On November 6, 2016 Mylan N.V. (NASDAQ, TASE: MYL) reported its financial results for the quarter and nine months ended September 30, 2017 (Press release, Mylan, NOV 6, 2017, View Source [SID1234521585]).
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Third Quarter 2017 Financial Highlights
Total revenues of $2.99 billion, down 2% compared to the prior year period
North America segment third party net sales of $1.17 billion, down 22%; and down approximately 6% excluding the decrease in sales of the EpiPen Auto-Injector of $245.1 million
Europe segment third party net sales of $1.04 billion, up 24%
Rest of World segment third party net sales of $743.3 million, up 9%
U.S. GAAP diluted earnings per ordinary share (“U.S. GAAP EPS”) of $0.16, up 170% over the prior year period.
Adjusted diluted earnings per ordinary share (“adjusted EPS”) of $1.10 in line with our expectations, down 20% over the prior year period.
U.S. GAAP net cash provided by operating activities for the nine months ended September 30, 2017 of $1.57 billion, down 8% compared to $1.70 billion in the prior year period.
Adjusted free cash flow for the nine months ended September 30, 2017 of $1.91 billion, up 13% compared to $1.69 billion in the prior year period.
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.
Mylan CEO Heather Bresch commented, “Our third quarter results, which included adjusted EPS of $1.10, were especially strong considering the ongoing challenges we experienced in the U.S., including accelerated deceleration of EpiPen sales – both from our launch of an authorized generic as well as the contraction of the overall epinephrine auto-injector market.
“Our third quarter results also continue to show the durability of our resilient global platform, where we now believe that approximately 75% of our more-than-$2 billion adjusted operating cash flows stems from more predictable, recurring revenues across all markets around the world.
“As impressive, we recently received approval from the U.S. Food and Drug Administration of our Glatiramer Acetate product. Being first to market with the 40-mg strength – as well as offering the 20-mg strength – is a milestone because it underscores our scientific, regulatory and commercialization capabilities for this very complex product; it also paves the path for the many other complex products we have in our pipeline.
“Given that, and the stability of our global platform, we see a strong finish ahead for the year. As a result, we are increasing the low end of our adjusted EPS guidance range, where we now expect to generate between $4.45 and $4.70 per share.
“We also see sustainable momentum globally as we head into the new year, which is why we remain confident in our 2018 target of at least $5.40 in adjusted EPS.”
Mylan President Rajiv Malik said, “We continue to see the benefits of our geographic, product, channel and pipeline diversification as well as the integration of Mylan.
Malik continued: “We also continue to see the strength of our science, especially as it relates to complex products, and we now believe Mylan is well-positioned to deliver on future opportunities. The submission of Insulin Glargine in the U.S., which currently is under active review with FDA; our continued work with FDA on generic Advair; and our progress with several of our biosimilar programs are great opportunities for us to bring additional value to our shareholders as we continue to execute on our promising complex product pipeline.”
Mylan CFO Ken Parks added, “We are pleased with our continued strong adjusted free cash flow generation of $1.9 billion for the first nine months of 2017. This strength reflects our stable and durable cash flow profile and provides us with the opportunity to continue to reduce debt levels, while at the same time allowing for financial flexibility as we continue to execute on our business strategy and maintain our commitment to an investment grade credit rating.”
Financial Summary
(1) As previously reported, effective October 1, 2016, we expanded our reportable segments as follows: North America, Europe and Rest of World. As a result, the amounts previously reported under the Specialty segment have been recast to North America and amounts related to Brazil are included in Rest of World for all periods presented. Segment amounts represent third party net sales.
(2) Non-GAAP financial measures. Please see “Non-GAAP Financial Measures” for additional information.
Third Quarter 2017 Financial Results
Total revenues were $2.99 billion in the third quarter of 2017, compared to $3.06 billion in the prior year period. Third party net sales for the current quarter were $2.96 billion compared to $3.03 billion for the prior year period, representing a decrease of $73.2 million, or 2%. The incremental impact on third party net sales from the acquisition of Meda AB (publ) (“Meda”) totaled approximately $163.6 million. Below is a summary of third party net sales in each of our segments for the three months ended September 30, 2017:
Third party net sales in the North America segment totaled $1.17 billion, a decrease of $333.3 million or 22% from the prior year period. Third party net sales were negatively impacted in the current quarter due to a decline in sales of existing products as a result of lower pricing and volume, partially offset by new product introductions. As anticipated, our North American generics business experienced higher price erosion than previous quarters, including the impact of the loss of market exclusivity of armodafinil. Sales of the EpiPen Auto-Injector declined in the current quarter by $245.1 million as a result of the impact of the launch of the authorized generic, higher governmental rebates as a result of Mylan agreeing to the terms of a $465 million settlement, plus interest, with the U.S. Department of Justice and other government agencies related to the classification of the EpiPen Auto-Injector for purposes of the Medicaid Drug Rebate Program (the “Medicaid Drug Rebate Program Settlement”), and increased competition. The impact of foreign currency translation on current period third party net sales was not significant.
