Mylan’s EpiPen profitable despite recalls, lawsuits; stock price immune to ethics rants

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Mylan NV (Amsterdam) is facing a new class-action lawsuit related to the price hikes of it EpiPen devices.

The lawsuit was filed in federal court in Tacoma, Washington on Monday (April 3, 2017) by EpiPen buyers and alleges that the company conspired with pharmacy benefit managers (PBMs) to overcharge them.

PBMs are firms that act as intermediaries between pharmacies, insurers and drug companies. They work by fulfilling the prescription orders for insurance companies and corporations, and also negotiate pricing with drug manufacturers and pharmacies.

The price of auto-injection epinephrine pens rose six times, from $100 in 2007 when Mylan acquired EpiPen to more than $600 for a two-pack of device, according to Investopedia.

While Mylan continues to defend itself in many other lawsuits related to EpiPen pricing, the recent case is the first to charge the PBMs, alleging their role in aiding the price rise.

The allegations include Mylan making large rebate payments to PBMs for favoring EpiPen over competitors, which helped the company command a massive 95% market share of epinephrine auto-injectors. The offered rebates to PBMs magnified the label price of the EpiPen.

The plaintiffs have filed their claims under the Racketeer Influenced and Corrupt Organizations Act, which has been traditionally used to fight against organized crime.

Although the lawsuit names three top US PBMs, including CVS Health, Express Scripts Holding Co. and UnitedHealth Group Inc.’s OptumRX, it does not name them as defendants.

These three largest PBMs of the US jointly account for 80% of the national prescription drug industry and manage benefits for around 180 million individuals. Along with insulin makers, the three PBMs are facing a lawsuit in New Jersey federal court over their price schemes. Through the lawsuit, the plaintiffs are seeking to represent a nationwide class of EpiPen buyers in seeking damages.

Mylan investors were faced with a relatively ugly headline on Friday (March 31, 2017) after the close as it was announced that an EpiPen recall that the company was already undergoing was to be expanded to the United States due to malfunctioning EpiPens.

CBSNews reported, Meridian Medical Technologies, makers of Mylan’s EpiPen injector, issued a nationwide, voluntary recall of EpiPen and EpiPen Jr.

According to the company, some of the devices may have a defective part that does not allow for the activation of the injector in case of allergic reaction.

“While the number of reported failures is small, EpiPen products that potentially contain a defective part are being recalled because of the potential for life-threatening risk if a severe allergic reaction goes untreated,” the company said in a statement.

Mylan is also dealing with another setback. The US Food and Drug Administration ordered a major recall of EpiPen and EpiPen Jr. on Friday amid concerns that some of the injectors could fail to activate because of a defective part.

Evercore ISI analyst Umer Raffat believes that the recall will not have a significant impact on Mylan’s revenues, based on the estimated cost at about 3%, or $21 million, of Mylan’s expected $650 million in US EpiPen sales this year.

Steve’s Take:

Amidst national outrage over the steep cost hike of a potentially life-saving drug, questions continue being raised about the market ethics of drug pricing.

There are “a lot of factors” behind price increases in the prescription drug market, said Dr. Jack Hoadley, a health policy analyst and researcher at Georgetown University, according to the Catholic News Agency. Thus, it’s hard to attribute the 400% rise in cost of the EpiPen to one particular cause, he said.

However, if Mylan–the manufacturer of the EpiPen–was simply “taking advantage of a partial monopoly,” he continued, then one “could raise the question” about the ethics of the cost increases.

The EpiPen is an injection device used on a patient whose allergic reaction has become a medical emergency. Some 3.6 million Americans were prescribed an EpiPen last year, according to the Wall Street Journal.

In very serious cases, an allergic reaction can become Anaphylaxis, a life-threatening condition with symptoms including trouble breathing, reduced blood pressure, gastrointestinal problems, and itchy skin. Some of the most common reactions of Anaphylaxis are from peanut and shellfish allergies, bee stings, and latex exposure.

These severe allergies require a hospital visit and an immediate injection of epinephrine, the drug in EpiPens. Since it acquired the EpiPen in 2007, Mylan has been raising the cost of the device. In 2007, two pens cost just over $100, but now they rose to over $600, according to the New York Times. EpiPens can only be used once because of a spring-loaded mechanism for dispensing the epinephrine that activates upon injection.

