In an industry that’s unpopular with consumers and politicians, Mylan was a standout last year. The U.S. pharmaceutical company that’s traded on the Tel Aviv Stock Exchange was the target of high-profile probes by the U.S. Congress and Securities and Exchange Commission for “price gouging” for its popular EpiPen injector and attracted broad criticism from consumer activists and the media.
But none of that seems to be reflected in Mylan’s stock price or in its financial results.
With a 12 percent rise over the past six months, Mylan shares have shown the best performance of any generic drug stock on the TASE, while the other two drug makers in the TA-35 Index, Teva Pharmaceuticals and Perrigo, have fallen 31 percent and 21 percent, respectively.
You can see why investors have decided to put EpiPen behind Mylan. As opposed to Teva and Perrigo, which have lowered their profit outlooks time after time over the past year, Mylan’s 2017 forecast for 2017 not only beat analysts’ expectations, it confirmed its multi-year targets for $6 of earnings per share for 2018.
Mylan’s optimistic forecasts for earnings per share of up to $5.55 for 2017, compared with $4.90 in 2016, are particularly impressive because they include a drop of 75 cents a share in profits from EpiPen, the adrenalin self-injector for emergency treatment of allergic reactions. EpiPen is a lot like Teva’s Copaxone, a product with an outsized impact on sales and profits. But unlike Teva and Copaxione, a multiple sclerosis treatment, Mylan has successfully developed alternative revenue streams to EpiPen.
As a result, Goldman Sachs says Mylan is the “best house in the neighborhood,” in fact a league unto itself.
Mylan has dealt with the pressure to lower EpiPen prices by diversifying its product portfolio and geographic expansion.
The company has six areas of medical treatments each with sales of over $1 billion – products for the central nervous system and anesthesia, allergy and respiratory system, infectious diseases (particularly AIDS), cardiovascular, gastrointestinal, diabetes and metabolism. In recent years Mylan has developed other big areas, such as women’s health ($760 million), oncology ($730 million) and dermatological ($570 million).
Mylan sells 7,500 products in 165 countries, and showed an average annual growth of 11 percent in the United States, 41 percent in Europe and 21 percent in the rest of the world over the past two years, even though it was a problematic time for the world generic drug market. Mylan grew mostly through acquisitions, such as Meda last August 2016 for $9.9 billion, and Abbott Laboratories in February 2015 in return for 22 percent of its own shares.
Despite the rapid growth, Mylan has improved operating profitability of its generic business in Europe from 9 percent to 22 percent, and in the rest of the world from 12 percent to 18 percent.
R&D in India
Mylan’s strong presence in key markets was achieved because of its competitive cost structure based on manufacturing the active raw materials for its drugs, research and development conducted in India and a big basket of products. This extensive presence can be seen in the way that over 50 percent of Mylan’s products are ranked first or second in sales in six of its seven leading markets. In eight of its 10 main markets it is growing at a faster pace than the market.
The firm controls about a fifth of the relevant generic market in the United States, which is worth $31.4 billion a year. The rest of the U.S. generic market is worth $28.6 billion a year and leaves lots of room for future growth.
Moreover, Mylan has proved it can penetrate European markets and take a leading position, such as its 28 percent share in France and 23 percent in Italy, where it is threatening Teva’s leadership. Mylan is making big strides in the Japanese market, too, which is much harder to enter, rising from the No. 11 competitor to No. 4 thanks to its partnership with Pfizer.
Mylan CEO Heather Bresch says the company intends to double its sales of dermatological drugs by 2021 to $1 billion, and of each of its injected drugs and over-the-counter products sales from $1 billion to $2 billion a year.
Mylan’s outstanding competitive advantage in the generic market is its excellent preparedness for the wave of patent expirations on best-selling biologic drugs – drugs manufactured from genetically engineered proteins derived from human genes. Mylan’s strong position in the biosimilar drug market sets it apart from the vast majority of generic drug firms and is expected to supply it with products in markets that are relatively protected from the brutal generic competition that exists for chemical-based pharmaceuticals.
