Mylan Lab's Proposed Merger with King Pharmaceutical Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

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 data	Roche	SICOR	Lek Pharmaceutical	ALZA	Average	Value 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	106	N/A	25.8671875	29.96875	62.26977578	39.36857109	4,169.13


Comparable companies
		Comparable companies as per revenue and EBITDA
	Kings data	Watson	Endo Health	Ono Pharmaceutical	Perrigo Company	Mylan, Inc.	Average	Value 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