In his 93 years, Bob Wallace has seen some product-pricing doozies over the decades, but the nonstop national furor over the stratospheric price hikes for EpiPens — now retailing above $700 for a two-pack — was the final shot.
“I’m a cheapskate,” the Saratoga inventor and businessman proudly proclaimed. “And this is not rocket science. People should be aware of what they’re getting hooked for.”
So in time-honored Silicon Valley tradition — and piqued by the EpiPen-maker Mylan’s corporate tagline “Seeing Is Believing” — Wallace and Roland Krevitt, a veteran Scotts Valley manufacturing and tooling consultant, set out to demystify the cost to produce the EpiPen, piece by piece.
The auto-injector delivers a lifesaving dose of adrenaline to treat serious allergic reactions to everything from bee stings to food.
Hunched over his vintage Shopsmith table saw in his garage, Wallace sliced open the plastic injector to begin reverse-engineering the device. Then it was Krevitt’s turn to break out his gram scale and caliper to crunch the costs for molding and manufacturing the nozzle, needle, syringe, springs, safety cap — and 0.3 mg of epinephrine.
Their startling estimate of the cost for a two-pack of EpiPens: $8.02.
And that even included the bright-yellow box.
“Talk about sleight of hand,” said Krevitt, who isn’t naive to R&D, marketing, distribution and other costs that go into brand name pharmaceuticals — but is still floored by what he figures is a 90-plus-fold markup over the retail price. “These guys put a magician to shame.”
From Capitol Hill to the corner drug store, the pharmaceutical giant Mylan is the latest drugmaker to withstand a public lashing over skyrocketing drug prices. While politicians and patients demand explanations, pointing out the same drugs are sold for a fraction of the price in other countries, policy experts and drug makers blame an American health care system built on an ever-expanding pool of middlemen whose piece of the action is driving up the final bill.
Since Mylan bought the EpiPen in 2007, the device’s wholesale price has soared from $100 to more than $600 for a now-standard two-pack.
The retail price is even steeper — the list price at CVS pharmacy, for example, is $733. Mylan insists most patients pay less than $50 out of pocket for a two-pack, though critics say insurers pass the higher wholesale drug costs along to consumers in other ways.
But what does it really cost to make?
To get the answer, Wallace and Krevitt dissected a two-pack of EpiPens into individual pieces, carefully weighed each plastic part and applied an industry-standard method for analyzing the manufacturing costs. This reporter calculated the total cost of the three liquid ingredients — epinephrine, sodium chloride and sodium metabisulfite — at $2.02 for both pens based on wholesale distributor costs for the drug, saline and preservative.
Krevitt assumed the manufacturer used one set of multicavity molds to come up with the calculation that left both men dumbfounded: Leaving out the box, plastic trainer pen, pen clamp and sets of instructions, their estimate of what it really costs to make two EpiPens was only $6.90.
On a mass scale, Krevitt said, it would be even less expensive. But just in case he missed something, Krevitt padded the total cost by 25 percent, bringing it to $10.03 for the entire kit.
He’s wise to the ways that manufacturers set prices, after spending 33 years managing tooling and manufacturing programs that produced measuring instruments at HP; monitors, keyboards and mice at Apple; communication headsets at Plantronics; and now, through his own firm Redwood Engineering, three FDA-approved disposable filters for arthroscopic surgery. It’s no surprise, for example, that a tech analyst firm that tore down an iPhone 7 reports it costs Apple about $224.80 to make its latest smartphone, which retails for $649 — a 189 percent markup.
So how does Mylan come up with its price for the EpiPen?
The company’s chief executive, Heather Bresch, recently told a congressional committee her company pays $69 per two-pack to the firm that actually manufactures the EpiPen, Meridian Medical Technologies, a subsidiary of Pfizer.
Grilled relentlessly by a congressional committee last month over the soaring cost of the pens, Bresch pointed to charts explaining why the company charges a $608 wholesale price for a two-pack.
“I think many people incorrectly assume we make $600 off each EpiPen,” she told the panel. “This is simply not true.”
Bresch said $334 of the $608 is paid out to pharmacy benefit managers, insurers, wholesalers and pharmacy retailers. Mylan is left with $274 after rebates and fees. Reduce the sum by the $69 that her company pays Meridian, and that leaves Mylan with $205 for each two-unit injector. Bresch testified that profit drops to $100 per two-pack, after the company deducts expenses for research and development, sales and marketing, regulatory compliance, distribution and various access programs.
Not so, according to The Wall Street Journal, which reported last week that Mylan low-balled its calculation of EpiPen profits to Congress by applying a misleading tax rate. The story suggested the company’s profits were about 60 percent higher than what Bresch told Congress, or $166 per two-pack.
“That is the free enterprise system,” said a grinning Wallace, a metallurgist who runs Polar Pure, a small company that makes iodine-based water purifier kits. “Cheateth thy neighbor before he cheateth thee.”
Spokeswomen for Mylan and Pfizer declined to comment on the cost estimates by the two Silicon Valley men, with Pfizer saying the terms of the supply agreement are confidential. Mylan’s spokeswoman insisted the EpiPen is a “complex prescription product,” implying it’s not something a do-it-yourselfer can make in a garage.
“The more than 15 critical component parts in this device must work every time without fail” in an emergency situation, said Lauren Kashtan, a Mylan spokeswoman.
At the UC San Francisco School of Pharmacy, health economist Leslie Wilson said Mylan has gone to great lengths to increase its market by convincing state governments to place EpiPens in schools across the country, including California, which mandated that policy starting last year. Just last month, Gov. Jerry Brown signed legislation allowing more businesses and colleges to stock the devices — though he blasted the company for its “rapacious corporate behavior.”
And on Thursday, California lawmakers held a special session inspired by the EpiPen uproar and the need for prescription drug pricing transparency and reform in the state.
In 2015, Mylan said it made less than 10 percent of its revenue from sales of 4 million Epi-Pen two-packs, or $1.1 billion. Bloomberg Businessweek said the pens account for about 40 percent of Mylan’s operating profits. The company is promising to introduce a generic version that will cost $300 — half the current price of the brand name version. But that’s still 37 times what Wallace and Krevitt say it costs to make, even if in the eyes of an engineer like Krevitt the pen’s design is “very clever.”
Still, Krevitt said, he’s learned a lot more than what the inside of an EpiPen looks like.
“Now I’m even more outraged at how badly we’re being gouged by the pharmaceutical industry and the insurance companies,” he said. “No wonder health care costs in the U.S. are abominable.”
