The big idea: Mylan’s flagship product was the EpiPen, a medical device used to automatically inject a measured dose of adrenaline to counter the quick and deadly allergic reaction that some people suffer from a bee sting or eating nuts or shellfish. Mylan heavily marketed the EpiPen brand so that, like Kleenex, it became a genericized trademark. Over the past five years, Mylan ratcheted up the price of the EpiPen from $100 to $600 per two-pack, resulting in soaring revenue. Consumers cried foul, seeing the increase as blatant price gouging. Major newspapers ran blistering stories about the suddenly expensive EpiPen and about chief executive Heather Bresch’s $18.9 million 2015 paycheck — a 671 percent compensation increase over eight years. Several U.S. senators demanded to know how the pricing decisions were made. As criticism mounted, Bresch watched her company’s stock price plummet by 10 percent in a few days. The question of fairness in drug pricing came to the fore nationally, and Mylan became the newest symbol of a greedy American drugmaker. How should Bresch react?
The scenario: Mylan’s portfolio consisted of generic drugs until it snapped up EpiPen from Merck in 2007. Mylan’s extensive marketing increased the number of patients using the device by 67 percent over the past seven years. By also raising the price of the device, the company’s revenue grew from $200 million to $1 billion annually. The EpiPen, helped by weak competition, seemed the perfect way to increase earnings over the relatively low 8.9 percent net profit generated by the company’s generic drugs. But Bresch pushed too far and too hard.
The EpiPen was a necessity for some, not a luxury. And it was not an innovative device. The autoinjector had been around for 25 years and cost about $2 to produce. The tiny amount of adrenaline in the pen cost about $1. Including all costs, such as licensing, each EpiPen cost about $35 to make.
Well before the EpiPen outcry, Americans were angry about the overall cost of pharmaceutical drugs. The previous year, consumer ire had exploded over Turing Pharmaceutical’s upping the price of Daraprim — a medication used to treat malaria and HIV — from $13.50 to $750 per dose. Americans were also angry that they paid more than people in other countries for the same product. In France, the EpiPen cost $85, thanks to hard negotiating through its one-payer system. In Canada, it cost $131. A survey found that 72 percent of Americans thought drug prices were unreasonable.
The resolution: On Aug. 25, 2016, just a few days after controversy exploded, Bresch reacted by trying to divert attention. She blamed some of the company’s partners in the pharmaceutical supply chain for the high prices. Ignoring consumer sentiment, she defended cheaper prices in other countries by saying: “We do subsidize the rest of the world. . . . and as a country we’ve made a conscious decision to do that. And I think the world’s a better place for it.” Consumers vehemently disagreed, and their anger rose, forcing Bresch to dole out greater discounts, increase eligibility for assistance programs and even sell the pen directly to the consumer. But criticism began to truly abate only when the company took the unprecedented action of offering both a generic version of the drug for $300, as well as the EpiPen. In the aftermath, a spate of lawsuits followed. Mylan has already agreed to pay $465 million to settle Medicaid claims, and shareholders are now getting their turn in the courts.
The lesson: Company leaders need to stay in touch with consumer sentiment and face trouble head on. Once the controversy exploded, Bresch should have immediately taken responsibility for the unfair price increase and shown greater empathy for consumers, who cannot understand how prices could rise so dramatically for a well-established technology. Companies are building profits on a bed of sand when they do not create meaningful value for consumers.
Steenburgh is Paul M. Hammaker Professor of Business Administration at the University of Virginia Darden School of Business.