At Mylan, Growth Is Far From Generic

7/22/2013


  Recent Price
$32
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
12
  Shares (millions)
399
  Long-Term Debt as % of Capital
66%
  52-Week Price Range
$32.28 - $21.31

Mylan ($32; MYL) has built its business model around the bane of most pharmaceutical makers — drugs coming off patent protection. Generics accounted for a record 84% of all prescriptions dispensed in the U.S. last year, according to researcher IMS Health, and utilization could ultimately top out at 87%. Mylan drugs fill one of every 11 U.S. prescriptions.               

The consensus expects Mylan to grow per-share earnings 10% in 2013 and 13% in 2014, both in line with the median for S&P 500 drug companies. Mylan commands slimmer profit margins than the peer-group median, as its pricing power quickly evaporates when rival generic products flood the market. As a result, Mylan depends heavily on new-product launches, which generated 28% of sales in the March quarter. Mylan plans to introduce about 500 new products this year, down 17% from 2012.

Mylan shares look unduly cheap at 11 times estimated 2013 earnings and 10 times estimated 2014 earnings; the median P/E for its peer group is at least 16 for both years. Mylan is a Focus List Buy and a Long-Term Buy.

Business breakdown

Generic drugs generated roughly 87% of Mylan's revenue in the 12 months ended March.  North America accounted for 54% of generic sales, followed by 23% from Europe, the Middle East, and Africa (EMEA), and 22% from Asia. In the March quarter, EMEA drove Mylan's growth in generics, helped by austerity measures that have forced European governments to seek savings by using generic treatments. Some countries still have low penetration rates for generic drugs (France is in the mid-20% area), giving Mylan ample opportunity for additional growth.

Specialty drugs comprise the remainder of Mylan's business, chiefly its EpiPen Auto-Injector, which holds more than 90% of the market for treating severe allergic reactions. Management sees opportunities to expand that addressable market, especially overseas. Mylan expects sales of specialty drugs to jump 28% this year.

Management seems determined to break into Brazil, Mexico, and China. In February, Mylan agreed to acquire Agila Specialties, a maker of generic injectable treatments sold in Brazil, India, and the U.S. The $1.6 billion deal would provide an immediate boost to earnings per share and establish Mylan as a global leader in injectables. Mylan had originally expected to complete the deal by the December quarter, though Indian regulators might try to extract some concessions. Regardless of the outcome of the Agila bid, Mylan will likely keep searching for more acquisitions.

Conclusion

In May, management reaffirmed its 2013 guidance, calling for earnings per share of $2.75 to $2.95, implying growth of 6% to 14%. The profit consensus of $2.86 per share leaves room for upside.

Mylan seeks annual earnings of $6.00 per share by 2018, implying annualized growth of 16%. The company plans to reach that target through a mixture of organic growth, acquisitions, and stock buybacks.

An annual report for Mylan Inc. is available at 1500 Corporate Drive, Canonsburg, PA 15317; (724) 514-1800; www.mylan.com.

Mylan
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '13
0.62
vs.
0.52
3%
31.22
-
27.38
12 - 11
Dec '12
0.65
vs.
0.53
13%
28.50
-
23.25
11 - 9
Sep '12
0.83
vs.
0.55
14%
24.67
-
21.20
11 - 10
Jun '12
0.60
vs.
0.52
7%
23.63
-
20.21
11 - 10
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2012
6.80
2.59
0.00
28.50
-
20.21
11 - 8
2011
6.13
2.04
0.00
25.46
-
15.49
12 - 8
2010
5.45
1.61
0.00
23.63
-
16.55
15 - 10
2009
5.09
1.30
0.00
19.21
-
9.65
15 - 7
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
95
90
80
79
47
83
57

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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