Mylan Inc (MYL) - Henry B. Tippie College of Business

The Henry Fund
Henry B. Tippie School of Management
Qi Cui [[email protected]]
October 20, 2014
Mylan Inc (MYL)
Investment Thesis
Mylan is another leading generic drug maker with a global presence. The
stock has 30% uptick in the last TTM. Our rating for Mylan is No Action.
Drivers of Thesis
 Mylan has the largest generic pipeline compared with other competitors.
A high value pipeline like generic Copaxone and injectable generics makes
the stock appealing. The pipeline is obtained through acquisitions,
partnership, and R&D.
 The generic utilization rates in some of Mylan’s key markets are still
underserved. The increasing spending trend towards generic drugs proves
to be a plus point. Mylan’s manufacture scale would also provide more
cost advantages.
 According to IMS health, emerging countries enjoy a faster generic drug
spending growth rate. Mylan’s continued expansion in emerging markets
has proved to be beneficial.
 The increase in both overall populations and aging demographics is
another driver for Mylan.
Risks to Thesis
 The tax inversion deal and the acquisition of Abbott’s non-U.S. developed
markets’ specialty and branded generics business remains uncertain due
to the newly proposed tax regulation. The current higher street target
price reflects some analyst’s opinions that the deal will continue. We did
not forecast the deal in the model.
 Concerns on higher debt/ EBITDA ratio and less impressive EBIT margins
make us have second thoughts on replacing Teva with Mylan.
 On average, 15% of Mylan’s revenue is from Cardinal Health, which
formed the largest generic sourcing JV with CVS in early 2014. The
increasing buyer power puts pricing pressure on Mylan.
Target Price
Henry Fund DCF
Henry Fund DDM
Relative Multiple
Price Data1
Current Price
52wk Range
Consensus 1yr Target
Key Statistics1,2,21
Market Cap (B)
Shares Outstanding (M)
Institutional Ownership
Five Year Beta
Dividend Yield
Long-term Growth
Price/Earnings (TTM)
Price/Earnings (FY1)
Price/Sales (TTM)
Price/Book (mrq)
Profitability1
Operating Margin
Profit Margin
Return on Assets (TTM)
Return on Equity (TTM)
Mylan
2012
$1.52
24.59%
2013
$1.58
3.95%
2014E
$2.05
29.88%
2015E
$2.47
20.34%
2016E
$2.63
6.55%
12 Month Performance
Mylan
$50.31
$36.97 – 57.52
$59.71
$18.50
374.00
90.00%
1.205
0.00%
12.60%
33.67
14.97
2.56
5.47
18.50%
12.30%
4.20%
18.50%
XLV
XPH
30
29.0
24.1
21.0
10
Earnings Estimates
2011
$1.22
79.41%
$54.34
$54.34
$36.29
$34.54
40
20
Year
EPS
Growth
No Action
Stock Rating
Health Care – Generic Pharmaceutical Manufacturers
0
P/E
Company Description
S&P 500
Mylan is one of the world’s leading generics and
specialty pharmaceutical companies with about
4
1,300 products sold in 140 countries. It has
more than 35 manufacturing facilities around the
world and one of the world’s largest active
pharmaceutical ingredient (“API”) operations.
Mylan’s major operations are in the United
States, Europe, India, Australia, and Japan. Mylan
is headquartered in Canonsburg, PA
35%
25%
15%
5%
-5%
O
N
D
J
F
M
A
M
J
J
A
S
Important disclosures appear on the last page of this report.
EXECUTIVE SUMMARY
Mylan is one of the leading generic drug makers. The
global increase in both overall populations and aging
demographics, continued generic drug spending trend,
especially in emerging markets, the continued patent cliff,
and biosimilar opportunities prove to be beneficial for
the industry and Mylan. Mylan’s aggressive efforts to
broaden its pipeline, especially high value pipelines, are
the key catalysts for its growth in the future. The recent
partnership with Gilead Science in producing Hepatitis C
treatments in developing countries and the acquisition of
the injectable generic leader Agila are great examples.
Mylan’s effort in developing complex generics such as
Copoxone and Advair will pay off in the long run.
Despite the above investment positives, the following
risks and uncertainties make us put a “No Action” rating
instead of a “Buy” rating on Mylan. One main concern for
Mylan is the uncertainty in the tax inversion deal, the
acquisition of Abbott’s non-U.S. developed markets
specialty, and the branded generics business. The deal is
expected to be closed in Q1 2015 and is expected to be
immediately accretive with EPS accretion $0.25 in Year 1
and continue to increase to 2018. The effective tax rate is
expected to lower from 25% to 21% in first year and to
the high teens thereafter. But the newly proposed tax
regulations aimed to curb this kind of tax inversion make
the deal uncertain. The street’s current target price
reflects some analysts’ opinions that the deal will
continue but we would rather remain cautious
considering the potential risk. We did not forecast the
deal in our model. Mylan’s history of aggressive debtfinanced acquisitions and the much higher debt/ EBITDA
ratio make it a higher risk profile than our current holding,
Teva. The increasing buyer pressure from joint ventures
by CVS and Cardinal Health will negatively affect Mylan,
considering an average 15% of Mylan’s revenue in the
past three years is from Cardinal Health. Based on our
analysis and financial models, we believe the fair value
for Mylan to be $54.34.
2013 Product Sales
15%
Generic
Specialty
85%
Source: 2013 Mylan Annual Report
3
Generic Medicines
The generic drug business is Mylan’a core business and
with the global spending trend towards generic it will
provide continued growth for Mylan in the future. Also,
the latest acquisition of Agila, global leader in generic
injectables, will further expand Mylan’s portfolios.
Mylan’s generic business is conducted primarily in the U.S.
and Canada (collectively, “North America”); Europe, the
Middle East, and Africa (collectively, “EMEA”); and India,
Australia, Japan, New Zealand, and Brazil (collectively,
“Rest of World”).3 The breakdown of generic geographical
sales is listed below:
2013 Mylan Generic
Geographical Sales
North America
24%
Europe, Middle
East, Africa
51%
24%
Rest of the World
Source: 2013 Mylan Annual Report
3
North America:
COMPANY DESCRIPTION
Mylan is one of the world’s leading generics and specialty
pharmaceutical companies with about 1,300 products
sold in 140 countries.4 It has more than 35 manufacturing
facilities around the world and one of the world’s largest
active pharmaceutical ingredient (“API”) operations.3 The
CAGR for the total revenue in the last three years is 7%,
and in 2013 the generic sales took up 85% of the total
revenues.
The US has the largest generics market in the world and
Mylan is one of the top 3 players. Approximately one in
every 12 prescriptions dispensed in the U.S. is a Mylan
product.3
Page 2
of available pipeline (which will be explained more in
Recent Development and Catalysts for Growth).
2013 US Market Share
10.0%
CAGR
9.6%
Industry 6.8%
Mylan
9.4%
13
Source: IBIS Industry Report
Teva
Actavis
8.4%
Last 5 years
Next 5 years
4.8%
5.5%
Mylan
Europe and Rest of the World:
Others
Source: IBIS Industry Report
13
Compared with other competitors, Mylan has more
pipelines in development. The following table illustrates
the number of ANDAs (Abbreviated New Drug Application,
used for generic drug application) pending FDA approval
and the number of first-to-file Paragraph IV ANDAs (firstto-file generics enjoy a 180-day market exclusivity and
therefore enjoy a higher margin than ordinary generics).
We also include annual sales for the brand name
equivalents of these products for the year ending
December 31, 2013 as indicators of future potential value
of a launch. Generally speaking, the generic drug is
expected to take 80% of branded drug market share at 20%
of its price. In reality, the market value of generic drugs is
varied case by case due to the impact of competitors,
timing to market, etc. So far, Mylan trumps others in the
total number of pipelines, but there is still effort to be
made in the relatively higher margin first-to-file ANDAs
compared with Teva.
Co.
