On February 27, 2020 Mylan N.V. (NASDAQ: MYL) reported its financial results for the fourth quarter and the year ended December 31, 2019 and provided 2020 guidance (Press release, Mylan, FEB 27, 2020, View Source [SID1234554939]).

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Fourth Quarter 2019 Financial Highlights

Total revenues of $3.19 billion, up 4%, up 5% on a constant currency basis, compared to the prior year period.
Revenue Highlights:
Rest of World segment net sales of $927.9 million, up 9%, on an actual and constant currency basis.
Europe segment net sales of $1.11 billion, up 2%, up 5% on a constant currency basis.
North America segment net sales of $1.13 billion, up 3%, on an actual and constant currency basis, primarily due to new products sales.
U.S. GAAP diluted earnings per ordinary share ("U.S. GAAP EPS") of $0.04, compared to U.S. GAAP EPS of $0.10 in the prior year period.
Adjusted diluted earnings per ordinary share ("adjusted EPS") of $1.40, up 8% compared to adjusted EPS of $1.30 in the prior year period.
U.S. GAAP net cash provided by operating activities of $686.7 million, up 8% compared to $636.1 million in the prior year period.
Adjusted free cash flow of $810.5 million, up 18% compared to $689.7 million in the prior year period.
Full Year 2019 Financial Highlights

Total revenues of $11.50 billion, up 1%, up 3% on a constant currency basis, compared to the prior year period.
Revenue Highlights:
Rest of World segment net sales of $3.17 billion, up 5%, up 8% on a constant currency basis.
Europe segment net sales of $4.04 billion, down 3%, up 2% on a constant currency basis.
North America segment net sales of $4.16 billion, up 2%, on an actual and constant currency basis, primarily due to new product sales.
U.S. GAAP EPS of $0.03, compared to $0.68 in the prior year period.
Adjusted EPS of $4.42, down 3%, or flat to the prior year at $4.58 on a constant currency basis.
U.S. GAAP net cash provided by operating activities of $1.80 billion, down 23% compared to $2.34 billion in the prior year period.
Adjusted free cash flow of $2.10 billion, down 22% compared to $2.71 billion in the prior year period, driven by investment in working capital to support the $1.0 billion in new product launches.
Mylan is not providing forward-looking guidance for U.S. GAAP reported financial measures or a quantitative reconciliation of forward-looking non-GAAP financial measures. Please see "Non-GAAP Financial Measures" for additional information.

Full Year 2020 Guidance Highlights

Total Revenues between $11.5 billion and $12.5 billion.
Adjusted EBITDA between $3.2 billion and $3.9 billion.
A reconciliation of the Company’s 2020 financial guidance for Total Revenues and Adjusted EBITDA to the 2020 financial targets provided in July 2019 is presented below.
($ in millions)

Mylan CEO Heather Bresch said: "Mylan’s 2019 full year and fourth quarter results demonstrate the durability and strength of the business model we have created as well as our continued long-term commitment to expand access to medicine. Our model continues to be best positioned to withstand the negative trends impacting the industry, and allowed us to deliver on every key metric we set out to achieve in 2019, including total revenue, revenue from new product launches, and both adjusted cash flow and EPS. Our performance is the result of a number of key milestones, including growth across all segments in the fourth quarter and for the year on a constant currency basis.

Bresch continued: "Looking ahead to the full year of 2020, although we widened the ranges to take into consideration certain factors, the mid-point of our guidance is in line with what we previously disclosed for 2020 in conjunction with the Upjohn transaction. We are extremely proud of the efforts of our global work force that enable us to sustain consistent business performance and profitability across all of our segments. This includes work on our business transformation, which as we’ve previously shared, is focused on unlocking latent value within the organization and delivering economic profit, while maintaining our commitment of providing access."

Bresch continued: "As we have previously stated, on a go-forward basis, we believe adjusted EBITDA to be the best measure of our company’s underlying operational results and true business performance. As we continue to make excellent progress on the path to close the combination with Pfizer’s Upjohn business, we are confident that the strength of our diverse portfolio, geographic reach and global commercial and operational scale will serve as a strong foundation for Viatris to become a new champion for global health."

Mylan President Rajiv Malik said: "Our full-year results also reflect solid underlying business performance driven by existing products that generated double-digit-growth, including Creon, Influvac, Dona, Amitiza and Glatiramer Acetate 40 mg, coupled with achieving our target of $1 billion in new product launch revenues. As we look forward, complex products, global key brands and biosimilars, in addition to our business transformation will enable us to deliver on our 2020 guidance and help position Viatris for a strong future."

