Viatris Inc. (VTRS) Q2 2012 Earnings Report, Transcript and Summary

Welcome to Mylan's Second 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 94584310. [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 Second Quarter 2012 Earnings Call. Joining me for today's call are Mylan's Chief Executive Officer, 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 numerous forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements often may be identified with the use of words such as may, will, could, should, would, project, believe, anticipate, expect, plan, estimate, guidance, trends, forecast, potential, intend, continue and variations of these words or comparable words. Our forward-looking statements may today include, among others, statements related to anticipated business levels, trends in some European countries, planned launches of and anticipated exclusivity period for new products, our ability to achieve forecasted full year results while absorbing the impact of negative pricing pressures, expectations for capital expenditures, expectations for R&D, SG&A and other spending. Our guidance range, future earnings, planned activities, anticipated growth and other expectations and targets for future periods, including our expectations regarding the third and fourth quarters for the 2012 overall. 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 factors set forth under forward-looking statements in our recent earnings release dated July 26, 2012, as well as the risk factors set forth in our report on Form 10-Q for the period ended March 31, 2012, and in our other SEC filings. You can access our Form 10-Q and other SEC filings, including our earnings press release, which we filed on Form 8-K 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 Generally Accepted Accounting Principles or GAAP. Please refer to today's earnings press release, which is available on our website, as well as on SEC website, as it contains detailed reconciliations of the non-GAAP financial measures we use for our second quarter results prepared in accordance with GAAP. Before I turn the call over to Heather, let me also remind you that the materials in the call, with the exception of the participant questions, is a property of Mylan and cannot be recorded or rebroadcast without Mylan's expressed written permission. With that, I will now turn the call over to Heather.