Teva
Actavis
Mylan
Total ANDAs
133/ $81 Billion
195/NA
324/$94 Billion
Source: 2013 Mylan Investor Day
First-to File ANDAs
53/ $40 Billion
NA/NA
41/ $24.1 Billion
Source: 2013 Mylan, Teva, Actavis Annual Report
European market is the second largest generic
pharmaceutical market in the world in terms of value and
Mylan has held leadership position in several markets
including France, Italy etc.3 The generic penetration rate
varies differently and markets including France, Italy and
Spain are characterized by lower generic penetration rate
(less than 39% compared with US 77%). With
government’s efforts to control health care spending, we
believe the future growth in EMEA is expected to be
driven by increased generic utilization and penetration
rate. The following graph illustrates the generic
conversion rate (conversion from branded drug to its
generic competitors) in Mylan’s major markets.
5
While the sales volume has been increasing, we noticed
the total sales revenue in EMEA has remained relatively
flat in the last 3 years due to the pricing pressure by the
local governments and the stronger dollar position.
Therefore, we remain cautious about the future revenue
growth and our CAGR for the next 5 years is 1.5%.
3
The patent cliff plus the spending trend towards generics
have greatly boosted US generic sales. The average CAGR
in the last 5 years is 6.8%13. However, while the patent
cliff still continues, the number of expired branded drug
becomes fewer and fewer in the next 5 years, and this
trend will negatively impact the growth rate. The
estimated US generic drug CAGR is 4.8% for the next 5
years. We estimate a higher than industry average—5.5%
CAGR for Mylan for the next 5 years, considering Mylan’s
leading position in the US market and the large number
For the rest of the world, it mainly includes sales to India,
Australia, Japan, New Zealand and Brazil. As we noted
from the table above, the generic conversion rates in
Japan and Australia are still relatively low and there is
continued growth potential. According to IMS health,
India and Brazil are one of the emerging countries that
will enjoy a lower double digit growth (around 12%) in
generic spending from 2012 to 2017.8 In our forecast
model, we remain cautiously positive and the CAGR for
the next 5 years is 11.4%. Our belief in the revenue
growth in ROW area is also back up by the recent of
Page 3
partnerships and acquisitions, which we will explain more
in the Recent Development section.
Specialty Medicines
Mylan’s specialty business is mainly focused on
respiratory and allergy therapies. In particular, about 85%
of the specialty sales revenue in 2013 is from the EpiPen
auto-injector. EpiPen is mainly used in the treatment of
severe allergic reactions, and it is currently the number
one dispensed epinephrine auto-injector. (Epinephrine is
the first-line-treatment for severe allergic reactions
according to the guidelines established by the National
Institute of Allergy and Infectious Diseases in 20103).
billion.11 The US injectable generic market is projected to
grow at approximately 10% per year, a level that
outpaces growth in orals and other generic categories.11
Agila helps Mylan get into the Brazil market and further
diversifies its current pipeline. Approximately 125
injectable products are anticipated to launch globally in
2014, which will double the injectable revenue to
approximately $600 million.5 In our model, about $170
million revenue increase was forecast in the US in 2014
and about $130 million was forecast in the rest of the
world in 2014.
Continued Global expansion
EpiPen has been on the market for about 20 years and
enjoys over 90% of market share.9 Its longstanding good
reputation and the increasing market size has led to
continue sales increase in EpiPen. In fact, the increase in
the specialty sales revenue is mainly driven by the
increase in the sales revenue of EpiPen in the last 3 years.
We expect this trend will continue in 2014 with 17%
growth rate. However, we are concerned about the
continued high sales growth rate of potential generic
competitors. According to the settlement between Teva
and Mylan, Teva may begin marketing its version of the
injector on June 22, 2015, or earlier under certain
circumstances, provided that Teva obtains US Food and
Drug Administration (FDA) approval.10 Traditionally, with
a branded-generics exchange, there is about 80% sales
revenue drop in the branded drugs. But we do not expect
this to happen here as EpiPen treats a severe, potentially
life-threatening medical condition. The fear of caregivers
using a less expensive generic alternative and having that
resulting in a fatal outcome should not be
underestimated.14 Because of this, we forecast a sales
revenue decrease around 15% in 2015 and 2016. The
company is planning to launch a new specialty product in
the second half of 2016. This will offset part of sales lost
from EpiPen. Overall, our forecast for specialty drugs
CAGR in the next 5 years is -1%.
Mylan has been seeking ways to capitalize on the growing
global needs and increase their market weights in other
global markets. Besides newly entering into Brazil’s
market, Mylan recently reinforced its market presence in
Japan by partnering with Pfizer. The new venture enjoys a
greater generic portfolio and a combined marketing and
sales effort. Currently, Japan is the seventh largest
generic prescription market worldwide by value, and the
Japanese government has stated that it intends to grow
the generic utilization rate to 60% by the end of March
2018, from approximately 47% at the end of December
2013.3 We believe this will drive continued sales revenue
growth for Mylan in the Asia-Pacific region.
RECENT DEVELOPMENTS
Mylan’s purposes through this acquisition are multifold:
to broaden its generic and specialty pipeline, to continue
increasing its global market share, and most importantly,
to further cut down its effective tax rate. Specifically,
Mylan would merge itself with the acquired unit and shift
its headquarters to the Netherlands.15 In this way, Mylan
will not be subject to the US corporate tax rate, and the
effective tax rate expected to lower from 25% to 21% in
the first year and to the high teens thereafter15 Tax
inversions could bring more after-tax profit and cash flow
Successful Acquisitions of Agila
Mylan acquired Agila, a high quality global injectables
leader, in December 2013. This acquisition allows Mylan
entrée into the attractive injectable generic market and
further integrates its generic manufacturer platform. The
global injectable generic market is estimated at $12
billion, with the US accounting for approximately $7.6
Uncertain Acquisition of Abbott
On July 13, 2014, Mylan entered into an agreement with
Abbott Laboratories to acquire Abbott’s non-U.S.
developed markets specialty and branded generics
business in an all-stock transaction.12 Upon closing,
Abbott will receive 105 million shares of the combined
company, worth approximately $5.3 billion based on
Mylan's closing price of $50.20 on Friday, July 11, 2014,
representing an approximately 21% ownership stake.16
The transaction is expected to close in the first quarter of
2015.12
Page 4
for a company; an increasing number of companies have
either completed or on their way to complete similar
transactions. Such a trend has caused concerns to the U.S.
Treasury Department and new rules were proposed in
later September to curb the corporate inversions in which
US companies move their headquarters without actually
moving the operations. Should regulators pass the rule, it
could halt the pending inversion deal between Abbott
and Mylan, as the new rule will be applicable to
companies who will invert from September 22 onwards.15
So far, tax experts have debated how this new rule could
affect Mylan, and Mylan still remains silent on this newly
proposed rule. While this transaction could also bring a
diversified pipeline, and it is expected to provide
approximately $1.9 billion in additional annual revenues
or an additional $600 million annual EBITDA16, the
uncertainty on the tax effect could make the deal less
attractive than before. Whether Mylan could drop this
deal and go after other acquisition targets is still
unknown. The street analysts also did not reach a
consensus here, with some taking the additional
revenues into consideration and some do not.
In our forecast model, we did not take this acquisition
deal into consideration, as there is too much uncertainty.
We did not forecast any revenue from the Abbott deal.
For the effective tax we took the average of the effective
tax from the last three years. We will keep following up
this topic and update our model accordingly.
INDUSTRY TRENDS
The industry is mainly driven by the following factors:
Increase spending trend towards generics
The continuing increase in expenditures for healthcare
has forced most governments and private insurance
companies in the world to seek ways to reduce or contain
healthcare costs. And the pressure creates an increasing
demand for generic drugs versus their branded
counterparts. The global generic drugs market was valued
at nearly $260 billion in 2012 and is estimated at nearly
$432 billion for 2017,8 registering a five-year compound
annual growth rate of 11% from 2012 to 2017. The
following graph illustrates the increase generic spending
trend in different markets in the world.