Mylan CFO Ken Parks added: "In 2019, Mylan’s stable and durable cash flow profile continued to generate strong results, delivering $2.1 billion of adjusted free cash flow, which was in line with our guidance range for the full year. In addition, we delivered on our commitment to repay $1.1 billion of debt in 2019 and reduced our notional debt to adjusted EBITDA leverage ratio to 3.6 times at the end of the year. In 2020, we remain committed to delever and to maintain our investment grade credit rating by paying down an additional $1 billion of debt on anticipated consistent free cash flow generation, while preserving our financial flexibility."

Evaluation of Financial Performance Measures

The Company’s management team recently undertook an evaluation of how it would measure the financial performance of the Company going forward. In evaluating its financial performance measures, the Company considered the strategy related to the planned 2020 closing of the Upjohn transaction (which will include a transition away from growth by acquisition with a greater focus on complex product related development activity and a focus on capital allocation, including strengthening of the balance sheet through the paydown of debt and returning value to shareholders). The purpose of the evaluation was to identify performance measures that best reflect the Company’s future business operations, strategy and goals. As a result of that evaluation, management identified the following primary financial performance measures for the Company: GAAP Revenues (measure for both guidance and actual results), GAAP Net Income (measure for actual results), Adjusted EBITDA (non-GAAP) (measure for both guidance and actual results) and Adjusted Net Income (measure for actual results).

The Company believes that these measures most appropriately reflect how the Company will evaluate business performance internally and have been used to set operational goals in 2020. In addition, the Company believes that adjusted EBITDA (non-GAAP) focuses management on the Company’s underlying operational results and true business performance, as well as demonstrating the Company’s ability to comply with financial debt covenants and assess the Company’s ability to incur additional indebtedness. As such, adjusted EBITDA will be used starting in 2020, in part, for management’s annual incentive compensation. The Company also believes that GAAP revenue focuses management on the overall growth of the business.

(1) Amounts exclude intersegment revenue that eliminates on a consolidated basis.

(2) Non-GAAP financial measures. Please see "Non-GAAP Financial Measures" for additional information.

Fourth Quarter 2019 Financial Results

Total revenues for the three months ended December 31, 2019 were $3.19 billion, compared to $3.08 billion for the comparable prior year period, representing an increase of $113.1 million, or 4%. Total revenues include both net sales and other revenues from third parties. Net sales for the current quarter were $3.16 billion, compared to $3.04 billion for the comparable prior year period, representing an increase of $127.8 million, or 4%. Other revenues for the current quarter were $28.5 million, compared to $43.2 million for the comparable prior year period.

The increase in net sales included an increase in the North America segment of 3%, in the Europe segment of 2% and in the Rest of World segment of 9%. Mylan’s net sales were unfavorably impacted by the effect of foreign currency translation, primarily reflecting changes in the U.S. Dollar as compared to the currencies of Mylan’s subsidiaries in the European Union. The unfavorable impact of foreign currency translation on current period net sales was approximately $34.9 million, or 1%. On a constant currency basis, net sales increased by approximately $162.7 million, or 5%. This increase was primarily driven by new product sales, partially offset by a decrease in net sales from existing products primarily due to the impact of lower pricing across the regions. Below is a summary of net sales in each of our segments for the three months ended December 31, 2019:

Net sales from North America segment totaled $1.13 billion in the current quarter, an increase of $32.0 million or 3% when compared to the prior year period. This increase was primarily driven by new product sales partially offset by a decline in sales of existing products due to lower volumes, and to a lesser extent lower pricing. New product sales were primarily driven by sales of the Wixela Inhub and other new products. The lower sales of existing products was due to changes in the competitive environment, including the loss of exclusivity of tadalafil. The impact of foreign currency translation on current period net sales was insignificant within North America.

Net sales from Europe segment totaled $1.11 billion in the current quarter, an increase of $19.3 million or 2% when compared to the prior year period. The increase was primarily the result of new product sales and higher volumes of existing products. These items were partially offset by the unfavorable impact of foreign currency translation and lower pricing on existing products. The unfavorable impact of foreign currency translation on the current period was approximately $33.4 million, or 3%. Constant currency net sales increased by approximately $52.7 million, or 5% when compared to the prior year.

