Mylan Beats on Earnings, Misses on Sales - Analyst Blog

Mylan's MYL first quarter 2014 earnings (excluding special items) of 66 cents per share surpassed the Zacks Consensus Estimate by 3 cents. Earnings in the first quarter of 2014 climbed 6% from the year-ago quarter. The year-over-year rise was due to higher revenues. A lower share count benefited results. On a reported basis (including special items), first quarter 2014 earnings climbed 7% to 29 cents per share.

Revenues climbed 5% to $1.72 billion, well short of the Zacks Consensus Estimate of $1.79 billion. Despite the negative impact of currency fluctuation and the lackluster performance of the specialty segment, Mylan recorded year-over-year growth on the back of strong sales in the generic segment. Mylan reports revenues from two segments: Generics and Specialty.

First Quarter in Details

Generic third-party net sales, derived from sales in North America, Europe and rest of the world, climbed 7.1% to $1.51 billion. Sales were hurt by adverse foreign currency movements.

Segmental third-party net sales grew 6.9% to $782.2 million in North America. Though newly launched products performed well, sales in the region were adversely affected by sales of existing products due to unfavorable pricing and volume.

Third-party net sales from the European market improved 2.1% to $355.9 million aided by favorable foreign currency movements. Third party net sales from rest of the world improved 12.9% to $370.2 million. Segmental performance improved on the back of increased sales of its antiretroviral products in India.

Foreign currency movements, however, adversely impacted revenues from the region due to weaknesses in the Indian, Australian and Japanese currencies versus the U.S. dollar. Excluding the impact of foreign currency movements, segmental sales climbed 27% in the first quarter of 2014.

Third-party net sales in the Specialty segment declined 8% to $194.7 million. Specialty segment sales were impacted by the weak performance of its flagship product – EpiPen auto-injector – for severe allergic reactions. Lower volumes resulted in the contraction of sales of the product in the quarter.

Adjusted gross margin during the first quarter of 2014 improved to 50% from 49% in the year-ago quarter on the back of higher margins on the new offerings at Mylan. Adjusted operating expenses climbed 13.6% to $469.6 million during the reported quarter due to higher selling, general and administrative (SG&A) costs. Higher marketing costs pushed up SG&A expenses.

Mylan, which acquired Agila Specialties private limited (the injectable drugs division of India's Strides Arcolab limited) in 2013 to strengthen its presence in the high potential generic injectables market, expects to make another meaningful transaction by Dec 31, 2014.

2014 Earnings Outlook Maintained

Mylan maintained its outlook for 2014 earnings that was provided in February this year while releasing the fourth quarter and full year 2013 results. The company still expects adjusted earnings in the range of $3.25–$3.60 per share. The Zacks Consensus Estimate currently stands at $3.44 per share, well within the guidance range.

Our Take

We are disappointed by the weak top-line performance at Mylan. The weakness of the Specialty segment was primarily responsible for the top line miss. The segment will continue to suffer in the event of below-par sales of the EpiPen auto-injector in the coming quarters.

We expect the generic segment to continue performing well. Mylan's focus on emerging markets is encouraging. Emerging markets are slowly and steadily gaining more importance and several companies are now shifting their focus to these areas.

Mylan carries a Zacks Rank #3 (Hold). Stocks like Mallinckrodt MNK, Actavis ACT and Dr. Reddy's Laboratories Ltd. RDY are examples of better-ranked stocks in the generic space. While Mallinckrodt carries a Zacks Rank #1 (Strong Buy), Actavis and Dr. Reddy's are Zacks Rank #2 (Buy) stocks.