Source: IMS Health
8
As we have discussed before, the generic conversion
rates in some of the Mylan’s major markets are still
relatively low and the governments intend to further
increase the rate. While the pricing pressure has also led
to an even tighter margin for generic drug makers, we
believe the overall volume increase would trump this
negative impact. Mylan would enjoy another advantage
compared with its competitors, considering its
manufacturing scale and a larger facilities presence in
low-cost areas like India.
Continued Patent Cliff
The patent cliff is expected to continue to 2018.13 While
the patent expirations have benefited the generic drug
industry revenue, they have also induced brand-name
manufacturers to cut costs, including R&D spending.13
This will in turn decrease the total number of new
pharmaceutical products in the market, which will
threaten the long-term growth for generic drug makers.
In response, the generic drug makers have been actively
developing new products like biosimilars and further
expand to emerging markets.
Biosimilars
Biologics are currently the star products in the
pharmaceutical industry due to their high value added
quality. Compared with chemical drugs, biologics drugs
are developed from living things such as antibodies.13
Biosimilars are generic forms of biologic drugs. The
Affordable Care Act also has established a clear
regulatory framework for biosimilars. The biosimilar
market is expected to further expand, considering a
number of major biological drugs, such as Humira,
Neulasta, and Lantus, which are scheduled to lose patent
protection by 2019.13 Mylan’s first biosimilar product is
Page 5
intended for breast cancer and was launched in India in
October 2013. Four other biosimilars are in development.
Increasing Buyer Power
The recent consolidation trend of drug wholesalers could
increase buyer power and put price pressures on
companies like Mylan. In particular, sales to Cardinal
Health represented approximately 15% of 2013 revenue.
We noticed CVS formed a 10-year join venture with
Cardinal in July 2014, making them the largest generic
sourcing business in the US. The joint venture will provide
more negotiation leverage to buyers, and Mylan will be
negatively impacted by this trend.
Mylan management’s appetites for debt-financed
acquisitions have led to a much higher total debt/ EBITDA
ratio than Teva. This may suggest that Mylan’s ability to
continue to pursue big transactions in the future would
be limited, or the company has to try the equity finance
method, which has been proven by the recent Abbott
non-US asset acquisition. Mylan proposed an all-stocktransaction for this acquisition. (Abbott will receive 105
million shares of the combined company, worth
approximately $5.3 billion, based on Mylan's closing price
of $50.20 on Friday, July 11, 201416).
Relative Operating Comparison
EBIT
MARKETS AND COMPETITION
Mylan is the world’s leading generic drug maker, but it
also competes in the branded drug industry. For better
comparison, we choose three major generic players (Teva,
Actavis, and Abbott Laboratories) and three major
branded drug players (Eli Lilly, Merck, and Pfizer) as our
targeted peer companies.
Relative Valuation Comparison
Ticker
MYL-US
Average
TEVA-IL
ACT-US
ABT-US
LLY-US
MRK-US
PFE-US
Price
49.46
76.72
50.31
224.73
40.86
62.58
54.02
27.83
Source: Faceset
Market Cap (M) P/E FY1
18,500.4
14.97x
95,187.7
16.01x
47,959.8
10.18x
59,509.9
16.91x
61,441.1
18.31x
69,921.1
22.72x
155,827.8
15.54x
176,466.2
12.41x
Ticker
MYL-US
Average
TEVA-IL
ACT-US
ABT-US
LLY-US
MRK-US
PFE-US
Current
Total
Debt/
Margin
Assets
Equity
Ratio
EBITDA
17.6%
4.2%
18.5%
1.72
4.61x
19.4%
5.4%
11.2%
1.88
2.08x
20.5%
5.5%
11.4%
1.14
1.86x
8.9%
0.3%
0.9%
1.98
4.94x
12.8%
5.1%
9.4%
1.85
1.65x
20.2%
9.9%
20.4%
1.77
0.93x
22.4%
5.5%
11.7%
1.87
1.36x
31.7%
5.9%
13.4%
2.66
1.72x
Source: Factset
P/E FY2 Dividend
12.35x
0.00%
14.68x
2.58%
10.20x
3.36%
13.69x
0.00%
16.66x
1.67%
19.94x
3.84%
15.13x
3.46%
12.48x
3.13%
Return on Return on
1
ECONOMIC OUTLOOK
Population Growth and Aging Demographic
The global population will increase by 1 billion people in
the next 12 years at a 1% CAGR. Most of the population
growth will occur in developing regions.6
1
Mylan’s P/E ratios are closer to the average of the P/E
ratios of the comparable companies, but are higher than
Teva. Mylan’s zero dividend yield is acceptable to some
extent, considering its great acquisition expansions in
recent years. The company has been repurchasing shares
to pay back the shareholders, but it is still less attractive
compared with high-dividend-yield Teva. We also made a
comparison in the operating results. From a profitability
standpoint, Mylan’s Return on Equity performance is
much better than its peers and Teva, but the Return on
Asset performance is less impressive. Mylan’s aggressive
debt financed acquisitions in recent years might be the
cause.
Regarding the use of cash, Mylan’s higher current ratio
suggests a better liquidity performance than Teva. But
Source: United Nations Population Division, World Population
6
Prospects, the 2012 Revision
Currently, the over-60 population is one of the fastest
growing groups. We can see from the graph below that
the growth rate of the older population (1.9%) is
significantly higher than that of the total population
(1.2%).7 We believe this growing population and aging
Page 6
demographic trend will continue to expand the current
market size and bring increasing revenue for the industry
and Mylan as well.
Health Organization as the first hepatitis C treatment in
April 2014.
This deal could generate great revenue for Mylan.
Assuming Mylan treats only 0.5 million patients annually
and the drug is priced at $5 a pill (currently Sovaldi is sold
at about $1,000 a pill or about $84,000 for a patient on a
standard, 12-week treatment schedule in the US18), it will
bring Mylan $195 million in revenue after the company
pays the 7% royalty to Gilead. That’s 3% of total revenue
compared with revenue in 2013 at $6.97 billion. And this
is a relatively conservative assumption. We believe this
new product will drive continued revenue growth for
Mylan.
Acquisition of Branded Arixtra in the U.S.
Source: World Population Ageing: 1950-2050
7
Foreign Exchange Rate
As a global pharmaceutical company with about 48% of
generic sales from outside the US, Mylan must consider
the significant role that the foreign exchange rate plays in
its financial performance. In fact, the unfavorable impact
of the foreign currency translation on 2013 total
revenues was 2%, or approximately $125 million.3
Currently, Mylan has implemented various currencyhedging approaches to manage foreign currency risks, but
these efforts may not be successful. As Europe represents
the majority of international sales, the fluctuations
between the US dollar and EU euro are our top priority.
The uncertainty on the recovery of Europe’s economy
would continue to exert difficulty for companies like
Mylan.
CATALYSTS FOR GROWTH
Mylan’s aggressive efforts to broaden its pipeline,
especially its high value pipeline, are the key catalysts for
its future growth.
Hepatitis C Treatments In Developing
Countries
On September 15, 2014, Mylan entered into an
agreement with Gilead Science, under which it could sell
a generic version of Sovaldi in 91 developing countries
together with 6 other companies.17 The countries within
the agreement account for more than 100 million
patients and Sovaldi was recommended by the World
In September 2014, Mylan acquired the branded Arixtra
and its authorized generic in the US. This drug is mainly
used for deep vein thrombosis (DVT), with an estimated
600,000 patients taking it in the U.S. According to
IMShealth, the annual sales revenue for Arixtra at $114
million by June 2014.19
R&D on Complex Generics
Besides actively engaging in acquisition or partnership to
broaden its high-value portfolio, Mylan is also keen on
self R&D on complex generics. The most notable ones
are generic Copaxone and generic Advair. Both these
drugs are multi-billion blockbusters and will bring
significant revenue streams for the company once they
are allowed into the market. In the meantime, their
branded counterparts are taking various measures to
delay the launch of generic products. Teva, for example,
has taken legal measures to postpone its patent
expiration date and has filed petitions to FDA, stating
more requirements need to be met for generic
Copaxone. Currently, generic Advair is under Phase III
trial. and management expects it will be able to launch
in the second half in 2016 if all goes well. In our forecast
model, we assume the generic Copaxone by Mylan will
start to kick into the market in late 2015. We did not
forecast generic Advair in our model, as we want to wait
to see the positive results from the phase III trial first.
