Jonathan Moreland
Jonathan Moreland

Inside the Markets: Insiders Bullish on Drugs

Even though fundamentals and technical reports support a positive opinion. Here’s why.

May 18, 2009
by Jonathan Moreland

[DISCLOSURE: Readers should assume that all stocks mentioned in this column are owned by the author and/or his firm unless otherwise noted.]

There were no large, nasty surprises in Mylan Laboratories’ (MYL: NYSE) first-quarter results, but the firm’s shares nonetheless sank by nine percent on heavy volume after the news release in late April. As far as I’m concerned, that disconnect is offering investors a better entry point to a firm with a potential 25 percent-plus annual bottom-line growth over the next two years.

Many CPA Insider™ readers may not know that generic-drug manufacturer Mylan Laboratories (Mylan) has garnered a positive insider rating from me for nearly two years. In June 2007, executives were buying their stock at over $18 per share. A year ago, they were buying at more than $10 per share. More recently, CEO Robert Coury increased his holdings nearly six percent by buying $322 thousand worth of Mylan’s stock at the end of February for $12.86 per share.

Two directors agree with Coury’s optimism. Rodney Piatt, president of Mylan, bought another 5,000 shares of Mylan at the end of February. And Heather Bresch, executive vice president and chief operating officer at Mylan, saw fit to exercise options at $11.58, and hold on to them all. Such “opting in” reflects that director’s expectations that MYL will not be trading down below that level again.

Insiders were obviously early with their bets back in 2007 and early 2008, as this stock eventually sank to a measly six dollars last fall in the depths of the economic uncertainty. But the recent purchases by several insiders into Mylan’s rising shares since then indicate that these executives feel that what has moved this stock recently has a good chance of continuing. And what has helped moved Mylan’s shares since last fall is its ability to post decent earnings growth in a very tough economic environment.

First-quarter sales at this global generic-drug manufacturer increased 13 percent year over year, to $1.21 billion, despite negative effects from a strong dollar. Improving margins allowed adjusted diluted EPS to jump from nine cents last year, to 33 cents this year.

Management also saw fit to increase the bottom end of its 2009 EPS (earnings per share) guidance from 90 cents to a dollar. The low-end EPS expectation for 2010 remains $1.30. Nothing wrong with that kind of growth in this market. Management even voiced intentions to focus more on opportunities in China and India in coming years, key words that have tended to excite CPA investor-clients of late. Even so, Mylan’s shares sold off hard on earnings day.

Management did remind that the first half of 2009 would likely be stronger than the second half due to an increase in R&D expenditures and because the company is about to lose exclusivity on two of its drugs. Still, this was known and should not have been viewed as a negative.
Ditto for the acquisition-generated ugly spots on Mylan’s balance sheet. While debt remains high at 189 percent of shareholder equity, and 54 percent of the firm’s stated assets are comprised of goodwill and intangibles, that’s the old news that no doubt helped Mylan shares to collapse down to six dollars late last year.

With financial results now showing Mylan progressing well in digesting its May 2007 purchase of Merck’s (MRK:NYSE) generic business, and fears of the world’s financial system heading back to the dark ages waning, concerns about the firm’s balance sheet should be lessening as well.
So instead of being spooked by the little trip south Mylan’s share’s took in late April, I’m viewing it as a better buying opportunity. The firm’s growth appears solid, and its shares are again at technical support within a strong rising channel. Plus, of course, Mylan’s insider profile remains bullish as well.

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Jonathan Moreland is the Director of Research at New York-based InsiderInsights.com. View a FREE trial issue of the firm's weekly newsletter InsiderInsights.