David Einhorn's New Long Position In Mylan

Shares of Mylan NV MYL spiked up on Tuesday, after the Greenlight Capital funds disclosed a new long stake in the company in a letter sent to investors.

The firm initiated a position in the generic pharmaceuticals company over the fourth quarter, after the shares lost 29 percent in the first nine months of 2015. Moreover, as of the end of the third quarter, stock prices were down more than 45 percent from their mid-year highs, after competing generics-maker Teva Pharmaceutical Industries Ltd (ADR) TEVA dropped its hostile takeover bid for the company.

During the fall, investors became excessively focused on a few overhangs including “potential earnings dilution from a proposed and ultimately failed buyout of Perrigo (a private-label OTC business); corporate governance concerns including an unusual takeover-defense mechanism;” and general anxiety in relation to the pharma industry amidst scrutiny of Valeant Pharmaceuticals Intl Inc VRX and other specialty pharma companies.

Related Link: A Look Into David Einhorn's Q4 Letter To Greenlight Investors

The firm does envision eventual headwinds for Mylan's branded EpiPen product, which could face increased competition from generics towards the end of the year. However, the fund’s experts see “medium-term upside from a competitor recall, an announced share repurchase, and board review of corporate governance complaints.”

Ultimately, Einhorn and his team expect the company to earn roughly $7 per share in 2018, driven by a strong pipeline of respiratory, injectable and biologic drugs and by “further capital deployment including share repurchases.”

Greenlight started a its stake in Mylan at an average price of $45.32 per share, or about 9 times 2016 consensus EPS estimates.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.