Net sales from Rest of World segment totaled $927.9 million in the current quarter, an increase of $76.5 million or 9% when compared to the prior year period. This increase was primarily driven by higher volumes of existing products sold in certain emerging markets, China and Japan and new product sales primarily in Australia, India and certain emerging markets. The increase in net sales was partially offset by lower pricing on existing products and, to a lesser extent, the unfavorable impact of foreign currency translation. The unfavorable impact of foreign currency translation was $1.5 million, or less than 1%. Constant currency net sales increased by approximately $78.0 million, or 9% when compared to the prior year.
U.S. GAAP gross profit for the three months ended December 31, 2019 was $1.09 billion and U.S. GAAP gross margins were 34%. For the three months ended December 31, 2018, U.S. GAAP gross profit was $1.02 billion and U.S. GAAP gross margins were 33%. U.S. GAAP gross margins were positively impacted by approximately 425 basis points due to new product introductions primarily in North America. Additionally, U.S. GAAP gross margins were also positively impacted by a decrease in amortization expense in the quarter. Partially offsetting these items, U.S. GAAP gross margins were negatively impacted by the decline in sales of existing products by approximately 660 basis points. The decline in sales of existing products was primarily in North America. Adjusted gross profit was $1.70 billion and adjusted gross margins were 53% for the three months ended December 31, 2019 compared to adjusted gross profit of $1.68 billion and adjusted gross margins of 55% in the prior year period. Adjusted gross margins were negatively impacted by lower gross profit from sales of existing products partially offset by gross margins on new product introductions primarily in North America.

R&D expense for the three months ended December 31, 2019 was $151.8 million, compared to $148.8 million for the comparable prior year period, an increase of $3.0 million. This increase was primarily due to higher payments in the current year period related to licensing arrangements for products in development partially offset by lower expenditures related to the reprioritization of global programs.

SG&A expense for the three months ended December 31, 2019 was $654.4 million, compared to $632.9 million for the comparable prior year period, an increase of $21.5 million. The increase was primarily due to continued investment in selling and marketing activities. Also contributing to the increase were higher consulting fees and other expenses primarily related to the pending Upjohn transaction totaling approximately $29.0 million in the current quarter. Partially offsetting these items were gains recognized through the sale of assets and a reduction in bad debt expense due to a special business interruption event for one customer realized in the prior year quarter.

During the fourth quarter of December 31, 2019, the Company recorded a net charge of $8.9 million in litigation settlements and other contingencies, net, compared to a net charge of $1.1 million in the comparable prior year period. The increase from the comparable prior year period primarily relates to an increase in fair value of contingent consideration totaling approximately $8.5 million.

U.S. GAAP net earnings decreased by $30.7 million to earnings of $20.5 million for the three months ended December 31, 2019, compared to earnings of $51.2 million for the prior year period and U.S. GAAP EPS decreased from $0.10 in the prior year period to $0.04 in the current quarter. The Company recognized a U.S. GAAP income tax provision of $114.7 million in the current year period, compared to a U.S. GAAP income tax provision of $25.8 million for the comparable prior year period, an increase of $88.9 million. The increase in the U.S. GAAP income tax provision in the current year period is the result of an increase in earnings before taxes as compared to the prior year period combined with increases in the Company’s reserve for uncertain tax provisions in the current quarter. Adjusted net earnings increased by $51.7 million to $721.4 million as compared to $669.7 million for the prior year period. Adjusted EPS increased to $1.40 from $1.30 in the prior year period.

EBITDA was $827.4 million for the current quarter and $841.2 million for the comparable prior year period. After adjusting for certain items as further detailed in the reconciliation below, adjusted EBITDA was $1.06 billion for the current quarter and $1.01 billion for the comparable prior year period.

Year Ended December 31, 2019 Financial Results

For the year ended December 31, 2019, Mylan reported total revenues of $11.50 billion, compared to $11.43 billion for the prior year period, representing an increase of $66.6 million, or 1%. Total revenues include both net sales and other revenues from third parties. Net sales for the year ended December 31, 2019 were $11.37 billion, compared to $11.27 billion for the prior year period, representing an increase of $101.6 million, or 1%. Other revenues for the year ended December 31, 2019 were $130.2 million, compared to $165.2 million for the prior year period, a decrease of $35.0 million.

