A Generic McMansion

Mylan (NYSE: MYL  ) is like your neighbor down the street who bought his house with a nothing-down home loan. No, not the foreclosed one with a "bank owned" placard on the for sale sign. It's the guy that's paying down his mortgage just like you and me because he didn't bite off more than he could chew and accessed the credit market at just the right time.

Mylan did take an awfully big bite when it purchased Merck KGaA's generic-drug business last year, but so far it's proven that it can handle it. Now a year into the acquisition, investors are on their last quarter of year-over-year comparisons that make your head spin.

In fact, I'm just going to skip the comparisons altogether, since tripling revenue isn't all that impressive when it includes acquisitions and selling off rights to Bystolic to Forest Labs (NYSE: FRX  ) for $455 million. Even the increased revenue from its fentanyl patch -- thanks to competitors Johnson & Johnson (NYSE: JNJ  ) and Novartis (NYSE: NVS  ) having to pull their patches from the market -- isn't all that impressive, as the sales are expected to go down once competitors get it together and get onto the market again.

The important thing is the bottom line. Mylan is servicing its debt, and adjusted EPS -- excluding the income from selling Bystolic and charges for the acquisition -- came in at $0.23 per share. The company is now expecting to make between $0.64 and $0.67 per share on an adjusted basis, now that it's decided to keep Dey, its branded drug division.

I still think selling Dey would have been a good move to generate capital and pay down some of the debt it had to take on to purchase Merck's generic division. But it appears Mylan wasn't able to get a good enough price and instead sold some convertible notes to push out the due date on some of its debt to 2015 at a pretty respectable 3.75% interest rate. The convertible notes could come back to bite it if shares go up substantially in the next seven years, but are investors really going to complain about a little dilution if their shares have zoomed up?

With continued cost savings from synergies and paying down debt, Mylan is expecting adjusted EPS of $0.90 to $1.10 in 2009 and $1.50 to $1.70 in 2010. If it can hit those numbers, Mylan is looking pretty reasonably priced even after the 17% increase in its stock price yesterday. It still isn't nearly as large as its nearest competitors, Teva Pharmaceuticals (Nasdaq: TEVA  ) and Novartis, but the acquisitions should help it compete with the big boys through better operating margins as fixed costs like research and development get spread out over larger worldwide revenues.

More Foolishness on turnaround possibilities:

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Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. Johnson & Johnson is a selection of the Income Investor newsletter. The Fool has a disclosure policy.


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