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Summary

  • Mylan, the #1 US generic drug maker, has Celgene in its cross-hairs, and CELG investors are scurrying.
  • Mylan's actions are understandable, but success is questionable given its "litigious" history and the very nature of the business model.
  • Regardless of lawsuit outcomes, investors should invest cautiously and respect the stock's high-risk/high-reward profile.

I recently covered the basics of Celgene (NASDAQ:CELG) in a past article, in which I shared my opinion of how shares are undervalued given growth prospects, upcoming catalysts, and cheap valuations. However, it seems my timing could not have been any worse, as shares have sharply fallen since, along with the rest of the market.

What's new and perhaps alarming some investors is Mylan (NASDAQ:MYL) is suing Celgene for exercising its patents rights. Mylan is accusing Celgene of "using federal limits on the distribution of Revlimid and Thalomid, which were designed to promote the drugs' safety, as a pretext to keep generic drug makers from obtaining their own samples." When I read the headline, frankly, I was annoyed. Mylan not only wants mass quantities of Revlimid and Thalomid for purposes of copying, but at "market prices" as well.

Obviously, Mylan doesn't wish to pay hundreds of thousands of dollars as an actual patient would, but c'mon, really? Celgene would be foolish to give up its most valuable drugs for purposes of replication, and at a discounted price, right? Celgene has every right to be protective, as both Revlimid and Thalomid together totaled 70% of Celgene's 2013 revenue. But in addition, I believe it's Celgene's duty to tenaciously guard its products for shareholders which, by the way, it spends millions of dollars developing, not to mention dealing with the FDA for approvals.

So what's the deal with Mylan, are they crazy? Well, maybe not crazy, after all, Mylan is the number one generic drug maker in the US in terms of sales; dispensing 1 in every 12 prescriptions. Mylan's business model is to be a generic drug maker, and this arena comes with its lawsuits, given the expensive costs and huge profits potential, as well as navigating complex patent rights. Regardless, some experts have said Mylan has a history of being a tad ambitious. In fact, just 2 years ago, Mylan actually sued the FDA. During the time of lawsuit, an analyst for Crédit Agricole, Kim Vukhac, was quoted as saying Mylan had a "litigious history." Earlier that same year, the company unsuccessfully challenged Ranbaxy's exclusive right to sell generic Lipitor on grounds of manufacturing violations. It also sued Teva over its right to exclusively sell a generic version of Provigil, the anti-drowsiness drug, in a case that was later settled. You may also recall multiple tangos with Pfizer (NYSE:PFE) involving Sutent, Caudet, Azasite, and others. Overall, the list of suits is too long to research.

Tracking all of Mylan's suits is a difficult project, and I came up empty-handed. From the Q4 2013 press release, the company boasted a $13.2 M net gain, from "litigation settlements principally related to recoveries of lost profits in patent-infringement matters and favorable settlements for existing litigation matters." However, from 2013's 10-K slide # 46, Mylan's litigation efforts came up worse than flat for the past two years. This is misleading, though, as this metric only reflects direct lawsuit settlements, and does not reflect actual revenues from creating generics it won the rights to sell as a result of these events. As perhaps a better indicator of success or failure, Mylan's revenue grew by 20% in 2013. Is this number a better "tell" of Mylan's success in this litigation-happy business? Perhaps.

My point here is when the rewards are great and you are on top, Mylan probably has your patent-protected drug in its cross-hairs. Some call Mylan a leech or copycat that seeks to profit by copying other companies' hard work and risk-taking, while others consider it the "Robin Hood of drugs", since generic drugs are much cheaper than the original, and thus become more widely available to patients.

Given Mylan's relatively successful history, offset by the very nature of its litigious business model, should Celgene shareholders be concerned?

It seems Celgene has much to lose and Mylan much to gain, and I think the decline in Celgene shares might be justified given the possible risk. After all, Mylan is going after a very big part of Celgene.

Celgene is a fast-growing company with much to offer, but then again, so is the industry Robin Hood, Mylan. I own a Celgene call spread, so my downside risk is defined. You may be best off playing Celgene with a married put, or some other type of position that limits downside, just in case. Overall, at least for me and my risk-adjusted position, I'm not shakin' in my boots over the Mylan attack. However, it will probably still be in the back of my mind until resolved.

Disclosure: I am long CELG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I'm long CELG via call spreads

Source: Celgene In Mylan's Cross-Hairs: "I'm Shakin' In My Boots"... Well, Maybe A Little