Viatris Inc. (VTRS) Q3 2010 Earnings Report, Transcript and Summary

Good day, and welcome to the Mylan, Inc. Third Quarter Fiscal 2010 Earnings Conference Call. [Operator Instructions] At this time, I'd like to turn the conference over to Ms. Kris King, Vice President of Global Investor Relations. Please go ahead.

Thank you, Lisa. Good afternoon, everyone. Joining me for today's call are Mylan's Chairman and Chief Executive Officer, Robert J. Coury; President, Heather Bresch; Executive Vice President and Chief Financial Officer, John Sheehan; and Executive Vice President and Chief Operating Officer, Rajiv Malik. During today's call, including the Q&A, we will be making forward-looking statements including those relating to our anticipated business levels, our future earnings, our planned activities, our anticipated growth and other expectations and targets for future periods. Note that these statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Because these statements are forward-looking, they inherently involve risks and uncertainties and accordingly, our actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2009, and in our other SEC filings. You can access our Form 10-K and other SEC filings through the SEC website at www.sec.gov, and we strongly encourage you to do so. In addition, during this call, we will be referring to certain actual and projected financial metrics of Mylan on an adjusted basis, which are non-GAAP measures. It should be noted that non-GAAP financial measures such as adjusted revenues, adjusted gross margin and adjusted diluted EPS should be used only as a supplement to, not as a substitute for, or as a superior to measures of financial performance prepared in accordance with GAAP. Please refer to today's earnings press release, which is available on our website as it contains detailed GAAP to non-GAAP reconciliations of our actual 2010 and 2009 third quarter results, including the allocation of each reconciled line item to specific income statement line items. Before I turn the call over to Robert, let me also remind you that the material in the call, with the exception of the participant questions, is the property of Mylan and cannot be recorded or rebroadcast without Mylan's expressed written permission. With that, I'll now turn the call over to Robert.

Thank you, Kris. Welcome, everyone and thank you for taking the time to join us this afternoon. I would also like to welcome all of the Mylan employees on the call today, especially those from Bioniche Pharma, who are listening as the new members of the Mylan family. On behalf of the Board of Directors and our leadership team, I'd like to thank each and everyone of you for your continued hard work, dedication and outstanding performance. I am extremely pleased to report to you yet another strong quarter performance of exceptional earnings. As I mentioned on the last conference call, I did anticipate the third quarter to be better than the second quarter, and I am extremely pleased to report adjusted diluted earnings per share of $0.43, a 16% increase from our second quarter results. With that said, I still expect at this time that the fourth quarter will come in slightly better than the third quarter. We maintain this position even with the most recent ruling related to our Paroxetine CR. While we are extremely disappointed with the lower court's ruling, we believe strongly that the lower court has erred in its decision not to grant us an injunction, and we have appealed that decision. It should also be noted that this is still just a ruling on an injunction. It is not a final decision resolving Mylan's rights on this matter. Regardless of the outcome of the appellant court decision on the injunction, we will continue our litigation to enforce our contractual rights and all of its negotiated provisions with GSK. With that said, and irrespective of this short-term distraction, the longer-term fundamentals of our business have not changed, which is why we remain committed to our stated targets of $2 of adjusted diluted earnings per share for calendar year 2011 and our longer-term growth targets of 15% top line and 20% bottom line CAGR by the end of 2013. We very much look forward to providing you a detailed breakdown of our 2011 guidance on our next conference call. Moving on to other activity in the quarter. You will recall that we issued $300 million in follow-on 10-year bonds to finance the acquisition of Bioniche Pharma. In addition, we are also able to use part of the strong operating cash flows that we continue to generate to prepay $300 million in term loan borrowings in the third quarter as well, further reducing our leverage and staying committed to our stated objective to achieve a 3:1 debt-to-adjusted-EBITDA leverage ratio. And finally, you may remember that on November 15 of this year, our mandatory convertible preferred stock will automatically convert to common stock. Given the recent growth and strength of our stock price performance, we anticipate issuing the lowest number of shares required under the terms of the preferred stock agreement, which is approximately 125 million shares. A further note, November 15 will also mark the final payment of the preferred stock dividend, thereby substantially enhancing our future free cash flows to the company by $139 million per year. I look forward to answering your questions, and I'd now like to turn the call over to Heather Bresch.

