Please ensure Javascript is enabled for purposes of website accessibility

Amid EpiPen Scandal, Sell MYL, Buy this Biotech Stock Instead

Price-gouging of its signature EpiPen has investors fleeing Mylan Labs (MYL). Fortunately, I have an alternative biotech stock that has already returned 30% in the two months since I recommended it to my subscribers.

The ongoing saga of Mylan Labs’ (MYL) EpiPen has enough plot points to make a major motion picture.

On one side are the innocent victims, who rely on the EpiPen to protect themselves from anaphylaxis, typically from foods (particularly nuts) or insect stings.

On the other side are Mylan Labs (a once-popular biotech stock), the FDA, insurance companies, lobbyists and legislators, who have created a situation where people in the U.S. are being asked to pay more than $600 for a pair of EpiPens that each deliver roughly $1 worth of adrenalin.

In the meantime, people in Europe enjoy a very competitive market where they can choose from as many as eight alternative—and cheaper—products!

Yes, all these parties in the U.S. are “just doing their jobs” and many are sincerely “trying to help.” But the net effect of their actions has brought us to this place where a company with $10 billion in sales—and a near-monopoly on a life-saving medical device—is paying its CEO, the daughter of a U.S. Senator, $19 million a year—while regular people beg, borrow and steal to afford the company’s product.

Something is wrong. Very wrong!

But before I get into the details, let me step back—as I like to do—and look at the big picture, time-wise. In this case, this approach is particularly relevant because MYL was the first stock I ever bought.

That was back in December 1984, when generic drugs were just gaining traction and little Mylan Labs made six of the most widely prescribed generic drugs: ampicillin, penicillin V.K., penicillin G., tetracycline, erythromycin and furosemide.

The company’s sales that year were just $37 million, which shows you how small the generic drug business was!

But the company was growing fast. My father, Carlton Lutts, had just recommended the stock in Cabot Market Letter—since renamed Cabot Growth Investor. And I liked the story of the little company that was beating the big guys with cheaper generics.

The next year, Mylan received approval for seven more generic drugs: Aldomet, Dalmane, Darvocet-N, Inderal, Motrin, Norpace and Valium. Business was hot!

But the following year, I sold all the stocks I owned to help build my first house—which I still live in, though it’s grown substantially larger.

But what if I had kept some MYL? How would that have worked out?

Well, if I had kept, say, $1,000 in the stock, it would have grown to $32,846 today. That’s a compound annual return of 11.5%—good but not great.

More important, my fast-growing little biotech stock stopped being a market-beater in 1992. For all the company’s growth, MYL over the past 24 years has done no better than the broad market.

Furthermore—and more relevant to the EpiPen discussion—the stock’s biggest gains in that 24-year period came from 2009 through 2015, smack in the middle of the period when Mylan raised the price of a two-pack of EpiPens from $100 to more than $600!

The price hikes goosed revenues; the revenues goosed earnings; and the earnings goosed the stock price.

The Power of Lobbyists

But it wasn’t just price hikes that greased the skids for Mylan.

Thanks to an army of paid lobbyists, Mylan was able to:

Get Sanofi’s (SNY) competing product recalled in November 2015.

Get Teva Pharmaceuticals’ (TEVA) generic device rejected by the FDA in March 2016, thanks in part to a “citizens petition” that was filed by Mylan.

Get the FDA to broaden the indications for its EpiPen to include risk of anaphylaxis.

Get Congress to generate legislation making EpiPens available in public places in the same way that defibrillators are.

Get the “School Access to Emergency Epinephrine Act” passed. The act not only protects anyone from liability if they administer epinephrine to a child in a school, it also provides financial incentives for schools that didn’t already stock EpiPens to start stocking them.

Get people to increasingly ignore the fact that antihistamines and steroids can often be used as substitutes for epinephrine, in the process conditioning all of us to believe that the firm’s products are the only real solution. In fact, the word EpiPen is fast becoming as generic as previous brand names Kleenex, Scotch Tape and Velcro.

And acquire Abbott Laboratories (ABT) of Ireland, thus lowering its tax rate from 35% to 20%.

Lastly, there’s the little matter of the Heather Bresch’s college degree.

When she became Chief Operating Officer of Mylan in 2007—having worked her way up from clerk—her resume showed an Executive Masters of Business Administration degree from West Virginia University. But when the press investigated, the school said she hadn’t earned the degree, and in fact had completed only 26 of the 48 credit-hours required. However, the school soon created some credits for her out of thin air (her father was governor at the time) and officially granted her the degree. But the subterfuge soon came to light, and in 2008, the school’s President, provost and business school dean all resigned.

Four years later, Bresch became CEO of Mylan. (Think about that for a minute!)

Now, everything Mylan has done at this point is perfectly legal—at least as far as I can tell.

However, there’s no question that the firm has used its considerable financial and political capital to influence public policy.

