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Expect a Slow and Steady Climb Ahead for Mylan NV

Mylan stock - Expect a Slow and Steady Climb Ahead for Mylan NV

Source: Greg Friese via Flickr

Now that the Mylan NV (NASDAQ:MYL) EpiPen pricing scandal is but a distant memory, the stock’s upward trend line on the stock market appears sustainable. Mylan stock resonated with investors at the start of 2018 and pulled back after that, but its fourth-quarter earnings report suggests the company will reward its patient shareholders.

Mylan is realistic about the headwinds it faces in the near-term, which threatens its prospects. The government is cracking down on opioid suppliers while still scrutinizing the pricing model of drug firms. Fortunately, Mylan is experienced in navigating the U.S. markets and believes it is in a strong, competitive position to absorb the tougher market conditions.

In the last decade, the company diversified its business to markets outside the U.S. As a global firm, Mylan may leverage its business and grow without worrying about the turbulent U.S. regulatory changes. Last year, more than half of Mylan’s approximately $12 billion in revenue came from outside the U.S.

Mylan Stock’s Mixed Bag

Mylan reported a 7-percent drop in earnings year-over-year, due to the revaluation of the EpiPen. The “rebasing” of the EpiPen cut profits by $500 million. Still, the company generated incredibly strong free cash flow of $2.6 billion, up 20 percent YOY. In hindsight, the EpiPen pricing scandal created an entry point for value investors. Even at stock trading Thursday at around $41, its forward price-earnings ratio is just seven times.

Value investors may argue that the P/E is still high at 27 times. By comparison, Regeneron Pharmaceuticals Inc (NASDAQ:REGN) is valued at a 16x forward P/E. Allergan plc (NYSE:AGN) trades at a forward P/E of around 10 times. These numbers clearly show Mylan’s strong cash flow and relatively strong growth ahead make its stock a compelling value investing idea.

Management continued to maximize shareholder returns by buying back $1 billion in its stock and buying back $1.36 billion in its debt. At a time when interest rate hikes will raise the cost of debt, Mylan’s pre-emptive move to lower its debt makes sense. Valeant Pharmaceuticals Intl Inc (NYSE:VRX) still has an unfavorable debt/equity, enough that investors are nervous about its ability to manage it.

Mylan’s situation is completely different. Not only are debt levels low, but the current FCF allows Mylan to cut its leverage faster than Valeant.

Mylan has also launched new products to broaden its portfolio and grow FCF generation. On Wednesday, the company launched a generic of Bristol-Myers Squibb’s Co’s (NYSE:BMY) Mutamycin in the U.S. This is a $59 million market. On March 2, the company said it would launch two HIV drugs in the U.S. These products will be priced at significant discounts to the competition, a move that should give Mylan market share growth.

Outlook for Mylan Stock

Mylan forecast revenue of between $11.75 billion to $13.25 billion, up 5 percent in 2018 compared to the previous year. Earnings per share will be between $5.20 to $5.60 or up 18 percent YOY. Free cash flow will be in the range of $2.1 billion and $2.5 billion. Mylan’s growth driver this year is the ARV franchise in the U.S. and in particular, the recently launched generic of Efavirenz. In Europe, Mylan has three growth drivers: established brands, OTC portfolio, and new product launches. Management alluded on its conference call a willingness to invest in the key brands, such as Dymista and Creon, to support their product growth.

Assume a worst-case scenario where revenue grows in fiscal 2018 but dips the following year, then tapers off in the last two years of the 5-Year DCF Growth Exit model:

Input Projections
Fiscal Years Ending 17-Dec 18-Dec 19-Dec 20-Dec 21-Dec 22-Dec
Revenue 11,908 13,250 11,750 13,250 13,585 14,036
% Growth 7.50% 11.30% -11.30% 12.80% 2.50% 3.30%
EBITDA 3,243 3,710 3,408 3,975 4,076 4,211
% of Revenue 27.20% 28.00% 29.00% 30.00% 30.00% 30.00%

Source: finbox.io

Applying a discount rate of between 10 percent and 12 percent implies an average fair value of around $50 a share. That still gives Mylan stock an implied upside of over 20 percent.

Disclosure: Author does not own shares in any of the companies mentioned.

Article printed from InvestorPlace Media, https://investorplace.com/2018/03/expect-slow-steady-climb-for-mylan-nv-myl-stock/.

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