Thank you, Robert, and good afternoon, everyone. As Robert said, we are very pleased with our strong third quarter performance and a great start to our expected strong second half of 2010. We remain highly confident in our ability to deliver 2010 results in line with the guidance we have reaffirmed today. We also continue to be extremely confident about our growth prospects for '11 and beyond. I too would like to commend our employees around the world for making our continued exceptional performance possible. During my remarks today, I'll review our performance by segment, provide an update on synergies and comment on why we remain so confident about our future. I'd now like to walk you through the performance of our commercial operations. During the third quarter, we generated total revenues of $1.36 billion, an increase of 7% compared to last year's third quarter total revenues of $1.26 billion. On a constant currency basis, revenues were up approximately 9% year-over-year, and on the bottom line, we generated $0.43 of adjusted EPS, a 34% increase over last year's third quarter result of $0.32. We also delivered a strong adjusted gross margin of 48.4% during the third quarter, up from our second quarter performance of 45% and right in line with our full year expected range of 47% to 49%. As expected, driving the strong performance were recent approvals on higher margin, limited competition products, higher sales in our Specialty segment and continued synergy realization. Within our Generics segment, our North American operations delivered third-party net sales for the third quarter of $573 million, up 17% from last year's third quarter result of $488 million. The increase was mainly the result of new product launches in the United States. Among those launches were limited competition products, Minocycline ER, Clonidine Transdermal and Tacrolimus, bringing to ten the dozen such products we anticipate launching by year end, and we remain on track to achieve our full year target of 50 to 60 launches in the U.S. Our third quarter also includes results from Bioniche, a Specialty Injectables business we acquired on September 7. The integration has been seamless so far, and on October 4, we announced our first approval from the FDA for our Bioniche product, Fludarabine, an injectable chemotherapy medication for leukemia. Our ANDA filings now include those of Bioniche Pharma. Currently, we have 153 ANDAs pending FDA approval, representing about $95 billion in annual brand sales. 45 of these pending ANDAs are potential first-to-file opportunities, representing more than $24 billion in annual branded sales. In EMEA, third-party net sales of $364 million, 12% versus last year's third quarter third-party sales of $414 million. However, on a constant currency basis, operational performance in EMEA declined only 3% year-over-year while year-to-date, sales have risen almost 2%. That result was driven by unfavorable pricing throughout Europe, which was partially offset by new product launches in several markets. Looking forward, we continue to see our ability to even further offset negative trends in the region, thanks to the sheer number of internal products we expect to launch in 2011 and beyond. In addition, we continue to repatriate finished dosage forms, which will continue to add to our competitive position throughout Europe. In France, third quarter local currency sales rose compared to the year-ago quarter. New product launches and higher volumes on existing products more than offset ongoing competitive pricing pressures. With more than 30% market share, our market position remains very strong in France, which drives our performance in Europe. We also experienced higher year-over-year third quarter local currency sales in Italy, where we benefited from a combination of new product launches, higher generic penetration and the continued favorable effect of regulatory changes. And in Spain, our new product launches offset the impact of government-posed price reduction. Other markets such as Portugal and Germany experienced lower sales during the third quarter due to government-imposed price reductions and the impact of tender systems, respectively. Turning now to our Asia Pacific region. We delivered very strong third quarter results. Third-party net sales for $268 million, up 30% over last year's third quarter sales on $206 million. On a constant currency basis, sales rose about 22%. Matrix, Australia and Japan all contributed to the strong results. Matrix continued to deliver strong double-digit growth through API and ARV sales and our ARV portfolio now contains 33 products. Finally, Dey, our Specialty segment performed well during the third quarter. Third-party net sales rose 6% to $141 million over the same period last year after adjusting last year's third-party sales to account for the fact that in 2010, our Mylan Pharmaceutical division assumes responsibility for selling Dey's generic products. The primary driver of our growth was domestic sales of EpiPen Auto-Injector, which were strong compared to the third quarter of '09. Recall that last October, we launched our next-generation needle-protected auto-injector, which has been received favorably in the U.S. and Canada. In addition, compared to our second quarter, sales benefited from the seasonal return of children to school. Further, we can continue to experience double-digit growth in many markets outside the U.S. as we continue the expansion opportunities for this very important product, mainly through focusing on an underserved population. Moving on now to synergies. I'm pleased that we remain on track to deliver more than $350 million in cumulative annual benefit by the end of this year. We continue to seek out and capture additional opportunities to further increase our efficiency and leverage our powerful operating platform. Looking ahead to '11, as Robert stated, we will provide formal guidance for the year on our next conference call. Nonetheless, it's important to note and to remind you that we continue to see Mylan entering the new year with very strong momentum, especially as we launch more products around the globe than we have ever launched in our company's history. In 2011, we look forward to monetizing or continuing to monetize several opportunities resulting from prior settlements such as Minocycline ER, voriconazole, letrozole and Venlafaxine ER. We see a number of 30-month stay to expiring on other opportunities, some of which are first-to-file. We look forward to introducing oral contraceptives in the U.S., and once again, launching more than a dozen limited competition products. Worldwide, we continue to expect to launch approximately 500 products. As important, our pipeline is stronger than ever. We currently have about 15,000 global products initiatives pending approval. Before I turn the call over to John, I'd like to step back and make some observations about our company and how far we've come. Earlier this month, we've celebrated the three year anniversary of the union of legacy Mylan, Matrix and Merck. Behind that union was our vision that the world could be served far better if we created a global, vertically integrated and highly disciplined company that could consistently supply any market with high-quality, affordable generic and specialty pharmaceuticals. Over the past three years, we have focused relentlessly on executing on our vision by integrating vertically, delivering synergies far beyond our expectations and serving customers in more than 140 countries and territories. Those accomplishments alone allowed us to meet or exceed Street [Wall Street] estimates for 13 consecutive quarters. But that's not all we've been doing for the last three years. We've also been selling our global network with internally supplied products by applying the same methodology and fundamentals that made our integration so successful. Among the actions we've been taking, optimizing R&D, enhancing our portfolio and management capabilities, repatriating products and filling gaps in our product line, we also have created a biologic strategy and strengthening the promising future of our Specialty business, Dey. And perhaps most important, we have filed approximately 3,000 applications globally by the end of this year. Now, we're ready to reap what we've sown. That is why we're so confident about our growth over the next three years and beyond. With that, I'll now turn the call over to John.