And while the shareholders of the biotech stock have clearly benefited, the costs of the company’s success have been borne by all of us, who pay higher prices for drugs because competitors are thwarted, pay higher prices for insurance, and pay higher taxes because Mylan doesn’t pay its fare share.

And now Mylan has dipped into its bag of tricks once more to announce that it will soon release a generic version of its own EpiPen, thus providing some relief to consumers from its own price hikes. But skeptics—and their numbers are growing rapidly—see this as simply one more crafty self-serving move, first by calming the critical mob and second by getting a jump on Teva, which may finally be allowed by the FDA to sell its generic epinephrine injector next year.

So what do I recommend?

First, I think we need to rein in the influence of big business on politics. The growing disenfranchisement of the American people is not healthy for a purportedly democratic society. In fact, it’s a trend that could end badly.

Second, I think we need to pressure the FDA to loosen up a bit, to allow more competition into the market. The perfect should not be the enemy of the good.

Third, I think we need tort reform, so that “fear of being sued” isn’t the driving force behind every decision.

And fourth, I recommend that you sell any shares in this hated biotech stock that you have.

Yes, MYL stock is already down 46% from its high, so technically it is oversold. Short-term, a bounce would not be surprising.

And yes, the company is expected to grow earnings 18% next year and trades at a price/earnings ratio of only 9, so by this simple measure, the stock looks like a bargain.

But looking at the big picture, I can’t call MYL a bargain today. On the contrary, I think the company has just finished an uncharacteristically strong eight-year run when it pulled all the tricks it could out of the hat.

I think slowing growth is in the company’s future.

And I think the combination of that slowing growth with the tarnished public perception of the company thanks to the EpiPen price-gouging will sour growing numbers of investors on this biotech stock as the months go by.

The main trend in MYL is still down and I think it will trend longer than most people anticipate.

Thus, I recommend you put your hard-earned money elsewhere.

This Biotech Stock Is a Great Alternative to MYL

As much as I am pessimistic about the future of MYL stock, I remain bullish on the medical sector as a whole. People are going to keep paying for improved health, and the companies who can deliver it while keeping both their shareholders and the public happy will succeed.

In fact, of the 16 stocks currently held in my Cabot Stock of the Week portfolio, four are in the medical sector. And the one I want to talk today is Biogen (BIIB).

Biogen makes therapies for the treatment of neurodegenerative diseases, hematologic conditions and autoimmune disorders. Its big moneymakers target multiple sclerosis (MS), hemophilia and severe plaque psoriasis. While Mylan has annual revenues of $10 billion, Biogen’s revenues are $11 billion, so they’re in the same league. But Biogen isn’t irritating its customers!

Biogen’s stock hit a record high of 480 back in March of 2015, but the stock, like many biotech stocks, came under selling pressure, eventually shedding more than 52% of its value. At that point, it was definitely unvalued.

But what was needed to truly set the bottom was a big visible piece of bad news (though not too big), and that was provided in early June, when the company’s trials of an improved treatment for MS did not meet expectations. The stock plunged 12% on the news, eventually bottoming two weeks later at 226.

Despite the setback, Biogen remains the market-share leader in treating multiple sclerosis!

Furthermore, the company is involved in mid- and late-stage trials for Alzheimer’s disease. An effective Alzheimer’s treatment could be worth tens of billions in annual sales for Biogen within two to three years!

So, Roy Ward, Cabot’s senior value analyst, featured the biotech stock in Cabot Benjamin Graham Value Investor on June 9, and today, his followers have a gain of 23%!

Following in Roy’s footsteps, I recommended BIIB to the readers of my own Cabot Stock of the Week on June 21.

Here’s the chart of BIIB when I first recommended it.

And here’s the chart today.

My readers now have a gain of 30%!

If this kind of stock interests you, you have two choices.

1. You can become a regular reader of Roy Ward’s Cabot Benjamin Graham Value Investor, and concentrate on the world of value stocks. Roy’s approach, which he has refined over many decades, is entirely by the numbers. He follows all the quality value stocks in the market (275 of them, to be exact), and he calculates a Maximum Buy Price and Minimum Sell Price for each one of them. As to his record, it’s excellent.

Since inception in 1995, the Cabot Value Model has provided an impressive return of 1,183.1% compared to a return of 603.3% for Warren Buffett’s Berkshire Hathaway. During the same 20-year period, the Dow has gained just 259.6%.

For more info, click here.

2. Or you can become a regular reader of my own advisory, Cabot Stock of the Week, which every week recommends one cherry-picked stock that’s previously been recommended by another Cabot analyst. In this way, you can build a diversified portfolio of stocks selected by a variety of successful investing systems (growth, momentum, small-cap, emerging markets, dividend stocks) and gain safety through both diversification and market timing.

For more info, click here.

The choice is yours. The sooner you join us, the sooner you can get on board the great bull market of 2016!

Timothy Lutts is Chairman and Chief Investment Strategist of Cabot Wealth Network, leading a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems.