Pain in Mylan's Future

Earlier this month, it seemed the FDA was clearing out its painkiller applications. Seemingly within hours of each other, the agency approved both Watson Pharmaceuticals (NYSE: WPI  ) and Actavis to manufacture generic versions of Duragesic, the brand-name version of the drug fentanyl produced by Johnson & Johnson (NYSE: JNJ  ) subsidiaries.

According to research market analysts at IMS, sales of the generic and brand-name versions of the fentanyl patch were about $1.2 billion for the 12-month period ending this past June. The patch, otherwise known as the "fentanyl transdermal system," received FDA approval in 1990, and 15 years later, Mylan Pharmaceuticals (NYSE: MYL  ) got approval to market a generic version.

Pain management is big business. The Associated Press says that prescriptions for the five top pain medications -- codeine, morphine, oxycodone, hydrocodone, and meperidine -- rose more than 90% between 1997 and 2005. Oxycodone, the primary drug behind OxyContin, alone rose more than six times in that time period.

Fentanyl, which was first manufactured in the 1950s, is often used in operating rooms and ICUs, and for chronic pain management. It is said to be 80 times more potent than morphine, and while it comes in several forms, like the patch, tablets, and lozenges, the patches have been linked to abuse by addicts, who cut them up and eat them, and to overdose deaths. In 2005, the FDA issued a warning for the patch that it should be prescribed only in the lowest dosages possible and not be used to treat pain after an operation. Additional guidance on the proper use of the patch was issued in 2006. Despite the warnings, prescriptions for fentanyl rose 10% to 4.7 million the year after the guidance was issued.

Just last week, however, an article in the Los Angeles Times highlighted the problem that patches may cause in delivering drugs, from fentanyl to birth control and attention deficit drugs. While they are an effective means for delivering drugs, delivering a fairly steady dosage, there's also the risk of too much drug being administered. For example, as heat facilitates the absorption of drugs from the patch, sunbathing or vigorous exercise can lead to excess medication being absorbed.

Generic competition for fentanyl is obviously heating up, too. Last year, Mylan had sided with those seeking greater testing of the patch as a way to slow down its rivals entering the market. Mylan wanted competitors to submit independent tests showing the patch was safe, as it had done. It was able to boost earnings guidance then on the basis that there would be no further FDA approvals in that fiscal year.

Barr Pharmaceuticals (NYSE: BRL  ) is manufacturing a generic version of Cephalon's (Nasdaq: CEPH  ) fentanyl tablet that is absorbed through cheek membranes and may offer a more effective way of administering lower dosages of the drug.

It's true that a mega-Mylan is a much different company today than it was last year, having made several acquisitions that have increased its size. Yet fentanyl has been a disproportionately large driver of revenue growth and profits for the generic manufacturer. It accounted for over 14% of fourth-quarter revenues and was one of the primary reasons for the 200-basis-point increase in gross margins.

Now, with additional rivals manufacturing fentanyl, critics continue to highlight the dangers of the drug and the fact that Mylan faces the prospect of lower cash flows as a result of its acquisitions. As much as the company looks different from the way it did last year, it might also be a different investment now, too.

The stock has dropped precipitously from its highs, and while it's recovered some, its immediate outlook is cloudy. Even with a multiple trading at a discount to its rivals, Mylan is no generic bargain.

Barr is the generic drugmaker selected by Motley Fool Stock Advisor, the investment service beating the market by 38 percentage points. A 30-day risk-free trial subscription is available just by clicking here.

Fool contributor Rich Duprey owns shares of Barr but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy. Johnson & Johnson is a recommendation of Motley Fool Income Investor.


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