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Morningstar | Mylan Lowers Expectations on Manufacturing Woes and Lack of Complex Product Launches

Mylan hit a rough patch during the second quarter thanks to competitive pressure on existing products, a lack of major product launches, and regulatory and restructuring issues. As a result, management significantly lowered its year-end outlook, including a revenue and adjusted EPS estimate reduction to $11.75 billion and $4.73 at the midpoint, respectively, which are both below our estimates and imply nearly flat growth for the year. We plan to lower our fair value after adjusting our model. While some of the company’s recent issues--such as EpiPen contract manufacturing complications with Pfizer and the recent Form 483 regulatory problems at the Morgantown, West Virginia, manufacturing facility--remain transitory, we view many of the company’s competitive headwinds as a reflection of our no-moat rating and the tough competitive dynamics within the generic drug industry. Mylan’s board of directors announced a review of strategic options in tandem with the weak results, but we see few good options on the company’s horizon.

Given Mylan’s focus toward complex generic products, we’re not particularly surprised to see the depressed outlook without approvals for products like generic Advair and Restasis so far this year as well as weak market share gains for Copaxone. However, Mylan’s ability to improve operational issues and ability to gain complex generic and biosimilar approvals, which we continue to probability weight, could dramatically improve the firm’s future performance. As part of its restructuring and remediation efforts at the Morgantown facility, management has discontinued products, which we believe largely stems from margin erosion we’ve seen in many generic product categories over the last year. Meanwhile, Mylan’s generic Copaxone has only cornered about mid-teens market share leading management to take more recent steps to dramatically lower pricing. We also think a generic Advair approval for Mylan this year looks unlikely.

Digging deeper on generic Advair, Mylan received a complete response letter in June regarding labeling and chemistry, manufacturing, and control comments, which potentially pushes the approval to late this year following the company’s response in July. While Mylan has succeeded with products like generic Copaxone, we still view Advair as a uniquely complex product that continues to baffle peers like Novartis’ Sandoz unit.