Mylan's Profit Downgrades: Too Much Coincidence?
Whenever I see a handful of analysts cut a company’s quarterly estimates all at once (or within a few days of one another) I always wonder: Coincidence?
Enter Mylan , the generic drug maker and no stranger to my readers. My last piece a month ago raised red flags over its accounting and its recent move to forecast earnings six years out.
The latest: In the span of just a few days in recent weeks, several analysts lowered first quarter earnings forecasts on the generic drug maker.
Here are some snippets:
- March 26, Tim Chiang of CRT Capital: To 50 cents from 52 cents “to reflect currency headwinds and slightly lower than forecast Lexapro generic sales due to higher than expected discounting of 30-40% off the brand.”
- March 28, David buck of Buck Research: “We recently spoke with Mylan about recent launches and came away with the conclusion that 2012 earnings progression will be more heavily back-weighted than our model (and consensus).” He added: “Generic Lexapro (depression) launch done at lower-margin. We originally had believed that Mylan’s generic Lexapro launch would be at a better than a typical 10%-15% gross margin for an authorized generic. This is apparently not the case.”
- March 29, Jami Rubin of Goldman Sachs : to 50 cents from 53 cents, with changes “primary driven by Lexapro…”
- A week later, on April 10, Kim Vukhac Glasser of CLSA joined in cutting estimates to 54 cents from 59 cents to reflect “more modest expectations about the Lexapro generic launch.”
All of these revisions came more than month after the company’s February 21 Investor Day, and within a month of the company’s first quarter earnings, slated for April 26.
A key theme in the analyst revisions was the launch of a generic version the anti-depression drug Lexapro, announced in a press release February 29 — eight days after the Investor Day. According to the transcript, Lexapro was not part of the company’s formal comments or analyst questions. Its launch was widely expected, as was an announced rollout two weeks later by rival Teva .
Based on my discussions with several analysts, from reading their reports, I suspect that the earnings revisions occurred after the analysts had conversations with Mylan.
Notably, in her report Kim VukhacGlasser wrote (with emphasis by me):
Given the early launch, we would have expected this to be a nice opportunity and boost for Mylan in 1Q12. However, in speaking with management, they explained that because they wanted the pricing to remain disciplined during the exclusivity period, rather than flood the market ahead of Teva’s launch, they wanted to be more restrained and suggested our enthusiasm for the generic Lexapro contribution was likely too high. We have pared back our revenue estimates in 1Q12 as a result. We note that in the first 5 weeks of launch, Mylan has captured 41 percent of the total market.
Who called whom? The analysts I spoke with wouldn’t say. Neither would Mylan. A spokeswoman suggested I check out CFO John Sheehan’s guidance at the Investor Day, when he said the back half of the year “would likely be stronger than the first half” and “I see Q1 developing fairly closely slightly less than Q4 2011 from an operational perspective” — or around 53 cents a share.
So why, then, more than a month later, toward the tail-end of Mylan’s quarter, did analysts shave their estimates — and of all things, blame lower margins on generic Lexapro?
The bigger (elephant in the room) question: Was the company walking the fine line that separates selective disclosure from fair disclosure? And if so, which side was it on?
According to Regulation Fair Disclosure, better known as Reg FD, if a company engages in selective disclosure it must issue a press release or SEC Form 8-K.
But that gets into the interpretation of selective disclosure. For example, according to the SEC website, a company can confirm a forecast it previously made.
In an FAQ on the SEC’s website, the government says:
A confirmation of expected quarterly earnings made near the end of a quarter might convey information about how the issuer actually performed. In that respect, the inference a reasonable investor may draw from such a confirmation may differ significantly from the inference he or she may have drawn from the original forecast early in the quarter. The materiality of a confirmation also may depend on, among other things, intervening events. For example, if it is clear that the issuer's forecast is highly dependent on a particular customer and the customer subsequently announces that it is ceasing operations, a confirmation by the issuer of a prior forecast may be material.
What about a company reviewing and commenting on an analyst’s models? That’s actually okay, as is conveying “inconsequential data,” which the analyst could use to help “form a mosaic that reveals nonpublic information.”
On the other hand, a company can’t “use the discussion of an analyst's model as a vehicle for selectively communicating — either expressly or in code — material nonpublic information.”
Materiality, of course, is in the eyes of the beholder.
In response to my inquiry, Mylan issued this statement: "Mylan's communication program is fully compliant with applicable regulations. As is well known, Mylan has a long history of transparency in its disclosure practices."
My take: Anytime there is a cluster of analyst actions on a stock and there is no apparent corporate event the “coincidence” question is fair game.
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