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Morningstar | Mylan Posts Disappointing Fourth Quarter and 2019 Outlook; Lowering Our Fair Value Estimate

We plan to lower our fair value estimate for Mylan after the company reported weaker-than-expected fourth-quarter performance. Although a number of recent product launches like Fulphila (biosimilar Neulasta) and Wixela (generic Advair) help keep our forecast for $12.1 billion in revenue for this year near the midpoint of guidance, our adjusted EPS estimate falls just above the high end of management’s goal for between $3.80 to $4.80. Although we expected some margin pressure from generic competition on EpiPen and ongoing pricing pressure in the U.S. market, management sees a higher marketing expense than we had anticipated up to 21% to 22%, in part on selling efforts necessary for the company’s more complex products, as well as a higher tax rate. We speculate part of the higher costs also stem from Mylan’s warning letter received in the fourth quarter at its Morgantown manufacturing facility. While Mylan has had decent success beating competitors to market for complex generic products, including other products like generic Copaxone, these challenges reinforce our no-moat rating for the company and its peers in the generic drug industry.

Mylan’s fourth-quarter revenue decline of 4% from a year ago stemmed from an 18% decline in North America revenue offset by positive growth in international markets. Mylan’s U.S. market operations face ongoing limited market share gains for generic Copaxone, the late approval of generic Advair, the Morgantown remediation issues, and rationalization of the generics portfolio amid competitive pricing pressure. While we do anticipate some price stabilization for the U.S. generics market in 2019, we imagine many of these factors will stay persistent headwinds for Mylan. Additionally, Mylan’s complex generic launches help uphold sales and gross margin, but it’s becoming a more expensive endeavor to sell these products where market share gains have been slow.

With adjusted EPS relatively flat for the year at $4.58 for 2018, management’s outlook for this year suggests an earnings decline of about 6% at the midpoint.