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Mylan, Inc. – A Leveraged Play on Generic Drugs

January 08, 2010 | About:
Mylan manufactures and sells generic and branded drugs, including pills and transdermal patches. The recently completed Merck KGaA and Matrix acquisitions made Mylan the third-largest producer of generic drugs with the second-biggest portfolio of active pharmaceutical ingredients. Mylan's branded Dey unit (9% of total sales) markets the off-patent EpiPen injection with a better than 90% global market share. All told, they have over 130 prescription products in 39 therapeutic areas.

Debt levels surged with the acquisition of Merck KGaA in October of 2007 and management has been diligently working to deleverage ever since. It was announced earlier today that Mylan paid off $196 million in short –term debt early leaving no other bond maturities prior to 2012. Earnings have been picking up and current estimates for the recently concluded 2009 are running $1.26/share. Zacks and others see $1.52 - $1.56 for 2010.

At today’s quote of $17.30, Mylan’s multiple is about 13.7x last year’s and 11.2x 2010’s expectations. Those are quite low by MYL’s historical standards. Typically Mylan has traded between 15x – 25x earnings. Value Line is using a P/E of 17 in calculating their 3-5 year target zone. If MYL earns even the lower end $1.52 for this year that would allow for a share price rebound to over $26 by early next year.

Standard and Poors now carries a conservative 12-month target price of $22 /share. Even that goal would be 27.1% above this afternoon’s price. S & P assigns Mylan their highest, 5-star stock ranking.

Industry rival Teva Pharmaceutical Industries Ltd , the world's largest generic drugmaker, on Thursday set a target of revenue of $31 billion in 2015, more than double its current annual amount as it sees major growth in overall use of generics.

The future of generic drugs looks very bright and Mylan should continue to be a major player with its broad product line and wide geographical footprint.

A $23 - $26 share price by early 2011 seems to be an attainable goal. That mid-$20’s target is in line with where Mylan actually changed hands in 2003-2004 and 2006 – years when EPS were $1.21, $0.74 and $0.99 versus the $1.52 - $1.56 expected for this year.

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If you’re comfortable with options here’s a nice (approximately one year) play that offers excellent risk/reward characteristics.





Cash Outlay


Cash Inflow


Buy 1000 MYL @$17.30 /share


$17,300




Sell 10 Jan. 2011 $20 calls @$1.25 /share




$1,250


Sell 10 Jan. 2011 $20 puts @$3.80 /share




$3,800


Net Cash out-of-Pocket


$12,250






If Mylan's shares rise to $20 or better (+15.7% from today’s price) by Jan. 21, 2011:

· The $20 calls will be exercised.

· You will sell your shares for $20,000.

· The $20 puts will expire worthless.

· You will end up with no shares and $20,000 in cash.

· You will have no further option obligations.



That best-case scenario profit would be $7,750/$12,250 = 63.2% over the 12 + months of the trade’s time horizon. Any move of 15.7% or greater could lead to a total return of over 63% for those who ‘buy and write’ as described above.



What’s the risk?

If Mylan’s shares fail to reach or exceed $20 on the Jan. 21, 2011 expiration date:

· The $20 calls will expire worthless.

· The $20 puts will be exercised.

· You will be forced to buy an additional 1000 MYL shares.

· You will need to lay out another $20,000 in cash.

· You will end up with 2000 MYL shares.

· You will have no further option obligations.



What’s the break-even on the whole trade?

On the original 1000 shares it’s their $17.30 /share purchase price less the $1.25 /share call premium = $16.05 /share.

On the ‘put’ shares it’s the $20 strike price less the $3.80 /share put premium = $16.20 /share.

Your overall break-even would be $16.13 /share or 6.8% below our trade inception price.



Disclosure: Author is long MYL shares and short MYL options.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.gurufocus.com/peter_lynch.php
http://www.TalkMarkets.com
http://www.MutualFunds.com

Visit Dr. Paul Price's Website


Rating: 3.5/5 (13 votes)

Comments

Dr. Paul Price
Dr. Paul Price premium member - 4 years ago




Barrons wrote a very positive article on MYLAN in their Feb. 22, 2010 issue.

They see MYL as benefitting from the contuing push to generics. Their estimates are now running $1.27 for the recently concluded 2009, $1.53 for 2010 and $1.79 for 2011.

Barrons sees a 12-month share price of $23 or > 20.6% above last Friday’s close (and about 33% above my recommended price of $17.30 in the original posting from Jan. 8, 2010).

Please leave your comment:


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