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Hate The Game, Not The Player? - Mylan Is Out Of Tune Amid An Angry Chorus


I take a broad view of Mylan's EpiPen pricing controversy.

I use a timeline of Mylan’s recent earnings reports to establish the background and context for the company’s response to the firestorm.

Detail the responses from the political, medical, and commercial establishments to claim that Mylan’s current efforts are insufficient and doomed to fail if the company stays the course.

The "hate the player, not the game" approach is an inadequate excuse for maintaining existing prices.

I conclude with trading and investing recommendations that assume more short-term pain to come ahead and potential longer-term upside IF Mylan’s sales goals are achievable.

This is the message actress to join a chorus of protest and complaint about the extremely high cost of the EpiPen® Auto-Injector, a device used to administer epinephrine for treating victims of a severe and potentially life-threatening allergic reaction (also known as anaphylactic). With hindsight, Parker expressed regret in her involvement with a campaign that included her son, a user of EpiPens, to promote awareness of allergic reactions and sales of the EpiPen device. The angry chorus Parker joined has caused a world of hurt for Mylan (NASDAQ:MYL), the maker of this important device.

A near geometric rise in the price of EpiPens shortly after Mylan acquired the device.

Source: CNBC

In this piece I take a broad view of the EpiPen controversy. I use a timeline of Mylan's recent earnings reports to establish the background and context for the company's response to the firestorm. I detail the responses from the political, medical, and commercial establishments to claim that Mylan's current efforts are insufficient and doomed to fail. I conclude with trading and investing recommendations that assume more short-term pain to come ahead and potential longer-term upside IF Mylan's sales goals are achievable AND all related parties can figure out a workable solution to the pricing mess in due time.

My extended family includes children and adults who are vulnerable to anaphylactic reactions to various kinds of allergens. I am quite familiar with EpiPens, and I take this topic very seriously. As a result I have followed the price outrage with great interest. In writing this piece, I discovered there is a LOT about this system of medicine delivery I did not fully appreciate. I come out the other side both more frustrated and hopeful.

The Mylan Solo Song - Sowing the seeds of wrath

I launch this tale with Mylan's perspective beginning with the company's Q2 2015 earnings report on August 6, 2015 (all quotes from the earnings conference calls come from Seeking Alpha transcripts). At the time, Mylan was bracing itself for an increasingly competitive market. Mylan's guidance for earnings took into account the arrival of a generic EpiPen sometime in the second half of 2015. This was a potentially important event given Mylan held an 86% share of the multi-epinephrine market and had achieved a double-digit growth rate up to that point in the year.

In just under three more months, the market dramatically changed with the convergence of two significant events before Mylan reported its earnings for Q3 2015 on October 30, 2015. Teva Pharmaceutical Industries (NYSE:TEVA) announced a delay of its generic entry into the multi-epinephrine market. MYL quoted a statement from TEVA in which the company indicated it would not likely produce a BX-rated or AB-rated alternative to the EpiPen "any earlier than the second half of 2016." Ironically, TEVA once targeted MYL for an acquisition. On July 27, 2015, TEVA announced it had dropped its plans to acquire Mylan. TEVA cited its intent to acquire Allergan Generics as a prime reason for the change in plans.

The other big news item preceding Mylan's Q3 2015 report came from Sanofi-Aventis (NYSE:SNY). Two days before Mylan's earnings, SNY announced what MYL described as an unprecedented, complete product recall of its competitor to the EpiPen, Auvi-Q. Here is how Mylan responded:

"Sanofi has instituted a nationwide recall of Auvi-Q, affecting hospitals, retailers and consumers. We have confirmed that we have sufficient supply of product to meet any anticipated demand. We're confident that the widespread familiarity with EpiPen established over more than 25 years coupled with our robust training resources will provide access and support for those impacted by the recall."

CEO Heather M. Bresch was very careful in describing the opportunity ahead for Mylan. Firstly, the withdrawals from the market meant that its earlier expectations for a "slight softening" in Q3 for the epinephrine market would likely not materialize. Mylanadjusted its earnings expectations for 2015 to the higher end of its range and announced that the EpiPen would deliver an additional $0.25 to $0.30 per share in adjusted EPS for 2016. Despite these significant boosts, Bresch was careful to note that Mylan would not build its business on one product or on one-off events. The implication was that Mylan did not plan to let EpiPen dominate its business even as it acknowledged a substantial market opportunity:

"…there are approximately 28 million at-risk individuals in the United States. Of the approximately 14 million people who have been diagnosed, about 10% are carrying an Auto-Injector, leaving room for substantial upside.

