hf case studies part 4 myl stock pitch

7/24/2019 HF Case Studies Part 4 MYL Stock Pitch

1/11

Sample Hedge Fund Stock Pitch: Mylan [MYL]

In this sample stock pitch outline, well make a LONG(Buy) recommendation for

Mylan [MY! "ased on the results of our market and #aluation analysis$

%ell e&plain the reasons for this recommendation, the additional information we

would need to create a comprehensi#e pitch, and then conclude with a stock pitch

outline that you can immediately apply to Mylan, or any other company youre

pitchin'$

NOTS !N" "#S$L!#M%S:

irst, please do not construe this as in#estment ad#ice$ %e are NOT

recommendin' that you in#est in any of the companies co#ered here$ his is a

tutorial a"out how to researchandpitchcompanies that you think are interestin',and how to use what we#e learned so far to support your ar'uments$

*lso, keep in mind that the tips co#ered here mo&e you in the right direction'

(ut a)e NOT *u+cientfor an entire case study or stock pitch$

Stock Pitch , LONG %ecommendation -o) Mylan [MYL]

%ecommendation

I recommend lon'in' Mylan [MY!, a 'enerics pharmaceuticals company, which

currently trades at +-$./ per share, "ecause it is under#alued "y 0/1/2, the

market has incorrectly o#eremphasi3ed price competition in its 4pi5en product line,

and there is si'ni6cantly more upside to its recently announced *'ila ac7uisition

than the market has 'i#en it credit for$ *dditionally, e#en if 'rowth in its 'enerics

se'ment declines at faster1than1e&pected rates, there is still at least 0/2 potential

upside in the stock$

8atalysts to increase its share price in the ne&t .10 months include the close of its

recently announced +0$. "illion *'ila ac7uisition (e&pected in 9:), the companys

6rst earnin's announcement post1ac7uisition, and the launch of ;eloda, an oral

cancer dru', in the middle of the year$


2/11

$ompany .ackg)ound

Mylan is a 'lo"al

pharmaceuticals company

that operates in se'ments>

'enerics and specialty

pharmaceuticals (primarily

4pi5en)$ otal re#enue in Y

/0 was +.$- "illion, with

4BI?* of +0$@ "illion (:2

mar'in), and the company

has 'rown re#enue at 0/1

02 for the past years,

mostly throu'h ac7uisitionsof 'enerics and specialty

"usinesses from other companies$

Its 'enerics se'ment accounted for --2 of total re#enue and -A2 of operatin'

income in Y /0, "ut its percenta'e of total re#enue has declined sli'htly from

o#er /2 C years a'o$

Mylan currently trades at trailin' multiples of $C& 4D = Ee#enue and $C& 4D =

4BI?*$ orward multiples in our "ase case re#enue and mar'in assumptions are

$0& 4D = Ee#enue and $/& 4D = 4BI?* in Y /0C, e&cludin' the impact of the

*'ila ac7uisition (which is set to close in 9: of Y /0C)$

#n&e*tment The*i*

8urrently, the market #iews Mylan as a fairly standard 'enerics pharmaceuticals

company in the middle of the ran'e of its peer companies in the industry$ *s a

result, it also trades at #aluation multiple s7uarely in the middle of that ran'e, and

its multiples are close to those of *cta#is, its closest peer (e&cludin' the impact of

ac7uisitions)$

Fowe#er, the stock is priced imperfectly for the followin' reasons>

0$ here is si'ni6cantly mo)eupside to the *'ila ac7uisition than the market

has priced in G as demonstrated "y channel checks we performed in

emer'in' markets such as Bra3il, which comprises @2 of *'ilas re#enue$

actorin' in hi'her1than1proHected 'rowth rates, our analysis implies a

#aluation of at least +C0$// G +C$// per share #s$ Mylans current price of

+-$./$

http>==www$mer'ersandin7uisitions$comhttp>=="reakin'intowallstreet$com


3/11

$ here is si'ni6cantly le**downside in the decline of its specialty se'ment

than the market has attri"uted to it$ 4#en with more conser#ati#e estimates,

the speci6c decline rate of this se'ment only accounts for appro&imately

+/$@A G +0$// of Mylans implied per share #alue$ In most reasona"le

scenarios, a faster1than1e&pected decline rate would push down Mylans

#aluation "y at most+/$A/ per share$C$ %hile some ha#e e&pressed concern o#er 'rowth in its core 'enerics

