Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How EpiPen Priced a Life-Saving Drug and Sparked Outrage
Transcript
- Lucas: So, there's a number that I keep coming back to this week: six hundred and nine dollars. That's roughly what a two-pack of EpiPens cost in 2016, up from fifty-seven dollars in 2007. That's a tenfold increase in under a decade. Luna: And that's not a luxury item or a concert ticket. That's an injection that can save your life if you have a severe allergic reaction. Lucas: Exactly. And the company behind it, Mylan, didn't invent the device. They bought the rights to it in 2007, and then turned it into one of the most controversial pricing stories of the decade. Today, I want to dig into how they did it, why they got away with it for so long, and what broke the spell. Luna: And what does it say about pricing power when demand is literally a matter of life or death? Lucas: Right. Let's start with the product itself. The EpiPen is an auto-injector filled with epinephrine, a hormone that constricts blood vessels and opens airways. It's been around since the 1970s, and the basic technology wasn't exactly cutting-edge by the 2000s. Luna: So it's not like they were on the bleeding edge of innovation. They just took an existing device and figured out how to maximize revenue from it. Lucas: Precisely. When Mylan acquired the product line from Merck KGaA in 2007, the list price was around fifty-seven dollars. Over the next nine years, they raised it in a series of small, seemingly innocuous steps, sometimes by ten or fifteen percent a year, sometimes more. By the time the public really noticed, it had crossed six hundred dollars. Luna: And each individual increase probably didn't make headlines. But the cumulative effect was staggering. Lucas: And that's the first lesson: they used the 'boiling frog' approach. Incremental price increases that fly under the radar until you've tripled or quadrupled the price. It's a classic strategy, but it works best when people don't have an alternative. Luna: And that's where the market structure comes in. There wasn't a generic auto-injector on the market for a long time. So if you had a severe allergy, your options were basically Mylan's EpiPen or nothing. Lucas: Right. And Mylan actively worked to keep it that way. They used a couple of tactics. First, they filed a citizen petition with the FDA to require specific safety testing for any generic competitor. That delayed generic entry by years. Second, they kept tweaking the device and filing new patents, which extended their exclusivity. Luna: Classic patent stacking. You don't need one giant patent; you need a web of them that's expensive and time-consuming for anyone else to untangle. Lucas: And it worked. Generics didn't hit the U.S. market until 2018, a full eleven years after Mylan took over. Meanwhile, they also made it hard for patients to switch to alternatives. They had a program to offer discounts to some patients, which sounds nice, but it also kept their market share in the retail pharmacy channel. Luna: And that's the other piece, right? The list price is one thing, but the actual revenue Mylan got was often lower because of rebates. So they were gaming the system on multiple levels. Lucas: Exactly. Mylan raised the list price, which increased the rebate they could offer to pharmacy benefit managers and insurers. Those rebates helped them secure favorable formulary placements, which meant the EpiPen was the default product on many insurance plans. So even with the high list price, patients often paid less, but their premiums went up. Meanwhile, Mylan's revenue per unit was actually lower than the sticker price, but still much higher than it had been. Luna: So it's not just a simple story of greed. It's a story of using the complexities of the pharmaceutical supply chain to extract more value. Lucas: Right. And the public didn't fully understand all that when the story broke. In 2016, the news came out that the EpiPen price had crossed six hundred dollars, and there was a massive public backlash. Parents, schools, allergy patients, even politicians were outraged. The company's CEO, Heather Bresch, was called to testify before Congress. Luna: And what was her defense? I remember she said something about how they only kept a small portion of the price as profit, and that the rest went to middlemen. Lucas: Yeah, she argued that Mylan's gross margin on EpiPen was actually less than twenty percent after all the rebates and fees, and that the system was broken. Which was partly true, but it didn't resonate with a mother paying six hundred dollars for a life-saving device that used to cost fifty. Luna: And that's the thing about pricing power. You can have all the business logic in the world, but if your customers perceive it as unfair, you're going to have a problem. Lucas: That's a crucial point. Pricing power isn't just about market share and barriers to entry. It's also about social license. Mylan's actions eroded their social license to charge that price, and the backlash forced them to respond. They