JPMorgan Says Mylan Has 3 Paths To Upside

In a report published Wednesday, JPMorgan analyst Chris Schott shared his thoughts on Mylan NV (NASDAQ: MYL).

According to Schott, Mylan shares are showing an "increasingly attractive" set-up with solid organic growth prospects (12 percent earnings per share compounded annual growth through 2018), coupled with "significant" merger and acquisition optionality while trading at an "inexpensive" valuation of 13x 2016E earnings per share.

"While we a solid standalone case for Mylan, we increasingly view the potential for business development (as either a target or serial acquirer) as not well reflected in valuation and as a clear upside case for shares," Schott wrote.

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Scenario One: Organic Growth And Tuck-In

Schott argued that Mylan is one of the cheapest names in Specialty Pharma, driving healthy growth from its "complex" generics pipeline over the next several years. In addition, the company has over $7 billion in debt capacity and an upside case to Mylan earnings can be made through a combination of share repurchases and accretive tuck-in transactions.

Scenario Two: Mylan Acquired By Teva

Schott noted that the potential for a Teva Pharmaceutical Industries Ltd (NYSE: TEVA) merger has been discussed over the past six months and the merits of such a transaction are difficult to ignore. The analyst added that an $80 per share acquisition (based on 35 to 40 percent upside from current levels) could drive nearly 25 percent accretion to Teva's earnings.

Beyond Teva, Schott stated that it makes financial and strategic logic for another large generic manufacturer or established products division of a Major Pharma company to acquire Mylan.

Scenario Three: Mylan Pursues Acquisitions On Its Own

Finally, Schott argued that Mylan is operating in an "eat or be eaten" environment within Specialty Pharma and it would not be surprising to see Mylan pursue acquisitions of its own. The analyst noted that the company has the transaction and integration experience to pursue acquisitions, but did note that any deal wouldn't create comparable upside versus an outright sale of the company.

Shares remain Overweight rated with a price target raised to $70 from a previous $66.