Analyst Conference Summary

generic pharmaceuticals

conference date: May 7, 2019 @ 7:00 AM Pacific Time
for quarter ending: March 31, 2019 (first quarter, Q1)

Forward-looking statements

Overview: Revenue declined y/y.

Basic data (GAAP):

Revenue of was $2.50 billion, down 19% sequentially from $3.08 billion, and down 7% from $2.68 billion in the year-earlier quarter.

Net income was negative $25.0 million, down sequentially from $51.2 million, and down from $87.1 million year-earlier.

Earnings Per Share (EPS), diluted, were $0.05, down sequentially from $0.10 and down from $0.17 year-earlier.

Guidance:

"For the full year 2019, we are reaffirming our guidance and business outlook, including our total revenue range of $11.5 billion to $12.5 billion, adjusted EPS guidance range of $3.80 to $4.80 and adjusted free cash flow range of $1.9 billion to $2.3 billion."

Global pricing trends in 2019 are expected to be similar to 2018 (downward).

Conference Highlights:

Mylan CEO Heather Bresch commented: "Mylan's first quarter represents a solid start to the year and we remain positioned to reaffirm our guidance for 2019. We continue to manage an increasingly diverse portfolio of products across all three segments of our business, and given the evolution of our commercial and geographic mix see opportunities to enhance our investments for certain areas of our portfolio. In the U.S., where the industry continues to experience volatility, we are leveraging past experience and applying key learnings to our largest launches, like Wixela, even as we advocate for policies that seek to put the patient first. With that said, our top-line results fell within the range of where we thought they would be at $2.5 billion. On the bottom line, we came in ahead of where we expected at $0.82 of adjusted EPS, mainly due to gross margins coming in at the high end of our guidance range while also having some positive offsets from a timing perspective in G&A against our increased sales and marketing spend."

Mylan's generic equivalent of Advair was approved in February 2019. Tradename is Wixela Inhub. New drugs for 2019 are almost all launched, including generic Copaxone and Yupelri, with new product revenue expected of about $1 billion. This is requiring investments upfront. Generic Copaxone is increasing its market share.

Adoption of serialization in Europe was a key cause of softness in revenue, plus currency change effects. Believes 21% to 22% of sales is the right target for SG&A. Mylan can reach this by moving away from commodity products. It is clear value has been extracted from the market, we are not immune, but we have been resiliant. Formalized a business transformation office.

Believes will eventually get more biosimilar approvals and traction in the U.S. market.

CFO Ken Parks said "During the first quarter, adjusted free cash flow of $27 million was slightly ahead of our expectations. Our results reflect an anticipated increase in net working capital required to support our topline growth expectations for 2019, which includes over $1 billion in new product launches, as previously communicated. Given our stable and durable cash flow profile, we remain committed to deleveraging and intend to repay $1.1 billion of debt during 2019. We also remain fully committed to maintaining our investment grade credit rating." Revenue was only 2% lower y/y on a constant currency basis.

Revenue by geography: North America $923 million, down 6% y/y from $985 million. Europe $895 million, down 14% from $1.04 billion y/y. Rest of world $642 million, up 3% y/y from $627 million.

The revenue decrease in North America was due primarily to lower volumes on existing products, primarily driven by changes in the competitive environment and the impact of the Morgantown plant remediation activities, partially offset by new product sales, including Wixela Inhub and Fulphila (biosimilar to Neulasta), and increased market share on Glatiramer Acetate Injection. Pricing also declined when compared to the prior year period.

Non-GAAP numbers: EPS $0.82, down 37% sequentially from $1.30, and down 15% from $0.96 year-earlier. Net income $422 million, down 37% sequentially from $670 million, and down 15% from $496 million year-earlier. EBITDA was $534 million, Adjusted EBITDA $710 million. Gross margin 53.7%, up from 52.9% year-earlier.

Cash and equivalents balance was $230 million, down sequentially from $388 million. Long Term Debt was $13.1 billion, down slightly sequentially from $13.2 billion. Cash flow from operations was negative $40 million GAAP due to investments in working capital, or about $80 million adjusted. Capital expenditures were $ million. Adjusted free cash flow $27 million.

Cost of sales was $1.69 billion, leaving gross profit of $805 million. Operating expenses of $781 million consisted of: research and development $173 million; selling general and administrative $608 million; $1 million litigation expense. Leaving income from operations of $24 million. Interest expense was $131 million, and other expense was $7 million. Income tax benefit $90 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, including over 200 brand 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. Working on a botox biosimilar with a partner.

Mylan remains committed to reducing its debt. No debt matures soon. Goal is 3.0 debt to adjusted EBITDA. Ended Q1 at 3.95, up slightly sequentally.

Q&A summary:

Business transformation office outcomes yet? We look forward to updating on that on investor day later this year. The benefits would be in 2020 and beyond. It is done at a very granular level, at each individual product.

Europe drop from serialization? Europe serialization is a timing issue, it is now behind us. New product launches in Europe and rest of world would be mainly in the second half of the year.

Strategic review by board members? Not ready to report yet, but should be near term.

Working capital investments detail? Launched generic copaxone in Q4 2017, receivables got collected in Q1 2018. Wixella launched in February 2019, the receivables cannot be collected until Q2. There are also working capital commitments as we prepare for new product launches in 2019.

Payers giving preference for brands and Wixella? We are pleased with the launch and market uptake. It did stall a bit after first uptake, but we are looking to increase uptake going forward as we work with the payers. But 3 months post launch we had about 50% generic utilization, which is very good.

Spend if guidance turns out high? We still think our planned spend is appropriate. Our move to complex products requires more support. Our willingness to invest over the longer term has paid dividends over the long run.

Biosimilars? The launches in Europe will continue to drive sales. We are also getting ready for a US launch.

New product launch revenue in Q1? $250 million, mostly in the U.S.

Serialization mostly IDs, did not hear from other companies? We were ready for serialization, but in EU we rely on third parties quite a bit, and the pharmacies needed to be ready to accept the serialized products. We are back on the normal trajectory.

Generic advair revenue vs. 2019 sales target? We are happy with the 3 month results with Wixella. We are driving to maximize this product. We are working to increase market share in the coming months.

Revenue miss in Q1 vs. maintained 2019 guidance? No changes in adjusted cash flow. Q1 was about new product launches and working capital. New product launch revenue roadmap is $1.1 billion. We have launched two-thirds of the products for this already.

We want to continue to move up the value chain, including the branded business. We can continue to layer in products that make sense, including branded. We do look at acquiring new branded products. We have 5000 sales people worldwide.

Generic pricing in the US? In US in Q1 still seeing declining prices, but about what we expected, not accelerating.

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