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Mylan falls after lawmaker reveals 'misclassification' led to drug overpayment

Heather Bresch, CEO Mylan
Michael Nagle | Bloomberg | Getty Images

Shares of Mylan extended losses Friday after a lawmaker said the Centers for Medicare and Medicaid Services found that Mylan misclassified the lifesaving EpiPen device.

CMS found that Mylan had misclassified the EpiPen as a "non-innovator multiple source drug," or a generic drug.

The error resulted in the overpayment for the drug by the government on a federal and state level through the Medicaid Drug Rebate Program.

For drugs classified as generic, companies pay a 13 percent rebate to Medicaid, compared to the 23 percent rebate for branded drugs. 

"The Minnesota Department of Human Services has estimated that this misclassification will cost our state more than $4 million in overpayment this year alone," wrote Senator Klobuchar in a letter to the Centers for Medicare & Medicaid Services (CMS).

Klobuchar demanded a nationwide investigation by CMS.

Klobuchar: Mylan price hike was clearly out of sync

CNBC reached out to Mylan which said it is in compliance with all the laws and regulations around classification under the Medicaid rules. Mylan said EpiPen does meet the "non-innovator" definition. The company also acknowledged a new rule change in CMS this year, which prompted Mylan to apply for a new status.

Mylan shares were already under pressure in the session after Democratic presidential candidate Hillary Clinton announced her plan on Friday that proposed government regulation of drug prices.

Clinton said she aims to make alternatives available as a means of increasing competition, as well as introduce penalties against drug companies, like Mylan, for unjustified price increases.

"Every time this happens, investors come back with the question of 'Will this hurt the growth rate of the drug industry?'" said Dr. Ronny Gal, senior analyst at Sanford C. Bernstein.

With the valuation of the drug sectors being fairly low, Dr. Gal said he believes a rebound from the bottom should occur sometime before the end of this year.

Mylan, the pharmaceutical company that acquired the EpiPen in 2007, has risen the product's list price to approximately $600.

Shares of Mylan have fallen more than 26 percent so far this year.