Viatris Inc. (VTRS) Q1 2012 Earnings Report, Transcript and Summary

Welcome to Mylan's First Quarter Earnings Conference Call and Webcast. Hosting the call today from Mylan is Ms. Kris King, Vice President, Global Investor Relations. Today's call is being recorded and will be available for replay beginning at 1 p.m. Eastern standard time. The dial-in number is (800) 585-8367, or (404) 537-3406 for international callers, with pin number 70819215. [Operator Instructions] It is now my pleasure to turn the floor over to Kris King; you may begin.

Thank you, Beverly. Good morning, everyone. Welcome to Mylan's First Quarter 2012 Earnings Call. Joining me for today's call are Mylan's CEO, Heather Bresch; President, Rajiv Malik; Chief Operating Officer, Hal Korman; and Executive Vice President and Chief Financial Officer, John Sheehan. During today's call, including the Q&A, we will be making forward-looking statements including those relating to our anticipated business levels, our future earnings, our planned activities, our anticipated growth and other expectations and targets for future periods. Note that these statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Because these statements are forward-looking, they inherently involve risks and uncertainties, and accordingly, our actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the risk factors set forth in our report on Form 10-K for the period ended December 31, 2012, and in our other SEC filings. You can access our Form 10-K and other SEC filings through the SEC website at www.sec.gov. And we strongly encourage you to do so. In addition, during this call, we will be referring to certain actual and projected financial metrics of Mylan on an adjusted basis, which are non-GAAP financial measures. It should be noted that non-GAAP measures such as adjusted revenue, adjusted gross margin and adjusted diluted EPS should be used only as a supplement to, not as a substitute for, or as a superior measure to measures of financial performance prepared in accordance with GAAP. Please refer to today's earnings press release, which is available on our website, as it contains detailed GAAP to non-GAAP reconciliations of our actual first quarter results. Before I turn the call over to Heather, let me also remind you that the materials in this call, with the exception of a participant question, is the property of Mylan and cannot be recorded or rebroadcast without Mylan's expressed written permission. With that, I'd like to turn the call over to Heather.

Thank you, Kris, and good morning, everyone, and thank you for joining us today. Before we get started, I'd like to welcome and recognize all of our fellow employees around the world. Through their passion and hard work, we delivered very strong results this quarter. On behalf of the Board of Directors and our entire management team, I would like to thank each and every one of them. Our diverse global platform has once again delivered strong results, representing a great start to 2012. Double-digit growth on our North American, Asia-Pacific and Specialty businesses allowed us to deliver robust financial results despite persistent macroeconomic headwinds in certain regions, specifically Europe and Australia. We are reaffirming our 2012 guidance of $2.30 to $2.50 per share and we see opportunities for upside during the year. Further, the strength of our platforms, first-in-class science and robust product portfolio give us continued confidence in our long-term growth target for 2013 and beyond. During the first quarter, we generated total adjusted revenues of $1.58 billion, an increase of 11% on a constant currency basis as compared to last year's first quarter revenues of $1.45 billion. On the bottom line, we delivered adjusted diluted earnings per share of $0.52, an 18% increase over the $0.44 per share we delivered during the first quarter of '11. In our North American Generics business, third-party net revenues for the quarter were $777 million, up more than 15% from the comparable year-ago period. This strong result was driven in part by launches of 11 new products in the U.S., including Ibandronate and Escitalopram, a first equivalent product that generated the highest and fastest conversion rate in versus generic launch we've seen in recent history. We also enjoyed strong sales in the U.S. on many of our existing products. Further, consistent with the strength of our R&D capabilities, 2 of the 8 first quarter products submissions we made in the U.S. are first-to-file opportunities. Currently we have 171 ANDAs pending FDA approval, 40 of which are potential first to file. Regarding our neurology franchise which is one of our strategic growth drivers, we're awaiting the court's ruling in the Copaxone patent infringement case whose trial concluded in September of 2011. We remain convinced that we