Merger Weighs on Mylan Labs

The drugmaker's generic business has slipped since it proposed merging with King in July.
Publish date:

When financial analysts tune in Thursday morning for the latest quarterly results of

Mylan Laboratories

(MYL) - Get Report

, their biggest challenge will be assessing the condition of the company's basic business.

Affected by the shadow of

billionaire investor Carl C. Icahn and the fog surrounding

Mylan's bid to buy

King Pharmaceuticals


, analysts' predictions about Mylan's third-quarter performance are all over the place. There are three buy ratings, seven neutral ratings and two sell recommendations, according to Thomson First Call.

But analysts agree Mylan will do worse in this quarter than in the year-ago quarter. The consensus view is a profit of $49.9 million, or 18 cents a share, on revenue for $312.6 million for the three months ended Dec. 31. For the third quarter of the previous fiscal year, Mylan earned $84.6 million, or 31 cents a share, on revenue of $349.8 million.

Many analysts remain concerned that Mylan has lost focus on its generic drug unit, which accounts for 80% of total sales. For the first six months of its current fiscal year, generic revenue dropped 7% while brand-name drug sales slipped 4%.

Last week, the company got some good news when the Food and Drug Administration said it could begin selling a generic version of Duragesic, the transdermal patch-based painkiller developed by

Johnson & Johnson

(JNJ) - Get Report

. J&J's U.S. Duragesic business accounted for $1.27 billion in revenue last year.

However, analysts don't agree on how much revenue and how much momentum this generic product can provide to a company whose stock has lost about one-third of its value in the last 12 months.

"Mylan is facing pricing pressure on a number of key products," said Timothy Chiang of Natexis Bleichroeder in a recent report to clients. Even though Mylan is now making the generic pain patch, Chiang said he was "concerned with additional competitors and the impact this could have on pricing."

He said the pain patch could add 10 cents to 16 cents in EPS over the first 12 months of sales. Chiang places a $19 fair value on the stock, which is now trading at $16.82. (He doesn't own shares, and his firm doesn't have an investment banking relationship with Mylan.)

"Generic Duragesic arrives, but is it too little, too late for Mylan?" says the headline of a Monday research report by Elliot Wilbur of CIBC World Markets. The FDA's approval of this product "was badly needed to shore up sagging results in Mylan's core generic segment," Wilbur said as he reaffirmed a sector performer rating.

But he warned investors against "extrapolation of potential short-term EPS upside" from the product, because five or six competitors could enter the market in the next 12 months. Wilbur cut his sales estimates of generic Duragesic for the fiscal years ending March 31, 2005, and March 31, 2006. That would reduce 2005 EPS by 5 cents to 87 cents and 2006 fiscal EPS by 15 cents to $1.13. (He doesn't own shares; his firm says it expects to receive or seek investment-banking-related compensation from Mylan in the next three months.)

Of course, no discussion of Mylan would be complete without a reference to King Pharmaceuticals, whose financial problems, government investigations and restatement of several years of earnings finally put a dent in Mylan's total devotion to completing the deal. At the time it was announced in late July, the deal was worth about $4 billion.

On Jan. 12, Mylan said King's revelations about restating earnings -- a technical deal-breaker -- made Mylan doubt the transaction could be completed by the Feb. 28 deadline. The company said it was "unlikely" it would pay the original price for King, which was 0.9 shares of Mylan for each share of King.

In early December, King said it would restate earnings for 2002, 2003 and the first half of 2004, adding that it might restate earnings for 2000 and/or 2001.

The King announcement further infuriated Icahn, who has become Mylan's second-largest shareholder while also shorting King's stock. He continues to oppose the deal. In recent months, he has threatened to run a slate of directors to oppose Mylan directors, offered to buy the rest of Mylan's shares for $20 a share, sued another shareholder and Mylan over the shareholder's investment and warned Mylan about renegotiating the King deal without shareholder approval.