When Mylan said last month that it would consider a sale, analysts were skeptical the company could find an interested buyer. But one of them is changing his tune.
On Friday, RBC Capital Markets analysts Randall Stanicky laid out the case for a private equity player completing a leveraged buyout of the generics leader. It’s a potential move he says “should not be dismissed” thanks to Mylan management’s frustration with the company’s stock price and a generics industry Stanicky thinks is on the up-and-up.
The way he sees it, years without any stock movement—Mylan’s shares have been flat for the last five—may convince the company’s leaders to go private. They’ve already signaled their impatience with U.S. markets that continue “to underappreciate and undervalue the durability, differentiation and strengths of Mylan’s global diversified business,” as Mylan put it in an August statement.
And the generics industry, which has been ravaged by pricing pressure in recent years, could be headed for a turnaround, he figures, which would make now a “favorable” time for a private equity suitor to strike.
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Of course, there are some major hurdles—namely, that Mylan’s purchaser, even if prepared to take on a whole lot of debt, would have to put forth $11.6 billion in equity to pull off a deal of about $40 billion, according to Stanicky’s calculations. But while that’s a “large amount, there are plenty of examples of sizable LBOs to point to as support,” he noted.
Mylan first announced last month, amid a spate of bad earnings news, that it would launch a strategic review, keeping all options—including a sale—on the table. At the time, though, industry watchers didn’t get too jazzed about the possibility.
“Many at the time (including us) dismissed this as an attempt to support the stock amidst a sizable miss and guide cut,” Stanicky said.
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Even if the generics landscape does improve, though, Mylan still has some of the same problems that made other analysts doubtful it could work out a sale—such as troubles at a Morgantown, West Virginia, manufacturing facility and what Bernstein’s Ronny Gal called slower-than-expected approvals and uptake for the company’s complex generics.
“The U.S. business has been hit twice—once by the broader industry trends” affecting generics makers and “then by company-specific action,” Gal wrote to clients at the time.
Wells Fargo’s David Maris agreed in his own investor note, writing that, “We do not think there is a high likelihood that a public or private buyer for the company or significant parts of the company emerges.”