Bookkeeping: Starting Mylan (MYL)
Submitted By Trader Mark
You can probably tell what direction we're heading by today's purchases. Mylan (MYL) is a very boring company in generic drugs. I could spend an hour talking about fundamentals but it means nothing; this is an asset allocation play - it's in healthcare and the stock broke a double top, and now pulled back to support, down 2% ish today so I'm starting a 1.25% stake in the $13.30s. Since this is a slow mover entries and exits are important.
(Please note the next few paragraphs involve fundamentals, none of which matter)
The generic drug story is easy to understand - the big pharma makers have drugs that come off patents and then a whole slew of generic companies fight over getting "first to market" copy cats and they sell it for a fraction of the cost. Competition is high, but we've seen some consolidation in the space with the big dog Teva Pharmaceutical (TEVA) buying Barr Pharmaceuticals (BARR) about a month ago.
- Teva Pharmaceutical Industries (TEVA), the world's largest generic drug company, said on Friday it would buy rival Barr Pharmaceuticals Inc (BRL) for $7.46 billion to expand its leadership in the U.S. market and fortify its presence in Europe. The price represents a 42 percent premium to Barr's closing price on Wednesday.
Mylan (MYL) has struggled (stock wise) with a large purchase of it's own; Merck KGaA's generics business. Mylan also has bought a majority stake in Indian firm Matrix. So the point being that the company is expanding globally, helping to offset stagnant US growth. But a ton of drugs are coming off patent in the next 3-5 years so there will be opportunity for all. But the more consolidation the better (less competition in the space).
Mylan had to take quite a hit to earnings and lowered guidance across the board after the acquisitions so 2008 EPS is pretty shoddy but analysts think they will rebound to about $1.00 next year - that gives you a sub 14 PE ratio (forward), for about 15% growth. TEVA is around a 15 PE ratio. Does it really matter? I find the value (relative to growth) rich but people don't want global growth companies growing at 40-70% for half the multiple of a generic drug maker so it is what it is. For those not named HAL 9000 here are the last earnings.
- Mylan previously had two reportable segments, the Mylan Segment and the Matrix Segment. With the acquisition of Merck Generics on October 2, 2007, Mylan now has three reportable segments: Generics Segment (or Generics), Specialty Segment (or Specialty) and the Matrix Segment (or Matrix). The former Mylan Segment is included within the Generics Segment.
- Total revenues for the quarter ended June 30, 2008 increased by $656.8 million to $1.20 billion from $546.3 million in the same prior year period. Approximately $669.3 million represents amounts contributed through the acquisition of Merck Generics.
- Total revenues from North America were $461.8 million for the three months ended June 30, 2008 compared to $455.0 million for the same prior year period, representing an increase of $6.8 million. Revenues of approximately $32.4 million were realized in North America in the current quarter as a result of the acquisition of Merck Generics. Excluding these amounts, total revenues decreased by $25.6 million from the same prior year period.
- Total revenues from EMEA and Asia Pacific, as well as revenues from the Specialty Segment, were all the result of the acquisition of Merck Generics. For EMEA, revenues for the quarter ended June 30, 2008 were $389.8 million, the majority of which are derived from the three largest markets; France, the United Kingdom and Germany. Total revenues from Asia Pacific were $141.4 million for the three months ended June 30, 2008, and were derived from Mylan's acquired operations in Australia, Japan and New Zealand.
- The Matrix Segment reported third-party revenues of $104.6 million for the three months ended June 30, 2008 compared to $91.3 million for the same prior year period, representing an increase of $13.3 million or 15%. This increase is the result of growth in the anti-retroviral franchise, with higher sales of both API and finished dosage form products, the latter of which Matrix began to produce and sell in late calendar year 2007.
- Gross profit for the three months ended June 30, 2008 was $414.2 million and gross margins were 34.4%. Gross margins were negatively impacted by certain purchase accounting items recorded during the quarter of approximately $112.1 million, which consisted primarily of amortization related to purchased intangible assets and the amortization of the inventory step-up associated with the acquisition of Merck Generics. Excluding such items, gross margins were 43.7%. Gross margins in the same prior year period, also adjusted to exclude certain purchase accounting items, would have been 57.7%. This decrease is due to the fact that, on average, the newly acquired Merck Generics entities, particularly in countries outside of the United States, contribute margins that are lower than those realized by Mylan's domestic subsidiaries.
- On a GAAP basis, primarily as a result of purchase accounting items, the Company reported a loss per diluted share of $0.03 for the three months ended June 30, 2008.
So let's review
- Mostly stagnant revenue
- Falling margins
- Falling earnings per share
With this potent trio the stock is on fire. Why? It's in healthcare and that's all that matters in the market of "asset allocation means everything". I am being somewhat facetious and some of these issues are shorter term in nature - I won't add (edited for not nice words) type of stocks to the portfolio even if the market drives them up - I still want quality names - Mylan should rebound nicely in 2009 as the Merck line is better absorbed and it now has a much better global reach than 2 years ago.
But in summary, all the above is useless in the current market. Healthcare is where hot money is flowing and this should provide some buffer in what I think will be some rocky roads ahead. The chart below does not agree with my typical charting source, which shows the 50 day moving average at $13.30. So we had a double top broken, and now the stock has pulled back to a support level so using nothing but technicals, this is a buy. We continue to increase exposure to the hedge funds favorite area of the market. Until they abandon it and move to the next sexy flavor of the week/month/quarter. If they decide its time to move on and they've gotten sick of healthcare, and drop the stock below $12.75 we'll take a stop loss and move on.
Long Mylan in fund; no personal position
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