Analyst Conference Summary

generic pharmaceuticals

conference date: August 9, 2017 @ 7:00 AM Pacific Time
for quarter ending: June 30, 2017 (second quarter, Q2)

Forward-looking statements

Overview: Lowered guidance and missed prior guidance. I saw a misinterpretation in the mainstream press, which said Mylan is deferring major drug launches for the remainder of 2017. As you can see below, the statement is that these launches have been removed from 2017 full year guidance.

Basic data (GAAP):

Revenue of was $2.96 billion, up 9% sequentially from $2.72 billion, and up 16% from $2.56 billion in the year-earlier quarter.

Net income was $297.0 million, up 347% sequentially from $66.4 million, and up 76% from $168.4 million year-earlier.

Earnings Per Share (EPS), diluted, were $0.55, up 358% sequentially from $0.12 and up 67% from $0.33 year-earlier.

Guidance:

Guidance reduced for the full year 2017 (all non-GAAP estimates):

Gross margin 53.5% to 55.0%. R&D 6% to 7% of sales SG&A 19% to 20% of sales.

Revenue $11.5 to $12.5 billion.

EBITDA $3.75 to $3.95 billion. Net income $2.3 to $2.5 billion. EPS $4.30 to $4.70. Cash from operations $2.5 billion to $2.8 billion. Capital expenditures $400 to $500 million.

Adjusted free cash flow $2.0 to $2.4 billion. Effective tax rate 18.0% to 18.5%

Diluted shares outstanding 535 to 540 million.

3.7 times debt to adjusted EBITDA ratio.

For 2018, adjusted EPS of at least $5.40. Assumes any launches delayed from 2017 will take place in 2018. Assumes even more EpiPen competition. Sees growth opportunity outside the U.S.

Conference Highlights:

Mylan CEO Heather Bresch commented: "Given the [U.S.] region's ongoing challenges and the uncertain U.S. regulatory environment, we have elected to defer all major U.S. launches from our full year 2017 financial guidance to 2018, including generic Advair and generic Copaxone. As a result, we now expect to deliver total revenues this year of between $11.5 billion and $12.5 billion, and adjusted EPS of between $4.30 and $4.70. Notwithstanding the above, as we look to 2018, we are moving our target of $6.00 in adjusted EPS to at least $5.40." There are "significant headwinds in the U.S. market."

EpiPen revenue dropped about $172 million y/y, mainly due to Mylan selling its own generic equivalent and higher government rebates. Expects approval delays to persist. Generic Advair and Copaxone were removed from guidance "from an abundance of caution." Heather noted the "depressed share price," believing educating investors is needed.

Rajiv Malik, President of Mylan, said "We also continue to navigate a challenging competitive and pricing environment and expect generic price erosion for the year of mid-single digits globally, with high-single-digit erosion expected in North America. Furthermore, we continue to make great progress on our key pipeline programs, and while we may experience delays, mostly in the U.S., in realizing some of these opportunities, our confidence in our ability to bring these important products to market and maximize their potential has not changed."

Believes has met all the requirements for generic Copaxone approval. Generic Advair talks with FDA were productive, and no further study is needed for approval. But timing is uncertain due to chaos [my term; Mylan used "reorganization"] within the FDA.

Revenue by geography: North America $1.28 billion, down 9% y/y. Europe $954.3 million, up 59% y/y, mainly from the Meda acquisition. Rest of world $692.6 million, up 29% y/y. Australia say 20% revenue growth. Also one of top 5 generic companies in Japan. Over the counter (OTC) products are a growth driver.

Non-GAAP numbers: EPS $1.10, up 18% sequentially from $0.93, and down 5% from $1.16 year-earlier. Net income $589.9 million, up 18% sequentially from $500 million, and down 0.4% from $592.4 million year-earlier. Gross margin was 54%.

EBITDA was $903.9 million, up 37% sequentially from $658 million, and up 45% from $621.7 million year-earlier. Adjusted EBITDA was $930.9 million, up 15% sequentially from $812 million, and up 13% from $821.4 million year-earlier.

Cash and equivalents balance was $612 million. Long Term Debt was $14.0 billion, down sequentially from $14.7 billion. Cash flow from operations was $567 million GAAP, or $664 million adjusted. Capital expenditures $50.9 million. Adjusted free cash flow was $613 million.

Cost of sales was $1,74 billion, leaving gross profit of $1,23 billion. Operating expenses of $752 million consisted of: research and development $181 million; selling general and administrative $621 million; $50 million litigation settlement benefit. Leaving income from operations of $473 million. Interest expense was $136 million, and other expense was $12 million. Income tax was $28 million.

Mylan has about 225 ANDAs pending with the FDA. Over 1,200 products in the pipeline, 940 regulatory submissions [must be multiple countries] are pending approval and over 3000 submissions are planned. Believes approvals are simply a matter of time. Has over 4,200 active patents. Mylan operates in 165 countries and has over 7,500 marketed products. Mylan is #6 worldwide for prescription volume, and is #2 in the U.S. and #1 in France. Sells over 600 products in the U.S.

The biologics/biosimilar pipeline has 16 unique products in it. Mylan is already marketing Hertraz (Trastuzumab - Herceptin) in 15 countries. Partnered with Biocon and Momenta for this.

Mylan remains committed to reducing its debt. No debt matures soon. Goal is 3.0 debt to adjusted EBITDA.

Q&A:

Overall operating margins in this new environment? How much lower can margins go? Within the U.S. margins depend on diversity of the product portfolio, including OTC. New product launches of complex products like biosimilars help maintain margins. R&D investment in new products will differentiate companies. Scale still depends on details; it is better to build it globally like Mylan, rather than focus on the U.S. like Teva.

Profitability by region? Broken out on the slides. N.A. about 50% profitability; Europe 25% profitability; Rest of world 33% profitability.

Guidance change, what factor stands out the most? Foremost, delayed launches because of administrative delays at FDA. Same time, more approvals in already approved generics, bringing in competitors numbered 3, 4, 5, etc. Third was EpiPen, which is now less than 5% of Mylan profit going forward.

High single digit price erosion in U.S., likely to be the new normal? For the foreseeable future, and accounted for it in our 2017 and 2018 guidance. Consolidation to just 3 major buyers in the U.S. is another driver.

Launch revenue in 2017 outlook? Was predicted at R&D day at about $850 million globally, clearly that has come down, but we do not have a number at this time.

Business Development in 2018? We could continue to look at things to add to our product portfolio, but our focus is on paying down debt.

No matter how much competition there is among manufacturers, every stop between them and the patient is consolidating, becoming less competitive.

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