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Mylan N.V. (NASDAQ:MYL)
Q3 2019 Earnings Call
Nov 5, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Lisa and I will be your conference operator today. At this time I would like to welcome everyone to the Mylan Third Quarter 2019 Earnings Conference Call and Webcast. [Operator Instructions]

I would now like to turn the call over to Ms. Melissa Trombetta Head of Global Investor Relations. Please go ahead.

Melissa Trombetta -- Head of Global Investor Relations

Thank you Lisa. Good morning everyone. Welcome to Mylan's Third Quarter 2019 Earnings Conference Call. Joining me for today's call are Mylan's Chairman Robert Coury; Chief Executive Officer Heather Bresch; President Rajiv Malik; Chief Commercial Officer Tony Mauro; Chief Financial Officer Ken Parks. During today's call we will be making forward-looking statements on a number of matters including our financial guidance for 2019 and the proposed transaction pursuant to which Mylan will combine with Pfizer Inc.'s Upjohn business in a Reverse Morris Trust transaction. These forward-looking statements are subject to risks and uncertainties that could cause future results or events to differ materially from today's projections.

Please refer to the earnings release we furnished to the SEC on Form 8-K earlier today as well as our supplemental earning slides all of which are posted on our website at investor.mylan.com for a fuller explanation of those risks and uncertainties and the limits applicable to forward-looking statements. Mylan routinely posts information that may be important to investors on this website and we use this website address as a means of disclosing material information to the public in a broad non-exclusionary manner for purposes of the SEC's regulation fair disclosure. In addition we will be referencing to certain actual and projected financial metrics of Mylan on an adjusted basis which are non-GAAP financial measures.

We will refer to these measures as adjusted and present them in order to supplement your understanding and assessment of our financial performance. Non-GAAP measures should not be considered a substitute for or superior to financial measures calculated in accordance with GAAP. The most directly comparable GAAP measures as well as reconciliations to the non-GAAP measures to those GAAP measures are available in our third quarter earnings release and supplemental learning slides as well as on our website. Please note that this call relates to Mylan's third quarter 2019 earnings and we will be limited in what we can speak about during Q&A regarding the new company and we will not be speaking about Upjohn's business.

Let me also remind you that the information discussed during this call except for the participant questions is the property of Mylan and cannot be recorded or rebroadcast without Mylan's expressed written permission. An archived copy of today's call will be available on our website and will remain available for a limited time.

With that I'd like to turn the call over to Robert.

Robert J. Coury -- Chairman of the Board

Thank you Melissa and good morning everyone but a special hello and welcome to all Mylan employees around the world and to the Upjohn employees who will be soon joining forces with us. I would like to provide you with a brief update regarding the proposed combination of Mylan and Pfizer's Upjohn business which we announced in July. But before I do I would like to briefly remind all of our Mylan stakeholder some of our Board's rationale for this very powerful strategic and financial transaction. For Mylan as a stand-alone company this transaction represents an acceleration and culmination of our own long-stated goal of building a truly one-of-a-kind global platform positioned to serve and deliver high-quality affordable medications to patients around the world. The transaction will be what I describe as Mylan's final legacy transaction.

The combination with Upjohn not only achieves our original goal but it does so while expanding the geographical reach and scale that Mylan sought to create on its own. In that context it also allows Mylan to accelerate the expansion of its broad product portfolio and future pipeline particularly in the Asia Pacific region for example in countries like China. At the same time we do expect Mylan's existing business to benefit greatly from the significant assets that Upjohn will bring to the new company. In particular the new company will have the benefit of Upjohn's own high-quality iconic brand portfolio its own highly talented workforce needed bench strength and expertise especially in the emerging growth markets and an enhanced commercial platform. Overall I am very impressed with the talented and committed Upjohn team members whom I have met since the announcement and I know that the Pfizer and Mylan teams are continuing to work hard to transfer all the requisite commercial and other assets to a stand-alone Upjohn prior to the combination with Mylan.

Taking into consideration these 2 expected transaction benefits as we have listened to input from many of our shareholders and other stakeholders over time and in light of Mylan's recent strategic review intended to find ways to unlock unrealized value that we believe still exists in Mylan today. The Mylan Board of Directors decided to take this opportunity to create a new company Newco by combining Mylan with Upjohn's business 2 highly complementary businesses establishing a truly unique new company profile with no direct pharmaceutical peer set. Newco will represent more than just a new name. Once the transaction closes Newco will have a new strategy a new operating model and a further differentiated product portfolio as compared to Mylan today as well as even a stronger balance sheet with new financial profile that will emphasize a renewed focus on capital returned to shareholders through anticipated dividends and stock repurchases.

Newco will also be a Delaware company with a shareholder-centric governance model and an expanded new management team comprised of both Mylan and Upjohn executives to support the new operating model going forward. With that said one thing will never change at Newco neither from the perspective of Mylan nor Upjohn and that is our steadfast commitment to providing high-quality medicines to patients around the world while serving Newco's employees our customers the communities in which we operate and Newco truly will create new champion for global health. We also envision that Newco will be placing much more emphasis and focus on total shareholder return and striving to earn multiple expansion from the market. We believe that once investors have had the opportunity to learn more about the newly created company and its unique profile its differentiated platform and its ability to deliver sustainable and more predictable results over time investors will eventually afford Newco a rerating in its market multiple relative to Mylan on a stand-alone basis.

