Mylan: Investors Focused on Advair Generic, Not EpiPens

A former Wall Street analyst discloses the topics that equity analysts and hedge fund managers are currently talking about. 

Many of us know of Mylan due to the EpiPen controversy, which became the poster child for healthcare and its out-of-control pricing in America. In late August of 2016, the media began reporting on the significant price increases on the EpiPen, which had increased from $100 in 2007 to $609 in mid-2016. Up to that point, the drug had become the primary component of Mylan's earnings, with a significant portion of profitability coming from the business (with some estimates placing it at 40% of its operating profit).


Mylan is beginning to put the EpiPen controversy behind them. The company nipped the controversy in the bud and released an authorized generic at half the price of the EpiPen in December. The company also agreed to a $465M settlement to the government for misclassifying the drug as a generic (which allowed Mylan to underpay the government).

Now, with many sell-side analysts modeling lower revenues from the EpiPen (~5% of total sales) and the company managing expectations lower going forward (with an expected 50 bps headwind on margins in 2017 from EpiPen pricing), the company appears ready to move ahead with its focus on the rest of its portfolio.

Outside of the EpiPen, Mylan has a large generic drug portfolio. This portfolio has been a source of concern as a bevy of upcoming approved drugs were expected to deteriorate Mylan's generic pricing, and ultimately its revenue trends. In 3Q16, revenue missed expectations, supporting the ongoing bear thesis - price erosion and share losses were accelerating due to competition.

As a result, investors were concerned going into 4Q. However, the company reported 4Q results that bucked that trend and suggested that the company's portfolio can hold onto market share through its drug differentiation and superior service levels. Going forward, investors have now put their sights on management's 2017 EPS guidance of $5.15 - $5.55 and their longer-term EPS guidance of $6 for 2018.


Bulls Focused on Advair Generic

Investors are primarily focused on the Advair generic as the primary driver to get to management's goals.  This gets fairly complicated, so stay with me. Analysts are considering 4 major factors: 1) timing, 2) potential contribution to financials, 3) chances of approval, and 4) competition.


Context: Let's first talk about what Advair is. Advair is a branded drug currently targeting two of the main causes of asthma symptoms - airway constriction and airway inflammation - to prevent symptoms from occurring. The drug is currently owned by GlaxoSmithKline (MP) and generated $4.8 billion in gross sales and $2.4 billion in net sales. The drug lost patent protection but has no generic competition currently on the market. TEVA and other pharma companies have cited numerous hurdles to FDA approval in the past.

There are two generics currently in the later stages of FDA approval - one owned by Mylan, which will be marketed as Wixela Inhub, and one owned by Hikma and Vectura. Both have expressed optimism and confidence in their interactions with the FDA and their belief that the drugs could receive approval in 2017.

Timing: Mylan expects a potential decision from the FDA as soon as March 28th, their FDA GDUFA goal date. Mylan management has publicly communicated a launch date of of mid-2017 to 2H17 for the drug, giving them some wiggle room. Bulls generally believe that Mylan will receive approval some time in 2017. Hikma's generic has a GDUFA action date of May 10th.

Size: In terms of its impact on financials, estimates between analysts tend to vary between $75 - $200M in 2017 and $400-$700M in 2018 depending on a number of factors, including 1) generic penetration vs. Advair, 2) number of generics in the market, 3) timing of competing generic approvals, and 4) market share between the generic players. Bulls would point to Mylan's high chance of approval and the device's advantages over Hikma's generic, including ease of use, which would move their estimates to the high end of those ranges. In terms of earnings, expectations range from $0.10 to $0.25 EPS in 2017 and $0.30-$0.50 for 2018. Note that while analyst estimates do bake in some of these contributions into their estimates, some have adjusted their estimates for the risk that the drug is not approved (i.e. discounting their estimates by 50%), and therefore are not baking in the full benefit of having the drug in their revenues. 

