The Mylan NV (MYL) Stock Relief Rally Won’t Last Long

Mylan NV (NASDAQ:MYL) shares rose nearly 10% early on Oct. 10 as investors heaved a sigh of relief over a $465 million fine it agreed to pay concerning its rebates on EpiPen injectable epinephrine to Medicaid patients. The hope for MYL stock is that the politically connected CEO, Heather Bresch, will be able to limit damage over the scandal and the company can return to normal.

The Mylan NV (MYL) Stock Relief Rally Won't Last Long

But the settlement covers only one set of government claims concerning the pricing of one form of one drug. There are still private lawsuits concerning the EpiPen to contend with. Political controversy over drug pricing also seems unlikely to end any time soon.

So why are people still paying 25 times earnings for Mylan stock?

What Else May Explode at MYL?

MYL is mostly a generic drug company.

Since failing to acquire Perrigo Company plc Ordinary Shares (NYSE:PRGO) last year it has, like Allergan plc Ordinary Shares (NYSE:AGN), gone after the opportunity piecemeal, acquiring rights to a host of generics and biosimilars this year. It is weighing a bid for Bayer AG (ADR)’s (OTCMKTS:BAYRY) dermatology business as that company sells assets in order to buy Monsanto Company (NYSE:MON).

The strategy is eerily similar to that of Valeant Pharmaceuticals Intl Inc (NYSE:VRX), only without the associated scandal involving specialty pharmacies. Instead, Mylan CEO Bresch blamed pharmacy benefit managers like Express Scripts Holding Company (NASDAQ:ESRX) for high prices in her testimony before Congress.

But MYL and its competitors have all spent the last several years consolidating the industry, hiking prices on generic medicines, using rebates to push the price hikes through, and moving the profits offshore through tax inversions.

This is the business model that is now subject to political attack. Presidential front-runner Hillary Clinton has made MYL and, by extension Mylan stock, a “punching bag” on the campaign trail.

Mylan is blaming the U.S. healthcare system for its high prices and the Journal of the American Medical Association agrees, writing that U.S. consumers pay twice as much for drugs as citizens in other industrial countries. The system is broken, they say.

But the system gets back to work in January, and it’s hard to imagine that the EpiPen price hikes, high profits and rising executive pay won’t spur some reform.

Calling this a “systemic problem” won’t keep profits up, as the system changes to the detriment of the company and MYL stock.

Warning Signs Abound for Mylan Stock

Insiders have been selling MYL stock and technicians are warning of ominous patterns in the company’s stock chart.

You’re paying about 25 times earnings, where earnings may have peaked, and for a company whose balance sheet, thanks to recent acquisitions, now has about half its assets under debt. Almost all of Mylan’s positive cash flow involves financing, not operations, and revenues for the first half of the year were only on pace to match last year’s $9.45 billion.

A no-growth company sailing into a political storm, with unique vulnerabilities and its basic business model under attack is not where I want my money. Steer clear of Mylan stock.

Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time.  Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.

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