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| MYL > SEC Filings for MYL > Form 10-Q on 4-Nov-2008 | All Recent SEC Filings |
4-Nov-2008
Quarterly Report
The following discussion and analysis addresses material changes in the results of operations and financial condition of Mylan Inc. and subsidiaries ("the Company", "Mylan" or "we") for the periods presented. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements, the related Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Results of Operations and Financial Condition included in the Company's Transition Report on Form 10-KT/A for the nine-month period ended December 31, 2007, the unaudited interim Condensed Consolidated Financial Statements and related Notes included in Part I, Item 1 of this Report on Form 10-Q ("Form 10-Q") and the Company's other SEC filings and public disclosures.
This Form 10-Q may contain "forward-looking statements". These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include, without limitation, statements about the Company's market opportunities, strategies, competition and expected activities and expenditures, and at times may be identified by the use of words such as "may", "could", "should", "would", "project", "believe", "anticipate", "expect", "plan", "estimate", "forecast", "potential", "intend", "continue" and variations of these words or comparable words. Forward-looking statements inherently involve risks and uncertainties. Accordingly, actual results may differ materially from those expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the risks described below under "Risk Factors" in Part II, Item 1A. The Company undertakes no obligation to update any forward-looking statements for revisions or changes after the date of this Form 10-Q.
Executive Overview
We are a leading global pharmaceutical company and have developed, manufactured, marketed, licensed and distributed high quality generic, branded and branded generic pharmaceutical products for more than 45 years. As a result of our acquisition of the former Merck Generics business in October 2007 and the acquisition of a controlling interest in Matrix in January 2007, we are the third largest generic pharmaceutical company in the world based on 2007 combined calendar year revenues, a leader in branded specialty pharmaceuticals and the third largest active pharmaceutical ingredient ("API") manufacturer with respect to the number of drug master files, or DMFs, filed with regulatory agencies. We hold a leading generics sales position in four of the world's largest pharmaceutical markets: the United States, the United Kingdom ("U.K."), France and Japan, and we also hold leading sales positions in several other key generics markets, including Australia, Belgium, Italy, Portugal and Spain.
Mylan previously had two reportable segments, the "Mylan Segment" and the "Matrix Segment". With the acquisition of the former Merck Generics business, Mylan now has three reportable segments: the "Generics Segment", the "Specialty Segment", and the "Matrix Segment". The former Mylan Segment is included within the Generics Segment. Additionally, certain general and administrative expenses, as well as litigation settlements, and non-operating income and expenses are reported in Corporate/Other. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS No. 131"), information for earlier periods has been recast.
The measure of profitability (loss) used by the Company with respect to segments is gross profit less direct research and development expenses ("R&D") and direct selling, general and administrative expenses ("SG&A"). The amortization of intangible assets, as well as certain purchase accounting related items, including the write-off of in-process research and development and the amortization of the inventory step-up, are excluded from segment profitability (loss).
Bystolic
In January 2006, the Company announced an agreement with Forest Laboratories Holdings, Ltd. ("Forest"), a wholly-owned subsidiary of Forest Laboratories, Inc., for the commercialization, development and distribution of BystolicTM in the United States and Canada (the "2006 Agreement"). Under the terms of that agreement, Mylan received a $75.0 million up-front payment and $25.0 million upon approval of the product. Such amounts were being deferred until the commercial launch of the product and were to be amortized over the remaining term of the
license agreement. Mylan also had the potential to earn future milestones and royalties on Bystolic sales and an option to co-promote the product, while Forest assumed all future development and selling and marketing expenses.
In February 2008, Mylan executed an agreement with Forest whereby Mylan sold to Forest its rights to Bystolic (the "Amended Agreement"). Under the terms of the Amended Agreement, Mylan received a one-time cash payment of $370.0 million, which was deferred along with the $100.0 million received under the 2006 Agreement, and retained its contractual royalties for three years, through 2010. Mylan's obligations under the 2006 Agreement to supply Bystolic to Forest were unchanged by the Amended Agreement. Mylan believes that these supply obligations represented significant continuing involvement as Mylan remained contractually obligated to manufacture the product for Forest while the product is being commercialized. As a result of this continuing involvement, Mylan had been amortizing the $470.0 million of deferred revenue ratably through 2020 pending the transfer of manufacturing responsibility that was anticipated to occur in the second half of 2008.
