Mylan’s EpiPen faces competition from Kaleo Pharma; just what the doctor ordered

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Privately held drugmaker Kaleo Inc. (Richmond VA), the main competitor to Mylan NV’s (Amsterdam) EpiPen, announced plans on Wednesday (October 26, 2016) for a US relaunch of its Auvi-Q injector for life-threatening allergic reactions in the first half of next year. (See all my posts on the Epipen saga)

Kaleo, the main competitor to @Mylannews #EpiPen, announced its US relaunch of Auvi-Q injector Click To Tweet

Like EpiPen, the shot, called Auvi-Q, can deliver an emergency dose of the drug epinephrine to stop a severe allergic reaction. It was recalled from the market last year because of manufacturing concerns tied to dosage accuracy, according to Reuters.

Mylan said last month it plans to launch, at a list price of $300, its own generic EpiPen by the end of this year.

Officials at Kaleo declined to comment on a planned list price for the re-launched Auvi-Q.

“We are working on what is the right price to assure that the ultimate patient co-pay is low,” Kaleo CEO Spencer Williamson told Reuters. “It is not in the best interest of patients or physicians to have high out-of-pocket costs,” says Williamson. “We’re engaging with all of the stakeholders–wholesalers and pharmacy benefits managers–to insure that we can provide this innovative technology to patients and that they can afford it. And we are going to assure that the out-of-pocket is going to be low for patients.”

Williamson says Kaleo will offer Auvi-Q at an affordable price even to patients without health insurance, and promises that competition will benefit patients. In the past, that wasn’t true, at least when it came to costs.

Auvi-Q was launched in 2013, by the drug giant Sanofi SA (Paris), which had licensed it from Kaleo, which was then known as Intelliject. The product had some compelling selling points.

Auvi-Q is smaller and easier to carry–the size of a credit card, and the thickness of a cell phone. Unlike EpiPen, patients never actually see its retractable needle. And the Auvi-Q instructs users how to give an injection with recorded voice messages, something that could be an advantage when a panicked parent is trying to save a child.

But those advantages didn’t translate to much in the way of sales. In 2015, the Auvi-Q’s best year, Auvi-Q was prescribed 353,589 times, compared to 3.4 million prescriptions for EpiPen.

Mylan has been widely criticized for raising the price of the EpiPen device by more than 600%. But when Auvi-Q was sold by Sanofi, it took virtually the same increases in its list price as EpiPen.

Between 2013 and 2015, the list prices of both products doubled to $500. Mylan has blamed its list-price increases partly on a system of wholesalers and pharmacy benefit management companies that are paid rebates in order to stock the drug.

Williamson couldn’t clarify how Auvi-Q would now be able to compete on price, saying only that he’s working with those stakeholders to come up with a pricing solution.

Sanofi voluntarily withdrew Auvi-Q in October 2015 because in rare cases the syringe would not deliver the proper amount of epinephrine, the drug used to treat severe allergic reactions.

Kaleo says it has fixed those problems with an extensive new, automated manufacturing process that uses a production line composed entirely of robots with more than 100 quality checks. Williamson said Auvi-Q will be manufactured at an automated robotic production facility located in the Midwestern United States.

Kaleo also sells Evzio, a hand-held device designed to automatically deliver a set dose of naloxone, a drug approved to treat an overdose of opioid painkillers. Evzio has a current list price of $3,750 for two active devices and one training device.

Steve’s Take: Consumers got some much-needed good news Wednesday upon learning there’s another product soon to be competing with the life-saving EpiPen, possibly within the next year. Competition usually bodes well for lower retail prices.

But what about investors? With its predatory price-hike history, it’s easy to frown and either dump or avoid Mylan’s stock.

Then again, the best time to buy a stock is when it’s beaten down and Mylan fits the bill, says InvestorPlace. Mylan stock has tanked more than 30% since mid-August.

The latest punch to Mylan’s groin comes in the unwelcome announcement by Kaleo that it intends to challenge Mylan by re-entering the market for epinephrine auto-injectors.

Kaleo didn’t disclose a price for the injector, but it has to compete with both Mylan’s branded and generic versions of EpiPen. The generic version is about half the price of the original.

That’s important because brand-name drugs can be hard to get consumers to replace with generics, so this isn’t necessarily a sure winner for Kaleo.

Analysts say the EpiPen market is worth more than $1 billion. That’s less than 10% of Mylan’s full-year revenue forecast. Kaleo’s product could produce a material hit, says InvestorPlace, but hardly a knockout punch.

Big pharma companies cycle through blockbuster drugs as a fairly routine matter. They’re used to eventually losing exclusivity. That’s why it’s so crucial for them to fill their pipelines via R&D or acquisitions.

At Mylan’s price-to-sales multiple of 2.01, the entirety of Mylan’s EpiPen business is worth roughly $2 billion in market cap. Mylan has already lost roughly $7 billion in market cap since the EpiPen price hikes hit the national newswires. Seems excessive, says InvestorPlace.

