Pricing Epipens, Evil or Brilliant? Lessons You Should Learn

EpipenEpiPen prices have gone up 400% over the last few years. This has been all over the news and is giving a bad name to Mylan, the company that makes EpiPen. For example, see this interview on CNBC with Mylan CEO Heather Bresch.  As a pricing person, I feel compelled to share my opinion.  These price increases are both brilliant and stupid at the same time.

Brilliant:  From a pure pricing and economic perspective, Mylan has been acting very smart.  After all, if the market will pay more, they should charge more.  More details below on what they have been doing right.

Stupid:  Face it, Mylan is gouging buyers of this product.  Gouging is a negative term used when the market is used to paying one price and the price goes up dramatically, usually with minimal justification.  Gouging always looks bad, and it looks even worse when we’re talking about people’s health.  As a pricing expert, I avoid pricing in the medical space because it’s not simple economics.  Instead of just focusing on willingness to pay, suddenly there are big ethical questions.  The biggest of all, “Shouldn’t we help more people by having a lower price?”  This complicates the pricing decision immensely.  There isn’t a simple goal of maximizing profit (or market capitalization of the company).  The goal should drive pricing.  What is Mylan’s goal?  Do you have clearly stated goals?

One last comment on ethics before putting on my economist’s hat again.  In a way, Mylan is being ethical.  They are charging users in the US a high price (over $300 per pen) so they can subsidize users in other countries (Europe is as low as $100 per pen).  If the US wasn’t paying high prices, the drug may not exist for anyone, or maybe Mylan couldn’t afford to sell it in Europe at the government set prices.  Charging a higher price in a wealthy country makes it more available in less wealthy countries. Ethics is a hard topic to grapple with.

Back to analyzing the pure economics of their pricing decisions (whew!).  From what I’ve read, the EpiPen is truly a Will I product.  There is not real competition.  When there is no competition, companies have pricing power and have the ability to raise prices without significantly reducing demand.  This seems like a perfect example.  Are you building Will I products?

Next, when they raised prices, notice they blamed rising costs.  In this case it is the rising costs of Obamacare and distribution.  I’m sure their profits are going up as well, but they wisely put the blame on rising costs.  Are you blaming increasing costs when you raise your prices?

To repair or offset the damage of their price increases, they are offering significant rebates to people who can’t afford the retail price.  This is fantastic price segmentation.  They get anyone who can afford it to pay much higher prices while still servicing users who can’t afford the higher prices.  How are you segmenting price?

The last topic though is fairness.  Fair is in the mind of the customer.  Since this has just recently blown up, it seems that until a few months ago they were doing a good job of monitoring and managing customer attitudes.  The last price increase was what broke the camel’s back.  All heck has broken loose and Mylan now looks like a greedy uncaring business.  They are probably sorry they did the last price increase.  Are you watching your customers perceptions of fairness?

If we can separate the ethics from the business decisions, this case gives us some pretty interesting lessons on pricing: build Will I products, blame costs for price increases, and consider rebates as a price segmentation technique.  But our market decides what’s fair, not us.  When we get on the wrong side of that perception, watch out.

The bigger problem for Mylan though surrounds the ethics.  If you are in a medical field, find a way to include the ethics of helping more people in your goals.  That will give guidance to your pricing decisions.