In September 2008, Mylan completed the transfer of all manufacturing responsibilities for the product to Forest and Mylan's current supply obligations have therefore been eliminated. The Company believes that it no longer has significant continuing involvement and that the earnings process has been completed. As such, the remaining deferred revenue of $455.0 million was recognized and included in other revenues in the Company's Condensed Consolidated Statements of Operations.
Future royalties are considered to be contingent consideration and are recognized in other revenue as earned upon sales of the product by Forest. Such royalties are recorded at the net royalty rates specified in the Amended Agreement.
Issuance of Cash Convertible Notes
On September 15, 2008, Mylan announced that it completed the sale of $575.0 million of 3.75% Cash Convertible Notes due 2015 ("Cash Convertible Notes"). The Cash Convertible Notes were sold in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). The amount includes $75.0 million of notes sold pursuant to the initial purchasers' exercise of their overallotment option.
The Cash Convertible Notes, which are unsecured, will pay interest semi-annually at a rate of 3.75% per annum and will mature on September 15, 2015. The Cash Convertible Notes are convertible under certain circumstances into cash at an initial conversion reference rate of 75.0751 shares of Mylan's common stock per $1,000 principal amount of notes (which is equal to an initial conversion reference price of approximately $13.32 per share). The Cash Convertible Notes are not convertible into shares of Mylan common stock or any other securities.
The offering generated net proceeds, after deducting the initial purchasers' discount and estimated offering expenses, of approximately $562.0 million. Of these net proceeds, approximately $98.6 million was used to fund the net cost of convertible note hedge and warrant transactions. Mylan used $300.0 million of the remaining net proceeds to pay down outstanding borrowings under its senior secured revolving credit facility and expects to use the remainder to pay down our senior term loan facilities in late December to avoid triggering prepayment penalties under such facilities.
Women's Health
On August 6, 2008, Mylan announced that it completed an agreement with Famy Care Ltd, a global, India-based manufacturing leader of women's health care products, to develop and supply 22 oral contraceptive ("OC") medicines to customers in the United States. The agreement also provides Mylan with a right of first refusal for additional oral contraceptive products and certain additional markets, including Australia and Japan. Currently, total U.S. OC market sales are approximately $3.3 billion, according to IMS. Of the 42 OC products available, 31 are sold generically.
Goodwill Impairment
On February 27, 2008, the Company announced that it was reviewing strategic alternatives for its specialty business, Dey, including the potential sale of the business. This decision was based upon several factors, including a strategic review of the business, the expected performance of the Perforomisttm product, where anticipated growth was determined to be slower than expected and the timeframe to reach peak sales was determined to be longer than was originally anticipated.
As a result of our ongoing review of strategic alternatives, we determined that it was more likely than not that the business would be sold or otherwise disposed of significantly before the end of its previously estimated useful life. Accordingly, a recoverability test of Dey's long-lived assets was performed during the three months ended March 31, 2008 in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"). We included both cash flow projections and estimated proceeds from the eventual disposition of the long-lived assets. The estimated undiscounted future cash flows exceeded the book values of the long-lived assets and, as a result, no impairment charge was recorded.
Upon the closing of the former Merck Generics business transaction, Dey was defined as the Specialty Segment under the provisions of SFAS No. 131. Dey is also considered a reporting unit under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"). Upon closing of the transaction, the Company allocated $711.2 million of goodwill to Dey.
The Company tests goodwill for possible impairment on an annual basis and at any other time events occur or circumstances indicate that the carrying amount of goodwill may be impaired. As we had determined that it was more likely than not that the business would be sold or otherwise disposed of significantly before the end of its previously estimated useful life, the Company was required during the three months ended March 31, 2008 to assess whether any portion of its recorded goodwill balance was impaired.