Thank you, Kris, and good morning, everyone, and thank you for joining us. I would also like to welcome and recognize Mylan's employees around the world. Because of their dedication and hard work, we once again delivered very strong results. On behalf of the Board of Directors and our entire management team, I would like to congratulate them on a job well done. Mylan had an outstanding second quarter, delivering double-digit top line and bottom line year-over-year growth. Sales were about $1.7 billion, up 12% on a constant currency basis, and our adjusted diluted EPS increased 15% from the same prior year quarter to $0.60 a share. Building on our strong first quarter, this stellar performance supports our confidence that 2012 will be the best year-to-date in Mylan's history, with many more to come. Among the second quarter's highlights were growth of more than 50% in our Specialty business, double-digit growth in North America and strong performance of our ARV franchise. Our performance this quarter was strong compared to last year's second quarter when we had several very significant product launches. Further, we delivered this growth while continuing to invest in our global platform through increased R&D and sales and marketing programs. In addition, our gross margin was up almost half a percentage point. We also saw improvement in some European countries. Constant currency third-party net sales in our EMEA region were down about 3% year-over-year, a smaller decline than we've seen in recent quarters. EMEA's top line was essentially flat from Q1 to Q2 of this year. These results are yet another demonstration of our ability to manage our global platform for growth by optimizing new launches and seizing opportunities as we continue to build our base business and effectively manage pricing pressures. It's against this factor of that we look forward to the third quarter, which we project to be by far our strongest of the year, and a fourth quarter that is similar to or slightly higher than the second quarter. We are reaffirming our 2012 adjusted EPS guidance of $2.45 to $2.55 per share, as well as our 2013 target of $2.75. Earlier this year, when we hosted our Investor Day, we outlined Mylan's strategic growth drivers. I'd like to walk you through several of them now and comment on results achieved or progress made during the second quarter. Our core growth driver is our global operating platform, which we continue to leverage this quarter. In our North America generics business, third-party net sales for the quarter were $845 million, up 13% from the comparable year ago period. More than 70% of these sales come from existing products, with the remainder coming from multiple new launches. In the U.S., drivers in the quarter included Escitalopram, Doryx and Abacavir, which is enjoying 180 days of exclusivity. We also look forward to important launches throughout the rest of the year, including Modafinil. For our settlement with Teva, we may launch our product on August 10, which is prior to the expiration of the 180-day exclusivity period brand of Teva. We also expect to launch Actos, Actoplus Met and [indiscernible]. In Canada, our robust pipeline has produced 17 new product launches thus far in 2012, an unprecedented number for us, and we expect to sustain a similar level annually through at least 2015. Among our more significant second quarter launches were Crestor and Tracleer. In EMEA, constant currency third-party net sales for the quarter totaled $327 million which, as I mentioned earlier, represented a decline of about 3% year-over-year. Nearly 90% of these outcomes from existing products, with the remainder coming from new product introductions throughout the region which included Lipitor, Candesartan, Ibandronate, Lamivudine, which is our first generic ARV launched in Europe. While existing product volume remained flat year-over-year, pricing was as expected, lower due to government action and ongoing competitive pressure. In this environment, we continue to manage our cost structure aggressively through vertical integration, repatriation of product and other measures taken to manage and reduce cost of goods sold. In both Italy and Spain, we experienced double-digit constant currency sales growth year-over-year due to higher volumes on existing products and new product launches, which offset pricing impact. In addition to Italy and Spain, we saw some growth in smaller countries. And in Germany, our enhanced cost structure continue to allow us to compete in multiple tenders. In our Asia-Pacific region, third-party net sales for the quarter totaled nearly $308 million and 9% constant currency increase. The primary driver of this growth was our ARV franchise. In Japan, higher volumes continue to offset price cuts that went into effect on April 1, and of which the market began adjusting during the first quarter. Our third-party sales in Australia fell slightly as new product revenue and favorable volume and mix nearly offset the impact of price cuts of nearly 25% made in the second quarter by Australia Pharmaceutical Benefits Scheme and most significant agency's history [ph]. As for our Specialty business, our second quarter performance was very strong. Sales rose 51% year-over-year to almost $200 million. Year-over-year sales for the first half of 2012 were up 58%. Domestic sales of EpiPen Auto-Injector accounted for most of this increase, driven by unprecedented script to expansion and ongoing growth of the anaphylaxis marketplace. Performance sales also grew, and the product continues to do well in all 4 major channels: retail, home health care, hospitals and long-term care. The nebulized LABA market in the U.S. is expected to expand about 15% this year and 10% in 2013. We expect our growth to continue to outpace the market. We also were pleased to announce in May that we had entered into settlement agreements with Sanofi and concerning their Brovana products. Moving on to our other strategic growth drivers, we continue to believe we are well positioned to benefit from ongoing measures being taken to boost generic utilization. In the last year, utilization has increased in several European countries such as France, Italy, Spain, Portugal and Belgium, as governments modify reimbursement practices. Recently in France, for instance, when a consumer wants to buy a certain brand of product, he must pay for them out of pocket and then get reimbursed, whereas if he's willing to accept the generic alternative, he will pay nothing. In addition, Japan continues to represent a significant opportunity. Over the last 12 months, Japan has experienced growth in generic utilization, which now stands at about 24%. As for our global Institutional business, we continue to invest in research and development and an additional capacity, which will allow us to increase the vertical integration of this business and support the future double-digit sales growth we expect. In addition, year-to-date in the U.S., we have received approvals on 5 injectable products, and we launched several products throughout the rest of the world. Moving on to our ARV franchise. We continue to strengthen our position as the market leader with our new and innovative dosage forms, and our portfolio now contains 43 products. Currently, approximately 1/3 of all HIV patients being treated in the developing world for the disease rely on a Mylan product. With respect to geographic expansion, we look forward this summer to launching our commercial business in India. And initially, we'll concentrate on certain therapeutic categories, starting with our ARV portfolio. We also are pleased with progress we are making in our export markets, and we are on track this year to file 150 dossiers in countries around the globe. Portfolio diversity continues to be an important driver of our business. Year-to-date, we've launched about 300 products, and we're on track to launch approximately 350 more by year end. As we have continued to diversify, today we offer a wide variety of dosage forms, with oral solids making up only about 57% of our portfolio. Examples of other forms include injectables, ophthalmic, patches, soft gel caps, dermatologics, respiratory and liquids. In neurology, earlier this year, lower courts ruled against us in the U.S. and U.K., respectively on Copaxone, and we intend to appeal those decisions. We remain confident in our application and expect to receive FDA approval before we have the ability to launch our product, given the anticipated length of the appeals process. Turning to our respiratory franchise. We continue to be on track and expect to launch generic Advair in 2015 in Europe and in 2016 in the U.S. We also continue to invest in internal respiratory capabilities in Ireland. In addition, the development of our COPD combination product remains on track. As for biogenerics, our product development remains on track, and we look forward to commercializing affordable products globally. Finally, earlier this month, we applauded the signing of the Food and Drug Administration Safety and Innovation Act, FDASIA, which received near-unanimous bipartisan support in Congress. Mylan has long been a passionate leader and an advocate for many pieces of the legislation, which updates the 1938 law governing FDA to help protect the health and safety of consumers by requiring that all facilities that supply product in the U.S., regardless of where they're located, be routinely inspected by the agency and have the one quality standard. Through the landmark Generic Drug User Fee program, the new law also will help expedite approvals of generic drugs by reducing review times of ANDA from 31 months to 10 months over the next 5 years. I'll now turn the call over to John to discuss this quarter's results in more detail, and I look forward to responding to your questions.

