In the last two years, Mylan (MYL) is down almost 15% and has dramatically underperformed the S&P 500. I think the stock will continue to underperform.
Back in February, MYL announced it would buy Meda, a Swedish pharmaceutical company, for $9.9 billion or 4.3x revenue in a cash-stock deal. Meda has a mix of branded, generic and over-the-counter products that are sold in 150 countries. In the last full year of operations, Meda had revenue of $2.3 billion and was growing top-line revenue about 3%.
Meda is a good fit with Mylan. Meda has strength in dermatology, pain management and respiratory treatments. Within four years, Mylan believes it can cut $350 million in costs from the merged company. Management said it believes the deal will help get MYL to its goal of at least $6 per share in earnings by 2018. To finance the transaction, Mylan borrowed $7 billion, issued $1.4 billion in shares and assumed $2.8 billion of Meda's debt.
On Aug. 9, Mylan reported second-quarter earnings of $1.16 per share, $0.03 ahead of the consensus estimate. Revenue rose 8% to $2.56 billion, right in line with the consensus Wall Street estimate. Generic sales rose 4% to $2.14 billion, while the specialty sector saw sales increase 33% to $402.5 million. The increase was the result of higher unit volumes and the realization of higher prices related to sales of the EpiPen auto injector.
EpiPen is Mylan's biggest-selling product and will likely account for 13% of revenue and about 20% of the company's profits this year. For the year, analysts think the company will earn $4.96 a share on $11.1 billion in revenue.
Year to date, shares of Mylan are down 26%, mostly because of the controversy surrounding the EpiPen price hike. Trading at 8x fiscal 2016 estimates of $4.96 per share and only 7.4x 2017 estimates of $5.44, statistically the stock is cheap.
But without acquisitions and without price gouging from EpiPen, Mylan has very little growth. Sanofi's (SNY) epinephrine drug is off the market and is mired in litigation. The FDA issued a Complete Response Letter (CRL) to Teva (TEVA) , which has delayed Teva's generic product by a few months.
Mylan announced a generic EpiPen with a lower price than the branded product in order to score some political points with the public.
Given the political pressure on the FDA, Teva's generic drug will probably be approved late this year. That means Mylan might only have six to nine months of profits from the EpiPen before Teva gets on the market. Adamis Pharmaceuticals (ADMP) also has a prefilled auto injector that could be approved early next year. Impax Labs (IPXL) has Adrenaclick, but is facing supply shortages. EpiPen has a 93% market share.
While earnings are expected to rise 15-17% this year, next yea'sr earnings are likely to grow in the mid-single digit range. And that's the problem. It's hard to see how this company can grow earnings much beyond single digits.
In numbers, it looks something like this.
Revenue grows 18-19% this year (which is half over). That growth is mostly due to adding the Meda revenue. But next year, revenue growth slows (because generic EpiPens start hitting the market) and by fiscal 2018, revenue growth will probably be in the low-single digits as EpiPen is engaged in full hand-to-hand combat with generics. Earnings per share follow revenue into the single digits.
In other words, we are probably six months away from peak revenue.
I think the stock is cheap for a reason. Ironically, by raising the price of a two-pack of EpiPens to $600 from $57, Mylan may have opened the floodgates to new completion. I bet estimates will come down all next year. If I'm right, the company never gets to its $6-per-share goal by 2018.
I would avoid shares of MYL. It's too much of a shot in the dark.