Mylan's EpiPen Pricing Decision Was Predictable
"I am running a business. I am a for-profit business. I am not hiding from that." With those words Mylan's CEO, Heather Bresch, has become the pharmaceutical industry's latest "villain-of-the-month." Democrat Presidential candidate Hillary Clinton called Mylan's price increase of EpiPen, a precise epinephrine auto-injector treatment for patients undergoing severe, and potentially fatal, allergic reactions, "just the latest troubling example of a company taking advantage of its consumers. One would think that after raising the cost of a two-pack of EpiPens from $265 to $608.61 since 2013, that Ms. Bresch would be repentant and apologetic, but she is not, as this pricing decision is reflective of a highly complex business and public policy environment in which the U.S. pharmaceutical industry operates.
From a business strategy perspective, Mylan has been in a unique position since 2012, when a patent infringement lawsuit that was filed by Pfizer (the manufacturer of the EpiPen for Mylan) and settled with generic manufacturer Teva. Mylan management was aware that Teva was planning to have their version of EpiPen available to American consumers by the summer of 2015. Mylan, also a generic pharmaceutical manufacturer, and Bresch, who is the 2016 chair of the Generic Pharmaceutical Association, are all too aware of what occurs with the entry of new generic competitors. As Greg Ip notes in his September 1st column ("A Cure for Swelling Drug Prices: Competition") in The Wall Street Journal: "Since then [the passage of the Waxman-Hatch Act of 1984], generics have risen from 19% to 84% of all prescriptions. ... A 2010 study found that within three years of the first generic launch, the average generic has 12 competing suppliers and its price has fallen 94%."
With a closing "window" available for profitability in the U.S. market (in Europe, Mylan's EpiPen presently competes with several allergic device competitors offering their auto-injector device packs at well under $100), Mylan's management decided to maximize its profit until real U.S. competition appears. Until now, Mylan has faced little competition in the U.S. market, with only a comparable epinephrine auto-injector device from Adrenoclick presently available to U.S. consumers at a retail cost of about $142. Another alternative product, Sanofi's Auvi-Q, was pulled from the market in 2015 because of dosing problems. According to market data collected by Truven Health Data, Mylan controls 89% of current U.S. market share for allergic device products. Unsurprisingly, this is a market position that Mylan wants to maintain as long as possible. But market strategy alone is not responsible for Mylan's success. The pharmaceutical industry is heavily regulated by the U.S. Food and Drug Administration (FDA), and Mylan has pursued an active, and complimentary, non-market strategy to maintain its commanding position in the U.S. marketplace.
According to a recent study by Michael A. Carrier and Carl Miniti of Rutgers University Law School, Mylan filed a "citizen petition" with the FDA in January 2015 in an attempt to persuade FDA regulators not to approve Teva Pharmaceuticals rival auto-injector device unless it was identical to Epi-Pen. Mylan's management knew that the FDA had 150 days to formally respond to a citizen's petition. Mylan's regulatory strategy provided, at minimum, a delay in generic entry from a potential competitor, and at best could lead to the FDA disapproving Teva's proposed device. In fact, the FDA did reject approval of Teva's proposed device for "certain major deficiencies", although for different reasons than Mylan had suggested in its petition.
Since EpiPen is protected by patents on the device itself (not the active ingredient of epinephrine), and generics are soon entering the U.S. market (including, after alleviating FDA deficiencies, Teva's epinephrine auto-injector device in 2017), Mylan's pricing strategy is not unlike what other brand-name pharmaceutical companies have followed in the past. Also, as Andrew Pollack notes in his August 24th article in The New York Times ("Mylan Raised EpiPen's Price Before the Expected Arrival of a Generic"): "One reason drug companies can raise prices sharply before generic competition arrives is that insurers and pharmaceutical benefit managers are willing to tolerate such increases if they know that lower prices from a generic are on the way."
And they are on the way. Yet, after the consumer social media outcry late last month, Mylan announced that it will offer an authorized generic version of EpiPen in several weeks at $300 per two-pack. In addition, Mylan raised its co-pay coupon system to cover $300 of those whose insurance co-pay is either not met or who have high deductible co-pays. These management responses will hopefully assuage the consumer outrage against the company.
While Mylan misjudged the social media backlash from its latest price increase for EpiPen, the company is still maintaining its price increase with health care insurers and pharmacy benefit managers, who eventually pass it on to consumers. Bresch has publicly stated that anyone who needs an EpiPen will get access to it regardless of ability-to-pay. Yet Mylan is also getting further scrutiny from Congress, as Senator Ron Wyden (D-Oregon) and Representative Frank Pallone (D-New Jersey) sent a letter last week to Sylvia Burwell, Secretary of the Department of Health and Human Services, asking the Department to investigate a possible misclassification of the EpiPen under the Medicaid program. For Mylan, when it rains, it pours.
Not having access to a potentially life-saving device such as an EpiPen, especially for vulnerable children, is a non-starter for the pharmaceutical industry in the U.S. Yet if fingers need to be pointed at Mylan's management for its pricing practices, they should also be pointed at the same legislators who are now "outraged" at the company's alleged "price-gouging" strategies. Yet the simplest answer to reducing the cost of EpiPen is to introduce competition into the U.S. epinephrine auto-injector market - as exists in Europe today.
The Wall Street Journal's Ip identifies the costly and time-consuming regulatory hurdles that a U.S.-based generic manufacturer is confronted to get approval from the FDA before selling its product. According to the Generic Pharmaceutical Association, the average lag time between application and FDA approval for a new generic is four years. Although the FDA application backlog has been recently shrinking, the allocation of additional agency human resources should be a high-level priority, with the appropriate Congressional committees receiving quarterly reports on agency progress in reducing FDA time-to-approval for generic pharmaceutical manufacturing. This executive branch initiative should be considered "low-hanging" public policy fruit, especially considering the willingness of generic pharmaceutical companies to pay FDA industry user-fees to accelerate the agency's regulatory approval process.
Furthermore, Ip quotes Alex Tabarrok, a George Mason University economist, who suggests that offering reciprocal approval of generic drugs that have received manufacturing approval in other advanced economies would allow for the importation of epinephrine auto-injector devices from countries with lower-priced government-negotiated prices. Moreover, a "single development pathway" for reciprocal approval has been proposed by the Generic Pharmaceutical Manufacturers and Medicines for Europe, its European industry equivalent.
If the market does not respond to the American consumer's satisfaction, or it is limited in its response by public regulatory constraints, the pharmaceutical industry could face the looming prospect of enhanced regulatory intervention. Mylan's pricing practices with EpiPen may be a "tipping point" in the ongoing public policy debate over pharmaceutical pricing in the U.S. As Caroline Poplin, an attorney, physician and health care analyst from Bethesda, Maryland proposed in a September 2nd letter to the The New York Times:
It [Congress] could regulate drugs like utility monopolies, setting up a commission to calculate prices based on reasonable costs (including research and development and failed drugs) and appropriate profit.
When market forces produce bad results, we have remedies.
And it is just such intrusive public policy "remedies" that the pharmaceutical industry, and American consumers, need to desperately avoid.