Mylan Waits Patiently at the Bottom of the Patent Cliff
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One of the most prevalent conversations taking place in the world of big pharmaceuticals is the so-called patent cliff that is rapidly approaching for many of the largest drug makers. When a major drug goes off-patent, it means that the company that had exclusively controlled the drug can experience a significant drop in revenues. It also means that generic drug makes, like Mylan Inc. (NASDAQ: MYL), are able to step in and sell lower-cost versions of the drug and undercut the original manufacturer’s cost. This year alone, Pfizer Inc. (NYSE: PFE), Merck (NYSE: MRK) and Bristol-Myers Squibb (NYSE: BMY) each have a major drugs coming off-patent. While each of these players is facing the problem with a different approach, these developments tend to be favorable for generics, and Mylan is clearly ready.
Patent Cliffs For Three Behemoths
Merck, Pfizer and Bristol-Myers are three of the biggest drug makers in the world. Each is facing the expiration of a blockbuster drug in differing ways. Mylan has, in turn, taken a different approach to its preparations to capitalize on each these new markets. What follows is a brief discussion of each of the three drug makers and the circumstances surrounding their respective patent expirations.
Merck & Singulair – This asthma and allergy drug posted sales of approximately $1.43 billion last year. In April, the Food and Drug Administration (FDA) approved ten generic drug makers, including Mylan, to begin manufacturing montelukast sodium – the chemical name of Singulair. Estimates suggest that Merck may lose as much as 90% of its sales of Singulair as a result of the lost patent protection. The company is handling the situation well, focusing on the growth of its other blockbuster drugs and acquisitions to insulate it against the loss. If Mylan is able to capture even 10% of the montelukast sodium sales available, it should be considered a big win.
Pfizer & Lipitor – Pfizer’s best-selling cholesterol drug lost its patent protection this year, causing the company to take some dramatic steps to diversify the sources of its revenue. Mylan is one of the companies already selling a generic version of the drug. The first step that Pfizer has taken to protect some of its Lipitor sales is to offer coupons that allow patients to buy Lipitor at a deep discount. Individuals with private insurance have been able to purchase the drug for as little as $4 per month, while all others receive a straight $75 discount. While two-thirds of those on Lipitor have switched to a generic, with roughly 3.5 million monthly prescriptions, the third that Pfizer has kept are significant.
In addition to its discounting efforts, Pfizer has entered into a major strategic alliance with Mylan. The purpose of the collaboration is to combine Pfizer’s branding power, marketing might and sales reach with Mylan’s manufacturing and formulation expertise to bring generic drugs to the growing Japanese market. The deal calls for an immediate portfolio of 350 drugs, with another 125 in development. This collaborative effort will help Pfizer to offset some of its Lipitor loses and should prove significantly beneficial to Mylan as well.
Bristol-Myers Squibb & Plavix – Bristol-Myers Squibb's anti-clotting drug, like Lipitor, has been a key compound used by doctors to fight heart attacks. The two drugs had combined sales in 2011 of roughly $20 billion. In order to counteract the loss of these sales, Bristol-Myers is taking a page from both Merck and Pfizer. Like Merck, the company is focusing on diversification and growth within other critical blockbusters currently sold by the company. Like Pfizer, the company is attempting to use a coupon program to at least slow the rate of attrition from Plavix to the generic market. Given the huge size of this market, it could prove to be yet another growth area for Mylan.
How to Trade Mylan
While Mylan looks like a very strong play over the longer-term, there are a few factors that should give you pause before entering the stock at current levels. First, Mylan has not produced the kind of growth statistics in Europe that I would like to see before placing a “strong buy” blessing onto the company. As the Pfizer relationship plays out, the company may be able to cross-leverage some of its momentum, but the cautious play is to wait and see how things develop. The second factor you should consider is the option trading action seen recently in the stock. OptionMONSTER reported last week that over 4,000 September 23 puts were purchased on the stock. While this is likely in response to the fact that stock is trading just below a key technical resistance level, given that it is a fairly sizable bet, it should be taken into account. As the factors discussed above play out, Mylan should be a solid long-term play, but the cautious investor may wish to remain neutral in the immediate-term to see how the stock behaves.
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