have an AB-rated product and look forward to securing approval in the second half of this year. While we eagerly anticipate the court's ruling and regulatory approval, I'd like to remind everybody that we are not relying on this product to achieve our 2013 target of $275 million. We also are pleased with our performance in Canada, and it's another example of the robustness of our global pipeline. In Canada, we launched 9 products during the quarter, which is more than we launched during all of 2011. Our expanded portfolio is fueling sales and growth in our customer base, along with cost of goods efficiency that will help us weather price cuts and remain competitive and ensure consistent supply in every province. In EMEA, as anticipated, we delivered third-party net revenues of $336 million during the quarter, a decline of approximately 14% compared to last year's first quarter results. On a constant currency basis, revenues fell 10%. New products launched throughout the region served to offset volume pressure on sales of existing products and mitigate some of the effects of unfavorable pricing. During the quarter, we also enjoyed constant currency revenue growth of 8% in Italy, one of Europe's fastest growing markets. And in Spain, our sales volume grew along with this rapidly expanding market. Results in both cases were driven by increased generic utilization. Moreover, we remain on track to launch nearly 300 new products in Europe this year. By now, it should be very evident that our powerful global platform has and will continue to demonstrate its ability to absorb headwinds such as those occurring in Europe. Despite such headwinds, we have maintained our leadership positions in several markets such as France, Italy, Spain, U.K., Belgium and Portugal. Moving now to our Asia-Pacific regions. We generated third-party net revenues of nearly $299 million during the first quarter, an increase of more than 8% over last year's results and 12% higher on a constant currency basis. Our double-digit growth was driven largely by the strong performance of our business in India. We continue to see growth in our third-party business and accelerated growth in our ARV franchise, both in finished dosage form and API. We currently supply to more than 90 countries. We keep expanding our ARV business by adding products and geographies and expanding market access. Further, we remain on track to launch our Commercial business in India later this year. Finally, our Mylan Specialty business reported a 67% year-over-year increase in third-party net revenues, which totaled more than $162 million during the first quarter. This exceptional performance resulted from higher sales of the EpiPen Auto-Injector, another strategic growth driver. Increased volumes and favorable pricing drove the growth in sales, and we continue to see double-digit accelerated quarter-over-quarter sales growth. The settlement announced this morning with Teva only further enhances our confidence in the anticipated continued strong performance of this product and our entire Specialty franchise. As we've stated before, we see tremendous opportunity ahead for EpiPen as only 7% or 2 million of the 28 million people estimated to be at risk for anaphylaxis actually carries one. Continually increasing public awareness is essential to ensuring access to this product for people who need it, and generating sustained market expansion. Now let me turn to some of our other important strategic growth drivers. Our global Institutional business continues to deliver double-digit growth. We anticipate that this business can become a billion dollar franchise by 2016. We remain focused on supply chain integrity and optimization of our cost of goods; we’ve benefited and we will continue to benefit from being vertically integrated; and we now have successfully internalized the manufacture of 80% of our products globally, giving us even greater control of over our cost and quality at each point in the supply chain. We also expect significant growth in our product portfolio and are on track to launch approximately 650 products and file more than the 750 regulatory submissions globally this year. We also are pursuing external opportunities to expand our portfolio, such as our acquisition of 2 limited-competition dermatological products from Valeant earlier this year. Looking at our respiratory platform, we have made good progress on the integration of the Pfizer business we acquired in November of 2011, and we believe we are on track to launch the first AB-rated generic version of Advair. Finally, with respect to biogenerics, we have had productive discussions with the FDA regarding our portfolio and remain confident that we will be in the U.S. market starting in 2016. With that, I look forward to responding to your questions and will now turn the call over to John.

