Fair Prices, Fair Play And Profitable Brands
The price of an Epipen injector has risen from around $100 in 2009 to more than $600 in 2016. Epipen is a life-saving emergency injector for people violently allergic to certain foods, such as peanuts: it will keep a person’s throat from closing up during anaphylactic shock. A year ago, as news spread about this enormous hike in prices, Congress summoned Heather Bresch, the CEO of Mylan, Epipen’s manufacturer, to find out why. She told them that, with rebates and insurance coverage, 85% of patients were actually paying less than $100 for the absurdly-priced medication. But that meant the insurance industry was paying the balance of those higher prices for those with coverage. And it would raise premiums accordingly. In other words, we would all be paying for those unreasonable profits.
Her testimony didn’t really explain why the company had hiked the prices so much to begin with, when the costs for producing an Epipen had remained the same. Of course, her answer could have been reduced to one word: greed.
Mylan recognized a full-blown public relations nightmare and so began offering its own “generic” alternative for Epipen at half price: $300. Meanwhile, a potentially much cheaper alternative medication, from Teva Pharmaceutical Industries, was awaiting FDA approval. Mylan could see the stiff competition coming later, in 2017, when Teva’s alternative would go to market, and Mylan would likely need to lower prices dramatically. So it was trying to gouge as much profit for as long as it could from hapless allergy patients who needed that shot of epinephrine to prevent anaphylactic shock.
And all of this was happening as more and more Americans were being herded into high-deductible plans and thus having to pay for many drugs out of pocket.
Into this cynical scramble for exploitive profits, CVS stepped in and announced that it was going offer a much lower-cost alternative to the Epipen, a generic version of Adrenaclick, manufactured by Impax Laboratories. A two-pack of the CVS injectors costs only $109, and with coupon discounts, a typical patient pays only $10 for the medication. The difference in prices is astonishing. Mylan ought to be mortified, but I wouldn’t hold my breath waiting for them to feel ashamed.
CVS can’t be praised highly enough for bringing sanity, compassion, and ultimately good business sense to this controversy. It is putting its customers first, but is also thinking about its long-term relationship with them — as well as sensible profits. It’s in a position to sell more broadly the medication at a reasonable price because, as a major retailer, it will bring so many customers into its stores, who will walk past shelf after shelf of merchandise, and likely buy other things they need.
Managing a brand for the long-term is an art and a science. I recall a conversation I once had with the late Peter Drucker, arguably the most respected thinker on the subject of business strategy. I was seeking advice for a client on pricing a product that had unique advantages. “Be careful,” Peter said. “Price it to make a good return on the innovation. But not too high to invite aggressive competition to take over the market with lower prices.”
Mylan and its CEO made a potentially tragic mistake. It was based on greed, and the culture of shareholder primacy with advocates and demands the fastest possible profits, sometimes at any cost. It was exploiting patent protection to reap as much profit as possible before competitors could move in: the law gives an innovator a certain window of exclusivity in order to recoup the costs of development. The brand, as with Epipen, yields great advantage being the “first-mover” to market: strong differentiation and immediate trust for its new product.
The scandalous actions from Mylan’s CEO ruined these advantages: people now associate greed with Mylan, and it’s only worse because Mylan was the only provider of the medication. Clearly Bresch had never spoken with Peter Drucker, nor any other smart business leader about her decisions. She succumbed to shareholder primacy, and her company will only suffer as a result.
CVS did what smart business leaders do. They value the brand. They act to enhance the reputation of that brand and build not only revenue growth but also good will and trust. They act to promote the customer’s well-being and thus strengthen an annuity-like asset, in this case, the CVS brand itself. It’s savvy business sense, and morally admirable as well: those two qualities are inseparable.
What companies like Mylan are doing is despicable and illegal. As Harvard Business Review points out, the big brands for many medications are:
• Paying generic companies not to play in the market for as long as possible. They are actually spending money to keep prices high, when prices should be dropping through competition, once patents run out. This hurts consumers and the entire industry, and is likely illegal under antitrust and price-fixing laws.
• Circulating fake “citizens petitions” against generics which, by law, Congress must consider before approving generic production, when in fact no citizens are actually organizing the petition. As HBR pointed out: “The FDA recently said branded drug manufacturers submitted 92% of all citizen petitions. Many of these petitions are filed near the date of patent expiration, effectively limiting potential competition for another 150 days.”
• Doing what Mylan did and getting a first-mover advantage by releasing their own generic brand, but at far higher prices than other companies could offer — keeping the competitors out of the market for as long as possible, extending their monopoly for another six months.
What Mylan has lost in all of this, once again, is the covenant of trust that needs to prevail between companies and their customers: transactions based on the recognition that companies must help their customers thrive in order to sustain their own profits. You don’t nurture a growing, avid market for what you make by cynically fleecing your buyers, or the system itself, extracting the highest profit at what is ultimately the greatest cost to those who need what you produce.
Epipen could have been managed as a brand to provide healthy profits over time. Instead, Epipen will surely die. It’s maker, Mylan, has been severely damaged. CVS should be congratulated and celebrated as a case history of how to correct bad business practices through healthy competition. Their actions serve as an example to pharmaceutical companies and all other businesses as well. Peter Drucker would approve.