EpiPen Shock

The white hot EpiPen controversy is the latest signal—and it should be loud and clear at this point—that the pharmaceutical marketplace is dysfunctional.

To be sure, drug companies make medicines that save and prolong lives and ease suffering. And many drugs save money compared to alternative treatments, and yield productivity gains by keeping people alive, well, and working.

But over the past two decades, the industry has become the poster child for poor business ethics, flaunting the law, and profiteering. Just one example: Since 1990 drug companies have paid $15 billion in civil and criminal fines to the federal government for promoting the use of their products “off-label” – that is, for unapproved uses.

They have also been caught red-handed (a) testing drugs in illegal and unethical ways in third world countries, and (b) hiding study results from authorities worldwide that undermine claims for their drugs’ effectiveness and/or safety.

Most recently, they have been vilified for startling increases in the prices of both brand-name and generic drugs.

EpiPen, made by Mylan Pharmaceuticals, is the latest. Thanks go to analysts at Well Fargo who brought to light the product’s steady year-over-year price rise (for a two-pack) from $165 in May 2011 to $608 in May 2016.

Mylan’s CEO Heather Bresch has reacted aggressively to tamp down the public and media uproar, and in fairness she’s not another Martin Shkreli, the infamous former head of Turing Pharmaceuticals who smirked his way through a congressional hearing on the companies 5000% increase of a generic drug that cost pennies to make. Nor does she seem to be in the mode of pharma villain Michael Pearson, former head of Valeant Pharmaceuticals. According to a revealing and detailed piece in Vanity Fair (June 2016) by Bethany McLean, Pearson pioneered a new form of “drug dealing” and made a high art form out of price gouging before he was forced out.

No, Bresch and Mylan are more in the main stream, and that’s the problem. In recent days she has justified the EpiPen price increases by arguing that: (1) she had to do it to recoup legitimate investment costs; (2) Mylan gets only $274 of that $608 list price with the rest going to insurers, pharmacy benefit managers, and other middlemen, because of (her words) “an outdated, inefficient system;” and (3) “It was never intended that a consumer — the patient — would be paying this price” (as she told CNBC) and they are paying more, Bresch said, because insurers have hiked insurance deductibles and drug co-pays so significantly in recent years.

Bresch makes some valid points. But much of her explanation and response is disingenuous and spotlights the problems with the pharma industry as well as the way we price and pay for drugs in the U.S.

First, what’s the justification for even doubling the price? There can be none other than the desire for more profit. The drug (epinephrine/adrenalin) as well as the type of delivery mechanism EpiPen uses has been on the market for decades. Mylan acquired EpiPen in 2007 when sales were $170 million. EpiPen sales in 2015 were $1.7 billion.

The real explanation, which Bresch didn’t acknowledge, is that her product has a near monopoly (more on that below). So Mylan could raise the price without fear of market share loss. In fact, Mylan has a quasi state-sanctioned monopoly since 11 states require schools to have injectable epinephrine products on hand, in part as a result of Mylan’s lobbying. And a 2013 federal law—the School Access to Emergency Epinephrine Act—gives financial incentives to states to enact mandates for schools to stock epinephrine autoinjectors and train personnel to administer them.

That’s actually a good law because the need is justified, but the problem is there’s only one viable product now. In fairness, according to a Washington Post story, Mylan gives EpiPen free to many schools.

Not incidental to its market lock and profitability (and the cumulative cost to buyers over time), EpiPens have a shelf life of just 1 year.

Second, Bresch’s statement that “the consumer was never meant to pay” for EpiPens betrays a broad pharma approach to the marketplace. Since the consumer is insulated from out-of-pocket costs, let’s get what we can from insurers and government.   Well, everybody is doing that so what’s the problem? The problem is that Bresch and every other pharma CEO (and healthcare CEO in general) knows that in the end, WE PAY. In higher premiums, taxes, deductibles, co-pays etc. It’s that simple.

Bresch says she know that, believes “the system is broken,” and is ready to work with Congress to fix it.

She could have started by immediately lowering EpiPen’s price. She declined to do so. Instead, she adopted the tried and true pharma approach of reducing consumer’s out-of-pocket costs for EpiPen. Mylan will increase the amount of money on a copay assistance card from $100 to $300 and will widen eligibility for that assistance program. Per the above explanation, that’s not in any way a savings to the system or in the long run, consumers.