This is obviously something that is not going to be automatic but instead will have to be earned and earned over time. And I assure you Newco will be up for the task. The Mylan Board of Directors set the clear first example when it signaled to investors its willingness come on its own accord to return the company back to the United States and organized the company in Delaware. We continue to make good progress on the integration and other regulatory steps to be taken prior to closing. We will also at the appropriate time continue to visit and speak with both the Mylan and Pfizer shareholders over the coming months as well as sell side analysts to communicate our commitment to the success of the new company and help them better understand and appreciate the value creation opportunity that can be derived for all stakeholders. Since the announcement I have been spending a considerable amount of time with both Michael Goettler the new company's incoming CEO and Rajiv Malik Newco's incoming president both independently as well as together to discuss Newco's anticipated key company initiatives considerations and priorities.

I am very pleased to report that the Mylan Board is very encouraged with their progress and collaboration today. We truly believe that Michael and Rajiv represent the right combination to deliver the real power of what both organizations are bringing to the table. In addition I have spent time with other executives on both Mylan and Upjohn teams and can already see and feel the power of what those individuals will also be bringing to Newco. I would like to thank our current CEO Heather Bresch for not only her continued leadership here at Mylan but for also playing a key role in working very closely with Pfizer Michael and Rajiv to help lead our integration planning efforts for Newco. I would also like to thank Ken Parks for his continued contribution and his efforts during this critical stage of transition. In terms of the new CFO search things continue to progress well and we fully expect to have one announced before closing.

I am excited about Newco's new management team and other future senior executives of Newco who'll be playing a significant role in optimizing total shareholder return by demonstrating their ability to execute flawlessly on Newco's new strategic plan while consistently delivering on the financial objectives. This will be one of the most critical variables if we are truly to earn the multiple expansion that I discussed above. I would also like to note that since our announcement I have been on the road with Michael and Rajiv and others as well to meet with shareholders in addition to sell-side analysts do not only discuss the transaction but also what we believe to be a solid road map for Newco and its management team to focus on and to execute against. And lastly before I turn the call over to Heather to discuss what today's call is really all about which is Mylan's third quarter and year-to-date performance I would like to comment on one question we received on the S-4 that was recently filed in connection with the transaction. I would simply like to point out that the internal financial projections in the S-4 are not and should not be used as financial guidance for Newco. The financial guidance for the new company will only be delivered by Newco's management at or around the time of closing which is still on-track to occur in mid 2020.

What I can tell you is when Newco's management does provide initial financial guidance and targets to investors. I fully anticipate that you will be given a strong range of revenues EBITDA EBITDA margins and shown significant free cash flow generation and provided other financial metrics that will be very important for shareholders. My expectation is that the guidance they provide will also fully account for all of the questions that have been swirling around and the new ones that even may come up where it's the VPP in China or LYRICA in the United States or LYRICA in Japan etc and on and on. The new company's management will fully incorporate their assessment of the potential risk but even more importantly the potential upside opportunities known at that time. In closing I can certainly tell you that everything I have learned on both sides of the equation since the announcement has only further confirmed my excitement my confidence and not only the powerful rationale for this transaction but the anticipated strength of the combination of these 2 highly complementary businesses and the ability of the new company to deliver real value to shareholders based on our new business model over the long and sustainable future ahead.

I will now turn the call over to Heather but would like to emphasize what Melissa mentioned that we will be limited in what we can speak about on the Q&A regarding the new company and we will not be speaking about Upjohn's business. Thank you.

Heather Bresch -- Chief Executive Officer and Executive Director

Thank you Robert. Good morning everyone and thank you again for joining today's call. I would first like to reiterate Robert the Board and management's continued enthusiasm for the progress we're making on the path toward a successful close of the combination of Mylan and Pfizer's Upjohn business. As Robert highlighted the combination not only makes good financial sense but also will make a meaningful difference for the patients we serve. Importantly the deal also has the potential to create opportunity for Mylan and Upjohn colleagues around the world. For those Mylan employees joining us on today's call thank you for all that you continue to contribute to bring our mission to life each day. And I'd also like to welcome any Upjohn colleagues who may be listening in. We look forward to continuing to collaborate with you as we work toward next steps in the successful combination of our 2 companies.

As we prepare for the closing of the Upjohn deal we are still continuing to focus on the previously announced transformation of Mylan's business. You'll recall from previous calls we view this work as an opportunity to unlock latent value within the organization and instill additional focus on economically profitable performance. We have now begun the execution phase of our transformation. Rajiv will share more detail in his remarks. However at a high level we have applied a highly disciplined financial lens to the assets we've integrated and built throughout the company in order to streamline our portfolio right size investments and improve the efficiency of our company's operating model. Our approach across the board with business transformation has been very purposeful purposeful on how we rationalize operations and purposeful on how we invest. You'll see some of the levers we've been pulling reflected in this quarter's results. However it's important to note that there our meaningful transformation will be a multiyear process. So one quarter cannot be a proxy for the long-term profile of the company.

At a minimum it would be best to view our results on a year-to-date basis where you will see that we are aligned with the ranges we provided at the beginning of the year. The strength of our performance highlights our holistic intentional and focused approach to managing the overall health of the company for today and the long term. To date steps we've taken to rationalize value consuming volume from our global portfolio of products are reflected in the top line this quarter. Notwithstanding we grew every region year-over-year on a constant-currency basis. And on a year-to-date basis we achieved 3% growth and total net sales with all segments contributing to the positive results on a constant-currency basis.

