Lessons From The CVS Launch of Adrenaclick

Epipens, the epinephrine injections that provide relief to those with severe allergies that include the possibility of anaphylactic shock, had recently become politicized. The major drug manufacturer Mylan had purchased the intellectual property and distribution systems for Epipen in 2007 and subsequently raised the price for a two-pack from $99 on the date of acquisition to $608 this past May. This price increase occurred close in time to Martin Shkreli’s decision to raise the price of Daraprim tablets (used to treat protozoal infections) from $13.50 to $750 per tablet.

Amid the pharmaceutical industry’s violation of acceptable pricing norms, Americans developed an increasingly hospitable attitude towards government intervention of Big Pharma pricing. On August 24th, 2016, Democratic candidate for President Hillary Clinton sent Mylan stock down 6.2% after publicly declaring a need for more “reasonable pricing in access to drugs.” The pricing of Epipens seemed so egregious that even Republicans wanted to get in on the action— Senate Judiciary Chairman Chuck Grassley demanded explanations from Mylan about the why the price of the injector increased six-fold in under a decade.

A few days, CVS announced that it was teaming with Impax Laboratories to launch a generic form of epinephrine injections called “Adrenaclick” that will only cost $110 for two-pack and will cost most consumers only $10 after applying a widely available manufacturer’s coupon.

I have four reactions to this development:

First and most importantly, I am sincerely happy that those at risk of anaphylactic shock will be able to find access to a cost-effective alternative. Most likely, the price of Epipen will come down quite a bit in the next few months to compete with Adrenaclick, and this is a great development for my fellow Americans will have lower out-of-pocket costs for addressing illnesses that are out of their control.

Second, there is a tendency to focus on sticker prices rather than actual median prices paid by the costumer. For instance, the $110 cost of Adrenaclick is really going to average somewhere in the $25-$35 neighborhood after most customers take advantage of customers that give them $10 access.

With Epipen, there was also a $300 discount available through the insurance markets. Sure, $300 still represented a three-fold price hike in under a decade, but $300 was a more accurate depiction of the Epipen cost than the $600 touted about by the media. You can make your case that $300 is too expensive for the injector without resorting to hyperbole. And if you do need to resort to hyperbole to make your point, you don’t really have much of a point to make.

And third, this is a bit of a welcome PR for the free market. The image of laissez faire commerce has taken a hit these past few years. It is nice to have a real-world reminder of the textbook lesson that obscene profit margins are like blood to sharks—you just can’t resist swimming towards those waters.

Epipens costs about $30 to manufacture. Mylan was collecting about a 10,000% margin above the cost of creating the good. With margins that high, it was inevitable that a competitor would enter the market. And now, you have the Adrenaclick that you can get at CVS.

This is how markets sort themselves out over time. The downside is that you must endure the pain of the market calibration (i.e. the time it takes for a competitor to spot the competitor earning above-market rates and then marshal the strategy and resources to launch a competitive product). While the market sorts itself out, you are paying higher rates than you would once the competition perfects itself. The silver lining is that, as the magnitude of the undeserved profit margins increase, the shorter the period of time it will take for the competitor to make moves to enter the market. Epipen pricing was the story of 2016, and by the first month of 2017, a much lower alternative entered the market. This strikes me as a vindication of the notion that the free market is the friend to the consumer.

And fourth, it renews my confidence in what I wrote about CVS stock on November 8th in which I called the drugstore chain a “Phil Fisher growth stock selling at a discount to market price.” It was making about $6.3 billion in profit and trading at a valuation of $70 billion when it fell below $70 per share. The sentiment had soured so much that it was trading at 11x earnings despite a fifteen-year track record of 15% annual growth.

From that valuation, it didn’t require much to go right for the business to treat shareholders very well. Did I have any idea that CVS was going to launch an Epipen competitor? Nope. But there is something to the notion that institutions bringing in $525 million in net profit per month can come up with innovations. It is not blind faith, but rather, a recognition that a firm with a great track record will be able to come up with *something* with all of that cash flow which will prove that a valuation higher than 11x earnings is warranted.

The introduction of a competitor to the Epipen, as well as some readjustment of the CVS stock price, seems to offer early examples that patience tends to come with an eventual payoff when you see something selling for a price that doesn’t seem to correspond to reality.