Mylan Pursues Global Generics Dominance Strategy

Mylan (MYL) is a pharmaceutical company included in the Nasdaq 100. Mylan has a very different model than most of the biotechnology stocks I follow and invest in, which typically have pipelines of novel therapies in clinical development that have a likely future value that is not fully priced into the stock. Instead Mylan mainly manufacturers a wide variety of generic drugs and has several divisions and subsidiaries, many of them outside the United State of America.

Mylan, therefore, has to be analyzed in aggregate, rather than therapy by therapy. It may turn out that Mylan has a better risk/potential profile than the smaller pharmaceutical companies I will be looking at for this round of investment. With healthcare costs a growing concern, and a growing population of seniors who often take over 6 generic drugs for the remainder of their lives, perhaps owning a generic drug company would be a smart move. Eventually, but not in this article, I will compare Mylan to the other biotechs I am researching to consider for my new round of investment.

It is notable that Mylan and its competitors cannot manufacture and sell a drug just because it has gone off patent. Each generic must demonstrate to the FDA (or equivalent agency in other nations) that it is as safe and effective as the private label therapy it is replacing. So by knowing which drugs are falling off-patent and which Mylan is planning to apply to manufacture, and by studying the competition, it is possible to project future new income. The difference is that it is rare for any single new therapy to move the needle much. Instead the needle usually moves from dozens or even hundreds of new product introductions each year.

Q2 2013 numbers (released August 1) were not very impressive from a revenue growth standpoint. Revenue was up just 1% y/y to $1.70 billion. Even eliminating the effect of the yen and rupee, revenue was up just 2% y/y. Mylan claims the launch of a particular generic therapy, Escitalopram, in Q2 2012 also made for a difficult y/y comparison, given the high inventory build upon its introduction.

However, the efficiency of the operation improved y/y, so that EPS was up 13% on a non-GAAP basis to $0.68, and up 39% on a GAAP basis to $0.46.

Generally speaking revenue and profits have ramped significantly each of the past 5 years. Much of the ramp was through acquisitions of companies or products, which left Mylan with a rather high debt for a biotechnology company, $5.8 billion. The cash and equivalents balance was just $277 million, a somewhat narrow margin for a company doing so much business.

Cash from operating activities was $283 million, but $126 million was made in capital expenditures, leaving free cash flow of $157 million. If all free cash flow were used to pay off debt, that would take about nine years. In addition more debt will be added to acquire Agila Specialties for $1.6 billion when the deal closes in Q4.

Mylan management has a clear vision of how make the company into both a profit-making machine and also the largest generic (and possibly overall) drug company in the world. Cash flow is expected to ramp over the years, enabling paying down the debt at a reasonable pace, if all goes as planned.

Guidance paints this picture in numbers. Q3 non-GAAP EPS is expected to jump sequentially to between $0.77 and $0.79 per share. Full year non-GAAP EPS is expected between $2.75 and $2.95. 2014 non-GAAP EPS is expected up another 19%, or to between $3.27 and $3.51 per share.

Most dramatically, and with all the usual caveats, non-GAAP EPS in 2018 is expected to exceed $6 per share. If that is the case, and if free cash flow growth is roughly proportional to EPS growth, and it the growth is achieved without more expensive acquisitions, then the debt is not a problem if everything goes according to plan.

The Mylan vision is attractive in ways that are not just reflected in the guidance numbers. Mylan has invested in state-of-the-art manufacturing facilities and the scientific capability to get its own new generic approvals, lessening the need to expand through acquisitions in the future. In addition to making a push in HIV anti-retroviral drugs, Mylan is prepared to bring biosimilars to market. Biosimilars like monoclonal antibodies and insulin analogs are much, much harder to manufacture than most generic drugs, which are small molecules. That means less generic competition and likely more revenue and better margins per drug introduced.

In a world where healthcare costs have climbed, and in a nation like the U.S. where healthcare costs have bubbled, quality generics are a big part of the economic and health solution. Mylan sees a coming globalization of the drug market. By bringing the highest U.S. quality standards to global generics, and competitive global prices to the U.S. and developed nations, Mylan could become the dominant player. The key to doing that is not just volume, but efficiency in cost of goods sold and operating costs, including R&D expenses. Efficiency plus volume means cash flows for reinvestment and to reward shareholders.

