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Mylan Is Too Expensive At A $22b Market Cap

|Includes: Mylan Inc (MYL)

Generic drugmakers, which produce cheap, off-patent medicines. They should not have 20% net margins. That's what Google, Facebook and Apple make for having near monopolies on their markets.

On Mylan:

1) Company with 87% of revenues from generics (undifferentiated) products that are primarily advantaged by the FDA due to being cheaper than their branded name counterparts. Branded drug pricing is going to come under pressure due to political scrutiny and drug price inflation gone wild, do you think generic pricing will follow? I do.

2) Acquisition of Meda was at a high multiple 16.3X EBITDA in an inflationary environment. What generic or specialty pharma company trades at those kind of nose bleed multiples today? None

3) Does a company whose products compete primarily on price deserve to trade at Gross Margins in the mid-50s? No. I would argue 30% GM should be peak, but we don't need to get there to see significant price erosion.

Price deflation is coming to Pharma. Mgmt on the earnings call is in denial, despite having an assumption of low single digits price erosion in pricing. The trend is just beginning.

In terms of valuation, Mylan has a $21.7b market cap, EV of $27b. Depending on how Myland structures the Meda transaction, debt levels will rise. So as margins contract, leverage ratios will go up and multiples should come down.

The best days of U.S. Pharma are in the rear view mirror.

UPDATE (5/16/2016)

Mylan is trading down to a market cap of $19.9b. They just announced another acquisition of dermatology products for $1b. That's not a small acquisition. The deal is all cash. Of course, analysts are saying it will be accretive to adjusted EPS numbers.

Mylan is levered up right here. I estimate that net debt will rise to ~$16b. 2017 EBITDA estimates are currently at $4.5b. That may not seem levered, but this is a generic drug company enjoying very attactive (and I would argue) anomalous margins. If margins start coming down due to increased pricing pressures, watch out.

EV will be close to $36b.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.