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Mylan’s EpiPen Recall Couldn’t Come at a Worse Time

Mylan’s EpiPen has been recalled across the U.S., and the timing couldn’t be worse.

The pharmaceutical company is still recovering from its price scandal last summer, when critics accused Mylan (MYL) and CEO Heather Bresch of taking advantage of a virtual monopoly on the life-saving EpiPen allergy treatment by raising its price by 500%. Public and Congressional outrage not only forced Mylan to pay a $465 million settlement and launch a cheaper, generic version of the injection device, but it also spurred rivals and regulators to speed competing epinephrine injectors to market to lower costs.

The current recall, which includes 13 lots of EpiPen distributed between mid-December 2015 and July 2016, comes as Mylan is struggling to hold on to its market dominance, making it particularly vulnerable to bad news. There have been only two reported instances when the device failed to release its medicine, but the nature of the product—where people rely on it to quickly save lives during an allergy emergency—means the uncertainty alone could accelerate the switch to other available brands.

“Don’t ignore this topic,” Umer Raffat, a senior analyst at Evercore ISI, told clients last week in a video discussing the recalls. “They’ve had two cases now where the device didn’t work.”

After all, Raffat pointed out, recalls were what took out EpiPen competitor Auvi-Q, which was pulled from the market entirely early last year after 26 cases when the device malfunctioned. The withdrawal of Auvi-Q contributed to Mylan’s monopoly on epinephrine injectors, setting the stage for the EpiPen price hikes.

But now that Auvi-Q, made by drug company Kaleo, has relaunched, Mylan could find itself on the opposite side of the coin if EpiPen recalls spread further. “I don’t think it’s heading down that direction, but it’s something you can’t ignore,” Raffat said.

Here’s why Mylan’s position in the market is especially precarious. A report from Athenahealth (ATHN) in February found that EpiPen’s market share had dropped from 95% last summer to just over 70%, and it appears to be rapidly deteriorating further.

The number of EpiPen prescriptions filled at pharmacies dropped 44% in March from a year earlier, according to RBC Capital Markets’ analysis of IMS Health data. The decline was measured over a four-week period ending March 24, just days after Mylan’s initial recall of 81,000 EpiPen injectors outside the U.S., so it’s not entirely clear that the product defects were responsible for the falloff.

But what is evident is increasing competition from EpiPen alternatives such as Auvi-Q and Adrenaclick, made by Impax Laboratories (IPXL), which now sells a generic version at CVS (CVS) for about a sixth of the cost of Mylan’s device.

The Adrenaclick generic now commands 28% of the epinephrine market, and Auvi-Q has already claimed 1% after just relaunching in February, according to RBC. Besides the original EpiPen, Mylan’s own generic version holds on to less than 17%.

EpiPen, which was Mylan’s first $1 billion blockbuster drug, is now much less valuable, expected to generate only $600 million of the company’s 2017 revenues, as the lower-cost generic Adrenaclick cannibalizes sales of the more expensive original. While that limits the amount of harm EpiPen problems could cause the company—one reason Mylan stock ended the day flat Monday after falling more than 1% earlier—it would still be a huge blow to CEO Bresch and Mylan’s brand.

From what was once a flagship product, Mylan now risks losing a foothold in the EpiPen market completely. With many patients and parents of kids with potentially fatal allergies still seething over EpiPen sticker shock, some may be just looking for a chance to switch to a product that’s both cheaper and, potentially, safer.