Adjusted gross margins were down slightly for the quarter. However despite ongoing pricing headwinds and changes in the competitive environment this year we have been able to maintain our targeted total company adjusted gross margins of over 53% year-to-date. For the balance of 2019 we remain confident in the company's ability to execute and in fact have already achieved the milestones necessary to reach our expected full year results. Year-to-date we've already launched $800 million in new products and remain on track to hit more than $1 billion for the year including our launch of Ogivri our biosimilar to Herceptin which we expect to occur within the coming weeks.

We also see adjusted free cash flow sequentially improving in Q4 resulting from the normal cadence of the business along with realized benefits from targeted working capital initiatives. This strong cash flow generation will help fund the remaining portion of the $1.1 billion of debt paydown we committed to at the beginning of the year. As we close out the year we will remain extremely focused on execution in order to deliver on our commitments. To that end we are tightening our guidance within the ranges we provided at the beginning of the year including $11.5 billion to $12 billion in total revenues and $4.20 to $4.40 in adjusted EPS while maintaining our expected adjusted free cash flow range of $1.9 billion to $2.3 billion.

With that I'll turn the call over to Rajiv and Ken for additional detail on the quarter before opening the line for Q&A.

Rajiv Malik -- President, Executive Director

Thank you Heather. I would like to give out my excitement about the proposed combination between Mylan and Pfizer's Upjohn business. As we continue to plan for integrating the company I look forward to working with Michael and other members of Upjohn management team to ensure our shared success. At the same time I can assure you that we as Mylan today have a steadfast dedication to our stand-alone execution and are highly committed to finishing the year strong. I am proud of all of our employees who work tirelessly across the world to increase access to the medicine each and every day. I would like to take a moment to thank them for their continued commitment and hard work. I also would like to welcome any Upjohn employees who are on this call. Let me start by providing an overview of our business results by region. Starting with North America.

We had high single-digit net sales growth of 8% in comparison to the previous year. The increase was primarily influenced by the strong execution and performance of several key products. Starting with Fulphila. We have been able to accelerate the expansion of the manufacturing capacity and are optimistic to operationalize it in the very near term. With the entire backfill growth to market going at a high single digit and only 23% of the total Neulasta market converted to biosimilars. The underlying demand is here and we are confident that we will play a meaningful role in the continued expansion of this market. Next the launch of our novel once-daily LAMA Yupelri has met our initial expectations and is now gaining further momentum. Yupelri today has 83% market share of nebulized LAMA market. We see this as a short- and long-term opportunity in a critical therapeutic disease state. Moving on to generic Copaxone.

We have strong demand with current market share exceeding 35% as we continue to meet patient needs on this important product. We continue to see uptick on growth as the new prescriptions are now bigger than 40% market share. We also are happy that Wixela is steadily gaining market share and has now crossed 30% despite the very aggressive share retention strategy taken by the brand. We remain optimistic that this will continue to steadily grow and remain a durable product as we look ahead to 2020 and beyond. And last but not the least we continue on our journey to expand access to our [biosimilars to Herceptin] road map Ogivri. We have secured regulatory approvals in more than 75 countries globally and are on-track to launch in U.S. in the coming weeks. We expect to be the first company to bring full strength of the product the 420-milligram and 150-milligram to market. Moving to Europe.

Net sales were up 6% on a constant-currency basis in line with our expectations. We are making good progress across many markets and being prudent where we invest to optimize market returns. Influvac Creon Dymista performed above expectations and are continuing to grow year-over-year. We were especially pleased with Germany's growth for key products including Hulio our biosimilar to Humira and Influvac. In the rest of the world segment net sales were up 4% on a constant-currency basis. This increase was primarily driven by the new product sales in Australia and emerging markets and higher volumes of existing products including growth in our global key brands such Dona and Elidel as well as our biosimilars. I would now like to share a few highlights related to our pipeline. For bevacizumab a biosimilar to Avastin in collaboration with Biocon the top line clinical results of our Phase III study in non-small cell lung cancer have met the necessary endpoint criteria. Mylan is on track to submit a U.S. BLA by the end of this year.

The EU submission will follow in Q1 of 2020. Additionally we have initiated a Phase III clinical trial for insulin aspart. Our European regulatory application was accepted for review at the end of October. Our FDA submission is on-track to be submitted mid next year and we are projecting to launch the product in the second half of 2021. For our insulin glargine in collaboration with Biocon we have received more than 40 regulatory approvals and recently launched in Australia. For the U.S. market Mylan received a complete response letter in August 2019. The CRL confirmed that the scientific matters of the review were closed and found acceptable. Biocon and Malaysia are addressing the Malaysia facility concern and are committed to resolve these in a timely matter. We are working closely with FDA and remain optimistic for a first quarter approval prior to the transition date to a biology. Regarding Hulio our biosimilar to Humira. With our partner FKB remain on-track for a 2023 launch in U.S.A.

We now have regulatory approvals in nearly 30 countries. For our bio similar to idea being developed in collaboration with Momenta under Mylan lead our global Phase III clinical trial is under way and we continue to target U.S. submission for quarter 1 of 2021. Regarding our partnership with Revance for bio similar to BOTOX the FDA meeting had earlier this year showed the biosimilar pathway to be viable. We extended out the timeline with Revance through the first part of 2020. In the meantime Revance will be working to provide additional deliverables related to the program. Our partner Mapi recently announced the enrollment of the first patient in its Phase III study for glitter educate once a month depot. This is a key clinical study for our U.S. submission. We are excited to have this phase under way and continue to be encouraged by the scientific success of this program.

