Mylan NV Still Undervalued Despite Unveiling of New Products

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MYL stock - Mylan NV Still Undervalued Despite Unveiling of New Products

Source: Greg Friese via Flickr

Whenever a company has a product that is facing a supply shortage, that is a positive indicator of profitability. Mylan NV (NASDAQ:MYL), while still trending upward on the stock market, is on pause and without direction at the moment. Markets do not yet recognize the growth potential in MYL stock.

Shortage in EpiPen

The price hikes for the EpiPen, which fell under government scrutiny, is but a distant memory. The U.S. is fortunate that the drug, used to treat severe allergic reactions, is not facing a supply constraint. Conversely, Canada must work with the FDA to alleviate the shortage. Pfizer Inc. (NYSE:PFE) is to blame. It produces the global supply of EpiPens for Mylan, but has manufacturing problems at its Missouri plant. Pfizer put some of the blame on an outside supplier, which has had problems with component sourcing.

 

The limited supply runs contrary to the appearance that Mylan deliberately hiked prices purely to lift profits. No competitor has yet succeeded in producing a generic version of the drug to alleviate the market’s imbalance for the EpiPen. Still, even if it cost Mylan fractions to make it, the list price paid by consumers and healthcare systems is significantly higher. Rebates and negotiations with pharmacy benefit managers (PBMs) cut the actual revenue Mylan makes.

Favorable Valuations

Mylan’s forward price-to-earnings ratio of around 7 appears to more than discount the company’s future prospects. On investor day, MYL executives noted that most of the contributions to EPS in 2018 will come in the back half of the year. Markets are discounting the risks that Mylan will miss on its earnings and revenue expectations. In effect, the market is mispricing MYL stock. In the near-term, the company is introducing drugs similar, called biosimilars, to Amgen Inc.’s (NASDAQ:AMGN) Neulasta, a white blood cell booster. La Roche’s Herceptin is used to treat breast cancer but Mylan won approval from the FDA to make a biosimilar five months ago.

Price Target on MYL Stock

Wall Street’s average price target on MYL stock is $50. This 25 percent upside may still understate the company’s true fair value. If EBITDA and revenue growth outpace expectations, then Mylan should trade at revenue multiples above that of similar companies. Per finbox.io, Valeant Pharmaceuticals International, Inc. (NYSE:VRX) and Teva Pharmaceuticals Industries Ltd. (NYSE:TEVA) should trade at lower EV / LT EBITDA multiples than that of Mylan. Since Mylan benefits from strong demand for core products like EpiPen and has a portfolio of upcoming new products, operating profits ahead will likely outpace these comparable companies.

Assuming an EV/LT EBITDA multiple of between 12-16, MYL stock is worth at least $50 and as much as $70 a share.

Mylan (MYL)

Source: finbox.io (click on the link to change assumptions)

Outlook for MYL Stock

Mylan forecasts revenue of between $11.75-$13.25 billion for 2018. Non-GAAP figures will be in the range of $5.20-$5.60 a share. At the high end, Mylan’s forward P/E ratio is 7.7, which is not even in the double-digits. Markets are clearly overstating the risks of the company’s debt load, which is 97% of equity. They could also be expecting a slow start in initial sales for its biosimilars.

In any case, the stock is trading at a steep discount to fair value for multiple reasons that the company will eventually show are not anything to be concerned about. A generally flat market and higher volatility could also explain why investors are avoiding the biotech sector overall. Higher rates put pressure on stocks because bonds become more attractive. They also raise the cost of debt refinancing, although Mylan is aggressively cutting down its debt to improve its balance sheet.

As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get actionable insight to achieve strong investment returns.


Article printed from InvestorPlace Media, https://investorplace.com/2018/04/mylan-nv-myl-undervalued-despite-new-products/.

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