Mylan's 52 week high was $37.47, against a 52 week low of $23.25. Mylan has a P/E 22 on trailing GAAP EPS of $1.63 price and a non-GAAP trailing P/E of 13 on non-GAAP EPS of 2.78. MYL closed at $35.93 on September 4, 2013.

These P/Es are very reasonable, even given the heavy debt load. If long-term guidance is correct, MYL as it stands today is a bargain, with minimal risk and a likely 20% per year upside. [I use the term likely in the statistical sense.] That is a very good long term proposition for most investors.

Mylan pays no dividend, nor should it given the debt load. While few biotechnology companies pay dividends, I like dividends and so that would bias me to the ones that do pay them like Amgen (AMGN) (1.6%).

To do better than MYL (in my coming biotechnology investment round) I would have to find several much smaller, riskier, companies with undervalued pipelines and a higher expected return. I will be looking for them, and reporting my findings here. While risks can be reduced with a properly chosen group of such stocks, they cannot be eliminated. In the end I may choose to add less-risky Nasdaq 100 biotechs like Mylan, Amgen, Intuitive Surgical (ISRG) or Alexion (ALXN) to the ones that I continue to hold that served me so well these last 5 years: Gilead (GILD), Biogen Idec (BIIB), and Celgene (CELG).

Disclosure: I am long GILD, CELG, BIIB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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Why we're heading for a global healthcare crunch – and how to avoid it

The cost of providing healthcare is spiralling, but considering the value of services could help save money. Photograph: Alamy

Humankind has managed to get people to the moon, created devices which connect us with others anywhere in the world, and made 640 tonnes of metal fly through the air, so why can't we find a sustainable model for healthcare?

Healthcare spending is growing at an unsustainable rate, faster than economies and faster than wages. In the US, it is predicted that in just seven years health will cost 20% of GDP. The UK will catch up some time within the next 50 years, depending on inflation. NHS England recently revised upwards its expectations for efficiency savings, claiming that on top of the £20bn savings it had already predicted, an additional £30bn will need to be found between 2014 and 2020.

Commentators often argue that the answer to the problem is to refocus the healthcare system from delivering activity to delivering value; simply spending more money does not translate to better outcomes.

So what is value in healthcare? It may be patient outcomes or results achieved per pound spent; this is hard to visualise so it may be better to say that value equals solving health problems for patients to leave them in a better position than when they approached the service, and at a cost which is more efficient than paying for the long-term consequences of the presenting problem.

Spend a few minutes digesting these sentences, for they explain the root of the problem and the barriers to better value-based services in healthcare. The particular pressures that health services face are the difference between solving a problem and responding to an illness, and the difference between taking the long term or short term view.

To understand this fully let's look at the mobile phone industry. Telecommunications solves problems for people and adds value by making us more productive. It does this because technology adapts to how people want to use it.

Most people reading this article will have smartphones, but I can guarantee that we all use these technologies in different ways. We'll have different apps arranged to solve individual problems, creating individual opportunities and overcome unique barriers.

Smartphones, like some other products and industries, have created adaptive systems which allow us to boost our own productivity. In adopting a new device we will each make a judgement about the upfront cost versus the medium term cost of not buying something, and we might also make an investment in making our lives easier in future, at an immediate cost.

Those of us who work in healthcare will know that, in general, the system is focused on the short term to fix acute illness, rather than building physical resilience to avoid the longer term consequences of poor health. We also recognise that healthcare does not adapt to help people to solve their own problems. Instead, and quite unintentionally, it can make patients adapt around its own systems.

When it comes to value, many healthcare services work in the opposite direction: they take a short-term view and respond to things which have already gone wrong. But there are some exceptions.

Public health as a model is inherently value based, or at least it can be. Let's take vaccinations as an example. Depending upon who we are, and whether we are travelling to certain countries, we each receive different vaccinations. So the process of vaccination adapts around us and the lifestyle we choose.