Thank you, Heather, and good morning, everyone. This morning, I'm going to be referring to financial metrics that have been prepared on an adjusted basis. These are non-GAAP financial measures and I remind you of Kris' comments at the beginning of the call today regarding our use of adjusted measures. I am extremely pleased with our financial results for the first quarter of 2012, a great start to what we firmly believe will be the most successful year in our company's history. Our Q1 results were achieved and our full year results will be achieved amid the macroeconomic headwinds that continue to plague Europe and in the wake of a 10% price cut in Japan and the most significant price cuts in Australian history, both of which occurred this quarter. This is a testament to the strength of our diverse global business, our first-in-class science, and our robust product portfolio. The difficult pricing environment in several of our locations was certainly not expected -- unexpected, nor were the positive development which served to offset, and in some cases, fully mitigate the unfavorable impact. In fact, our first quarter results came in line with what we -- with that which we have forecasted in our Investor Day on February 21. Also, our current quarter results were in line with those of the fourth quarter of 2011 on a pre-tax basis. Adjusted pre-tax income in the current quarter was $304 million compared to $294 million sequentially. Getting in the details, let me walk you through our financial results for the first quarter of 2012. I will also provide an update on our capital structure and liquidity position. Starting at the top of our income statement, total revenues for the quarter were $1.59 billion, an increase of 10% over last year's first quarter revenues of $1.45 billion. Year-over-year, first quarter third-party net revenue growth on a constant currency basis was approximately 11%. The relatively small unfavorable effect of foreign currency translation primarily reflects a stronger U.S. dollar in comparison to certain other functional currencies of our major operations, mainly in Europe and in India. Included in total revenues for the current quarter is approximately $9 million of other revenue related to a clean energy investment subsidiary, which we invested in near the end of 2011 and whose activities qualify for tax credits under Section 45 of the U.S. Internal Revenue Code. Our adjusted metrics, which I'll discuss momentarily, exclude all activity related to this investment with the exception of the net tax effect related to its operation, which is included in our adjusted effective tax rate. As a reminder, our guidance range for total revenue for the full year 2012 is between $6.8 billion and $7.2 billion. Looking at our operating profitability measures. Adjusted gross margin for the 2012 first quarter was a very strong 48%, up approximately 1 percentage point from the same prior-year period. Our strong current quarter margins are primarily the result of favorable pricing on EpiPen in our Specialty segment. Within generics, gross margins remained stable as new product launches in North America served to offset the normal pricing trend in the generic pharmaceutical industry. Our operations, particularly in Europe, continue to employ cost-savings initiatives, especially from the perspective of cost of goods sold. These efforts have proven successful, and adjusted gross margins in Europe, on a sequential quarter-over-quarter basis and excluding the effect of foreign exchange, and as we anticipated, increased nearly 300 basis points despite lower sales. And while I'm certainly not going to predict when the economic situation in Europe will improve, these initiatives are expected to continue to have an incremental positive impact on our adjusted gross margin throughout 2012. Adjusted operating income was $368 million for the first quarter of 2012, an 8% increase from Q1 2011. This is primarily the result of the favorable gross profit that I previously discussed, partially offset by increased levels of spending on R&D and SG&A. R&D expense on an adjusted basis was $80 million, or approximately 5% of total revenues and up approximately 7% from the prior year. Our guidance range for R&D expense for the full year is between 5.5% and 6.5% of total revenues. The timing of certain R&D spending, principally amounts related to our biologics and respiratory platform, has shifted into later periods of the current year with no impact on the timing of the programs themselves, and we continue to expect that the full year spend will be within our guidance range. At the same time, SG&A also on an adjusted basis, was $312 million or approximately 19.7% of total revenues, closer to the high end of our full year guidance range of 18% to 20%. The increase in SG&A in the current quarter is due in large part to our investment in our Specialty franchise, which has resulted in higher volume and increased market share. Adjusted EBITDA for the 3 months ended March 31, 2012, was $411 million and remains forecasted to be between $1.75 billion and $1.95 billion for the full year. Moving onto our consolidated non-operating financial metrics. Adjusted interest expense for the first quarter of 2012 was $61 million. We continue to benefit from low short-term interest rates. As of March 31, 2012, the average rate on all of our outstanding borrowings was approximately 5%. We continue to use interest rate swaps in order to target a long-term 70:30 fixed to floating debt portfolio, which we believe is an optimal ratio. As I mentioned before, our adjusted pre-tax earnings in the current quarter was slightly favorable as compared to that of the fourth quarter of the prior year. However, the effective tax rate in the current quarter was 26% as compared to 23% in the sequential quarter. The net result was adjusted diluted EPS in the current quarter in line with that of the fourth quarter of the prior year. Our full year 2012 tax rate range is unchanged at 26% to 27%, and we continue to believe that this rate will be sustainable at this level going forward. First quarter adjusted net income was $224 million, or $0.52 per share, an 18% increase from our Q1 2011 adjusted diluted EPS of $0.44 per share and in line with that of the fourth quarter 2011 after their adjusting for and fully consistent with, our expectations from our -- and adjusting for the higher tax rate in Q1 2012. Our guidance range for adjusted diluted EPS for 2012 remains at $2.30 to $2.50 per share. And as I previously mentioned, and fully consistent with our expectations from our Investor Day, we expect earnings in the second quarter to be in line with the first before accelerating into the third quarter, which will be by far our strongest of the year and finishing with a fourth quarter that will propel us to our midpoint of $2.40 per share. Turning to our cash flow metrics. Cash flow from operations on an adjusted basis was approximately $67 million. This takes into account certain – account certain special items principally the exclusion of payments of approximately $90 million related to previously settled and accrued litigation primarily related to AWP and the inclusion of approximately $62 million related to amounts due in 2012, which were received in late December 2011 but excluded for adjusted cash flow purposes from that quarter. Our GAAP cash flow from operations for the current quarter was a cash outflow of $109 million, leaving us with unrestricted cash and marketable securities totaling approximately $267 million. The first quarter is, historically, the heaviest in terms of the usage of cash and as a result of the timing of certain payments including taxes, interest and incentive optimization. But we are still forecasting our full year 2012 adjusted operating cash flow to be within our guidance range of $900 million to $1 billion. First quarter capital spending was $36 million and we expect full year capital expenditures to be within our guidance range of $300 million to $400 million. In addition to capital expenditures, approximately $70 million was spent during the quarter to acquire product rights and licenses, the majority of which relates to the purchase of 2 limited competition dermatological products from Valiant Pharmaceuticals. During the current quarter, we repaid the $600 million due under our convertible notes and made a scheduled payment under our term loan. Both of these payments were made using a combination of cash on hand, borrowings under our revolver and through cash received from our accounts receivable securitization facility, which we established in February. During the first quarter, we borrowed $285 million under this facility. At the end of the quarter, following the debt repayment and additional borrowings under the revolver and the AR facility, our leverage ratio remains at 2.9x and we continue to have more than ample borrowing capacity. To summarize, our first quarter was strong and was in line with what we had anticipated. This is an indication of things to come throughout what we believe will be our strongest year yet and another chapter in the exciting story that is Mylan. That concludes my remarks. And I'll turn the call over to the operator for Q&A. Operator?