Now I'd like to further build up on Heather's comment on our business transformation program. We have completed a holistic review of our business plan and developed an integrated transformation plan for Mylan's stand-alone business. We have already began the implementation of this plan which will continue into 2020 prior to and concurrent with the Upjohn integration. The business transformation program includes: rationalization of products not earning their cost of capital refocusing commercial resources to promote further growth of our most responsive products while improving margins of unresponsive products and further centralizing and rightsizing our commercial and operating infrastructure. Let me walk you through some examples. Our first area of focus was on product rationalization. For example in U.S. the customer consolidation and market dynamics are continuing to put pressure on prices of some of our oldest commodity products and as a result gross margins have been driven below fully loaded economic cost.

To date we have decided to rationalize more than 350 SKU across all the solid doses. Throughout this process the FDA drug shortage list has been top of our mind along with the patient and customer specif needs. While the rationalization does not impact us on the bottom line it does have an impact on our top line results. Another area of review was on refocusing our commercial resources. A comprehensive assessment of the sales responsiveness our commercial investment has been conducted across our major markets and at the general product level to determine where we should direct our future commercial spending. This work has highlighted the opportunity to further optimize our SG&A expansion in the near term while evaluating potential revenue growth in future years. We'll continue to assess the return on our commercial investments going forward. Regarding capital allocation for the future.

We comprehensively evaluated our R&D pipeline and rationalized investments taking into consideration the evolving industry landscape regarding commoditized products while focusing in our -- focusing on our stated objective of moving up the value chain with our scientific platform. Lastly we are focusing on centralizing and rightsizing our commercial and operating infrastructure by creating shared centers of excellence and consolidating our production capacity. As an outcome of this exercise we will be eliminating the standard cost across the organization. As you can see we have a lot of exciting initiatives under way and remain focused on 0ur performance in 2019 while looking ahead to our next journey in 2020 and beyond.

With that I will turn the call over to Ken.

Ken Parks -- Chief Financial Officer

Thanks Rajiv and good morning everyone. I'll take a few minutes to provide a quick overview of our financial results for the third quarter. Total revenues of $2.96 billion were 3% higher than the prior year. Excluding the negative impact of foreign exchange constant-currency total revenues grew 6% with all segments growing year-over-year. The growth was primarily driven by new product sales of approximately $247 million with approximately 2/3 of that number in our North America segment primarily driven by Wixela and Yupelri sales. The remaining amount was split evenly between Europe and the Rest of World. This growth combined with higher volumes from existing products was partially offset by the impact of lower global pricing. In the third quarter our adjusted gross margins were approximately 53% compared to 54% in the prior quarter and approximately 55% in the same period last year.

The declines for both comparisons are primarily the result of higher sales of the authorized generic version of EpiPen which carries a lower than company average margin as well as changes in the competitive environment on certain products. In addition there were certain inventory write-offs the largest of which is dated Wixela product resulting from the later-than-expected approval and launch date for that product. These inventory adjustments are not expected to recur in the fourth quarter. Moving to segment profitability excluding approximately $58 million in 2019 and $98 million in 2018 relating to the Morgantown restructuring and remediation program North America adjusted segment profitability grew 1% quarter-over-quarter which reflects contributions from new product sales partially offset by impacts from lower pricing and volumes on existing products due to changes in the competitive environment including the loss of exclusivity on Tadalafil along with higher investments in selling and marketing. Europe segment profitability expanded 5% driven by benefits from new product sales including Hulio our biosimilar to Humira higher volumes on existing products and lower restructuring costs.

These increases were partially offset by the expected higher selling and marketing investments and lower pricing. Rest of World was down 12% versus the prior year mostly driven by lower gross profit on ARV sales resulting from higher API costs expected higher investments in selling and marketing and lower pricing which was partially offset by contributions from new product sales. Both Europe and Rest of World reflect unfavorable impacts from foreign currency translation. Adjusted R&D was down 10% compared to 2018 for the third quarter due to reprioritization of global programs. For 2019 full year we continue to expect to invest between 4.5% and 5.5% of total revenues to fund the long-term health of our business. During the quarter adjusted SG&A increased 6% compared to the third quarter of 2018 reflecting the expected incremental investments in selling and marketing partially offset by benefits from existing restructuring activities along with business transformation initiatives. In addition the prior year included the favorable impact of reversing certain performance-based incentive accruals. As previously indicated we'll continue to make our investments as efficiently as possible monitoring and managing such cost to support top line expectations and growth opportunities.

For the quarter we reported adjusted net earnings of $604 million and adjusted EPS of $1.17. The year-over-year decline is primarily driven by unfavorable impacts from foreign exchange and the increased SG&A that was previously discussed. Adjusted free cash flow for the quarter was favorable to our expectations at $542 million. Year-over-year adjusted free cash flow was slightly lower by $156 million as a result of the expected increase in operating networking capital required to support the new product launches in the year. In 2018 North America revenues were essentially flat from Q2 to Q3 requiring little change in working capital. In 2019 North America revenues grew 6% sequentially from Q2 to Q3 generating trade AR build in Q3 of the current year that will result in incremental Q4 cash collections and cash inflow. We're ahead of our year-to-date expectations for adjusted free cash flow and remain on-track to deliver between $1.9 billion and $2.3 billion of adjusted free cash flow for the year including ongoing working capital velocity improvement initiatives.

