Mylan May Be Gem in Rough Generic Sector

By Charley Grant

Generic drug companies like Mylan have been out of favor with investors for several years. It might finally be time to bet on a turnaround.

Mylan, which reported first-quarter sales of $2.7 billion and adjusted earnings of $0.96 a share on Wednesday morning, looks especially interesting. Those figures, down 1% and up 3% from a year earlier, respectively, were hardly spectacular.

But its shares were 4% higher Wednesday because those numbers start to look a little better when one considers the backdrop. Mylan shares are down by about 15% so far this year and 50% from their 2015 peak. EpiPen revenues have been in decline ever since the 2016 pricing scandal. Mylan's headquarters were raided later that year by the Federal Bureau of Investigation as part of an investigation throughout the industry into generic drug price collusion.

Wednesday's results didn't resolve every problem the company and industry face. First-quarter earnings calls from rivals like Teva Pharmaceutical Industries and Novartis haven't given any indication that U.S. pricing pressure is easing.

That prolonged slump in generic drug prices continues to weigh on Mylan's income statement: North American sales were down 19% from a year ago, though Mylan blamed falling EpiPen sales and other one-time factors. Moves to diversify Mylan's geographic reach, like the 2016 acquisition of Swedish drug company Meda, are paying off. First-quarter European sales grew by 16%.

And, while nobody knows when the U.S. pricing environment will improve, stock markets are forward looking; the stock is likely to rally before results improve, not after.

An investment in Mylan has a nice margin of safety in absolute and relative terms. Its debt adjusted market value is less than eight times forward earnings before interest, taxes, depreciation and amortization. By contrast, Teva fetches more than 10 times and Mylan traded north of 14 times back in 2015.

Major product launches for generic versions of blockbuster brands might be in Mylan's near-term future. The Food and Drug Administration is set to rule next month on Mylan's applications to sell a generic version of the asthma blockbuster Advair and a biosimilar version of cancer drug Neulasta.

Mylan has a chance to have the first version of each hit the market, which carries advantages like favorable pricing and a six-month window of exclusivity. Those drugs combined for more than $8 billion in world-wide revenues last year.

After a long wait for good news, capturing even a small part of those sales would brighten Mylan's outlook in a hurry.

Write to Charley Grant at charles.grant@wsj.com

(END) Dow Jones Newswires

May 09, 2018 13:13 ET (17:13 GMT)

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