se'ment, e#en with lower assumed 'rowth rates o#er the ne&t A years, there

is still potential upside of at least 0/2 o#er the ne&t 0 months furthermore,

the launch of key new products such as ;eloda in the middle of this year

reduces the risk of lower1than1e&pected re#enue 'rowth$

4ach of these reasons ties in directly to the companys #aluation and will make a

su"stantial impact (in the case of reasons J0 and JC a"o#e), or will make far less ofan impact than what the market currently e&pects, e#en in a downside scenario (for

reason J)$

4#en if some of these reasons turn out to "e incorrect, any one of the factors a"o#e

represents a si'ni6cant diKerence from the current market #iew of the stock and

could result in su"stantial upside$

If all of the factors a"o#e turn out to "e incorrect, then Mylan is #alued appropriately

at its current stock price and an in#estment would represent minimal downside risk,

e#en if theres no room for share price appreciation$

$ataly*t*

8atalysts in the ne&t .10 months include>

he close of the recently announced +0$. "illion *'ila ac7uisition (e&pected in

9: Y /0C)

he companys 6rst earnin's announcement post1ac7uisition and

he ;eloda launch in the middle of the year$

8atalysts J0 and J are interrelated and are the most si'ni6cant in terms of

#aluation$ Lpeci6cally, the ac7uisition of *'ila may result in +:A/ million in

additional re#enue in Y /0: and o#er +0/ million in 4BI?*, with re#enue'rowin' to o#er +// million and 4BI?* 'rowin' to +C// million in Y /0@$

his makes a diKerence of o#er +@$// per share in the "ase case assumptions in our

?8 analysis (discount rate of .$@2, terminal 8 'rowth rate of 0$/2, and 'enerics

re#enue 'rowth at @2 initially, fallin' to :2 "y Y /0@)>

/#THO0T*'ila, Mylans implied share price is in the +/$// 1 +C/$// ran'e>



4/11

Its implied share price is e&actly +A$0 without the ac7uisition, "ut it Humps to

+C$// per share with the ac7uisition included in future years (the hi'hli'hted

area "elow shows more of a downside case C/1:/2 re#enue 'rowth is likely

"ased on our channel checks)>

*s shown in the ta"le, e#en if *'ilas re#enue declines at faster1than1e&pected rates

(the "ottom se#eral rows), there is still upside and a +-$// per share price is

plausi"le with the *'ila contri"ution$

8onsensus estimates currently pe' *'ilas re#enue 'rowth at A2 in Y /0:,fallin' to 0/2 "y Y /0@, "ut we ha#e assumed a premium to these num"ers

"ecause of the followin' factors>

Dia channel checks, we spoke with se#eral healthcare professionals in

emer'in' markets and they all a'reed that *'ilas market position in Bra3il

(which currently represents @2 of its re#enue) is hi'hly desira"le and #ery

diNcult to replicate 'i#en 'o#ernment re'ulations there and the re7uirement

to manufacture locally$ 4Kecti#ely, it has close to a monopoly in this fast1

'rowin' market and will maintain that for the ne&t se#eral years$

urthermore, se#eral customers in Bra3il mentioned that they e&pect demand

for inHecta"les will "e hi'her than e&pected and that the 'rowth rate in Bra3il

will "e e#en hi'her than o#erall inHecta"les 'rowth in emer'in' markets as a

whole$

*s a result, we "elie#e that CA2 'rowth initially followed "y a slower1than1

e&pected decline is reasona"le, which in turn will "oost Mylans share price once the

market 'ains knowled'e of this and prices it in appropriately$



5/11

he second catalyst, the companys 6rst earnin's announcement post1ac7uisition, is

si'ni6cant "ecause this e#ent may make the market reali3e the pricin' imperfection

in Mylans stock once the company pro#ides hi'her1than1e&pected 'uidance for Y

/0: as a result of the ac7uisition$

It is possi"le that the ac7uisition may not close, or may not "e appro#ed "y

'o#ernment authorities, or may not work as well as e&pected, "ut we address these

risks "elow in the section on In#estment Eisks$

inally, catalyst JC, the launch of the ;eloda "rand, is si'ni6cant "ecause it is a

