Mylan: Guidance Concerns Grow as Drug Approvals are Delayed

Mylan has drifted down by about 14% since early March as institutional investor concerns have grown over that time. Concerns have specifically centered around risk to 2017 and 2018 guidance due to approval delays in the company's new product pipeline. Additionally, the company's core business (generics and Epipens) have had new developments that have raised concerns over their outlooks as well. 

Source: Google Finance

Source: Google Finance

2017 and 2018 guidance could move lower

The company has given 2017 EPS guidance of $5.15 - $5.55, with $850 million revenue from global new product launches. Management noted that the list of drugs that will contribute to the $850 million is long, but did not break out expected contributions by drug. As a result, it's unclear how much revenue management expected from drugs that are currently still pending approval (i.e. Copaxone and Advair). If the company is not able to get approval for some of these bigger drugs, the company could potentially miss its $850 million contribution from new products, which could thereby put management's $5.15 - $5.55 guidance in jeopardy. As a result, investors have grown more concerned that management could potentially lower their 2017 guidance when they report 2Q on August 9th, which could push consensus estimates down further. Consensus estimates for 2017 currently are already below the bottom-end of management's guidance at $5.10. 

Beyond 2017, the company has also given guidance for 2018 EPS of $6.00. However, with 2017 guidance in danger, one wonders if the company can achieve its 2018 target. Should 2017 EPS move down to ~$5, the company would need to grow EPS by 20%+ to achieve its $6 EPS target in 2018, which would likely require an accretive acquisition. At 3.7x net debt/EBITDA, this may be difficult to do. Consensus estimates are already $0.30 below the $6 target, but could move lower if the company moves its 2018 guidance lower. 

Source: Visible Alpha

New products: Copaxone, Advair delays

With that in mind, let's zoom into what's happened with Copaxone and Advair - the two drugs that investors believed would make up a large chunk of the new product revenues, but have had issues receiving FDA approval.

Mylan received a non-approval for Advair back in late March. Management gave further details on its 1Q conference call, noting that the company disagreed on several points raised by the FDA, and have submitted their response to those points. The FDA has not asked for additional clinical endpoint or device-related studies. Instead, the FDA has asked the company to relate its existing study results to newly issued industry draft guidance. In terms of next steps, the company is now waiting to have a face-to-face meeting with the FDA to address some of the issues, but cannot give further guidance on timing until that meeting happens. As of mid-June, the company has still not had that meeting, but management is hopeful that they can give a more detailed update by their 2Q call.

What does this mean for Advair and for the stock? Most investors, and management, had expected the Advair generic to be approved this year and to contribute to revenue. And given that the drug was expected to be the first generic to market for the $4.2 billion Advair branded drug, investors had big expectations for the generic. As we begin to enter the 2H of 2018 and still do not have clarity on the timing of the drug, investors are beginning to lower those expectations. Several analysts have noted that they no longer expect the drug to contribute to revenue in 2017. 

What about Copaxone? The drug has a long history of delays, but investors began to see the light at the end of the tunnel when management noted on its 1Q conference call that they had an upcoming action date for both the 20mg and 40mg in June. However, in mid-June, management disclosed that the company had received a request for additional information on the 20mg application. Investors are again beginning to lower expectations for the drug given that we're now in August and have not received an update on the drug. 

There are a few things to consider as it relates to company's new drug guidance. First, the company has noted that there is a long list of drugs that are expected to contribute to that $850 million guidance, and the company has already received 20 drug approvals year-to-date. Second, management's guidance of $850 million likely includes a risk adjustment to both the Copaxone and Advair generics, and therefore it is possible that management did not expect a significant contribution from those drugs. As a result, there is a possibility that the delays for the two drugs does not hurt the company's guidance as much as investors believe.  However, it's clear that the Advair (or Wixela Inhub) and Copaxone generics are key to the company's plans in the U.S., as shown by the company's Investor Day slides below.

Source: Mylan 2017 Investor Day Red highlight is my own

Source: Mylan 2017 Investor Day

Red highlight is my own

Core business: generic pricing environment, Epipen competitor

Investor concerns are also growing for Mylan's generic portfolio. Management has noted that they expect to see mid-single digit price erosion among their generics. This runs counter to other generic manufacturers that have experienced pressure in recent quarters and expect double-digit price erosion for the year. For example, Novartis's generic division Sandoz reported a global pricing decline of 8% and US generics sales down 15%. Much of these dire expectations are driven by consolidating retail/wholesale buyer groups and the fact that as much as 1/4 to 1/3 of US generic prescriptions may be up for bidding in the remainder of 2017. Investors fear that Mylan may need to lower guidance further in the midst of a weakening generic pricing environment.

Other threats to the company's products have emerged as well. In mid June, Adamis Pharmaceutical announced FDA approval of its Symjepi product, which is expected to be a low-cost competitor to the Epipen. 

In regards to the generic pricing environment, Mylan would note that the company has advantages in the generic market that others do not - including greater scale and support that provides differentiation and more insulation from the broader pricing issues.

In regards to the Epipen competitor, it's important to note that the Epipen is becoming a smaller portion of its overall revenues and that investors are not as focused on the product as they were in the past. Analysts now only model ~5% of MYL sales from the Epipen, and expect that to continue to shrink in the coming years. 

However, these issues in totality do raise the risk that the company could see further pressure in other areas of its guidance as well.

Bull case rests on early approval, biosimilar pipeline

While there has been a steady wave of negative news in recent months, expectations may have lowered sufficiently enough to where the risk/reward is potentially attractive. As noted above, many analysts are not holding out hope for a 2017 approval for either the Advair or Copaxone generic. There is still a chance that the drugs get approval this year in 2017 though, and either approval would be a surprise and send the stock higher.

Additionally, the company's biosimilar pipeline shows promise. The Trastuzumab biosimilar, in particular, recently received a unanimous recommendation from the FDA's ODAC panel for approval. With a BsUFA goal date on September 3rd, there is a high chance that the drug gets approved. With the branded Trastuzumab generating $7 billion in 2016 US sales, Mylan's biosimilar could generate a sizable amount of revenue when the patent expires in 2019. In total, Mylan has 16 biosimilars that target $88 billion in branded drug sales.