You can see this overreaction in what investors are willing to pay for Mylan’s future earnings. Shares currently trade at a forward price-to-earnings ratio of not-quite 7. That comes despite Mylan having a projected compound annual growth rate forecast of 13%. The S&P 500 is more than twice as expensive as Mylan stock despite having far worse growth prospects, says InvestorPlace.

But hold on a moment. Don’t count your stock profits before they hatch. There are more dark clouds forming on Mylan’s horizon.

It seems that the less Mylan and the Justice Department say about their big settlement over EpiPen, the more Congress wants to hear about it.

On Thursday (October 27, 2016), news broke that the Senate Judiciary Committee will hold a hearing Nov. 30 to examine Mylan’s agreement to pay the federal government $465 million to settle potential claims that the big drug company shortchanged Medicaid over rebates for EpiPen sales, according to CNBC.

You see where this is headed.

The hearing was called on Wednesday, Oct, 26, by committee chairman Sen. Chuck Grassley (R-IA). He is just one of several senators who have expressed frustration over the deal, with some calling for more disclosure about the yet-to-be-signed settlement agreement or for it to be ditched altogether.

The quickly arranged settlement–announced by Mylan on Oct. 7–allows the company to escape potential criminal prosecution over the matter, avoid having to admit any wrongdoing, and to not pay a higher rebate rate for EpiPen until next spring.

“Mylan’s management of the EpiPen has not only led to higher costs for patients and their families, but also for taxpayers in Iowa and across the nation by misclassifying its product to dodge higher Medicaid rebate requirements,” Grassley said.

“Americans deserve to know what the government is doing to hold Mylan accountable, recoup lost tax dollars and prevent similar behavior in the future,” Grassley said.

A press release from Grassley’s office noted that key details of the agreement and the background for it have yet to be revealed.

They include the question of whether Mylan’s payment is “proportional to what Mylan overcharged taxpayers,” as well as “how much of the settlement would be returned to the states,” who with the federal government jointly run Medicaid, which covers primarily poor people.

Another question is how much, if any, penalties under the federal False Claims Act would apply to the deal.

Mylan and the Justice Department also have refused to reveal what rebate rate the company will pay for EpiPen starting in April. A list of witnesses for the Senate committee hearing has yet to be announced.

In addition to looking at the Mylan deal, Grassley said the hearing will look at whether the federal government is doing enough with its current authority to prevent drug companies from misrepresenting their products to government programs, and what officials are doing to hold companies accountable for that.

A spokeswoman for Mylan declined to comment on the hearing.

Amid that criticism, questions were raised whether Mylan should have been paying a rebate rate of at least 23.1%–and probably well more than that–to Medicaid for EpiPen sales, instead of the 13% rate it had been paying.

Because Mylan has increased EpiPen prices more than 500% in recent years, analysts have suggested that the rebates owed to Medicaid by the company could nearly equal what it makes in sales through Medicaid.

The week prior, Sen. Elizabeth Warren (D-MA) sent Attorney General Loretta Lynch a letter saying that the deal with Mylan appeared to be “shamefully weak.” Warren said her staff had calculated that under the agreement Mylan may have been allowed to keep $65 million it should have paid the government in rebates.

But that’s not anywhere close to the potential additional liability.

Evercore ISI analyst Umer Raffat has said that if CMS told Mylan as far back as 2011 that it was paying the incorrect rebate rate, the company may have shortchanged Medicaid more than $700 million since then in rebates. That would be over $235 million more than the $465 million Mylan has already agreed to pay under the Justice Department settlement.

As if all this wasn’t off-putting enough for investors, on Friday Reuters reported that Mylan’s price hikes on EpiPen’s have added millions to US Department of Defense spending since 2008 as the agency covered more prescriptions for the allergy shot at near retail prices, according to government data.

Pentagon spending rose to $57 million over the past year from $9 million in 2008–an increase driven both by volume but also by price hikes that had a bigger bite on prescriptions filled at retail pharmacies, according to previously unreported data.

A Mylan spokeswoman, Nina Devlin, declined to comment on the specific department of defense spending, says Reuters. She said in an email statement that talks were underway to address “any questions or concerns from the agency.” She declined to say if any repayment to the Department of Defense (DOD) was in the offing.

But here’s some good news for the corporate players in this pharma-sector high drama. The Wall Street Journal on Thursday reported that Mylan executives, including CEO Heather Bresch, are unlikely to see their compensation reduced as a result of the $465 million settlement with the Department of Justice (or any other agency or by court order), because of the of the company’s practice of excluding litigation costs from pay calculations.

Steve's Take: Alas @Mylannews execs will not see their compensation reduced due to #epipen fracas Click To Tweet

That assurance must do wonders for helping Mylan execs sleep soundly at night.

Certainly in this country, one can’t criticize corporate execs from doing everything possible to maximize corporate profits while meeting the “straight-face” test. After all, that’s their job. On the other hand, Congress apparently is staunchly determined to penetrate the EpiPen pricing scheme at Mylan, and after hearing CEO Heather Bresch’s testimony, contain themselves. Good luck.

Mylan shares were little changed Friday at $36.89.