Mylan discloses two more government probes; posts 3Q loss as EpiPen Woes Persist

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The maker of EpiPen emergency allergy injectors, under a microscope for repeatedly hiking the price of the life-saving device, revealed that it’s a target of two price-related probes by federal agencies and has had its premises searched.

@Mylannews revealed that it’s a target of two price-related probes by federal agencies Click To Tweet

The news, disclosed in a filing with the Securities and Exchange Commission, came after Mylan NV (Amsterdam) reported that it swung to a third-quarter loss, mainly due to a big settlement for overcharging the federal government for the product.

Mylan’s results missed Wall Street expectations, and the company stuck with the reduced 2016 profit forecast it issued last month when it announced that $465 million settlement.

In the SEC filing last week, Mylan disclosed that on Oct. 7, “Mylan received a document request from the Division of Enforcement at the SEC seeking communications” with the Centers for Medicare and Medicaid Services and documents concerning Mylan products sold to the Medicaid Drug Rebate Program.”

Mylan, which is technically based in Amsterdam but operates out of its Canonsburg, PA-based headquarters, also disclosed in the filing that on Sept. 8, the Department of Justice subpoenaed a company subsidiary, a senior executive and other employees about alleged price fixing and also executed multiple search warrants related to its probe.

Mylan said that Justice is seeking “additional information relating to the marketing, pricing and sale of” four generic medicines–cidofovir, glipizide-metformin, propranolol and verapamil—“and any communications with competitors about such products.”

Rumors have been circulating since the prior week that the Justice Department is investigating multiple makers of generic medicines for price fixing and collusion. That follows a trend in recent years of some generic drugmakers raising prices in near lockstep for medicines that compete with one another, mainly for drugs that are only made by two or three generic companies. Mylan wrote that it intends to cooperate with both the SEC and Justice inquiries.

Mylan also received a subpoena in December 2015 from the Justice Department Antitrust Division seeking information relating to the marketing and pricing of its generic doxycycline “and any communications with competitors about such products.”

The SEC filing also noted that Mylan has been hit this year with about 20 potential class action lawsuits filed by either shareholders or companies that paid for Mylan’s products alleging conspiracies to fix and raise prices for various generic medicines it sells.

Mylan said on Oct. 7 that it would pay $465 million to settle allegations that it overbilled Medicaid for years for EpiPen. The settlement with the Justice Department followed news that EpiPen has been incorrectly classified since late 1997 as a generic product under the Medicaid health program for the poor and disabled, rather than as a brand-name drug, for which rebates owed to Medicaid would be nearly twice as high as for generic medicines. That charge, other litigation costs and higher spending on marketing, administration and research, partly related to acquisitions, doubled Mylan’s operating expenses in the latest quarter.

Mylan has become the latest epitome of pharmaceutical industry price-gouging, for hiking the price of a pair of EpiPens from $94 in 2007, when it acquired the product, to $608 this year, despite making no substantive improvement to EpiPens over that stretch. Meanwhile, analysts and others have estimated that it costs less than $10 to produce one EpiPen.

CEO Heather Bresch, who recently testified before Congress that much of the $608 dollar list price for a pair of EpiPens goes to middlemen, told analysts that the current payment system needs change. “The system needs reinventing across the entire US healthcare landscape,” she said, along with greater transparency on how prices are set.

Bresch’s remarks are ironic, perhaps even disingenuous, given that Mylan does not break out sales figures for its top seller and best-known product, EpiPen, contrary to standard industry practice, and didn’t discuss the two probes on the call. The company also said that it now plans to launch a $300 generic version of EpiPen in December, after initially saying on Aug. 29 that it would do so within several weeks.

Mylan posted a third-quarter loss of $119.8 million, or 23 cents per share, after reporting a $428.6 million profit a year earlier. Earnings, adjusted for non-recurring costs, came to $1.38 per share, well below the $1.50 per share analysts expected.

The company, which mostly makes generic drugs, posted revenue of $3.06 billion in the third quarter, also missing Street forecasts, which averaged $3.23 billion. Mylan said its generics business brought in $2.61 billion, and its specialty drug division, which sells EpiPen and a couple other brand-name products, had sales of $418.7 million.

Mylan said it still expects full-year earnings in the range of $4.70 to $4.90 per share, down from a forecast issued in August of $4.85 to $5.15 per share. The company revised its outlook after announcing the $465 million settlement.

Mylan shares closed the week off 8% at $37.93, while other drugmakers and much of the broader markets were up.

Steve’s Take:

Last week was all about the presidential election, which resounded throughout the stock market when Donald Trump was elected. The election also threatened to overshadow several healthcare sector earnings reports and new government probes that have plenty of significance of their own.

