Lesson 03 MYL Stock Pitch

8/19/2019 Lesson 03 MYL Stock Pitch

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http://breakingintowallstreet.com

http://www.mergersandinquisitions.com

Hedge Fund / Healthcare Valuation Case Study: Mylan [MYL] vs. Actavis [ACT]

In this sample stock pitch outline, we’ll make a LONG (“Buy”) recommendation for Mylan [MYL] based

on the

results

of

our

market

and

valuation

analysis

and

the

DCF

output

from

Part

2 of

these

tutorials.

We’ll explain the reasons for this recommendation, why we’re not saying anything about Actavis, the

additional information we’ll need to create a comprehensive pitch, and then conclude with an actual

stock pitch outline that you can immediately apply to Mylan, or any other company you’re pitching.

Lesson Overview and Why Stock Pitches Are Important

What Information You Need for Stock Pitches

How to Structure a Stock Pitch and Tips on Each Section

Example Stock Pitch – LONG Recommendation for Mylan

What Next?

NOTES AND DISCLAIMERS:

First, please do not construe this as “investment advice.” I am NOT recommending that you invest in any

of these companies. This is a tutorial about how to research and pitch companies that you think are

interesting, and how to use what we’ve learned so far to support your arguments.

Also, keep in mind that the tips covered here move you in the right direction, but are NOT sufficient for

an entire case study or stock pitch – for that, you’ll need the resources covered in the full courses on the

site, as well as additional research you need to complete on your own.

What You Will Learn in This Lesson:

Why stock pitches and case studies are so important in hedge fund / asset management, equity

research, and even in fields like investment banking, private equity, and corporate finance.

What kind of information and analysis you need to properly pitch a stock, and the 6‐point

structure that you can apply to any type of investment pitch – even outside of equities, in fields

like fixed income or commodities.

How to structure a stock pitch, including the 6 key points that you always need to mention, how

to avoid the top 3 most common mistakes that will sink your chances, and how you should

research each of the 6 points.

A real example – you’ll get a stock pitch for Mylan that you could easily re‐use and re‐apply to

other companies and investment ideas as well.

What Next? Now that you’ve been through the tutorials and you’ve seen real life examples of all

these concepts, you’ll learn what your next steps should be – if you want to land internship / job

offers, or if you’re already working and simply want to perform better, get promoted, or move

to another firm, using the skills you’ve learned here.


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Why Are Stock Pitches Important?

They’re Critical in Interviews – Even outside of public market roles, you must be able to pitch

ideas for

investments,

clients,

potential

buyers/sellers,

and

so

on,

for

interviews

across

the

buy

‐

side and sell‐side, and even at normal companies outside the finance industry.

They Level the Playing Field – If you don’t have a 4.0 GPA from Harvard or top A‐Levels and an

Oxbridge degree, presenting an exceptionally well‐thought out stock pitch is a great way to set

yourself apart and get firms to hire you over the “Ivy League crowd.” And if you are in that

“crowd,” well, you also need a great stock pitch to set yourself apart from your competition.

They ARE What You Do on the Job – You’ll make these pitches all the time when presenting

ideas to the investment committee or others at your firm and attempting to “sell” them on your

ideas. Even in sell‐side roles such as investment banking, you’ll have to write CIMs and other

documents that pitch companies to investors, and to do that you need to understand how

investors think about companies.

Return to Top.

What Do You Need for a Stock Pitch?

You need a combination of market/industry research, company‐specific research, and ideas about the

valuation.

In this case study, we’ve mostly focused on the valuation side because it isn’t particularly interesting to

show you how to do Google searches about the healthcare industry or how to contact industry

professionals on

LinkedIn

or

other

sources.

However, all of those are important and you would need to do (more of) them in a real pitch.

Here are the 5 major categories we need in this pitch for Mylan:

Company Research – Read their filings, investor presentations, and equity research. What we’ve

done so far in this case study is a good start, but it’s not quite enough to ensure that we’ve

covered all our bases. Specifically, we’ve done a lot of work and analysis around the Agila

acquisition, but less work on the company’s generics pipeline and its existing generics business.

Industry Research – Read industry reports issued by IDC, the Big 4 accounting firms, and any

industry‐specific

journals

you

can

find.

Look

at

recent

M&A

and

financing

activity,

read

any

recent articles about the industry in The Wall Street Journal or Financial Times, and leave no

stone unturned as you figure out the key drivers. For example, for Mylan we might take a look at

the PwC report on healthcare deals, or the section on just pharmaceuticals, or the life sciences

section of the Deloitte site.

Company Documents – Their most recent annual report (the 10‐K for US‐based companies) and

any interim reports (10‐Qs), recent investor presentations (see the Investor Relations section of


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their site), earnings call transcripts, and potentially even equity research (but be careful – see

the section below on mistakes to avoid).

