Unlock: Mylan (MYL) – Bullish View on Generic Inflation Pays Off
It pays to do fundamental research. This bullish view on Mylan was presented to clients last week on February 24. Those March 42.5 calls finished higher by +212% today. To learn more about our approach and how you can become a successful trader, sign up for 2 week trial and test drive live chat room with some of the best traders: SUBSCRIBE
February 24, 2017
Mylan (MYL) – Couple weeks ago on February 6 big buyers of over 7,000 March 42.5 calls paid 78-95 cents offer side. Approx $600,000 bullish bet that remians in open interest. These calls are currently going for $1.25. And previously the bulls also accumulated over 4,500 March 40 calls in late January and that also remain in open interest. Quite a bit of bullish action in option chain in last 4 weeks particularly focused on March expiration.
Generic drug makers suffered several setbacks in 2016, primarily for two reasons: 1) Clinton bashing due to drug pricing (Mylan owns EpiPen) and 2) generic drug pricing deflation. This led to significant valuation contraction in generic drug makers in last 12 months. Now MYL trades at 7.8x forward FY2017 earnings (similarly TEVA trades at 7.4x). At least one of those two negative sentiments are gone. Hillary Clinton is not the President and Trump pretty much doesn’t care. This has allowed Mylan stock to gradually recover since beginning of year on high volume. But what about generic drug price deflation?
Generic Drug Price Deflation – On February 3, Quintiles IMS Tracker did channel checks, which is arguably not the perfect proxy for generic pricing but it comes pretty close to solving the puzzle. December 2016 checks (last checks they did) show some improvement in generic pricing as generic sales/TRx declined “only” 4.6% YoY vs. Jun-16 to Nov-16 when the decline in this ratio was high single to low-double digits. See picture below. More importantly, out of all generic drug makers, MYL appears to be faring the best in terms of sales/TRx erosion, up +3% YoY in 4Q16. Several reasons for this as BAML points out:
“MYL was helped in part by its strong execution on generic launches thus far in 2016, including larger launches such as generics of Benicar and Benicar HCT in 4Q, as well as generic Nuvigil and Fortamet earlier in the year. MYL has also launched an authorized generic of its own EpiPen brand and a generic of Concerta, which may be significant contributors in 2017.”
Catalyst on March 1 – In unusual way, Mylan has scheduled Analyst Day on the same day when it will report earnings. With valuation very low, political sentiment improving, generic pricing improving, what are chances stock blasts higher into the space?