The news of the price hikes has led to a widespread outcry. Hoadley suggested that if the EpiPen price hike is an example of drugmakers taking advantage of very limited competition, at the expense of people who need the drug, ethical questions could be raised. Different consumers will be affected by the cost hike in different ways, he noted.

For instance, someone without insurance will have to pay the high out-of-pocket costs for the EpiPen. A low-income family whose children are on Medicaid or the Children’s Health Insurance Program may obtain it for a small co-pay or even for free, and the cost would be passed on to the states or federal government.

For those with private insurance, it would depend on their plan. In the short-term, there only might be a small increase in their co-pay, but a large increase in their premium later on. In cases where a health plan doesn’t cover an EpiPen, however, patients may be on the hook for most or all of the cost of new pens.

However, Hoadley said, Mylan’s cost increase is a “symptom of some of the issues that we’re dealing with” in the larger prescription drug market as a whole, where cost hikes of drugs have been linked by some to companies using “market leverage.”

For instance, Martin Shkreli–former CEO of Turing Pharmaceuticals – made headlines after Turing increased the cost of its anti-parasite drug Daraprim from $13.50 to $750. Subpoenaed by Congress, he simply told members that he would “invoke my Fifth Amendment privilege against self-incrimination.”

I side with those who think that the EpiPen recall is not nearly as big a deal as Mylan’s stock price has made it out to be. In fact, on the heels of a strong earnings report and shares climbing back into the high $30 range (closing at $38.70 on April 4), the stock remains an extremely strong buy, says Seeking Alpha.

It doesn’t appear that drug pricing is going to be an issue the way it once was. Buying sectors selectively that have gotten hammered over the last year or two can be a very lucrative strategy. But it still requires nerves.

Pharmaceuticals nosedived in October 2015 when the issue of drug pricing was first raised by Hillary Clinton. Since then, companies like Mylan have been taken to the woodshed with ridiculously low valuations despite having a wide portfolio of products and being mightily cash-flow positive.

Like investors in the retail space, investors in healthcare and pharmaceutical stocks are simply shell-shocked due to the avalanche of negative headlines the last couple of years.

This latest EpiPen recall, while a negative headline for the day and certainly germane if you use one, will be addressed dealt with just like an automotive recall in due time, Seeking Alpha argues. They’ve hit the nail on the head. The recall does not affect generic EpiPens that the company has been making and it’s taking steps to make sure those who need to receive new EpiPens get them.

Bottom Line:

Sentiment in the Pharma space was horrendous over the last two years and names like Mylan and other drug companies with debt got distressed-style valuations based on the amount of leverage they had.

While this was appropriate for some names, like Valeant Pharma, it was unfitting for companies like Mylan which are diversified and have manageable debt loads. It may take a while, but we expect that valuations in the sector will eventually start to expand again.

With the failure of Trumpcare and reprieve of Obamacare, many of us expect that healthcare is not going to be an issue that comes up again anytime soon under the Trump administration. We think about the healthcare issues that Trump campaigned on that are likely to be abandoned from this point going forward.

First, he campaigned on repealing and replacing Obamacare. We know that this isn’t going to happen. Second, he campaigned on working on reducing drug prices with the pharmaceutical industry. We are fairly certain that this would have been part of a new healthcare bill and may not wind up being addressed at all going forward.

Seeking Alpha believes Mylan’s cash-flow stream looks to only strengthen in the future for the company and predicts that Mylan will eventually, over time, see its valuation expand to closer to 10X estimates, which are about $5.78 for next year. Should this happen, shares could be trading closer to $58, representing upside of about 50%.

Steve's Take: 50% upside on @MylanNews is a compelling reason to add to your #biotech portfolio Click To Tweet

Although contrarian to the once nearly unanimous negative sentiment toward its stock, there’s now a compelling argument here for adding MYL at these levels. And a compelling case for a 50% upside doesn’t come along every day.

Steve Walker has no position in any stocks mentioned. MedContent Inc. has no position in any stocks mentioned. has a disclosure policy.

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