Channel

Checks

and

“Experts”

–

This

step

is

extremely

important

and

a

lot

of

people

miss

it

completely. It’s not enough just to do online research when pitching stocks and completing case

studies – you need to talk to real people on the ground, such as customers, suppliers,

distributors, retailers, and so on, to figure out what’s going on and what they think of the

company’s products and prospects. For example, for Mylan we should reach out to a few

employees at their biggest customers via LinkedIn, speak with any hospitals or medical groups

that use their pharmaceuticals, and reach out to key suppliers and partners, especially if we can

find anyone in the emerging markets that will drive future growth.

Valuation – We already have the DCF for Mylan, and you should complete some type of DCF

analysis for any company you pitch (unless it’s an industry where the DCF is not applicable, such

as commercial

banks).

What’s

missing

here

are

the

public

comps

and

precedent

transactions

–

those are both covered in detail in the full courses on the site.

How can you tell when you already have enough research?

Ask yourself whether or not you have specific answers to the following questions:

Are you recommending for or against investing in this company, and what are the 3 main

qualitative and quantitative reasons why?

How much money could you make if it increased or decreased to the share price that you think

it’s actually worth?

What are

2‐3 key

events

or

potential

events

(“catalysts”

–

see

the

action

below)

over

the

next

6‐

12 months that could cause its stock price to change?

What are the top 2‐3 risks to your targeted stock price, what’s the approximate numerical

impact of each risk, and how could you mitigate each risk?

If you CANNOT come up with good answers to those questions, keep working until you can.

What to Avoid When Gathering Information:

Over‐Reliance on Equity Research – Yes, get industry data from it and use it to find out more

about the market, but DO NOT form your own investment thesis based on sell‐side research.

These reports

tend

to

be

overly

optimistic

and

fail

to

consider

the

risk

factors

in

many

cases.

Online‐Only Research – You might be able to get away with this sometimes, but do you want to

take the chance in a competitive interview process? Candidates who perform the best talk to

real people in the market and do the channel checks described above.

Only One Source – Just like you would diversify your portfolio to reduce risk, you also need to

diversify your sources or you’ll risk using biased, incomplete information.


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You can also now understand why we avoided Actavis in this stock pitch: we don’t even have close to

enough information on it to do everything above. At least with Mylan, we have a fair amount of market

and valuation data and we can use that to outline what a stock pitch might look like.

Return to Top.

How Do You Structure a Stock Pitch?

Here’s the 6‐point structure I recommend using:

Recommendation – Long or short, and what do you think the company/asset is really worth?

“Neutral” recommendations are not recommended because you need a pricing imperfection to

make money.

Company Background – What are its products, how much revenue/EBITDA does it have, what is

its market cap, and what are its current valuation multiples?

Investment Thesis – The stock is priced imperfectly because of these 2‐3 key factors. The

market has not factored them in because…. But you believe they’ve been overlooked, and that

there’s a chance to gain significantly by longing/shorting this stock.

Catalysts – And certain key events in the next 6‐12 months will cause the market to “realize”

this pricing imperfection, resulting in a correction and the potential to make money. Key events

might be new product launches, acquisitions (as in the case of Mylan and Agila), earnings

announcements, competitors’ tactics changing, divestitures, positive clinical trial data (again,

important for Mylan but we have less insight into this), and financing activities such as share

repurchases and issuing debt or equity.

Valuation – For a long recommendation, you need to show that there’s a good chance that the

stock is undervalued in some way (e.g. right now it’s trading at $25, but there’s a reasonable

chance it’s worth $30‐$35) by showing your public comps, precedent transactions, and DCF

analyses; for short recommendations, you do the opposite and show why the stock is

overvalued.

Risk Factors and How to Mitigate Them – What are the main reasons why you might be wrong?

And yes, everyone is wrong sometimes. You have to lay out the top 2‐3 market and company‐

specific reasons why your investment thesis might be wrong, and then explain what you can do

to hedge against these risks… even if you’re wrong, could you at least limit your losses?

Here are a few tips and tricks on each section before we go into the actual stock pitch for Mylan:

Recommendation

The goal of every single stock or investment pitch is to convince the other person that your idea has an

asymmetric risk profile. In other words, by investing, they have a 75% chance of gaining 15% and only a


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25% chance of losing 15%... or whatever the actual numbers are. The “expected value” must be positive

for the pitch to be convincing.

The trick

is

that

you

don’t

want

to

be

super

‐specific

because

that

will

just

lead

to

questions

you

cannot

answer, such as, “So how do you know there’s exactly a 75% chance of gaining 15%?”

You can be (relatively) specific with the potential to gain or lose a certain percentage since that should

come from your valuation, but you don’t want to get into specific probabilities – it’s better to leave it as

“a significant chance” or “a greater than 50% chance” or something like that.