Partially offsetting the decrease in North America was third party net sales growth in the Europe segment of $199.6 million, or 24%, in the quarter. Third party net sales in Europe totaled $1.04 billion in the current quarter. The increase was primarily the result of the incremental net sales from the acquisition of Meda, which totaled approximately $117.2 million, new product introductions and favorable volume and pricing on existing products. The favorable impact of foreign currency translation on current period third party net sales was $45.5 million or 5% within Europe.
Third party net sales in the Rest of World segment totaled $743.3 million in the current quarter, an increase of $60.5 million, or 9%. This increase was primarily driven by incremental net sales from the acquisition of Meda which totaled approximately $38.2 million. In addition, net sales were positively impacted by new products and increased net sales in emerging markets, which were driven primarily by higher volumes. These increases were partially offset by lower pricing and volumes on existing products from our anti-retroviral (“ARV”) franchise, including active pharmaceutical ingredients. The favorable impact of foreign currency translation was $6.2 million, or 1%.
Gross profit was $1.18 billion and $1.28 billion for the third quarter of 2017 and 2016, respectively. Gross margins were 39% and 42% in the third quarter of 2017 and 2016, respectively. Gross margins were negatively impacted in the current quarter by lower gross profit from the sales of existing products in North America, including the EpiPen Auto-Injector, partially offset by lower purchase accounting amortization as a result of the prior year amortization of the step-up in the fair value of acquired inventory. Adjusted gross profit was $1.57 billion and adjusted gross margins were 53% for the third quarter of 2017 compared to adjusted gross profit of $1.74 billion and adjusted gross margins of 57% in the prior year period. Adjusted gross margins were negatively impacted in the current quarter as a result of lower gross profit from the sales of existing products in North America, partially offset by the contributions from acquired businesses and new product introductions.
R&D expense decreased slightly from the comparable prior year period due to lower expenditures related to the Company’s respiratory programs due to the timing of clinical activities, partially offset by the incremental impact of the Meda acquisition.
SG&A expense increased from the comparable prior year period primarily due to the additional expense related to the incremental impact of the Meda acquisition, partially offset by lower acquisition related costs, including consulting and legal costs, and the benefit of integration activities in the current quarter.
Litigation settlements and other contingencies, net decreased from the prior year period primarily as a result of the prior year litigation charge for the Medicaid Drug Rebate Program Settlement and the Company’s settlement with Strides Arcolab regarding substantially all outstanding regulatory, warranty and indemnity claims (the “Strides Settlement”) related to the acquisition of Agila Specialties Private Limited.
U.S. GAAP net earnings increased by $208.1 million to $88.3 million for the three months ended September 30, 2017, compared to a loss of $119.8 million for the prior year period and U.S. GAAP EPS increased from a loss per share of $0.23 in the prior year period to $0.16 in the current quarter. Adjusted net earnings decreased to $589.7 million compared to $726.4 million for the prior year period. Adjusted EPS decreased to $1.10 from $1.38 in the prior year period.
Cash Flow
Net cash provided by operating activities was $1.57 billion for the nine months ended September 30, 2017 compared to $1.70 billion for the prior year period. Capital expenditures were approximately $156.4 million for the nine months ended September 30, 2017 compared to approximately $239.5 million for the comparable prior year. Adjusted net cash provided by operating activities was $2.06 billion for the nine months ended September 30, 2017 compared to $1.93 billion for the prior year period. Adjusted free cash flow, defined as adjusted net cash provided by operating activities less capital expenditures, was $1.91 billion for the nine months ended September 30, 2017, compared to $1.69 billion in the prior year.