Thank you, Heather, and good afternoon, everyone. This afternoon, I will begin by walking you through our third quarter 2010 financial results, which, as Heather and Robert have both indicated, were exceptional. I will then provide an update on our capital structure and liquidity position. As Kris mentioned earlier, I'm going to be referring to actual and projected financial metrics that has been prepared on an adjusted basis. These are non-GAAP financial measures. We present these non-GAAP financial measures because they're prepared on the same basis as used by our management and Board of Directors to evaluate the performance of our business. This afternoon's earnings release includes a complete reconciliation from our GAAP to non-GAAP financial measures for our third quarter 2010 and 2009 results. Our earnings release is available on our website, and I encourage you to take a look at it. Starting at the top of the income statement. Total revenues for the quarter were $1.36 billion, an increase of 7% over last year's third quarter total revenues of $1.26 billion. The effect of foreign currency translation had an unfavorable impact of approximately 2% on our third quarter revenues, reflecting a weaker euro in comparison to the U.S. dollar, partially offset by the strengthening of other currencies, primarily the rupee, the yen and the Australian dollar. During the third quarter, we launched Minocycline ER. As I discussed with you on last quarter's call, because of significant uncertainties surrounding the pricing and market conditions with respect to Minocycline, we are not able to reasonably estimate the magnitude of potential price adjustments, including product returns, and as a result, have deferred revenue recognition until such uncertainties are resolved. At this time, we considered such uncertainties to be resolved upon the sale by our customers of the product and have recognized revenue accordingly. Looking at our operating profitability measures, adjusted gross margin for the quarter was approximately 48.4% compared to 46% in the prior year. As expected, this adjusted gross margin is an improvement from that of the first and second quarters and is within our full year guidance range of 47% to 49% and is primarily the result of new product launches in North America and favorable pricing on our Specialty segment, EpiPen Auto-Injector. Adjusted R&D expense for the quarter was $69 million or approximately 5% of revenues. Also as expected, this level of spending represents an increase over the first half of 2010 and is in line with our revised full year guidance range of 5% to 6% of revenues. Importantly, our R&D projects remained on target, and we are planning for even higher levels of spending in the fourth quarter. Adjusted SG&A expense was $257 million for the quarter or 19% of revenues, within our full year guidance range of 18% to 20%, and our third quarter adjusted EBITDA was $368 million. Now let me move to a couple of non-operating financial metrics. Third quarter 2010 adjusted interest expense was $70 million. We continue to forecast adjusted interest expense for the year to be at or near the low end of our guidance range of $280 million to $300 million, which continues to consider the potential for higher short-term interest rates. Our third quarter adjusted effective income tax rate was 26%, which translates into a year-to-date and full year projected adjusted effective income tax rate of 28%, which is at the low end of our forecasted range of 28% to 29%. We do fully anticipate this full year effective tax rate to be sustainable going forward. In summary, third quarter adjusted net income was $189 million or $0.43 per share. In calculating our adjusted diluted EPS, the impact of assuming the conversion of our preferred shares into 125 million common shares was more dilutive than the $35 million quarterly preferred dividend. Therefore, adjusted diluted EPS for the third quarter is calculated based on an average outstanding diluted share count of approximately 438 million shares. Touching briefly on the year-to-date results, and again, please refer to our earnings release for a complete reconciliation from our GAAP to our non-GAAP financial measures. For the nine months ended September 30, 2010, total revenues were $4.02 billion, an increase of 8% over adjusted revenues of $3.71 billion in the same prior year period. For the nine months, foreign currency translation had a favorable impact on revenues of approximately 1% due mainly to the strengthening of the rupee, yen, and Australian dollar versus the U.S. dollar, partially offset by a weaker euro. Adjusted gross margin for the nine months was approximately 46% compared to 47% in the same prior year period. The lower gross margin in the current year is the result of a loss of exclusivity on divalproex during the third quarter of 2009. However, the current year gross margin was negatively impacted by certain inventory charges, principally in Q2. Excluding the impacts of these inventory charges, year-to-date gross margin would have approached 47%. We continue to see full year gross margin at the low end of our 47% to 49% guidance range. Adjusted R&D expense was $195 million, and adjusted SG&A expense was $753 million for the current nine-month period. Our adjusted EBITDA for the first nine months of 2010 was $1.03 billion. Adjusted net income was $511 million and adjusted diluted EPS was $1.16 per share. As in the previous quarter, adjusted diluted EPS was calculated assuming the conversion of our preferred shares into 125 million shares of common stock. On November 15 of this year, our mandatory convertible preferred stock will automatically convert into shares of common stock. The number of convertible shares will be based upon the closing stock price over the 20-day trading period ending on November 12. Based on the current stock price, we expect that approximately 125 million shares will be the conversion amount. As mentioned before, we