Mylan’s got some problems
Steve’s breakdown: PR problems that is. If you have an answer, we bet they’ll listen. Check out the Young Turks/CNBC featured video if you don’t know the story.
MORGANTOWN, WV: Despite all of the scrutiny and anger directed at Mylan, the maker of the EpiPen allergy treatment, the company’s CEO will not say firmly that the price of the drug will be lowered after increasing by about 500% in less than a decade.
When asked about the matter, Mylan CEO Heather Bresch told CNBC only that she would be looking forward to working with Washington to find solutions for problems in the US healthcare system.
Not really an answer, you may notice.
In fact, it’s reasonable to assume that — until this week, at least — Mylan would have kept increasing the price of EpiPen through 2018.
Why? Well it all ties into Mylan’s executive compensation plan. If the company can get to earnings per share of $5.40 (the goal is actually $6, but there’s some wiggle room) by 2018, Bresch and her team stand to make millions in stock payouts.
And because EpiPen is the company’s star product, Mylan is unlikely to pull off those gains without its help.
Bresch has 87% of her compensation tied to her company’s stock price, compared with 82% for her executive board.
Of Bresch’s payout, 67% is based on long-term targets. The next target mentioned over and over in the company’s compensation documents is the $6 EPS goal to be hit by March 2018.
If this goal is met “on March 4, 2018, Ms. Bresch is expected to vest in 76,984 shares,” according to Mylan’s compensation structure.
The rest of her team wins too. Director Rajiv Malik is expected to vest in 47,375 shares; Anthony Mauro, also a director, is expected to vest in 18,506 shares; and Robert Coury, the executive chair, is expected to vest in 71,951 shares.
(We should also note that in 2014 the company awarded Coury $20 million for his performance contingent on his continuation at the company to December of this year.)
At the company’s current stock price, that’s a nice $3.4 million payday for Bresch. Of course, it’s almost assured that if the company’s EPS increases, its stock price will as well. So it stands to reason she will get a more significant payday than that.
Anybody got a pen?
The bulk of the burden of Mylan’s success falls on the EpiPen — it has since Mylan bought the drug. The device has done more than $1 billion in revenue for the company since 2014. That same year, the investment firm Evercore ISI initiated coverage on Mylan, giving it a hold rating. The bank’s analysts feared that if EpiPen ever came under threat from generic competition, Mylan would sink.
But that threat never materialized.
Business Insider reached out to Mylan for comment, and the company responded with, “Please refer to our 2016 proxy statement for details of our compensation structure and the diversity of our business.”
In the past, Mylan has said its business is not predicated on price hikes.
EpiPen sales at its current price, $608 for a two-pack, were a big reason Mylan beat earnings estimates last quarter.
“Our strong second-quarter results delivered year-over-year total revenue growth of 8% and adjusted EPS growth of 28%,” Bresch said in a statement. “Given our performance to date this year and our current trajectory, we are committed to our 2016 adjusted EPS guidance range of $4.85 to $5.15.”
That’s great, but how are you going to pump it up next year? How about the year after that?
There are other ways to boost a company’s earnings. Stock buybacks are pretty popular, and executives who are gung-ho about those are often also incentivized to boost share performance. Bresch has also told investors the company is looking for an acquisition target. Securing that could boost earnings, but she was careful to say an acquisition was not by any means a sure thing.
Another way the company could get to $6 a share is to increase EpiPen’s 2015 sales at its current price by about 50%. It’s working on a partnership with Disney Parks and Resorts, for example, and if you read company documents about its “strategic growth drivers,” it’s mostly a discussion about how to sell more EpiPens. Even so, increasing sales by 50% in the next two years is highly unlikely.
EpiPen isn’t the only Mylan drug that has seen its price hiked substantially. Ed Silverman at Stat News recently walked through several other products that have seen massive price increases — some by over 100% — in just the past six months. But none of these are as huge sellers as the EpiPen. They treat ailments that require treatments that needn’t be nearly as ubiquitous as EpiPen, like gallstones, or face competition from generic drugmakers.
The easier way to get to $6 EPS is to keep on doing what the company has been doing and increase the price of an EpiPen.
At the very least, it’s something Bresch refuses to rule out even under the most intense scrutiny. That should tell you something.