The first step of the SFAS No. 142 impairment analysis consisted of a comparison of the fair value of the reporting unit with its carrying amount, including the goodwill. We performed extensive valuation analyses, utilizing both income and market approaches, in our goodwill assessment process. The following describes the valuation methodologies used to derive the estimated fair value of the reporting unit.
Income Approach: To determine fair value, we discounted the expected future cash flows of the reporting unit. We used a discount rate, which reflects the overall level of inherent risk and the rate of return an outside investor would expect to earn. To estimate cash flows beyond the final year of our model, we used a terminal value approach. Under this approach, we used estimated operating income before interest, taxes, depreciation and amortization in the final year of our model, adjusted to estimate a normalized cash flow, applied a perpetuity growth assumption, and discounted by a perpetuity discount factor to determine the terminal value. We incorporated the present value of the resulting terminal value into our estimate of fair value.
Market-Based Approach: To corroborate the results of the income approach described above, we estimated the fair value of our reporting unit using several market-based approaches, including the guideline company method which focuses on comparing our risk profile and growth prospects to a select group of publicly traded companies with reasonably similar guidelines.
Based on the SFAS No. 142 "step one" analysis that was performed for Dey, the Company determined that the carrying amount of the net assets of the reporting unit was in excess of its estimated fair value. As such, the Company was required to perform the "step two" analysis for Dey, in order to determine the amount of any goodwill impairment. The "step two" analysis consisted of comparing the implied fair value of the goodwill with the carrying amount of the goodwill, with an impairment charge resulting from any excess of the carrying value of the goodwill over the implied fair value of the goodwill based on a hypothetical allocation of the estimated fair value to the net assets. Based on the second step analysis, the Company concluded that $385.0 million of the goodwill recorded at Dey was impaired. As a result, the Company recorded a non-cash goodwill impairment charge of $385.0 million during the three months ended March 31, 2008, which represented our best estimate as of March 31, 2008. The allocation discussed above was performed only for purposes of assessing goodwill for impairment; accordingly, we have not adjusted the net book value of the assets and liabilities on the Company's Condensed Consolidated Balance Sheet, other than goodwill, as a result of this process.
The determination of the fair value of the reporting unit required the Company to make significant estimates and assumptions that affect the reporting unit's expected future cash flows. These estimates and assumptions primarily include, but are not limited to, the discount rate, terminal growth rates, operating income before depreciation and amortization, and capital expenditures forecasts. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates. In addition, changes in underlying assumptions would have a significant impact on either the fair value of the reporting unit or the goodwill impairment charge.
The hypothetical allocation of the fair value of the reporting unit to individual assets and liabilities within the reporting unit also requires the Company to make significant estimates and assumptions. The hypothetical allocation requires several analyses to determine the estimate of the fair value of assets and liabilities of the reporting unit.
In September 2008, following the completion of the comprehensive review of strategic alternatives for Dey, the Company announced its decision to retain the Dey business. This decision includes a plan to realign the business, including positioning the Company to divest Dey's current facilities over the next two years. (See Note 15 to the Condensed Consolidated Financial Statements). The Company has yet to finalize the plan and therefore not yet estimated the total amount expected to be incurred with respect to such activities but the amount could be significant.
Financial Summary
Mylan's financial results for the three months ended September 30, 2008, included total revenues of $1.66 billion compared to $477.1 million for the three months ended September 30, 2007. This represents an increase in revenues of $1.18 billion. Consolidated gross profit for the current quarter was $911.1 million compared to $221.6 million in the same prior year period, an increase of $689.5 million. For the current quarter, operating earnings of $560.8 million were realized compared to $91.9 million for the prior year three months ended September 30, 2007.
The net earnings before preferred dividends for the current quarter was $206.8 million compared to net earnings of $149.8 million in the comparable prior year period. This translates into earnings per diluted common share of $0.45 for the three months ended September 30, 2008, compared to earnings per diluted common share of $0.60 for the comparable three-month period. The results were affected by the following items:
Three Months Ended September 30, 2008:
• The recognition of $455.0 million of previously deferred revenue related to Mylan's sale of the product rights of Bystolic;
• $105.4 million, which consisted primarily of incremental amortization related to purchased intangible assets and the amortization of the inventory step-up ($23.9 million, pre-tax) associated with the acquisition of the former Merck Generics business; and
• 152.8 million shares of common stock assumed outstanding for the full quarter under the if-converted method related to the convertible preferred stock issuance in November 2007. (See Note 8 to the Condensed Consolidated Financial Statements).
