The EpiPen Price Increase is More Than a Battle of Good vs. Evil

Aug 28, 2016 • By • 297 Views

EpiPen Mylan

America’s pharmaceutical market is complex. More complex, in fact, than can fully be captured by one news article. Or 10. Or even 100. Last September, media outlets and Congress took Turing Pharmaceuticals’ young former CEO Martin Shkreli to task following a more than 5,000% price increase of his company’s antiparasitic drug Daraprim. Several months later, Shkreli’s name had mostly disappeared from the headlines, supplanted by an increasingly more provocative 2016 presidential primary race. Yet almost exactly one year later, a new story seems to be playing out much the same way. Only this time, the drug in question has been a long-time staple for delivering life-saving doses of epinephrine shots: The EpiPen.

Mylan, the company that has reportedly owned the rights to market and distribute the device since 2007, has now taken center stage in what is seemingly America’s healthcare morality play. This is due to Mylan’s incremental hiking of the EpiPen’s purchase price following the company’s acquisition of Merck KGaA’s generic-drug assets. While Shkreli and Mylan CEO Heather Bresch appear to each be cut from noticeably different cloths, and indeed the EpiPen increase comes off as much more tame in comparison, the rising cost of pharmaceuticals in the U.S. is more convoluted an issue than a simple battle between evil corporations and needy patients. Unfortunately, that is the way most media outlets commonly sell it. After all, it makes for good reading. It compels the audience to take a side. But in framing the discussion this way, either implicitly or explicitly, media outlets choosing to overly simplify the issue ultimately run the danger of watering down a troublesome trend more motley than a mere right versus wrong.

A Bigger Story to Tell

It's easy to drum up anger at companies like Mylan when one reads headlines this one from Business Insider:

“Here's why it's ridiculously tempting for the CEO of Mylan to keep hiking the EpiPen price”

In the article, writer Lanett Lopez draws a conclusion that is as tantalizing as it is common: Because Bresch stands to profit big time from continuing price increases of EpiPen, those prices aren't going to be going down any time soon. An assumption to be sure, but fair enough. Yet there were many factors that influenced the EpiPen’s relatively low price at the time Mylan purchased Merck’s generics assets. This includes a 1998 recall on the device that forced the holding company, Meridian Medical Technologies, to take a huge hit to its stock value. Meridian was later acquired by King Pharmaceuticals, Inc. in 2002, which itself was acquired by Pfizer in 2011. The sudden media attention on Mylan, Bresch and the EpiPen, despite the rise in price having occurred, not suddenly, but over a 12-year period, seems to have more to do with what the EpiPen does than what it cost this year as opposed to 2 or 3 years ago. And much of the anger undoubtedly exists because of how many parents and children rely on the safety and ease the device provides. Even still, to many, the price increase appears to be just another example of corporations lining their pockets thanks to the ongoing suffering of mankind.

Interestingly, Mylan’s relationship with Meridian and the EpiPen appears to go back further than most media outlets are reporting. In researching, we discovered not only a press release from Meridian detailing an agreement with Mylan dated April 8, 1997, but an SEC document stating that Mylan and Meridian had already entered into an “alliance formed in 1997...under which Meridian will license, develop and manufacture a line of generic injectable drugs to be marketed by Mylan.” As far as we can tell, no other media outlets have identified the fact that Mylan’s connection to the product has been much longer than from 2007 onwards. Or the fact that, during that time, the price of the EpiPen did not skyrocket.

