The year over year increase in healthcare costs has significantly outpaced wage increases over the past 10 years.  An increased generic utilization rate has helped mitigate costs and should continue as a record number of generics enter the market in 2008.

2. Global Position

Merck’s generic division and the Matrix segment give Mylan a global presence which should position the company well going forward.

3. Duragesic Prescription Trends

According to a Cowen and Company report, Mylan has 55% of the Duragesic market after competitor Watson recalled one of its lots of the drug.  This is up from 44.1% in September.  Analysts expect Duragesic to earn revenues of $250 million in 2008.

4. Guidance is Achievable

Mylan lowered FY 2008 EPS guidance to $0.40-$0.50 in May after the first quarter and then raised and narrowed guidance after the second quarter to $0.47-$.53.  After they issued the $500 million in new notes they reaffirmed these numbers.

5. Takeover Target

For large cap pharmaceutical companies Mylan presents an attractive investment opportunity.  Cash cows like Novartis (NVS: 53.53, +0.83 (+1.57%)) and Pfizer (PFE: 18.20, -0.04 (-0.22%)) could make a bid as Mylan’s share price continues to depreciate.

Cons

1. Poor Management

Management has not been concerned with shareholder value for years by continually misleading investors about the state of the company.  That is why shares have depreciated about 5% over the past 10 years.  According to FiercePharma.com CEO Robert Coury received total compensation of $8.4 million during fiscal 2007, which was only nine months due to the company changing its fiscal year.

2. Inability to find a buyer for Dey

The inability to find a buyer for Dey suggests it is worth significantly less than any bidder was willing to pay.  Instead of being able to sell a weak franchise that does not fit within Mylan’s core competencies and pay down debt, the company is forced to keep a failing business and issue additional debt.

3. Valuation

3.  On a strict EV/EBITDA, Mylan trades at a significant premium to Teva (TEVA: 46.16, -0.11 (-0.24%)), Barr (BRL: 66.68, -0.02 (-0.03%)) and Watson Pharmaceuticals (WPI: 29.46, -0.28 (-0.94%)).  According to Yahoo! Finance Mylan’s EV/EBITDA is 14.1x’s versus Teva’s 12.0x, Barr’s 12.9x’s and Watson’s 6.9x’s.  With the new debt issuance they aren’t cheap!

4. Highly Leveraged

Mylan has about $4.5 billion in debt versus a market cap of $3.6 billion.  The financial burden that a leverage ratio creates will make it difficult for Mylan going forward.

5. Takeover Bid is Holding on Hope

Reports suggest Pfizer (PFE: 18.20, -0.04 (-0.22%)) and Novartis (NVS: 53.53, +0.83 (+1.57%)), who hold $27 billion and $16 billion in cash respectively could make a bid for Mylan.  M+A activity has been strong in Healthcare (LINK TO SANTOSH’S ARTICLE), but holding and waiting for a takeover is never a strong investment rationale.

For risky investors, Mylan may be an attractive long term opportunity.  For risk-averse investors, Mylan will not even be on your radar.