MYLAN ADDED TO OPPORTUNITIES IN HEALTHCARE

Mylan NV (MYL)

 

Key Measures

52 Week Price Range: $38-$75
EPS: $4.95
PE: 9
Shares Outstanding: 510 million
Market Capitalization: $23 billion
Dividends Per Share: None
Target Price: $60
Sell Price: $38
Price as we Publish:  $45

Generic Drugs: Containing Healthcare Costs
The United States pays the highest prices for prescription drugs of any country in the world.  New drugs enjoy long patent protection that allows their makers to set prices at whatever the market will bear.  It doesn’t stop there.  Once on the market, prices are free to be increased at will.  The Affordable Care Act has had very limited success in reducing drug price inflation.

There are basically three forces to contain perpetually rising prices: Competition from other new drugs; buying-groups such as hospital chains; and the expiration of patent protection.  This third alternative is where generics take over and where the biggest price benefits are to be found.

Generic drugmakers offer big savings of 50%-70% or more.  All drugs both branded and generic need regulators like the FDA to approve product safety and efficacy.  Generic companies have a much smoother path to the market since the branded formulations of their products have already been approved.  

This means generic drug development doesn’t require tens of millions of dollars of research.  And then there is the cost of product advertising.  Last year for example, pharmaceutical giant Pfizer spent over $1.4 billion.  Generic manufacturers have almost none of these costs.  This means generics can be marketed at least 50%-70% lower in price and still generate a high level of profitability.   

When measured by the number of prescriptions filled, generics account for 88% of the US market.  Between the aging of the US population and the number of major pharmaceuticals that will soon come off patent, the outlook for above average market growth is quite good.  

Mylan: #2 In The World But Looking For More
Mylan Labs is the world’s second largest generic drug company, behind Teva Pharmaceutical (TEVA: $51).  With more than 1400 products, Mylan is highly diversified.  No single product accounts for as much as 5% of total sales.  The benefit of size also means tremendous strength in dealing with distributors and retailers of these products.

Mylan’s products are sold in over 165 countries worldwide with the United States accounting for half.  Europe contributes a quarter while the rest of the world amounts to a quarter.  Mylan is a powerful force in France, equal to 8% of sales, and India at 11%.
 
Major Industry Consolidator
Mylan is using its size and financial muscle to accelerate its growth through acquisitions.  Over the past two years the company has acquired six businesses, products or marketing rights.  The company has spent more than $700 million in cash and $6.3 billion in stock in the process of becoming the industry leading consolidator of products and brands.  

Mylan’s most important acquisition took place in 2015 with the $6.3 billion stock acquisition of Abbott’s generic business.  The deal brought in $1.9 billion in sales including over 100 specialty and generic drugs in five major therapeutic categories.  This significantly expanded its global reach and established an operating platform for future international growth. The table below shows the breadth and balance this move helped achieve.

Recent Results
In recent years revenues have seen an average annual growth of 16%, and Wall Street expects a similar 15% increase this year to $11 billion followed by a 20% gain to over $13 billion in 2017.  These gains are the results of management’s aggressive acquisition strategy as well as organic growth.

 

Even with these strong revenues, EPS fell 28% in 2015 to $1.80 per share.  The Abbott acquisition resulted in almost $450 million in unusual costs that included $220 million in overlapping marketing and administrative costs and $225 million in one-time acquisition related costs.

These costs are behind the company now and this shows in Wall Street's expectation for 2016 EPS of $4.95 this year rising 19% in 2017 to $5.90.

Balance Sheet Is Strong
Mylan is a big cash generators.  This is just one good reason to own Mylan.  The balance sheet currently holds $1 billion in cash against $6.3 billion in long-term debt.  Even after laying out $700 million in cash last year for acquisitions, cash continues to pile up.  The company retains lots of financial muscle going forward.

BMR TAKE
When we find a company that is growing rapidly and selling at a low multiple, we get very excited.  The most critical of Wall Street analysts sets Mylan’s earnings growth at a 14% annual average over the next five years.  This is the sort of rate that normally begets big premiums, but here we have Mylan selling at less the 9 times 2016 EPS and 7.3 times next year’s estimate.  We are not making up these numbers up; they are the average of 15 of the best drug analysts in the business.  Need we say more?  Mylan has to be one of the real values we have come across in a long time.