[Operator Instructions] Our first question comes from the line of Douglas Tsao with Barclays.

Just a couple of questions. First, I was just hoping you could speak a little bit to what you're currently seeing in terms of market conditions in Europe. Just given some concerns regarding economic instability or softness, obviously, you expected -- you saw good results from Spain and Italy. In particular, I was curious if you could speak to what you’re seeing in Spain right now.

Well look, I think, Europe overall, what I'd say is, we're seeing what we've been seeing and saying that we're not trying to predict the future of when that's going to turnaround and obviously, why we continue to say we did not predict or forecast growth for our European region. I think with that being said, we do see increased generic utilization beginning to increase, especially in the southern European markets. We saw growth and maintain leadership position, obviously, in Italy. And we see the same with Spain. We see that volume through increased utilization offsetting some of the price cuts. So I definitely would say that governments are beginning to realize that for sustainable cost-containment, utilization increase is a more proven, has a better track record than just cutting cost. So I would say there is some optimism that, that trend certainly will continue but again, we certainly didn't predict growth this year.

And, Doug, I'd just add that although we're not seeing growth, we are very focused on maintaining the profitability of the region through cost savings and vertical integration initiatives, and we saw very nice growth in the margins in Europe, in the first quarter.

And in terms of the product introductions that you referred to in the prepared remarks, is that broadly across the entire region and applicable to almost all the countries?

Yes, absolutely.

Okay. And then also just a point of clarity on the settlement with Teva that was announced this morning. If they do make changes to their ANDA and there are meaningful, perhaps, design changes to their product, do you still have the opportunity to reinitiate litigation?

Well look, I think as far as our current settlement, it's very clear that we have through June of 2015. And as we made reference in there, they still have to receive regulatory approval, which we continue to believe that hurdle remains very high. So I would look at it that kind of regardless of product or changes and, obviously, we would look at any of those things that happen in the future, but I would say we are excited. And I think that this settlement just further enhances and underscores truly the value of this franchise and our ability to now have some great runway to just continue to show accelerated growth quarter-over-quarter.

Our next question is coming from Chris Schott with JP Morgan. Christopher Schott - JP Morgan Chase & Co, Research Division: First question, just would be interested in your views on the implications of further consolidation of the U.S. market with the Watson, Actavis transaction announced yesterday. Just as it relates to the overall health of the U.S. generic market and Mylan's business, specifically?

Sure. Look, I think it's a fantastic deal. I think it -- as we've said for quite a while, and Robert has been very vocal about, that consolidation is needed. Taking capacity out of the market especially a large player like Actavis, it certainly benefits the global marketplace. I think it further underscores the need to be globally competitive, which underscores the platform that we've pulled together over the last 5 years. So look, I think congratulations to them; it's good and I think there is more to come, more consolidation to come. Christopher Schott - JP Morgan Chase & Co, Research Division: Great. And then second question, just changing gears a little bit. Asia increasingly appears to be a more relevant driver to your numbers than Europe. Is this kind of low-teens organic growth we saw this quarter a decent proxy for the growth you could see the rest of the year given the Australian and Japanese price activity you just kind of referenced on the call?

Sure. So first of all, as I stated in my remarks, our business in India is just hitting on all cylinders from third-party business. The ARV franchise continues to grow, and we continue to add diversity of our product line. And so we see -- as we said, we anticipate continued double-digit growth. As far as Japan, again, we see a nice steady increase. Increased utilization continues to go up. We continue to build our product portfolio and most importantly, we continue to internalize those products, giving us much more flexibility, controlling the supply and the quality of that supply chain. So as Australia, obviously, continues to be a market that is undergoing significant pressure, I think since '08, we've shown our ability to manage through those headwinds and we're going to continue to do that. So I think all-in-all, Japan, and certainly, India, offsetting any of that pressure that we're feeling in Australia. And why we continue to be very confident in our growth in that region.

Our next question is coming from Elliot Wilbur of Needham & Company. Elliot Wilbur - Needham & Company, LLC, Research Division: Just an additional follow-up question, Heather, on the settlement. At your Analyst Day, you talked about the company's view that the financial community sort of over-estimated the potential negative impact to Mylan's numbers, if and when the generic was introduced of EpiPen. Is there anything in the agreement itself enabling Teva's entry in June 2015 that changes your expectation that a competitive generic entree would get roughly 40% of the market that would result in roughly an $0.08 to $0.12 negative impact on Mylan's bottom line? Then follow-up question for John. Just looking at the company's capital structure as it currently exist, some of the out-year debt senior notes, around, I think you're around $2.3 billion, is still sitting on the balance sheet at interest rates north of 7 1/2% and I guess given some of the recent transactions in the space and the current 0 interest rate regime across the world, I'm wondering if there might be an opportunity to refi that at more favorable rates given the company's enhanced cash flows and just stronger balance sheet position overall.

