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| MYL > SEC Filings for MYL > Form 10-Q on 30-Oct-2009 | All Recent SEC Filings |
30-Oct-2009
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 Annual Report on Form 10-K, as amended, for the year ended December 31, 2008, the unaudited interim Condensed Consolidated Financial Statements and related Notes included in Part I - Item 1 of this Quarterly Report on Form 10-Q ("Form 10-Q") and the Company's other Securities and Exchange Commission ("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", "will", "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 filing date of this Form 10-Q.
Executive Overview
Mylan is the world's third largest producer of generic and specialty pharmaceuticals, offering one of the industry's broadest and highest quality product portfolios, a robust pipeline and a global commercial footprint that spans more than 140 countries and territories. Employing approximately 15,000 people, Mylan has attained leading positions in key international markets through its wide array of dosage forms and delivery systems, significant manufacturing capacity, global scale and commitment to customer service. Through its Matrix Laboratories Limited ("Matrix") subsidiary, Mylan controls the third-largest active pharmaceutical ingredient ("API") manufacturer in the world. This relationship makes Mylan one of only two global generics companies with a comprehensive, vertically integrated supply chain.
Mylan previously had three reportable segments, "Generics", "Specialty" and "Matrix," as determined in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards CodificationTM ("ASC" or "Codification") topic 280, Segment Reporting ("ASC 280"). The Matrix Segment had consisted of Matrix, which had been a publicly traded Indian Company, in which Mylan held a 71.2% ownership stake. Beginning this quarter the Company has changed its segment disclosure to better align with how the business is now being managed. Following the acquisition of approximately 24% of the remaining interest in Matrix and its related de-listing, Mylan has two reportable segments, "Generics" and "Specialty." The former Matrix Segment is included within the Generics Segment. Under the provisions of ASC 280, information for earlier periods has been recast.
Generics primarily develops, manufactures, sells and distributes generic or branded generic pharmaceutical products in tablet, capsule or transdermal patch form, as well as API. Specialty engages mainly in the manufacture and sale of branded specialty nebulized and injectable products. The Company also reports in Corporate/Other certain general and administrative expenses; litigation settlements; amortization of intangible assets and certain purchase-accounting items (such as the inventory step-up); non-cash impairment charges; and other items not directly attributable to the segments. The measure of profitability used by the Company with respect to its segments is gross profit, less direct research and development ("R&D") and direct selling, general and administrative ("SG&A") expenses.
Acquisition of the Remaining Interest in Matrix Laboratories Limited
On March 26, 2009, the Company announced plans to buy the remaining public interest in Matrix from its minority shareholders pursuant to a voluntary delisting offer. At the time, the Company owned approximately 71.2% of Matrix through a wholly-owned subsidiary and controlled more than 76% of its voting rights. On June 1, 2009, Mylan announced that it had successfully completed the delisting offer and accepted the discovered price of 211 Rupees per share, which was established by the reverse book building process prescribed by Indian regulations. During the nine months ended September 30, 2009, the Company completed the purchase of an additional portion of the remaining interest from minority shareholders of Matrix, for cash of approximately $172.3 million, bringing both the Company's total ownership and control to approximately 95%.
Matrix's stock was delisted effective August 21, 2009. Minority shareholders who have not yet tendered their shares may do so during the six-month period following the delisting. The purchase was treated as an equity transaction as required by ASC topic 805, Business Combinations ("ASC 805"). Under ASC 805, subsequent increases or decreases of ownership that do not result in a change in control are accounted for as equity transactions.
Termination of Joint Ventures
During the quarter ended June 30, 2009, Matrix and Aspen Pharmacare Holdings Limited ("Aspen") terminated two joint ventures in which each held a 50% share; Astrix Laboratories Limited ("Astrix") and Fine Chemicals Corporation ("FCC"). Under the agreed upon terms, Matrix sold its 50% interest in FCC to Aspen for $23.3 million. At the same time, a wholly-owned subsidiary of Mylan purchased from Aspen its 50% interest in Astrix for $38.9 million. These transactions resulted in a net gain of approximately $10.4 million, which is included in other income, net, in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2009. As of the date of purchase, June 1, 2009, the results of Astrix were consolidated with those of Mylan.