Still, in defense of the decade-long price hikes, Bresch explained to the New York Times, “I am running a business… I am a for-profit business. I am not hiding from that.” Indeed, Bresch and Mylan have hidden nothing. It is not as if the price hikes happened overnight or in secret. And while her words are unlikely to assuage the frustrations of many calling the issue by another name -- corporate greed -- Bresch gave an explanation to CNBC that provides one of the clearest pictures yet as to why most specialty pharmaceuticals, not just EpiPens, have risen dramatically in price:

Some viewers will likely watch her interview and cringe. It is, after all, difficult to play the victim while simultaneously making billions of dollars in profits from a device that your company marketed successfully to become both a household name and an essential life-saving tool. No one absolutely needs Mylan's device. There is the less well-known alternative called Adrenaclick, or the old-fashioned method of just using a traditional dose bottle and a syringe. When Mylan bought the product back in 2007, the company knew it was purchasing a unique product that has essentially come to symbolize emergency care for life-threatening anaphylaxis. Yet Bresch's statement should not only be given more attention but likely the most attention. That is, just how many “hands” touch an EpiPen before it reaches its final destination. The importance, however, may not just be how many middle men are involved in the production of the product and its eventual sale to customers. Instead, a clearer picture emerges when one looks at the varied layers in the healthcare market and overall economy influencing the price of prescription drugs.

A Look at Multiple Causes

In order to get a better idea of the ongoing issue of pharmaceutical price increases, it’s important to identify several other factors among the many that directly influence the cost.

Supply and Demand

The rules of supply and demand apply heavily in the drug market. The use of, and demand for, prescription drugs has been growing rapidly in the U.S. But because prescription drugs can only be acquired via a doctor’s prescription, their use is significantly limited to a certain subset of the population. As a result, drug companies will only produce their product in a limited amount. This is typically enough to meet demand. In the years following Mylan’s purchase of the EpiPen, effective advertising led to an increase in sales -- thus an increase in demand. While this may have inadvertently led to a rise in misuse of the product with so many more in the hands of new customers, the increasing frequency of children and adults with peanut and other food allergies seems to have also coincided with the increased demand for the EpiPen.

At its most basic level, supply and demand affects the cost of a product in four ways:

As the supply of a product increases, the price decreases.

As the supply of a product decreases, the price increases.

As the demand for a product increases, price increases.

As the demand for a product decreases, price decreases. 

Given the increase in demand for the EpiPen, both due to Mylan’s effective marketing and the increase in children suffering from dangerous food allergies, it’s clear that the third option, demand increase, is one key factor relating to the price increase for Mylan. Does it account for the entire price increase? Unlikely. But it’s almost assuredly playing a major role, if not the biggest one.

Limited Competition

Competition in a market invariably drives down costs for products. Companies are forced to compete and innovate until an equilibrium is reached. For a long time, the EpiPen had little to no competition. And the device has remained effectively the same for more than 20 years with little reason to innovate the design. This begs the question: Why didn’t the prices increase earlier? At this point, we refer back to supply and demand. It’s clear that the EpiPen’s value was based on market demands. A dramatic rise in price without a rise in demand, when a company controls the sole source of a needed product, would indeed be price gouging as well as monopolistic. There are 34 states with laws against price gouging, a practice that is certainly morally questionable, but also difficult to legislate without causing more damage. That said, Mylan does not have a monopoly on life-saving epinephrine. Neither does it have a monopoly on auto-injectors to deliver the drug.

There are generic alternatives to the EpiPen. Most notably, the Adrenaclick can be purchased for as little as $140 per 2-pack, a far cry from the $600+ one would have to pay out of pocket for an EpiPen. However, the EpiPen’s household name results in many doctors simply writing prescriptions for EpiPens instead of researching cheaper alternatives. Many doctors will write prescriptions for the drugs they know, especially when those drugs are already known to be effective and safe. And in some cases, many doctors receive financial kickbacks for prescribing certain drugs.

According to ProPublica’s Dollars for Docs database, Mylan has delivered at least 34,121 payments totaling some $1.85M to doctors who have prescribed EpiPens. And indeed, of Mylan’s list of products in which payments were delivered, the EpiPen easily tops the list. The Chicago Tribune notes that Mylan was well on its way to creating a monopoly in its marketplace for the EpiPen, although it technically never reached that point. There is enough evidence to suggest that a variety of factors, including prescription kickbacks, are part of the equation for Mylan’s lack of real competition.