During Q3 2019 we repaid the remaining $100 million of our outstanding term loan and reduced our credit agreement debt to adjusted EBITDA leverage ratio to 3.8x. On a year-to-date basis we've repaid approximately $650 million of debt and expect to repay additional depth in Q4 to reach our target of $1.1 billion of debt repayment for the year. We remain fully committed to our deleveraging strategy and our investment-grade credit ratings. Finally as you heard Heather mentioned earlier we've narrowed our full year 2019 guidance range. We now expect total revenues in the range of $11.5 billion to $12 billion. We narrowed our revenue outlook to the lower end of our previous guidance range for 2 primary reasons: currency movement is expected to generate approximately $250 million of headwind versus our budgeted expectations along with slightly lower expectations for new product revenues.

While our launch of Wixela has been very successful full year sales are anticipated to be a bit short of original expectations as a result of the aggressive share retention actions by the brand that Rajiv mentioned. In addition the approval of generic Restasis continues to be delayed. Despite these headwinds we remain on-track to deliver adjusted EPS at the midpoint of our original range of due to proactive cost management through the year and our narrowing our adjusted EPS outlook to $4.20 to $4.40. Based upon year-to-date strong cash flow generation that's ahead of our initial expectations we're maintaining our outlook for adjusted free cash flow in the range of $1.9 billion to $2.3 billion for the full year 2019.

With that we'll now open the call for questions. Lisa?

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Randall Stanicky with RBC Capital Markets.

Randall S. Stanicky -- RBC Capital Markets -- Analyst

Great. Just a few quick ones. One just going back to the comments on not viewing the S-4 projections as guidance with Newco guidance coming at closing. Should we still be viewing initial Newco guidance when the deal was announced as appropriate targets? And then the follow-up for Rob the bigger picture one on business development. Now that you're going to becoming a bigger -- have a bigger brand footprint and given the fragmentation of footprint and given.

Robert J. Coury -- Chairman of the Board

Thank you Randall. Let me start with the last question. I think you're spot-on. I've read some of your prior notes and have been following you very closely. I think you're really onto something there. I think what we're most most excited about in terms of the future upside and you're exactly correct. We are definitely -- Mylan was already moving up the value chain but with the size that we are now our investment and partnering especially in the potential to look at future capital allocation and what areas of concentration the answer is yes I do see further alignment to participate in that because our portfolio that we're going to be bringing especially to the Asia Pacific region is going to present huge potential upside.

And I think at the time of closing I fully expect that we're going to outline as we talk about future capital allocation and touch on some of these points. In terms of the numbers we gave in July we absolutely -- and I understand I wasn't on Pfizer's call but look we stand by what we gave in July for 2020. I'm just simply reminding people to level-set them on a going-forward basis. Obviously we have I think very clear vision about what we're faced with and nothing I see today that has been brought up not even any new issues that were raised by some who are now getting a better understanding of the business does anything to remotely change my absolute excitement about what we created with the 2 combinations and I'm very much anxious and looking forward to be able to show you that once we can get closer to close.

Operator

Your next question comes from the line of Chris Schott with JPMorgan.

Christopher Thomas Schott -- JP Morgan -- Analyst

Great, thanks for the questions . I guess first one here can you just comment on the China opportunity for the pro forma company in light of the tendering dynamics that have been rolled out? There's obviously a lot of focus on that market by The Street. So maybe just talk a little bit about what does China look like for the pro forma company over time? And just another comment on a pro forma guidance does it fully anticipate some of this standard dynamics? Second really quick one. Can you just -- you talked earlier this year about the step-up in SG&A investment in the portfolio. Does the Upjohn deal change either your priorities for that investment or the size of those investments as you think about the much broader business that you'll be running over time?

Robert J. Coury -- Chairman of the Board

So thank you Chris and I'll again start with your second question because it really applies to my commentary on the S-4. When you're bringing 2 organizations together what's in the S-4 are 2 internal company's projection internal independently company projections. One of the things that you can't see that's actually well under way to your exact question is it -- those projections do not take into consideration for example the regulatory overlay what products we may have to divest product rationalization between the 2 organizations and then where do you now put your emphasis when you bring the 2 organizations together. So your question is well-founded and I want you to know that work is under way. And I do believe between now and closing we'll have that all sorted out and be able to lay out for you in terms of how we see whether it's SG&A or other cost allocation for the business model on a going-forward basis. In terms of China there is nothing really happening in China to be very honest with you that we've not -- I can't say that we didn't anticipate. Now there's always nuances. I'm not going to say that we're Nostradamus and we can predict everything especially in China. But there's nothing really there other than there could be a tweak in some of the new roles that they're putting out that may cause some changes. But I would say in large part overall there is an anticipation on our side not for just what's happening in China today but there's an anticipation for a continuation that healthcare system over there changes.

And the reason why we continue to be extraordinarily bullish is because we've now got a true commercial infrastructure over there that is well-situated and suited especially with the massive product portfolio which -- that we're bringing in. And by the way this is a product portfolio that's very much-needed over there. So we think that all the stars are aligned to move our massive product portfolio that has already been identified to move into the China pipeline. And also to Randall's question some of the opportunities we see that we can also -- as we go up the value chain to bring and leverage now the strong commercial infrastructure that the Pfizer Upjohn division now brings us.