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. I refer you back to Kris's comment at the beginning of today's call regarding our use of adjusted measures. I am pleased with our results for the second quarter of 2012, which are in line with our expectations. As you'll recall, in early May, we increased and narrowed our adjusted diluted EPS guidance range for 2012 from $2.30 to $2.50 per share to a range of $2.45 to $2.55 per share. With the exception of our fully diluted share count, which I'll speak about in a few minutes, our other guidance metrics remains unchanged, and I'll walk through each of them today. Our Q2 results reflect double-digit growth on the top line and bottom line, excluding the effects of foreign currency, and were achieved while continuing to invest in new product development and sales and marketing programs, both of which also grew by double digits. As Heather discussed previously, our ability to continually introduce new products, in particular this quarter Doryx in the U.S., Lipitor worldwide, has served to mitigate some of the challenges of the macroeconomic environment in Europe, as well as government-mandated price reductions, which took place in Japan and Australia earlier in the year. We continue to manage against these macroeconomic headwinds and remain poised to achieve our forecasted full year result while also fully absorbing their impact. Getting into the details, let me now walk you through our financial results for the second quarter and first half of 2012. I'll also provide an update on our capital structure and liquidity position. Starting at the top of our income statement, total adjusted revenues for the quarter were approximately $1.7 billion, an increase of 7% over last year's second quarter revenues of approximately $1.6 billion. Year-over-year, third-party net revenue growth on a constant currency basis was approximately 12%. The 5% unfavorable effect of foreign currency translation primarily reflects a stronger U.S. dollar in comparison to many of the other functional currencies of our major operations but mainly in Europe and India. For the first half of 2012, total adjusted revenues were approximately $3.3 billion, an increase of 8% over revenues from the first half of 2011 or 12% on a constant currency basis. As a reminder, our guidance range for total revenues for the full year 2012 is between $6.8 billion and $7.2 billion. Recognizing current exchange rates and using them to forecast the remainder of the year, we expect to be near the low end of this revenue range as the impact of changes in foreign exchange rates is estimated to have an unfavorable impact approaching $200 million. Looking at our operating profitability measures. Adjusted gross margin for the 2012 second quarter was a very strong 48.5%, a 30 basis point increase over the same prior year period. This increase was driven by favorable volume and pricing on our EpiPen Auto-Injector and by new product launches, partially offset by lower margins on existing products. The current quarter also saw margin improvement in Asia Pacific. Sales and gross profit from Mylan Laboratories Limited, our Indian subsidiary, benefited from the effects of a stronger dollar as compared to the rupee, as a significant portion of its sales are denominated in U.S. dollars. For the 6 months ended June 30, 2012, adjusted gross margins were 48.3% as compared to 47.7% in the prior year. Our guidance range for adjusted gross margin is 48% to 50%. We currently expect our gross margin in the second half of 2012 could potentially be above or at the upper end of our guidance range and as a result, our full year gross margin to be at the upper end of our guidance range. Adjusted operating income was $398 million for the second quarter of 2012, a 4% increase from a very strong Q2 2011 and up 8% from the first quarter of 2012. This increase, which is primarily the result of the favorable gross profit that I just discussed, was realized in spite of R&D expense for the -- was realized in spite of increased levels of spending on R&D and SG&A. R&D expense for the quarter, on an adjusted basis, was $93 million or approximately 5.5% of total revenues and up approximately 29% from the prior year and 39% on a constant currency basis. This increase was realized mainly as a result of ongoing clinical studies with respect to our respiratory and biologics programs. At the same time, SG&A, also on an adjusted basis, was $328 million for the quarter or approximately 19.4% of total revenues, and up approximately 9% over the prior year or 13% on a constant currency basis. The increase in SG&A in the current quarter is due in large part to increased sales and marketing in our Specialty franchise, in particular for the EpiPen Auto-Injector, which has resulted in the overall growth of the anaphylaxis market. For the 6-month period, adjusted R&D expense was $173 million, up 17% over the prior year. As a percentage of revenues, R&D expense to date for 2012 is 5.3%. Our guidance range for R&D expense for the full year is between 5.5% and 6.5% of total revenues. We expect R&D spending to continue to increase throughout the rest of the year, primarily related to our biologic and respiratory platforms, and we continue to believe that the full year spend will be within our guidance range. SG&A expense, on an adjusted basis, for the 6 months ended June 30, 2012, was $640 million, an increase of nearly 13% and within our full year guidance range of 18% to 20% of total revenues, albeit at the high end as a result of the increased sales and marketing spend. Adjusted EBITDA was $448 million and $859 million for the 3 and 6 months ended June 30, 2012, respectively, and remains forecasted to be between $1.75 billion and $1.95 billion for the full year. I'd like to briefly discuss a few of the one-off items that are being excluded from our adjusted results this quarter. In April, we entered into a new 5-year collective bargaining agreement with our production employees in Morgantown, West Virginia. In conjunction with this new agreement, we incurred approximately $15 million of cost