I recommend structuring the initial recommendation like this:

1. Long or short, current share price, percentage by which it’s overvalued or undervalued, and the

top 2‐3 reasons why the stock price will change in the next 6‐12 months.

2.

2‐3 potential

catalysts

that

will

result

in

the

stock

price

changing

in

the

next

6‐12

months

(see

the section below on catalysts).

3.

2‐3 investment risks (company‐specific and/or market‐specific) and how you might mitigate

those risks through other investments, protective options, etc.

You’ll see firsthand how to apply this structure when we get to the example pitch for Mylan.

Company Background

This is the easiest section of the entire stock pitch because you just list key financial stats about the

company (revenue, EBITDA, market cap, and current multiples) and a quick overview of what it does and

its key business segments.

Don’t just copy in the descriptions from the company’s filings or annual reports – you need to

summarize and focus on the most important points, while leaving out the corporate‐speak and

boilerplate language.

Investment Thesis

Here’s your template for this section:

“Currently, the market thinks of this company in X way, and as a result it trades at approximately $Y per

share. However,

I think

the

stock

is

priced

imperfectly

because

of

reasons

W

and

Z.

The

market

hasn’t

priced in these factors yet because of reasons A, B, and C.

As a result, I am making a [LONG/SHORT] recommendation on the company, with a target price of [$D –

$F] in the next 6‐12 months.


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These reasons are significant because [Explain how each of them directly ties into the company’s implied

valuation, ideally showing sensitivity tables or any other output from your analysis – your reasons must

be specific

to be effective].

Even if only one of these reasons ends up making an impact, there’s still significant upside potential in

the stock price because [And then point to any other analysis linking just one of these factors to the

implied share price].”

Catalysts

It’s more difficult to give a “template” for this section because it depends on the specific catalysts you’re

citing. But here are a few examples for what you might say in this part:

1. “Catalysts in the next 6‐12 months include… [Summarize them briefly in the beginning].”

2.

“Catalyst #1

is

significant

because

the

company

could

generate

an

additional

$X

in

revenue

from

it, which would result in additional EBITDA or earnings of $Y, boosting its share price by $Z if its

current valuation multiples remain the same.”

3. “Catalyst #2 is significant because the market has not yet priced in the implications of the

regulatory environment in [Country X], which will be a major source of growth for the company

going forward. If its recent acquisition there closes on schedule, in its first earnings call XX

months from now it will announce results and that could lead to a market correction.”

4.

“Catalyst #3 is significant because its competitor’s recent acquisition is in a high‐risk and

unproven area, which means that investors may flee the stock as the deal closes in the next 12

months and move into [Our Company] instead, pushing up its share price. Additionally, the

competitor has not yet offered detailed disclosures on the company it has acquired, which may

result in a continued sell‐off.”

You’ll see the exact catalysts we cite for Mylan in the example pitch below.

Valuation

This section mostly contains the output from your public comps, precedent transactions, and DCF

analysis for the company in question. In this case, of course, we don’t have public comps or M&A comps

for Mylan, so that’s something you’d have to do on your own, and something that we cover in detail in

the full courses on the site.

In addition to pasting in your output, however, you need to justify your assumptions and, ideally, show

a company’s valuation across different sets of assumptions to illustrate that you’ve thought about a

wide range of possible outcomes.

If, for example, you’ve only considered the case where the company grows by 10% per year in your DCF,

you’re going to have a very difficult time explaining how you know that will be the exact growth rate.


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It’s better to look at a range of possible growth rates, highlight the ones that seem more likely, but at

the same time also show that you’ve given thought to the downside cases as well.

With public

comps

and

precedent

transactions,

you’re

not

defending

your

assumptions

so

much

as

explaining why your selection criteria was correct and how these companies and M&A deals apply

directly to the company you’re pitching.

With Mylan, for example, if we had created a set of public comps and then added in health insurance

companies or pharmaceuticals companies that do not focus on generics, it would be very difficult to

justify the set.

Even in the current set used in the DCF to calculate WACC, adding in companies like Pfizer and Merck is

questionable (since they’re much bigger and more diversified), and you would get questions on this

decision

if

someone

dug

into

your

analysis.

Risk Factors and How to Mitigate Them

This is the most commonly overlooked or misinterpreted section of any stock pitch. Yes, the most

obvious risk for a long/short recommendation is that the stock price moves in the opposite direction…

but what causes that to happen?

To determine that, you have to go back to your investment thesis and catalysts and link the risk factors

directly to those points.

The key here is specificity. Whenever possible, you need to tie each risk factor to a specific dollar impact

on the company’s implied share price and indicate how you might protect against it, or at least reduce

your potential losses.

Here is the structure I recommend:

1. The Top 2‐3 Risk Factors – For Mylan, for example, key risk factors would be new products

failing to launch on time, the Agila acquisition not closing or not performing as well as planned,

the growth rates in emerging markets being lower than expected, and so on. You would then

attempt to estimate the implied per share impact from each of these (even a wide range is

better than nothing at all).