Three Months Ended September 30, 2007:
• $12.4 million of similar purchase accounting related items recorded primarily with respect to the Matrix acquisition.
In addition to the above, the earnings per diluted common share in the current quarter was impacted by the issuance of 55.4 million shares of common stock in November 2007. A more detailed discussion of the Company's financial results can be found below in the section titled "Results of Operations".
Mylan's financial results for the nine months ended September 30, 2008, include total revenues of $3.93 billion compared to $1.51 billion for the nine months ended September 30, 2007. This represents an increase in revenues of
$2.42 billion. Consolidated gross profit for the nine months ended September 30, 2008 was $1.68 billion compared to $753.2 million in the same prior year period, an increase of $922.4 million. For the nine months ended September 30, 2008, operating earnings of $263.3 million was realized compared to $272.2 million for the same prior year period.
The net loss available to common shareholders for the nine months ended September 30, 2008 was $280.3 million compared to net earnings of $158.3 million in the comparable prior year period. This translates into a loss per diluted common share of $0.92 for the nine months ended September 30, 2008, compared to earnings per diluted common share of $0.65 for the comparable nine-month period. The results were affected by the following items:
Nine Months Ended September 30, 2008:
• The recognition of $468.1 million of previously deferred revenue related to Mylan's sale of product rights of Bystolic;
• $335.7 million, which consisted primarily of incremental amortization related to purchased intangible assets and the amortization of the inventory step-up ($89.6 million, pre-tax) associated with the acquisition of the former Merck Generics business;
• A non-cash impairment loss on the goodwill of the Specialty Segment of $385.0 million (pre-tax); and
• A $104.2 million (pre-tax and after-tax) dividend on the 6.50% mandatory convertible preferred stock.
Nine Months Ended September 30, 2007:
• $53.1 million of similar purchase accounting related items recorded primarily with respect to the Matrix acquisition; and
• The write-off of acquired in-process research and development related to the Matrix acquisition of $147.0 million (pre-tax and after-tax).
In addition to the above, the loss per diluted common share in the first nine months of 2008 was impacted by the issuance of 26.2 million shares of common stock in March 2007 and the issuance of 55.4 million shares of common stock in November 2007. Because the first offering occurred in March 2007, the loss per common share for the nine months ended September 30, 2007 did not bear the full impact of the new shares. However, these 26.2 million shares, as well as the additional 55.4 million shares were outstanding for the full nine months ended September 30, 2008. A more detailed discussion of the Company's financial results can be found below in the section titled "Results of Operations".
Results of Operations
Three Months Ended September 30, 2008, Compared to Three Months Ended September 30, 2007
Total Revenues and Gross Profit
For the current quarter, Mylan reported total revenues of $1.66 billion compared to $477.1 million in the same prior year period. This represents an increase of $1.18 billion. The acquisition of the former Merck Generics business contributed revenues of $687.2 million, of which $561.7 million are included in the Generics Segment and $125.4 million are included in the Specialty Segment. Also included in total revenues for the quarter is $455.0 million of previously deferred revenue recognized related to the sale of our rights of Bystolic. Excluding the effects of the former Merck Generics business acquisition and the Bystolic revenue, total sales for the three months ended September 30, 2008 were $514.6 million. This represents an increase of approximately 8% or $37.5 million over the comparable prior year period. Matrix contributed third-party revenues of $90.3 million compared to $80.0 million in the comparable prior year three-month period.
Gross profit for the three months ended September 30, 2008 was $911.1 million and gross margins were 55.0%. For the three months ended September 30, 2007, gross profit was $221.6 million and gross margins were 46.5%. Gross profit is impacted by certain purchase accounting related items recorded during the three months
ended September 30, 2008 of approximately $105.4 million, which consisted primarily of incremental amortization related to purchased intangible assets and the amortization of the inventory step-up associated with the acquisition of the former Merck Generics business. Excluding these items, as well as the Bystolic revenue, gross margins would have been approximately 46.7%. Prior year gross profit is also impacted by similar purchase accounting related items recorded primarily with respect to the Matrix acquisition in the amount of $12.4 million. Excluding such items, gross margins in the prior year would have been approximately 49.1%.