Operator

Your next question comes from the line of Elliot Wilbur with Raymond James.

Elliot Henry Wilbur -- Raymond James & Associates Inc. -- Analyst

A couple of questions I guess most appropriate for Rajiv. First Rajiv could you clarify your earlier commentary around the portfolio rationalization process? It wasn't clear to me if that was more of a retrospective comment or prospective. I think you said 350 SKUs and talked about the negative revenue impact. I'm assuming that was largely on historical and not a go-forward basis but maybe just clarify that please? And then just a follow-up on insulin glargine. Should we be expecting to hear nothing from FDA until March '18 I believe? Meaning that there would not be a tentative approval only a final approval issued on that I'm not sure what is going to happen on that product and obviously March '20 is sort of a key date with respect to hitting the FDA deadline.

Rajiv Malik -- President, Executive Director

Thanks and regarding the fourth quarter rationalization what I had given you was just an example in U.S.A. that what we are undertaking that if the products are not -- if the products have been commoditized to an extent that they're not earning their cost of capital the more you sell them it doesn't make any business rationale. So yes when you rationalize those products these are -- there can be some top line impact but there's no significant bottom line impact and we have extended this not just to U.S.A. but we have evaluated our global portfolio from that point of view. Now while I would say this is not a onetime exercise because this is a new discipline we have created it will be an ongoing basis. But you would not see a bolus like this. But I just said 350 SKUs because once you clean up on a going-forward basis there will be some products here and there but they will not be bolus like that. Regarding insulin we absolutely expect to hear from them I think before March. We believe that there's concern about Malaysia facility which we are in the process of addressing will be behind us in the I believe first quarter. And yes the final approval is on the date of that March 20th or something around that that's the date. And we are very confident that it will be -- we'll get our final approval before the transition date to biology.

Operator

Next question comes from the line of Umer Raffat from Evercore.

Umer Raffat -- Evercore ISI Institutional -- Analyst

Robert you mentioned you're comfortable with the numbers previously communicated for 2020 but 2020 is still in flux because of things like LYRICA Japan which will still be part of 2020 but not pro forma or 2021 if I may. So I guess if we were to focus on true pro forma numbers for the combined Newco and I realize a lot of work is going on. A lot of the street debate is aggregating around the number closer to $18 billion than not. I'm curious to what extent you're willing to comment or able to comment on that. Secondly I'm curious the magnitude of divestitures that might potentially be required because I think that is one of things that perhaps isn't baked into a lot of the street numbers where if we just put the 2 together and try to model out China. So I'm curious any early feedback on that? And finally one for Ken if I may. Ken I've looked at the purchase accounting amortization numbers and the sheer magnitude of it always confuses me a bit. So I was going to ask you in simple words what exactly is that? And do you expected to stay at $1.5 billion for the foreseeable future?

Robert J. Coury -- Chairman of the Board

Why don't you go first Ken?

Ken Parks -- Chief Financial Officer

Sure. So Umer the $1.5 billion is truly -- as you know when you go through purchase accounting at a time you have a certain amount that's put in goodwill and then you have a certain amount that's attributed to customer portfolios products valuations of assets. And that goes into this amortization bucket that gets amortized over various lives depending on the estimated remaining lives of the appropriate asset. The short answer to your $1.5 billion question is and this is on a Mylan stand-alone basis obviously there would be other work done once the Newco transaction occurs. But that $1.5 billion should tick down slowly over time because each year some of the amortization or some of the intangible falls off. So I would expect for the near term it may take down slightly but it will continue for a period of time because many of these underlying assets have long lives especially things like customer assets and products.

Robert J. Coury -- Chairman of the Board

I think on the divestitures at least what I'm being told now Umer I don't see it as a real significant number. But I don't want to jump out in front of the regulators because they can actually go in one direction or the other whether it's our product or even their product that they would required to be divested. So I'd prefer not to jump out front. But I think we said this before and I feel very comfortable I don't see it significant but there obviously is going to be some. In my understanding those discussions are progressing quite well. In terms of -- yes I mean look Umer I think that I really can't comment more on the numbers that we put out that -- as we were trying to say with the assumption if we -- looking forward by the time we anticipate to close I think it was July 2020 here's kind of sort of what we saw the organization looking like.

That range that we've given you that is what it is. I -- since then and since we've been out trying to discuss with investors and we're not giving any guidance I've actually been following a lot what you have been trying to rationalize. I actually think you're doing a pretty damn good job forgive me but I really think you're doing a great job in trying to also find that right level set. I cannot wait until we can get closer to close get some of this work done and really clear up for investors just where is that starting point. And I've made it abundantly clear that starting point from everything I can see and know to date without giving any guidance I am extremely confident that the street will be very pleased about wherever that starting initial guidance is and the strong EBITDA that's going to come with it. Because remember what you're going to see is the rationalization of the portfolio rationalization of cost based on what we can see out in the future and then the synergies coming in. So that's why we feel very confident that we'll give you a very strong range of revenue without me telling you exactly where that starting point is going to be. And then -- and even a stronger range of EBITDA due to the synergies that we intend on bringing in and the cost rationalization that we can see as we adjust for the various healthcare market -- the markets around the world.

Operator

Your next question comes from the line of David Risinger with Morgan Stanley.