including amounts associated with our planned withdrawal from a multiemployer defined benefit pension plan. Second, we incurred approximately $14 million of restructuring cost principally associated with the planned closure of our manufacturing facility in Napa, California. This amount relates principally to severance and related benefits. And finally, in accordance with applicable accounting guidance, we incurred a noncash charge of approximately $16 million, which represented an increase to our contingent consideration liability with respect to our acquisition of Pfizer's respiratory platform. Approximately half of this amount relates to the accretion of a liability to its undiscounted value, which would occur each quarter. Moving on to our consolidated, nonoperating financial metrics. Adjusted interest expense for the second quarter of 2012 was $61 million. As of June 30, 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 floating debt portfolio, which we believe is an optimal ratio. During Q2, we entered into forward starting derivative financial instruments to extend to 2016 the period over which we will maintain our 70-30 fixed floating ratio of our debt portfolio, as well as our average effective interest rate. Adjusted interest expense for the 6-month period was $122 million, and is forecasted to be between $245 million and $265 million for the full year. The effective tax rate in the current quarter was 26% compared to 27% a year ago. Our full year 2012 tax rate range is between 26% and 27%, and we continue to believe that this rate will be sustainable at this level going forward. Second quarter adjusted net income was $254 million, or $0.60 per share, a 15% increase from our Q2 2011 adjusted diluted EPS of $0.52 per share. For the 6 months, adjusted net income was $478 million or $1.12 per share, a 17% increase over the same prior year period. As I mentioned previously, our guidance range for diluted EPS is now $2.45 to $2.55 per share. During the quarter, we completed a $500 million share repurchase program under which we repurchased 23.4 million shares at an average cost of $21.36 per share. The impact of this share repurchase program is included in our calculation of adjusted diluted earnings per share on a weighted basis and now to approximately $0.01 for the current quarter. Our revised estimate of diluted shares for the full year is approximately 420 million shares. Turning to our cash flow metrics. Cash flow from operations on an adjusted basis, which takes into account the special items which are outlined in our press release and which I discussed in detail in our first quarter earnings call, was approximately $282 million for the quarter and $349 million for the year-to-date period. In addition, the cash paid to settle previously accrued litigation, which is excluded from adjusted cash from operations, we have also excluded cash received during the quarter with respect to the settlement of a patent litigation matter. Also during the quarter, Mylan and Sunovion settled outstanding litigation with respect to Sunovion's Xopenex product. As a result of this settlement, Mylan is licensed to continue sales of its concentrate product and will have a loyalty bearing license to sell its non-concentrate product upon receiving final FDA approval from the U.S. FDA. The settlement also releases Mylan from payment of the $18 million in damages that has been awarded by a jury earlier this year. The net penal impact of these items, as well as a few miscellaneous other litigation matters, was an income of $12.2 million for the quarter, all of which is excluded from our adjusted earnings. Our GAAP cash flow from operations for the current quarter and year-to-date period was a very strong cash inflow of $302 million and $193 million, respectively, and leaving us with unrestricted cash and marketable securities totaling approximately $347 million at June 30, 2012. We are still forecasting our full year 2012 adjusted operating cash flow to be within our guidance range of $900 million to $1 billion, driven by increased second half earnings, as well as increased cash receipts from accounts receivable related to our significant recent product launches. Second quarter capital spending was $61 million, bringing the total for the year-to-date to nearly $100 million. And as a result of the timing of planned capital expenditures, 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 first half of 2012 to acquire product rights and licenses. During the current quarter, we borrowed $365 million under our revolving credit facility. This, along with cash on hand and through cash received through our -- from our accounts receivable securitization facility, was used to fund the share repurchase program, which I previously discussed. In July 2012, the size of the accounts receivable securitization facility was increased to $400 million. Even with the additional borrowings under the revolver and the AR facility, we continue to have a significant financial flexibility. Our leverage ratio at June 30, 2012, as a result of the additional borrowings was 3.09 to 1, which is slightly above our long-term target of 3 to 1. However, we expect to be back below 3 to 1 by December 31, 2012. As such, we will continue to revaluate the uses of free cash flow for transactions based on the parameters, which we've outlined to you in the past. Additionally, I am pleased that in May, Mylan's credit rating was upgraded by Moody's to Ba1 from Ba2. And following this action, Moody's rating outlook is stable. This change is reflective of Mylan's track record of meeting our prior stated commitments, as well as our solid position within the global generic industry, in particular, our strong geographic diversification and robust product pipeline. To summarize, our second quarter, much like our first, was strong and in line with what we had anticipated. This positions us well heading into what will be an exciting second half of the year, culminating in what should be our strongest year yet. That concludes my remarks. I will turn the call over to the operator for Q&A. Beverly?

