Description

Business Description

Mylan is one of the leading generic pharmaceutical manufacturers in the world. The company markets over 7,500 products to customers in over 165 countries through 5,000+ sales reps. MYL is expected to generate ~45% of its ‘17E revenue in US, and ~30% from Europe. The company is expected to generate ~65% of their '17E sales from generic products and ~30% from branded Rx productss, with the balance from OTC.  As a vertically integrated company, MYL is a top API (active pharmaceutical ingredient) manufacturer, and operates a total of 50 plants.

The company’s main therapeutic franchises include: cardiovascular, CNS and Anesthesia, Dermatology, Diabetes and Metabolism, Gastroenterology, Immunology, Infectious Disease, Oncology, Respiratory and Allergy, and Women’s Healthcare.

MYL’s R&D capabilities are broad and deep with over 1,200 products in the pipeline, ~1,800 pending approval, and over 6,000 planned submissions. The company expects to spend $750 mm on R&D in ‘17E.

Like many peers in the generic / specialty pharma industry, MYL has gained scale over time via acquisitions. In '15, large acquisitions included Abbott’s non-US developed markets specialty and branded generics business, which allowed the co to shift jurisdiction outside of the US, and Famy Care (woman’s healthcare). In ’16, the company acquired Meda (int’l specialty pharma business) and Renaissance (dermatology business).

The company was both the hunter and the hunted onthe M&A front in '15. The company attempted to buy Perrigo (PRGO) in Apr '15 and launched a hostile tender offer later that year that ultimately failed. In Apr '15, Teva (TEVA) also announced a proprosal to acquire Mylan for $82 /share (~50/50 cash and stock). MYL rebuffered TEVA's overtures and the offer was terminated when TEVA instead opted to acquire Actavis in mid'15. Roughly six months after its failed PRGO bid, MYL announced it was acquiring Meda.

Why Does The Opportunity Exist?

The generic industry has broadly fallen out of favor with investors due to a number of headwinds that it is currently facing. Producers face elevated pricing pressure in their US business due to:(1) the FDA's accelerated approval for new generic drugs increases competition and drives down prices and market share for established players – some of whome are experiencing headwinds up to 30%; (2) lower ability to continue the price increases that helped boost profitability in recent years due to higher shortages and lower regulatory scrutiny; and (3) buyer consolidation. Balance sheets are also stretched thin as a result of the debt-fueled acquisition binge of recent years. At the same time, most companies face significant legal liability due to the past practices and amount of attention that the industry has received. Finally, significant management turnover has increased uncertainty around many company's go forward strategy, especially in light of the other challenges highlighted above.

Beyond broad industry pressure, MYL has substantial exposure to its epinephrine auto-injector (EpiPen). EpiPen delivers a lifesaving drug that has been generic for decades through a unique delivery mechanism has become the de facto standard in the industry. MYL received significant criticism for rapid price increased on the EpiPen in recent years, is facing the introduction of generic alternatives (and launched an authorized generic in Dec ’16), and has faced DoJ (and Congressional) scrutiny around its classification of the EpiPen as a generic device in the Medicaid Drug Rebate Program. MYL has become one of the posterchildren for corporate greed and has received bi-partisan criticism for its practices. Finally, many investors are concerned about the company’s corporate governance given management’s pushback against Teva’s previous offer and lavish comp packages.

Investment Thesis

While not completely immune from many of the headwinds facing the industry, MYL is better protected than its competitors. Its diverse, mature, and global product portfolio shelter it from the more extreme pricing pressure in the US faced by others. The company expects mid-single digit pricing erosion in ‘17E across its product portfolio. At the same time, the company has a very deep pipeline of new drugs, including several large potential opportunities in gCopaxone and gAdvair, that will help to offset declines in the base business. MYL also has been more aggressive vs competitors in also having a pipeline of biosimilar products, which are broadly expected to be one of the larger areas of growth as we move in the early part of the next decade.

While MYL’s management team can certainly be criticized for their compensation and possibly for being empire builders, they are one of the more tenured and stable in the industry, providing quite a bit of stability during turbulent times. And while vendor consolidation is real, being a large company with a number of critical drugs does provide MYL with a better relative position to their buyers versus smaller competitors.

MYL is less levered than many peers and should rapidly de-lever given its significant FCF.

Finally, while legal and regulatory risk will always be an issue for players in the industry, in some of the specific cases, the fact pattern suggests that corner case negative outcomes should be unlikely, making the risk here more manageable. That said, MYL will continue to face significant scrutiny for the foreseeable future.

Catalyst

- Resolution on upcoming major launches: gAdvair and Copaxone

- Stabilization of price decline curve for generic pharma 

- Resolution/clarity on final EpiPen and/or DoJ settlement costs