In a new development surrounding the controversy of price hikes of Mylan’s lifesaving drug EpiPen, the manufacturer announced that it will introduce a generic version, and sell the new drug at half the price of its branded version. Mylan has increased the price of its EpiPen injections from about $100 in 2009 to over $600 this year and will sell the generic at $300, and has come under scrutiny and strong criticism from public and government officials alike. Mylan are not alone in increasing drug prices in recent times. For instance, Martin Shkreli increased the price of Daraprim by 5000 percent in 2015. However, that was to do with a hit-and-run opportunity that arose out of its orphan drug status, and the speed with which a rival generic could gain approval to enter the market (see my earlier post, ‘The Economics of a $750 Pill’).
Leaving aside the issue that the generic is still three times more expensive than the original 2009 price, this announcement has left some puzzling over why, or rather how, such a move makes any sense. To paraphrase the incredulity expressed by Richard Quest of CNN, why would anyone pay $600 for a drug when the exact same product by the same company is also available for $300? How does Mylan stand to gain anything from this move?
The process of introducing a generic version of your own brand name drug is called launching an ‘authorized’ or ‘pseudo’ generic. Here, brand name firms introduce generic versions, sometimes by themselves, other times via third parties as part of pay-to-delay deals (explained below). In this particular case, the timing of the announcement may be a publicity ‘auto-injector’ to deal with the loss of reputation caused by public outcry over the EpiPen price hike.
The story of launching an authorized generic can be understood in the context of one such deal between Mylan and Teva, which was made after initial patent litigation, when Teva filed for a generic drug application with the US Food and Drug Administration (FDA) in 2009. The settlement was reached in 2012, and under the terms of the deal, Teva could start producing the generic version by mid-2015. The deal of course had to be approved by the Federal Trade Commission (FTC), and Teva would still have to get marketing approval from the FDA prior to launching the generic in mid-2015. However, in the current case, Teva’s generic application has recently been denied by the FDA, and while Mylan would prefer to maintain its monopoly for as long as possible, they were probably already set on Teva launching an authorized generic by now as per the original terms of the deal.
So why do branded firms launch authorized generics? First, there may be a large first-mover advantage in being the first in the generic segment of the market: patients (or insurers) may switch to the much cheaper first generic (relative to the branded drug), but as the patient gets used to that specific generic, they may not want to switch again to another generic, especially if the price difference between first and second generic is very small. There is empirical evidence which suggests that first-mover advantage in the generic segment is present, as the first entrant often holds on to a large market share relative to late entrants. Thus, if entry in the generic segment is going to happen regardless, then it might as well be your own firm (or a subsidy or a partner firm) who enters first.
Second, if a firm has a monopoly due to a patent, and a potential entrant is trying to break that monopoly by challenging the validity of the patent, the branded firm can offer the generic challenger some money and a licencedentry at a later point in time in exchange for withdrawing the patent challenge. This is called a pay-to-delay deal, the economics of which are further explained in my previous blog. In fact, the branded firm can also offer an exclusivity period to the future authorized generic entrant, i.e., it would not offer such a licence to anyone else within six-months of entry by the authorized generic firm.
This way both firms avoid the uncertainty and cost of patent litigation and the challenger can still reap the benefits of the first-mover advantage associated with being the first entrant in the generic segment of the market. Further, the branded firm can capture part of the profit associated with generic segment of the market when the generic partner enters, by charging it a licensing fee for production of the authorized generic.
Finally, reaching a pay-to-delay deal bundled with an authorized generic launch can also keep the other would-be challengers at bay. By announcing that the branded firm has settled the patent litigation with the first challenger, who is authorized to enter no later than an agreed upon date, the branded firm signals to all others that even if they win the patent litigation case, they would not necessarily capture any first mover advantage. This is because the authorized generic can be launched just a few days before the launch of independent generic (my colleagues and I work out the conditions under which such a threat is credible in this CCP working paper).
In short, while Mylan’s announcement to launch their own generic may seem bizarre, it is entirely consistent with signalling to other potential entrants that, even though Teva is having trouble entering the market, they can grab the first mover advantage for themselves. If someone else were to enter, they now have a generic product whose price they can lower even further to meet any generic competitors’ price. So, while I am glad that Richard Quest took notice, the Federal Trade Commission may also take notice, as the announcement to launch this generic might be more than just a publicity stunt. This is not to suggest Mylan has broken the law in any way.
 See Milford P, ‘Mylan, Pfizer Reach Epinephrine-Pen Settlement With Teva’ (Bloomberg Technology, 26 April 2012).
 Hollis, Aidan. 2002. “The importance of being first: evidence from Canadian generic pharmaceuticals.” Health Economics, 11(8): 723–734.