Sure. So I'll start with EpiPen. Look, absolutely nothing changes our thoughts or convictions about the strength and the brand equity of EpiPen. If anything, I think this settlement just underscores our confidence because we're going to have, at minimum, and I say minimum because I certainly believe the hurdles to get an AB-rated product are significant. But at a minimum, another 3 years to truly build the education around the need for people at risk to be carrying an EpiPen, so I think that brand equity only continues to become much more significant over the next few years. I think that you've seen the results of us being out there, raising awareness and educating and we're just going to continue to increase and invest in those efforts.

And then your question with respect to our capital structure and the notes that we issued, quite honestly, less than 2 years ago. You're right that interest rates have fallen significantly over the last 2 years and so some of those notes may have the opportunity, when they are prepayable and taking into consideration what prepayment penalties may exist, may have the opportunity for prepayment or refinancing. That's something that we'll look at when we get to a point where they're able to be refinanced.

Our next question is coming from David Risinger of Morgan Stanley.

I was hoping 2 things. First, if you could just frame out the key considerations for the second quarter so that we have a better understanding of how to think about the momentum year-over-year in the second quarter of 2012 versus 2011, and also, sequentially, versus the first quarter of 2012. And then second, for Heather, just to clarify, can you just let us know if you're settlement today covers generic EpiPen only in its current form or in all future forms as well?

So I'll start with your second question and I'll let John come back to your first. Look, what we can say about the settlement is that it absolutely covers everything between Meridian and Teva through June of 2015.

And I think, David, with respect to the second quarter, as I said in my prepared remarks, the second quarter being similar to the first is fully in line with what the expectations we had on Investor Day when we indicated that the second half of 2012 would be stronger than the first half of the year. The -- in particular, the -- my comments do not take into consideration a Doryx approval. But we continue to be -- to look forward to the court's ruling on that subject and our being able to launch that product, which has been long delayed, although I would say that as we look at the full year, we do expect -- we have always expected that before the end of the year that we would be in a place where we were or in a position to launch Doryx. We will launch Lipitor, the generic form of Lipitor, at the latter part of this quarter. And so I guess I would just conclude or summarize by saying that Q2 is -- continues to be in line with what we talked about or expected on our Investor Day.

Our next question is coming from Marc Goodman with UBS.

Heather, I was curious your thoughts on France and there seems to be some new rules that have been implemented to try to drive more generic competition utilization. So I was curious on your thoughts there. Second, if you could just talk about Japan a little bit more, what was the strength in Japan and how good was it? I mean was this a double-digit growth quarter? Have we had double-digit growth for Japan? Just give a sense because you did say, in the press release, it seemed like it was strong and accelerating a little bit.

Sure. So in France. We do absolutely see the beginnings of this push for increased generic utilization as I said, kind of, throughout Southern Europe. Italy is certainly the lead of that pack, but we do -- are very encouraged by the recent new regulation statute to try to incentivize on several fronts that increase of utilization. And like I said, I do think our efforts are paying off as we have been continuing to educate regulators and officials that, that utilization is much more sustainable to cost containment at healthcare than the price cuts. So I think that those numbers are -- they're starting to see that, obviously, from other countries. And so I'm very encouraged. And in the meantime, we've maintained our leadership position, 30% of the market share. As John said, we're very focused on that profitable growth and believe that, obviously, when Europe does come out of this -- comes out of the storm they're in right now, that we're going to be stronger than ever and certainly benefit disproportionately from now the increase in utilization. And as far as Japan goes, yes, as I said, we did see strong results. I would say that for the year, we certainly anticipate low double-digit growth in that country. And I think that it comes from a couple of places. One, as I've said, we've continued to enhance and now reaping the benefits of the pipeline that we started to build after our acquisition. And we see those coming to fruition so we're launching more products, we're launching more internally manufactured products. So the profitability of that -- the country continues to increase. And again, utilization, we continue to see it creeping up close to the mid 20s. So all-in-all, Japan is steadily, just steadily increasing and we're very happy with our performance there.

Our next question is coming from Jami Rubin of Goldman Sachs.

I don't want to beat a dead horse or anything, but John and Heather, maybe if you can just elaborate a little bit more why you're still so confident that there is such a high regulatory bar for AB-rated generics for EpiPen. I guess I was somewhat surprised that -- wasn't really quite sure why you reached a settlement given your confidence in that regulatory landscape, so if you could be a little bit more specific why you don't expect to see that. And then secondarily, again on generic Doryx, we were expected to hear that case or that verdict in February or March and here we are almost, we are in May, almost in May, haven't heard anything yet and just what you think is going on there.