have been including this preferred stock conversion in our forecasted results. As such, the actual conversion will not result in an additional dilution to our guidance amounts. November 15 will also mark the final payment of the preferred stock dividend. Depending on the market value of our common stock going forward, our average outstanding diluted share count could increase further due to additional dilution from stock options and other potentially dilutive financial instruments such as our convertible debt obligations and related warrants. We also include such potential dilution in our forecasted results. As I mentioned previously, the impact of foreign exchange translation on our results was not significant, and actual foreign currency exchange rates during the period ended September 30, 2010, did not differ materially from those used to calculate our 2010 guidance, which we discussed with you last quarter. More recently, we have seen the euro strengthened steadily against the U.S. dollar. However, we do not expect currency to have a significant impact on our results for the remainder of the year. This is due to the fact that the currencies of other markets in which we operate are moving in the opposite direction of the euro, and it's also a result of various hedging strategies that we've employed. We've taken measures in an effort to prevent our results from being impacted significantly by changes in foreign currency exchange rates. In addition to having on our balance sheet euro-denominated long-term debt against which the cash flows of our euro-denominated subsidiaries are offset, we use financial instruments such as forward contracts in order to mitigate this risk. Any favorable or unfavorable variances resulting from foreign exchange for the three- and nine-month period ended September 30, 2010, are included in the adjusted diluted per-share amount of $0.43 and $1.16 per share, respectively. Turning to our cash flow metrics. Our third quarter GAAP cash flow from operations was nearly $380 million, the highest in our company's history or $360 million excluding certain items. While we don't anticipate fourth quarter cash flow from operations to approach this level, we do continue to project full year operating cash flow in the range of $725 million to $825 million excluding certain one-off items. Our strong current quarter cash from operations was made possible through positive changes in our working capital, primarily accounts receivable as a result in improved cash collections, including amounts received with respect to Minocycline. As you may recall, on last quarter's call, I indicated that Q2 cash from operations were negatively impacted by the timing of collection of receivables, for which a substantial amount was received in early July. Q3 cash from operations was also impacted by the timing of collection of receivables, for which a substantial amount was received prior to September 30, 2010. Third quarter capital spending was $53 million, including approximately $10 million paid toward the acquisition of a finished dose manufacturing facility in India. Based on the anticipated timing of spending on certain projects, we now project capital spending in the range of $200 million to $250 million for the full year. Our current quarter also include a cash outflow of approximately $544 million with respect to our acquisition of Bioniche Pharma, which is net of any cash acquired. As Heather mentioned, results of Bioniche are included in our current quarter results from September 7. The Bioniche acquisition was financed through a combination of cash on hand and the proceeds from recent notes offerings. As discussed last quarter, in May, we completed a private placement of $1.25 billion of senior unsecured notes due in 2017 and 2020. In the current quarter, we completed an add-on offering of an additional $300 million of the 2020 notes. These notes were issued at initial price of 105.5% and a coupon of 7 7/8% or an effective yield to maturity of slightly over 7%. The notes issued in the current quarter's offering, together with the 2020 notes from the May offering, are treated as a single class of notes under the indenture. In addition to funding the Bioniche acquisition, the bond issuances were done in accordance with our objective of extending the maturity profile of our outstanding indebtedness. $1 billion of the net proceeds from the May issuance were used to pay down existing indebtedness under our credit facility. In late September, we used our strong operating cash to repay an additional $300 million of existing indebtedness under our credit facility. As a result of these repayments, we continue to have no meaningful long-term debt maturities until the $600 million due under our convertible notes in the first quarter of 2012, which we currently intend to repay with available cash at that time. At September 30, 2010, following the additional debt repayment of $300 million, we continue to have unrestricted cash and marketable securities totaling over $640 million. Continuing on with the capital structure, concerning leverage. As Robert have stated many times, it is our commitment to achieve a long-term leverage ratio of 3:1 or less. We are firmly committed to balancing growth in our business from the continued use of prudent and responsible financing. As such, Mylan remains committed to deleveraging over time to meet this long-term capital structure goal. We continue to expect to generate approximately $4 billion of cumulative operating cash flows by the end of 2013. From a covenant perspective, the level of our senior secured debt is approximately 1.7x our last 12 months covenant basis adjusted EBITDA, comfortably ahead of our December 31, 2010 threshold of 3.5x. In closing, I'm very pleased with our solid quarterly performance. A great start to what we've been saying will be a strong second half of 2010. That concludes my remarks. Lisa, I'll turn the call back over to you to start the Q&A.

