A Generic Drug Maker with Clout
02/17/2009 11:00 am EST
Stephen Biggar, Standard & Poor’s global director of equity research, says a US generic drug maker has attained world-class status, and its stock is attractive.
Mylan (NYSE: MYL) has undergone a corporate metamorphosis that has transformed the company from a US-only midsize generic drug maker into the third largest player in the over-$70-billion global generics market.
This has been accomplished principally through the acquisitions of the generics division of German drug maker Merck—not related to US-based Merck (NYSE: MRK)—for $6.9 billion in October 2007; and Matrix Laboratories, an India-based manufacturer of active pharmaceutical ingredients in January 2007 for about $776 million.
Mylan's US generic division markets about 180 generic products encompassing some 50 therapeutic categories. Merck Generics markets over 400 generic products, and had estimated sales of close to $1.6 billion in the first nine months of 2008.
As of January 2009, Mylan had some 119 generic product applications pending at the Food & Drug Administration, representing products with estimated branded sales of about $75 billion.
Mylan's key objectives are to successfully integrate Merck Generics, and capitalize on the company's strengths of global reach and vertical integration. Mylan also plans to focus on difficult-to-develop generics and specialty pharmaceuticals. Mylan expects Merck Generics to be dilutive to cash earnings per share (EPS) in year one, to break even in year two, and to be accretive thereafter. Annual merger-related savings, estimated at about $100 million in 2008, are expected to reach $300 million in 2010.
Although growth in the global generic drug market has slowed from past double-digit, we still expect generics to outpace comparable growth in the branded drug sector, reflecting greater emphasis on the use of inexpensive generic therapies [and] a relatively large number of branded blockbuster drugs that are scheduled to lose patent protection over the coming years.
IMS Health, a provider of health care data, identified $24 billion in branded sales that will face generic competition in 2009, $33 billion in 2010, $33 billion in 2011, and $30 billion in 2012. IMS projects worldwide generics sales to expand some 5% to 7%, to between about $68 billion and $72 billion, in 2009, as compared with growth of 4.5% to 5.5% for the total pharmaceutical market. This forecast indicates a reversal from recent slowing trends.
We forecast 2009 revenues of about $5 billion, up from $4.6 billion that we estimate for 2008. We look for gross margins in 2009 to widen somewhat. We also see tight controls of selling, general, and administrative (SG&A) costs and research and development (R&D) spending, helped by ongoing merger synergies.
After preferred dividend payments, we project 2009 cash EPS of $1.00, before acquisition-related charges and other items, up from an estimated 66 cents in 2008. We forecast cash EPS of $1.50 for 2010.
While MYL shares, which recently traded at around $12, have rebounded nicely over the past two months, they are still well below previous highs. Based on our discounted-cash-flow-derived target price of $15, we believe they offer significant appreciation potential. The stock carries Standard & Poor's highest investment recommendation of 5 STARS (strong buy).