All right. Jami, so look, the confidence, I've never been more confident in our statements about EpiPen and an AB-rated product. And I think that our settlement, the way in which we settled should certainly underscore that. So our settlement has nothing to do with the regulatory aspects. The press release clearly lays out that they still have to get regulatory approval, which we continue to believe is a very high hurdle and why I'm saying we now have a minimum until June of 2015. So our settlement really has with -- just truly on the patent case and the judicial, nothing to do with the regulatory process or the hurdles that we believe are still absolutely in place. As far as Doryx, look, like we can't predict Europe, I can't predict when judges are going to rule. He said it would be soon, and I guess his definition of soon or quick may differ from some of ours but so look, we anticipate that decision any time.

Our next question is coming from Shibani Malhotra of RBC Capital.

I guess, Heather, you talked about expecting increased consolidation in the generics industry due to excess capacity. Could you comment on whether Mylan is looking to further consolidate businesses and what sort of businesses you would be looking for if you were considering M&A? And then second, just to follow up on EpiPen again, I guess and on Jami's question. I was just wondering were you able to look at Teva’s Actavis filing before you reached a settlement or was this just kind of a blind sort of case?

Okay. So first, I'll talk about the macro issue. And I want to just clarify, my point on consolidation is not even just a generic industry, but the pharmaceutical industry as a whole. I think that as we've continued to talk about the global competitiveness needed to compete is brands looking at generics, I think more than ever because of the emerging markets and the need to have a high-quality breadth product portfolio. So look, that's why we continue to believe there absolutely will be consolidation, perhaps among smaller players, but continued activity among brand and generics. As far as our activity, I think we laid out a lot of parameters and clarity on Investor Day, speaking to the fact that we absolutely are looking and always looking at a lot of different things, whether it's new geographies, products, therapeutic categories, bolt-on for dosage forms, certainly looking for products for our Specialty division. So we are extremely active looking on all fronts. And like I said, just continue to be excited at the opportunities we see out there given some of the macro economic conditions in some of these geographies. As far as EpiPen, look, I can't and we don't talk about litigation and so forth. But all I can tell you is, obviously, litigation is not typically blind in both parties; there's a lot of activity between the parties, obviously, in pretrial as well as trial. So I'll just leave it at that.

Our next question is coming from John Boris with Citi.

First question just has to do where you invited to look at Actavis and can you just share whether you did look at the Actavis transaction and just discuss your competitive position? Obviously, based on some of the slides, lots of input out there, you do slip to #4 in a consolidating industry. Just some commentary there. And then I have a follow-up on EpiPen.

So look, I think it's safe, John, for you to imagine that we look at everything. And I think that probably the only thing I'd say about the process is that it's not an auction or a competitive process. So I would just kind of lead to that about what the activity that was going on around Actavis for a long time now. And as far as -- so as far as our continued activity, as I said, I think that we have a tremendous amount of opportunity to continue to add on. And again, as we said on Investor Day, we're not standing still or gone on vacation. So I can assure you that we are very active right now on many fronts. And I guess all I'd say about commenting on #3, #4, #1, #2, we've said it's really not about the number, I think it's the quality of the assets and it's how we're building Mylan. And I think we put together a great global platform, as Robert has said. We don't need another transformational deal. But what we are very interested in is high-quality assets that we can continue to add and maximize and leverage this platform that we've brought together. And I think between our vertical integration, which is exceeding all of our wildest imaginations and the benefits we're reaping from that, just continues to boost our ability to compete in every market around the world with the highest quality products. So we've not lost our sight on our mission to reach 7 billion people and believe that we've got a lot of opportunity to get there whatever number that puts us as a global player in this marketplace.

For John, on EpiPen, there was a slide you put up during your analyst meeting that seemed to indicate that with direct-to-consumer advertising, it was very deep, very responsive to market share gains. I think you're electing to make 2 investments this year, 6 months of direct-to-consumer advertising and you've invested in a 100-person sales force. How do you measure those investments going forward? And what are the implications for at least the volume growth on EpiPen going forward? And then just for Heather, can you just maybe talk about the Teva device and is it the device that would prevent it from being therapeutically substituted or AB-rated if and when they ever get approved?

So I'll start then I'll let John -- my comments about AB-rated have to do with the FDA and the regulatory environment around the Dragon [ph] device. So as I've talked about for a long time, that those regulations, and FDA clarified their position and the answer to the citizen petition a couple of years ago, that it's not that's same. Then it can't be rated substitutable and especially in a life – or an emergency situation. So my comments have always been around our confidence and our intellectual property around our Dragon [ph] device, the regulations at FDA and the ability to have to be the same. So if you have to retrain, it's not the same. And for obviously EpiPen and anaphylaxis, obviously reaches that hurdle of being a life saving or an emergency situation. So that again is why I underscore my confidence in the franchise and the hurdles for getting an AB-rated. I'll let John speak to ROI but what I will say is, we were -- after we saw the results from last year's DTC as well as other initiatives. Because while direct-to-consumer is certainly a large aspect, we're doing on many fronts, around this education. And obviously, if you look since Q3 of last year, you see just beyond accelerated double-digit growth year-over-year for each quarter. And obviously, this now being a record Quarter 1 for EpiPen and we see that continuing to grow. So it is absolutely, the results, I think, speak to the pay off here. And we just see that doing nothing but continuing to grow at an accelerated rate.

