Mylan N.V. (NASDAQ:MYL) has been a battleground stock in 2018. And that’s with good reason, Mylan stock has seen plenty of good news, but also a number of setbacks. EpiPen is a perfect example. The brand brought Mylan shame and a substantial fine, but it’s also in short supply now, continuing to lead to strong ongoing profits.
Twists and turns in EpiPen and several complex generics have had Mylan trading in a big range this year, from a low of $35 to a high of $48.
With Mylan stock at $39 now, it’s closer to support than resistance for technical traders. At Investorplace, we’ve had a nice back and forth. Joseph Hargett rightly said MYL stock would go “Back Down To $40” in March. In April, Chris Lau argued that MYL stock is “Still Undervalued.” My take? Let’s dive in.
EpiPen Controversy
In a twist of irony for a company known for generics, Mylan got itself into a pricing scandal with a branded product. Its EpiPen emergency allergy product became a major source of drug industry outrage. Between 2008 and 2016, the company raised the price of a pair of EpiPens from $100 to $600.
French rival Sanofi SA (ADR) (NYSE:SNY) filed a whistleblower lawsuit in the U.S., claiming that Mylan was overcharging the government and squelching competition. They had a dog in the fight, as Sanofi previously sold its competing Auvi-Q product.
In any case, Sanofi’s intervention was a success. The US Justice Department pursued the case and reached a $465 million settlement with Mylan. It claimed that Mylan incorrectly classified EpiPen as a generic product when in fact it was branded and priced as such. Mylan refused to admit wrongdoing, but reclassified pricing going forward.
In what must be a bitter twist for Mylan, Sanofi, as the whistle-blower, scored a $39 million payout for exposing the situation.
And that’s not all. Regardless of how EpiPen was classified, it had been earning Mylan premium pricing in the past. That should change soon. Teva Pharmaceutical Industries (NASDAQ:TEVA) has long been trying to bring a rival to EpiPen to market.
The FDA originally held up plans back in 2016. However, Teva has continued trying, and it appears they are now preparing for launch in coming quarters, hitting Mylan’s franchise further.
Mylan’s Progress on Generics
Turning from bad to good news, Mylan is in the process of launching the long-awaited first generic to Copaxone. Approved in 1996, Copaxone has long been one of the three so-called ABC Drugs used to slow the progression of Multiple Sclerosis. The market for these drugs is huge, as MS has ravaged the developing world in recent years.
Mylan is still in the process of getting Copaxone fully launched, and Teva, who sells the branded version, is fighting back with aggressive discounting. Teva’s stock surged on its last earnings report when it announced that Copaxone sales had fallen less rapidly than expected.
Expect Mylan to keep gearing up its efforts to put pressure on Teva on this front, however. It’s also a good sign for Mylan stock more generally that they can bring these more complex generics to market, which should result in higher future profit margins.
On the other hand, Mylan got bad news last week on another of its other complex generic undertakings, Advair. Mylan stated that the FDA rejected its copy of GlaxoSmithKline Pharamceuticals Limited’s (NYSE:GSK) respiratory drug due to “minor deficiencies” in its application.
The FDA is expected to explain these in detail in a Complete Response Letter later this month. In theory, Mylan could still have an approved version by the end of the year but any further delay could hit Mylan’s earnings forecasts heading into 2019.
Tougher Industry Cycle Ahead
In past years, generics companies have done very well. There are several factors that could reverse this trend in coming years, however. For one thing, competition is rising. As expected within a capitalist market, the generic makers high profit margins attracted competition, particularly from India.
On top of that, there’s been a general slowdown in breakthrough new FDA-approved drugs in recent years. Logically, we can thus conclude that fewer big drugs will be coming off patent in coming years, leading to a relative decline in opportunities for the generic players.
In general, returns on R&D budgets are falling across the biotech industry, suggesting the low-hanging fruit may be gone for drug developers. If that’s the case, generic drug-makers will have fewer and fewer big opportunities going forward. Additionally, governments are cracking down on pricing (and not just on EpiPen), limiting Mylan’s margins.
Mylan and its competition aren’t asleep at the wheel. Mylan in particular is reacting to this challenge aggressively. It is making numerous acquisitions, boosting the firm’s geographical diversification while moving into areas that have fewer competitors. Still, investors expecting the highly profitable days of generic drug-making to return will likely be disappointed.
What’s Mylan Stock Worth?
On paper, Mylan stock looks cheap, as it is trading around 8x forward earnings. Even given that drug-makers tend to trade at low PE ratios compared to the market, 8x still grabs attention.
That said, a lot of speculation is baked into that earnings figure. If you are a bull on Mylan, you have to hope Teva can’t get a generic EpiPen to market until 2019, that Copaxone generic sales will ramp up quickly, and that the FDA won’t slow down the rollout of Mylan’s Advair generic too much. As you can see, that’s quite a few moving parts for calculating earnings going forward.
And while Mylan looks cheap, there is probably good reason for that. The company is heavily leveraged up. It makes acquisitions frequently, and often at high valuation ratios, putting the balance sheet in a riskier position.
Not surprisingly, there’s little cash left over for shareholder returns. MYL stock hasn’t paid a dividend since before the financial crisis. Mylan stock could still perform well for its shareholders, but with that in mind, pay more attention to the potential downside.
At the time of this writing, the author owned TEVA stock and had no position in the other aforementioned securities. You can reach him on Twitter at @irbezek.
