EpiPen: perfect storm of genius, greed and bureaucracy
Nearly 100 years ago, a hormone called adrenaline proved to have life-saving properties when administered to victims of severe allergic reactions. The EpiPen, so prominent in the news lately, delivers about $1 worth of the hormone through an easily administered auto-injector. The story of how the price skyrocketed six-fold evinces both the genius and the folly of the American healthcare system.
The device that became the EpiPen was invented in 1974 as a means for U.S. soldiers to quickly treat symptoms of poison gas on the battlefield. In 1987, the device was approved for delivery of epinephrine (the trade name for adrenaline) to treat anaphylaxis. The manufacturer was acquired by Pfizer, which sold the marketing rights to Merck. In 2007, Mylan Pharmaceuticals purchased the marketing rights to the product. At that time, a single-dose injector sold for around $50.
Mylan embarked upon a brilliant strategy: to stimulate additional demand by encouraging the stockpiling of EpiPen devices in public venues. It was a masterstroke of promotion that also saved lives, as the company relentlessly raised awareness of the risk of severe allergic reactions in children. Ultimately, Congress passed a bill in 2013 encouraging schools to keep emergency supplies of the injectors on hand. This was a classic case study in marketing that enriched shareholders as well as Mylan’s executives as sales spiked from $200 million in 2007 to $1.1 billion last year.
Thanks to the byzantine and mysterious mechanism of rebates, discounts and revenue sharing with pharmacy benefit managers and insurance companies, virtually no one paid the full retail price. This began to change as high-deductible health care plans gained market share. And while the trend was already under way, Obamacare accelerated the rush to high-copay plans. This means many more patients are now confronted with the full $300 bill for an EpiPen until their deductible is satisfied. While never anticipated by Mylan, the significant cost shift toward patients has now created a major public relations nightmare for the company. Many of the same politicians who mandated EpiPen distribution in the schools now rail against the resultant price hikes.
One might reasonably inquire as to why a century-old drug in a 30-yearold package has not been replaced with generics. Recall Ronald Reagan’s prophetic quip about the most terrifying words in English: “I’m from the Government and I’m here to help you.”
As it turns out, there exist both a less expensive branded competitor to Mylan’s EpiPen and a generic equivalent. But under current FDA rules, they cannot be freely substituted without a specific prescription, although it is unclear how they could differ substantially enough to warrant exclusion. Nevertheless, these alternatives have struggled to attain barely 10 percent of the market.
Meanwhile, the FDA has been woefully slow to evaluate and approve additional generic substitutes. According to the Generic Pharmaceutical Association, there are over 4,000 generic drug applications awaiting FDA approval, including potential EpiPen replacements. Contrast that with the European equivalent of the FDA, with a backlog of just 24 applications. Not surprisingly, the European version of the EpiPen sells for a fraction of the cost. It is indeed rare that we look across the Atlantic for a model of economic efficiency, but in this case the U.S. FDA has actually protected Mylan’s effective monopoly and inhibited the market’s inherently competitive response to a pricing imbalance.
Mylan is responding to the negative attention with a generic of its own, and it looks like FDA approval for a Teva Pharmaceutical version may finally be forthcoming in 2017. Once the force of competition is unleashed, expect the price to decline rapidly. And expect the EpiPen to star in future case studies of both what is right and what is wrong with American healthcare.