The Company accounted for the acquisition of the remaining 50% of Astrix using the purchase method of accounting. Under the purchase method of accounting, the assets acquired and liabilities assumed in the transaction were recorded at the date of acquisition at the preliminary estimate of their respective fair values.
Biologics Agreement
On June 29, 2009, Mylan announced that it has executed a definitive agreement with Biocon Limited ("Biocon"), a publicly traded company on the Indian stock exchanges, for an exclusive collaboration on the development, manufacturing, supply and commercialization of multiple, high value generic biologic compounds for the global marketplace.
As part of this collaboration, Mylan and Biocon will share development, capital and certain other costs to bring products to market. Mylan will have exclusive commercialization rights in the U.S., Canada, Japan, Australia, New Zealand and in the European Union and European Free Trade Association countries through a profit sharing arrangement with Biocon. Mylan will have co-exclusive commercialization rights with Biocon in all other markets around the world. In conjunction with executing this agreement, Mylan recorded a non-recurring research and development charge related to its up-front, non-refundable obligation pursuant to the agreement.
Financial Summary
Mylan's financial results for the three months ended September 30, 2009, included total revenues of $1.26 billion compared to $1.66 billion for the three months ended September 30, 2008. Included in total revenues for the three months ended September 30, 2008, was $455.0 million of previously deferred revenue related to the Company's sale of the product rights of Bystolictm. Excluding this, total revenues increased by $62.2 million over the same prior year period. Consolidated gross profit for the current quarter was $505.0 million compared to $911.1 million in the same prior year period, a decrease of 44.6%. Excluding Bystolic, gross profit for the current quarter increased by 10.7%. For the current quarter, operating earnings of $61.3 million were realized compared to $560.8 million for the three months ended September 30, 2008, or $105.8 million, excluding Bystolic.
The net loss attributable to Mylan Inc. common shareholders for the three months ended September 30, 2009 was $40.0 million, which translates into a loss per diluted share of $0.13. In the same prior year period, the net earnings attributable to Mylan Inc. common shareholders were $182.4 million, which translates into earnings per diluted share of $0.47. A more detailed discussion of the Company's financial results can be found below in the section titled "Results of Operations".
In addition to the revenue from the sale of the product rights of Bystolic, the comparability of results between the two periods is affected by the following:
• Charges consisting 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 of $71.8 million (pre-tax) during the three months ended September 30, 2009, compared to $105.4 million (pre-tax) in the comparable prior year period; and
• A charge of $121.0 million (pre-tax) related to the settlement of an investigation by the U.S. Department of Justice, concerning calculations of Medicaid drug rebates.
Mylan's financial results for the nine months ended September 30, 2009, include total revenues of $3.74 billion compared to $3.93 billion for the nine months ended September 30, 2008. This represents a decrease in revenues of $193.5 million. Revenues related to the sale of the product rights of Bystolic totaled $468.1 million during the nine months ended September 30, 2008. Excluding this, total revenues in the current year increased by $274.6 million or 7.9%. Consolidated gross profit for the nine months ended September 30, 2009 was $1.56 billion compared to $1.68 billion in the same prior year period, a decrease of 7.0%. Excluding Bystolic, gross profit for the current year increased by 29.1%. For the nine months ended September 30, 2009, operating earnings of $463.3 million was realized compared to $263.3 million for the same prior year period.
The net earnings attributable to Mylan Inc. common shareholders for the nine months ended September 30, 2009 were $89.4 million, which translates into earnings per diluted share of $0.29. In the same prior year period, the net loss attributable to Mylan Inc. common shareholders was $280.6 million, which translates into a loss per diluted share of $0.92. A more detailed discussion of the Company's financial results can be found below in the section titled "Results of Operations".