2.

How to

Mitigate

the

Risks

–

For

long/short

equity

strategies

and

stock

pitches,

you

mitigate

the

risks mostly via protective options (e.g. put options for long recommendations and call options

for short recommendations) and by longing or shorting other companies’ stocks that may move

in the opposite direction from the company you’re analyzing.

3. And Even in the Worst Case… – Let’s say that you’re really, really wrong. How much are the

company’s net assets worth if it goes bankrupt? Does it have any assets or divisions that it could

sell off in the case of extreme financial distress? For short recommendations, how will you limit


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your losses if you’re completely wrong and the company’s stock price skyrockets? Does your

valuation indicate that, even in the worst case, there’s a low probability of the company’s share

price falling below a certain number or rising above a certain number?

The Top 3 Most Common Mistakes in Your Stock Pitch Structure and How to Avoid Them

Here are the 3 most common mistakes we’ve seen with clients and students of our courses who are

researching and valuing companies (or other investments) for use in their own pitches:

1. Inability to Support Assumptions – Why are you assuming higher revenue growth or margins in

a certain year? What research or channel checks support that assumption? Why do you think

the company will grow at a higher‐than‐expected or lower‐than‐expected rate? If they get into a

detailed discussion and you can’t back up every number in your analysis, you’ll be in trouble.

2.

Poor

or

Non‐

Existent

Catalysts

–

If

your

catalysts

are

beyond

the

6‐

12

month

range,

that’s

too

far into the future for most hedge funds (remember, they are reporting performance to their LPs

very frequently). Also, if you list catalysts but you’re vague about the specific price per share

impact, or your catalysts are not company‐specific (e.g. “The economy will rebound due to new

fiscal policy!”) you’re also making a mistake.

3. Poor or Non‐Existent Risk Factors and Mitigants – The most common mistake is to leave these

risk factors out altogether, or to give risk factors that are too vague (e.g. “Emerging markets

growth will be slower than expected” – yes, but what dollar amount of potential losses does

that translate into for you?). Failing to give mitigants that are properly matched to the risks you

state is another common mistake in this section.

Return to Top.

How Do You Outline and Write a Stock Pitch?

Finally, what you’ve been waiting for.

Note that this is a lengthy pitch and is not something you would say in response to a simple interview

question unless they want to make the whole interview an extended discussion of a stock.

This is more of an outline that you would use to prepare for a formal presentation of a stock pitch or

case study in an interview.

Here’s the example stock pitch outline for Mylan, along with a few notes and comments in between:


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Investment Thesis

Currently, the market views Mylan as a fairly standard generics pharmaceuticals company in “the middle

of the range” of its peer companies in the industry. As a result, it also trades at valuation multiple

squarely in the middle of that range, and its multiples are close to those of Actavis, its closest peer

(excluding the impact of acquisitions).

However, the stock is priced imperfectly for the following reasons:

1. There is significantly more upside to the Agila acquisition than the market has priced in – as

demonstrated by channel checks we performed in emerging markets such as Brazil, which

comprises 27% of Agila’s revenue. Factoring in higher‐than‐projected growth rates, our analysis

implies a valuation of at least $31.00 – $32.00 per share vs. Mylan’s current price of $28.60.

2.

There is

significantly

less

downside

in

the

decline

of

its

specialty

segment

than

the

market

has

attributed to it. Even with more conservative estimates, the specific decline rate of this segment

only accounts for approximately $0.75 – $1.00 of Mylan’s implied per share value. In most

reasonable scenarios, a faster‐than‐expected decline rate would push down Mylan’s valuation

by at most $0.50 per share.

3. While some have expressed concern over growth in its core generics segment, even with lower

assumed growth rates over the next 5 years, there is still potential upside of at least 10% over

the next 12 months; furthermore, the launch of key new products such as Xeloda in the middle

of this year reduces the risk of lower‐than‐expected revenue growth.

Each of these reasons ties in directly to the company’s valuation and will make a substantial impact (in

the case of reasons #1 and #3 above), or will make far less of an impact than what the market currently

expects, even in a downside scenario (for reason #2).

Even if some of these reasons turn out to be incorrect, any one of the factors above represents a

significant difference from the current market view of the stock and could result in substantial upside.

If all of the factors above turn out to be incorrect, then Mylan is valued appropriately at its current stock

price and an investment would represent minimal downside risk, even if there’s no room for share price

appreciation.

Catalysts

Catalysts in the next 6‐12 months include:

The close of the recently announced $1.6 billion Agila acquisition (expected in Q4 FY 2013);

The company’s first earnings announcement post‐acquisition; and

The Xeloda launch in the middle of the year.