Page 7
INVESTMENT POSITIVES
VALUATION

Mylan’s
recent
successful
acquisitions,
partnership, and self-innovations have diversified its
portfolios and provided new growing opportunities for
the company. Mylan currently has the largest number of
generic drugs in the pipeline compared with its
competitors.
The key valuation modeling assumptions for Mylan are
described as follows:

Mylan’s continued global expansion in emerging
markets will further drive growth.

The continued global spending trend towards
generic drugs proves to be a plus point, as Mylan is one of
the leading generic drug manufacturers in the industry.
Especially in some of Mylan’s current markets there is
lots of room for growing in terms of generic conversation
rates.

With increase in the world’s overall population
and aging demographics the healthcare sector and Mylan
are expected to benefit from this long-term value driver.
INVESTMENT NEGATIVES

There is great uncertainty on the Abbott
acquisition deal. The newly proposed tax rules may result
in Mylan’s not reaching its original tax inversion goal and
whether Mylan would drop the deal and pursue other
targets is still uncertain. If the deal goes south, Mylan
would have to pay Abbott no more than $100 million. The
street did not reach a consensus regarding this issue, and
some analysts still expect the deal to continue, which is
also reflected in the consensus target price.

Mylan has been actively engaged in debtfinanced acquisitions in the past few years, leaving the
debt/ EBITDA ratio much higher than our current holding,
Teva. The high debt may leave less room to operate for
Mylan compared with Teva.

There would be challenges to manage the
acquisitions and reach the synergy the management
expected, and the EBIT margin is less impressive
compared with Teva.

Increasing buyer power from the US wholesale
consolidation and international governments’ healthcare
costs control puts pricing pressure on Mylan.
Revenue Growth
We have discussed each revenue section and the
reasoning behind our forecasts in the previous categories.
The overall CAGR for the next 5 years is 5.4%, compared
with 7.9% in the last 5 years. If the Abbott deal succeeds,
it could significantly boost the total revenue.
Payout Policy
Mylan does not pay cash dividends on common stock and
has no clearly stated intention to do so. Considering
Mylan is still expanding quickly and part of its money has
to be invested in acquiring new businesses, and the
company has already paid back the shareholders through
the share repurchase plan, no dividend payout is
justifiable. We believe this policy will continue for the
next 5 years. In our forecast models we assume no
dividend payout, but the company will continue to use
excess cash to repurchase the stocks. We forecast a total
of $7 billion of share repurchase by the end of 2018 in
our model.
Profit Margins
Considering Mylan’s manufacturing scale and purchasing
power within the industry, we are expecting a COGS
(including depreciation and amortization expense)
improvement from the 54.54% in 2013 to 52.52% in 2018.
We also expect a 0.6% improvement in SG&A in the next
5 years, and we think the percentage on R&D would
increase, as the company has been actively engaged in
developing complex generics and biosmilars. Overall, the
EBIT margin has improved from 20.43% in 2013 to 21.58%
in 2018E.
R&D
We forecast a higher R&D for the next five years,
considering Mylan has been actively engaged in
developing complex generics and biosimilars. The
company’s R&D guidance for 2014 is $546~$640 million.
Our forecast for 2014 is closer to street consensus at
$556 million and will increase to $676 million in 2018.
The average R&D% has increased to 7.61% from 5.68% of
the last three years.
Page 8
Capex
REFERENCES
The average Capex for the last 3 years is $310 million,
with CAGR at 12%. The company’s guidance to Capex in
2014 is $350~$400 million and our forecast in 2014 is
$400 million. We forecast a 12% Capex growth rate from
2014 to 2016, considering the need to further increase
manufacture scales driven by Mylan’s recent acquisitions.
After 2016, we expect the growth rate of Capex will slow
down to 5% CAGR.
WACC
Our WACC is calculated at 7.23%. (The details of the
specific inputs are shown in the first page of our models).
We are using 5-year raw monthly beta from Bloomberg in
calculating the WACC. Our sensitivity analysis shows that
an adjusted beta will lead to $3-$5 of increase in current
price. Considering the great uncertainty in the short term,
it does not greatly affect our current stock rating for
Mylan.
Our DCF/EP model provides a current target price at
$54.34, the DDM model provides a current target price at
$36.29, and relative valuation multiples provide a target
price at $34.54. While we acknowledge the important
information the other models provide, we think the DCF
model best justifies our growth forecast for the company.
(DDM model: No dividend payout policy, only use the
discounted cash flow from CV period to calculate the
price. Relative P/E model: only use 2014 and 2015 figures,
failed to take into account the growth from 2016E to
2018E.) That gives us a target price at $54.34 and a No
Action recommendation for Mylan, considering its
current price at $50.31.
KEYS TO MONITOR
Buy Discipline
1) The newly proposed tax rule does not hurt Mylan as
originally expected, and the acquisition of Abbott’s
non-U.S. developed markets’ assets continues.
2) FDA approval of generic Copaxone earlier than
expected and successful trial results from generic
Advair and biosimilars.
3) Potential high value pipeline added to the portfolios
through acquisitions.
We will take an overall assessment of the above 3 factors
and we will continue to monitor Mylan’s efforts in
expanding the current portfolios and pipeline.
1.
2.
3.
4.
5.
Factset
Bloomberg terminal
Mylan 2013 Annual Report
Mylan Company website
2013 Mylan Investor Day
http://www.mylan.com/assets/2013InvestorDayFinalP
DFwithRecs.pdf
6. World Population Prospects: The 2012 Revision,
http://esa.un.org/wpp/Documentation/pdf/WPP2012
_HIGHLIGHTS.pdf
7. World Population Ageing: 1950-2050
http://www.un.org/esa/population/publications/worl
dageing19502050/pdf/80chapterii.pdf
8. The Global Use of Medicines: Outlook through 2017
November2013
http://www.imshealth.com/deployedfiles/imshealth/
Global/Content/Corporate/IMS%20Health%20Institute
/Reports/Global_Use_of_Meds_Outlook_2017/IIHI_Gl
obal_Use_of_Meds_Report_2013.pdf
9. Update: Teva And Antares's Generic Challenge To
EpiPen
http://seekingalpha.com/article/388681-update-tevaand-antaress-generic-challenge-to-epipen
10.Teva reaches compromise on epinephrine injector
http://www.globes.co.il/en/article-1000744141
11.M&A Ramps Up in the Global Injectables Market
http://connect.dcat.org/blogs/patricia-vanarnum/2014/07/22/ma-ramps-up-in-the-globalinjectables-market#.VEMnp_nF9Q0
12.Mylan 2014 2Q report
13.IBISWorld Industry Report, Generic Pharmaceutical
Manufacturing, July 2014.
14.Expect Management To Remain Aggressive
- This Is The Right Strategy By COWEN Equity Research
Report
15.The new tax rules announced by the US Treasury
Department on Monday might halt the pending
inversion deal between Mylan and Abbott
http://www.bidnessetc.com/26175-new-tax-ruleslikely-to-impact-mylanabbott-inversion-deal/
16.Mylan To Acquire Abbott's Non-U.S. Developed
Markets Specialty And Branded Generics Business In
An All-Stock Transaction
http://www.mylan.com/news/pressreleases/item?id=123238
17.Mylan Signs Agreement with Gilead to Accelerate
Access to Hepatitis C Treatments, Sovaldi®
(Sofosbuvir) and Single Tablet Regimen of
Ledipasvir/Sofosbuvir, in Developing Countries
Page 9
18.
19.
20.
21.
http://www.mylan.com/news/pressreleases/item?id=123250
WebMD
http://www.webmd.com/hepatitis/news/20140714/hi
gh-cost-hepatitis-c-drug-sovaldi-investigated
Mylan to Acquire U.S. Rights to Arixtra® (fondaparinux
sodium) Injection from Aspen
http://www.mylan.com/news/pressreleases/item?id=123249
The Pros And Cons Of Institutional Ownership
http://www.investopedia.com/articles/stocks/07/insit
utional-owners.asp
Yahoo Finance
IMPORTANT DISCLAIMER
Henry Fund reports are created by student enrolled in the
Applied Securities Management (Henry Fund) program at
the University of Iowa’s Tippie School of Management.
