Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How EpiPen Pricing Sparked a Backlash That Changed Pharma
Transcript
- Lucas: So the EpiPen. If you had to guess what it actually costs to manufacture one — the device, the epinephrine, the packaging, the whole thing — what number comes to mind? Luna: I mean, we know the list price was around six hundred dollars at the peak. But manufacturing cost? Maybe thirty bucks? Forty? Lucas: Closer to two dollars. I'm not exaggerating. A 2016 analysis by Bernstein pegged the total cost of goods at roughly two dollars per twin-pack. That's less than a fancy coffee. Luna: Two dollars. And they were charging six hundred. That's a thirty-thousand-percent markup. Lucas: Exactly. And that markup didn't happen overnight. Mylan acquired the EpiPen from Merck in 2007, when a twin-pack cost about a hundred dollars. Over the next nine years, they raised the price roughly six hundred percent. No reformulation. No new delivery tech. Just straight price increases. Luna: What was their justification? I remember Heather Bresch, the CEO, testifying before Congress. She blamed the middlemen — the pharmacy benefit managers, the insurers. Lucas: Right. And there is some truth to that. Mylan was playing a game that a lot of pharma companies play. They set a sky-high list price, then offered huge rebates to PBMs and insurers to get preferred formulary placement. The net price — what the system actually paid — was lower than the list price. But here's the thing: patients with high-deductible plans or coinsurance often paid a percentage of the list price, not the net. So they were getting hammered. Luna: So the list price was essentially a negotiating fiction, but real people were paying it. Lucas: Exactly. And that's what made the backlash so intense. Families were paying hundreds out of pocket for a device that, again, costs two dollars to make. And it's not like there were alternatives. EpiPen had something like ninety percent of the market for epinephrine auto-injectors. The only competitor, Auvi-Q, was recalled in 2015 due to dosage accuracy issues. So Mylan had a de facto monopoly. Luna: But how did they keep competitors out? Patents? Or something else? Lucas: Patents played a huge role. Mylan aggressively listed patents in the FDA's Orange Book — over a dozen of them — covering things like the auto-injector mechanism, the needle guard, even the shape of the device. That made it extremely difficult for generics to get approved. And when a company called Teva finally got a tentative generic approval in 2015, Mylan sued them for patent infringement. That delayed Teva's launch by years. Luna: So it's the classic pharma playbook: acquire a drug, raise the price, use patents to block competition, and blame PBMs when people get angry. Lucas: Pretty much. And it worked — for a while. EpiPen generated about one point one billion dollars in revenue for Mylan in 2015, and that was growing. But the public anger in 2016 was different. It wasn't just consumer complaints. It made its way into the presidential election. Hillary Clinton tweeted about it. Congress held hearings. The FTC started investigating. Luna: And that's when Mylan finally blinked. They introduced an authorized generic at a list price of three hundred dollars, about half the brand price. Lucas: Right. An authorized generic is basically the exact same product, same factory, same device, just sold under a different label. So Mylan could claim they were offering a lower-cost option without actually lowering the brand price — because lowering the brand price would have triggered rebate clawbacks from their PBM contracts. The authorized generic let them bypass that trap. Luna: But did it actually help patients? I read that many insurers still required higher copays for the brand, so people were steered toward the generic. But the generic's list price was still three hundred dollars, not exactly cheap. Lucas: It helped some, but not as much as you'd hope. The list price of the brand actually kept going up — by 2017 it was over six hundred dollars. And even the generic had a list price of three hundred, which is still a lot for a device that costs two bucks. The deeper issue is that the whole system — list prices, rebates, patient cost-sharing — is designed to be opaque. The EpiPen story is just a vivid window into that. Luna: Speaking of windows, I want to pull back the curtain a little on this show itself. Lucas, we've now done nine episodes of Pricing Power — and every single one is ad-free. That's a deliberate choice. But it means this podcast only exists because a small group of listeners chips in monthly through buy me a coffee dot com slash fexingo. Lucas: Yeah, and that support is literally what funds the research, the writing, the production. If these conversations have moved your work forward or changed how you think about pricing, that's exactly the kind of listener who keeps this going. No pressure, just — that's the honest economics. Luna: Exactly. So back to the EpiPen — because there's a final twist I think is worth talking about. Lucas: What's that? Luna: In 2017, the FDA approved the first true generic epinephrine auto-injector from Teva. But by then, Mylan had already lost a lot of goodwill. And the pricing environment had shifted. The whole industry was under a microscope. So did the EpiPen saga actually change anything systemic, or was it just a temporary PR crisis? Lucas: I'd say the short-term impact was real but limited. Mylan's revenue from EpiPen dropped sharply as the generic took share. But overall drug pricing has continued to rise. The rebate system is still in place. PBMs still negotiate huge rebates off inflated list prices. What did change is that investors and boards now see extreme pricing power as carrying political risk. You can't just raise the price of a life-saving drug six hundred percent without expecting a backlash. That calculation has shifted. Luna: So the lesson isn't 'don't raise prices.' It's 'if you raise prices, make sure you can defend the value — and make sure the person paying is the one getting the value.' Lucas: Exactly. The EpiPen case is a cautionary tale about what happens when the person who decides to buy — a doctor prescribing for a patient — isn't the person who pays, and the person who pays — a parent at the pharmacy counter — has no choice. That's a recipe for rage. And when the cost to manufacture is two dollars, the optics become impossible to defend. Luna: It's a case study in pricing power without accountability. And maybe that's the real lesson: pricing power only works if you can tell a story that makes the price feel fair. Lucas: Right. And Mylan could not tell that story. Two dollars to six hundred dollars — there's no narrative that bridges that gap. So the backlash was inevitable. And honestly, it's a reminder that pricing is never just arithmetic. It's also about trust, and trust is fragile. Luna: Fragile and expensive to rebuild. Thanks, Lucas. That's a good place to leave it for this episode.