+@// million "rand with the potential to "oost Mylans total o#er re#enue o#er the

ne&t A years "y anywhere "etween 2 and A2 dependin' on the re#enue

contri"ution each year$

his sensiti#ity ta"le shows the impact of Mylans 'enerics se'ment re#enue 'rowthand its o#erall operatin' mar'in o#er the ne&t A years on its implied share price>

%hile this ta"le does not directlyshow the impact of cumulati#e re#enue andre#enue 'rowth o#er A years, you can see the impact of e#en a 02 chan'e in initial

re#enue 'rowth in Y /0C> appro&imately 02 in e&tra re#enue 'rowth translates

into around +0$A in e&tra per share #alue$

%ith ;eloda and other new products, we "elie#e at least .1@2 re#enue 'rowth,

fallin' "y /$A210$/2 per year, is reasona"le, which would imply #aluations of at

least +$// 1 +C/$// per share, and potentially o#er +C$// per share$

*ll of the a"o#e represent catalysts that could "oost Mylans share price to our

tar'eted ran'e of +C$// 1 +C:$// per share in the ne&t 0 months if they all come

true and work as e&pected, the price may "e near the upper end of that ran'e, andif one or more is false, there is still potential upside in the stock "ut it would "e

reduced to the lower end of that ran'e, or sli'htly "elow it$

1aluation

%e ha#e #alued Mylan usin' pu"lic comps, precedent transactions, and the ?8

analysis$



6/11

o select compara"le pu"lic companies and precedent transactions, we ha#e used

the followin' criteria> [You 2ould e3plain the c)ite)ia he)e in a )eal *tock

pitch , 2e a)e *kipping it he)e in the inte)e*t o- time and 2anting to -ocu*

mo)e on the "$F analy*i*4]

Fere are the implied #aluation ran'es from these methodolo'ies> [You 2ould

di*play the )ange* -)om thi* analy*i* in a )eal *tock pitch and e3plain 2hat

the &aluation )ange* tell you a(out the company , might it (e

unde)&alued5 O&e)&alued5 1alued app)op)iately5]

he discounted cash Oow analysis uses the followin' "ase case assumptions>

Initial Penerics Le'ment re#enue 'rowth of @$/2, declinin' "y /$@A2 per

year ("ased on Mylans product pipeline, e&pected launch dates, and

consensus estimates, which we ha#e seen no reason to de#iate from) Initial Lpecialty Le'ment re#enue 'rowth of 0/$/2, which then re#erses into

a /$/2 annual decline each year startin' in the second year G most analysts

proHect this se'ment to 'row for years "efore declinin', "ut we are "ein'

e&tra conser#ati#e with the "ase assumptions here

Qperatin' Mar'in of 0.$A2 and a& Eate of CA$/2, in1line with historical

le#els

+0$. "illion in de"t raised for the *'ila ac7uisition in Y /0C, with a +0A

million cash earnout in Y /0: *'ilas re#enue 'rows from +:A: million in

Y /0: to +/- million in Y /0@, with Qperatin' Income risin' from +00

million to +-C million G these num"ers e&ceed consensus estimates due toour channel checks and additional research

.$@2 discount rate ("ased on pu"lic comps and %*88), 0$/2 terminal 8

'rowth rate, and standard discount periods

Feres the ?8 down to the RQ5* line so that you can see the re#enue and

operatin' income contri"utions from diKerent se'ments and the *'ila ac7uisition>



7/11

Fere are the most rele#ant sensiti#ity ta"les "ased on key #aria"les in this analysis,

such as the discount rate, terminal 'rowth rate, and re#enue 'rowth and mar'ins>

6ey Takea2ay*:he analysis is hi'hly sensiti#e to "oth of these assumptions G

howe#er, these terminal 'rowth rates are also 7uite conser#ati#e and e#en in the

case of /$A2 'rowth, the company would only "e #alued at slightlyless than its

current stock price$ he "i''er 7uestion is the di*count )ateG is .$A2 or @$/2

more appropriateS Qur estimated rate is ri'ht in the middle of the ran'e$ his one