[Operator Instructions] Our first question comes from Randall Stanicky with Goldman Sachs.

Can you just drill down on the EMEA result and when we can expect a return to growth from that region? And then the follow-up would be maybe, Robert, with the EMEA result in conjunction with the Paxil CR news, can you just talk about some of the offsets that allow you to remain comfortable as we think about the $2 target for 2011?

Sure, Randall. First, again, there are many, many mitigating factors, and it's difficult, I understand from your perspective, not to be able to evaluate the number of moving variables. But let's start with EMEA. I said that this would be basically almost a two-bucket approach. I've been telling you all along that we continue to see what we've anticipated, what the governments are doing over there in terms of pricing and pushing prices down lower. But we've often said that we felt very comfortable with our position to be able to mitigate that by all the other initiatives that we have in place, including, I'll pull a knot, cost infrastructure that really doesn't fit with the new system, the new wave of direction where Europe is going. Our cost of goods, our repatriation, our bringing in a lot of the third parties back in-house, and of course, our increase in volumes. So that's kind of sort of -- and the races in Europe, Randall, the races, again, what I've always stated, the speed at which governments move and the speed at which we can, through a regulatory process, be able to yield all the benefits that we've been telling you all along. And in terms of the Paxil CR, we are in litigation. It's been a long-standing position of ours, and not to comment when we are on litigation. I tried to give you a signal, obviously, in our opening remarks about how I feel as a whole about that whole situation. We're extremely confident in our position. We think there's a lot more involved in terms of the dealings between GSK and Apotex, and it wasn't just a one-off type of situation. And that's what litigation is all about, and I'm very confident that we'll prevail once we have an opportunity to get inside. In terms of the $2, the last piece of your question, look, all these factors have -- there's nothing really new. There's just nothing new in terms of what we've thought about, what we've been trying to anticipate. And the best way I can explain to you on the $2 on why we're still confident is actually for two reasons. One, Randall, the fundamentals, the long-term fundamentals of the company have not changed at all, at all. Basically, what we're dealing with is the short-term issues that we have to just continue to manage or work our way through. And what I would bring to your attention is go back for the last 13 quarters where we have been trying the same exact question that we're faced with today about visibility in 2011 and beyond. When we were in 2007 roughly at $0.45 and an $0.80 in 2008 and $1.30 in 2009 and roughly a midpoint of $1.60 in 2010, nobody understood how we were going to get there. And what I can tell you, and what we have done already is this management team promised that it would manage. It would manage this new acquired platform for earnings growth. And I can tell you that when we were back at $0.45 and $0.80 and $1.30 and $1.60 in terms of our respective midpoints, when we started out that guidance and where we thought those earnings per share are going to come from and where they actually came from are not always exactly the same. That's just the nature of our business. So I can assure you that when we once again I think we have become at least somewhat predictable to all of you guys. If we tell you that our vision is in the balancing act, what we can see the number of variables versus what you may not be able to see, we are very comfortable that the $2 target in calendar year 2011 is achievable.

That's irregardless if Paxil CR will come again, just to be clear.

Yes. I mean you have to look at the Paxil CR this way. Take a look at a vein in your body, forgive me. But blood flows through, right one side of the vein to the other. And every once in a while, a vein can blow up in the middle when you have an issue. And what you hope for and so as the vein blows up, the blood's still going to get through the other side. You have this bubble. And I can only tell you that unless we thought, Randall, that somehow Paxil CR was never going to achieve competition ever, ever, ever, then I can say that, that would be an effect on us. In a generic company, one can never project that a generic product forever will be in your product without competition. So obviously, it's a timing issue. And that's why the long-term fundamentals simply haven't changed.

Our next question comes from Chris Schott with JPMorgan. Christopher Schott - JP Morgan Chase & Co: Just another follow-up on EMEA and specifically France. Can you just elaborate a little bit more in the trends you're seeing in that market? I guess specifically, how does some of the recent proposals from the French government that call, for it seem to be a pretty modest 2011 drug cost savings compared to your expectations? And then second question on EMEA. We had obviously the Teva Russia front deal closed this quarter. Just what are your thoughts in terms of the likelihood of further consolidation in the EU market over time? And what implications does that have, that consolidation have for your business?

