Possible Investment: Mylan @ $40/share

Mylan NV is a large pharmaceutical company based in the United Kingdom.  The company has been featured in the news recently because of its EpiPen pricing.  This recent poor publicity has restricted the company’s share price.

“Drug pricing drama helped cause pharmaceuticals stocks to badly trail the market in 2016” – Charley Grant, Wall Street Journal, R12, 3 January 2017

The pricing drama Grant is talking about was centered on Mylan’s EpiPen, pharma fell last year when most of the industries had a banner return.  The company booked a $465 million charge last quarter to settle the ensuing Justice Department investigation.  This charge, combined with lower EpiPen volumes resulted in a loss last quarter.

This dramatic series of events presents a possible investment opportunity.  This post will analyze the company for such an investment.  In a disclosure up front, I have a personal interest on one call option in this company to purchase it at $60/share January, 2019.

Mylan NV

Company Profile (Adapted from TDAmeritrade’s website)

Mylan N.V. is a global pharmaceutical company. The Company develops, licenses, manufactures, markets and distributes generic and branded generic products for resale by others; specialty pharmaceuticals, and active pharmaceutical ingredients (APIs). It operates through two segments: Generics and Specialty.

Generics segment

Mylan’s Generics segment primarily develops, manufactures, sells and distributes generic or branded generic pharmaceutical products in tablet, capsule, injectable, transdermal patch, gel, cream or ointment form, as well as API.

Specialty segment

Mylan’s Specialty segment is focused on respiratory and allergy therapies. The EpiPen Auto-Injector, which is used in the treatment of severe allergic reactions, is an epinephrine auto-injector. The Company’s Perforomist Inhalation Solution is a long-acting beta2-adrenergic agonist indicated for the maintenance treatment of bronchoconstriction in chronic obstructive pulmonary disorder (COPD) patients.  The Specialty segment was bolstered by the recent acquisition of Meda.

Growth prospects

The 7 October 2016 Value Line review indicates that the company has two major blockbusters that it is pursuing in the generics business for Advair and Herceptin.  Just 20% of these two markets last year would represent $3 billion in revenue.

Market threat

Although government entities are up in arms over the pricing of products like EpiPen, the fact remains that until another company is able to make a generic the company will have the ability to maintain pricing power.  The company’s fortunes are not solely based on the EpiPen however, much of its recent price performance appears to be correlated with how this product is performing.

The recent settlement with the Department of Justice represents a significant blow to the company because it’s quarterly earnings that were to be significant, turned into a loss.  This settlement represented just over 100% of the company’s quarterly earnings.  The company’s share price suffered as a result and has hovered under $40/share  for the last two months.

The following table compares key information about the company compared to Pfizer, I find that comparing companies to industry leaders helps identify a company’s value.

Ticker MYL PFE
Top 1 or 2 in individual industry No 2
Positive annual Cash Flows since ’08 since ’00
P/E ratio 22.6 30.2
Invesment size ~2% of portfoli0 $330 NA
Management consistently
reduces shares (10 year change)
9% -2%
Consistent earnings growth, 10 year change Mylan posted earnings losses for two years ten years ago, it may not perform well in a recession -4% earnings growth rate negative
Year over year positive growth during the past 10 years 60% 60%
Interest and preferred dividend expense coverage 2.71 2.90
Earnings or cash flow
losses in the past 10 years
2 yrs’ earnings losses and one year cash loss during the financial crisis No losses
Dividend growth rate -100% 5%
Current Ratio 3.23 1.37
Debt to Capital 203% 263%
Price as a % of Net Tangible Assets 173% 304%
Number of superior elements 4 6

Mylan has better current ratio, debt to capital ratio, and P/E ratio.  Pfizer, an industry leader has better earnings history and interest coverage.  This places Mylan as a peer to one of the respected industry leaders and DJIA component.  The price of Mylan is what makes it a superior investment it has a P/E that is roughly 2/3 of Pfizer’s.  Value Line projects the share price to be 80-120 in three to five years’s time a double or triple its value. I want to see more on how the settlement may affect future earnings but I expect to add to my investment later this week.  My call purchase is anticipating over 50% return over the next two years.