These reports are intended to provide potential
employers and other interested parties an example of the
analytical
skills,
investment
knowledge,
and
communication abilities of Henry Fund students. Henry
Fund analysts are not registered investment advisors,
brokers or officially licensed financial professionals. The
investment opinion contained in this report does not
represent an offer or solicitation to buy or sell any of the
aforementioned securities. Unless otherwise noted, facts
and figures included in this report are from publicly
available sources. This report is not a complete
compilation of data, and its accuracy is not guaranteed.
From time to time, the University of Iowa, its faculty,
staff, students, or the Henry Fund may hold a financial
interest in the companies mentioned in this report.
Page 10
MYLAN Inc
Revenue Decomposition
(in millions)
Fiscal Years Ending Dec. 31
Generic Revenue
Generics North America
Growth
Generics EMEA
Growth
Generics ROW
Growth
Other Generic
Growth
Specialty
Growth
Net Revenue
Growth
Foreign currency forward contracts
Total Revenue
2011
5,580
2,858
21.04%
1,466
-5%
1,236
15.06%
20
-51.34%
550
28.50%
6,130
12.47%
(5)
6,135
2012
5,946
3,229
12.97%
1,356
-7%
1,330
7.61%
31
56.50%
850
54.55%
6,796
10.87%
(44)
6,840
2013
5,901
3,007
-6.88%
1,430
5%
1,439
8.16%
26
-17.57%
1,009
18.65%
6,909
1.66%
(60)
6,970
2014E
6,363
3,247
8.00%
1,458
2.00%
1,626
13.00%
32
24.00%
1,180
17.00%
7,543
9.17%
(30)
7,573
2015E
6,734
3,393
4.50%
1,480
1.50%
1,829
12.50%
32
0.00%
1,215
3.00%
7,950
5.39%
(22)
7,972
2016E
7,204
3,614
6.50%
1,510
2.00%
2,048
12.00%
32
0.00%
1,033
-15.00%
8,237
3.61%
(22)
8,259
2017E
7,638
3,795
5.00%
1,528
1.20%
2,284
11.50%
32
0.00%
930
-10.00%
8,568
4.02%
(22)
8,590
Notes:
EMEA: Europe, the Middle East, and Africa
ROW: Rest of World, include India, Australia, Japan, New Zealand and Brazil
85% of Specialty Revenue is from Epipen/NGA, patent expiration in September 11,2025. Reference from DrugPatentWatch
2018E
7,992
3,927
3.50%
1,543
1.00%
2,489
9.00%
32
0.00%
976
5.00%
8,968
4.67%
(22)
8,990
MYLAN Inc
Income Statement
(in millions except per‐share data)
Fiscal Years Ending Dec. 31
Net sales
Cost of products sold
2011
6,135
3,056
2012
6,840
3,234
2013
6,970
3,304
2014E
7,573
3,586
2015E
7,972
3,775
2016E
8,259
3,906
2017E
8,590
4,059
2018E
8,990
4,243
Depreciation & Amortization Expense
Gross Profit
494
2,585
547
3,060
498
3,168
477
3,510
472
3,725
493
3,860
511
4,020
531
4,216
389
1,296
456
1,288
556
1,398
606
1,465
646
1,510
666
1,553
676
1,600
Research & development expenses,net
Other SG&A
295
1,158
Operating Income
1,133
Nonoperating Income - Net
Interest Expense
Unusual Expense - Net
Pretax Income
Income Taxes
Net income
Net income attributable to non-controlling interests
Net Income
Preferred Dividends
Net Income available to Common Shareholders
(23)
333
122
655
116
539
2
537
537
Weighted Average Shares outstanding
EPS(diluted)
Dividends declared per common share
440
1.22
-
$
$
1,375
1,424
(59)
319
192
804
161
643
2
641
641
422
$ 1.52
$ -
(167)
327
183
747
121
627
3
624
624
$
$
395
1.58
-
1,556
(58)
379
150
969
174
794
2
792
792
377
$ 2.05
$ -
1,653
1,704
1,801
1,940
(58)
320
150
1,125
203
923
2
921
921
(58)
324
150
1,172
211
961
2
959
959
(58)
327
150
1,265
228
1,038
2
1,036
1,036
(58)
331
150
1,401
252
1,148
2
1,146
1,146
368
$ 2.47
$ -
361
$ 2.63
$ -
$
$
354
2.90
-
348
$ 3.27
$ -
MYLAN Inc
Balance Sheet
(in millions of U.S. Dollar, except per share items)
Fiscal Years Ending Dec. 31
Cash Only
Total Short Term Investments
Short-Term Receivables
Inventories
Other Current Assets
2011
385
31
1,426
1,397
331
2012
351
42
1,554
1,525
431
2013
422
1,820
1,665
566
2014E
505
1,855
1,742
568
2015E
624
1,913
1,822
558
2016E
1,070
1,961
1,875
545
2017E
1,544
2,019
1,937
533
2018E
2,250
2,090
2,014
539
Total current assets
3,570
3,903
4,472
4,670
4,916
5,452
6,032
6,893
Property, plant & equipment, cost
Less accumulated depreciation
Property, plant & equipment, net
2,371
1,073
1,298
2,484
1,087
1,397
2,726
1,063
1,663
3,126
1,212
1,913
3,526
1,385
2,141
3,926
1,577
2,348
4,351
1,789
2,562
4,776
2,019
2,757
3,518
2,631
39
543
11,599
636
3,516
2,224
88
168
11,933
627
4,288
2,518
78
1,591
15,237
462
4,288
2,191
78
833
14,435
486
4,288
1,931
78
877
14,717
504
4,288
1,721
78
908
15,299
524
4,288
1,511
78
945
15,940
548
4,288
1,317
78
989
16,870
Total current liabilities
817
703
44
999
2,564
394
778
35
987
2,194
440
1,073
51
1,393
2,956
683
1,060
59
1,363
3,165
577
1,036
69
1,355
3,037
583
1,032
72
1,363
3,050
589
1,031
77
1,374
3,072
596
1,079
86
1,438
3,199
Long-Term Debt
Deferred Tax Liabilities
Other Liabilities
Total liabilities
4,479
309
742
8,094
5,337
274
771
8,577
7,586
469
1,265
12,277
6,408
469
1,212
11,253
6,483
469
1,076
11,065
6,545
469
1,074
11,138
6,622
469
1,031
11,193
6,725
469
1,034
11,426
270
3,987
2,061
(74)
1
(14)
(2,891)
3,341
15
272
4,104
2,685
(232)
0
(9)
(3,879)
2,942
18
272
4,254
3,477
(232)
(9)
(4,600)
3,163
19
272
4,404
4,398
(232)
(9)
(5,200)
3,633
19
272
4,554
5,357
(232)
(9)
(5,800)
4,142
19
272
4,704
6,392
(232)
(9)
(6,400)
4,727
19
272
4,854
7,539
(232)
(9)
(7,000)
5,424
19
3,505
3,356
2,960
3,182
3,652
4,161
4,747
5,443
11,599
11,933
15,237
14,435
14,717
15,299
15,940
16,870
Total Investments and Advances
Net Goodwill
Net Other Intangibles
Deferred Tax Assets
Other Assets
Total assets
ST Debt & Curr. Portion LT Debt
Accounts Payable
Income Tax Payable
Other Current Liabilities
Preferred Stock (Carrying Value)
