Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How EpiPen Prices Sparked a Pricing Revolt
Transcript
- Lucas: So it's 2016. Mylan, the company that makes the EpiPen, is about to report earnings. The EpiPen is a device that delivers epinephrine to someone having a severe allergic reaction — anaphylaxis. It's literally life-saving. And the price has gone from about $100 in 2007 to over $600 by 2016. Luna: Right, and that's not even the headline. The headline is that the company's CEO, Heather Bresch, is called to testify before Congress. The EpiPen becomes a national symbol of drug pricing greed. Lucas: Exactly. And what I find fascinating is that this isn't a story about a monopoly on a new compound. EpiPen's active ingredient, epinephrine, has been around for over a century. The device itself had patents, but there were other auto-injectors. So how do you get away with a sixfold price increase on something people literally die without? Luna: And at what point does the pricing strategy backfire so badly that it actually hurts the business? Lucas: That's exactly where I want to go. But before we dive in — and this is actually related to the idea of 'what is something worth' — I want to mention something about how this show works. We keep Pricing Power free of ads, and that's possible because a small group of listeners chips in monthly over at buy me a coffee dot com slash fexingo. It's not a huge number, but honestly, it's what funds the research and production for episodes like this one. Luna: Yeah, and I think it's worth saying — if these conversations have moved your thinking forward in any way, that's a direct way to keep them coming. No pressure, just the reality of how independent shows survive. Lucas: Appreciate that. So back to the EpiPen. The key number is a 500-plus percent increase over nine years. How does a company even justify that internally? Luna: Well, Mylan's public defense was that they were investing in education, awareness, and the device itself. They said they'd improved the EpiPen's design, added a training device, and funded school programs. Lucas: Sure, and those are real costs. But let's look at the math. In 2007 the EpiPen generated about $200 million in revenue. By 2015 it was over $1.1 billion. The gross margin on that device was reportedly around 50 to 60 percent. So you're talking about hundreds of millions in profit from a single product. And the actual epinephrine in the syringe costs maybe a dollar. Luna: And yet, the company wasn't just raising the list price for the heck of it. There's a structural reason pharma companies do this, right? The middlemen. Lucas: Right. The pharmaceutical supply chain is opaque. There are pharmacy benefit managers, or PBMs, who negotiate rebates and discounts. So the list price goes up, but the net price — what Mylan actually keeps after rebates — may not have gone up as much. In fact, Mylan argued that the real price to insurers and employers was lower than the list price suggested. Luna: But that's the problem. The list price is what patients with high-deductible plans or those without insurance actually pay. So you can have a situation where the net price is flat, but the patient's out-of-pocket cost is skyrocketing. Lucas: Exactly. And that's where the moral hazard of pricing comes in. Mylan was optimizing for the payer — the insurer, the PBM — not the end user. The end user doesn't see the rebate. They see the copay or the full cash price. So when the list price hit $600, families who needed an EpiPen for their child were suddenly looking at a $300 copay or more. Luna: And that's a completely different demand curve than, say, a luxury good. For a luxury good, if you raise the price, demand might stay the same or even go up. For a life-saving drug, raising the price doesn't destroy demand — it creates a public relations disaster and invites regulation. Lucas: Which is exactly what happened. In 2016, Mylan's pricing became front-page news. The company was accused of gaming the Medicaid Drug Rebate Program by classifying the EpiPen as a generic rather than a brand — which saved them hundreds of millions in rebates. They eventually settled for $465 million. And the CEO's compensation became a scandal: Bresch made nearly $19 million that year. Luna: And the aftermath is interesting. Mylan lost the EpiPen monopoly to a generic competitor in 2018. But here's the twist: they launched their own authorized generic, priced at about $300 — half the brand price. So they essentially undercut themselves. Lucas: Right, which is a classic pricing move when you're about to lose exclusivity. You introduce a lower-priced version to capture the segment that was already going to switch to a generic. But in this case, the authorized generic was Mylan's own product, just without the brand name. So they maintained some margin while fending off competition. Luna: And it worked — for a while. But the damage to the brand was done. Today, the EpiPen still has about half the market, but the price war has driven list prices down. You can now get a two-pack generic for around $150 or less with coupons. Lucas: So the lesson here is not just about pricing inelastic goods. It's about pricing in a system where the person who pays is not the person who chooses. In pharma, the doctor prescribes, the patient uses, and the insurer or government pays — but the patient feels the pain of high deductibles. If you don't account for that pain, you can destroy your reputation and invite political backlash. Luna: And the EpiPen case is a textbook example of how pricing power can be self-limiting. You have the power to raise prices, but if you use it too aggressively on a visible, life-saving product, you motivate your customers to find alternatives — or motivate lawmakers to act. Lucas: Exactly. So what's the right approach if you're selling something essential? The lesson I take is: know who actually feels the price. If it's the patient, not the insurer, then you need to be transparent about costs and offer assistance programs. Mylan did have a patient assistance program, but it wasn't well advertised. And the price increases were too steep, too fast. Luna: And there's another layer: the EpiPen's pricing strategy might have made sense if you only looked at the PBM negotiation. But it failed the broader stakeholder test. The public, the media, Congress — they all became stakeholders. Lucas: Right. And I think that's the lasting insight for any business: pricing is not just a financial decision. It's a reputational one. Especially when your product sits at the intersection of health, necessity, and emotion. The EpiPen controversy forced Mylan to change its pricing model, and it also sparked a broader conversation about drug pricing that continues today. Luna: And it's not just pharma. Any company with pricing power on an essential good should probably ask: what's the social license for this price increase? And how far can we push before the backlash erodes the value we're trying to capture? Lucas: I think that's a great framing. So, for anyone pricing a product that customers truly need — whether it's a software subscription, a utility, or a medical device — the EpiPen story is a warning. You want to capture value, but you also want to keep the trust that makes that value sustainable. Luna: And maybe the final takeaway is that pricing power isn't just about what the market will bear. It's about what the market will forgive. Lucas: Nicely put. That's a good place to leave it. Thanks, Luna. Luna: Thanks, Lucas.