will re7uire some additional research$



8/11

Feres another ta"le for the initial re#enue 'rowth in Mylans 'enerics se'ment

(with the re#enue 'rowth rate fallin' "y /$@A2 each year, i$e$ the second year

would "e .$C2), alon' with the companys o#erall operatin' mar'in>

6ey Takea2ay*:If you look at the hi'hli'hted area, youll see that even in

downside scenarios, the #aluation implies, at worst, appro&imately a 0A2 discount

to Mylans current share price, and each /$A2 in mar'in contri"utes a"out +0$// pershare, with each additional 0$/2 of re#enue 'rowth addin' +0$A$

he more optimistic scenarios and implied #alues o#er +CA$// per share are less

likely, "ut from this ta"le it certainly seems like the potential upside e&ceeds the

potential downside$

%e ha#e already shown the analysis of *'ilas initial re#enue 'rowth and decline

rate in the 8atalyst section and 'i#en estimates for the impact of the Lpecialty

se'ment decline rate the key takeaways are that the Lpecialty decline rate is

almost irrele#ant, and that additional upside from *'ila contri"utes su"stantially to

implied #aluation, at around +0$A per share for each A2 of initial Year 0 re#enue'rowth$

Based on our research and channel checks, we "elie#e there is a hi'h likelihood that

actual re#enue 'rowth will meet or e&ceed these num"ers due to *'ilas fa#ora"le

'eo'raphical split and stron' competiti#e ad#anta'e in emer'in' markets$

#n&e*tment %i*k*

he top risk factors include>

0) he *'ila ac7uisition failin' to close) Inte'ration "ein' more challen'in' than e&pected (resultin' in lower re#enue

'rowth and=or mar'ins) andC) he companys new product launches for the comin' year, such as ;eloda,

'eneratin' lower1than1e&pected re#enue$

%ell address each of those risk factors in turn and e&plain how to miti'ate them>

!gila !c7ui*ition Fail* to $lo*e



9/11

If the *'ila ac7uisition does not close or is held up "y re'ulatory appro#al or "y

other factors, the company mi'ht "e worth closer to the +A$// G +C/$// per share

ran'e (see the ta"les in the 8atalysts section a"o#e)$

%hile that is not dramatically diKerent from its current price of +-$./, there is a

chance that the market may o#erreact and send the stock price down, or that the

stock price could fall as the company 'uides to lower re#enue and 45L in Y /0: as

a result of the delay$

o hed'e a'ainst this risk, we could "uy protecti#e put options on Mylans stock at a

strike price of +@$0@ (or somethin' close to that) to limit our losses to A2 this is

not an in#estment with massi#e upside, so we dont see a reason to accept 'reater

than A2 losses if the potential 'ain is only 0/10A2$

#nteg)ation i* Mo)e $hallenging than 3pected 8 me)ging Ma)ket* G)o2Mo)e Slo2ly

*s shown in the ta"les a"o#e, this in#estment thesis is hea#ily dependent on 'rowth

in emer'in' markets e&ceedin' estimates and the *'ila ac7uisition makin' a

su"stantial contri"ution to re#enue and operatin' income from Y /0: throu'h Y

/0@$

If that does nothappen, the companys implied per share #alue would "e closer to

+A$// G +C/$// per share in the case where initial re#enue 'rowth from *'ila is

"etween 0A2 and C/2 and the annual re#enue 'rowth decline rate is C$/2 G A$/2

rather than the C$/2 we#e assumed in the "ase case$

hat doesnt represent a massi#e potential loss, "ut we could hed'e a'ainst this

outcome "y lon'in' a competitor with less e&posure to emer'in' markets (e$'$

*cta#is), or e#en a much lar'er pharmaceuticals company with a more di#ersi6ed

pipeline, such as 563er or Merck$

Ne2 P)oduct Launche* 9eloda; Gene)ating Lo2e)