Common Stock Par/Carry Value
265
Additional Paid-In Capital/Capital Surplus
3,795
Retained Earnings
1,421
Cumulative Translation Adjustment/Unrealized For. Exch. (39)
Gain
Unrealized Gain/Loss Marketable Securities
(43)
Other Appropriated Reserves
(6)
Treasury Stock
(1,901)
Total stockholders' equity
3,492
Non-controlling interest
13
Total equity
Total liabilities and equity
MYLAN Inc
Cash Flow Statement
In millions unless otherwise specified
Fiscal Years Ending Dec. 31
Operating activities:
Net income
Depreciation and amortization
Change in receivables
Change in Inventories
Change in Other Current assets
Change in Defered Tax Assets
Change in Other Assets
Change in Accounts payable
Change in Income Tax payable
Change in Other Current Liabilities
Change in Defered Tax Liabilities
Change in Other Liabilities
Net cash provided by operating activities
Investing activities:
Change in Short term investments
Change in Total Investments and Advances
Change in Net Intangible
Change in PP&E cost
Change in Goodwill
Net cash used in investing activities
Financing activities:
Proceeds from short-term debt
Proceeds from long-term debt
Proceeds from capital surplus
Cumulative Translation Adjustment
Repurchases of common stock
Payment of dividends
Net cash provided by (used in) financing activities
Net change in cash
Cash at beginning of period
Cash at end of period
2014E
2015E
2016E
2017E
2018E
792
477
(35)
(77)
(2)
758
(13)
9
(30)
(54)
921
472
(58)
(80)
10
(44)
(24)
10
(8)
(136)
959
493
(48)
(53)
13
(32)
(4)
3
8
(3)
1,036
511
(57)
(62)
13
(36)
(2)
6
12
(43)
1,146
531
(72)
(77)
(7)
(44)
48
8
64
3
1,826
165
1,064
1,335
1,377
1,601
(400)
(235)
(24)
(40)
(400)
(464)
(18)
(90)
(400)
(508)
(20)
(90)
(425)
(535)
(24)
(106)
(425)
(555)
243
(1,179)
150
(721)
(1,507)
(106)
75
150
(600)
(481)
7
62
150
(600)
(381)
6
77
150
(600)
(368)
7
103
150
(600)
(340)
84
422
505
118
505
624
447
624
1,070
474
1,070
1,544
706
1,544
2,250
MYLAN Inc
Common Size Income Statement
Fiscal Years Ending Dec. 31
Net sales
Cost of products sold
Depreciation & Amortization Expense
Gross Profit
2011
100.00%
49.81%
8.06%
42.13%
2012
100.00%
47.28%
7.99%
44.73%
2013
100.00%
47.40%
7.15%
45.46%
2014E
100.00%
47.35%
6.30%
46.35%
2015E
100.00%
47.35%
5.92%
46.73%
2016E
100.00%
47.30%
5.97%
46.73%
2017E
100.00%
47.25%
5.95%
46.80%
2018E
100.00%
47.20%
5.90%
46.90%
Research & development expenses,net
Other SG&A
4.80%
18.87%
5.69%
18.94%
6.55%
18.48%
7.34%
18.46%
7.60%
18.38%
7.82%
18.28%
7.76%
18.08%
7.52%
17.80%
Operating Income
18.46%
20.10%
20.43%
20.55%
20.74%
20.63%
20.96%
21.58%
Nonoperating Income - Net
Interest Expense
Unusual Expense - Net
Pretax Income
Income Taxes
-0.37%
5.43%
1.99%
10.67%
1.89%
8.78%
0.03%
8.75%
0.00%
8.75%
-0.87%
4.66%
2.81%
11.75%
2.36%
9.40%
0.03%
9.37%
0.00%
9.37%
-2.39%
4.69%
2.62%
10.72%
1.73%
8.99%
0.04%
8.95%
0.00%
8.95%
-0.77%
5.01%
1.98%
12.79%
2.30%
10.49%
0.03%
10.46%
0.00%
10.46%
-0.73%
4.02%
1.88%
14.11%
2.54%
11.57%
0.03%
11.55%
0.00%
11.55%
-0.70%
3.92%
1.82%
14.19%
2.55%
11.63%
0.02%
11.61%
0.00%
11.61%
-0.68%
3.81%
1.75%
14.73%
2.65%
12.08%
0.02%
12.06%
0.00%
12.06%
-0.65%
3.68%
1.67%
15.58%
2.80%
12.78%
0.02%
12.75%
0.00%
12.75%
Net income
Net income attributable to non-controlling interests
Net Income
Preferred Dividends
Net Income available to Common Shareholders
MYLAN Inc
Common Size Balance Sheet
Fiscal Years Ending Dec. 31
Cash Only
Total Short Term Investments
Short-Term Receivables
Inventories
Other Current Assets
2011
6.28%
0.50%
23.25%
22.77%
5.39%
2012
5.13%
0.62%
22.72%
22.30%
6.30%
2013
6.05%
0.00%
26.12%
23.88%
8.11%
2014E
6.67%
0.00%
24.50%
23.00%
7.50%
2015E
7.82%
0.00%
24.00%
22.85%
7.00%
2016E
12.96%
0.00%
23.75%
22.70%
6.60%
2017E
17.97%
0.00%
23.50%
22.55%
6.20%
2018E
25.03%
0.00%
23.25%
22.40%
6.00%
Total current assets
58.18%
57.06%
64.17%
61.67%
61.67%
66.01%
70.22%
76.68%
Property, plant & equipment, cost
Less accumulated depreciation
Property, plant & equipment, net
38.65%
17.49%
21.16%
36.31%
15.89%
20.43%
39.11%
15.25%
23.86%
41.28%
16.01%
25.27%
44.23%
17.37%
26.86%
47.53%
19.10%
28.44%
50.65%
20.82%
29.83%
53.12%
22.46%
30.66%
0.00%
57.34%
42.88%
0.64%
8.85%
189.05%
9.30%
51.40%
32.52%
1.28%
2.45%
174.44%
8.99%
61.53%
36.13%
1.12%
22.83%
218.62%
6.10%
56.62%
28.93%
1.03%
11.00%
190.62%
6.10%
53.79%
24.22%
0.98%
11.00%
184.62%
6.10%
51.92%
20.83%
0.94%
11.00%
185.24%
6.10%
49.92%
17.59%
0.91%
11.00%
185.56%
6.10%
47.70%
14.64%
0.87%
11.00%
187.65%
Total current liabilities
13.32%
11.46%
0.72%
16.28%
41.78%
5.76%
11.37%
0.51%
14.43%
32.07%
6.31%
15.39%
0.73%
19.99%
42.42%
9.02%
14.00%
0.78%
18.00%
41.80%
7.23%
13.00%
0.86%
17.00%
38.10%
7.06%
12.50%
0.87%
16.50%
36.93%
6.86%
12.00%
0.90%
16.00%
35.76%
6.63%
12.00%
0.95%
16.00%
35.58%
Long-Term Debt
Deferred Tax Liabilities
Other Liabilities
Total liabilities
73.00%
5.04%
12.10%
131.93%
78.03%
4.01%
11.27%
125.39%
108.85%
6.72%
18.16%
176.16%
84.61%
6.19%
16.00%
148.60%
81.33%
5.88%
13.50%
138.80%
79.25%
5.67%
13.00%
134.86%
77.09%
5.45%
12.00%
130.30%
74.81%
5.21%
11.50%
127.10%
Preferred Stock (Carrying Value)
0.00%
Common Stock Par/Carry Value
4.32%
Additional Paid-In Capital/Capital Surplus
61.86%
Retained Earnings
23.15%
Cumulative Translation Adjustment/Unrealized For. Exch. Gain -0.64%
Unrealized Gain/Loss Marketable Securities
-0.69%
Other Appropriated Reserves
-0.10%
Treasury Stock
-30.99%
Total stockholders' equity
56.91%
Non-controlling interest
0.21%
Total equity
57.12%
