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Mylan’s PE Ratio of 10.1x Is Lower Than Its Peer Ratios

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Mylan’s price-to-earnings ratio

Mylan (MYL) announced its 3Q15 results on October 30, 2015. Since then, Mylan has been trading at a price-to-earnings (or PE) ratio of 8.6x–10.1x. As of January 26, 2016, Mylan traded at a PE ratio of 10.1x that was lower than its peers like Bristol Myers Squibb (BMY), Pfizer (PFE), and GlaxoSmithKline (GSK). Respectively, the three peer ratios stood at 20.3x, 11.5x, and 15.6x.

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Relative valuation

The success of a generic pharmaceutical company depends on the commercial success of its product, competition within the industry, and the pricing of the product. It also depends on the possible success of the R&D (research and development) pipeline. Considering all these factors, a discounted cash flow valuation is a more appropriate method to evaluate a pharmaceutical company.

A company can be fairly valued with a combination of discounted cash flow and option valuation. However, these techniques require a large number of inputs assumptions. If an incorrect value is assumed, the impact will be seen on the whole model and adversely affect the output. The relative valuation should help investors determine if the stock is undervalued or overvalued when its compared to peers.

Mylan’s operating expenses

In this section, we’ll see what percentage of total revenues of Mylan are utilized for R&D purposes. In 3Q15, R&D expenses were at $174.8 million compared to $158.2 million for the same period of the prior year. The rise was mainly due to the impact of the EPD[1. Established Pharmaceuticals Division] that Mylan acquired from Abbott Laboratories (ABT). R&D expenses accounted for ~6.4% of the total revenues of 3Q15.

Also, SG&A [2. Selling, general, and administrative expenses] rose for the quarter to $537.1 million for 3Q15 from 418.3 million in 3Q14. The rise was due to costs incurred on the acquisition and integration of Abbott’s EPD. SG&A accounted for ~20% of the total revenues.

The iShares NASDAQ Biotechnology ETF (IBB) holds ~3.8% of its portfolio in Mylan.

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