In addition to the revenue from the sale of the product rights of Bystolic, the comparability of results between the two periods is affected by the following:
• Charges consisting 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 of $210.2 million (pre-tax) during the nine months ended September 30, 2009, compared to $335.7 million (pre-tax) in the comparable prior year period;
• A charge of $121.0 million (pre-tax) related to the settlement of an investigation by the U.S. Department of Justice, concerning calculations of Medicaid drug rebates; and
• A non-cash impairment loss on the goodwill of the Dey, L.P. ("Dey") business of $385.0 million (pre-tax and after-tax) recorded during the three months ended March 31, 2008. The operating results of Dey are included in the Specialty Segment, however this non-cash impairment charge has been included in the Corporate/Other results for the nine months ended September 30, 2008.
Results of Operations
Three Months Ended September 30, 2009, Compared to Three Months Ended September 30, 2008
Total Revenues and Gross Profit
For the current quarter, Mylan reported total revenues of $1.26 billion compared to $1.66 billion in the comparable prior year period. Net revenues increased $64.7 million or 5.4% from $1.19 billion to $1.26 billion, while other revenues decreased $457.5 million, mainly due to the sale of the product rights of Bystolic in the prior year. Foreign exchange translation had an unfavorable impact on net revenues, due primarily to the strengthening of the U.S. Dollar in comparison to the functional currencies of Mylan's other subsidiaries, primarily those in Europe,
Australia and India. On a constant currency basis, net revenues increased by approximately 9%. The increase in net revenues is due to higher third-party sales in both of the Company's segments. The Generics Segment accounted for the majority of the increase ($42.2 million) followed by the Specialty Segment ($22.4 million). See below for a more detailed discussion of each segment.
Gross profit for the three months ended September 30, 2009 was $505.0 million, and gross margins were 39.9%. For the three months ended September 30, 2008, gross profit was $911.1 million, and gross margins were 55.0%. Excluding the impact of the Bystolic revenue, gross profit in the prior year was $456.1 million and gross margins were 38.0%. Additionally, gross profit for both quarters is impacted by certain purchase accounting related items which consisted primarily of incremental amortization related to purchased intangible assets and the inventory step-up associated with the acquisition of the former Merck Generics business. Excluding such items from both periods and the Bystolic revenue from the prior year, gross margins would have been approximately 45.6% in the current quarter compared to 46.7% in the same prior year period. The decrease in margins was realized by the Generics Segment, due mainly to an unfavorable product mix, as Specialty Segment margins remained constant.
Generics Segment
For the current quarter, the Generics Segment reported total revenues of $1.12 billion, compared to $1.08 billion for the comparable prior year period. 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, India and New Zealand (collectively, "Asia Pacific").
Total revenues from North America were $502.5 million for the three-month period ended September 30, 2009, compared to $460.3 million for the three months ended September 30, 2008, an increase of $42.1 million or 9.2%. The increase in revenues is the result of products launched subsequent to September 30, 2008, and favorable volume, partially offset by unfavorable pricing. New products contributed net revenues of approximately $60.0 million. Products generally contribute most significantly to sales and gross margin at the time of their launch, when there is limited generic competition and even more so in periods of market exclusivity.
Fentanyl, Mylan's AB-rated generic alternative to Duragesic®, continued to contribute to both revenue and gross profit despite the entrance into the market of additional generic competition. Sales of fentanyl have remained relatively strong primarily due to Mylan's ability to continue to be a stable and reliable source of supply to the market. 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. Competition on fentanyl in the future could continue to have an unfavorable impact on pricing and market share.
Total revenues from EMEA were $417.6 million for the three-month period ended September 30, 2009, compared to $422.1 million for the comparable prior year period, which represents a slight decrease. However, on a constant currency basis, EMEA revenues increased by approximately 7%, driven mainly by France and the U.K., partially offset by lower sales in Germany.