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Catalysts #1 and #2 are interrelated and are the most significant in terms of valuation. Specifically, the

acquisition of Agila may result in $450+ million in additional revenue in FY 2014 and over $120 million in

EBITDA, with revenue growing to over $900 million and EBITDA growing to $300+ million in FY 2017.

This makes a difference of over $7.00 per share in the base case assumptions in our DCF analysis

(discount rate of 6.8%, terminal FCF growth rate of 1.0%, and generics revenue growth at 7% initially,

falling to 4% by FY 2017):

WITHOUT Agila, Mylan’s implied share price is in the $20.00 ‐ $30.00 range:

Its implied share price is exactly $24.35 without the acquisition, but it jumps to $31.00+ per share with

the acquisition included in future years (the highlighted area below demonstrates more of the

“downside case” – 30‐35%+ revenue growth is likely based on our channel checks):

As shown in the table, even if Agila’s revenue declines at faster‐than‐expected rates (the bottom several

rows), there is still upside and a $30.00+ per share price is plausible with the Agila contribution.

Consensus estimates currently peg Agila’s revenue growth at 25% in FY 2014, falling to 10% by FY 2017,

but we have assumed a premium to these numbers because of the following factors:

Via channel

checks,

we

spoke

with

several

healthcare

professionals

in

emerging

markets

and

they all agreed that Agila’s market position in Brazil (which currently represents 27% of its

revenue) is highly desirable and very difficult to replicate given government regulations there

and the requirement to manufacture locally. Effectively, it has close to a monopoly in this fast‐

growing market and will maintain that for the next several years.

Mylan, Inc. ‐ Net Present Value Sensitivity ‐ Terminal Growth Rates

Discount Rate

24.35$ 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0%

2.5% 72.63$ 57.89$ 47.36$ 39.46$ 33.32$ 28.40$ 24.37$ 21.02$ 18.18$

2.0% 59.26 48.52 40.47 34.20 29.18 25.08 21.66 18.76 16.25

1.5% 49.70

41.49

35.10

29.99

25.80

22.31

19.36

16.81

14.56

1.0% 42.54 36.02 30.81 26.54 22.98 19.97 17.39 15.09 13.09

0.5% 36.97 31.65 27.30 23.67 20.60 17.96 15.64 13.59 11.79

0.0% 32.51 28.07 24.37 21.24 18.55 16.19 14.11 12.27 10.63 T e r m i n a l G

r o w t h

R a t e

Mylan, Inc. ‐ Net Present Value Sensitivity ‐ Initial Agila Revenue Growth vs. Decline in Revenue Growth Rates in Subsequent Years

Initial Agila Revenue Growth

31.41$ 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0% 55.0%

(1.0%) 27.96$ 28.85$ 29.90$ 31.13$ 32.56$ 34.22$ 36.13$ 38.33$ 40.83$

(1.8%) 27.73

28.57

29.57

30.75

32.12

33.71

35.54

37.64

40.05

(2.5%) 27.50 28.31 29.26 30.38 31.69 33.21 34.97 36.99 39.30

(3.3%) 27.29 28.05 28.96 30.03 31.28 32.73 34.41 36.35 38.57

(4.0%) 27.09 27.81 28.67 29.69 30.88 32.27 33.88 35.74 37.87

(4.8%) 26.89 27.58 28.40 29.37 30.50 31.83 33.37 35.15 37.20 A g i l a

‐ A n n u a

l

D e c l i n e i n

R e v e n u e G r o w

t h

R a t e


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Furthermore, several customers in Brazil mentioned that they expect demand for injectables will

be higher than expected and that the growth rate in Brazil will be even higher than overall

injectables

growth

in

emerging

markets

as

a

whole.

As a result, we believe that 35%+ growth initially followed by a slower‐than‐expected decline is

reasonable, which in turn will boost Mylan’s share price once the market gains knowledge of this and

prices it in appropriately.

The second catalyst, the company’s first earnings announcement post‐acquisition, is significant because

this event may make the market realize the pricing imperfection in Mylan’s stock once the company

provides higher‐than‐expected guidance for FY 2014 as a result of the acquisition.

It is possible that the acquisition may not close, or may not be approved by government authorities, or

may

not

work

as

well

as

expected,

but

we

address

these

risks

below

in

the

section

on

Investment

Risks.

Finally, catalyst #3, the launch of the Xeloda brand, is significant because it is a $700+ million brand with

the potential to boost Mylan’s total over revenue over the next 5 years by anywhere between 2% and

5% depending on the revenue contribution each year.

This sensitivity table shows the impact of Mylan’s generics segment revenue growth and its overall

operating margin over the next 5 years on its implied share price:

While this table does not directly show the impact of cumulative revenue and revenue growth over 5

years, you can see the impact of even a 1% change in initial revenue growth in FY 2013: approximately

1% in extra revenue growth translates into around $1.25 in extra per share value.