[Operator Instructions] Your first question comes from the line of David Risinger of Morgan Stanley.

My question is, can you just talk a little bit about that improvement in performance? Obviously, you're going into a little bit easier comps because of the declines in 2011, but if you could speak to how we should think about the prospects for constant currency performance in EMEA going forward. And then second, obviously, there was a big hit to prices in Australia, but your Asian business performed well. Could you talk about that outlook on a go-forward basis?

Sure. David, so I'll start with Europe. Look, I think that -- I want to be careful about not talking about this quarter as a trend yet in Europe, but I will say this. We certainly are getting positive indicators. And starting with France, our, as you know, largest market, we continue to see them take initiatives, increased utilization. We see those starting to take hold. We see volumes holding. So that ability of perhaps turning the quarter, maybe throughout the rest of this year, we will see a trend. But what I can tell you, we have our arms around what we can control, our cost of goods structure, our continual repatriation and vertical integration has benefited us. And that said in the past, once that market started to turn around, we -- certainly, we get our disproportionate share because of what we've been doing during these headwinds. Italy and Spain continue to be -- show a lot of growth, especially in volume. So while there continues to be austerity measures and price impact, we see that volume in our product mix and our ability to continue to grow those markets as very promising. So I think when you look overall of where there's still see -- or where we still see opportunity as the utilization being a much better offset the cost containment than just slashing prices. And as -- when you look at some of the other European countries that are much more mature, like the U.K., there is not that opportunity for utilization. They are pretty mature markets, so thus to maintain in some of those areas is very different than some of the growth opportunities we see for our strong holders. And then let's turn to the Asia Pacific. Yes, Australia continue to see price pressure as one of the most significant to date with the 25%. I will tell you, we continuously have them since 2008 when I believe they took the first big hit on pricing to rightsize that organization to remain very nimble and agile and be able to adapt to the changing environment. We've continued to invest in our R&D and product launches and cost of goods structure, which we'll continue to do, which has helped us hold and offset that price cut. As you mentioned, Japan had a nice increase. And again, we see opportunity. We see utilization for that country at about 24%. As you know the government has talked about getting that up to at least 30% here in the very near term, so again, continuing to capture some of that growth. And as I mentioned, our world driver being our ARV franchise out of our India subsidiary. And that continues to grow nicely, and we continue to be a very competitive market leader around tenders throughout the world.

Your next question comes of the line of Gary Nachman with Susquehanna Financial.

In terms of the contribution from new products in North America, the $240 million, can you quantify roughly how much of that was Doryx? What were the other big contributors? And those will probably drop off, but should we still see sequential growth in North America for the rest of the year from other new products?

Well, I think, Gary, as you know, we don't break out our revenue from products individually. We were very pleased with the launches that we had in the second quarter, and we do have a very strong quarter. We do have a very strong quarter coming up here in the third quarter for North America. So I think that it will be a very robust year for North America overall, including the second half of the year.

Okay. And then maybe for Heather, how is the DTC been going for EpiPen? Have you been able to measure the effect on this and the campaign in terms of drawing in new patients and also growing the market? Just some qualitative metrics around that.

So we've been very focused. As I mentioned in my remarks, it's actually growing the anaphylaxis market. So really just at the moment with us being the only epinephrine auto-injector on the market at this time, we've really been able to focus on education around anaphylaxis. So we have seen, as you've seen in these results, we've seen a great response to that. And we obviously look at Q3 to be one of the best ever for EpiPen as we continue to know that it's a very -- it's at the moment still very seasonal with back to school. We see Q3 always historically by being larger, but what we've seen with the script trend and expansion is that peak is starting earlier, lasting longer. So we certainly have seen a benefit and obviously, now with the runway absolutely clear for us through 2015, through our settlement with Teva, I can assure you, we are going to continue as we see those response continue to invest in EpiPen as a franchise.

Your next question comes from the line of Frank Pinkerton with SunTrust.

Just first one, can you give us any details on your confidence in the comments you made earlier about the timing for the Copaxone FDA approval?

Yes, we remain absolutely confident on our regulatory pathway and our ability to receive an approval. As you know, the -- how Hatch-Waxman works, our ability to get an approval prior to the appeals process is not possible. So we are very focused on still receiving our regulatory approval and absolutely, as I mentioned in my comments, believe that we'll get that prior to the appeals process ending.

Okay, great. And then maybe a little broader question. In Europe, and I don't want to talk about your business, but can you make comments on other competitors there? What are you seeing out of the regional players, some of the smaller players? Is consolidation happening from a standpoint of taking capacity out kind of outside of the top 10 players in that market?

Well, as we've said before, it's really tough to talk about Europe where it gets one country and one market. I mean, we -- you've got many, many markets, many different regions, many different dynamics. What I would say is as we do participate in many of those markets throughout Europe, what we have continued to see is, yes, through some of these macroeconomic headwinds, we saw irrational behavior in some countries. We've stated that we always believe that those weren't sustainable business model, that our ability to continue to leverage our global platform very much made us unique throughout the European countries. And so our ability to weather the storm that Europe's been going through, and come out on the other side stronger with a much better cost of goods structure, put us in position to compete much better than any regional or local player that doesn't have the benefit of the global scale that the Mylan platform have. So I think that's the best way I can describe how we see Mylan fitting in for Europe overall, how Mylan would be very differentiated from a regional or local player.

Your next question comes from the line of Marc Goodman with UBS.

