While we expect Mylan Inc.’s (MYL) acquisition of Merck Generics to contribute to long-term growth, near-term execution risks remain. Mylan announced certain strategic initiatives which should help drive long-term growth. We view these initiatives as steps in the right direction. But the management also stated that they expect 2008-2010 EPS to be negatively impacted by a slower-than-expected new product launch.

The company adjusted EPS guidance for 2008-2010 based on higher expenses, reduced opportunities from patent challenges and the potential sale of its specialty business. We believe that the new guidance should be achievable and we have updated our model based on the guidance. The company expects to conclude the sale of its specialty business later this year – we have removed contributions from this segment from the fourth quarter onwards. We maintain a Hold rating on the stock.

The Merck Generics acquisition will allow Mylan to expand its footprints in non-U.S. markets like Europe, Japan and other Asia-Pacific regions. With Matrix and Merck Generics, Mylan should be able to position itself as a leader in the worldwide generics market.

The company expects to achieve synergies of $100 million, $121 million and $272 million in 2008, 2009, and 2010, respectively. Mylan shares are currently trading at 27.4x our estimated 2008 EPS of $0.50. Our price target of $14.50 is based on 29x our 2008 EPS estimate of $0.50.

Arpita Dutt, CA, contributed to the report.

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