With Xeloda and other new products, we believe at least 6‐7% revenue growth, falling by 0.5%‐1.0% per

year, is reasonable, which would imply valuations of at least $29.00 ‐ $30.00 per share, and potentially

over $32.00 per share.

All of the above represent catalysts that could boost Mylan’s share price to our targeted range of $32.00

‐ $34.00 per share in the next 12 months; if they all come true and work as expected, the price may be

near the upper end of that range, and if one or more is false, there is still potential upside in the stock

but it would be reduced to the lower end of that range, or slightly below it.

Mylan, Inc. ‐ Net Present Value Sensitivity ‐ Generics Revenue Growth vs. Operating Margin (Excl. Acquisition)

Initial Generics Revenue Growth (Annual change of (0.8%))

31.41$ 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 11.0%

17.5% 28.39$

29.61$

30.88$

32.20$

33.56$

34.98$

36.44$

37.96$

39.53$

17.0% 27.48 28.66 29.89 31.17 32.49 33.86 35.28 36.75 38.27

16.5% 26.57 27.71 28.90 30.13 31.41 32.74 34.11 35.54 37.01

16.0% 25.66 26.76 27.91 29.10 30.34 31.62 32.95 34.32 35.75

15.5% 24.74 25.81 26.92 28.07 29.27 30.50 31.78 33.11 34.49

15.0% 23.83 24.86 25.93 27.04 28.19 29.38 30.62 31.90 33.23

M y l a n , I n c .

S t a n d a l o n e

O p e r a t i n g M a r g i n


13/18



Valuation

We have valued Mylan using public comps, precedent transactions, and the DCF analysis.

To select comparable public companies and precedent transactions, we have used the following criteria:

[You would explain the criteria here in a real stock pitch – this selection process and the calculations

you need to make are covered in the full courses on the site].

Here are the implied valuation ranges from these methodologies: [You would display the ranges from

this analysis in a real stock pitch and explain what the valuation ranges tell you about the company –

might it be undervalued? Overvalued? Valued appropriately? These charts and discussions are

covered in the full courses on the site.]

The discounted cash flow analysis uses the following “base case” assumptions:

Initial Generics Segment revenue growth of 7.0%, declining by 0.8% per year (based on Mylan’s

product pipeline, expected launch dates, and consensus estimates, which we have seen no

reason to deviate from)

Initial Specialty Segment revenue growth of 10.0%, which then reverses into a 20.0% annual

decline each year starting in the second year – most analysts project this segment to grow for 2

years before declining, but we are being extra conservative with the base assumptions here

Operating Margin of 16.5% and Tax Rate of 35.0%, in‐line with historical levels

$1.6 billion in debt raised for the Agila acquisition in FY 2013, with a $125 million cash earnout in

FY 2014; Agila’s revenue grows from $454 million in FY 2014 to $908 million in FY 2017, with

Operating Income

rising

from

$121

million

to

$283

million

–

these

numbers

exceed

consensus

estimates due to our channel checks and additional research

6.8% discount rate (based on public comps and WACC), 1.0% terminal FCF growth rate, and

standard discount periods

Here’s the DCF down to the NOPAT line so that you can see the revenue and operating income

contributions from different segments and the Agila acquisition:


14/18



Here are the most relevant sensitivity tables based on key variables in this analysis, such as the discount

rate, terminal

growth

rate,

and

revenue

growth

and

margins:

Key Takeaways: The analysis is highly sensitive to both of these assumptions – however, these terminal

growth

rates

are

also

quite

conservative

and

even

in

the

case

of

0.0%

or

0.5%

growth,

the

company

would only be valued at slightly less than its current stock price. The bigger question is the discount rate

– is 7.0% (or 6.8% more precisely) appropriate? That may require some additional research.

Here’s another table for the initial revenue growth in Mylan’s generics segment (with the revenue

growth rate falling by 0.75% each year, i.e. the second year would be 6.3%), along with the company’s

overall operating margin:

Mylan, Inc.‐ Free Cash Flow Projections

Historical Projected

Fiscal Year Ends December 31, 2010 2011 2012 2013 2014 2015 2016 2017

Generics & Other Revenue: 5,028$ 5,583$ 5,996$ 6,416$ 6,817$ 7,192$ 7,533$ 7,835$

Generics Revenue Growth Rate: N/A 11.0% 7.4% 7.0% 6.3% 5.5% 4.8% 4.0%

Specialty (EpiPen) Revenue: 423 547 800 880 704 563 451 360

Specialty

Revenue

Growth

Rate: N/A 29.3% 46.3% 10.0% (20.0%) (20.0%) (20.0%) (20.0%)

Total Revenue: 5,451$ 6,130$ 6,796$ 7,296$ 7,521$ 7,755$ 7,984$ 8,195$

Overall

Revenue

Growth

Rate: N/A 12.4% 10.9% 7.4% 3.1% 3.1% 3.0% 2.6%

Operating Income: 722 1,005 1,109 1,204 1,241 1,280 1,317 1,352

Operating Margin: 13.2% 16.4% 16.3% 16.5% 16.5% 16.5% 16.5% 16.5%

Less: Taxes, Excluding Effect of Interest: (421) (434) (448) (461) (473)

