Case 068Long pitches and valuationCore
Tarsil Pharma trades at 14x earnings while three peers trade at 20x, 22x and 24x. But 35% of Tarsil's revenue comes from one US product that loses patent protection in two years, which would cut earnings by 30%. Is Tarsil mispriced against its peers?
1The situation
Tarsil Pharma, a mid-sized generic and speciality drug maker, trades at 14x this year's earnings. Three listed peers with similar businesses trade at 20x, 22x and 24x. A screen flags Tarsil as the cheapest name in the group.
35% of Tarsil's revenue comes from one speciality product sold in the US, whose patent expires in two years. Once generic competitors enter, you estimate Tarsil's earnings fall 30%. None of the three peers faces a comparable patent expiry in the next five years.
2Your task
Is Tarsil cheap against its peers, or is the discount explained? Put numbers on it and say what would change your mind.
Quick check
On earnings after the patent loss, what multiple is Tarsil trading at?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
Mostly explained: on earnings after the patent cliff Tarsil trades at 20x, level with the cheapest peer. Add back two more years of full earnings and it is worth about 4% to 14% more than today at 20x to 22x, a modest gap, not the 36% discount to the median the screen shows. If generics cut earnings 40% instead, Tarsil is dearer than its peers at 23.3x. The opportunity, if any, lies in the pipeline that replaces the product.
Step 1What is the screen missing?
The screen divides today's price by today's earnings, and a third of those earnings has an expiry date. A shop with a lease ending in two years on its busiest counter should not be valued on this year's sales. A 30% cut leaves 70 of every 100 of today's earnings, so a 14x multiple on today's earnings is 14 / 0.7 = 20.0x on the earnings that last. That puts Tarsil level with the cheapest peer and below the 22x median, not at a 36% discount. The patent cliffThe fall in a drug maker's revenue and profit when a patent expires and cheaper generic copies of the drug enter the market. is exactly the kind of fact a multiple screen cannot see.
Step 2Is any of the discount left once you count the next two years?
A little. The product still earns for two more years, which a post-cliff multiple ignores. Two years of the extra 30 per 100 of earnings, discounted at 10%, is worth about 52 per 100 of today's EPS; add it to 20x to 22x on the lasting 70, and Tarsil is worth 1,452 to 1,592 against a price of 1,400. That is 4% to 14% of possible upside, and it assumes both that the cut is only 30% and that peers deserve their multiples.
| Per 100 of today's EPS | At 20x | At 22x |
|---|---|---|
| Lasting earnings after the cliff | 70 | 70 |
| Value of lasting earnings | 1,400 | 1,540 |
| Two more years of the product, at 10% | 52 | 52 |
| Value | 1,452 | 1,592 |
| Against a price of 1,400 | +4% | +14% |
Step 3What would change your mind either way?
Three things. First, the size of the cut: if generic entry takes 40% of earnings rather than 30%, Tarsil is at 23.3x lasting earnings and is expensive, not cheap. Speciality products can hold price longer than plain generics, or lose it faster if several competitors launch at once. Second, the pipeline: a product in late-stage trials that could replace some of the lost profit would make the lasting earnings higher than 70. Third, the peers: if one of them has a cliff you have not found, the median is overstated. The honest answer names the cliff first and pitches Tarsil only if you have a view on one of these.
Where candidates lose it
The usual loss is taking the screen at face value and pitching Tarsil as a cheap stock with a 36% discount to peers. The interviewer planted the patent to see whether you would ask what earnings the multiple is on.
The second is overcorrecting and valuing Tarsil only on post-cliff earnings. The product still earns for two years, and that cash is part of the value.
What the interviewer asks next
- Tarsil announces a licensing deal that replaces a third of the lost profit. What is the stock worth now?
- How would you pair Tarsil against one of the peers to isolate the patent view?
- What evidence would tell you how fast generics will take share?
Asked at Point72, Investment Banking, London, 2026 (Wall Street Oasis): one stock you find interesting one stock mispriced compared to its competetitprs
Company names and figures are illustrative.