Chances of approval: In general, most investors (both bears and bulls) believe the odds of an approval for Mylan's Advair generic are fairly high. This is based in part on the resources spent to build a strong team and increase the odds of approval (Mylan acquired the commercial rights from Pfizer, where the device was initially developed by the former head of GSK's inhalation team), and management's cited reasons for optimism (5 pre-approval inspections, positive interactions with FDA, confidence that the program has met FDA guidelines). However, the timing of the approval is a more contentious topic.

Competition: Some bulls have also pointed to a small chance that Hikma/Vectura's generic would either see more delays or even not receive approval. In the former case, delays would give Mylan's generic a head start on the market. Even without delays, many analysts tend to give a slight edge to Mylan's generic in terms of marketshare as initial surveys suggest that their device is easier to use than Hikma's.

So how will the stocks move? Bulls believe that the risk/reward is favorable ahead of the March 28th date. If the drug gets approval (a small chance of perhaps 10-25%, but a chance nonetheless), the stock could be up 10%. If the approval is delayed, as most investors widely expect, then the stock may drift down 1-2%.

Beyond that March date, most investors do believe that the drug will receive approval some time in 2017. With the financial benefits mentioned above, the company would significantly derisk the stock, increasing the odds that they hit their EPS targets in 2017 and 2018.


Other Bullish Opportunities Outside of Advair-Generic

Investors are primarily focused on Advair and its chances of approval in the upcoming year, but there are several other opportunities for out-performance that bulls point to. Many of these opportunities come from management's Investor Day in early March. The first opportunity is its broad generics portfolio. The company expects as many as 9 drugs to potentially launch in 2017 and 2018, all targeted at branded drugs that generated over $7 billion in revenue. Key drugs to watch include Estrace, Restasis, Namenda XR, and Reyataz. Bulls believe that investors are developing a stronger appreciation for the company's portfolio of generics, which have shown to be more resilient than investors were giving them credit for. 

Second, investors would also point to synergies from the MEDA acquisition that closed in the middle of last year. The acquisition is expected to generate cost synergy targets of $700M over 4 years. The company also noted potential revenue synergies but did not quantify them.

Third, investors also would point to the biosimilar opportunity. The company highlighted its 16 biosimilars/insulin analogs in their portfolio that are targeting ~$88B in branded sales. Some analysts believe that the market is not fully giving the company credit for the portfolio's potential, as they have made significant progress in moving towards commercialization.


Bears Don't Like The Risk/Reward, Believe Longer Delay is Likely

Generally the bear case is one in which the risk/reward remains unfavorable. Much of whether the company achieves its guidance is predicated on Advair-generic approval. Several analysts have noted that the chance of Advair-generic approval on March 28th is fairly low - not because of issues with the filing, necessarily, but because 1) the agency has a low rate of approval on ANDA (abbreviated new drug applications) first reviews (<10%), 2) the Advair filing is a fairly complicated one, and 3) there is a risk that competitors use citizen petitions to delay the decision. Some analysts believe that there is a chance that the approval gets dragged out into 2018, thereby putting the company's 2017 and 2018 guidance at risk.

Additionally, bears point to the concerns that were raised during their 3Q results - increased competition from new drug approvals and the resulting price erosion. While 4Q results did suggest that this was a one-time quarter, 4Q could also have proved to be the anomaly. Management has currently guided to mid-single digit erosion, but any signs of increased erosion will be met with concerns around the future growth trajectory of the company.

Finally, while the EpiPen saga is declining, it likely remains a fair portion of the company's profitability, and could prove to be a bigger headwind than investors anticipate. While the company finalized a settlement with the government, there is a small chance for more unexpected lawsuits in the future. And the company just recently had to recall another 81,000 EpiPens due to a faulty mechanism. While this recall doesn't likely pose a significant financial impact to the company, it does keep EpiPens in the news. As a result, EpiPens could continue to pose some headline risk to the company. 


Watch for Advair-Generic Potential Decision on March 28

Institutional investors will be intently focused on a potential FDA ruling on March 28th for the Advair generic. While the market currently does not expect a decision, an approval would represent an upside surprise and likely send the stock higher (and vice versa to a smaller degree in the case of a delay).