Net Operating Profit After Tax (NOPAT): 782 807 832 856 879

Contribution from

Agila:

Revenue: 70 129 193 255 344 454 586 739 908

Revenue Growth Rate: 84.3% 49.6% 32.1% 35.0% 32.0% 29.0% 26.0% 23.0%

Operating Income: 32 49 66 91 121 169 223 283

Operating Margin: 24.7% 25.4% 25.9% 26.3% 26.6% 28.8% 30.2% 31.2%

NOPAT: 68 91 126 168 212

Tax Rate: 25.0% 25.0% 25.0% 25.0% 25.0%

Combined Company Revenue: 7,296 7,975 8,341 8,722 9,103

Combined Company Operating Income: 1,204 1,362 1,448 1,541 1,635

Combined Company NOPAT: 782 897 958 1,024 1,091

Mylan, Inc. ‐ Net Present Value Sensitivity ‐ Terminal Growth Rates

Discount Rate

31.41$ 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0%

2.5% 89.51$ 71.77$ 59.10$ 49.60$ 42.21$ 36.30$ 31.47$ 27.44$ 24.03$

2.0% 73.40 60.48 50.80 43.26 37.24 32.31 28.20 24.72 21.74

1.5% 61.90 52.02 44.34 38.19 33.16 28.97 25.43 22.39 19.76

1.0% 53.27 45.43 39.17 34.04 29.77 26.16 23.06 20.37 18.03

0.5% 46.56 40.17 34.94 30.58 26.90 23.74 21.00 18.61 16.47

0.0% 41.19 35.86 31.41 27.66 24.44 21.64 19.20 17.04 15.08 T e r m i n a l G r o w t h

R a t e


15/18



Key Takeaways: If you look at the highlighted area, you’ll see that even in downside scenarios, the

valuation implies, at worst, approximately a 15% discount to Mylan’s current share price, and each 0.5%

in margin contributes about $1.00 per share, with each additional 1.0% of revenue growth adding $1.25.

The more optimistic scenarios and implied values over $35.00 per share are less likely, but from this

table it certainly seems like the potential upside exceeds the potential downside.

We have already shown the tables for the Specialty Segment revenue growth vs. decline rates and the

analysis of Agila’s initial revenue growth and decline rate in the Catalyst section; the key takeaways are

that the Specialty decline rate is almost irrelevant, and that additional upside from Agila contributes

substantially to implied valuation, at around $1.25+ per share for each 5% of initial Year 1 revenue

growth.

Based on our research and channel checks, we believe there is a high likelihood that actual revenue

growth will meet or exceed these numbers due to Agila’s favorable geographical split and strong

competitive advantage in emerging markets.

Investment Risks

The top risk factors include:

1) The Agila acquisition failing to close;

2) Integration being more challenging than expected (resulting in lower revenue growth and/or

margins); and

3)

The company’s new product launches for the coming year, such as Xeloda, generating lower‐

than‐expected revenue.

We’ll

address

each

of

those

risk

factors

in

turn

and

explain

how

to

mitigate

them:

Agila Acquisition Fails to Close

If the Agila acquisition does not close or is held up by regulatory approval or by other factors, the

company might be worth closer to the $25.00 – $30.00 per share range (see the tables in the Catalysts

section above).

Mylan, Inc. ‐ Net Present Value Sensitivity ‐ Generics Revenue Growth vs. Operating Margin (Excl. Acquisition)

Initial Generics Revenue Growth (Annual change of (0.8%))

31.41$ 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 11.0%

17.5% 28.39$ 29.61$ 30.88$ 32.20$ 33.56$ 34.98$ 36.44$ 37.96$ 39.53$

17.0% 27.48 28.66 29.89 31.17 32.49 33.86 35.28 36.75 38.27

16.5% 26.57 27.71 28.90 30.13 31.41 32.74 34.11 35.54 37.01

16.0% 25.66 26.76 27.91 29.10 30.34 31.62 32.95 34.32 35.75

15.5% 24.74 25.81 26.92 28.07 29.27 30.50 31.78 33.11 34.49

15.0% 23.83 24.86 25.93 27.04 28.19 29.38 30.62 31.90 33.23

M y l a n , I n c .

S t a n d a l o n e

O p e r a t i n g M a r g

i n


16/18



While that is not dramatically different from its current price of $28.60, there is a chance that the

market may overreact and send the stock price down, or that the stock price could fall as the company

guides to lower revenue and EPS in FY 2014 as a result of the delay.

