Why Mylan Labs is being scapegoated by the political class

In late 2013, President Barack Obama signed legislation aimed at increasing the nationwide availability of epinephrine in schools.  After passage of The School Access to Emergency Epinephrine Act, twelve states now require schools to stock this medication, while, with the exception of Hawaii, forty-seven states recommend making it available.

Epinephrine helps prevent adverse reactions and even fatalities in children with severe allergic reactions that result in anaphylaxis.  The School Access to Emergency Epinephrine Act structured the legislation as an incentive rather than as a mandate; however, states that require schools to maintain a supply of the medication delivered through an EpiPen and permit trained school personnel to administer it will receive preference for federal asthma treatment grants.

Today, the largest supplier of EpiPen to schools, hospitals, and individuals, with 95% market share, is a Netherlands-based public company called Mylan Laboratories.  Mylan, on August 24, 2016, came under intense criticism from members of Congress, Democrats, and Hillary Clinton.  This criticism centers on the fourfold price increase, from 2012 to 2016, of the company’s easy-to-administer EpiPen device to approximately $640.

How did this come about, and who is really to blame for the price level of EpiPens in the United States?  How should we award innovative market-dominant companies that produce life-saving products that are safe and easy to administer?

The answers can be divided into regulatory overreach, market demand created by the regulators, and the opaque nature of pricing within the drug distribution channels

In 2015, The FDA made a series of decisions that effectively led to limited options for patients needing epinephrine and created a virtual monopoly for Mylan Labs.  This was accomplished by stiff-arming Adamis Corporation’s pre-filled epinephrine syringe, asking for more data and demanding an
 expanded patient usability study including product stress testing before the original application.  Back in November 2015, France-based Sanofi Corporation’s Auvi-Q product hit a wall when an injector fault triggered a hefty recall.  Ultimately, the pharmaceutical giant yanked Auvi-Q from the market.  More recently, the FDA handed generics giant Teva Pharmaceutical a rejection for its generic version of EpiPen, flagging “certain major deficiencies” in its letter to the Israeli pharmaceutical corporation.  With serious issues to work through, Teva said earlier this year that it expects its product to be “significantly delayed” – meaning it doesn’t expect a rollout before 2017.

A secondary reason for Mylan’s market dominance and $1.3-billion revenue stream can be attributed to the implementation of The School Access to Emergency Epinephrine Act and the state mandates that followed.  Schools have become a significant source of demand for the stocking of Mylan’s EpiPen product, as school boards, administrators, legislators, and health advocates have pushed for its availability.

Lastly, with regards to Mylan’s profitability from the EpiPen, it has been largely flat for the last several years despite a fourfold price increase at the retail customer level.  This tells the average person, at a high level of analysis, either that most of the sales increase benefits the various distributors and intermediaries who sell EpiPen to the retail stores and schools or that there are significant price rebates being provided to large customers of EpiPen based on volume or relationship.

Many of the critics also need to pause and reflect as to why the price of EpiPen, after four years of sequential price increases, has suddenly become so controversial.  The answer resides within Obamacare and the large deductibles that individuals have to pay out of pocket before meeting the $6,000 under a conforming bronze health insurance plan.  At $150, the EpiPen was moderately priced as an out-of-pocket purchase with no insurance reimbursement.  At $640 per dose, the EpiPen has become an extremely expensive life-saving drug for middle-class households.

Editor's Note: The author will appear on CNBC's Power Lunch today.

Jim Thornton is managing partner at Kamuela Partners in Issaquah, Washington.

In late 2013, President Barack Obama signed legislation aimed at increasing the nationwide availability of epinephrine in schools.  After passage of The School Access to Emergency Epinephrine Act, twelve states now require schools to stock this medication, while, with the exception of Hawaii, forty-seven states recommend making it available.

Epinephrine helps prevent adverse reactions and even fatalities in children with severe allergic reactions that result in anaphylaxis.  The School Access to Emergency Epinephrine Act structured the legislation as an incentive rather than as a mandate; however, states that require schools to maintain a supply of the medication delivered through an EpiPen and permit trained school personnel to administer it will receive preference for federal asthma treatment grants.

Today, the largest supplier of EpiPen to schools, hospitals, and individuals, with 95% market share, is a Netherlands-based public company called Mylan Laboratories.  Mylan, on August 24, 2016, came under intense criticism from members of Congress, Democrats, and Hillary Clinton.  This criticism centers on the fourfold price increase, from 2012 to 2016, of the company’s easy-to-administer EpiPen device to approximately $640.

How did this come about, and who is really to blame for the price level of EpiPens in the United States?  How should we award innovative market-dominant companies that produce life-saving products that are safe and easy to administer?

The answers can be divided into regulatory overreach, market demand created by the regulators, and the opaque nature of pricing within the drug distribution channels

In 2015, The FDA made a series of decisions that effectively led to limited options for patients needing epinephrine and created a virtual monopoly for Mylan Labs.  This was accomplished by stiff-arming Adamis Corporation’s pre-filled epinephrine syringe, asking for more data and demanding an
 expanded patient usability study including product stress testing before the original application.  Back in November 2015, France-based Sanofi Corporation’s Auvi-Q product hit a wall when an injector fault triggered a hefty recall.  Ultimately, the pharmaceutical giant yanked Auvi-Q from the market.  More recently, the FDA handed generics giant Teva Pharmaceutical a rejection for its generic version of EpiPen, flagging “certain major deficiencies” in its letter to the Israeli pharmaceutical corporation.  With serious issues to work through, Teva said earlier this year that it expects its product to be “significantly delayed” – meaning it doesn’t expect a rollout before 2017.

A secondary reason for Mylan’s market dominance and $1.3-billion revenue stream can be attributed to the implementation of The School Access to Emergency Epinephrine Act and the state mandates that followed.  Schools have become a significant source of demand for the stocking of Mylan’s EpiPen product, as school boards, administrators, legislators, and health advocates have pushed for its availability.

Lastly, with regards to Mylan’s profitability from the EpiPen, it has been largely flat for the last several years despite a fourfold price increase at the retail customer level.  This tells the average person, at a high level of analysis, either that most of the sales increase benefits the various distributors and intermediaries who sell EpiPen to the retail stores and schools or that there are significant price rebates being provided to large customers of EpiPen based on volume or relationship.

Many of the critics also need to pause and reflect as to why the price of EpiPen, after four years of sequential price increases, has suddenly become so controversial.  The answer resides within Obamacare and the large deductibles that individuals have to pay out of pocket before meeting the $6,000 under a conforming bronze health insurance plan.  At $150, the EpiPen was moderately priced as an out-of-pocket purchase with no insurance reimbursement.  At $640 per dose, the EpiPen has become an extremely expensive life-saving drug for middle-class households.

Editor's Note: The author will appear on CNBC's Power Lunch today.

Jim Thornton is managing partner at Kamuela Partners in Issaquah, Washington.