Mylan Beats on All Fronts

Mylan, Inc.’s ( MYL - Analyst Report ) second quarter 2012 earnings (excluding special items) of 60 cents per share beat the Zacks Consensus Estimate by 5 cents. Second quarter earnings increased 15% from the year-ago quarter.

Higher revenues and gross margin expansion led to the rise in second quarter 2012 earnings. Revenues climbed 7% to $1.69 billion, beating the Zacks Consensus Estimate of $1.66 billion. Third party revenues for the second quarter went up 6.9% to $1.68 billion including approximately 5% negative currency impact.

On a reported basis (including special items), second quarter 2012 earnings remained flat at 33 cents per share.

The Quarter in Detail

Mylan reports revenues from two segments: Generics and Specialty.

Total Generics segment sales increased 3.3% to $1.49 billion in the reported quarter. Generic third-party net sales, derived from sales in North America, Europe, Middle East & Africa (EMEA) and Asia Pacific, climbed 2.8% to $1.48 billion in the second quarter of 2012.

Total Specialty segment sales increased 38.6% to $207.7 million, while third party revenues from the segment increased 50.8% to $198.6 million. Specialty segment sales were driven by the strong performance of flagship product, EpiPen auto-injector for severe allergic reactions.

Third-party net sales declined in the EMEA and Asia-Pacific but grew in North America. Third-party net sales in North American markets climbed 12.8% to $845.3 million in the reported quarter. The increase was mainly attributable to new product launches, which include the generic equivalent of Mayne Pharma's Doryx (150 mg), which is marketed by Warner Chilcott ( WCRX - Analyst Report ) .

Third-party net sales from the EMEA market declined 13.7% to $326.6 million. The decline was primarily due to negative currency impact. Pricing pressure in the European markets also affected the sales. Third party net sales in the Asia Pacific market fell 1.1% to $307.5 million due to unfavorable foreign currency translation.

Adjusted gross margins improved to 49% (from 48%), mainly due to new product launches coupled with favorable pricing and volume on EpiPen, partially hampered by pricing pressure in the generic segment globally.

Research and development (R&D) expenses increased 30.2% to $94.4 million in the reported quarter, due to higher investment in the pipeline.

Selling, general and administrative (SG&A) expenses rose 14.3% to $359.2 million. Higher SG&A expense was due to increased EpiPen related commercialization costs and higher employee benefit costs.

During the second quarter of 2012, Mylan completed the share repurchase program announced in May. The company repurchased approximately 23.4 million shares (worth $500 million) of common stock.

Outlook Maintained

Mylan reiterated its guidance announced earlier in May 2012. The company continues to expect 2012 adjusted earnings in the range of $2.45 to $2.55 per share. The 2012 Zacks Consensus Estimate of $2.48 per share is slightly tilted towards the lower end of the guidance.

The company expects 2013 earnings to be approximately $2.75 per share. The 2013 Zacks Consensus Estimate is pegged at $2.73 per share.

Our Recommendation

We are encouraged by Mylan’s geographic reach and product depth along with a robust generic product pipeline.

However, we are concerned about the company’s performance in the EMEA region. Additionally, with most large branded drugs due to lose patent exclusivity in the 2017-2018 period, we have little visibility on the growth prospects of generic companies like Mylan beyond that timeframe.

Thus, we prefer to remain on the sidelines and have a Neutral recommendation on Mylan. The stock carries a Zacks #3 Rank (Hold rating) in the short term.