Two things. First, on gross margin, you talked about how much of this is going to improve as the year progresses, how much of that is just the product mix and good products coming out of the U.S. versus what is more sustainable and I mean, relative to your comments about taking cost down in Europe, et cetera, et cetera, the gross margin line? And then secondly, are you doing anything in Europe to change the SG&A kind of cost structure because of all this austerity in the difficult markets over there? Because you've really talked about taking cost out of the gross margin line and you haven't talked about SG&A as far as Europe.

So Marc, with respect to the gross margin, certainly a portion of the margin increase in the second half of the year is the seasonality associated with our product mix. Certainly, the Specialty business, including EpiPen, has its strongest quarter of the year in the third quarter, and that it will benefit us. We also have a very strong year for launches in North America, and new product launches, obviously, are beneficial. But aside from North America, as we talked about in the first quarter, we have been seeing through the cost-reduction efforts that we've been taking, whether it be the vertical integration, the repatriation efforts, we have been able to maintain and grow margins in Europe, and we've been able to also -- even with the price cuts that we've seen in Asian countries, been able to weather that with stable margins. So I think that it is a -- the strength of our gross margin is a combination between product mix, new products and then also managing aggressively the cost associated with our existing product portfolio.

Well, I guess, just before you answer the other questions, just on the gross margin. If you didn't have this massive increase in the number of U.S. products, which arguably you're not going to have as much next year versus this year, which is where I'm going with the question, what is the kind of the core gross margin? I mean, are we -- that 48% kind of becomes like kind of the baseline that we're thinking about now?

I think that we'll certainly provide more detailed guidance with respect to '13 when we get closer to that year. We did talk about that a bit in our Investor Day, and I think we are confident in our 48% to 50% gross margin range that we have as our current guidance out there.

And as far as your question about the rest of European cost, I guess, first I would say that the global scale doesn't just apply to the product side. Our global scale is pulling on sales excellence, marketing excellence, looking at really -- as these markets continue to change and adapt, we're able to do so with along with them. So I would say, we have been able to take some restructuring in different countries and adapt in our sales model, and we continue to do so. So we are absolutely looking across the board at where that makes sense. And like I said, at the end of the day, our ability to really pull upon this global scale benefits us across the entire organization.

Have you cut any -- like of the sales force and staff, or how does that work?

It depends. I mean, we have countries, take Belgium, who was a total branded generic marketplace, and they have been increasingly switching to an INN substitution. So our ability, obviously, to marry up with the dynamics of that market is important, and we're able to do so. So I would say at the best we can be everything from sales, from marketing to sales reps to how we're selling the market into those countries.

Your next question comes on the line of Elliot Wilbur of Needham & Company. Elliot Wilbur - Needham & Company, LLC, Research Division: First question is for Heather. Heather, do you still believe that the generic version of Lidoderm is opportunity for the company in 2013? And if so, could you indicate whether or not you've included it as one of many potential probability adjusted products in your $2.75 per share guidance?

Sure. I do absolutely believe that Lidoderm could be opportunity for us in the second half of '13. And I guess just to build upon that a little bit, because I know there's been a lot of discussion around Lidoderm, just for your recollection, the citizens petition, which has been discussed quite a bit, we filed back in 2006. After that citizens petition was filed, talking about -- Indo [ph] put forward their argument about bioequivalency and how the standards should be changed and what should be required, FDA issued guidance very clearly and have said about what they wanted to see with the Lidoderm patch in the ANDA. So all of that transpired before Watson filed their ANDA in 2009, and absolutely nothing has changed from FDA's perspective on guidance or requirement since that time. So the idea that the citizens petition is holding up the application to manage, it's just not really possible. So again, we look forward to our regulatory approval and still believe that to be a very viable option in the second half of '13.

Elliot, with respect to the second half of your question on whether Lidoderm is in our 2013 numbers or not, I guess what I would say to you is that we risk adjust all of our products and take into consideration that there could be a range of periods in when products are introduced and, therefore, without saying specifically whether Lidoderm is in there or not, I would just say that Lidoderm is risk-adjusted into our future business plan. Elliot Wilbur - Needham & Company, LLC, Research Division: Okay. And I have additional question for probably you John as well. Could you just describe for us what, in terms of management and the Board's perspective on what is the most attractive use of the company's discretionary free cash flow at this point in time. I mean assuming you have a range of options between paying down debt, buying back shares or something more strategic, you kind of have done a little bit of everything over the past couple of years, I'm just kind of wondering what your current thinking is in terms of what's the best use of cash for enhancing shareholder returns?

Look, I'll -- I guess not being a member of the Board of Directors I'm not sure I want to speak on behalf of the Board of Directors, but I think we laid out on Investor Day earlier this year the parameters for how we would evaluate transactions. And I think those parameters continue to exist. In May, we believe that executing on a share repurchase program was the best and most appropriate use of the capital we had available to us at that time. And so we execute on that, and we were very pleased with the execution. On a going-forward basis, we'll continue to evaluate opportunities that are available for transactions in the marketplace, again, using the parameters we outlined, and we'll also evaluate the appropriateness of share repurchase program.

