Mylan to Pay $465 million Fine to Settle EpiPen Dispute

Drugmaker under scrutiny for raising prices of EpiPen by six-fold in less than a decade

m1Mylan N.V. (NASDAQ: MYL), the world’s third-largest generics and specialty pharmaceutical company, was under scrutiny for hiking prices on its lifesaving EpiPen by six-fold in less than a decade, making the device unaffordable for those who suffer from severe food allergies, as reported by Reuters on October 5th, 2016. The Centers for Medicare and Medicaid Services (CMS) pointed out that the drugmaker misclassified its epinephrine pen, EpiPen, as a generic drug, and thus may have avoided the hefty rebates attached to branded treatments. The revelation came after public outcry against Mylan for hiking prices for its EpiPen, which holds a near-monopoly position as the emergency treatment for severe food allergies.

CMS has accused the Netherlands-based drugmaker of underpaying rebates to state Medicaid programs by misclassifying EpiPen as a non-innovator multiple source drug (generic drug) instead of a branded drug. The Medicaid rebate for a generic is 13% compared with a minimum 23.1% if EpiPen was treated as an innovator drug with little competition (branded drug). Lawmakers are also investigating the impact Mylan’s EpiPen pricing has had on government-funded health programs.

According to CMS, U.S. government health plans spent more than $1 billion on Mylan’s EpiPen between 2011 and 2015. In response to a request from U.S. Senator Amy Klobuchar of Minnesota, CMS said that the Medicaid plan for the poor spent $797 million on EpiPen in the five-year period, including rebates provided by Mylan, or $960 million before rebates. Costs for the Medicare Part D program were nearly $335 million, which does not reflect rebates.

m2Mylan defends its stance

Mylan CEO Heather Bresch, who was pulled up by lawmakers during a Congressional hearing in September 2016 for raising list prices of a pack of two EpiPen Auto-Injectors to more than $600 in 2016, has defended the Company’s stance, saying that it has complied with CMS rules. Mylan has pointed out that the classification of EpiPen for Medicaid rebates had been made in 1997, a decade before it acquired the product. EpiPen was priced at about $100 in 2007, when Mylan acquired the product. Mylan has argued that the list price does not reflect its true earnings on EpiPen once its discounts to payers, development costs, and other expenses are taken into account.

Mylan has also defended itself saying that the new CMS rules that took effect in 2016 allow companies to clarify any classification issues for a product like EpiPen, with companies being asked to submit their requests by April 1st, 2017. Mylan said that EpiPen will be classified as a branded drug as of April 1st, 2017. In the meantime, Bresch has also assured lawmakers that Mylan will launch a generic version of EpiPen priced at a more affordable $300 before December 2016.

Mylan reaches settlement with DoJ

On October 7th, 2016, Mylan announced that it has reached a settlement with the U.S. Department of Justice (DoJ), under which the drugmaker will have to pay a $465-million fine to the DoJ to resolve questions that have been raised about the classification of EpiPen Auto-Injector under the Medicaid Drug Rebate Program. As part of the settlement, Mylan will not have to admit any wrongdoing.

The settlement between Mylan and the DoJ, made on a pre-tax basis, boosted the Company’s shares by nearly 12.5% in Monday, October 10th, 2016. Mylan’s shares also surged as a result of the Company’s affirmation that it expects EPS of $6 in 2018. However, management trimmed its full year FY16 adjusted EPS guidance by 5% to between $4.70 a share and $4.90 a share from a prior range of $4.85 to $5.15. Mylan attributed the downward revision to changes in EpiPen Auto-Injector access programs and the upcoming launch of the generic to EpiPen Auto-Injector.

Separately, Mylan also disclosed in a filing it has received a document request from the Division of Enforcement at the Securities and Exchange Commission (SEC) seeking communications with the CMS and documents concerning Mylan products sold and related to the Medicaid Drug Rebate Program. Mylan said it intends to fully cooperate with the SEC’s investigation.

Growing consumer ire against high drug prices

By seeking to address consumer concerns swiftly and assuring lawmakers of the launch of a more affordable generic version of EpiPen soon, Mylan hopes to resolve public outrage over its drug price increases. However, Mylan has an upper hand since EpiPen dominates the emergency allergy response market, with little or no competition at all. In 2013, French drug giant Sanofi SA (NYSE: SNY) launched a competing product, but later pulled it from the market citing dosing concerns. Teva Pharmaceutical Industries Ltd (NYSE: TEVA) was working on a generic version of EpiPen, but the Food and Drug Administration (FDA) rejected Teva’s application in February 2016. Other lower-priced alternatives are commercially available but are not as easy to use as EpiPen.

In recent years, public ire over price increases has caused stock selloffs and prompted Congressional hearings. Drug companies are gearing up to face a tougher pricing environment in the U.S. after both U.S. presidential candidates Hillary Clinton and Donald Trump pledged to clamp down on drug price rises. However, the threat of pricing regulation poses a huge risk to investors and points to problems within the U.S. healthcare system.

Stock Performance

m3Mylan’s stock ended the day at $37.07, falling 3.24%, at the close on Wednesday, October 12th, 2016, having vacillated between an intraday high of $38.35 and a low of $36.90 during the session. The stock’s trading volume was at 7,162,253 for the day. The Company’s market cap was at $20.33 billion as of Wednesday’s close.

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