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Mylan N.V.’s (MYL - Analyst Report) shares gained 8.2% after the company announced that it has agreed to pay $465 million to resolve the disputes regarding the classification of its severe allergy treatment, EpiPen. The decision came after several lawmakers criticized the classification of the drug as well as the rebate obligations under the Medicaid drug rebate program. Mylan has reached a settlement with the U.S. Department of Justice and other government agencies in this regard. Overall, the company’s shares are up 6.6% since the announcement.

The proposed settlement offers to resolve all potential rebate liability claims by federal and state governments on whether EpiPen should have been classified as an innovator drug or branded drug for the purpose of Centers for Medicaid and Medicare Services (CMS), and therefore subject to a higher rebate formula.

The CMS found that Mylan had misclassified EpiPen as a non-innovator drug or a generic drug. This implied that Mylan has been vastly underpaying rebates to Medicaid for the drug for a long time. Apparently, instead of the 23.1% rebate for a branded drug, Mylan has been paying the much lower generic rebate of 13%.

Mylan said in its press release that the settlement did not imply any admission of wrongdoing on the part of the company or any of its affiliated entities or personnel. EpiPen has been classified with CMS as a non-innovator drug since before Mylan acquired the product in 2007 based on longstanding written guidance from the federal government.

Mylan intends to continue to work with the government to finalize the settlement and will enter into a corporate integrity agreement with the Office of Inspector General of the Department of Health and Human Services.

Mylan expects to take a third-quarter 2016 pre-tax charge of approximately $465 million to reflect this settlement.



Cuts 2016 Earnings Outlook

Concurrent to the announcement of settlement, Mylan lowered 2016 earnings outlook. The company now expects earnings in the range of $4.70–$4.90 per share. This is significantly lower than the previously guided range of $4.85–$5.15 per share.

The company attributes the cut in the earnings guidance largely to the previously announced changes in EpiPen access programs and the upcoming launch of generic EpiPen. Mylan said that it expects to see considerable impact of this guidance in the third quarter of 2016.

Meanwhile, Mylan is targeting earnings of at least $6.00 per share in 2018.

The company will report third-quarter 2016 results on Nov 9, after the market closes.

We note that Mylan has been under immense pressure ever since the company came under scrutiny of several lawmakers for the massive price hike of EpiPen.

Zacks Rank & Key Picks

Mylan currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the health care sector include Incyte Corporation (INCY - Analyst Report) , Geron Corporation (GERN - Analyst Report) and VIVUS Inc. (VVUS - Analyst Report) . While Incyte and Geron sport a Zacks Rank #1 (Strong Buy), VIVUS carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Incyte’s earnings estimates for 2016 and 2017 were up a respective 29.5% and 11.5% over the last 60 days. The company has beaten estimates thrice in the last four quarters with an average surprise of 335.16%.

Geron has recorded an average positive surprise of 20.78% over the trailing four quarters.

VIVUS has recorded an average positive surprise of 39.88% over the trailing four quarters. Share price of the company gained 4.7% year to date.

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