Public health is also a longer term investment; we have vaccinations now to reduce the risk of contracting debilitating disease in the future. It is productivity-boosting by its very nature.

So where does this leave us? Now that we have a twopoint framework for value in healthcare, it would be interesting to use it as a thinking tool.

How could your service or services become more value based? Set some time aside to think it through, because if the theory is right (or at least nearly right) then this is what will determine the sustainability of what you do. And ultimately, the sustainability of the NHS.

Put differently, if we don't begin to do something about the barriers then perhaps we really are headed for a global healthcare crunch.

Anoop Maini is senior policy advisor to the health services regulator Monitor.

This article is published by Guardian Professional. Join the Healthcare Professionals Network to receive regular emails and exclusive offers.

View the original article here

Why we're heading for a global healthcare crunch – and how to avoid it

The cost of providing healthcare is spiralling, but considering the value of services could help save money. Photograph: Alamy

Humankind has managed to get people to the moon, created devices which connect us with others anywhere in the world, and made 640 tonnes of metal fly through the air, so why can't we find a sustainable model for healthcare?

Healthcare spending is growing at an unsustainable rate, faster than economies and faster than wages. In the US, it is predicted that in just seven years health will cost 20% of GDP. The UK will catch up some time within the next 50 years, depending on inflation. NHS England recently revised upwards its expectations for efficiency savings, claiming that on top of the £20bn savings it had already predicted, an additional £30bn will need to be found between 2014 and 2020.

Commentators often argue that the answer to the problem is to refocus the healthcare system from delivering activity to delivering value; simply spending more money does not translate to better outcomes.

So what is value in healthcare? It may be patient outcomes or results achieved per pound spent; this is hard to visualise so it may be better to say that value equals solving health problems for patients to leave them in a better position than when they approached the service, and at a cost which is more efficient than paying for the long-term consequences of the presenting problem.

Spend a few minutes digesting these sentences, for they explain the root of the problem and the barriers to better value-based services in healthcare. The particular pressures that health services face are the difference between solving a problem and responding to an illness, and the difference between taking the long term or short term view.

To understand this fully let's look at the mobile phone industry. Telecommunications solves problems for people and adds value by making us more productive. It does this because technology adapts to how people want to use it.

Most people reading this article will have smartphones, but I can guarantee that we all use these technologies in different ways. We'll have different apps arranged to solve individual problems, creating individual opportunities and overcome unique barriers.

Smartphones, like some other products and industries, have created adaptive systems which allow us to boost our own productivity. In adopting a new device we will each make a judgement about the upfront cost versus the medium term cost of not buying something, and we might also make an investment in making our lives easier in future, at an immediate cost.

Those of us who work in healthcare will know that, in general, the system is focused on the short term to fix acute illness, rather than building physical resilience to avoid the longer term consequences of poor health. We also recognise that healthcare does not adapt to help people to solve their own problems. Instead, and quite unintentionally, it can make patients adapt around its own systems.

When it comes to value, many healthcare services work in the opposite direction: they take a short-term view and respond to things which have already gone wrong. But there are some exceptions.

Public health as a model is inherently value based, or at least it can be. Let's take vaccinations as an example. Depending upon who we are, and whether we are travelling to certain countries, we each receive different vaccinations. So the process of vaccination adapts around us and the lifestyle we choose.

Public health is also a longer term investment; we have vaccinations now to reduce the risk of contracting debilitating disease in the future. It is productivity-boosting by its very nature.

So where does this leave us? Now that we have a twopoint framework for value in healthcare, it would be interesting to use it as a thinking tool.

How could your service or services become more value based? Set some time aside to think it through, because if the theory is right (or at least nearly right) then this is what will determine the sustainability of what you do. And ultimately, the sustainability of the NHS.

Put differently, if we don't begin to do something about the barriers then perhaps we really are headed for a global healthcare crunch.

Anoop Maini is senior policy advisor to the health services regulator Monitor.

This article is published by Guardian Professional. Join the Healthcare Professionals Network to receive regular emails and exclusive offers.

View the original article here