0.00%
3.94%
58.28%
30.14%
-1.08%
0.02%
-0.20%
-42.26%
48.84%
0.22%
49.06%
0.00%
3.90%
58.88%
38.53%
-3.32%
0.00%
-0.12%
-55.65%
42.21%
0.26%
42.47%
0.00%
3.59%
56.17%
45.92%
-3.06%
0.00%
-0.11%
-60.74%
41.76%
0.26%
42.02%
0.00%
3.41%
55.24%
55.17%
-2.91%
0.00%
-0.11%
-65.23%
45.58%
0.24%
45.82%
0.00%
3.29%
55.14%
64.86%
-2.81%
0.00%
-0.11%
-70.23%
50.15%
0.23%
50.38%
0.00%
3.17%
54.76%
74.41%
-2.70%
0.00%
-0.10%
-74.51%
55.03%
0.22%
55.26%
0.00%
3.03%
53.99%
83.86%
-2.58%
0.00%
-0.10%
-77.86%
60.33%
0.21%
60.55%
174.44%
218.62%
190.62%
184.62%
185.24%
185.56%
187.65%
Total Investments and Advances
Net Goodwill
Net Other Intangibles
Deferred Tax Assets
Other Assets
Total assets
ST Debt & Curr. Portion LT Debt
Accounts Payable
Income Tax Payable
Other Current Liabilities
Total liabilities and equity
189.05%
MYLAN Inc
Value Driver Estimation
In millions unless otherwise specified
Fiscal Years Ending Dec. 31
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
6,135
3,056
494
295
1,158
6
1,139
6,840
3,234
547
389
1,296
5
1,380
6,970
3,304
498
456
1,288
5
1,429
7,573
3,586
477
556
1,398
5
1,561
7,972
3,775
472
606
1,465
7
1,660
8,259
3,906
493
646
1,510
7
1,711
8,590
4,059
511
666
1,553
8
1,809
8,990
4,243
531
676
1,600
9
1,949
116
(6)
83
31
1
237
161
(15)
80
48
1
305
121
(42)
82
46
1
291
174
(15)
95
38
1
322
203
(15)
80
38
2
336
211
(15)
81
38
2
346
228
(15)
82
38
2
364
252
(15)
83
38
2
389
309
39
270
(150)
274
88
187
(83)
469
78
391
204
469
78
391
-
469
78
391
-
469
78
391
-
469
78
391
-
469
78
391
-
751
992
1,342
1,239
1,324
1,365
1,445
1,559
Normal Cash
Receivables, net
Inventories, net
Other current assets
Operating Current Assets
357
1,426
1,397
331
3,511
398
1,554
1,525
431
3,908
406
1,820
1,665
566
4,456
441
1,855
1,742
568
4,606
464
1,913
1,822
558
4,757
481
1,961
1,875
545
4,862
500
2,019
1,937
533
4,988
523
2,090
2,014
539
5,167
Accounts payable
Income Tax Payable
Other current liabilities
Operating Current Liabilities
703
44
999
1,746
778
35
987
1,800
1,073
51
1,393
2,516
1,060
59
1,363
2,483
1,036
69
1,355
2,460
1,032
72
1,363
2,467
1,031
77
1,374
2,483
1,079
86
1,438
2,603
Net operating working capital
+Net PPE
+Present Value of Operating Leases
+Net Other Intangibles
+Other Assets
Invested Capital
1,765
1,298
105
2,631
543
6,342
2,109
1,397
102
2,224
168
6,000
1,940
1,663
106
2,518
1,591
7,819
2,123
1,913
134
2,191
833
7,194
2,296
2,141
150
1,931
877
7,395
2,395
2,348
164
1,721
908
7,537
2,506
2,562
179
1,511
945
7,702
2,564
2,757
193
1,317
989
7,819
751
5,956
12.62%
992
6,342
15.64%
1,342
6,000
22.36%
1,239
7,819
15.84%
1,324
7,194
18.40%
1,365
7,395
18.46%
1,445
7,537
19.17%
1,559
7,702
20.25%
992
(342)
1,334
1,342
1,818
(477)
1,239
(624)
1,863
1,324
201
1,123
1,365
142
1,223
1,445
165
1,280
1,559
116
1,443
6,342
15.64%
7.23%
534
6,000
22.36%
7.23%
908
7,819
15.84%
7.23%
673
7,194
18.40%
7.23%
804
7,395
18.46%
7.23%
831
7,537
19.17%
7.23%
900
7,702
20.25%
7.23%
1,003
Net sales
-Cost of products sold
-Depreciation & Amortization Expense
-Research & development expenses,net
-Other SG&A
+Implied Interest on Operating Leases (Cost of Debt * PV lease(t-1)
EBITA
Provision for income taxes
-Tax gain on Non-operating Income
+Tax shield on Interest expenses
+Tax shield on Unusual expenses
+Tax shield on implied lease interest
Total Adjusted taxes
Deferred long term income tax Liabilities
-Deferred tax long term assets
Net Deferred Tax Liabilities
Change in Deferred Taxes
NOPLAT (EBITA-Adjusted Taxes+Change in Deferrred Taxes
NOPLAT
Beginning Invested Capital
Return on Invested Capital (ROIC) (NOPLATt/Begin ICt)
NOPLAT
Change in Invested Capital
Free Cash Flow (FCF) (NOPLATt - Change in ICt,t-1)
Beginning Invested Capital
ROIC
WACC
Economic Profit (EP) (Begin IC * (ROICt - WACC))
751
385
366
5,956
12.62%
7.23%
321
MYLAN Inc
Key Management Ratios
Fiscal Years Ending Dec. 31
2011
2012
2013
2014E
2015E
2016E
2017E
Liquidity Ratios
Current Ratio
Cash Ratio
Quick Ratio
1.39
0.15
0.85
1.78
0.16
1.08
1.51
0.14
0.95
1.48
0.16
0.93
1.62
0.21
1.02
1.79
0.35
1.17
1.96
0.50
1.33
2.15 Current Assets/Current Liabilities
0.70 (Cash + Equivalents)/Current Liabilities
1.53 (Current Assets-Inventory)/Current Liabilities
Activity or Asset-Management Ratios
Assets to Sales
1.89
Inventory Turnover Ratio
2.32
Accounts Receivable Ratio
4.75
1.74
2.21
4.59
2.19
2.07
4.13
1.91
2.11
4.12
1.85
2.12
4.23
1.85
2.11
4.26
1.86
2.13
4.32
1.88 Total Assets/Sales
2.15 COGS/Average Inventory
4.38 Net Sales/Average Receivables
Financial Leverage Ratios
Debt to Equity Ratio
Debt Ratio
Debt to Non-Cash Assets
1.71
0.72
0.74
2.71
0.81
0.83
2.23
0.78
0.81
1.93
0.75
0.79
1.71
0.73
0.78
1.52
0.70
0.78
1.34 Book Value of Debt/Book Value of Equity
0.68 Total Liabilities/Total Assets
0.78 Total Liabilities/(Total Assets-(Cash+Equivalents))
Profitability Ratios
Operating Margin
Net Profit Margin
Free Cash Margin
Return on Assets
Return on Equity
Payout Policy Ratios
Dividend Payout
1.51
0.70
0.72
18.46%
8.78%
5.97%
4.67%
14.90%
20.10%
9.40%
19.50%
5.54%
18.34%
20.43%
8.99%
-6.84%
5.25%
18.67%
20.55%
10.49%
24.60%
5.21%
26.84%
20.74%
11.57%
14.09%
6.39%
28.99%
20.63%
11.63%
14.81%
6.53%
26.30%
20.96%
12.08%
14.90%
6.78%
24.93%
0%
0%
0%
0%
0%
0%
0%
2018E
21.58%
12.78%
16.05%
7.21%
24.20%
Operating Profit/Sales
Net Income/Sales
Free Cash Flow/Sales
Net Income/Beginning Assets
Net Income/Beginning Book Value of Equity
0% Dividend per share/Earnings per share
MYLAN Inc
Weighted Average Cost of Capital (WACC) Estimation