The decrease in gross margins excluding the above items, is primarily due to the fact that, on average, the newly acquired former Merck Generics business particularly in countries outside of the United States, contribute margins that are lower than those realized by Mylan's domestic subsidiaries.
Generics Segment
For the current quarter, the Generics Segment reported total revenues of $1.44 billion. Generics Segment total revenues are derived from sales primarily in or from the U.S. and Canada (collectively, "North America"), Europe, the Middle East and Africa (collectively, "EMEA") and Australia, Japan and New Zealand (collectively, "Asia Pacific").
Total revenues from North America were $910.8 million for the three-month period ended September 30, 2008 compared to $397.0 million for the three months ended September 30, 2007, representing an increase of $513.8 million. In the current quarter, revenue of $455.0 million is the result of the sale of Bystolic, as discussed above and revenue of $30.7 million is the result of the acquisition of the former Merck Generics business. Excluding the impact of these items, total North America revenues increased by $28.1 million or 7%. This increase is the result of new products, partially offset by unfavorable pricing. Volume had little impact on the change in revenues as doses shipped during the quarter, excluding the impact of the acquisition, increased by approximately 1%.
Fentanyl, Mylan's AB-rated generic alternative to Duragesic® , continued to contribute significantly to the financial results. Despite the entrance into the market of additional generic competition in August 2007, volumes in the current quarter increased compared to the comparable prior year period as Mylan was able to supply to the market while certain competitors recalled their versions of the fentanyl patch. The Company expects additional competition in the future that may impact pricing and market share. The entrance into the market of additional generic competition upon Mylan's loss of exclusivity on amlodipine also had an unfavorable impact on the current quarter sales as compared to the prior year period. As is the case in the generic industry, the entrance into the market of additional competition generally has a negative impact on the volume and pricing of the affected products. In order to offset decreases in sales as a result of additional competition, generic pharmaceutical manufacturers must be able to successfully bring to market new products. During the three months ended September 30, 2008, new products contributed $67.9 million to total revenues, with paroxetine being the most significant.
Total revenues from EMEA were $393.9 million for the three months ended September 30, 2008, all of which were the result of the acquisition of the former Merck Generics business. Within EMEA, approximately 70% of net revenues are derived from the three largest markets: France, the U.K. and Germany.
Total revenues from Asia Pacific were $137.6 million for the current quarter, all of which were the result of the acquisition of the former Merck Generics business. The majority of revenues from Asia Pacific are contributed by Alphapharm, Mylan's Australian subsidiary, with the remainder comprised of sales in Japan and New Zealand.
Certain markets in which the Company does business have recently undergone, some for the first time, or will soon undergo, government-imposed price reductions or similar pricing pressures on pharmaceutical products. This is true in France and Australia, though this issue is not limited to solely these markets. In addition, a number of markets in which we operate have implemented or may implement "tender systems" for generic pharmaceuticals in an effort to lower prices. Such measures are likely to have a negative impact on sales and gross profit in these markets. However, some pro-generic government initiatives in certain markets could help to offset some of this unfavorability by potentially increasing generic substitution.
For the three months ended September 30, 2008, segment profitability for the Generics Segment was $720.1 million compared to $168.0 million in the comparable three month period. Of the current year amount, approximately $455.0 million is a result of the recognition of the Bystolic revenue and $70.2 million is due to the
acquisition of the former Merck Generics business . Excluding these amounts, segment profitability increased by $26.9 million as a result of higher sales and gross profit as discussed above.
Specialty Segment
For the current quarter, the Specialty Segment reported total revenues of $130.6 million, of which $125.4 million represented sales to third parties. The Specialty Segment consists of Dey, an entity acquired as part of the former Merck Generics business acquisition that focuses on the development, manufacturing and marketing of specialty pharmaceuticals in the respiratory and . . .
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