I'll just briefly add on to what Heather said. As you know, we are the market for anaphylactic shock with over 98% market share. And therefore, the programs that we're running are both focused on building the awareness regarding anaphylactic shock and the value of the EpiPen for dealing with those types of life-threatening situations. And the way we measure the success of the programs, whether it be the direct-to-consumer advertising campaign or the expansion in our field force, is by looking at the expansion of the market that's taking place. And that expansion of the market, we showed that on the Investor Day, has been significant. We're off to a great start for 2012. We talked on the Investor Day of the Specialty business growing 30% year-over-year for 2012. And at this point, one quarter into it, I think it's at least that.

Our next question is coming from Greg Gilbert of Bank of America Merrill Lynch.

Getting a lot of free advertising on EpiPen today, Heather. I'll start with EpiPen. Would the settlement structure allow you to launch an AG [ph] if you wanted to? And what are your thoughts on EpiPen OTC. And for John, I think you could've made a nickel or more in EPS on Modafinil before the Teva development. You're still pointing to potential upside to the range. So what's going better than expected so far this year? Or were you just being incredibly conservative on your initial guidance?

So look, I would say that there's no restrictions on us on EpiPen, but I have to tell you that there is certainly no reason – EpiPen --the kind of product and what we've spoken about from brand equity and the awareness around there would just be no reason to put an AG [ph] in. So look, I think that the settlement certainly, again, I'm just going to say -- and you're right a lot of good advertisement this morning, removes that overhang that we know the Street continued to be concerned that the what-if possibility that, that what-if has been taken off the table, and I can assure you we will maximize the opportunity we have ahead of us.

Yes, so Greg, I guess, Greg, on your second part, first of all, I guess I would start by saying that we're incredibly disappointed by the whole Modafinil situation. But Mylan has never been, we've said it so many times, about one product. And therefore, the -- we will -- we're whether it's Modafinil in or Modafinil out, we're still very confident at our $2.40 per share midpoint of our guidance range. And whether it be the very successful launch of Escitalopram that we had here in the first quarter or the strength of the EpiPen that we're seeing throughout 2012, all of those things make us very confident that 2012 will be a very good year, the best year for Mylan that we've had in our history. And look, I don't know that I would say we were being incredibly conservative or however you described it, I think we were providing a guidance range at the beginning of the year that we believe reflected the fact that not all good things happened, not all bad things happened. And that we would be in that guidance range. And we look forward to the year continuing to develop this way and taking advantage of upside opportunities.

How about that OTC piece of my question?

Oh, I'm sorry. Yes. So as far as OTC, listen, we've had a lot of discussions and we'll be continuing to have these discussions. I believe that the most responsible thing for EpiPen would be behind the counter. So it would look much more like sometimes how insulin is treated or plan B. So we believe that there is absolutely opportunity to continue to work with states because as you might imagine, there is -- all the states differ with pharmacy laws and regulations. But we are actively pursuing and looking at doing just that, working with the states, working with the FDA, to hopefully get to a place where there would be both prescription EpiPen as well as behind-the-counter EpiPen that would provide the maximum access to everybody who wanted or needed to carry an EpiPen to be able to have as many as they want and also be able to make sure, from a collaborative perspective that whether it's schools being covered, soccer fields, football as you might imagine, that not only it’s important to have the schools equipped, which we're launching a huge program here in the next couple of months with schools, but also everything in the community related to that. So all of this is working in conjunction and why I said that outside of just our DTC investment that there's a lot of other initiatives that are ongoing that we'll be excited to be telling you more about as the year unfolds.

Our next question is coming from Ronny Gal with Sanford Bernstein. Aaron Gal - Sanford C. Bernstein & Co., LLC., Research Division: I’ve got 2 and I promise not to ask a thing about EpiPen. The first one is John, kind of, we were a little bit on the Watson announcement yesterday where -- which surprised me the most is how much cash they can free to pay down the debt early on. And looking at your numbers, you've got roughly the same EBITDA they do roughly the same tax, roughly the same interest rate. You generate about $1 billion in operating cash flow, but you’re spending $400 million of that on CapEx; you're spending 40% of your operating cash flow on CapEx. And the question is, is there -- how do we think about that? You guys are spending a lot more than your peers in terms of percentage of cash flow on CapEx. Should we think about this as a positive or should you be thinking about maybe holding some of that back, paying down your debt more and then suddenly you look a lot less levered and look lot more financial, let’s call it digi-flexibility to return the cash, buy something or somehow to create like a most significant upside to the business. And then I do have a follow on.

