The recent public outcry about Mylan and the price of the EpiPen may seem like just the next in a line of companies facing reaction against massive increases in drug prices. The backlash from patients, payors and government against pharmaceutical company greed and overpricing that started with Turing Pharmaceuticals, casting Martin Shkreli as the lead villain, has continued of late with increased intensity, focusing on Valeant and other companies whose leading method of growing revenues is by increasing prices. Political and public backlash has shone the spotlight on these practices, and while it’s not uncommon for any company to raise (or lower) prices now and then in response to the market, much of the public outrage in this case likely stems from the magnitude of the price hikes and the fact that the EpiPen is an essential and lifesaving treatment for children which may now be out of reach financially for many families.
Mylan acquired the rights to EpiPen in 2007 from Merck KGaA, at which time sales were around $200M. It was a relatively niche product at that time, but still an absolute essential for children and adults with severe allergies. After the acquisition, Mylan ramped up marketing efforts and began raising the price. By 2015, the product had exceeded a billion dollars in sales, accounting for 40% of the company’s total revenues, in large part due to price increases.
Along with the price increase, the Company’s margins during this time increased from 9% to 55%, showing that the increase in price had no correlation to the actual manufacturing cost of the product or as reimbursement for the costs of innovation.
If accusations of price gouging were not enough to paint the company as a bad actor, there’s also more to this story that may have a significant impact on Mylan’s image.
The Company’s marketing efforts after the acquisition also included a significant increase in spending on lobbying, resulting in federal legislation encouraging states to stock EpiPens in schools and other public places (public entity prescriptions). Lobbying is a key strategy for drug-makers, but the issue in this case lies with the CEO, Heather Bresch, and her ties to congress. Ms. Bresch’s father, Joe Manchin is a Democratic senator, which may be perceived negatively considering the significant impact of favourable legislation on the growth of EpiPen in the last several years.
Ms. Bresch is also under fire for the increase in her salary of the same time period, up 600% since 2007, now at $19 million. Furthermore, it was found in 2007 that she did not complete the course work for her MBA at the University of West Virginia. Internal investigations found that she had received preferential treatment due to the influence of her family in West Virginia and the degree was subsequently revoked. Taken separately, each of the points of contention (price, margins, salary, lobbying, political favouritism, etc) raised here may not have sparked the current scandal, but together they may spell trouble for Mylan’s reputation.
It isn’t clear what the answer to Mylan’s PR nightmare might be, but it will likely take more than an increase in the amount of the copay coupons to dampen the outrage. But beyond the behaviour of individual companies, there are systemic factors at play in pricing and reimbursement. With many calling for government intervention or tighter regulation, it will be interesting to see how these issues play out, and what effect pricing pressures might have on the industry as a whole, affecting the exploitative pricing practices such as Mylan and Turing, but everyone else as well. As explained rather elegantly by the LifeSciVC blog (here), there is a difference between hiking prices on generic drugs with no real competition just because you can vs. higher prices reflecting real innovation serving a significant unmet need. As investors in healthcare companies, we focus our efforts on those real innovators. The risks may be higher, but the reward, both financially and in real human terms, will reflect that.