Mylan To Wall Street: Forget Patent Cliff, We'll Grow

By
A A A

Five years ago,Mylan ( MYL ) became the third-largest generic-drug company in the world, catapulted by two acquisitions totaling around $7 billion.

But in late October,Watson Pharmaceuticals ( WPI ) overtook Mylan when it bought Swiss partner Actavis in a deal valued at $5.9 billion. Mylan dropped to No. 4.

So Israel'sTeva Pharmaceuticals ( TEVA ) and the Swiss firmNovartis ( NVS ) remain the top two generic-drug firms worldwide.

But Mylan may get bigger again.

Management says it has the "financial flexibility" to put as much as $4 billion to work to make one or more acquisitions.

"We are looking. And if the right opportunity presents itself, we will take advantage of it," said Chief Financial Officer John Sheehan in a phone interview this week.

Analysts say a buy or two may help offset an expected drop in the number of brands going off patent in the U.S. after 2012's banner year. It would mute concerns of slowing growth, especially in what is seen as 2014's "patent cliff."

Fewer brands going off patent generally means fewer opportunities for generics to replace them.

Branded Drugs

"This year is a good year for Mylan and also other generic manufacturers because of the largest number of branded drugs coming off patent," said Morningstar analyst Michael Waterhouse. "All the generic companies have posted good growth numbers."

Mylan's third-quarter revenue jumped 15% from the prior year to $1.8 billion. Third-quarter operating cash flow was "the highest in our history," Sheehan said.

Management wouldn't talk about specifics of potential candidates other than that it's looking "across the globe," as Sheehan put it.

But analysts believe they're looking at generic-drug companies in emerging markets and manufacturers of injectable or topical drugs.

Mylan gets the lion's share of its sales from generic drugs, which are low-cost copies of branded drugs. It sells more than 1,100 generic products.

It also sells several branded drugs through its specialty pharma business, which focuses on respiratory diseases, severe allergic reactions and psychiatric disorders.

Its EpiPen product is the top prescribed auto-injector for treating severe allergic reactions.

Mylan's EpiPen franchise could be threatened by a potential generic entry from Teva in 2015.

Mylan's India-based subsidiary, Mylan Laboratories, makes a wide range of ingredients used in drug manufacturing, including those for generic antiretrovirals for treating HIV/AIDS.

An acquisition outside the U.S. is viewed as especially favorable.

"Mylan is heavily exposed to the U.S. and southern Europe," said Waterhouse, adding that 50% of its generic sales are in the U.S. vs. only 20% for Teva.

Sheehan defends Mylan's high U.S. share. "If you are going to be the largest someplace, I'd want to be the largest in the U.S.," he said. "I'm not sure Europe is the best place to be the largest."

But Waterhouse says Mylan is one of the most exposed to Europe of any generic-drug company in Morningstar's coverage.

Up until the second quarter of this year, Mylan's European business showed eight straight quarters of negative growth. However, it showed a 3% gain in Q3 revenue vs. the earlier year.

In Europe, Mylan is strongest in France, with around 30% market share in generics.

France and other countries in austerity-minded Europe are now encouraging higher use of low-cost generic drugs, Sheehan says.

"We see Europe as a long-term growth driver as generic utilization rates increase," he said.

RBC Capital Markets analyst Shibani Malhotra agrees. "There is so much underutilization of generics (outside the the U.S.), even in Europe, that ultimately (generics) is a growth market," he said.

Waterhouse doesn't expect Mylan to ink one big deal because it still has a lot of debt on its balance sheet, but perhaps smaller ones. It's been paying down debt since its transformative acquisitions in 2007. But long-term debt was still $4.8 billion in Q3.

Mylan had spent $6.8 billion for German-based Merck KGaA (unrelated to the U.S.-basedMerck ( MRK ) and more than $700 million for 72% of India-based Matrix, since renamed Mylan Labs (later paying $133 million for the rest).

Merck KGaA gave Mylan more exposure to Europe and other countries.

Matrix gave Mylan low-cost manufacturing plants in India and China. Those operations contributed to Mylan's Asia-Pacific revenue growth of 9.2% in Q3, to $339.2 million, including the negative impact of foreign exchange translation.

Strong Earnings

Long-term debt is "obviously a big number," Sheehan said, "but it's in relation to the size of the company."

He says the "vast majority" of any acquisition would be done through borrowing.

But the firm's strong earnings, not to mention assumed earnings of a target company, would enable it to borrow "without overleveraging the enterprise."

Mylan's earnings in Q3 grew 51% over the prior year to 83 cents a share. Analysts expect full-year profit of $2.83 a share, up 26%, on revenue of $6.8 billion, for an 11% increase, reports Thomson Reuters.

But analysts see profit slowing to the single digits in 2013 through at least 2015.

Mylan doesn't see it that way.

"We see the patent cliff affecting generic companies differently," Sheehan said. "For example, in 2012, we have 378 products in the U.S. market. By 2015 we will have 596."

Mylan is counting on getting U.S. approval for a generic version ofGlaxoSmithKline 's (GSK) branded respiratory drug Advair, for one.

Meanwhile, Mylan's recently announced partnership in Japan withPfizer (PFE) should begin bearing fruit starting at year-end.

Mylan continues to forecast double-digit earnings growth "beyond 2013." But its 2013 forecast of $2.76 a share is just 6.6% higher than Wall Street's 2012 forecast.

In February, management plans to put out new guidance for 2013.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: MRK , MYL , NVS , TEVA , WPI

Investor's Business Daily

Investor's Business Daily

More from Investor's Business Daily:

Related Videos

Stocks

Referenced

Most Active by Volume

79,812,121
  • $12.11 ▼ 5.61%
68,370,136
  • $104.83 ▲ 1.79%
65,036,978
  • $16.60 ▲ 1.22%
64,087,181
  • $8.40 ▲ 5.93%
54,443,769
  • $33.66 ▼ 2.43%
44,944,529
  • $97.82 ▲ 1.50%
40,119,778
  • $45.02 ▲ 1.44%
34,306,166
  • $80.04 ▲ 2.13%
As of 10/23/2014, 04:15 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com