Mylan's (MYL) EpiPen Settlement with DOJ Removes Key Risk Overhang - Fitch

October 10, 2016 2:21 PM EDT

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Mylan's (Nasdaq: MYL) $465 million settlement of claims it had misclassified its EpiPen injector allays the otherwise significant risk of rebate recoup payments to Medicaid agencies related to the recent EpiPen scrutiny, according to Fitch Ratings. The firm remains subject to other government-related investigations, however.

Mylan announced last week a settlement with the federal government to "resolve questions that have been raised about the classification of EpiPen ... for purposes of the Medicaid Drug Rebate Program," according to a Mylan statement. Mylan had been accused of misclassifying EpiPen as a non-innovator multiple-source (or generic) drug, rather than as a branded drug, for the purpose of paying rebates to Medicaid. Pharmaceutical firms are required to pay a 13% rebate for generic drug sales paid for by Medicaid agencies, compared to 23% for branded products.

The announcement brings a greater degree of certainty, and more quickly, than Fitch expected. Mylan will have sufficient liquidity to make the settlement payment without derailing expected de-leveraging subsequent to its mostly debt-funded acquisition of Meda. Still developing, however, is the impact of Mylan's pending launch of its own authorized generic version of EpiPen.

Fitch maintains our view that there will not be significant changes to the underlying economics for Mylan following the launch of its own authorized generic. Mylan will remain the sole source for EpiPen - whether branded or generic - and will not be subject to any incremental direct outside competition. Therefore, pricing negotiations with private third-party payers shouldn't change much, and demand is not expected to shift in any significant manner to the few competing therapies available.

That said, Medicaid pricing for Mylan's soon-to-be-launched authorized generic EpiPen is unknown. We expect the average manufacturer price (AMP) will be lower than pricing currently employed, but probably not drastically. Mylan has disclosed that approximately 20% of EpiPen sales are paid by state Medicaid agencies.

For branded sales in the remainder of 2016 or those that remain after the authorized generic launch, we expect a modest incremental reduction in profitability due to higher rebates paid to un-/under-insured consumers and to Medicaid. Some workdown of inventory in advance of the generic launch on the part of distributors and/or pharmacies may also impact sales recognized by Mylan. Most of this impact will be realized in third-quarter 2016, as reflected in the company's 2016 guidance revision.

The launch of an additional generic competitor poses the greatest threat to EpiPen's profitability in the medium term. We note that the FDA may be under pressure to approve another generic version as soon as possible, which could aid Teva Pharmaceuticals or other generic firms in bringing new generic version to market. Teva's application for an epinephrine injector was rejected by the FDA in February 2016 citing "major deficiencies." Consequently, Fitch does not anticipate meaningful outside direct competition before second-half 2017 at the earliest.

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