10/11

se'ments of the pharmaceuticals market, or one that oKers products in the same

se'ment (oral cancer dru's) "ut with more competiti#e pricin' or other "ene6ts$

his would re7uire additional research on the market and peer companies toe&ecute properly$

The /o)*t $a*e Scena)io

*nother risk is that we could "e wron' a"out e#erythin' outlined a"o#e, from the

re#enue 'rowth rates and mar'ins to the ac7uisition, new product launches, and

more$

* true worst case scenario mi'ht result in an implied share price of "etween

+0A$// and +/$// if you assume dramatically lower re#enue 'rowth, lower

mar'ins, a si'ni6cantly hi'her discount rate, and a terminal 8 'rowth rate of lessthan 0$/2$

*ssets minus ia"ilities on Mylans Balance Lheet is currently +C$: "illion, which

e7uates to a stock price of +-$./$

If you su"tract out Intan'i"le *ssets and Poodwill, howe#er, the picture is notas

fa#ora"le since Tangible*ssets minus ia"ilities is actually a ne'ati#e num"er G as

is often the case for pharmaceutical 6rms with I51hea#y portfolios$

Lo there is not much Balance Lheet protection, "ut we could protect a'ainst these

e&treme downside scenarios #ia protecti#e put options, lon'in' the stock of peer

companies such as *cta#is, or in#estin' in another company in the sector with a

diKerent 'eo'raphical and=or product focus$

*dditionally, there is another way to hed'e a'ainst this e&treme downside with

Mylan> since it has ac7uired so many companies in recent years, it could sell oK any

di#isions that ha#e not already "een fully inte'rated, or e#en ones that have"een

more fully inte'rated (and accept a discount to market #alue for them)$

%e would need to conduct additional research and do more #aluation work on what

these di#isions mi'ht "e worth, "ut the company has spent nearly +0 "illion on

these deals in the past se#eral years G on the surface, that is also a low per1share

#alue, "ut potentially they could "e sold for si'ni6cantly more than that +0 "illion

dependin' on how market #alues ha#e chan'ed o#er time$

Eeturn to op$

/hat Ne3t5



11/11

Row that you#e completed this case study and read throu'h this stock pitch a"o#e,

2hat=* ne3t5

%hat can you do to master these concepts and 'et more practice with all of thisS

Feres what we recommend>

0$ Fle*h Out the Mi**ing Piece* He)eG or e&ample, do your own channel

checks and your own industry research and see if you can con6rm = deny

some of these assumptions, or at least make your own ar'uments for or

a'ainst what we#e laid out a"o#e$$ P)actice 2ith You) O2n $ompanyG Tse what you#e learned here to

'enerate your ownin#estment ideas and stock pitches, in any industry youre

interested in$ he same structure always applies, "ut the model inputs,

research, and #aluation will "e diKerent$

*nd if youre lookin' for a more structured approach>

0$ >o( Sea)ch "ige*t /e(ina)*G %ere actually co#erin' this #ery case study

and includin' more on the technical parts in a case study on uesday ne&t

week (Uune Ath)$ If you si'n up for the Uo" Learch ?i'est newsletter, youll

recei#e an announcement a"out this we"inar and instructions on how to Hoin$$ Numi=* Stock Pitch and $a*e Study Se)&iceG I linked to this at the end of

the pre#ious articles, "ut hes your "est source for personali3ed assistance

with your stock pitches and hed'e fund case studies and hes worked with

do3ens of clients o#er the years and helped them land oKers in e7uityresearch, hed'e funds, and more$ You can #isit his inkedIn pa'e hereor

email him at numi$ad#isoryV'mail$com$C$ .#/S Financial Modeling $ou)*e*G his is a relati#ely recent addition, "ut

we now include (onu* ca*e *tudie*if you#e si'ned up for the

undamentals or *d#anced courses (or any com"ination thereof)$ If youre

already a mem"er, click here to access them$ hese case studies co#er

#aluation, mer'er models, BQ models, and more, and se#eral of them also

teach you how to make in#estment recommendations in 54 and F

inter#iews$

Eeturn to op$

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hf case studies part 4 myl stock pitch

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