Five years ago,Mylan (
) became the third-largest generic-drug company in the world,
catapulted by two acquisitions totaling around $7 billion.
But in late October,Watson Pharmaceuticals (
) 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 (
) and the Swiss firmNovartis (
) 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.
"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
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
"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
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
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
"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
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
Mylan had spent $6.8 billion for German-based Merck KGaA
(unrelated to the U.S.-basedMerck (
) 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
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.
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
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
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
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