The biologic drug market is forecast to grow from $289 billion annually in 2014 to $445 billion by the end of 2019, and that’s just the start. Biologic drugs whose patents will expire by 2018 have sales of $70 billion, which means that the potential to launch biosimilar versions will grow to some $100 billion a year by 2020. Mylan is now developing biosimilar versions for eight of the 10 leading biological drugs, whose sales totaled $68 billion in 2016.
In contrast to Teva’s portfolio, Mylan’s biosimilar versions are on the verge of being approved and launched. The U.S. Food and Drug Administration is expected to respond by March 28 to Mylan’s application for its generic version of the Advair asthma treatment, a market worth $4.6 billion a year. If it gets the approval, Mylan may become the only firm (or one of two) selling a generic version of Advair for a long period of time. Mylan has said it hopes to launch its version, named Wixela Inhub, in June of July.
Mylan is also seeking approval in the U.S. for its generic version of Herceptin for treating breast and colon cancer. Worldwide sales of the brand-name drug totaled $6.8 billion in 2016 ($2.5 billion in the U.S.) and the generic version is already on sale in 13 countries, including India.
Analyst Jami Rubin, head of the healthcare research group at Goldman Sachs, reiterated her Buy recommendation for the stock with a target price of $55 a share, which reflects a multiple of 10 times forecast profits for 2017. Mylan shares were trading late morning local time in New York yesterday at $43.15, down 2.1 percent.
Competition from Jordan
Rubin notes that Mylan management has expressed great confidence it will receive approval for the generic version of Advair, but she did not necessarily agree with the timetable of a June or July launch and expects competition from the Jordanian firm Hikma Pharmaceuticals. Rubin says that Mylan expects to launch products worth some $850 million in 2017, a forecast that assumes the launch of a generic version of Copaxone in two dosages, 20 and 40 milligrams. Mylan executives said the two requests are being examined simultaneously by the FDA, and expect approval to be granted in the first half of this year for the 20-milligram version.
Rubin emphasized in her recommendation Mylan’s extensive product pipeline for biosimilars, which includes 16 products, three of which have already been submitted for approval. In addition, Mylan intends to apply for approval of generic versions of Humira, a drug used to treat rheumatoid arthritis and Crohn’s disease, which had U.S. sales of $10.4 billion in 2016, and for Avastin, used for treating a number of types of cancer, whose U.S. 2016 sales totaled $3 billion.
Ronny Gal, pharmaceutical analyst at Sanford Bernstein, which is represented in Israel by Excellence Nessuah Brokerage, has a Buy rating for Mylan with a target price of $52 per share. Yet Gal has criticism for Mylan over the lack of transparency in its financial results, and especially for the way it changed its reporting of business lines, so that the sales of original and brand name drugs, such as the EpiPen, were included in the North American results along with generic drugs. The number of prescriptions for EpiPen dropped in the fourth quarter by 21 percent, and even if EpiPen prices remained unchanged, this means that EpiPen sales fell 21 percent, or $150 million, so the rise in revenues in North America came from launching new products.
Mylan did good work when it built its generic and biosimilar product pipeline, and is now entering a period of launches that will accelerate its growth, says Gal. But he has reservations and says investors must remember the low level of transparency and the corporate governance at Mylan, which have led to a lower price for the share compared to its profit potential.
Another reservation Gal has concerns Mylan’s dependence on the North American market, which was responsible for 73 percent of its operating profits in 2016. Still, Gal raised his EPS forecast for 2016 by 16 cents to $5.35, partly because he thinks EpiPen sales will be $100 million higher than his previous estimates. This is based on the low level of market penetration for AUVI-Q, a competing product that reached store shelves recently, but whose price is higher than of EpiPen’s.
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