Government Regulations and Laws

Because there is often a lag time between when a law is passed and when we see the results, it's easy to forget how many laws are actually influencing the price of drugs in the U.S. As the Chicago Tribune noted in their article, laws requiring schools to keep auto-injectors in stock at contributed directly to the EpiPen’s rise in price. Take, for example, a California law passed in 2015 that requires all schools in the state to have at least one epinephrine auto-injector handy. While the law specifies the generic term “epinephrine auto-injector”, many media outlets, and indeed most schools, interpreted this as “EpiPen”.

A total of 11 other U.S. states have laws requiring schools to keep epinephrine auto-injectors both supplied and updated. The remaining states, excluding Hawaii, have laws that allow keeping the device stocked without making it a requirement. Considering the EpiPen’s dominance over the very concept of the epinephrine auto-injector, it stands to reason that the company benefited from these laws, most of which were passed in the past 15 years. That benefit would have been both an increase in demand and an increase in sales.

Inflation

One of the key criticisms of Mylan’s price increases involves inflation. When Mylan acquired the EpiPen, it originally intended to sell off the rights to the product, which, as Bloomberg reports, was only bringing in around $200 million a year. In 2007, the cost of each device was $57. In today’s dollars, that’s equivalent to $66 a device. At today’s current cost, the device would have come out to be the equivalent of $516 back in 2007. Realistically, however, the cost of an EpiPen had changed very little for some time.

According to a 2001 research paper on the out-of-hospital use of epinephrine, the cost of the device was around $50 at that time. Had the price stayed the same without proper inflation adjustments, Mylan would be charging the equivalent of around $37.00 on each device. And, given the company appears to make only around 1/3 of the cost back on each device, Mylan would have been realizing around $12-$13 per device sold. Not exactly profitable.

Adjusted for inflation, $50 in 2001 is equivalent to around $58 in 2007. What this shows is that prior to its sale of the product, Meridian kept the product’s price effectively aligned with inflation. Yet given the fact that Merck gave up those assets, it should come as no surprise that Mylan was originally considering cutting the EpiPen from their product line. The purchase of Merck’s products was viewed negatively by investors, causing the steep dive in Mylan’s stock at the time. In inflation-adjusted dollars, it was not making enough money to be considered a valuable asset. Due to low demand, and what was likely a significant supply, the product was simply not valuable. Inflation certainly played a role in the product’s price increase, although not the biggest one. Even the price of the next closest alternative, Adrenaclick, at $140 a device, is well above what the EpiPen would have been had they simply adjusted the price to match inflation.

Preparing for Future Drug Price Increases

In general, prescription drug use and spending are dramatically higher today than 20 or 30 years ago. This has been noted in several studies, and, when taken into account with the general rules of supply and demand alongside the many other factors influencing product pricing, has likely helped influence the increasing cost of prescription drugs. And according to the Drug Trending Report from Express Scripts, “Drugmaker consolidation, price hikes ahead of impending patent expirations and hyperinflation on older medications without therapy class competition all contributed to increased drug spending.” All of these, save for the patent expiration (which for the EpiPen is not until 2025) are definitely part of the puzzle for the EpiPen’s and other drugs’ price increases.

The Express Scripts report also noted that specialty drugs, in particular, have seen particularly significant price increases, driven primarily by Hepatitis C prescriptions. Like the increase in food allergies driving the EpiPen increase, there has been a notable increase in Hepatitis C infections, driving up the demand, and therefore cost, of the drug. Unsurprisingly, other specialty drugs helping to drive the cost averages up include those for attention deficit disorder and asthma.

The suggestions for how to stem the tide of price increases are many. This includes allowing the federal government to negotiate prices down through Medicare. Yet one of the biggest problems, perhaps, is how disconnected Americans are from what they’re paying. As with the increase in college tuition prices, the more the government offers to pay for services, the more they’ll cost. And as long as the money is guaranteed, companies will have little reason to lower prices.

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About the Author

Samuel Cook Samuel Cook

Samuel Cook is a former teacher and freelance writer. He writes for a wide variety of websites, covering diverse topics in technology...