Revenues in France increased as a result of new product launches and higher volumes. In the U.K., prior year revenues were negatively impacted by excess supply in the market at that time. The increase in the current year is the result of such excess supply issues having since been resolved.
The German market was affected by recently implemented "tender systems". A number of markets in which we operate have implemented or may implement such tender systems for generic pharmaceuticals in an effort to lower prices. These measures have a negative impact on sales and gross profit in the affected markets. In Germany, current quarter revenues were negatively impacted by the price reductions as a result of these tenders, as well as general pricing pressure on its non-tender business and the loss of exclusivity on certain Statutory Health Insurance contracts.
Total revenues from Asia Pacific were $237.0 million for the three-month period ended September 30, 2009, compared to $226.6 million for the three months ended September 30, 2008, representing an increase of $10.4 million or 4.6%. Sales in Asia Pacific are derived from the sale of generic pharmaceuticals in Australia, India, Japan and New Zealand.
On a constant currency basis, Asia Pacific revenues increased approximately 10%. In Australia, sales decreased as new products were offset by lower volume. The third quarter of 2008 was an unusually strong quarter in terms of volume as many Australian customers re-stocked their inventory following the government mandated pricing reform that took place in July of 2008. Japan sales increased as Mylan continues to gain footing in the continually expanding Japanese generics market. In India, revenues increased primarily due to higher sales of first-line anti-retroviral ("ARV") products. Also contributing to the increase in Asia Pacific revenues are higher third party sales of API. API is also sold to Mylan subsidiaries in conjunction with the Company's vertical integration strategy.
In addition to net revenue, total revenues in Asia Pacific included other revenue of $9.6 million in the current quarter through intercompany product development agreements, compared to $13.9 million in the same prior year period.
Certain markets in which the Company does business have recently undergone government-imposed price reductions, thereby increasing pricing pressures on pharmaceutical products. This is true in Australia as well as several European countries. Such measures, along with the tender systems discussed above, 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, 2009, the segment profitability for the Generics Segment was $295.2 million compared to $273.9 million in the prior year comparable period. This increase is the result of higher revenues and gross profit, mainly from North America and Asia Pacific, as well as lower operating expenses as discussed below.
Specialty Segment
For the current quarter, the Specialty Segment reported total revenues of $154.7 million, of which $150.9 million represented third-party sales, compared to total revenues of $130.6 million in the same prior year period, of which $125.4 million represented third-party sales. The Specialty Segment consists of Dey, which focuses on the development, manufacturing and marketing of specialty pharmaceuticals in the respiratory and severe allergy markets. The most significant contributor to Specialty Segment revenues and profitability is the EpiPen® Auto-Injector, which is used in the treatment of severe allergic reactions. The EpiPen Auto-Injector is the number one prescribed treatment for severe allergic reactions with a U.S. market share of over 95%.
Segment profitability for the current quarter was $39.8 million compared to $28.2 million in the comparable three-month period. The increase is the result of increased revenue and gross profit as operating expenses were consistent when comparing the periods.
Operating Expenses
R&D expense for the three months ended September 30, 2009, was $69.8 million compared to $74.7 million in the same prior year period, a decrease of $4.9 million. The decrease was primarily realized by the Generics Segment and is reflective of certain restructuring activities undertaken by the Company with respect to the previously announced rationalization and optimization of the global manufacturing and research and development platforms.
SG&A expense for the current quarter was $259.6 million compared to $275.6 million for the same period in the prior year, a decrease of $16.0 million. This decrease was primarily recognized in Corporate/Other and is due to lower costs, including temporary staffing and consulting costs related to the integration of the former Merck Generics business, the majority of which were incurred in prior periods. Lower selling expenses, resulting from right-sizing of the sales force in certain non-U.S. markets, and the favorable impact of foreign currency also contributed to the overall decrease in the current quarter.
Litigation Settlements, net
During the three months ended September 30, 2009, the Company recorded net unfavorable litigation charges of $114.3 million. The majority of this amount, $121.0 million, pre-tax (approximately $83.0 million after-tax), related to the settlement of an investigation by the U.S. Department of Justice concerning calculations of Medicaid drug rebates.
