Mylan NV (NYSE:MYL) is down roughly 16% since its most recent peak in mid-August, when Congress and the media first began taking notice of what is now called the “EpiPen Scandal” — huge hikes in the price of a product schools were told to buy.
The iShares NASDAQ Biotechnology Index (NASDAQ:IBB), which covers the whole industry, has held up well over the last few weeks and is actually up almost 3.9% over the last month. But it has begun rolling over in the last week and is over 12% below its price at the start of the year.
The concern is that Mylan’s troubles could infect the rest of the sector, possibly leading to new regulations in a Hillary Clinton Administration. The index held up well during the fall of Valeant Pharmaceuticals Intl Inc (NYSE:VRX), but the damage this time could be more far-reaching.
The reason is that Mylan’s is an easy scandal to understand, and it has delivered an easy villain in CEO Heather Bresch.
Mylan’s Pricing and Profits
News that Bresch low-balled her company’s profit on the EpiPen during her recent Congressional testimony could send the stock tumbling further over the next few days.
Bresch based her profit estimate on U.S. tax rates, but the company, whose main office is near Pittsburgh, is legally headquartered in the Netherlands after a 2015 tax inversion with Abbott Labs.
Like Valeant, Mylan has been consolidating the generic drug market to get branded profit margins from those drugs, then shipping the profits overseas and avoiding taxes on them. Efforts by Democratic presidential candidate Hillary Clinton to rein in drug prices have analysts saying “Valeant AND Mylan,” which can’t be good for the stock.
Before Valeant’s scandal broke, Mylan stock’s strategy of consolidation and inversion was working well. Sales grew nearly 40% between 2012 and 2015, to $9.429 billion, and about 9% of those 2015 sales, or $847.6 million, reached the net income line.
But through the first six months of this year Mylan is only on pace to match 2015’s sales figures, and profits are running at only half that pace. The resulting price-to-earnings multiple of 26 may seem like a bargain, but it’s based on profits earned last year, when times were better than they are now.
From a fundamental standpoint, Mylan may have been a good stock to sell even without the scandal. With it, things are worse.
Dumping Bresch Solves Nothing for MYL Stock
The obvious solution to the short-term problem would be to dump CEO Bresch, who has previously gotten in trouble for résumé fraud and corporate expenses. But her father is Democratic Sen. Joe Manchin, a member of the Senate Commerce committee and her mother, Gayle, pushed for Mylan’s EpiPens to be bought by schools as head of the National Association of State Boards of Education. Easing her out may be difficult.
Dropping Bresch, however, is unlikely to still the clamor in Washington to do something about high drug prices, especially those based on generic medications like epinephrine, the active ingredient in the EpiPen.
Proposals like allowing Medicare and Medicaid to negotiate directly on prices for such drugs could gain traction, and that could drive profits for the whole sector down.
Even at its current price, Mylan stock is expensive, and its price is based on its past profits rather than its future prospects. Even with the recent fall, those who invested in the company five years ago are sitting on a gain of about 125% and, for them, it’s time to take profits.
As to new investors, it might be good to wait for the smoke clears. After November we’ll have a much better idea of the regulatory situation for the industry. Right now there is too much uncertainty.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
