Mylan's decision to make a cheaper, generic EpiPen 'baffles' experts

Mylan, the drugmaker feeling the heat over its pricing of the EpiPen, said Monday that it will make an "authorized generic" version of the EpiPen that will cost $300 for a two-pack. It will also continue to produce its branded version, with a list price of $600.

To fend off public outrage over the EpiPen's cost (up 500% since Mylan acquired the drug back in 2007), the company had also previously raised its copay coupon system to cover $300 of people's out of pocket cost. But that discount did little to get them out of the woods.

Mylan said it plans to launch the generic product in "several weeks," depending on when it can whip up the new labels. But this authorized generic of the EpiPen, a device used in emergencies to treat a severe allergic reaction called anaphylaxis, seems to be more confusing than anything else.

"I and others who study these issues full time cannot understand why Mylan thought this would work to quell the widespread indignation over its pricing practices," Rachel Sachs, a law professor at Washington University in St. Louis, wrote in a Harvard Law blog post about how the company's decision "baffles" experts. 

Why make an authorized generic?

For a set period of time, a drugmaker has the chance to have an exclusive on the market for a drug it developed. But once that time is up, other companies can come in with their competing versions that are virtually identical to the original.

Authorized generics are basically a drugmaker's way of staying in the game after generic competition comes to the market. The Food and Drug Administration keeps track of all the authorized generics that the makers of original branded products have created.

An authorized generic is identical to the original drug, but it doesn't come with all the bells and whistles of the branded product. In this case, the pen will be the same, but the packaging might be a different color or carry just the "epinephrine auto-injectors" title.

Much of the time, the authorized generic comes in after there's already generic competition from other companies. But here, Teva Pharmaceuticals, the company developing a generic epinephrine auto-injector did not get approval from the Food and Drug Administration, with the agency citing "certain major deficiencies." (There is a less expensive epinephrine injector that's on the market, the Adrenaclick, but it doesn't work in exactly the same way.)

So, with the authorized generic, Mylan can "effectively cannibalize their own business," Michael Rea, the CEO of Rx Savings Solutions, which works to help consumers and employers paying for healthcare understand their drug prices, told Business Insider.

At the same time, Mylan has set up the rules of the game for when other generic epinephrine auto-injectors make it to the market. "Mylan has now benchmarked a new price for those products if they return - they must price below $300 for a two-pack to compete effectively with Mylan," Sachs wrote.

Keeping its share of the epinephrine market

The move might look good on paper as a way to improve access, but there are still a bunch of things that could stand in its way while benefiting Mylan's branded version. 

Sachs put it well in her post, summing up a few open questions:

"I wonder whether their generic will be fully substitutable by pharmacists, a question which may depend on the state laws involved (and which Mylan has lobbied to influence). I wonder whether the EpiPen comes with training or other easy-to-use tools that will be missing from the generic, and as long as Mylan provides copay coupons only for the branded product, parents facing equivalent copays in either situation will choose the branded EpiPen. I wonder whether Mylan will not offer discounts off the list price for the generic (except those required by law for Medicaid), meaning that the actual prices paid by insurers will be roughly comparable.  And finally, because a significant portion of EpiPen purchasing happens during the back-to-school season, Mylan has done little harm to its revenues this year.  It is only next year that this product may affect their bottom line."

The answers to those questions, which Mylan has yet to offer, could significantly influence exactly how the introduction of the authorized generic will affect the bigger picture.

If the generic version isn't allowed to be substituted by pharmacists, for example, those without insurance could still be on the hook for the full price of the branded EpiPen. Those with insurance and a high deductible would end up paying the same amount either way, so why not choose the branded product?

And, depending on how discounts to authorized generic shake out, Mylan could stand to make more off the $300 generic than their original product.

By Mylan's own argument, the company makes $274 from every EpiPen sold. The rest of the list price all gets absorbed through the different members of the supply chain.

But say Mylan doesn't have to deal with some of those middlemen who make money along the way, and can just distribute the drug to pharmacies - something that they'd have an easier time doing with generic versions. That cuts out the wholesalers and the pharmacy benefit managers, which are in charge of negotiating drug prices, along with the charges that would come along with their involvement. That would mean Mylan would get to pocket almost 10% more, in total, than they otherwise would.

"They don't get a gold star for suddenly being charitable," Rea said.

Mylan declined to comment on this, but did point to an analyst report from Susquehanna Financial Group's Andrew Finklestein. The report estimated that Mylan's net earnings per generic two-pack would be more than $200, but still down from the branded product's $274. Mylan's revenue for both the branded and authorized generic EpiPen, Finklestein forecasted, could still come in just above $1 billion in 2017. That would be a minor decrease from the $1.21 billion EpiPen sales are forecast to bring in 2016, before the introduction of the generic. But it would be roughly equal to the company's EpiPen revenue in 2015.

It remains to be seen, when the authorized generic comes out, how it will actually impact Mylan's EpiPen sales. By that point, other generic options (auto-injectors and single-use syringes alike) could be there to set the tone for the next back-to-school season.