The increase in net sales was primarily the result of an increase in net sales in the Rest of World segment of 5% and the North America segment of 2%, partially offset by a decrease in the Europe segment of 3%. Mylan’s net sales were unfavorably impacted by the effect of foreign currency translation, primarily reflecting changes in the U.S. Dollar as compared to the currencies of Mylan’s subsidiaries in the European Union, Australia and India. The unfavorable impact of foreign currency translation on current year net sales was approximately $322.4 million, or 3%. On a constant currency basis, the increase in net sales was approximately $424.0 million, or 4% for the year ended December 31, 2019. This increase was driven by new product sales, partially offset by a decrease in net sales from existing products as a result of lower pricing and volumes. Below is a summary of net sales in each of our segments for the year ended December 31, 2019.

Net sales in the North America segment totaled $4.16 billion, an increase of $68.5 million or 2% from the prior year. This increase was due primarily to new product sales, including the Wixela Inhub, Fulphila (biosimilar to Neulasta) and YUPELRI. This increase was partially offset by lower volumes, and to a lesser extent, pricing of existing products, driven by changes in the competitive environment and continued portfolio rationalization. The impact of foreign currency translation on current period net sales was insignificant within North America.

Net sales in the Europe segment totaled $4.04 billion, a decrease of $120.2 million or 3% from the prior year. This decrease was the result of the unfavorable impact of foreign currency translation of approximately $223.7 million, or 5%. Partially offsetting this decrease were new product sales and higher net sales of existing products which were driven by higher volumes partially offset by lower pricing. Constant currency net sales increased by approximately $103.5 million, or 2% when compared to the prior year.

Net sales in the Rest of World segment totaled $3.17 billion, an increase of $153.3 million or 5% from the prior year. This increase was the result of higher net sales of existing products and new product sales. The increase to net sales of existing products was driven by higher volumes primarily in China, Japan, certain emerging markets and from the Company’s ARV franchise. The increase in net sales as a result of new products was primarily due to new product sales in Australia, certain emerging markets and from the Company’s ARV franchise. The increase in net sales was partially offset by the unfavorable impact of foreign currency translation of $93.3 million, or 3%, and to a lesser extent by lower pricing on existing products. Constant currency net sales increased by approximately $246.6 million, or 8%.
U.S. GAAP gross profit for the year ended December 31, 2019 was $3.90 billion and gross margins were 34%. For the year ended December 31, 2018, gross profit was $4.00 billion and gross margins were 35%. Gross margins were negatively impacted by the decline in sales of existing products by approximately 550 basis points. The decline in sales of existing products was primarily in North America and includes the impacts of product rationalization. Partially offsetting this impact, gross margins were positively impacted by approximately 500 basis points due to new product introductions primarily in North America. Adjusted gross profit was $6.14 billion and adjusted gross margins were approximately 53% for the year ended December 31, 2019, compared to adjusted gross profit of $6.18 billion and adjusted gross margins of approximately 54% for the year ended December 31, 2018. Adjusted gross margins were negatively impacted by lower gross profit from sales of existing products partially offset by gross margins on new product introductions primarily in North America.

R&D expense for the year ended December 31, 2019 was $639.9 million, compared to $704.5 million for the prior year, a decrease of $64.6 million. This decrease was primarily due to lower expenditures related to the reprioritization of global programs and lower restructuring related costs.

SG&A expense for the year ended December 31, 2019 was $2.56 billion, compared to $2.44 billion for the prior year, an increase of $122.6 million. The increase was primarily due to an increase of approximately $82.5 million for consulting fees and other expenses primarily related to the pending Upjohn transaction in addition to increased investment in selling and marketing activities. Also contributing to the increase was higher share-based compensation expense of approximately $60.7 million as a result of the reversal of all of the cumulative expense related to certain performance-based awards totaling $70.6 million in the prior year. Partially offsetting these increases was bad debt expense of approximately $26.5 million incurred in the prior year related to a special business interruption event for one customer and $20.0 million of compensation expense for an additional discretionary bonus for a certain group of employees in the prior year. None of the employees who received the 2018 discretionary bonus were named executive officers.

During the year ended December 31, 2019, the Company recorded a net gain of $21.4 million in Litigation settlements and other contingencies, net, compared to $49.5 million in the prior year. During the year ended December 31, 2019, the Company recognized a net gain in litigation settlements of approximately $1.0 million. This net gain was primarily due to a favorable litigation settlement related to the Celgene Corporation matter of $62.0 million, which was partially offset by litigation related charges for settlements reached during the year. Charges for litigation related matters included $18.0 million for the modafinil antitrust matter and $30.0 million for the settlement with the SEC. In addition, a $20.4 million gain was recognized for the reduction of contingent consideration related to the acquisition of the exclusive worldwide rights to develop, manufacture and commercialize a generic equivalent to GlaxoSmithKline’s Advair Diskus incorporating Pfizer’s respiratory delivery platform.