And I would just add, as you might imagine, Robert and the Board are extremely involved at looking at everything and constantly looking at all of our options.

Your next question comes from the line of Ronny Gal of Sanford Bernstein. Aaron Gal - Sanford C. Bernstein & Co., LLC., Research Division: I have two. First, regarding EpiPen, you kind of look at the ACA and its potential implications and you just wonder if EpiPen is not one of the products that is likely to have a disproportionately higher growth from ACA. I was wondering if you guys have done any work to look at that tailwind that the ACA provide to EpiPen? And second, you kind of mentioned you're building injectable capacity and obviously, this is a good time to bring injectable capacity online. I was wondering if you kind of look at your current build map, when do you think you'll have more capacity, I mean, minimal step-up in capacity around the injectable. I think would you be able to get in the same cycle before some other competitors are able to bring their capacity backup?

Let me start with your second question because I'm not sure I clearly understood your EpiPen question, and so I'll come back to that. But quickly on your ask about our capacity build, as we've announced earlier this year, we are continuing to invest in our injectable capacity in Ireland, as well as other areas around the globe. We certainly agree that it's our continual ability to vertically integrate on the injectable front and bring more and more of that into the Mylan global supply chain. It's certainly a benefit to us. So it absolutely is part of our footprint for expansion and capacity building this year as well as into the future. As far as EpiPen, it wasn't clear or you didn't come across clear of what you were asking me. I believe you used some initials of ACA. Aaron Gal - Sanford C. Bernstein & Co., LLC., Research Division: I mean the health care reform act, okay, essentially have -- through the expansion of Medicaid and the [indiscernible] exchanges. A lot more people will be covered and those would be young adults or people that are -- that might have not -- that might be using EpiPen more than the general population. Now I was wondering if you did any announcements toward the effect of the health care reform on EpiPen.

Okay, I think maybe what you're speaking of ACO. But in any event, we absolutely do not. As you may be aware or not aware, most programs allow for a patient to be reimbursed for 2 EpiPens per year. And that's usually a general rule of thumb across all programs whether government or private sector where people are carrying more EpiPens or typically paying out of pocket or get a waiver from their insurance companies. So certainly nothing in the current health care law changes those dynamics.

Your next question comes from the line of Ken Cacciatore with Cowen and Company.

My question is looking out to mid-2015. I would think as the management team, you have to look at that EpiPen settlement and clearly have a potential worst-case model or worst-case scenario, although many good things could happen and maybe discount out some of the other potential positives. So I was wondering, in terms of capital deployment and knowing how long the integration for Merck took, as you're looking at potential acquisitions or other diversification, what should we be thinking in terms of timing? And John, you talked about not wanting to talk about parameters, but maybe you could just walk us through very briefly some of the parameters of assets or that the asset acquisitions that you gave at the analyst meeting?

Sure. So Ken, as far as a long-term visibility you're looking for, I think starting what we've been doing since 2008 is continuing to give that long-term visibility. And hopefully, with people have been able to start gaining confidence in our ability to be not only laying out guidance and potential targets but our ability to meet or exceed them. So I think as we came out Investor Day with a whole assortment of opportunities that are drivers for 2013 and beyond because, as you mentioned, we need to work today on those things. So whether it's EpiPen, yes, there's a possibility there could be an AB-rated. While I remain fairly confident that, that's going to be a high hurdle, we have many, many other opportunities. I mean, when we talk about biologics, Advair, Copaxone, all definitely coming after that 2015 time period, not to mention our continuous voluminous amount of launches across the board. That's why today in my remarks, I tried to lay out not only what the platform is generating but with all the different strategic drivers that we discussed that all give benefits. So you don't have to rely on all of them hitting obviously just a couple of them hitting certainly put at great growth to Mylan from this point going forward. And I guess the other thing I'd say on your comment about integration, I could say that our Merck acquisition certainly is in a hemisphere all by itself. When you buy a company 2.5x your size and do a transformational acquisition as we did, certainly that integration, I think took a couple of 3 years that we certainly were able and continue to show every step along the way our ability to realize those synergies. I think when you look at acquisitions outside of that, we've certainly stated we're not doing a large 2.5x our size transformative acquisition. So things like Bioniche respiratory franchise from Pfizer, we've continued to be able to bolt and tuck those in without ever even mentioning integration or missing a beat because I think the platform we have in place today is scalable and sustainable and is able to absorb these kind of acquisitions very, very easily. So there's not a long-term planning period for any of those.

I know never say never, but should we be thinking along the lines of Bioniche going forward, or could we see something more sizable?

I mean, I think we've been clear, and I'll let John speak about that. We have a whole range of opportunities and potential from sizing perspective in our continued strengthening our financial flexibility. So all I'm saying is that everything and these types of acquisitions are certainly nothing compared to what the Merck integration required.