As for Bresch’s explanation that Mylan gets only $274 of that $608 list price with the rest going to insurers, pharmacy benefit managers, and other middlemen, there’s no way to know if those numbers are correct. Why? Because the system is opaque, and she knows that. Knowing a bit about this marketplace, I doubt seriously that PBMs are pocketing $200 or more per EpiPen two-pack.

The system is also broken is ways Bresche didn’t directly address this past week.  EpiPen has a monopoly in large part because the FDA did not help competitors stay in the market or get to market to compete with it.

As reported by Dana Goldman, a professor at the University of Southern California, in the online news service STAT, FDA failed to work with Sanofi Pharmaceuticals in 2015 and this year to get a competitor to EpiPen back on the market after it was recalled in 2015 because of 26 adverse event reports. The device in those cases was found to be delivering too much or too little drug. But Goldman says no one died and the failure rate, based on sales of 2.8 million units, was just 0.01 percent.

Instead of working with Sanofi to keep it in the game, FDA dawdled as Mylan’s market grew rapidly, Goldman says. In addition, this past spring FDA rejected an EpiPen copycat made by Teva. Five senators wrote the FDA on August 25 expressing concerns the agency may have stifled competition.

This is consistent with complaints by lawmakers, consumer advocates and others over the last few years that the FDA does not approve generics fast enough, nor pay enough attention to situations in which a single product—brand or generic—lacks viable competition and starts to become excessively expensive. The FDA defends itself, claiming its only job is to make sure drugs are effective and safe, not affordably priced. Consumer advocate pooh-pooh that, arguing that FDA has a long-standing mandate from Congress to approve competing brands and generics quickly.

Two final notes:

(1) Mylan’s price hike for EpiPen is not an aberration. It just garnered the most attention. The company has made price hikes on dozens of medications.

(2) Bresch’s compensation has risen at the same rate as EpiPen’s price, roughly six fold since 2007, to $19 million in 2015.

Categories: Uncategorized

4 replies »

  1. Thanks Jim, William and PJ.
    UPDATE as many readers may have seen/heard in the news:
    Mylan on Aug 29 announced it would sell its own generic version of EpiPen for half the price of the generic–around $300 instead of $600. As has been widely reported, that’s very much in the company’s interest, and in the interest of wholesalers, PBMs and pharmacies. All take a bite out of the price of every drug. This clever move keeps the money flowing into Mylan’s coffers and does not anger the supply-chain companies. It also may stall other generic companies—one is known to be waiting in the wings—from bringing an EpiPen competitor to market. It’s an understandable strategy from a biz perspective. What it will not do is make this essential medicine—which, again, probably cost less than $30 to $50 to make—affordable for all who need it and fairly priced for the system as a whole. Mylan should bring the price of their generic down to no more than $170 and FDA should approve competitors as quickly as possible.

  2. Good article Steve. The whole pharma thing needs more sunlight on it. I realize the hideous costs of developing, testing, and getting FDA approval on drugs…BUT…somehow this still doesn’t make even good economic sense. If it were just supply, demand, etc., that’s one thing, but they are relying on an unfairly and improperly retained monopoly for this product and the insurer insulation that you pointed out. Pharma should be a hot topic for all of us

  3. I wish we could figure out some way for us to bring drugs in from Europe and the world and still ensure their safety and reliability. Competition is the sine qua non in this problem.
    Why couldn’t we have FDA inspectors that go all over the world to assess the quality of international drugs? Why is this so difficult? Or just pick a country that we trust, like Switzerland, and get drugs from there if we need to fulfill competition requirements here at home.

    If our drug manufacterers scream bloody murder, you know you are approaching effectiveness.

  4. Remember that PHARMA has always had an odd business plan. That is, 40 cents of every dollar of cash income is allocated to profit and promotion. This business plan generates its position on the stock exchange. Since the relatively easy products that will support this business plan have already been developed, odd things have begun to occur. The Epi-pen saga is just one of many. Now also remember that it can require up to $1 Billion to bring a product successfully to market, over an extended period of time. And then, its possible that a “1 in a million” prescription can lead to serious consequences for a person that was not detected during the pre-market research process. The subsequent legal process can be disheartening, at best. Even with a heightened risk profile, the level of profiteering by PHARMA is still hard to accept.