A recurring theme during the 2016 US presidential race has been the ‘unfair’ practice in which many pharmaceutical companies have steeply hiked prices of drugs with disregard for social and economic repercussions. This reached its height last Wednesday when the Democratic presidential nominee, Hillary Clinton, cited the company Mylan as an example of a pharmaceutical company being ‘outrageous’ in its quest for profits resulting in a monumental price hike of the EpiPen.
This, in turn, spooked investors who started pulling out of the company resulting in a drop of almost 12% in its stock price over the past week. Due to this controversy, Mylan’s share price has fallen from $49.92 on August 9th to $42.85 on August 25th.
Spotlight On Mylan
The EpiPen, manufactured by Mylan, could be life-saving in many cases. The EpiPen is an auto-injector that can be used to treat severe allergic reactions. It contains epinephrine which is a chemical that helps narrow blood vessels and open up the airways, helping to reverse the symptoms of an allergic reaction.
Mylan is currently in the top 30 biggest pharmaceutical companies in the world and its near-monopoly in the production of the EpiPen has meant that there is no real pressure on Mylan on the pricing of the drug. Mylan currently controls about 90% of the US auto-injector market.
This limited competition has meant that Mylan has been free to raise the price of the EpiPen as much as 500% over the past eight years. As can be seen in the graph below, the price of the EpiPen has been increased disproportionately to the consumer price index (often used as a measure of inflation). This has resulted in outrage amongst the general public.
The company has a history of controversy as it angered its investors in 2014 when it moved its headquarters to the Netherlands as part of an inversion deal meant to reduce corporate tax rates. Such moves have been called ‘unpatriotic’ by President Obama previously.
Heather Bresch, the CEO of Mylan responded to the criticism saying “No one is more frustrated than me” when asked about the current retail price of the EpiPen in the US. She went on to add that the costs include “manufacturing the product, distributing the product, enhancing the product, investing.”
The issue brought up a more underlying problem that Bresch mentioned during the interview. The EpiPen is sold in Europe at around $100 compared to the $608 in the US because many European countries have government-run health care systems placing a cap on the prices of drugs.
Bresch went on to say that the problem is with the health care system in the US itself: “Our health care is in crisis. It’s no different to the mortgage financial crisis back in 2007.” She was implying that in the US the customers are required to pay the insurance premiums for their health care as well as sometimes pay for prescription medications out of their own pocket, which can be all the way up to the full retail price. This situation has been made much worse by the fact that there has been a significant rise in the number of highly-deductible health plans by insurers in the US.
In a time when pharmaceutical companies were meant to be doing well, the latest debacle has hurt drug companies. The stock prices of many large pharmaceutical corporations have taken a hit, including those which were not necessarily considered ‘unfair’ their pricing. This could spell that investors believe new laws and regulations that could come into place could still affect even the ‘fair’ companies.
Yesterday Mylan announced that it would be introducing a new, cheaper alternative to the EpiPen at a 50% discount, and it is yet to be seen what investors make of this move.
The emergence of this story has highlighted a couple of key issues:; the health care system in the US still needs reform, and pharmaceutical companies are still vulnerable to political risk.