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Mylan, Inc.’s (MYL - Analyst Report) third quarter 2012 earnings (excluding special items) of 83 cents per share beat the Zacks Consensus Estimate by 6 cents. Earnings also increased 51% from the year-ago quarter.

Higher revenues and gross margin expansion led to the rise in third quarter earnings. Revenues climbed 14.6% to $1.81 billion, beating the Zacks Consensus Estimate of $1.85 billion.

On a reported basis (including special items), third quarter 2012 earnings were up 41.2% to 51 cents per share.

The Quarter in Detail

Mylan reports revenues from two segments: Generics and Specialty.

Total Generics segment sales increased 10.4% to $1.5 billion. Generic third-party net sales, derived from sales in North America, Europe, Middle East & Africa (EMEA) and Asia Pacific, climbed 10.3% to $1.5 billion.

Total Specialty segment sales increased 39.3% to $298.6 million, while third party revenues from the segment increased 37.4% to $294.1 million. Specialty segment sales were driven by the strong performance of its flagship product - EpiPen auto-injector - for severe allergic reactions.

Third-party net sales declined in the EMEA but grew in North America and Asia-Pacific. Third-party net sales in North American markets climbed 19.2% to $831.0 million in the reported quarter. The increase was mainly attributable to new product launches, which include the generic equivalent of Novartis' (NVS - Analyst Report) Diovan HCT (valsartan and hydrochlorothiazide) tablets.

Third-party net sales from the EMEA market declined 7.2% to $325.6 million. The decline was primarily due to negative currency impact. Third party net sales in the Asia Pacific market increased 9.2% to $339.2 million due to favorable foreign currency translation.

Adjusted gross margins improved to 52% (from 48%), mainly due to new product launches coupled with increased sales of EpiPen, partially hampered by pricing pressure in the Generic segment globally.

Research and development (R&D) expenses increased 52.8% to $108.3 million in the reported quarter due to higher investment in the pipeline. Selling, general and administrative (SG&A) expenses rose 7.2% to $342.4 million.

Outlook Raised

Mylan raised its adjusted earnings for 2012 to the range of $2.50–$2.60 per share from $2.45–$2.55 per share previously. The 2012 Zacks Consensus Estimate of $2.52 per share is just 2 cents ahead of the lower end of the guidance range.

Though Mylan raised its 2012 earnings guidance, the company reaffirmed its 2013 earnings guidance at around $2.75 per share. The 2013 Zacks Consensus Estimate is in line with the company’s guidance.   

Our Recommendation

The company’s raised guidance for 2012 is encouraging. Also, we are pleased with Mylan’s geographic reach and product depth along with a robust generic product pipeline. However, Mylan’s performance in the EMEA region remains a concern.

Thus, we prefer to remain on the sidelines and have a Neutral recommendation on Mylan. The stock carries a Zacks #3 Rank (Hold rating) in the short term.

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