Last week, on back-to-back days, Congress was on the warpath, with Democrats and Republicans setting aside their differences to jointly lambast the CEOs of Wells Fargo and pharmaceutical giant Mylan.
A Sept. 20 hearing of the Senate Banking Committee focused on the bank and revelations its employees opened as many as 2 million unauthorized customer accounts and charge cards. One day later, it was the House Oversight & Government Reform Committee’s turn, grilling Mylan CEO Heather Bresch during a four-hour hearing on price increases to its popular EpiPen product.
The takeaway: If you are a pharmaceutical company be afraid, be very afraid.
Here is what dragged Mylan into the Congressional crosshairs: Since 2004 the cost of a package of two epinephrine auto-injectors, commonly known by the brand name EpiPen, has risen from roughly $100 to $600. The injectors, which deliver a dose of adrenalin, are used to reverse the otherwise fatal symptoms of anaphylactic shock. A common example of when the pens would be used is reviving a child with a peanut allergy after an exposure and resulting respiratory crisis.
The crux of the hearing was three-fold: to address public outcry over the price increase, whether the Affordable Care Act has exacerbated the costs of prescription drugs as consumers shift to high-deductible plans, and how the epinephrine auto-injector market lacks the competition necessary to lower costs for consumers.
In her opening testimony, Bresch did her best to defend the price increase. She began with a bit of personal history: holding 15 different roles at the company and watching its sales grow from $100 million to more than $11 billion. One out of every 13 U.S. prescriptions is filled with one of Mylan's medications.
This year, Mylan will spend approximately $1.2 billion on research, development, and manufacturing facilities, nearly $3 million per day. The company acquired the company that owned EpiPen Auto-Injectors in 2007.
“I’m proud to be the CEO of Mylan, but I never expected to be here under these circumstances,” Bresch said. “We have worked diligently and invested to enhance the product and make it more available. We have invested more than one billion dollars in these efforts. On many fronts, we have succeeded.”
Among the accomplishments, she claimed, is that approximately 85 percent of EpiPen patients pay less than $100 for a two-unit package and a majority pay less than $50. In the last four years, Mylan provided 700,000 free EpiPen Auto-Injectors to more than 66,000 schools across America (future sales to schools discount the medication to $100, but impose a contractual clause on the deal to prohibit pens from being purchased from another manufacturer).
“I think many people incorrectly assume we make $600 off each EpiPen. This is simply not true,” Bresch said.
In the complicated world of pharmaceutical pricing there is Wholesale Acquisition Cost. For a two-unit pack of EpiPens that cost is $608, she explained. After rebates and various fees, Mylan actually receives $274. Then subtract the cost of goods, $69, for a balance of $205. After subtracting all EpiPen related costs the final profit is $100, or approximately $50 per pen.
“The misconception about our profits is understandable, and at least partly due to the complex environment in which pharmaceutical prices are determined,” she added. “The pricing of a pharmaceutical product is opaque and frustrating, especially for patients.”
“The greed is astounding, sickening, and disgusting. Not only by Ms. Bresch, but other executives. I am a very conservative Republican, but I am really sickened by what I’ve heard here today about this situation. In my opinion, nobody can really deserve to earn $19 million a year.”
\Rep. Jimmy Duncan (R-Tenn.)
In response to complaints, Mylan has since launched the first generic version of the EpiPen product, priced at $300. It also created a direct ship option, allowing patients to purchase the generic product directly from Mylan. Additional discounts will also be available.
In a perfect world, at least as Mylan would desire one, the pricing explanation would be sufficient. Bottom line: The convoluted system for drug approvals and pricing has created both a lack of competition and too many middlemen. That problem would certainly be a worthy one for Congress, especially if the Affordable Care Act is eventually retooled or repealed.
Legislators, however, also focused as much, if not more, on the product-specific pricing and executive compensation matters at the company.
In recent months, Congress has taken a keen interest in drug pricing, summoning executives to defend cost structures. Martin Shkreli, the “pharmabro” founder and former CEO of Turing Pharmaceuticals, became a hated figure in 2015 when his company obtained the life-saving drug Daraprim and raised its price by 5,556 percent, from roughly $14 to $750 per tablet. In April, J. Michael Pearson, the CEO of Valeant Pharmaceuticals, also testified before the Senate Committee on Aging about his company's rising drug costs.
What makes Mylan a somewhat different beast is both how its controversy flourished and the way Congress responded.
