EpiPen Price Hike and Controversies over Pricing Power in the Pharmaceutical Industry

Written by Pooja Narayanan

Mylan, a global pharmaceutical company, has recently faced intense scrutiny over the significant price increase of its life-saving drug, the EpiPen Auto-Injector. EpiPen is an allergy injection that keeps anaphylactic shock, a severe allergic reaction, at bay. It administers epinephrine, which keeps airways in the lungs open. Over the last eight years, the price of the EpiPen Auto-Injector two-pack has increased by 500 percent, from $100 in 2008 to $600 in 2016.

Though an EpiPen two-pack costs $600, each EpiPen only contains $1 worth of epinephrine. Mylan CEO Heather Bresch justified the price increase by arguing that the company has to pay distributors, pharmacy benefit managers, and insurance companies. According to Mylan, in 2015, 80 percent of commercially-insured people using the My EpiPen Savings Card did not have to pay for an EpiPen. Additionally, over 700,000 EpiPens have been distributed to American schools at no cost since 2012.

According to Bresch, Mylan only makes a $50 profit on each pen after factoring in discounts and rebates required by insurers. However, the Wall Street Journal reported that Mylan reduced its calculation of profits by factoring a tax impact of 37.5 percent, though the company’s effective tax rate was 7.4 percent in 2015 and 4.2 percent in 2014. Therefore, realized profits are likely much higher than Mylan’s calculations.

The scrutiny follows the recent investigations of Turing Pharmaceuticals and Valeant Pharmaceuticals for raising the prices of life-saving drugs. Turing Pharmaceuticals raised the price of Daparim, a drug used to treat HIV/AIDS patients, from $13.50 a tablet to $750 a tablet. Former Turing CEO Martin Shkreli said the price reflected increased investment in research and development. However, a study published in the American Journal of Sociology and Economics found that pharmaceutical companies actually invest proportionately less into research and development. The study also showed that between 1988 and 2009, pharmaceutical companies earned profits three to 37 times the all-industry average. Therefore, price hikes on drugs are often seen as efforts to rake in more profits. However, according to a study by the Congressional Budget Office, in the pharmaceutical industry, research and development spending as a percentage of sales has increased from 12 percent in 1970 to about 20 percent in 2004.

Pharmaceutical companies have also cited the limited window of time as a reason for high prices. Patents are awarded for about 20 years, and after drug development is completed, companies only have 10 years to generate as much profit as they can to offset costs. Once generics hit the market, sales can drop up to 90 percent. However, generics have been increasing in price as well. A 2016 Government Accountability Office report revealed that around 20 percent of a basket of established generics had at least one price increase of 100 percent. Manufacturers cite a lack of competition in the generic drug market for generic price increases. Competition is influenced by the availability of resources, consolidation, and the wait for FDA approval.

Ironically, government programs also lead to higher prices. According to The Economist, the biggest customer of pharmaceutical firms in the US is Medicare, which spent $112 billion in 2014 on medicines. The program cannot negotiate drug prices. Additionally, doctors under Medicare are incentivized to prescribe costly drugs. So while the government expects drug prices to decrease, it has created an environment that encourage price increases.

In response to increased pressure, Mylan plans on introducing a half-price generic EpiPen that sells for $300 per two-pack, which it says will not be ready until the end of the year. Even with this price decrease, however, Mylan still holds over 90 percent of the epinephrine auto-injector market. Though generics like Adrenaclick are far cheaper, they are no match for Mylan’s intensive marketing campaigns and cannot fill prescriptions specifically for EpiPens. Therefore, until Mylan faces significant competition from other brand-name prescriptions or generics alike, the price of an EpiPen is not likely to decrease anytime soon.