David Reed Risinger -- Morgan Stanley Research Division -- Analyst

Thanks very much. So I have a follow-up question for Rajiv. Could you just provide a little bit more clarity? So the 350 SKU rationalization what is that timing? What inning are we are in now. Are we in the first inning? And then for the 350 that you've identified is that going to be done in a year or two years? Just wanted to understand that in terms of that constraint on the global revenue line. And then Ken a quick question. You've mentioned inventory adjustments in the third quarter. Could you quantify the negative impact on COGS and gross profits in the third quarter?

Rajiv Malik -- President, Executive Director

David the 350 was U.S. specific number and as you go along the business transformation in U.S.A. as well as Morgantown remediation which was more driven -- resolving the complexity issue of the site could not have come at a better time. So both of these are facts. If any of those commoditized products were also adding to the complexity so it was very natural for us to take that walk and rationalize it right up front. So I would say for the U.S. almost 80% 90% of rationalization has already been done and is behind us as we go along Rest of the world and the European rationalization will be I think the second place.

Ken Parks -- Chief Financial Officer

And David on your question around the inventory adjustments and the COGS impact. In the quarter approximately 30 to 40 basis points on the gross margin rate and as we've called out the biggest chunk of that was this David Wixela inventory that as we were preparing for commercialization and launch we built the inventory to be sure we could launch on a timely basis and the launch was delayed. I think it's important just to reiterate again that we do not -- well it's an explanation. For the third quarter we have no reason to believe that will recur in the fourth.

Operator

Your next question comes from the line of Gregg Gilbert with SunTrust.

Gregory B. Gilbert -- SunTrust -- Analyst

Yes. First Rajiv can you give us your thoughts on the environment that you'll be launching into for the biosimilar Herceptin in terms of your supply situation and what launch trajectory you're expecting? And then for Robert going back to you setting the bar in 2020 and then providing outlook from there you've had some experience you and the board and Mylan had some experience setting long-term guidance for the stand-alone company. In the past it seemed to create concerns and controversy around your ability to hit it whether this step would be required etc. So my question to you is how will you and the Board approach the concept of long-term guidance when the deal closes and perhaps what was learned from the last time?

Robert J. Coury -- Chairman of the Board

Great great question. I have to tell you that's a great question. But Rajiv why don't you go first and then let me respond.

Rajiv Malik -- President, Executive Director

So let me go ahead with the Herceptin and Tony and Kenneth please feel free to add. First of all as far as the capacity that's not a constraint. Capacity for Herceptin is the only constraint and we have ample capacity to -- so it's an adequate market. Second I know why we are second Amgen has been there but we would be the first one to bring in -- hopefully we are expecting to be the first one to bring in the bold strength and we'll be launching this program in a couple of weeks. Yes there already 4 more approvals out there. We see that. But again in this one I would say there are 2 differences if I have to compare one is Part B and the incentives are very well aligned. Also in this case if we have to compare with the Neulasta biosimilar we see a slower ramp because it will be more -- it will not -- it will be lesser of a switch but more prescribed to the newer where patients. So you can see a little bit slow ramp on that as compared to that. But we see that shift-wise ultimately leading to the decent conversion of this road to the biosimilars. Tony you want to add something?

Ken Parks -- Chief Financial Officer

No I just might add that our 350 sales reps who are going to be selling these to oncology these very vital products to the marketplace are trained and ready. And I think there's as Rajiv articulated we're well positioned for success with this launch in the coming weeks.

Robert J. Coury -- Chairman of the Board

So Gregg let me hit what I consider to be a very powerful and potent question quite frankly and I think a very fair question. Let me start with the frustration that we the Board and -- have had in the past in dealing just with the point that you have outlined. And let me tell you why I do not see the same things on a going-forward basis. It comes in 2 parts. The first is in the past what was -- what management was trying to predict was predominantly in my opinion a North American story. A North America story. I don't know what more to say.

The U.S. generics business we had -- we had a very high-class issue. We had some really rare powerful large opportunities in the pipeline to launch. And when we planned -- when we invested in those original programs I don't think anybody could have anticipated the structural changes that have been put into that -- that have come into play in the U.S. market in the North American region that -- you had 2 things happening. There was a tiny issue of when we would get the approvals from the FDA and then you had the structural changes that actually were occurring and it was almost like one after the other. So the frustration that the Board and I'm certain that a lot of shareholders had was the predictability of such a powerful pipeline with very large opportunities.

And if you don't -- if these things don't line up well it causes a tremendous amount of oscillation variability uncertainty unpredictability. And then if you put on top of that the fact that investors have told us time and time again that if we're not as transparent about all these things that I'm now explaining to you and it seemed like that we were coming forward after the fact to try to explain these things and one of the things I learned in speaking with investors and also sell-side analysts is how we can do a much better job if on the inside we can envision and see all of this potential risk then why not come to investors and sell-side analysts as quickly and advanced as we can and to layout what we potentially could foresee so that people don't get frustrated that the company is not being as open as transparent not providing the right type of disclosures for analysts or investors alike to model and not wait until the actual event to occur. So I'm taking my time articulating all this because if we're not aware of ourselves and if we're not aware of what went wrong in the past there's -- it's going to be -- we're just kidding ourselves about correcting all this as we move forward in the future. Now as we move forward in the future one of the other reasons why I'm helping level-set everybody and I do -- look I think Umer has done a great job in his quest to really dig in deep and really try to understand and I think what I can assure you what we're doing is identifying all those potential risks that we can see in front.