To hedge against this risk, we could buy protective put options on Mylan’s stock at a strike price of

$27.17 (or something close to that) to limit our losses to 5%; this is not an investment with massive

upside, so we don’t see a reason to accept greater than 5% losses if the potential gain is only 10‐15%.

Integration is More Challenging than Expected / Emerging Markets Grow More Slowly

As shown in the tables above, this investment thesis is heavily dependent on growth in emerging

markets exceeding estimates and the Agila acquisition making a substantial contribution to revenue and

operating income from FY 2014 through FY 2017.

If that

does

not

happen,

the

company’s

implied

per

share

value

would

be

closer

to

$25.00

–

$30.00

per

share in the case where initial revenue growth from Agila is between 15% and 30% and the annual

revenue growth decline rate is 3.0% – 5.0% rather than the 3.0% we’ve assumed in the base case.

That doesn’t represent a massive potential loss, but we could hedge against this outcome by longing a

competitor with less exposure to emerging markets, such as Actavis, or even a much larger

pharmaceuticals company with a more diversified pipeline, such as Pfizer or Merck.

New Product Launches (Xeloda) Generating Lower‐than‐Expected Revenue

As shown above, the analysis here is dependent on solid revenue growth in Mylan’s generics segment

going into FY 2013 and beyond – if the initial revenue growth is in the 3.0% – 6.0% range rather than the

7.0% in our base case, and the operating margin falls from 16.5% to closer to 15.0%, the company’s

implied value per share falls to the $23.00 – $27.00 range.

This is a sizable discount to the company’s current $28.60 share price, so we could hedge against this

risk via protective put options (purchased at $26.00 – $27.00 strike prices), or by longing the stock of a

competitor that is focused on other segments of the pharmaceuticals market, or one that offers

products in the same segment (oral cancer drugs) but with more competitive pricing or other benefits.

This would require additional research on the market and peer companies to execute properly.

The Worst Case Scenario

Another risk is that we could be wrong about everything outlined above, from the revenue growth rates

and margins to the acquisition, new product launches, and more.


17/18



A true “worst case scenario” might result in an implied share price of between $15.00 and $20.00 if you

assume dramatically lower revenue growth, lower margins, a significantly higher discount rate, and a

terminal FCF growth rate of less than 1.0%.

Assets minus Liabilities on Mylan’s Balance Sheet is currently $3.4 billion, which equates to a stock price

of $8.60.

If you subtract out Intangible Assets and Goodwill, however, the picture is not as favorable since

Tangible Assets minus Liabilities is actually a negative number – as is often the case for pharmaceutical

firms with IP‐heavy portfolios.

So there is not much “Balance Sheet protection,” but we could protect against these extreme downside

scenarios via protective put options, longing the stock of peer companies such as Actavis, or investing in

another

company

in

the

sector

with

a

different

geographical

and/or

product

focus.

Additionally, there is another way to hedge against this extreme downside with Mylan: since it has

acquired so many companies in recent years, it could sell off any divisions that have not already been

fully integrated, or even ones that have been more fully integrated (and accept a discount to market

value for them).

We would need to conduct additional research and do more valuation work on what these divisions

might be worth, but the company has spent nearly $1 billion on these deals in the past several years –

on the surface, that is also a low per‐share value, but potentially they could be sold for significantly

more than that $1 billion depending on how market values have changed over time.

Return to Top.


18/18


http://www mergersandinquisitions com

What Next?

Now that you’ve completed this case study, looked at the DCF analyses for both companies, and read

this stock

pitch

above,

what’s

next?

What can you do to master these concepts and get more practice with all of this?

Here’s what I recommend:

1. Flesh Out the Missing Pieces Here – For example, do your own channel checks and your own

industry research and see if you can confirm / deny some of these assumptions, or at least make

your own arguments for or against what we’ve laid out above.

2. Learn How to Complete the Rest of the Valuation – This is covered in the Fundamentals,

Advanced, and BIWS Premium courses on the site, as well as in the industry‐specific courses. I

recommend clicking

here

and

signing

up

for

the

Premium

course

to

start

with,

so

you

can

see

the additional calculations that go into the DCF analysis, learn the more advanced additions, and

learn how to select and run the numbers for public comps and precedent transactions.

3. Practice with Your Own Company – Use what you’ve learned here to generate your own

investment ideas and stock pitches, in any industry you’re interested in. The same structure

always applies, but the model inputs, research, and valuation will be different. You could pick

Actavis and do a deep‐dive on them, or you could pick any other company or industry you’re

interested in and repeat what we’ve done above.

4. Use These Skills to Win Offers / Advance on the Job – The ability to research, pitch, and support

your investment ideas is critical in any field of finance, whether you’re interviewing for roles as a

recent graduate or you’re on the job and you’re using these ideas to convince your PM that

you’re correct and that he should listen to your ideas. And, of course, being able to present a

polished case study and write‐up like this will give you a massive advantage over everyone else

in interviews, and on the job.

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