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Here's Why Generic-Drug Manufacturers Were Down Monday

By Maxx Chatsko – May 14, 2019 at 9:17AM

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Forty-four states have brought a lawsuit against the industry.

What happened

Shares of generic-drug manufacturers were reeling Monday after the latest details of a price-fixing lawsuit were revealed. The case, which began years ago in Connecticut and Pennsylvania, now includes a stampede of attorneys general from 44 states alleging companies such as Teva Pharmaceutical (TEVA 2.84%), Mylan (MYL), Lannett Company (LCI 4.04%), and Mallinckrodt (MNK) inflated prices of common generic drugs by as much as 1,000%. 

According to reporting by The New York Times, the lawsuit identifies more than a dozen companies, executives, and generic drugs. The complaint identified Teva as the leader in the alleged conspiracy, but also notes that the alleged illegal activity was "pervasive and industrywide." Mr. Market responded by sending shares of most generic-drug manufacturers and distributors down by at least double digits.

A finger tracing a declining chart on a touchscreen.

Image source: Getty Images.

So what

Individual investors who dialed into quarterly earnings conference calls and dug into regulatory filings this month knew that dark clouds were circling over the generic-drug industry. On May 7, Lannett Company disclosed in an SEC filing that it and "one of its employees, along with other generic pharmaceutical manufacturers, received written notice from various state Attorneys General that they intend to bring claims alleging price fixing and anti-competitive behavior with respect to additional drug products, some of which are manufactured and distributed by the Company."

Depending on the outcome of the lawsuit and the potential severity of any financial fines, Lannett Company could be pushed to the brink. The business was already struggling to replace the loss of a contract representing nearly 37% of total revenue in fiscal 2018. This could increase scrutiny of its overweight balance sheet.

A technician in a pharmaceutical manufacturing facility.

Image source: Getty Images.

Mallinckrodt didn't specifically mention receiving a letter on May 1 on its quarterly conference call or in its quarterly SEC filing, but it listed "generic pricing subpoena" in a section describing legal matters. The business is involved in at least eight different investigations, in addition to a far-reaching investigation of opioid distribution.

Mylan is also involved in multiple investigations. Referring to the May 1 letter in its recent SEC filing, it simply disclosed to investors: "In May 2019, attorneys general from certain states notified Mylan that the states intend to file a new complaint alleging anticompetitive conduct with respect to additional generic drugs." The company came under fire in 2018 for increasing the price of two-injection EpiPen from $100 to over $600, according to the Times, although it's not clear if that's part of the most recent lawsuit. 

Now what

This is a serious matter that should be taken seriously by investors. Unfortunately, at this time, details are scant, but with 44 states involved, this issue isn't going away any time soon. The lawsuit will take time to work its way through the courts, although multiple settlements could be a more likely outcome. Then again, this is sure to increase scrutiny from Congress and could lead to tighter regulations for the generic-drug industry. That suggests investors will need to get used to a little more volatility and uncertainty.

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool recommends Mylan. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Viatris Inc. Stock Quote
Viatris Inc.
Teva Pharmaceutical Industries Limited Stock Quote
Teva Pharmaceutical Industries Limited
$7.96 (2.84%) $0.22
Lannett Company, Inc. Stock Quote
Lannett Company, Inc.
$0.47 (4.04%) $0.02
Mallinckrodt Public Limited Company Stock Quote
Mallinckrodt Public Limited Company

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