Interest Expense
Interest expense for the three months ended September 30, 2009, totaled $77.0 million compared to $93.5 million for the three months ended September 30, 2008. The decrease is due to the reduction in the Company's outstanding debt balance, through repayments made in December 2008 and March 2009, as well as lower overall interest rates.
Other Income, net
Other income, net was $0.2 million in the current quarter compared to $5.8 million in the comparable three-month period.
Income Tax Expense
The Company recorded an income tax benefit of $11.1 million for the three-month period ending September 30, 2009 compared to a provision of $256.1 million in the comparable prior year quarter. The fluctuation in the effective tax rate is due to different levels of income, the deductibility of certain foreign attributes, changes in unrecognized losses of certain foreign subsidiaries, and changes to the reserves required by ASC topic 740, Income Taxes ("ASC 740").
Nine Months Ended September 30, 2009, Compared to Nine Months Ended September 30, 2008
Total Revenues and Gross Profit
For the nine months ended September 30, 2009, Mylan reported total revenues of $3.74 billion compared to $3.93 billion in the same prior year period. Net revenues increased $239.2 million or 7% from $3.44 billion to $3.68 billion, while other revenues decreased $432.7 million. On a constant currency basis, net revenues increased by approximately 14%. The increase in net revenues is due to higher third-party sales in both of the Company's segments. The Generics Segment accounted for the majority of the increase ($198.7 million) in third-party sales followed by the Specialty Segment ($40.5 million). See below for a more detailed discussion of each segment.
The decrease in other revenues of $432.7 million in the nine-month period was primarily the result of approximately $468.1 million recognized in the prior year of previously deferred revenue related to the sale of the Company's rights of Bystolic. This decrease is partially offset by an increase in incremental revenue in the current year resulting from the cancellation of product development agreements for which the revenue had been previously deferred. Prior to the termination of these agreements, Mylan had been amortizing the previously received non-refundable, upfront payments over a period of several years.
Gross profit for the nine months ended September 30, 2009 was $1.56 billion, and gross margins were 41.7%. For the nine months ended September 30, 2008, gross profit was $1.68 billion, and gross margins were 42.6%. Gross profit for both periods is impacted by certain purchase accounting related items which consisted primarily of incremental amortization related to purchased intangible assets and the inventory step-up associated with the acquisition of the former Merck Generics business. Excluding such items from both periods, and the Bystolic revenue from the prior year, gross margins would have been approximately 47.3% in the current year period compared to 44.5% in the prior year period. This increase in gross margins was realized by the Generics Segment, due primarily to the launch of new products in North America, as gross margins in the Specialty Segment remained constant.
Generics Segment
For the nine months ended September 30, 2009, the Generics Segment reported total revenues of $3.41 billion, compared to $3.16 billion for the comparable prior year period. Total revenues from North America were $1.64 billion for the nine-month period ended September 30, 2009, compared to $1.31 billion for the nine months ended September 30, 2008. Included in total revenues are other revenues of $48.3 million in the current year period compared to $17.0 million in the prior year period. This increase is the result of approximately $26.0 million of incremental revenue resulting from the cancellation of product development agreements.
North America net revenues were $1.59 billion in the nine-month period ended September 30, 2009, compared to $1.30 billion in the prior year period, an increase of $293.3 million or 22.6%. The increase in net revenues is the result of revenue from new products and favorable volume, partially offset by unfavorable pricing. New products contributed net revenues of approximately $297.0 million, the majority of which were divalproex ER, Mylan's version of Abbott Laboratories' Depakote® ER, and levetiracetam, Mylan's version of UCB Pharma's Keppra®.
Fentanyl continued to contribute significantly to both revenue and gross profit despite the entrance into the market of additional generic competition. Sales of fentanyl have remained relatively strong primarily due to Mylan's ability to continue to be a stable and reliable source of supply to the market. As is the . . .
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