introduced a generic version of the EpiPen at three hundred dollars, which was still higher than the original generic would have been, and they expanded patient assistance programs. But the damage was done, and their reputation took a serious hit. Luna: And eventually, competitors did come. In 2018, the first true generic auto-injector hit the market, and Mylan's market share and pricing power collapsed. By 2020, the price for a two-pack had fallen to around seventy dollars for some patients. Lucas: Yeah. If you look at the arc, it's a perfect case study of how a company can maximize short-term revenue by exploiting a captive market, but at the cost of long-term sustainability. The moment competition arrives, you have no pricing power left because you never built any brand loyalty or customer goodwill. You just had a monopoly. Luna: And it's interesting because we've talked about companies like Rolex and Porsche that have strong pricing power based on brand and scarcity. But this is the dark side of pricing power, when it's just based on market control and exploiting a necessity. Lucas: Which brings us to a bigger question: when is pricing power actually a good thing? And when does it become a liability? I think the EpiPen story shows us that it's not just about the numbers. It's about the story you tell and the fairness that people perceive. If you're raising prices on a life-saving drug, you'd better have a compelling reason that goes beyond 'we can.' Luna: And if you can't tell that story, you're just a villain in a Senate hearing. Lucas: Exactly. And I think that's the lesson that applies to any business, whether you're pricing a new software subscription or a medical device. You have to think about the narrative around your price increase. Will your customers understand it? Will they accept it? Or will it feel like a siege on their wallet? Luna: And that's something we try to do here on the podcast, I think. We try to look at pricing from all angles, not just the shareholder's perspective. We want to give you, the listener, the tools to make smart decisions, whether you're running a business or just trying to understand why things cost what they do. Lucas: And we do that without running any ads on this show. That's a deliberate choice. We're able to keep it independent because of listeners who decide to support us, which means a lot. If you've found value in these conversations, you can back that choice at buy me a coffee dot com slash fexingo. No pressure, just an option. Luna: Yeah, it's a small gesture that keeps this ad-free and lets us dig deep into topics like this one. We really appreciate it. Lucas: So, back to the EpiPen. The generic competition that arrived in 2018 came from Teva, and that was the real turning point. Once there was a true alternative at a fraction of the price, Mylan's ability to keep raising prices evaporated. But here's a question: should we have expected companies to behave differently in the first place? I mean, they have a fiduciary duty to maximize shareholder value. Luna: But at what cost? If you destroy your reputation and invite regulation, that's not maximizing long-term value, is it? Lucas: Right. And that's the thing. Mylan's strategy worked for a while, but it was short-sighted. They could have taken a different approach. They could have invested in making the device more user-friendly, or actually lowering the cost to expand access, and built a sustainable brand. Instead, they squeezed the lemon. And when the lemon was dry, they had nothing left. Luna: So what's the takeaway for businesses listening to this? How do you balance pricing power with sustainability? Lucas: I think the key is to ask yourself: what is my pricing power based on? If it's just market control or a legal monopoly, that's fragile. If it's based on genuine value, innovation, or a brand that customers love, that's much more durable. And also, think about the social dimension. If your pricing is perceived as unfair, you're not just risking a PR problem. You're risking your entire business model. Luna: And in the case of EpiPen, the unfairness was so stark that it became a political issue. It eventually led to some changes in how drug prices are reported and discussed. Lucas: Yeah, it certainly brought the issue of prescription drug pricing to the forefront of public consciousness. And that's a conversation that continues today. But I find it fascinating that a simple auto-injector became the symbol of that entire issue. It shows how pricing can define a company's legacy, for better or worse. Luna: And for Mylan, it's definitely for worse. They ended up merging with Upjohn in 2020 to become Viatris, but the EpiPen saga is probably what most people remember them for. Lucas: So, next time you see a price increase on something you need, think about what's behind it. Is it rising costs, or is it just pricing power? And if it's the latter, ask yourself how sustainable that really is. Because the market has a way of correcting things, eventually. Thanks for listening, and we'll talk to you next time.