Hate the Game, Not the Player? – Mylan Is Out of Tune Amid An Angry Chorus

(This is an excerpt from an article I originally published on Seeking Alpha on August 29, 2016. Click here to read the entire piece.)


This is the message actress Sarah Jessica Parker posted on Instagram Thursday, August 25, 2016 to join a chorus of protest and complaint about the extremely high cost of the EpiPen® Auto-Injector…{snip} The angry chorus Parker joined has caused a world of hurt for Mylan (MYL), the maker of this important device.


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

{snip}


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

Source: FreeStockCharts.com

{snip}

The Political Chorus – A propagation of pressure

The blowback to Mylan erupted in full on Monday, August 22 when two members of Congress released separate letters sent to the company requesting more information about EpiPen pricing. {snip}


The iShares Nasdaq Biotechnology (IBB) seems to have hit a wall at the upper end of an extended trading range.
The iShares Nasdaq Biotechnology (IBB) seems to have hit a wall at the upper end of an extended trading range.

Source: FreeStockCharts.com

The Medical Chorus – Sealing Mylan’s fate

A political firestorm can cause plenty of damage, especially when attempts at PR fall on unappreciative ears. The Clinton Bash from last year still presents an ominous ceiling for IBB. However, I found the chorus from the medical community to be the most damaging to Mylan’s prospects of escaping this firestorm with its EpiPen franchise unscathed. I also find the rancor from the medical field relatively more credible since so many politicians happily accepted past campaign donations from Mylan’s Political Action Committee (PAC).

{snip}

Mylan’s Choral Encore – Desperately talking over a cacophony of disapproval



With the tremendous swell of negative opinion pressuring from all around, MYL doubled-down on its PR efforts to recapture favor. {snip}

Mylan was VERY clear in placing the blame on the system for the high prices (again, hate the game, not the player):

{snip}


Mylan claims that the supply chain is responsible for more than half of the list price of the EpiPen
Mylan claims that the supply chain is responsible for more than half of the list price of the EpiPen

Source: Mylan

Mylan does not explain why and how the cost of the EpiPen has increased so much and why a device that uses a dose of medicine that cost no more than a few bucks should have such a tremendous mark-up. The reaction from the Pharmaceutical Care Management Association (PCMA) was swift. {snip}


Express Scripts (ESRX), and other payers, take a huge hit as Mylan drags them through the mud and into the spotlight.
Express Scripts (ESRX), and other payers, take a huge hit as Mylan drags them through the mud and into the spotlight.

Source: FreeStockCharts.com

Something tells me that a thorough investigation will find blemishes up and down the line. However, Mylan gets to enjoy the brunt of the blame until it provides its numerous detractors a specific accounting and justification for its contribution to the cost. {snip}

The Trading Chorus – final implications

As with most volatile, new-driven stock situations, there are short-term and long-term implications. In the short-term, I see more selling ahead. In the longer-term, I see the potential for decent upside although I am far from willing to bet on it anytime soon.

According to SEC filings, Mylan’s CEO is incentivized to hit a $6 EPS (earnings per share) target by March, 2018. {snip}

In the short-term, the picture looks ugly for MYL and perhaps for the drug industry as well. If the government is in the middle of significantly changing the rules of the game, a price overhang will loom over many stocks in the industry – just as the Clinton Bash from 2015 continues to provide overhang. Both MYL and IBB should trend lower in coming weeks assuming MYL is not able to reach a relatively swift resolution to the firestorm. at this point, such a save will require some major “humble pie” that seems missing in the company’s demeanor to-date.

{snip}

Be careful out there!

Full disclosure: long IBB put options

(This is an excerpt from an article I originally published on Seeking Alpha on August 29, 2016. Click here to read the entire piece.)

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