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Company may have erroneously been operating under a generic classification
Only two days after CMS Acting Administrator Andrew Slavitt delivered a letter to Congressmen agreeing that Mylan's now-controversial EpiPen was misclassified as a generic, improperly entitling it to a lower discount under a Medicaid program, the company has reached a preliminary settlement with HHS and the Dept. of Justice to pay a fine of $465 million, resolving “all potential rebate liability claims by federal and state governments” while admitting no guilt, according to a Mylan announcement. Terms of a corporate integrity agreement with the Office of Inspector General of HHS are yet to be finalized.
The penalty is a stiff one, even given the highly criticized price hikes the company has imposed in recent years, and the efforts it has made to expand the market for the drug. Slavitt’s letter detailed some $960 million in gross sales between 2011 and 2015 under the Medicaid Drug Rebate Program, which was discounted by $163 million during that span. Mylan had expected to gross around $1.2 billion this year with the drug; a reasonable guess at the fraction that would fall under Medicaid is around $400 million. So, for six-year sales of about $1.5 billion, Mylan is disgorging $465 million, or 31% of sales, on top of the 13% rebate that it had been providing to states and the federal government. On the other hand, the hit that Mylan is taking on earnings is relatively minor—it projects a drop from predicted 2016 earnings per share from $4.85-5.15 to $4.70-4.90, and the majority of that is due to the company beginning to sell a lower-cost generic version of EpiPen.
Heather Bresch, Mylan CEO, said that the settlement is “another important step in Mylan's efforts to move forward and bring resolution to all EpiPen Auto-Injector related matters,” and investors seem to agree: in after-hours trading, Mylan’s stock price jumped 10%.
Senator Amy Klobuchar (D-MN), one of the first members of Congress to call Mylan’s pricing practices into question this summer, issued a statement applauding the settlement and declaring that “[T]his 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.” Indeed, one of the puzzles of the Mylan misclassification issue is why CMS did not go beyond simply warning Mylan that its drug was misclassified and to initiate its own investigation.
The previous Pharmaceutical Commerce story, after the Slavitt letter had been released, appears below.
More trouble for Mylan over EpiPen pricing and rebates
Around the time of the House Oversight and Government Reform Committee hearings last month, two Congressmen, Rep. Frank Pallone (D-NJ) and Sen. Ron Wyden (D-OR) sent a letter to CMS requesting details on the classification of Mylan’s EpiPen product, which has been under intense public and Congressional criticism since mid-summer. The CMS reply, released by Pallone and Wyden, confirms that the drug has been “incorrectly classified,” under Medicaid reimbursement rules. This could wind up costing Mylan tens or even hundreds of millions of dollars in corrected rebates and penalties.
“Today’s letter is more evidence that while Mylan irresponsibly raised the price of EpiPen, they were also bilking taxpayers out of millions of dollars,” Wyden and Pallone said in a statement, adding that “We will ensure taxpayers get their due.”
Getting a clear handle on the dispute, however, is not easy, given that the rebate rules and definitions of the Medicaid Drug Rebate Program have changed over time. Based on the CMS reply, from Acting Administrator Andrew Slavitt, CMS has paid out $960 million between 2011 and 2015 for EpiPen; it got back $163 million in rebates, which Slavitt says reflects the mandated 13% rebate for a non-innovator (generic) drug. (However, if you do the math, $163 million is 17% of the total; is it possible that the drug was being reimbursed under a different, 17.1%, Medicaid rebate for pediatric drugs?) The catch is that EpiPen has undergone a New Drug Application (NDA) and has patent protection—two defining characteristics of an innovator (branded) drug. The mandated rebate for such drugs is now 23.1%, and there is an inflation factor to be considered that could increase the rebate. The discrepancy is about $58 million in unreceived rebate dollars, to which, potentially, CMS could add a $100,000 penalty “per item of false information” on rebate calculations.
Slavitt’s letter also notes that EpiPen has been classified as a non-innovator (generic) drug since 1997 (Mylan acquired the product in 2007). And, while noting that “CMS has, on multiple occasions, provided guidance to the industry and Mylan on the proper classification of drugs and has expressly told Mylan that the product is incorrectly classified,” he had essentially nothing to say about why the product has been misclassified for so many years, other than that it is the responsibility of the manufacturer to correctly report the drug revenues and rebates. He also stated that “At this time, CMS cannot comment on the total amount of rebates owed by Mylan related to this incorrect classification.”
Mylan has not, as yet, issued a public statement on the CMS comments, nor has CMS indicated that it is opening its own investigation. But if Wyden and Pallone are to be believed, there will be more news coming out of this dispute.