This is a situation where Facebook was a catalyst for legislative redress. In a vacuum, $600 for a two-pack of medication that will not, hopefully, be used with any frequency may not seem excessive when compared to Turing’s daily dose pricing and a litany of other drugs that can cost tens of thousands of dollars per dose (see chemotherapy for sticker shock). In a world of $800 iPhones and triple-digit data plans, a once-a-year bill for life-saving EpiPens may not seem abusive.
Mothers of children who require the administered drug, however, had a much different view and mobilized on social media to demand action. Those demands led to media attention and, in time, caught the attention of legislators. It is a case study in social media risk and the challenges of reputation management.
The resulting hearing was surprising in that even Republicans on the committee seemed intent on controlling both pricing and executive pay, all while still trying to express their bona fides as “free market” idealists.
“The greed is astounding, sickening, and disgusting,” said Rep. Jimmy Duncan (R-Tenn.). “Not only by Ms. Bresch, but other executives. I am a very conservative Republican, but I am really sickened by what I’ve heard here today about this situation. In my opinion, nobody can really deserve to earn $19 million a year.”
“And lest anyone be under the misunderstanding that the free market or capitalism hasn’t worked here, you don’t have a free market,” he added. “That’s the problem. In a true free market, you have ease of entry. You certainly don’t have that in the drug industry. You certainly have plenty of competition in a true free market.”
Another Republican with harsh words was Rep. Scott DesJarlais of Tennessee. “The bottom line is that you took a very inexpensive drug and you profited handsomely off it,” he said. “I don’t have a problem, like a lot of my colleagues, that you can make money in a free market enterprise, but what I do have a problem with, as a physician, is when you [excessively price] life-saving drugs … A mother would cut off her right arm to get that dose of drug you decided to charge $600 for.
“Now, you are saying you are dropping it to $300 and that should make us all feel better when, in fact, that’s still 10 times what the drug should cost. I understand that you need to make some money, but you can really sit there with a clear conscience and say that’s ok?”
While the price of EpiPens shot up exponentially, “so did Ms. Bresch’s paycheck and the lavish compensation of her executives at Mylan,” said Rep. Elijah Cumming (D-Md.). “In 2007, she received $2.5 million; last year her compensation had soared to more than $18.9 million.”
“I hope that when this hearing is over you don’t just go back to the champagne and say, ‘Ok, we rope-a-doped it, and now we can just go back to the way things are,” he added.
To be fair, the broader issue of drug pricing wasn’t ignored.
“So if you can really charge $600 for it and people will pay for it, why aren’t more people rushing in to make this stuff, so they get a piece of this huge market? Because it’s too hard to get the darn stuff approved and that’s what I wish we were talking about,” said Rep. Mick Mulvaney (R-S.C.) said of the lack of marketplace competition and Mylan’s near monopoly on epinephrine injections.
DesJarlais blamed the FDA for becoming “so big and bureaucratic that it has become almost impossible for a small company to get a drug or a medical device to market. It costs, on average, more than $1 billion to get a drug to market.”
While a broad and serious dialog about marketplace competition and the FDA approval process is long overdue, it is troubling to see the government so concerned with pricing and compensation.
Pharmaceutical companies already face high hurdles for creating drugs and maintaining as much revenue as possible until a competitor emerges or generics enter the market. Is a $600 drug really the right battle to pick for government pricing mandates? Where does the line get drawn between reasonable profit and verboten gouging?
Hilary Clinton, the Democrat’s nominee for president, is using the Mylan controversy to fuel her own plan for pharmaceutical industry reforms. Her plan “will demand a stop to excessive profiteering and marketing by denying tax breaks for direct-to-consumer advertising and demanding that drug companies invest in R&D in exchange for taxpayer support, rather than marketing or excessive profits.”
Her other proposals: capping monthly and annual out-of-pocket costs for prescription drugs for patients with chronic or serious health conditions; clearing out the FDA’s generic drug approval backlog; lowering the biologic exclusivity period from 12 to 7 years; prohibit “pay for delay” arrangements that keep generic competition off the market; and allowing Americans to import drugs from abroad.
As for the shock and horror over Bresch’s rather unspectacular salary (by CEO standards, anyway) it should be alarming to any well-paid executive that both Republicans and Democrats were in on the shaming.
With CEO pay ratios (a comparison to the median employee) on the way from the Securities and Exchange Commission, one has to wonder whether executives must now fear even their pro-business allies on Capitol Hill as much as unions and shareholder activists when their paychecks become public and political.
No matter what happens in the November elections, 2017 is shaping up to be a very challenging year, politically and in terms of reputation risk, for drug companies.
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