EUR 850.00 For Business Accounts Only

Morningstar | Mylan: Reduced Confidence in Ability to Achieve Prior Expectations; $20 FVE

We assign Mylan a no-moat and stable trend rating. We are also lowering our fair value estimate to $20 per share from $33, as we are not confident in the company’s ability to introduce complex (new) therapies to replenish the pipeline beyond anticipated fiscal 2019 launches, which we think will weigh on margins more than previously expected.

As a leading global generic manufacturer in an industry undergoing dramatic changes, Mylan has also been one of the most controversial publicly traded healthcare companies. With the rapid generic market decline due to pricing pressures, the entry of generic competition for its largest specialty drug, EpiPen (treatment for anaphylaxis), a U.S. Food and Drug Administration warning letter on one of its facilities, congressional allegations of price gouging of EpiPen, and a high debt load, the shares have declined from the June 2015 high of approximately $75. Mylan shares have not been affected as much as its closest peer, Teva, most likely due to its smaller exposure to North America and lower debt load. Further, Mylan has been slightly more insulated with the generic launch of Advair (a complex respiratory drug), and Copaxone (treatment for multiple sclerosis), and recent progress in developing biosimilars.

Mylan’s global scale and vertical integration provides the firm with a low-cost edge in a highly fragmented market where only a few firms control most of the worlds generic production. Teva, Sandoz (a subsidiary of Novartis), and Mylan account for approximately half of generic sales in the U.S. and Europe. The balance of the market is highly fragmented. Low-cost manufacturers have grown rapidly as they actively compete for the less differentiated commodity generic drugs in the U.S. where regulatory hurdles are lower than European countries. Although the company will probably maintain share in the current market, the increased competitive dynamics will likely make it challenging to generate significant returns.