I'll answer the first one and you can talk about France. But in terms of -- I do see more consolidation in Europe. I believe that, that is one market that will go from a seller's market to a buyer's market. That is one region, I believe, that the multiples ought to contract. And my rationale is that I think what all of Europe is experiencing is the more regional companies, the more local companies, it's very, very difficult as Europe moves in the direction of some of the other markets around the world to be able to compete if you don't have scale. And without scale, again, that cost competitiveness, they're going to feel it. And I think that some of these mom-and-pop companies, these local companies, these regional companies begin to realize that the writing is on the wall. I think it will force them indirectly towards more activity. And I think as the more activity percolates, I think the supply-demand curve will kick in, and when there's more supply than there is demand, I think that you'll see multiples come down. So I do see more consolidation. I do think it's extremely healthy over in Europe to bring more capacity out of the market, and I do think that scale will prevail. Heather?

And just I guess to elaborate a little more on EMEA. I guess, just a couple of things. One, I'd remind you that Q3 has always been historically lower throughout Europe because of the summer and the holiday, the extended holiday season throughout Europe. So we do expect Q4 to see growth back from a revenue perspective. And as far as France and some of the trends, we absolutely what just came out for the 2011 time period we anticipated, and as you note, fairly modest. And to the extent that, like I said, we believe that was right in line with our thinking of where 2011 would be as well as some continuing to look at the whole value chain, not just the generic manufacturers. So as we've seen with other regulations and some of the pricing throughout Europe, Spain, Italy continuing to do the same, not looking at just the generic manufacturers, but kind of the entire supply chain. So that's why I stated the trends, and as I said, the tender markets whether it's Germany and some of the pricing pressure that you see that blimp that of course was attached to this quarter. And like I said, we see that revenue growth coming back in Q4.

Our next question is from Rich Silver with Barclays Capital.

Just shifting to the North American business. Can you elaborate to explain the sequential decline in just a little bit more detail on the drivers there and what we can look for going forward?

I'll start off by saying timing, timing, timing, timing and timing. Heather?

I think obviously, Rich, that's why we say that this business will try to gauge its snapshot quarterly is not representative of the business as a whole. Rob's viewpoint, there's certainly, we've had timing issues of some of our launches. Certainly, we did get some more of those limited competition market. In Q3, again we'll have the benefit of the full value of those products within the next quarter. So really, nothing other than like I said, kind of normal variations like go back and forth through some of our products. And like I said, some of the timing of some of our regulatory launches, but nothing out of the ordinary and nothing that we don't see kind of again coming back in Q4.

Putting aside Paxil CR, kind of all else equal, as what you're saying, if you were providing full year guidance, revenue guidance for North America, it would be unchanged even with the third quarter looking a little weak? And then just one last one, which is a whole paragraph devoted to Minocycline ER, can you give us some sense of the materiality of that product given that you made a point of putting that much base in the press release?

Well, a couple of things. One, I guess just quickly on North America, and I guess just to point towards, again year-over-year 17% growth out of that business. So again sequentially, timing. I don't want to lose the fact that we've seen nice growth and healthy growth in that business year-over-year from Q3 '09 to Q3 this year. And as far as Minocycline, look, I think what we are trying and I'll let John elaborate, but what I'm trying to explain from a revenue recognition perspective, said it was not a blimp like a bolus of the 180 days, and so I think we wanted to go above and beyond and try to make sure people understood exactly how we were treating that product.

Just two points, Rich. I guess number one, yes, I wouldn't be focused on changing our full year revenue guidance for North America if we were providing North American revenue guidance. And I think the way Heather, both Robert and Heather have described North America as a timing matter. It's exactly what that is. Number two, with respect to Minocycline, we launched Minocycline in the latter part of July, and we indicated in the second quarter earnings call that we would recognize that revenue on the deferred method and the pull-through method. And therefore, obviously it has an impact, but not nearly as large an impact as it would if we were recognizing it all in the current quarter. The other thing is that if the impact of Minocycline will increase as the amounts of our product there are being consumed by our customers' increases.

And our next question comes from John Boris with Citi Investment Research.

First one just has to do with Janet Woodcock at least indicated that she's hired some additional help to try and clear up the backlog of well in excess of 2000 ANDAs. Any thoughts on progress on cleaning this backlog up? Are you seeing any improvement in timelines on ANDAs?

I think from my perspective I see two mitigating factors here. I'm very happy that they actually have maybe gone out to the private sector to -- let's just help them with the queue and develop the right queue for better efficiency in flow of what they need to do. But on the other hand, let's not forget that there are comments out there, "in the year" of what we've always seen coming and we would support. And that's a tightening of specs. So if you're going to be tightening specs on one hand, I think that further creates a little bit of a backlog only to be offset, I hope, by this outside resource that she's going to bring in from the private sector. So I'm not sure yet how the two are going to offset and whether or not we're going to get more efficiency or whether or not the tighter specs may cause a little bit more. I think it's yet to be seen, but we're very encouraged in terms of the FDA taking the initiative to improve the entire process.

Just a follow-on to the tighter specs, she's also hinted that she's somewhat concerned about some of the generic supply that's out there. Can you help maybe elaborate on what she's implying? Are anticipating that there might be some other recalls on the horizon?