Right. Remember, Ken, that at Investor Day we indicated that we were committed to a long-term debt to EBITDA ratio of 3:1 that we would not go above that which is permitted under credit facility of 4.25:1. And that we would look at the transactions that expanded our portfolio or geographically into areas that we're not in or other shareholder value accretion transactions such as share repurchases that you saw too earlier this year.

Your next question comes of the line of Shibani Malhotra of RBC.

I'm just going to follow on from Ken's questions, but just in terms of looking at the Merck portfolio and the acquisitions you've done, Heather, can you just talk us through in terms of the synergies? I mean, should we assume that these have already been realized, or is there more to go? And then can you talk from the pipeline's standpoint, branded -- sorry, in terms of the filings you were expecting to get approved in Europe and also the kind of new Paragraph IV filings that you are thinking about, how much room is there for new products that we haven't heard of as yet and where we are -- where we are rather, on that? And then just specifically, on the M&A, can you talk about the kind of areas that we're looking at, I mean whether they're branded or generic, and what sort of disease areas you're looking at?

Let me start I guess on the portfolio aspect of your question. Just throughout the rest of this year, we're on track to launch another -- over 300 products throughout the world. We don't speak specifically before launches in Europe as you know. There's some competitive advantage, and it's not the same system that gives the same visibility, like here in the United States with Paragraph IV. But I can tell you, we've had very successful launches already this year, as I spoke about Atorvastatin and Candesartan and then Ibandronate. And like I said, we continue to have many more. Our total R&D portfolio and filings, we look to be doubling our size by 2015. So I mean, that should give you a sense of the amount of products that we have in the pipeline or already filed with regulatory agencies around the world of what we're going to be launching over the next couple of years. As far as Paragraph IV goes, I mean, certainly, we have been showing, like we did back in Investor Day, the state certain launches that we already know of or our first-to-file, share to file opportunities, 2012 was one of our largest years as far as the states certain so far been, but we continue to already be -- have settlements that go out through '13, '14, '15 of date certain. We continue to get our share of first-to-file opportunities. So I would just say that we continue to maximize and leverage our platform on all of the fronts that we have in the past. Difficult-to-formulate products, the Paragraph IV opportunity and, like I said, just a voluminous amount of dosage forms. And we are investing in everything from injectables, as I mentioned earlier, to our patches, at oral, solid dose soft gels, dermatologicals. So as far as from an M&A, when you think about -- we really have a lot of opportunity to complement this platform across the globe, from our Specialty division to continue to complement our infrastructure and disease state expertise in respiratory and allergy. You look at our Biologics partnerships and our ability to continue to leverage and build upon that, as well as therapeutic categories that we're not in yet. So we see an opportunity to still bid our U.S. generics business with things like whether it would be antibiotics or dermatological things that we're not as large in today. So across the board, I would say, we have many opportunities to continue to fuel the engine that we've put together across all of the fronts I just mentioned.

Your final question comes from the line of Jami Rubin with Goldman Sachs.

John, just a follow-up on some of the earlier questions regarding uses of cash and share repurchase, can the company expand its share repurchase program without violating your debt covenants? And we're calculating that you have about another $400 million to $500 million in share repurchase potential that you could do right now, can you confirm that, that is correct?

There are restrictions and under our bank facilities and borrowing facilities, with respect to our ability to do additional share repurchase programs. At the current time, our Board of Directors has not approved any other share repurchase programs. And quite honestly, I'm not in the position to confirm the $400 million to $500 million capacity at the current time.

But with the exception of the Board approving a buyback program, do your -- with your covenants, just given your cash flow generation, would your covenants allow you to announce a further share buyback program now?

I don't think that our covenants would allow us to announce a share repurchase program currently of the size that you were suggesting, no.

Okay. And just as a follow-up, EpiPen obviously performed very well this quarter, but we just noticed, in terms of IMS prescription trends during the month of June, demand for Epi dropped pretty considerably compared to the previous months. Just wondering what's going on, what you're seeing, is this just a seasonal adjustment, and how we should think about it going forward?

Well, a couple of things. I think you've heard me say before that I don't believe that EpiPen should be as a seasonal product as it's been historically. But we continue to educate people about obviously some of the unfortunate and unnecessary deaths that have taken place in restaurants and in schools have not been to things like these things that occur more in the springtime. So what I would say as we've seen, as you know, there's been a lot of reports of this allergy season started much earlier this yea since we had such a mild winter. I think that was a contributor to some of the strengths. But I would say, I also put a lot more weight on, like I said, just a pure expansion in education that's taken place in the market. And I continue to see hopefully more and more months becoming drivers short of what it's historically been just in Q3.

So operator, that will conclude our call, and we appreciate very much the support of everybody who participated.

Thank you, everyone, for joining today's conference call. You may now disconnect.