Litigation settlements for the year ended December 31, 2018 consisted primarily of a gain of approximately $22.9 million related to a favorable litigation settlement, which was partially offset by litigation related charges of approximately $14.9 million related to an antitrust and a patent infringement matter. In addition, a $44.0 million gain was recognized for the change in value of contingent consideration related to the respiratory delivery platform, which was partially offset by losses incurred on other contingent consideration.

U.S. GAAP net earnings decreased by $335.7 million to $16.8 million for the year ended December 31, 2019, compared to $352.5 million for the prior year. U.S. GAAP EPS decreased from $0.68 to $0.03 in the current year. The Company recognized an income tax provision of $137.6 million in the current year, compared to an income tax benefit of $54.1 million for the prior year period. During the year ended December 31, 2019, the Company reached an agreement in principle with the IRS to resolve all issues relating to our positions on the EPD Business Acquisition. As a result, the Company recorded a reserve of approximately $155.0 million as part of its liability for uncertain tax positions, with a net impact to the income tax provision of approximately $144.9 million. The tax provision for the year ended December 31, 2018 included a net benefit to the income tax provision of approximately $53.0 million as a result of the federal and state audits and settlements and expirations of certain state, federal, and foreign statutes of limitations. Partially offsetting this benefit was an increase in the reserve for uncertain tax benefits of approximately $18.0 million for certain other matters. Also impacting the current and prior year income tax provision and benefit, respectively, was the changing mix of income earned in jurisdictions with differing tax rates. Adjusted net earnings decreased to $2.28 billion in the current year from $2.36 billion in the prior year and adjusted EPS decreased to $4.42 in the current year from $4.58 in the prior year.

EBITDA was $2.75 billion for the year ended December 31, 2019, and $3.03 billion for the prior year period. After adjusting for certain items as further detailed in the reconciliation below, adjusted EBITDA was $3.54 billion for the year ended December 31, 2019 and $3.62 billion for the prior year period.

Cash Flow

U.S. GAAP net cash provided by operating activities was $1.80 billion for the year ended December 31, 2019 compared to $2.34 billion for the prior year period. Capital expenditures were approximately $213.2 million for the year ended December 31, 2019 compared to approximately $252.1 million for the comparable prior year. Adjusted net cash provided by operating activities was $2.29 billion for the year ended December 31, 2019 compared to $2.97 billion for the prior year period. Adjusted free cash flow, defined as adjusted net cash provided by operating activities less capital expenditures, was $2.10 billion for the year ended December 31, 2019, compared to $2.71 billion in the prior year period.

Guidance

Mylan is providing guidance for 2020 excluding any impact of the proposed combination with the Upjohn business. Mylan expects 2020 total revenues in the range of $11.50 billion to $12.50 billion, the midpoint of which represents an increase of 4% versus 2019. Adjusted EBITDA is expected to be in the range of $3.2 billion to $3.9 billion, which is in line with 2019 at the midpoint.

As discussed in the "Non-GAAP Financial Measures" section below, other than revenues, Mylan is not providing forward looking guidance for U.S. GAAP reported financial measures or a quantitative reconciliation of forward-looking non-GAAP financial measures to the most directly comparable U.S. GAAP measure because it is unable to predict with reasonable certainty the ultimate outcome of certain significant items without unreasonable effort. These items include, but are not limited to, acquisition-related expenses, including integration, restructuring expenses, asset impairments, litigation settlements and other contingencies, including changes to contingent consideration and certain other gains or losses. These items are uncertain, depend on various factors, and could have a material impact on U.S. GAAP reported results for the guidance period.

Q4 2019 Earnings Call and 2020 Guidance

As previously announced, Mylan N.V. will host a webcast at 4:30 p.m. ET today to discuss the Company’s financial results for the fourth quarter and year ended December 31, 2019, along with financial guidance for 2020. The webcast can be accessed live by calling 855.493.3607 or 346.354.0950 for international callers (ID#: 9599904) or at the following address on the Company’s website: investor.mylan.com. The "Q4 2019 Earnings Call & 2020 Guidance" presentation, which will be referenced during the call can be found at investor.mylan.com. A replay of the webcast also will be available on the website.