EpiPen's Price Shocker Lands Mylan in Hot Water

By Markets Fool.com

A long-term track record of price increases on its top-selling EpiPen has Mylan N.V. (NASDAQ: MYL) on the defensive. The price of a pair of EpiPens has increased from less than $100 in 2007 to more than $600 today, and since high-deductible insurance plans are more common than ever, American families are getting squeezed. What's behind Mylan's pricing decisions?

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In this clip from The Motley Fool's Industry Focus: Healthcarepodcast,analyst Kristine Harjes and contributor Todd Campbell discuss Mylan's pricing debacle.

A full transcript follows the video.

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This podcast was recorded on Aug. 24, 2016.

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Todd Campbell: EpiPen is an incredibly expensive drug relative to where it was a decade ago, and people are up in arms over this cost, because EpiPen is a life-saving drug. It's basically a shot of adrenaline that you can give into your thigh if you're suffering from a severe or life-threatening allergic reaction. Say you have a nut allergy, and you accidentally ate some nuts. This is a life-saving drug. And people are saying, "Wait a minute, how can you go from having a life-saving drug that has had no real changes to it over the course of the past decade, yet the price of it has increased fourfold?"

Kristine Harjes:Right. That's the heart of this issue. Somebody broke the story that this drug, which has been out there for a while -- and it's not even a brand-name drug itself anymore, it's actually a generic drug. But the brand-name thing going on is actually the delivery mechanism itself, this pen that you can stab yourself in the thigh with. It's only delivering about $1 worth of this generic drug. But people are up in arms about the price increase for it. The pen itself costs about $100 for a pack of two in January 2009. Now, it's up to $600. This is something that's pretty widely used. I've seen estimates that 1 in 50 Americans are at risk for the kind of allergies that EpiPen is designed to fight. And many of these are kids. And I think that's really why people are getting defensive here. Not only is this a tremendous price increase for a widely used drug, but it's something that saves children's lives.

Campbell:Right. And the other thing, too -- when you talk about healthcare and drug discovery, it's a very complex subject. It's much more complex than, say, making a new toy. If I can build a football for $1 and sell the football for $12, should I be able to sell that football for $12? The problem is, there's not nearly as much that has to go into gaining regulatory approval and proving that whatever it is that you have is safe and effective enough to be on the market. So the costs are much higher for drugs, and the drug delivery systems like EpiPen. And I think that's something that everybody has to remember. These companies take on a big risk when they innovate, and that costs deserves to be recouped to some extent. I think the real argument is, "Wait a minute, why are you able to increase the price 15% in Q4 of 2015, and then another 15% in Q1 of 2016, without having done anything to improve that pen delivery system?" It's a fair question to ask.

Harjes:Especially because, meanwhile, the compensation for CEO HeatherBreschhas increased from $2.4 million to$18.9 million, between 2007 and 2015.

Campbell:Right. And then, on top of that, there's the whole, "Hey, by the way, did you notice that Mylan did a tax inversion where they moved their headquarters overseas on paper to be able to avoid or lower their corporate tax rate?" So, there's a lot of different moving pieces where we look at this and say, this isn't necessarily a company that's acting in good faith with U.S. citizens, I suppose would be the argument. And that may be one of the reasons now, that the CEO is probably going to have some explaining to do in front of Congress.

Harjes:And to add another layer to this story -- you mentioned earlier that it's an election season. That's actually very important to this story. You have a handful of senators that have decided to write letters and ask Mylan for more information about what exactly is going on. And you can see why. This is a great opportunity for a representative to stand up for the people, to go in and lay down the law against these gigantic conglomerationhealthcare companies that might be abusing the small people. I get that, I totally get that. But when you start to involve politics here, another thing you need to take into consideration is, Heather Bresch's father is a West Virginia senator named Joe Manchin. There's just so many political elements to this story. Of course it's going to blow up into this big, sensational investigation that's being covered by outlets left and right.

Campbell:What we don't want to lose in this whole discussion, or maybe what this points to is, the whole question of, how drug prices are set in the U.S. versus other countries, and are there changes that are necessary? How do you have a free market where supply and demand should dictate price? And in this case, supply and demand is dictating a price that is, obviously, at least this high, because there's limited competition, currently, on the market in the U.S.

Harjes:Right. Something I feel like we need to bring up is Mylan's defense here. Mylan says that it's changed the price of EpiPen over time to better reflect important product features and the value the product provides. They say they've made a significant investment to support the device, which is, of course, true. And another thing is that Mylan actually does give away a lot of these. They have a coupon program, although it only helps people that have insurance. 80% of the people using that coupon program have paid nothing for EpiPens. Mylan also has a program to give schools these EpiPens for free. About half of U.S. schools have signed up. But, there are also some issues there. The program only gives each school four EpiPens, and the rest have to be bought themselves.

And then you get the opposite side of that coin, where Mylan spent about $4 million in 2012 and 2013 lobbying for access to EpiPens as a whole. They pushed legislation such as the 2013 School Access to EmergencyEpinephrine Act, that's the drug in EpiPens, which encourages schools to stock epinephrine auto-injectors. That's the generic way of saying "an EpiPen."

So, I don't know. I don't know if the company really has a valid defense here. I can see a little bit of both buckets.

Campbell:Kristine, I saw a study, and unfortunately I can't remember exactly where it is, I'll have to look it up and get back to listeners. But I saw a study that showed that, when drugs are about to face generic competition, in the two years leading up to that launch of generic competition, the prices of those drugs tend to rise substantially to try to bring forward some of those sales before they face that threat. I think it shouldn't be ignored by investors that earlier this year, the FDA actually rejected an approved generic alternative to the EpiPen that was being made byTeva Pharmaceutical.So yes, this year, there was supposed to be another competitor on the market. Unfortunately, that got sidelined, and now Teva doesn't think they'll be able to get that product on the market until 2017, maybe 2018. At that point, price competition comes in, and the price should naturally go lower again. So, this could be a temporaryphenomenon.

And obviously, there are lots of different things that are going into this, including health insurance and the use of high-deductible plans, drug formularies that are maybe moving EpiPen higher up in requiring higher co-payments and co-insurance. This is really something that's affecting notnecessarilypeople with Cadillac insurance plans, but more like people in middle-income families, maybe they're getting insurance through the exchanges, or maybe can't afford the best insurance plans on the market.

Harjes:It definitely leaves you with a lot to think about. A lot of moving parts, a lot of people with different opinions coming in. Definitely an interesting story to watch.

Kristine Harjes has no position in any stocks mentioned. Todd Campbell has no position in any stocks mentioned. The Motley Fool recommends Mylan and Teva Pharmaceutical Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.