Does Mylan Really Need to Charge $614.07 for EpiPens?

By Markets Fool.com

Image source: Mylan.

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Once again, Congress is edging toward another biopharma executive shaming festival. The company in its cross hairs this time, though, is a bit unusual.Mylan(NASDAQ: MYL)is a generic drugmaker domiciled in The Netherlands, and its CEO, Heather Bresch, is the daughter of Sen. Joe Manchin of West Virginia.

If similar congressional hearings are any indication, some member of Congress will lambast the industrywide trend of raising drug prices whenever possible. The panel will then ask Bresch why Mylan drastically increased the price of its successful EpiPen brand over the past several years.

Healthcare analysts would love to hear an honest "because we can," but don't count on it. I also doubt we'll hear any legislator ask Mylan the question investors want answered: "What would happen if a viable competitor pressures EpiPen's pricing power in the near term?"

Let's see if we can answer that question ourselves.

Is EpiPen drawing Mylan's big picture?

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Over the past few years, Mylan's financial results have been somewhat mixed. In the first half, total revenue grew 12% year over year to $4.75 billion. Operating profit also increased 18.5%, to $516.5 million, but shareholders aren't seeing the benefits, due to an increase in outstanding shares.

MYL Shares Outstanding data by YCharts

Mylan's long-term debt more than doubled this year to about $12.77 billion, and interest, along with other non-operating expenses, are dragging down the company's bottom line. The 110 million shares used to acquire Abbott's branded generics business,and more-recently created shares used to buy Sweden's Meda, have dragged trailing 12-month earnings per share to levels Mylan investors saw years ago.

Specialty segment sales are relatively minor for a company on pace to pass $9.5 billion in total revenue this year, but EpiPen probably contributes a larger percentage to the company's bottom line than Mylan would care to admit. The company doesn't break out individual components, but last year, the specialty segment contributed about $1.2 billion in sales, and Mylan disclosed EpiPen sales contributed at least $1 billion to the segment in 2014 and 2015.

You might be surprised to learn that Mylan doesn't actually make the EpiPen, but sources it from Pfizer; maybe management will blame pharma's Grand Acquisitor for the rapid price increases.Whatever the reason they give, there's no denying that Mylan's specialty drug sales are accelerating on the back of EpiPen. Specialty segment revenue during the three months ended June reached $416.2 million, a 34% increase over the previous year period, and a 61.4% increase over the previous quarter.

The competitive landscape

Potentially inaccurate dosing fromSanofi's epinephrine injection device, Auvi-Q, led to its withdrawal from the market last year,and the FDA denied an application for a similar device from Teva Pharmaceutical Industriesearlier this year.

These devices are too simple and profitable not to draw in a big competitor that might upset EpiPen's brand power. I'll would be surprised if Teva doesn't bounce back with a device that passes FDA scrutiny in the quarters ahead.

In the meantime, I found generic 0.3 mg epinephrine auto-injectors with a list price of $429 per pair, but I had to phone three large retail pharmacy chains with storesnear me before I found one that had any in stock. If you're curious, it was aCVS Healthretail outlet that carried the slightly cheaper generic devices, andWalgreensoffered to order a set for me.With slightly less expensive alternatives available, there's little chance any federal antitrust suit would have legs.

Image source: Getty Images.

That's good news for Mylan's management team. On a GAAP basis the company's bottom line hasn't grown in years. On an adjusted basis, though, Mylan's profits rose $195.3 million in the first half compared to the previous year period. That works out to a gain of $0.30 per share (also on an adjusted basis) in the first half.

First-half specialty segment revenue increased $144.9 million over the same period last year, largely on the back of EpiPen sales. Just how much of that increase filtered to the adjusted bottom line is anybody's guess, but I'd wager nearly all of it did.

Does Mylan needs to charge $614.07 for a pair of EpiPens?If you're Heather Bresch, or Mylan's higher-salaried Executive Chairman Robert Coury, then the answer is a definite "yes." Without EpiPen price hikes, the company isn't growing very fast despite its large, recent acquisitions. Until a competitor with the means to challenge Mylan's EpiPen brand enters the arena, expect further shameless increases.

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Cory Renauer has no position in any stocks mentioned. Cory Renauer has no position in any stocks mentioned. You can follow Cory on Twitter @TMFang4apples or connect with him on LinkedIn for more healthcare industry insight.

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