EpiPen Pricing: Much Ado About Nothing
Drug prices are back in the news, this time focused on the epinephrine auto-injector marketed by Mylan [NASDAQ: MYL] as “EpiPen.” EpiPen is a life-saving product for those at risk of anaphylaxis — a severe allergic reaction which in different individuals can be triggered by anything from peanuts to bee venom.
About one in 50 Americans is at risk for anaphylaxis, and many don’t know it; and the incidence is growing. According to a recent study in The Journal of Allergy and Clinical Immunology, in the decade from 2001 to 2010, the overall incidence of these severe allergies increased 4.3% annually — with food-related anaphylaxis increasing 9.8% annually. Currently anaphylaxis causes some 500 to 1,000 deaths annually in the U.S., and the market for epinephrine devices is over a billion dollars each year.
Anaphylaxis Caused By Food Allergies Is Rising Sharply
Source: Food and Drug Administration
Those at risk are used to carrying a pair of EpiPens with them, as well as keeping a set at school or at their workplace. The price of the device has risen about five-fold over the past decade, leading to the recent accusations of price-gouging and MYL’s pledge to introduce a generic version.
This raises the interesting point: the active ingredient in an EpiPen device, epinephrine, was first synthesized in a laboratory more than a century ago. With the active drug long out of patent, how is it that MYL still enjoys such market dominance — and the pricing power that goes with it?
The answer is that the government views EpiPen not simply as a drug, but as a combination of a drug and a medical device. Usually, when you get to the pharmacist with a prescription, she can automatically offer you a cheaper generic equivalent if one exists. This is not the case with medical devices. Even though there are generic epinephrine auto-injectors available, pharmacists in most states can’t substitute the generic. The physician who wrote the prescription would need to have specified the alternative.
Some argue that this restriction is just government interference, but there’s logic behind it. For a person in anaphylactic shock, it’s critical that the correct epinephrine dosage be quickly administered. Different delivery systems function differently — and with a potentially untrained layperson administering the medication in a crisis situation, differences in device construction and function could lead to deadly delay or confusion.
Physicians know this, and that helps MYL maintain its market dominance. Any competition must win over physicians — and that means, it must convince them that it represents a viable and reliable alternative that can be easily used. It will take time for any alternative to win doctors over.
EpiPen Alternatives
Even so, competition is here, and more is coming.
Amedra Pharmaceuticals, a subsidiary of Impax Laboratories [NASDAQ: IPXL], produces a name-brand competitor, Adrenaclick, as well as a generic equivalent of that device. The name-brand product is approximately the same price as EpiPen, and has not captured significant market share. The generic has seen some manufacturing and supply issues and its lack of availability may have constrained its wider adoption.
Sanofi [NYSE: SNY] brought a competing auto-injector to market several years ago, and it quickly took about 10% market share. Called Auvi-Q, it featured a smaller package and audio prompts to guide users. Manufacturing and dosing problems led SNY to abandon the product last October and return U.S. and Canadian rights to its partner Kaléo Pharma, which intends to remediate the problems and bring the product back to market.
Teva Pharmaceuticals [NYSE: TEVA] suffered a setback in March when the FDA rejected its application for a generic auto-injector, citing “major deficiencies,” and likely delaying its launch until late 2017 or early 2018.
Adamis Pharmaceuticals [NASDAQ: ADMP] is developing an alternative epinephrine delivery system: prefilled syringes, which are commonly used for delivery of vaccines and many other injectables. The company is currently planning additional studies requested by the FDA, and hopes for approval by mid-2017. Its product could be particularly attractive to the 15% of the market comprised of professional users — hospitals, schools, prisons, and the like.
No Problem With the System
The crux of the matter for us is that the patent system is functioning here exactly as it’s supposed to. It gives an innovator a period of exclusivity in order to let them recoup their expenses and make a profit. But it doesn’t make that period of exclusivity infinite. That way, innovation is encouraged — doubly so, because inventions are profitable, and because companies have to keep coming up with new innovations.
In the wake of the recent public criticism, MYL announced that it would be bringing its own generic version of EpiPen to market. This was not charity; it was sensible strategy in the face of the inevitable arrival of competition (as well as being good PR damage control). If MYL preempts its generic competitors, it will be able to maintain the loyalty of physicians for longer, and likely support its profits longer than if it simply held on to name-brand EpiPen.
The bottom line: EpiPen enjoys the dominance it does because it delivers a common medication through a reliable and convenient device — and doctors know and trust the device to be used effectively by laypeople in alarming and life-threatening situations. Its exclusive right to produce this device has given it a period of profits — and now other manufacturers are close to producing similar devices. They can’t be identical, since MYL’s delivery system is still under patent — but they will be good enough to win FDA approval, and perhaps also the loyalty of prescribing doctors. The generics are coming within the year — how long it takes them to erode MYL’s dominance remains to be seen.
Investment implications: The latest drug-price hubbub is over Mylan’s epinephrine auto-injector, EpiPen. Even though the medication in EpiPen is a hundred years old, it holds a dominant market share because the FDA treats it as a medical device, and most states bar pharmacists from substituting a generic. Nevertheless, generic competition is being developed by several competitors, and should be starting to claim some of the billion-dollar market in 2017 and 2018. Mylan has responded to this potential competition with a promise to launch its own generic product. We anticipate that the U.S. patent and regulatory system will soon result in cheaper epinephrine alternatives — without any price controls being necessary.
