CEPH Cephalon (MM)

Mylan Inc.’s (MYL) second quarter 2011 earnings (excluding special items) of 52 cents per share were above the Zacks Consensus Estimate of 45 cents as well as the year-ago earnings of 37 cents per share. Earnings growth was driven by increase in generics revenue and improved gross margins.

Quarter in Details

Total revenues at Mylan climbed 15% over the prior year to $1.57 billion driven by increased sales of generic drugs and the positive impact of foreign exchange (Fx). Revenues were also ahead of the Zacks Consensus Estimate of $1.50 billion. Total revenues comprise both net revenues and other revenues from third parties.

Mylan reports revenues through two segments: Generics and Specialty.

Generic third party net sales, derived from sales in North America, Europe, Middle East & Africa (EMEA), and the Asia Pacific, climbed about 17% to $1.44 billion in the second quarter of 2011. Third party net sales declined in EMEA on a constant currency basis, but grew in other markets like Asia-Pacific and North America.

Third party net sales in North American markets rose 27.2% to $749.1 million in the reported quarter. The increase was mainly attributable to new product launches, the important ones being the generic versions of AstraZeneca's (AZN) Entocort, Novartis' (NVS) Femara and Cephalon's (CEPH) Amrix. Results were aided by the September 2010 purchase of Bioniche Pharma.

Third party net sales from the EMEA market of $378.7 million remained flat year over year, benefiting from the positive impact of Fx. Excluding the positive impact of Fx, sales in EMEA reported a decline, mainly attributable to increased competition resulting in lower pricing and volume in some European markets like Germany and France. However, Italy did well in the quarter.

Third party net sales in Asia-Pacific spurred 17.2% to $310.9 million, driven by increased sales of anti-retroviral finished dosage products and active pharmaceutical ingredients (API) from the company’s Indian subsidiary, Matrix. Foreign exchange benefit, to the tune of 10%, was a major catalyst.

Third party net sales from the Specialty division climbed 6.2% to $131.7 million, boosted by pricing benefits of the EpiPen Auto-Injector and volume growth of the Perforomist Solution.

Adjusted gross margins improved to 48% (from 45% in the prior-year quarter), mainly due to new product launches in North America coupled with favorable pricing for EpiPen.

2011 Guidance Reiterated

Mylan tightened its outlook for 2011. Mylan expects 2011 adjusted earnings in the range of $1.95–$2.05 (old guidance: $1.90–$2.10) which includes headwinds in Europe. The Zacks Consensus Estimate, currently at $2.00, is within the guidance range. The company maintains its revenue and earnings growth guidance at a respective 15% and 20%, aimed for end 2013.

Our Recommendation

We currently have a Neutral long-term recommendation on Mylan. The shares carry a Zacks #3 Rank (short-term Hold rating). Mylan is one of the leading players in the US generics market. The company holds immense potential as many blockbuster drugs are slated to lose patent exclusivity in the forthcoming period.

We are encouraged by Mylan’s robust generic pipeline. However, competition in the generic segment is strong with players like Teva Pharmaceuticals (TEVA), Watson Pharma (WPI), Par Pharmaceuticals (PRX) and Sandoz -- the generics arm of Novartis - in the field. We also remain concerned about lackluster growth in the European generics business. We intend to remain watchful until better visibility is obtained on top-line growth prospects in Europe.

 
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