When Free Markets Fail….

Posted: August 28, 2016 in Current Events
Tags: , ,
By my back of the envelope calculation, every second counts about $38 for Mylan.

By my back of the envelope calculation, every second counts about $38 for Mylan (or about $3.3 million each day).

So here’s the usual market cycle, say for example, the HDTV. You first introduce the product into the market. Usually its price pretty expensively when you first start out. You are not in mass production yet so you are only going to be able to sell so many units, plus you want to recoup the costs of R&D and such. If the product gets a foothold into the market (like clearly the HDTV did), then you will enter a growth stage. As you are able to ramp up production, the cost per unit will start to drop and generally so will prices (as in a healthy market, you will have competitors also trying to sell units…plus you need to make the product more affordable so you can sell more units). The products will become more affordable to the masses. Eventually the market matures and each company will try to figure out how to hang onto share anyway they can, whether it’s pricing or maybe minor feature differentiators or what have you.

But as far as I know, nobody has ever died by not having a HDTV. Which brings me to Mylan and their EpiPen. The price of their product has reportedly increased over 400 percent since 2007. The point of the above is to state my belief that it can’t be because the price of production has gone up. As they have made more and more units, the price per unit should drop, not increase. So if it’s not the cost of production, then why are they selling EpiPens at a price of $250 per unit (though my understanding is you have to buy the $500 twin packs, singles aren’t available anymore) now when they could be sold at $57 per unit in 2007?

The CEO of Mylan responded by criticizing insurers and pharmacists and the health system in general, some of which may be well and proper. But it doesn’t answer the question, why did the price go from $57 to $500? Any answer that doesn’t address the question specifically is just noise. She said if she reduced the list price she couldn’t guarantee that everyone who needs a EpiPen would get one, but didn’t say why that would be (and I don’t think I even accept the premise that everyone who “needs” one is getting one right now).

So about EpiPen and Mylan…….EpiPen is NOT a new product. It was actually invented in the 1970’s by a former NASA engineer with taxpayer funding (the inventor did not get rich….it was made for public use). Mylan didn’t acquire the rights to EpiPen until 2007 (hmm….that’s when the price started going up…I’m sure that’s a complete coincidence!). Given the Mylan didn’t even develop the product, there shouldn’t be any R&D to recover and the manufacturing process should be well refined by now. In other words, I suspect production is cheap. (One more tidbit to Mylan, they moved their corporation to the Netherlands in 2014 to avoid taxes.)

The reason why I think price is up is the same reason that Mylan won’t talk about it. They are charging more because they can. It’s an fairly inelastic demand curve now (what’s the price you put on life saving???? On the other hand, you can’t sell EpiPens to people who don’t need then….dropping prices isn’t going to generate much more demand), though in fairness Mylan did do a lot of marketing initially to raise product awareness that did generate the level of demand you see now (though they have also taken advantage of lobbying and government legislation). And for various reasons, there’s no competition. It’s a monopoly and being a stock company, Mylan is just trying to generate as much profit as they think they can get away with.

Mylan has said they are offering discounts now, but that doesn’t really solve the problem. Not everyone gets the discount and even if they did, insurers are still paying those costs so the consumer ultimately pays one way or the other. Ultimately though, I think there needs to be recognition that there are some areas where the free market works great but some areas where it doesn’t. You need to have competition and consumers need to have choices, including the choice to not participate in the market at all. That’s hard to do when literally lives are on the line.

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