Mylan: (MYL: $46, down 4%) Scrutiny over the price of Mylan’s allergy treatment drug, EpiPen, is weighing on the stock.
Senator Amy Klobuchar, a Democrat from Minnesota, said a few days ago that a Senate panel should investigate the steep price increase for this drug. She went on to describe how a pack of two EpiPens used to cost $100 in 2009, but are now being sold for $600. Moreover, Senator Charles Grassley, a Republican from Iowa, sent a request Monday to Mylan for information on the pricing of EpiPen.
Why does this political rhetoric matter? The pricing of drugs is a hot topic in Washington right now. Awareness of the issue amongst investors intensified over the past year due in large part to the public scrutiny of pricing practices at Valeant Pharmaceuticals (VRX: $31). Even Hillary Clinton and Donald Trump have been debating the merits of drug pricing controls. Additionally, it did not help when it recently came to light how last summer Turing Pharmaceuticals purchased a drug called Daraprim and immediately raised its price more than 5,000%.
The controversy probably won’t hurt Mylan’s earnings. There is currently no regulatory authority that can be leveraged to mandate that Mylan lower the price. Instead, the current investigation is only a matter of information gathering at this time. But the investigation could ultimately lead to regulatory reforms or some form of self-regulation on pricing, which indeed would ultimately impose real earnings risk for the company.
The controversy very well may impact the price investors are willing to pay for the stock, however. The increased public scrutiny is likely to persist. In particular, we are most concerned that Mylan may have to appear before a Senate Judiciary Committee. The likely near term situation is producing weak sentiment driving multiple compression, in other words a lower valuation placed on the earnings of the company by investors. For instance, Valeant experienced PE multiple compression from over 20x to under 5x in the midst of pricing uncertainty and general controversy. Consider that 5x Mylan’s 2016 consensus EPS outlook of $5.00 implies a share price of $25, which frames the material downside risk we see. Not to mention that currently there are 13 buys and 9 holds out of 22 Wall Street analyst ratings. Could a wave of downgrades could be coming? We simply think it best to step out of the way.
BMR Take: Our concern is that the overhang of the investigation will weigh on sentiment and valuation. We are particularly concerned about the potential for a wave of Wall Street analyst downgrades. We are removing Mylan from our portfolio and booking our slight gain since initiation.
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