Now, a new story: Mylan, the maker of the EpiPen injector, increased its price by 450 percent. It should be noted the price was not increased overnight, but rather through sequential hikes of 5 to 15 percent each. Many of them. The EpiPen injector delivers a rapid shot of epinephrine, a medication used to counteract severe allergic reaction and save lives. Patients who suffer from severe allergic reactions to things such as peanuts could choke to death if they don't receive an immediate dose of epinephrine, and therefore typically carry two with them at all times. Schools are given federal grants to stock EpiPen injectors for such emergencies.
What makes EpiPen special is not the medication inside, but rather the method of delivery. It is simple enough to be used by an untrained student, parent, teacher, or nurse. Alternatives are more complicated, so the risk of misuse and injury is higher.
Mylan enjoys a near-monopoly status with EpiPen. Was it really an unfair practice to hike its price by 450 percent? It's easy to be outraged by the company's actions, but here are several considerations, with no bias or prejudice.
How much should you charge?
When I teach marketing I often ask: if it costs you $50 to make a product, how much should you charge for it? Some of my students will answer with $100. Somehow 50 percent profit margin seems normal to most. Others respond with $60. Those are my students who work in cutthroat businesses, and to them 20 percent margins are enough. Then there are those who believe that $1,000 is an appropriate price.
I've seen products that sell with 5 percent profit margins, and I've seen products that sell with 98 percent profit margin. The answer is, if it costs you $50 to make, you should charge as much as the market is willing to pay for it. Price is determined by the value of the product and the need for it. If the market is willing to pay $1,000 when it only costs $50 to make, good for you! If the market is willing to pay $20 when it costs $50 to make, get out of the business! If a business is made purely for the purpose of generating shareholder value, that would be my final answer. However, there are more considerations.
Achieving and maintaining a market monopoly position is not a bad thing. It is not illegal. It can be achieved through filing major patents, as was the case with EpiPen. Abusing the monopoly position is illegal. If you are the only company that makes a product, and the market is willing to pay $1,000 for it even though it costs you only $50 to make, do it! However, if the market is willing to pay $100, but will pay $1,000 only because of your monopoly position and therefore having no other choice, this should be considered an abuse of your monopoly position. Monopoly position should give you the lion share of the market, at the price the market is willing to pay for the value customers receive.
The previous rule applies to the initial price setting. However, sometimes prices have to change, and that's when questions arise. We are more sensitive to price changes than we are to the initial price, especially of a single-source product, as there is nothing to compare it too. One good reason for a price change is a significant change in value to the customers. Your product may offer 50 percent higher value, and therefore you should be able to get 50 percent higher price. It doesn't matter that your cost has not increased by 50 percent. It may have even declined, but as long as the value to the customer is higher, it justifies a higher price, and a great win for you! Another justification for a price increase is a change in the cost structure. Probably less so when your profit margin is in the 90s. However, if you operate your business at a 10 percent margin, and your cost had just increased by 25 percent, you should not sell at a loss. Increase the price, and see if the market is willing to pay. Such an increase is also easier to justify. Is that the case for EpiPen? Did the company sell it at a very low margin only to have its cost structure increase by 450 percent? Experts claim not.
Corporate social responsibility.
When you sell a luxury jet, it's hard to consider the social good that your product provides. However, when you sell a medication that saves lives, especially one that is mandated at schools, you are. You are going to be held to a much higher standard of scrutiny when you raise prices for such a product, or even introduce it at a price point that supports an obscene profit margin.
Optics of executive pay.
Finally, perhaps one of the most eye-popping elements of the Myle EpiPen story is the parallel increase in executive pay. Since Mylan acquired the rights to the product in 2007, during which EpiPen prices climbed 450 percent from $57 to $318 per unit, the CEO's salary increased from $2.5M in 2007 to $19M in 2015, a 670 percent increase. The stock price more than tripled during that period, and there is no doubt the CEO should be compensated for that. However, the optics of the link between the product price increase and executive pay raises simply doesn't look good. This, again, ties up to the nature of the product. If Heather Bresch ran a luxury corporate jet company that increased prices of its jets by 450 percent, and customers were still willing to pay the increased price and drive the profitability and stock price up, nobody would have challenged a 670 percent increase in her salary, But the product is a life-saving drug, not a corporate jet. And timing is everything.