One Quality Generic Drug Maker on the Cheap; One Dodged Bullet in Biotech

By Michael Brush
Exclusively for InvestorIdeas.com
June 21, 2007

The generic drug company Mylan Laboratories (MYL) offers that rare combination worth holding out for in a stock:

• Heavy insider buying
• Ownership or high ratings from value shops with good track records
• Sell-side analysts who don’t like the stock

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Time and again this combination has lead to great gains, and I think that’s what will happen with Mylan. Here’s a look at the bullish triumvirate.

The insiders : Chief executive Robert Coury picked up over $1 million worth of stock for around $18.50 in the recent weakness. Finance chief Edward Borkowski bought about $93,000 worth, according to InsiderScore.com.

The value guys : John Buckingham who manages the Al Frank Fund (VALUX), owns this stock. His fund is up 15.4% a year over the past five years, beating its category by 2.5% percentage points a year. Morningstar (MORN) also has a five star rating on the stock, its highest rating. Morningstar has had good success with its five star stocks – thanks in part to a strict value discipline and a willingness to wait for a decent price before turning bullish on a stock.

The sell siders : Overall, they have a hold rating on the stock. This is important because it means they aren’t shepherding clients into the name. But presumably they will -- once whatever the insiders see starts to kick in. Then they will up their ratings, and there will be lots of buyers to push up this name.

Getting into Europe

Why is Mylan a value play? Partly because it has fallen below $19 from above $22 in May on news that it was buying the generic drug business from Germany’s Merck. Speculators don’t like the huge debt load and dilutive stock issue to fund the deal. And they don’t see the synergies, so they are bailing.

But if you take the long view, this acquisition appears to make sense. “The stock now trades for only 11.7 times consensus fiscal 2008 earnings, and it looks like the market is giving long-term investors an opportunity to own this newly-formed generic drug giant at an attractive price,” says Buckingham. You may have to wait a while to see gains in the stock. The company says the deal would be dilutive in the first year, but it will be break-even in the second, and create $250 million in synergies by the end of the third year.

“Shareholders should benefit in the long run,” agrees Morningstar’s Brian Laegeler. Here’s how Laegeler sees it all working out in the medium term. The purchase of the Merck generics division will give Mylan good exposure to Europe. It will also position Mylan to benefit from generic biologics – or the use of substances synthesized from living organisms to treat diseases. Meanwhile, Mylan’s recent purchase of one of the big pharmaceutical active ingredients makers – Matrix in India – will give it access to cheaper ingredients. Once all the moving parts are integrated – cheaper ingredients from India, and new exposure to Europe and biologics – things should start to hum.

Other catalysts

The company should also benefit from these factors:

• By 2010 about $100 billion worth of branded drugs – in annual sales – are going off patent in the U.S., says Mylan.
• Mylan has about 65 applications with the Food and Drug Administration to make generic versions of patented drugs that currently generate $51 billion in U.S. annual sales. Of course, revenue will be a lot lower for the generic version of those drugs. But for 13 of them, Mylan would have 180 days of exclusivity in generic production – meaning it can charge a lot more. Those 13 drugs were worth about $10.7 billion in U.S. sales last year.
• Overall, Mylan has about 165 products in development and “advanced evaluation.”
• In the “active pharmaceutical ingredient” space, Mylan has applications in to become a manufacturer of 111 ingredients in the U.S., and 726 outside the U.S.

“We believe the Mylan’s robust pipeline coupled with that of Matrix provides a strong platform for future growth,” says the company.

The 411

Mylan currently offers about 170 generic drugs. It gets a lot of revenue by selling calcium channel blockers to treat high blood pressure, primarily one called nifedipine. It also gets a lot of sales from narcotic pain killers, mainly fentanyl which is used often in operating rooms and intensive care. Matrix is the world’s largest supplier of generic ingredients used the anti-retroviral drugs that treat HIV. It supplies more than 50% of the market.

The dodged bullet

We have a lot of success stories with insider buy names here at Insiders Corner. So it’s important to remind ourselves once in a while that insiders don’t offer any sort of guarantee that a stock will work out, just because they are buying it. Here’s a nasty disaster we barely avoided.

Back in early May one insider at the biotech company Coley Pharmaceutical (COLY) made a huge purchase worth over $1.6 million at around $8.67 a share. I saw it, but decided to focus on other areas like energy, investments and real estate. This was partly because biotech companies can so easily blow up since they are often dependant on just a few potential products.

That was a lucky call. On Wednesday, Coley Pharmaceutical announced that Pfizer (PFE), a partner, decided to pull the plug on research on one of Coley’s main anti-cancer drugs. The stock fell 59% to $3.50.

We dodged that bullet, but the insider buying was so compelling, we could have easily been in the name. This is worth remembering each time we decide to put our faith in an insider buy signal. They don’t all work out. Take it as a reminder of how important it is to stay diversified and have no more than 2%-5% of your portfolio in any single stock.

The bottom line : While investors dump Mylan, insiders and some reputable value shops are telling us it’s a buy for the long-term – at least a year or two. So I’d buy right here.

Disclaimer
At the time of publication, Michael Brush owned shares of the Al Frank Fund. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorI deas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp . InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

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