2013
Risk Free Rate
Equity Risk Premium
Beta
Cost of Equity (CAPM)
3.20%
4.64%
1.205
8.79%
30 Year US Treasury Bonds YTM @ October 5,2014 from Yahoo finance
Henry Fund Consensus
Bloomberg 5 year monthly beta (10/05/09~10/05/14)
Pre-tax Cost of Debt
Tax Rate
Cost of Debt
4.91%
25%
3.69%
Mylan Corporate bond Maturity @ 11/22/2043 from Finra Trace Database
Market Cap
Book Value of Debt
Capitalized Operating Leases
Enterprise Value
18,459
8,026
106
26,592
% Equity
% Debt
WACC
69.42%
30.58%
7.23%
MYLAN Inc
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
CV Growth
CV ROIC
WACC
Cost of Equity
Fiscal Years Ending Dec. 31
DCF Model
Free Cash Flow
PV of FCF at 12/31/2013
3.0%
20.25%
7.23%
8.79%
2014E
2015E
2016E
2017E
CV
1,863
1,737
1,123
977
1,223
992
1,280
968
31,405
23,754
804
699
831
674
900
681
PV of Operating Assets
(+)Excess Cash
(+)ST Investments
(+)LT Investments
(-) Book value of Debt
(-) PV of Operating Leases
(-) PV of ESOP
(-) Non-Controlling interest
(-) Pension Benefits
Intrinsic Value
28,428
16
627
8,026
106
518.2
71
-60
20,410
DCF Share Value 12/31/13
DCF Share Value Today
51.70
54.34
EP Model
Economic Profit
PV of Economic Profit
Present Value of Operating Assets
(+)Excess Cash
(+)ST Investments
(+)LT Investments
(-) Book value of Debt
(-) PV of Operating Leases
(-) PV of ESOP
(-) Non-Controlling interest
(-) Pension Benefits
Intrinsic Value
Economic Profit Share Value 12/31/13
Economic Profit Share Value Today
673
628
28,428
16
627
8,026
106
518
71
(60)
20,410
51.70
54.34
23,703
17,928
MYLAN Inc
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Dec. 31
EPS
2014E
$
2.05
2015E
$
2.47
2016E
$
2.63
2017E
$
2.90
Key Assumptions
CV growth of EPS
CV ROE
Cost of Equity
Intrinsic Value at 12/31/2013
Intrinsic Value Today
$
3.27
3%
21.06%
8.79%
Future Cash Flows
P/E Multiple (CV Year)
EPS (CV Year)
Future Stock Price
Dividends Per Share
Discounted Cash Flows
CV
14.81
$ 3.27
$ 48.37
$
$
0.00
34.53
36.29
$
0.00
$
0.00
0.00
34.53
MYLAN Inc
Relative Valuation Models
Ticker
TEVA
ACT
ABT
LLY
MRK
PFE
Company
Price
Teva Pharmaceutical Inds$ 50.04
Actavis
$ 224.73
Abbott Laboratories
$ 40.86
Eli Lilly
$ 62.58
Merck
$ 54.02
Pfizer
$ 27.83
MYL
Mylan
Implied Value:
Relative P/E (EPS14)
Relative P/E (EPS15)
Average
$
55.68
EPS
2014E
$4.94
$13.29
$2.23
$2.75
$3.48
$2.24
$
2.05
$
$
$
32.84
36.24
34.54
EPS
2015E
$4.93
$16.42
$2.45
$3.14
$3.57
$2.23
Average
$
2.47
P/E 14
10.1
16.9
18.3
22.7
15.5
12.4
16.0
P/E 15
10.1
13.7
16.7
19.9
15.1
12.5
14.7
MYLAN Inc
Sensitivity Analysis
$ 54.34
0.60
0.70
0.80
0.90
1.00
1.10
1.15
1.21
1.25
CV Growth of NOPLAT
1.00%
1.50%
65.25
72.80
59.40
65.68
54.32
59.59
49.84
54.32
45.88
49.70
42.34
45.63
40.71
43.77
39.02
41.84
37.69
40.35
$ 54.34
5.00%
6.00%
7.00%
7.23%
7.50%
8.00%
8.50%
9.00%
CV ROIC
13.00%
123.08
75.75
52.07
48.21
44.17
37.85
32.67
28.36
$ 54.34
CV Growth
1.00%
of NOPLAT
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
CV ROIC
13.00%
37.63
39.58
41.91
44.72
48.21
52.63
58.41
66.32
Beta
WACC
COGS%
SG&A
2.00%
82.65
73.70
66.21
59.84
54.36
49.60
47.44
45.21
43.50
2.50%
96.05
84.31
74.76
66.84
60.17
54.46
51.91
49.29
47.29
3.00%
115.32
98.99
86.24
76.00
67.60
60.57
57.48
54.34
51.96
3.50%
145.41
120.65
102.44
88.49
77.45
68.49
64.62
60.74
57.82
4.00%
198.99
155.82
127.07
106.54
91.14
79.15
74.10
69.12
65.43
4.50%
321.16
222.87
168.97
134.92
111.44
94.26
87.29
80.57
75.68
14.00%
125.89
77.56
53.37
49.43
45.31
38.85
33.57
29.16
15.00%
128.33
79.12
54.50
50.49
46.29
39.72
34.35
29.86
16.00%
130.47
80.49
55.49
51.42
47.16
40.49
35.03
30.48
17.00%
132.35
81.70
56.37
52.24
47.92
41.16
35.63
31.02
17.73%
133.60
82.50
56.95
52.78
48.42
41.61
36.03
31.38
20.25%
137.18
84.80
58.61
54.34
49.87
42.89
37.17
32.40
21.00%
138.09
85.39
59.03
54.73
50.24
43.21
37.46
32.66
22.00%
139.20
86.10
59.54
55.22
50.69
43.61
37.81
32.98
14.00%
37.90
40.03
42.57
45.64
49.43
54.24
60.55
69.16
15.00%
38.14
40.42
43.14
46.43
50.49
55.65
62.40
71.63
16.00%
38.35
40.77
43.64
47.12
51.42
56.88
64.02
73.78
17.00%
38.54
41.07
44.08
47.73
52.24
57.96
65.45
75.69
17.73%
38.66
41.27
44.37
48.13
52.78
58.68
66.40
76.95
20.25%
39.02
41.84
45.21
49.29
54.34
60.74
69.12
80.57
21.00%
39.10
41.99
45.43
49.59
54.73
61.26
69.81
81.49
22.00%
39.21
42.17
45.69
49.95
55.22
61.90
70.65
82.61
54.34
47.00%
47.10%
47.20%
47.30%
47.40%
47.50%
47.60%
47.70%
47.80%
CV Growth of NOPLAT
1.00%
1.50%
39.61
42.48
39.31
42.16
39.02
41.84
38.72
41.52
38.42
41.20
38.12
40.88
37.82
40.56
37.52
40.24
37.22
39.92
2.00%
45.90
45.56
45.21
44.87
44.52
44.18
43.83
43.49
43.14
2.50%
50.04
49.67
49.29
48.92
48.54
48.17
47.79
47.42
47.04
3.00%
55.16
54.75
54.34
53.93
53.51
53.10
52.69
52.28
51.86
3.50%
61.66
61.20
60.74
60.28
59.82
59.36
58.90
58.44
57.98
4.00%
70.16
69.64
69.12
68.60
68.08
67.55
67.03
66.51
65.99
4.50%
81.78
81.17
80.57
79.96
79.36
78.75
78.14
77.54
76.93
54.34
17.60%
17.70%
17.80%
17.90%
18.00%
18.10%
18.20%
18.30%
18.40%
CV Growth of NOPLAT
1.00%
1.50%
39.61
42.48
39.31
42.16
39.02
41.84
38.72
41.52
38.42
41.20
38.12
40.88
37.82
40.56
37.52
40.24
37.22
39.92
2.00%
45.90
45.56
45.21
44.87
44.52
44.18
43.83
43.49
43.14
2.50%
50.04
49.67
49.29
48.92
48.54
48.17
47.79
47.42
47.04
3.00%
55.16
54.75
54.34
53.93
53.51
53.10
52.69
52.28
51.86
3.50%
61.66
61.20
60.74
60.28
59.82
59.36
58.90
58.44
57.98
4.00%
70.16
69.64
69.12
68.60
68.08
67.55
67.03
66.51
65.99
4.50%
81.78
81.17
80.57
79.96
79.36
78.75
78.14
77.54
76.93

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