Well, I think one area that certainly we've been pretty vocal about is on the user fee front. And as you know, we have public comments out there and have been working closely with FDA and the industry to really set up a fair level playing field as far as foreign inspections and this truly global supply chain that the FDA has to be able to support a product that's being sold into the U.S. So she, obviously, in her remarks have been very, very supportive of leveling that playing field and making sure that FDA has the resources they need to do inspections every two years of anyone who's supplying products into the U.S. market. So I think that some of her comments certainly go to the fact that, that heightening attention, the heightening of resources and us being able to put something through that would allow the FDA to accomplish that would certainly benefit not only leveling that playing field, but back to Robert's point, it will also even go towards the backlog and where we see the applications, and I think, could see an improvement in those median times all being connected together, and that's the approach we certainly are taking of advocating and believe that FDA believes that, that would be beneficial on all fronts.

Our next question comes from Ronny Gal with Sanford Bernstein.

First, a quick one for John. John, if I look at the reconciliation table that you've provided us with, it looks like you are excluding about $125 million and the tax effect offsetting that is about $80 million or 64% of the excluded amount. That looks like a very high tax rate on the excluded amount. If you can give us a clue about that. And still on the issue of integration, was there about $32 million this quarter for acquisition and integration charges? Can you help us understand how that will trail off over the next year if there are no additional acquisitions?

On the first item, with respect to the taxes, remember that what we're doing with the tax reconciliation is not just in the tax adjustment, it's not just simply the tax affect of the reconciling items, but it is also to adjust the tax rate to the 28% full year effective rate, so to the extent that there are, let me say, one-time or unusual items within taxes, the tax expense or tax benefit, we also have to adjust those out.

And as far as your integration point, obviously, we've seen that come down tremendously year-over-year as we've gotten further into this integration. So yes, we continue to see that trailing off.

Follow-up on the Dey business. Some of your competitors have been talking about the opportunity in the respiratory area over the next few years, and you obviously have a respiratory platform. How do you think about this platform? If you can give us some view about what you're developing internally and what you might be interested in bringing from the outside to put on top of that sales force?

Yes. Absolutely, we have said this is an extremely an important niche in the Specialty business, not only, obviously, how we marry up to that, but just I think in the United States overall, it's a very important niche area that we've seen a ton of growth as an industry. And I think we have a lot of opportunity. As Robert's talked about looking for complementary products to be able to put into the infrastructure that we already have and the doctors that we're already calling on as well as our own internal R&D pipeline on the COPD front with combo and of course our current performance. So that infrastructure, and I think that allergy marrying up again to EpiPen and what we've talked about being this underserved market is again that education around market expansion and how we continue to see an awareness, of building an awareness and that again continuing to expand that market for us both on the respiratory, from respiratory docs as well as the allergists.

Our next question comes from Greg Gilbert with Bank of America Merrill Lynch.

A couple for Heather and one for Robert. Heather, first, can you clarify what you meant about growth in EMEA in 4Q? Or are you saying you expect growth over the 4Q of '09 level of $482 million?

Yes, I was just saying both, that one obviously Q3 has historically been lower. So last year, Q3 was [indiscernible] than Q4. This year, we're anticipating growth both over Q3 as well as over Q4 of '09.

And that would be mostly driven by new launches? Or is that other sort of organic drivers that would result in growth after a couple of quarters of decline?

A couple of things. We've got a lot of product launches this quarter as well as the benefit of a full quarter of some of the launches we've had throughout the year.

And then my other Europe question is whether or not you're seeing signs in Europe as governments understand the importance of making generic substitution happen or are they still just focused on finding short-term savings?

No, I've got a glimmer of hope that they are saying that the sustainability of utilization, that penetration is much more effective than a one-off price cut. I think we're starting to see that in Italy and Spain, as well as France. France, obviously, to me, is kind of the most mature in that Southern European region. And I see Italy and Spain kind of starting to follow a suit as far as some incentives and increasing. And we've seen an increase in penetration on both of those markets. And look, I can assure you, will not stop our efforts of being out there educating and showing the sustainability of generic penetration versus just, like I said, the price cuts. And I think the other point to note here is the responsibility that we have seen and demonstrate between looking at the entire supply chain and not just the generic manufacturer, whether it's from the pharmacy perspective, the brand arena. So it's balancing both of those fronts.

Our next question comes from Mark Goodman with UBS.

I just want to make sure I'm clear on this EMEA following on the last question. So we're going to have growth versus last year. Can you talk about what countries are going to be the key areas where you're talking about these new product launches? Is it France? Is Germany going to come back? Second question is maybe you can give us a sense of what happened in the quarter in Asia, just Australia versus Japan versus India? Just so we have a little more flavor there. Then the third question is just talk about EpiPen in the quarter. Was there growth year-over-year in EpiPen? It seemed a little weaker than what I thought it was going to be.