Guidance
Primarily as a result of the launch of generic Copaxone, Mylan is increasing the midpoint of its previous 2017 Adjusted EPS guidance and total revenue range by increasing the low end of the ranges. Mylan now expects 2017 total revenues in the range of $11.75 billion to $12.5 billion, which represents an increase of 9% at the midpoint versus full-year 2016. As discussed in the “Non-GAAP Financial Measures” section below, 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. For 2017, Mylan continues to expect to generate $2.0 billion to $2.4 billion of adjusted free cash flow, net of our revised capital expenditures range of $300 million to $350 million. Adjusted EPS for 2017 is now expected to be in the range of $4.45 to $4.70 per share, a decrease of 6% at the midpoint when compared to the prior year.
Conference Call and Earnings Materials
Mylan N.V. will host a conference call and live webcast, today at 10:30 a.m. ET, to review the company’s financial results for the third quarter ended September 30, 2017. The briefing can be accessed live by calling 800.514.4861 or 678.809.2405 for international callers (ID#: 99489678) or at the following address on the company’s website: investor.mylan.com. The “Q3 2017 Earnings Call” presentation and a presentation titled “Built to Last,” which will be referenced during the call can be found here. A replay of the webcast will also be available on the website.
Non-GAAP Financial Measures
This press release includes the presentation and discussion of certain financial information that differs from what is reported under accounting principles generally accepted in the United States (“U.S. GAAP”). These non-GAAP financial measures, including, but not limited to, adjusted EPS, adjusted gross profit, adjusted gross margins, adjusted net earnings, EBITDA, adjusted EBITDA, adjusted net cash provided by operating activities and adjusted free cash flow are presented in order to supplement investors’ and other readers’ understanding and assessment of the financial performance of Mylan N.V. (“Mylan” or the “Company”). Management uses these measures internally for forecasting, budgeting, measuring its operating performance, and incentive-based awards. In addition, primarily due to acquisitions, Mylan believes that an evaluation of its ongoing operations (and comparisons of its current operations with historical and future operations) would be difficult if the disclosure of its financial results were limited to financial measures prepared only in accordance with U.S. GAAP. We believe that non-GAAP financial measures are useful supplemental information for our investors and when considered together with our U.S. GAAP financial measures and the reconciliation to the most directly comparable U.S. GAAP financial measure, provide a more complete understanding of the factors and trends affecting our operations. The financial performance of the Company is measured by senior management, in part, using the adjusted metrics included herein, along with other performance metrics. Management’s annual incentive compensation is derived, in part, based on the adjusted EPS metric and the adjusted free cash flow metric. In addition, the Company believes that including EBITDA and supplemental adjustments applied in presenting adjusted EBITDA and Credit Agreement Adjusted EBITDA pursuant to our Credit Agreements is appropriate to provide additional information to investors to demonstrate the Company’s ability to comply with financial debt covenants and assess the Company’s ability to incur additional indebtedness. We also report sales performance using the non-GAAP financial measure of “constant currency” total revenues and third party net sales. This measure provides information on the change in net sales assuming that foreign currency exchange rates had not changed between the prior and current period. The comparisons presented as constant currency rates reflect comparative local currency sales at the prior year’s foreign exchange rates. We routinely evaluate our third party net sales performance at constant currency so that sales results can be viewed without the impact of foreign currency exchange rates, thereby facilitating a period-to-period comparison of our operational activities, and we believe that this presentation also provides useful information to investors for the same reason. The “Summary of Total Revenues by Segment” table below compares third party net sales on an actual and constant currency basis for each reportable segment for the three and nine months ended September 30, 2017 and 2016. Also, set forth below, Mylan has provided reconciliations of such non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures. Investors and other readers are encouraged to review the related U.S. GAAP financial measures and the reconciliations of the non-GAAP measures to their most directly comparable U.S. GAAP measures set forth below, and investors and other readers should consider non-GAAP measures only as supplements to, not as substitutes for or as superior measures to, the measures of financial performance prepared in accordance with U.S. GAAP.
For additional information regarding the components and uses of Non-GAAP financial measures refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations– Use of Non-GAAP Financial Measures section of Mylan’s Quarterly Report on Form 10-Q for the three months ended September 30, 2017 (the “Form 10-Q”).
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 those related to the Meda transaction, 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. With respect to the targeted adjusted EPS in 2018, the target does not represent Company guidance and the Company is not providing a U.S. GAAP target or reconciliation because the Company has not quantified all future amounts, including U.S. GAAP amounts, related to this target.