We don't see anything that we have not -- that really has surprised us. But what we haven't had a chance was to talk about all the other opportunities. And so one of the things I think will be helpful is that once of these LOEs of the Upjohn portfolio is out of the way which we're fully incorporating we're fully anticipating the final LOEs that will go out of the way you're going to find even a broader and more diversified portfolio that actually has a lot less oscillation to it. And the way we're to get investors comfortable knowing forward is -- let me give you an example if we decide to report the basis on 3 regions. Let's just say developed markets emerging markets and Asia Pacific markets. And if there's one particular market very large like China and Asia Pacific we'll carve that out. But I think doing what we promised both all you analysts and investors we're going to sit with each and everyone of you and we're going to walk you through and do SWOT analysis around each particular region each particular country and as we talk about the strengths the weaknesses the opportunities and threats rather than you relying on us solely to be the only ones giving the -- telling you what we anticipate I think once we go through that exercise and have our discussion about our views about how we are looking at the business going forward your views how we should look at the business going forward there's going to be discussions about how we report on our business. I'm certain there's going to be 3 buckets: metrics that we absolutely cannot give you; metrics we absolute are very easy to give you; and the middle bucket those metrics that I think can provide some great dialogue and really come to a compromise but make sure that the starting point everybody is on the exact same page.

I don't think I want you investors going forward and you analysts to rely solely on management if we do a good enough job giving you all the information that we have upfront being even more transparent than maybe what we have been and allowing you all to reach your own judgment. So I do feel that going forward to summarize I think this is going to be a combination of a less volatile business with not as much oscillation to it the way we're going to level-set and demonstrate this new diversified global platform that we have. I think we can get people comfortable with that. And then look we're trying to bring in a different kind of a management team who really is focused on execution. When I think about where we're taking the company and we're going to definitely need this 2- 3-year transition period I'll be honest with you we're moving the company to something quite different in terms of a business model and when it comes to execution which thus require a different mindset a different managerial mindset. I think we were well on our way with the beginning of the transformation work that was done that was going to take time. But I do believe that this transaction has only forced us to accelerate the strategies that we were doing on our own anyway.

And I think that Michael and others I do believe represent more of a future of where we're moving the company because they are much more driven through sheerly executing on numbers and delivering our numbers while just be very humbly honest with you. Up until this point Mylan from 15 years ago we built and spent our entire time building a true one-of-a-kind global platform that is second to none. There is not another peer set that matches what we have built and that's why I was so excited about the Randall Stanicky what he's doing around this concentration of therapeutic categories because we really have a global platform to leverage the return on our future investments. And so I think look all this is culminating together and I hope -- I apologize for the long-winded answer but I really thought that was a pretty powerful and potent question that's on everyone's mind and I hope I was able to answer that.

Operator

Your final question comes from the line of Jason Gerberry with Bank of America.

Unidentified Participant

This is Ash for Jason. Two questions please. So first your partner Biocon is guiding to $1 billion in biosimilar sales by financial year 2022. How does impact your thinking about some of the opportunities that you have in front of you? And then the second question is more around 2020 stand-alone Mylan. It seems like you have the tailwinds of a better biosimilar Advair and International Pharma but not major U.S. ANDA launches. So are those some of the major pushes and pulls or are we missing anything?

Rajiv Malik -- President, Executive Director

Let me give you the first part from the Q2 to Q4 and we've been very confident and -- that we can go geography by geography. There are very gratifying drivers of this Q3 to Q4 ramp whether it's Yupelri in U.S.A continued market -- Ogivri launch or Fulphila and Wixela for performance. Europe is being driven by products like Creon Dymista Brufen and Herceptin. We see that momentum behind these products. And the rest of the world whether it's our ARV portfolio Amitiza Sebivo and Patreon. So we have mapped this very carefully and we've been very confident about that. Now about Biocon spend I cannot -- it's not -- for us to comment on Biocon's $1 billion plan. We have shared with you very clearly the portfolio the whether -- the glargine aspart the Avastin biosimilar launch of Herceptin. We have our own business case and we've been very confident behind that.

Ken Parks -- Chief Financial Officer

And I guess the comment on 2020 is that look as we get closer to the normal time that we'll speak you about 2020. We'll look at the in my term lay of the land how close are we to the transaction. Does it make sense to provide Mylan stand-alone outlook or does it make sense to look at the new company together? But the reality is at this point in time we typically wouldn't start talking about the next year yet. And as we move closer to those dates we'll keep you obviously fully apprised of the Mylan numbers as well as the push and pulls in those.

Operator

[Operator Closing Remarks].

Duration: 65 minutes

Call participants:

Melissa Trombetta -- Head of Global Investor Relations

Robert J. Coury -- Chairman of the Board

Heather Bresch -- Chief Executive Officer and Executive Director

Rajiv Malik -- President, Executive Director

Ken Parks -- Chief Financial Officer

Randall S. Stanicky -- RBC Capital Markets -- Analyst

Christopher Thomas Schott -- JP Morgan -- Analyst

Elliot Henry Wilbur -- Raymond James & Associates Inc. -- Analyst

Umer Raffat -- Evercore ISI Institutional -- Analyst

David Reed Risinger -- Morgan Stanley Research Division -- Analyst

Gregory B. Gilbert -- SunTrust -- Analyst

Unidentified Participant

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