Mylan Unethical Mess or Value Investment

Mylan (NASDAQ: MYL) might just be the most unethical company in America. The drug maker became a poster child for corporate greed and everything wrong with the pharmaceutical industry; by raising the price of a lifesaving drug called the EpiPen by 461%.

The EpiPen; or epinephrine injector, is needed to treat a potentially deadly allergic reaction called anaphylaxis. Some people; including children, literally cannot live without it. Mylan CEO Heather Bresch took advantage of that by selling 100,200 shares of stock and making $5 million even as the bad news about the price raises became public, The Guardian reported.

Bresch has defended herself by saying that the cost of the pen is determined by forces other than the market. Mostly by benefit plan managers and the pharmacy industry which mandate high prices.

“My frustration is there’s a list price of $608,” Bresch told CNBC’s Squawk Box on August 25, 2016. “What Mylan takes from that, our net sales is $274, so $137 per pen.”’

Mylan’s Bresch has a Good Point about Health Insurance

Strangely enough, Bresch actually had a couple of good points about health insurance. She is right to blame the health insurance industry which pays the high costs and finances high pharmaceutical prices.

Bresch was also right when she noted that Americans are financing drugs for people in other parts of the world. That includes Europe where national-health insurance plans keep prices down with rigid price controls. She claimed many Europeans pay $100 and $150 apiece for the pens, while Americans pay several hundred dollars.

FILE - This Oct. 10, 2013, file photo, shows an EpiPen epinephrine auto-injector, a Mylan product, in Hendersonville, Texas. Mylan, now in the crosshairs over severe price hikes for its EpiPen, said Thursday, Aug. 25, 2016, it will expand programs that lower out-of-pocket costs by as much as half. (AP Photo/Mark Zaleski, File)
FILE – This Oct. 10, 2013, file photo, shows an EpiPen epinephrine auto-injector, a Mylan product, in Hendersonville, Texas. Mylan, now in the crosshairs over severe price hikes for its EpiPen, said Thursday, Aug. 25, 2016, it will expand programs that lower out-of-pocket costs by as much as half. (AP Photo/Mark Zaleski, File)

What Bresch did not mention was the system that Mylan is taking advantage of. Under the present patent system, Mylan is the only company that can legally sell epinephrine injectors in the United States. Since it only costs a few dollars to make a dose of epinephrine, Mylan can charge a huge markup on the devices and get away with it.

One obvious solution would be to reform the patent system, perhaps to limit patent protection for drugs to five years. It’s currently 20 years which means Mylan has another decade of monopoly and price-gouging.

Another solution would be to have the taxpayers finance research and development. Then simply put the drug formulas in public domain for any company to manufacture. Something like that is already done with a lot of technology. Perhaps the US could pool funds with other nations like China and the European Union to achieve this goal.

The government itself is in a great position to lower drug prices by simply giving the Centers for Medicare and Medicaid the ability to negotiate prices with pharmaceutical makers the way European governments do. Congress refused to do that when it created Medicare Part D; and made the situation worse by giving the pharmaceutical industry a blank check.

Whether we get actual reform to the pharmaceutical industry from the Mylan mess remains to be seen. Since Bresch is the daughter of US Senator Joe Machin (D-West Virginia) I wouldn’t hold my breath waiting for positive change. Yet there might be an opportunity for value investors here.

Is Mylan a Value Investment?

Many investors will wonder if Mylan is now a classic value investment – that is a good money-making company going through a bad stretch. After all Warren Buffett has made a fortune by buying such bargains.

There is something to this case because Mylan is generating a lot of cash. On June 30, 2016, Mylan reported these interesting numbers:

  • Revenues of $9.938 billion.

 

  • A net income of $273 million.

 

  • A profit margin of 6.58%

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  • A free cash flow of $273 million.

 

  • Assets of $28.84 billion.

 

  • Cash and short-term investments of $6.362 billion.

 

  • $6.412 billion from cash from financing.

 

  • $2.124 billion in cash from operations.

 

All this gives Mylan a lot of float; the problem is how it generated that float which is pretty sleazy. Bresch is right when she says she did not create the loathsome system, but she certainly abused it to make a fast buck at sick people’s expense.

Mylan also seems undervalued it had a market capitalization of $21.87 billion and an enterprise value of $29 billion on August 26, 2016. It provided investors with a return on equity of 8.1% on June 30, but no dividend yield according to our friends at ycharts.

That means if you can stomach price gouging, Mylan is a potential value investment. It is also a growing company, between June 2015 and June 2016; its revenues grew by $1.528 billion, rising from $8.41 billion to $9.938 billion.

Despite that I’ll pass on Mylan because I think companies should be able to make money without literally holding sick people for ransom. The pharmaceutical system certainly needs a lot of reform, so investors should stay away from it because of the ethnical mess the legal framework it operates in creates. If it is not cleaned up, expect a major collapse in pharmaceutical stock prices.