Additionally, anaphylactic events can occur in people with no known allergies. This was demonstrated by a recent survey of schools participating in our EpiPen4Schools program. The study indicated that more than 20% of the students or others on school grounds who had an anaphylactic episode and were treated had no idea they had any allergy. Obviously, this underscores the continued opportunity to build education and awareness about the need for access to our product, including public entities, as well as the run rate that still exists for our EpiPen franchise."

With so many people unexpectedly facing life-threatening incidents, one can only imagine the long runway for the sales of anaphylactic devices into public and private spheres of living. Yet, Bresch was once again very careful. She noted that Mylan competes in this market. She noted that nothing was likely to change with payers with whom Mylan typically signs long-term contracts.

"And as far as all of the recent events, I would say that our dynamic with the payers will stay just that, I think very dynamic…Obviously, in light of some of the recent developments, I think that we'll continue to have opportunities to improve that situation because it's not as competitive as it was."

Executive Chairman Robert J. Coury was much more blunt:

"…this opportunity with EpiPen really could not have come at a more opportune time because it only fuels the trajectory of our growth that we've been delivering for our shareholders over the last several years."

It is important to note that despite the upside of EpiPen, Mylan's stock actually lost ground that day and closed at $44.09. While the stock rallied from there as much as 38% in two months, MYL has struggled for all of 2016. Even before the current controversy erupted, MYL was down year-to-date and twice traded well below that post-earnings closing price in October, 2015.

Mylan's dominant market position with its EpiPen has apparently not helped the stock this year.


By the time of the next earnings call on February 19, 2016, Mylan announced the proposed acquisition of Meda, an international specialty pharmaceutical company, in a deal valued at $9.9B. Meda has partnered with Mylan on EpiPen in Europe since 2011. One of the reported benefits of the merger was the consolidation and acceleration of the European EpiPen businesses.

After its first quarter of doing business without SNY, Mylan reported that it experienced higher sales volume but no changes in its net payer pricing. Interestingly, Mylan saw no material changes for 2016 either, implying that perhaps longer-term contracts had already fixed in a lot of the pricing. Bersch was once again quick to caution analysts that EpiPen was just one small part of a diversified portfolio. In fact, MYL expected the EpiPen to become a shrinking part of its business:

"…I think it's important to remember that we're dealing with a whole portfolio of products with these payers that it's not about any one product. And while we will continue to be opportunistic, I think that as I've said, EpiPen, very important brand for us and brand franchise going forward, that it more and more represents as a much smaller part of Mylan."

In this earnings call, Mylan acknowledged paying a price to hold its dominant marketshare: "…we were maintaining market share, and to do so that requires aggressive rebating, and that's why, that we absorbed much of that during 2015."

Bersch went to even greater pains to state that nothing had really changed, and Mylan was simply moving forward with its plans to expand the market:

"And so when the Auvi-Q recall happened, we absolutely had the opportunity to not only increase our market share and increase volumes, we're continuing to invest to increase the overall market. We still think there is runway room around growing the anaphylaxis market."

Overall, Mylan delivered an impressive performance at tempering expectations. Throughout the Q&A session analysts were practically chomping at the bit to hear Mylan declare that the lack of competition would significantly expand profits beyond the company's existing guidance.

The Q1 2016 earnings call on May 3, 2016 was the most subdued in terms of EpiPen commentary. Mylan reported that the EpiPen contributed to a 17% year-over-year increase in its Specialty segment revenue ($248M). TEVA was talking about getting an AB-rated EpiPen generic into market, but Mylan was skeptical given the FDA's regulations for device drugs, especially those that are life-saving. Mylan expected that TEVA's product may not come until early 2017. Analysts significantly boosted earnings estimates for Mylan as a result. Once again, MYL focused on the opportunity to expand its market and save lives:

"…if you look at just our school program and the amount of EpiPens that we've been able to distribute to the public school system, and the amounts of lives that have been saved due to it. I mean, so we believe the investment has been well worthwhile and that the community continues to resonate to the education and awareness. And as we've said, there's over 20 million lives at risk. So, we believe that our just growth in the continued market size gets significant runway."

This brings me to the most recent earnings report on August 9th for Q2 2016 results, roughly two weeks before the current firestorm began. Mylan reported robust results in its Specialty division with 33% year-over-year revenue growth to $403M for the quarter thanks to "…higher sales of EpiPen, Perforomist, and ULTIVA." Anthony Mauro, Chief Commercial Officer, explained the success of its EpiPen product as follows:

"…revenues were driven by net price favorability, due in part to payer pricing dynamics year over year, as well as strong sales volumes in anticipation of the peak season. We began realizing the benefits of customer contract negotiations over the last several quarters. I'd note that year-over-year comps will continue to evolve until we pass the one-year mark of the Auvi-Q recall.

I want to stress that we continue to invest in expanding the size of the overall market by increasing awareness and access to this important product. We...