So I'm going to start off even though you said John. I just at least want to underscore, not only our commitment to investment in CapEx but why. If you go back to our Investor Day, we said we were going to double our size in the next 5 years, from a capacity perspective, our platform. So as you look, we are investing, obviously, across the board whether it's on our API, whether it's in the finished dosage form facilities, but doubling that capacity, we believe is, again, just goes to the diversity of our platform, our ability to absorb whatever, headwind, countries, issues. That, that ability to not only invest from an R&D perspective and we talked a lot about our product portfolio doubling. And when you think about not only doubling, it's the quality of what we're doubling and the kind of products, again, our respiratory announcement. Our ability to have the dollars and invest the dollars we believe is another barrier to entry because we're using large dollar investments, whether it's respiratory, whether it's biogenerics, doubling our size. So we believe, as I said earlier, it's not necessarily just quantity, we believe not only are we investing in the right things, but certainly in a very quality way.

And I guess I would just add on to what Heather said, at 2.9x gross debt to EBITDA, we're very comfortable with that leverage ratio. And that leverage ratio has been declining steadily and accelerating in that decline. And so we generate $600 million a year of free cash flow; it’s just a substantial amount. We've been using that cash flow to reinvest back in the business as well as to delever. And so I think that we're building a platform for the future and responsibly reinvesting in that platform so we have the right play -- the right growth in the future while at the same time managing the balance sheet in a smart way.

And which is why I think we continue to reiterate our confidence and commitment to delivering on our longer-term growth prospects. Because the investments we're making today are for the 2016, '17, '18 opportunities that we believe we'll be able to globally monetize.

Our next question is coming from Gary Nachman with Susquehanna.

First, a couple of pricing questions. How is the pricing shaking up for generic Lexapro between you and Teva since the share seems to have been split evenly between you guys? And on EpiPen, how much more headroom in pricing are you assuming this year after taking that 10% price increase in March? And then I have a follow-up.

Your pricing question, your first one, we don't discuss pricing of individual products. All I can tell you is we continue to see stability in our products at both the base business and opportunities on some of these new launches. So I would say that on the first one. EpiPen, look, I think we've been pretty consistent in our pricing. And we see that continuing. So as we continue to invest and continue to look at building that awareness, we'll continue to have a pricing strategy that certainly mirrors that.

Okay, and just you mentioned in terms of your building out the Commercial business in India later this year, I thought I remembered you saying at the Analyst Day that, that was going to be earlier in the year, so I'm just curious if there were any changes to that timeline. And just talk about the impact you think that's going to have on the business in that region.

We have talked about July launch and that's where we exactly are. We will be launching sometime between July and August. And we don't see any significant impact on the year.

Our next question is coming from the line of Michael Faerm, Jr. with Credit Suisse. Michael Faerm - Crédit Suisse AG, Research Division: You had commented earlier about your confidence in your ultimate approval and AB rating for your generic Advair. Can you elaborate on why you're confident in that, and maybe contrast it to the EpiPen situation where you're confident that the generic won't get AB rating.

Sure, I'm going to start and then I'm going to let Rajiv, perhaps, speak to our confidence in it. Look, I think that what we said when we announced the acquisition of that platform as we were taking the core competencies of the existing Pfizer platform and marrying that up with what Mylan has always been known to do best, which is taking very complex opportunities and bringing them to fruition. So when we looked at the high-caliber and the asset and the position and the point that Pfizer had developed a product now marrying that up and complementing it with our scientific ability is really what underscored our confidence. And I'll let -- and as far as EpiPen goes, look, as I continue to say, it's the Dragon [ph] device component of EpiPen that makes those regulations and those aspects different.

And our confidence is based on what we acquired, the quality of the device and the similarity of the device between this one's and Glaxo's, as well as our continued dialogue with FDA and the progress which we are making. So we remain very confident that we are on the right path to build the first generic Advair.

Operator, I think we have time for one more question.

Your final question is coming from the line of Randall Stanicky with Canaccord Genuity.

I just keep it one. Just going back to Europe for a second. I appreciate and I think we all appreciate the headwinds and the challenges there. The double-digit declines in constant currency growth, if those continue, how much cushion do you have built in before that becomes an issue? I understand that you don't need to grow, but at what point does the constant currency decline start to hurt you?

Look, I talked about the fact that our gross margins actually increased 300 basis points quarter-to-quarter, Randall. And so it's not about the top line; it's about the bottom line, and we're managing that region in the context of the macroeconomic headwind. So it's not hurting us. We obviously would love to see growth and we look forward to when the macroeconomic issues in Europe are resolved and generic utilization rates increase. And the top line growth, together with the gross margins increasing, and that's why we talked on the Investor Day about Europe being a long-term growth driver for us. So with that, look, we appreciate all of our investors and the questions we received in this call. Q1 was very much in line with what we had expected, and we look forward to continuing to deliver on 2012 so...

Thank you.

With that, operator, you can close the call.

Thank you, this does conclude today's teleconference. Please disconnect your lines at this time, and have a wonderful day.