UPDATED: Mylan strikes $465M EpiPen deal with DOJ, but other threats remain

In what may be a record speed for a Justice Department settlement, Mylan has cut a deal to pay $465 million to resolve allegations that it overcharged Medicaid for EpiPen. Investors cheered the news, but analysts and politicians both say the EpiPen fallout is far from over.

Announced Friday afternoon at about 5 p.m. Eastern Time, the deal sent Mylan shares up 10% in afterhours trading. And no wonder: The settlement wraps up a liability analysts had estimated could be far more than $465 million.

The company admits no wrongdoing in connection with the settlement. It will take a $465 million charge against third-quarter earnings to account for it.

But as Mylan's own securities filing about the deal shows, the EpiPen brouhaha is still going strong, even if the mainstream media has largely moved on to other issues. The Securities & Exchange Commission has now moved in to investigate EpiPen's Medicaid rebates.

And as much as investors would like to think the crisis is over for Mylan, there's still a way to go, Wells Fargo analyst David Maris pointed out in an investor note over the weekend. "We think investors will like the settlement as many will think this puts the issue largely behind the company," Maris said. "[W]e disagree, as this only addresses the CMS portion of this; it does nothing to answer the original issue--EpiPen pricing and consumers."

"We are not too excited," Maris went on to say. "We do not take our cue from after-hours trading (+10%) to gauge how good news is."

It's not over for Rep. Elijah Cummings, ranking member of the House Committee on Oversight and Government Reform, which held the much-publicized hearing where Mylan CEO Heather Bresch defended her company's EpiPen decision-making. In an emailed statement Friday, Cummings said, "With investigations now being initiated by Congress and others, this may be the beginning of Mylan's problems--not the end."

Still, wrapping up the CMS piece so quickly is a feat. Drugmakers and the Justice Department typically wrangle for years before coming to terms on settlements, whether they're wrapping up allegations about marketing violations or Medicaid price reporting and rebates.

"[W]e view the settlement as a positive and give management kudos for the fast action," Bernstein analyst Ronny Gal said in a Monday note, though he did point out that other legal hurdles remain, including a probe by the New York attorney general.

The DOJ deal follows months of controversy over EpiPen price increases, and two weeks of close scrutiny on Mylan’s rebates to Medicaid. Earlier this week, the Centers for Medicare and Medicaid Services said the company had misclassified EpiPen as a generic product, and as such had underpaid rebates owed to Medicaid.

“This agreement is another important step in Mylan's efforts to move forward and bring resolution to all EpiPen Auto-Injector related matters,” the company’s statement said.

In a letter last week, CMS Acting Administrator Andy Slavitt said the agency had notified Mylan that EpiPen had been misclassified. As a generic, EpiPen required a rebate of 13%, but as a branded med--its rightful classification, CMS said--the required rebate was 23.1%, plus additional rebates if prices increased at a rate greater than inflation. And at 400%-plus over five years, EpiPen price hikes substantially beat inflation, which typically runs in the low single digits in the U.S.

The $465 million settles all potential liability for EpiPen rebates, Mylan said in a statement. The company also will ink a corporate integrity agreement with the Inspector General of the Department of Health and Human Services, a standard feature of DOJ settlements.

After Slavitt’s letter went public, analysts ballparked how much Mylan might owe, and estimates ranged from $400 million to $600 million or even more. Slavitt pointed out that violations of Medicaid’s rebate policy could come with penalties of $100,000 per infraction, in addition to back rebates.

Evercore ISI analyst Umer Raffat, for one, said the liability the company might face would be up to three times “the several hundred million” investors had previously estimated.

Having a dollar figure to apply to the rebate problem will ease some fears, RBC Capital Markets analyst Randall Stanicky said in a weekend note. "[I]t will remove any lingering concerns of a larger cash call and ongoing negative headline here," Stanicky said, "and [it] represents an important step in moving forward."

The Justice Department might not be the only government agency Mylan has to satisfy, however. In a Friday filing, the company disclosed that the SEC's enforcement division has asked for documents related to Mylan's payment of Medicaid rebates.

The request covered "communications with the CMS and documents concerning Mylan products sold and related to the Medicaid Drug Rebate Program, and any related complaints," the filing states. "Mylan intends to fully cooperate with the SEC’s investigation."

And then there's the New York AG's probe, which is ongoing, plus basic questions about Mylan's relationship with CMS going forward, as Gal pointed out Monday. EpiPen will be treated as a branded product starting in April, Mylan said in its statement, but what will the Medicaid price be? The current $600 price? Or a price more on par with its sticker in 1997, the year when CMS initially told EpiPen's owner that it could be classified as a generic?

Gal also suggested that the DOJ deal can't be counted on until it's signed on the dotted line. Mylan announced that the terms had been "agreed" but "[i]t does not say the agreement was finalized/signed. Given Mylan's past posits, we are not 100% certain this is done," Gal wrote.

One of Mylan's fiercest critics appeared to be moving on--from the EpiPen rebate question, at least. In a statement on the settlement, Sen. Amy Klobuchar, who first raised questions about EpiPen's classification, said CMS now needs to follow up on other potentially misclassified drugs. 

“I am glad the Department of Justice pursued this so quickly, since the misclassification was an outrage,” Klobuchar said. “At the same time, this must be the tip of the iceberg. If other drugs are misclassified, and surely EpiPen isn’t the only one, the public deserves to know it, the taxpayers need to get their money back, and the process needs to be changed to stop this from happening again.”

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