Okay, so I'll start backwards so I don't forget anything. Yes, we saw, we definitely saw growth in EpiPen, both in volume as well as we had pricing in the year, but we certainly have seen some market expansion seeing the -- we saw the peak start a little earlier and last a little bit longer in the seasonality of the product. So we continue, as I said, to see our efforts around awareness to continue to help in that expansion. As far as Europe's concerned, obviously, as we continue to say, France is certainly the driver for us across the European region. As I noted this quarter,our sales were up year-over-year for France as well as Italy and Spain, and we continue to see those being contributors as well in this growth for Q4 both year-over-year and sequentially. As far as APAC is concerned, Matrix, while we don't break out the individual divisions within a segment, we have continued and will continue to at least give what the leaders are and Matrix has led that with double-digit growth from the APAC region, but we did have contribution both from Australia as well as Japan year-over-year.

Our next question is from Elliot Wilbur with Needham & Company. Elliot Wilbur - Needham & Company, LLC: First question, I just want to drill down a little bit more on the strong gross margin performance thinking about it sequentially up about 300 basis points. It doesn't really look like it's a mix issue given that North America and Specialty were relatively the same percentage of sales. Also, so it's not really a volume issue. So is it fair to say that the bulk, if not the entire degree of improvement sequentially, is attributable to synergies?

Yes. Look, I'd say certainly, as we forecasted and anticipated, synergy realization was going to be stronger in the second half of the year, but I wouldn't lose total sight on mix. We had important approvals of higher margin products as limited competition, like in clonidine, like in Minocycline and Tacrolimus so there is still -- you do have mix issues, which is why you have to look at the annual, the overall gross margin and the guidance, obviously, that we have out there. Elliot Wilbur - Needham & Company, LLC: I have a good question for John as well. With respect to the company's current capital structure and the duration of the debt obligations, sort of understand that you have quite a bit of financial flexibility through your first bolus payment in 2012 in lieu of $700 million in total. But if you look out to 2014, there's roughly $2 billion bullet that's due, and that just happens to coincide with I guess sort of a large systemic increase in overall debt obligations coming due in the U.S. And given the likelihood that there's going to be a lot of folks looking to refinance debt and also the fact that tremendous rates probably are going to be a lot higher than where they are now, just sort of how should we be thinking about maybe potential addition what it means on your part to maybe flatten out the maturity ladder or even extend it further, which you've already done?

I would say this. If you go back eight months ago, seven months ago, we had over $3 billion of maturity in 2014. And over the course of this year, we've reduced that by $1.3 billion. So we have flattened out the 2014 maturity significantly. We will continue to look to extend the maturity profile at appropriate points in time. We'll use our strong positive cash flow to continue to reduce the amount of the 2014 as we did here in the third quarter by repaying $300 million. So I actually feel really good about where we stand in the capital structure. Our free cash flow is over $500 million a year with the final preferred dividend that we're making here in the fourth quarter. That will increase our free cash flow by $139 million a year. So I see us with a lot of cash. Robert has talked about the fact that we're not looking to make another strategic acquisition. We're fully committed to reducing our leverage to 3:1 or lower.

Let me just add something. First of all, you may not have caught it, but we did prepay $300 million. So we're actually at $1.7 billion now from the $3 billion or the $2 billion in which you've mentioned, Elliot. So you can see, and as a matter fact, when we first prepaid the $1 billion, I think we said at the time we felt fairly comfortable at that time that we would generate enough operating cash flow actually to retire the debt itself. So taking the need for this organization to have to tap the market was exactly what we intended not to put ourselves in. So I feel very comfortable that we will continue to generate very strong free cash flows with the continued commitment to delever, but I will say at the same time I'm saying that, I wouldn't hesitate in a second to further extend those maturities if the opportunity arises and interest rates continue to be as advantageous as they are and simply give ourselves even more flexibility than what we've already provided ourselves.

And our final question comes from John Newman with Oppenheimer. John Newman - Oppenheimer & Co. Inc.: I just wanted to ask a clarifying question on EMEA. It looks like the revenues for EMEA last fourth quarter pretty robust, and I think I recall you saying that you were expecting both a quarter-over-quarter increase from 4Q this year versus current quarter and also last year. So just wondering, Tom, is there something specific that is going to give you a pretty significant push? Because it seems like an increase over third quarter this year seems totally reasonable, but fourth quarter last year seems like maybe a little kind of a challenging comp there.

All I can say is as we continue to stress the strength of our pipeline and launches not just third-party launches, but now our internal launches starting to roll in, that's really, like I said, the driver not only of just launches we're doing in Q4 but lunches we've now done throughout the year that we're getting, reaping the full benefit by the time it hits Q4. So it just continues to be the product launches and what we're able to do with those launches throughout all of the country. And again, Q4 being, if you go back the year before, Q4 has been a very robust year throughout Europe historically.

This concludes today's question-and-answer session. At this time, I'd like to turn the conference back over to our speakers for any additional comments or closing remarks.

I just like to thank everybody for their participation today, and at this point, Lisa, you can close out the call.

This does conclude today's conference call. Thank you for your participation.