Congressional committee members and Mylan CEO Heather Bresch exchanged some harsh words Wednesday during a contentious EpiPen hearing, as the politicians took their chance to lambaste Bresch’s pricing policies, $18 million-plus pay package and private-jet transportation to Washington, DC, for her showdown on Capitol Hill.
But as analysts point out, the hearing may well lead to another dead end on meaningful pricing legislation, and that, as little weight as the committee lent to Bresch's arguments, Mylan ($MYL) will take a meaningful hit to EpiPen revenue and profits as its appeasement moves play out.
The familiar statistics were trotted out: EpiPen’s list price is now more than 400% higher than it was 7 years ago. Mylan’s sales from the product are way up over the same period, and its marketing spend topped $100 million last year. Mylan’s top execs together brought in more than $300 million in compensation over the past 5 years.
And Bresch, once again, seemed a bit flummoxed by the optics: She was visibly frustrated that Chairman Jason Chaffetz and Ranking Member Elijah Cummings were not appeased by Mylan’s patient-assistance improvements and newly planned generic product. She appeared surprised that her use of a private jet to reach DC was questioned. When asked about her compensation, she hesitated at first, then claimed to be “in the middle” of pharma executive pay, a demonstrably false characterization, as one of the highest-paid in the industry, according to FiercePharma’s annual research.
Bresch took fire from members from both sides of the aisle, and suffered from spillover from other pricing scandals. For instance, her patient-assistance argument fell flat as a repeat of similar defenses from ex-Turing Pharmaceuticals CEO Martin Shkreli, whose enormous price hike turned up the heat on the debate last year, and Valeant Pharmaceuticals ($VRX), whose business model under former CEO Michael Pearson relied in part on outsize price increases.
Bresch’s big expansion in patient assistance came from “the same PR playbook that other companies use,” Cummings said. “That’s what Martin Shkreli did, that is what Valeant did, and that is what Mylan is doing.”
Mylan’s efforts to require schools to stock EpiPens and lobbying to expand access in other ways also backfired on Bresch. Republican committee member Mick Mulvaney (SC) said he didn’t usually take issue with a company’s profit motives. But that very lobbying made him question Mylan’s business.
“You came and you asked the government to get in your business--so here we are today,” he said. “You get a level of scrutiny and a level of treatment that would ordinarily curl my hair, but you asked for it.”
For her part, Bresch said Mylan had worked to make EpiPen, a lifesaving treatment for anaphylaxis, both profitable enough to fund the company's product improvements and other R&D, but to be accessible for patients.
“Price and access exist in a balance, and we believe we have struck that balance,” she said.
But as analysts noted afterward, the argument was just that--an argument, however embarrassing--and it’s an open question whether it will be followed by any meaningful action on drug prices, particularly beyond EpiPen itself.
What is apparent, provided Bresch’s forecasts for EpiPen are accurate, is that Mylan revenue and earnings will take a dive as the company rolls out its authorized generic as promised.
During the hearing, Bresch said Mylan’s profit from each EpiPen script runs at about $100, on a net price, after rebates, of about $274. At 4 million scripts dispensed in 2015, that’s a margin of about 35%. And that, in turn, translates to 10% to 15% of Leerink Partners’ 2016 earnings-per-share forecast for Mylan of $5.
Analysts expect the authorized generic, at a list price of $300, to bring in a net price of $200--and that directly cuts into EpiPen’s overall revenue. Bernstein analysts say Mylan expects the generic to grab 85% of the EpiPen market, which implies a 35% cut to the product’s revenue, which amounted to more than $1 billion last year.
That, obviously, hits the bottom line, too. Bernstein sees EpiPen profits dropping by half--and Mylan’s EPS sliding by about 10% if the generic takes over the market as the company now forecasts.
That’s Mylan’s financial fallout. What about the rest of the industry?
“I’m concerned that is a rope-a-dope strategy,” Cummings said in his opening statement. “The industry will take their punches. But then they go right ahead and keep raising their prices.”
In other words, more of the same, Bernstein’s Ronny Gal said in a Thursday investor note. Congress will continue to press drugmakers, and make proposals designed to somehow address pricing issues, but the essential problem will remain. And that means more case-by-case controversies as particular price hikes on particular drugs move into the spotlight, Gal predicted.
“Our impression was that members of Congress genuinely want something done here. However, there was little understanding of drug markets even by the more informed members,” he stated. “No one on the panel seems to have grasped the core issue requiring resolution--overall drug costs are trending up sharply and employers are shifting costs to the patients.
“We are thus far away from any concrete steps that will prevent these flare-ups on individual drug prices.”
But pharma may find itself sharing the heat. As Mylan continues to blame “an opaque and frustrating” pricing system--and point to pharmacy benefits managers for forcing higher and higher rebates from drugmakers--those companies could attract some unwanted attention in Congress themselves. Rebates to payers have more than doubled in four years, ZS Associates estimates, to $100 billion to $130 billion.
To PBMs, that’s a good thing; Express Scripts ($ESRX), for one, has taken credit for reducing the cost of next-gen hepatitis C drugs by billions, because of its pressing for discounts on the pricey meds. After Gilead Sciences ($GILD) lost its monopoly in the field, Express Scripts negotiated a big discount and a formulary exclusive with AbbVie ($ABBV), while its rival CVS Health ($CVS) did the same with Gilead. New numbers from the IMS Institute for Healthcare Informatics shows that Gilead’s list price on Harvoni of about $94,500 actually yields revenue, after discounts, of just over $50,000 per treatment course, less than the average net price in 5 European countries.
But PBM critics--and some clients, as Express Scripts’ dispute with client Anthem ($ANTM) shows--say the benefits managers use the rebates to enrich themselves, rather than passing the savings on to employers or consumers. Express Scripts has disputed that, however, and a spokesman told Bloomberg Wednesday that 90% of its rebates flow through to the insurers and large employers that are its clients, and said that EpiPen copays have remained static even as Mylan has raised its price.
Meanwhile, Allergan ($AGN) CEO Brent Saunders appeared on CNBC to reiterate his vows to adhere to a "social contract" with patients--and to call on other pharma companies to keep price hikes in check to hold off government interference.
"The American people deserve to be angry, and only we through self-police and self-regulation can fix it," Saunders told Jim Cramer on air Wednesday. "A government takeover of healthcare is not what we need. We need discipline, we need responsibility, we need companies to do the right thing."
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