Scandal-plagued Mylan is somewhere near the top of that list, if not the very top.

Check out all of my posts on the Mylan saga!

The company has been trying to defuse its EpiPen disgrace for months. So it has enhanced eligibility for its partner assistance program, announced it would create a generic EpiPen, and settled a Medicaid underpayment dispute with the US Department of Justice for $465 million.

But the stain is far from removed. Among other things, there’s news of another government subpoena. When it rains, it pours.

As part of its making the EpiPen treatment more accessible, Mylan has trimmed its full-year forecast from a range of $4.85 to $5.15 per share to a range of $4.70 to $4.90, according to US News.

And West Virginia’s attorney general is asking the DoJ to reject the “sweetheart” settlement. The deal hasn’t staunched the bleeding, either. Mylan has given up another 3% since these moves, extending its beatdown to nearly 35% for the year.

As was expected, when Mylan reported earnings, there really weren’t any real surprises in either direction. Many analysts thought that since the company had already reiterated its guidance for 2018 earlier in the week, it’s report was not going to hold any big surprises. For the most part, that’s precisely what happened.

First, most of the important financials that were reported met many expectations, including mine. Although the company missed EPS and revenue for the quarter, some of that was attributable partially to wholesalers preparing for the generic EpiPen launch by cutting back on the amount of branded EpiPen they carry, says SeekingAlpha.com.

Additionally, the company reiterated its guidance for this year at $4.70 to $4.90 in EPS and repeated its guidance for 2018 for $6.00. The company is going to be staging an investor roadshow during the upcoming quarter, wherein it has said it will issue 2017 guidance.

If Mylan is going to beat estimates–which stand at a 1% earnings increase to $1.45 per share on 15% revenue growth to $3.12 billion–it will come from the generics segment that has been saving Mylan all year. Instead, bulls should hold fast to the idea that a generic EpiPen marketed directly to consumers could actually boost future profitability.

Still, some disquieting issues linger.

After the rice pudding hit the fan, a steady drumbeat followed from management with a plea by CEO Heather Bresch for, what was it: “greater transparency on how prices are set.” But Mylan doesn’t break out sales figures for its cash-cow EpiPen, contrary to standard industry practice. The word “disingenuous,” doesn’t quite feel right. Perhaps “hypocritical,” “devious,” oh, and I almost forgot, “insincere.”

There’s also the matter of one thing, in particular, that Mylan’s Heather Bresch really doesn’t like to talk about: the tale of her erstwhile MBA degree. The scandal over Bresch’s business degree resurfaced amidst the early EpiPen price-gouging controversy.

The revocation of her MBA from West Virginia University–her home state school–was the least of her problems. Despite the fact she didn’t complete enough credits for the MBA, she addressed the issue more fully in the summer, explaining that, she really thought she had.

And now there’s Bresch’s father, Sen. Joe Manchin, delivering a sharp rebuke Friday to Senate Democratic Leader Harry Reid for denouncing Americans who elected Donald Trump.

“Senator Harry Reid’s statement today attacking President-elect Trump is wrong. It is an absolute embarrassment to the Senate as an institution, our Democratic party, and the nation,” Mr. Manchin, West Virginia Democrat, said in a statement released late Friday.

“I want to be very clear, he [Reid] does not speak for me,” said Mr. Manchin, one of the most conservative Democrats in the upper chamber of the U.S. Congress. Hmmm. Do I smell a defection?

I’m puzzled how the senior Senator of the “Mountain State,” which went solidly for Trump with its vast assemblage of unemployed workers and destitute families, handles questions about how his daughter, Heather, can reconcile her $19 million in salary and perks paid to her in 2015. I’m surmising her board probably “forced” her to take the money since under her mantle, the EpiPen [price-gouging] strategy raked in billions for Mylan. That was her job. What else could she do?

All that said, company shares, climbing relentlessly for years up to an all-time high of $76.06 on April 24, 2015, have crashed back to earth, down almost exactly 50% to $37.93 as of Friday.

Some investors wouldn’t touch Mylan shares with a 20-foot pole. Management is just too unprincipled, perhaps even corrupt, some may say. And there’s a bright spotlight now shining from Washington on every move. There may be more trouble ahead.

Steve's Take: @Mylannews looks attractive as an investment opportunity to other pharma companies Click To Tweet

But putting any emotional component about the company’s business ethics aside, and looking strictly at the investment opportunity, I’d have to say Mylan looks attractive, especially without Hilary Clinton around to require product pricing accountability. Of course, there’s still Bernie Sanders, and he’s not forsaking the fray anytime soon.

Mylan is further along in burying its self-created messes than rivals like Valeant Pharmaceuticals. All things considered, Mylan just looks attractive.