Mylan Lab’s Proposed Merger with King Pharmaceutical Harvard Case Solution & Analysis

 Analysis:

Quantitative analysis of KP:

Quantitative analysis of the deal is done in order to identify the value of KP through various methods. These include:

-       Discounted cash flow projections (DCF)

-       Value based on multiples of comparable transactions

-       Value based on multiples of comparable companies

Calculations performed are discussed below:

DCF:

For the purpose of value determination through DCF approach, a discount rate is determined using the WACC approach that suggests the discount rate for KP to be 6.17% using the beta calculated from stock prices. The cash flow sums up to $8.8 billion based on cash flow projections and terminal value. Following assumptions are used for calculations:

-       Average of KP’s data available for last three years.

-       Synergies are considered to be $100 million per year.

-       Growth rate of the pharmaceutical industry is not stable and is quite unusual. Hence, a 3% short-term growth is assumed for KP (as it is under pressure) and a 1% long-term perpetual growth rate is assumed for terminal value.

-       Market risk premium is assumed to be 5% on equity exposures, which is beyond risk-free rate.

Simple Weighted Average Cost of Capital (WACC) Calculator

Beta             0.46
% Debt

14.46%

2003 balance sheet
% Equity

85.54%

Corporate Tax Rate

36.40%

Average of last 3 years
Risk-Free Rate

4.45%

10 year Govt. rate
Market Risk Premium

5.00%

Assumption
Interest rate

4.51%

https://www.treasurydirect.gov/govt/rates/pd/avg/2004/2004_07.htm
Cost of debt

2.87%

Cost of Equity

6.73%

WACC

6.17%

 

DISCOUNTED CASH FLOW PROJECTIONS

g

1.00%

Perpetual (long term) growth rate - Assumption

k - Discount rate

6.17%

WACC

Perpetuity rate (k-g)

5.17%

Cash flows

0

1

2

3

4

5

2004

2005

2006

2007

2008

2009

Growth rate

3%

3%

3%

3%

3%

EBITDA

599.4

617

636

655

675

695

Depreciation

15%

95

98

100

103

107

Capital Expenditures

12%

76

79

81

84

86

Operating NWC

170%

1,053

1,084

1,117

1,150

1,185

Tax rate

36%

36%

36%

36%

36%

36%

Cash Flow
EBIT x (1-tax rate)         393           404           417           429           442
Synergies         100           100           100           100           100
Add: Depreciation           95             98           100           103           107
Less: Change in Working Capital        (775)            (32)            (33)            (34)            (35)
Less: Capital Expenditure          (76)            (79)            (81)            (84)            (86)
Free Cash flow        (264)           492           503           515           528        1,774
WACC

6.17%

6.17%

6.17%

6.17%

6.17%

PV of FCFF        (249)           436           421           406           391        1,405
Terminal value      10,315
PV of terminal value        7,646
Free cash flow to firm - FCFF        9,051
Less: Net debt          (199)
Free cash flow to Equity – FCFE        8,852

 

Excel file shows calculations in detail.

Multiples (comparable transactions and comparable companies):

Similarly, multiples used in recent transactions and multiples of comparable companies are also considered in determining the value of KP.   Calculations are made based on the recent data of KP and average of comparable transactions of rival firms (based on revenue and earnings that are comparable / close to that of KP). The result of calculations is as follows:

Comparable transactions

Comparable transaction as per revenue and EBITDA

 Kings dataRocheSICORLek PharmaceuticalALZAAverageValue as per multiple
Revenue multiple            1,521

2.132564841

7.260964912

3.103559871

14.04060667

6.634424074

           10,093.61
EBITDA multiple              599

1.336343115

18.29281768

13.7

42.72664615

19.01395174

           11,396.96
Net income multiple              106N/A

25.8671875

29.96875

62.26977578

39.36857109

            4,169.13
Comparable companies

Comparable companies as per revenue and EBITDA

 Kings dataWatsonEndo HealthOno PharmaceuticalPerrigo CompanyMylan, Inc.AverageValue as per multiple
Revenue multiple            1,521

2

4.7

3.1

1.3

3.5

2.92

       4,442.49
EBITDA multiple              599

6.9

18.3

7

9.3

9.6

10.22

       6,125.87
EBIT multiple              475

8.9

19.1

7.5

11.9

10.6

11.6

       5,507.68

Observation of valuations can be enhanced in the summarized graphical view as shown below....................

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