6 players in the market overnight, that certainly can drive a little bit of anomaly and volatility as you look at a year or comparisons year-over-year, which is the point we were trying to make.
However, all products then and looking at everything across our globe, we're still saying our generic price erosion is in mid to single digits, without excluding anything.
Yes.
I mean, <UNK>, I think you said it very well.
<UNK>, our U.<UNK> price erosion methodology really is about like to like from a year-over-year perspective.
And the one thing we were noting, yes, we feel very strongly about mid-single digits globally.
And in the U.<UNK> in 2016, we had several meaningful first-to-market launches that certainly don't have the same valuation in the corresponding period for 2017.
So we want to know what that base business corrosion would be without those in it.
Yes, so I'll just start.
I would say that, <UNK>, this is one of the areas where I think you really see the strategic acquisitions really paying dividends.
When you look at the Mylan legacy business now with Abbott and Meda and those assets, both from a geographic portfolio perspective that we've been able to pull together and as I mentioned in my commentary, really gives us the unique go-to-market in these countries strategies.
You've seen us continue to bolster our #1 position in France.
And I would say Italy is closely closing in on, and we currently are #1 in Italy.
You've seen us really strengthen the strong positions we've had.
And in addition to that, some of these up-and-coming markets that Meda brought us to really bring critical mass, we've got ---+ we see nothing but opportunity from places like U.K. and some of these areas where we have a very robust product portfolio and a really strong sales infrastructure to maximize.
So I don't know, Tony and <UNK>, any other countries but I just couldn't be more pleased myself with what these assets coming together and what our team has been able to yield.
Yes.
And I think that one of the question was, do we see any more government-instituted price cuts and all that.
No, <UNK>.
We don't see at this time what we saw a few years back.
And this Meda acquisition and Abbott acquisition has so well positioned us to leverage anything we drop in and add on that platform now.
And maybe just to close.
We do feel very good about the growth we've seen in our leadership markets in France and Italy as well as some of the up-and-coming like <UNK> said, U.K., Germany, Poland and Nordics, all done very well.
Okay.
So Ronny, let me try.
I'm not sure I quite understand your seasonality of the first question.
I mean, you look at our global business today, over half of which is coming from outside the United States and the fact that we've got over 2,000 products on the market, there's not real seasonality.
With that being said, I think Ken at Investor Day kind of laid out what we saw corresponding quarters and proportionality from '16 to '17 that would help for modeling purposes if you look at the percentage of the businesses.
So again, I think what we couldn't be more excited about is the resiliency of this platform and the fact that the seasonality for any product or given market, we're able to now really absorb that and show this contribution continuing to grow in a meaningful way and not being so much subjected to seasonality.
And then ---+ and so if you think about that, because I know what you're trying to get to, which is as we move through the year, how do you look at gross margins.
What we told you about the first quarter was gross margins were down 50 basis points ---+ 60 basis points year-over-year.
And that is consistent with what we projected and gave you an outlook for, for the full year.
So even though seasonality may move around a bit and you followed us long enough to know that the second half is a bigger half than the first half is, we don't see a significant amount of variation in that.
We saw in the first quarter what we have an outlook for, for the year.
Specifically, as far as new product introductions, new product launches this year we indicated will be heavier, obviously, in the second half.
Last year, I would say if you're looking at fourth quarter to first quarter, not significantly different because they were lighter new product launch quarters.
And I guess, going on your point about unprofitable business, I would say ---+ I tried to state in my opening remarks, we've had a long history of being committed to a very broad portfolio.
And as we've said, we have over just, even here in the United States, over 630 products at an average selling base of $0.25.
So there's a lot that goes into that mix, and we've continued to be committed to mean the most to our customers and we'll continue to look at that.
But I will tell you that meaning the most to our customers and having a robust portfolio is important, but that's not to say that we don't evaluate if something doesn't make sense at a certain period of time.
But certainly, I think by the sheer number of what we've got in the market, it should suggest that we're very committed to continuing to offer a broad range of products.
Yes.
No, <UNK>, thank you.
And thank you for your questions.
I think what we've continued to say and what we continue to see is it absolutely is driving a different conversation.
And as the external environment has been in, I'll call it, chaos, we've seen these cycles before over the last couple of decades, that it really provides an opportunity for people to really do work about a company, their portfolio, their platform.
And all generic companies aren't created equally.
All branded companies aren't created equally, and all hybrid companies aren't created equally.
And I think what we've continued to show is that the assets that we've pulled together on a global basis have allowed us to drive not only a different conversation but a reliable supply chain.
Our commitment to generics over the past 55 years and certainly the investment we've made in important complex generics like generic Advair and our biosimilars was one of the largest pipelines in the industry.
So not only do our customers see us as valuable to be able to have a global partnership, but certainly our pipeline drives much of that conversation and relationship and the importance that we are to each other.
So I absolutely can't underscore enough about how the platform and our differentiation is absolutely allowing us to have very different conversations than if we were just in one country with a niche portfolio.
And <UNK>, regarding business development, we are executing to the plan, which we shared with you on our Investor Day.
We have a very exciting and active and rich pipeline, which we are trying to close certain deals and bring products home.
So we see many tuck-in opportunities out there.
All right.
Thank you, Chris.
I'll start.
This is yes, our EPS guidance range that we reiterated this morning and I put in my commentary, is not dependent on approval of any one product.
To your point, approvals are important.
They're an important part of our business, and we have a lot of moving pieces and parts in our guidance.
But wanted to certainly point out it's not ---+ that range is not reliant on any one approval.
So I think that's the point of having the range and us being able to come out and reiterate that we're committed to this guidance range.
And Chris, as I already have mentioned, it will be prudent for us to wait for this dialogue before we comment on the potential impacts on any timing as their launch.
And regarding your question on Neulasta, you can expect us to have this product end up ---+ end of ---+ towards the end of '18 or early '19.
All right.
Thanks, everyone.
Thank you.
