Pricing the EpiPen: Financial Returns and the Care Thesis of Biomedicine

NB: The text below is a transcript of my AAA 2016 conference talk. It is a modified version of an essay published previously by Somatosphere under the title, “Pricing the EpiPen: Drug Prices, Corporate Governance, and the Financialization of Biomedicine“.

Why does Mylan’s EpiPen cost so much?

That was a question many parents of food allergic children found themselves asking this past August, as a flurry of news reports revealed that the standard two-pack now costs patients as much as $600 out of pocket. The device, a type of epinephrine auto-injector, looks like an oversized marker. Inside is a mechanism that pops out a short needle and delivers epinephrine in three seconds or less when it is pushed firmly against one’s body (preferably the outer, upper thigh). Epinephrine – a hormone also known as adrenaline – is the preferred substance for halting and reversing a severe allergic reaction, called anaphylaxis. Originally created as a tool for delivering emergency nerve gas treatment on Cold War-era battlefields, the device is now considered a necessity for people with food allergies.

This episode concerning EpiPen prices – a snapshot in my larger, three-year project on food allergies in the United States – underscores the importance for anthropologists and STS scholars to do more rigorous research on the relationship between medicine and finance. A number of scholars in what is often referred to as the social studies of finance have now studied how Wall Street-style investment banking gets done in practice (Mackenzie 2006, Riles 2011) and the distinctive cultural attitudes towards risk and reward these practices engender (Ho 2009). Meanwhile, medical anthropologists have written extensively about the construction of consumer and provider markets for pharmaceuticals (Dumit 2012, Greene 2014) as well as how clinical research is strategically designed to provide evidence for lucrative indications for prescribing (Petryna 2009, Jain 2013) and providing hands-on care (Kaufman 2015). What is largely missing from these literatures as they stand today is an in-depth understanding of the financial practices and logics of healthcare company executives and the effects they have on patient care.

This is an important part of the story of how value is created in healthcare. We can look further upstream to understand the levers that shape action on the ground, as decisions made early on in the drug development process by executives decide which drugs are even available on the market, which go into clinical trials, and so forth, before patients and the public even know that any action has been taken. Whether due to a disciplinary aversion to studying the powerful or a lack of access, very few anthropologists have examined how key actors in the social worlds of biotech and pharmaceutical companies, like executives, make the decisions that determine which drugs take shape as material commodities and which persist as merely spectral alternatives.

While I won’t discuss it much today, these decisions are also deeply influenced by chemical, physiological, and biomedical understandings of bodies in the material world: in order for this whole system to work, a drug must, at a minimum, be materially possible to produce in a reliable, consistent, and scalable way, pose few risks to users, and have some clinically demonstrable efficacy in clinical trials. Once they hit the market, they are one of the elements that sets the terms for what it means to live with a biomedical disease, yet they may be used, hoarded, circulated, or financialized in ways that exceed the normative patterns that were imagined by regulatory staff and pharma executives as governing their use. But none of this could happen without the products being developed in the first place, and these decisions come from the top.

The EpiPen pricing controversy is one of many events that have drawn attention to the escalating price of medical objects and procedures in the past year. Turing Pharmaceuticals’ Daraprim pricing scandal beginning in the fall of 2015 and Theranos’ meltdown earlier in 2016 on the news that the high-priced tests they performed were not as advertised has kept the issue of high drug prices in the public eye. In the EpiPen pricing case, many journalists and members of the food allergy community have critiqued the credentials and motives of Mylan CEO Heather Bresch. From analyses of her possibly fraudulent MBA to critiques of her compensation to her political connections via her US Senator father, her rise to corporate stardom on the strength of EpiPen revenue has been put under the microscope.

In each of these instances, the CEO of the company has been placed in the spotlight, portrayed as both the representative for the complex goings-on within their companies which generate such pricing strategies and as an avatar for corporate greed in healthcare. Yet while blaming the CEO satisfies the forensic itch of reporters and congresspeople, it obscures some important structural issues at play in healthcare today. In particular, the methods now used to raise operating capital and bring new products to market have made healthcare CEOs increasingly beholden to a new set of actors with new expectations for company conduct and performance: shareholders, debtholders, and various types of private investors. Accordingly, many pharmaceutical companies are now run by executives not as self-sustaining organizations with complex inner lives but as investment vehicles that promise extraordinary multiples of invested capital.

A key activity by which mid-sized to large pharmaceutical companies deliver these returns is through the acquisition of new products midway through the development process. Small companies conduct the early stages of research and development before their successful “assets” (as products are called by executives and investors) are scooped up by larger ones via partnerships or acquisitions. These transactions reduce a pharmaceutical company’s infrastructural investment at earlier stages where technologies are more prone to failure due to rocky transitions to use in humans or persistent difficulties in producing the actual drug substance or device. This effectively outsources the early stages of development to small companies supported by large federal grants, venture capitalist expecting 10x returns, the “sweat equity” of founders, or all three. By relying on investors and financiers in new ways to acquire so-called “de-risked” technologies, companies can reduce their exposure to the financial risks of designing and conducting early-stage research on new products for unruly human bodies, when they are most prone to fail unexpectedly.

To attempt such transactions, companies need access to capital, and there are two ways for them to get it: sell more products, or sell them at a high enough price to generate revenue quickly and have cash on hand; or (as Karen Ho (2009) has also explained in her ethnography of investment banking) raise the stock price, which raises the financial valuation of the company (also known as the market capitalization, or market cap), which the company can then borrow against through investment banks and shadowy private equity firms. Mylan’s August 2016 quarterly financial statement bears witness to this strategy, showing that the company raised over $6 billion in capital through debt and stock issuance – essentially borrowing from investors against the promise of future stock price growth – between August 2015 and August 2016. This was almost the precise amount needed for the $6.6 billion takeover of Swedish pharmaceutical company MEDA and associated transaction costs.

EpiPen pricing policies were undoubtedly a crucial lever that enabled this particular transaction. The value provided to a company like Mylan by a device like the EpiPen is not only the value of the revenue collected to date, but also the demonstration of the company’s ability to continue to increase revenue through price increases and increased sales into the future. In other words, it’s not only the capital that matters; it’s the potential for the collection of capital to accelerate over time. The promise of increasing revenue draws in new investors as the strategy is demonstrated to work in successive quarters, increasing the company’s stock price which benefits the company by increasing its access to borrowed capital. For modern pharmaceutical companies, this promissory function of pricing is an important aspect of company strategy that enables the pursuit of other activities and transactions.

These practices matter because they undermine what most assume to be the social role of pharmaceutical companies to be: the development of reasonably priced, high-quality medications for very ill patients. They do so by reinforcing the alignment of management with investors who are interested in making products with large markets that can quickly generate revenues that increase quarter after quarter, thereby generating revenue, increasing share price that can be leveraged as debt in exchange for more capital, or both. In the wake of the shareholder revolution and the widening acceptance of Wall Street financial governance models in healthcare-related businesses, the CEO’s role in pharma has been redefined as one of keeping investors satisfied by assuring them that they will receive their anticipated returns. CEOs who fail at this can be removed by their company boards, as it is common for the majority of a pharmaceutical company’s board seats – especially those of smaller or newer companies – to be populated by representatives of their largest shareholders. The company must be aligned with investor expectations from the top down for the work of making medicines to even begin.

It is a dead end to try to understand pharmaceutical company behavior – from pricing schemes to early-stage R&D strategies – based on the assumption that drug makers are primarily motivated by a desire to expand access to necessary care. This assumption, which I call the “care thesis of biomedicine,” makes pricing controversies seem contradictory, immoral, even irrational to observers (also see Dingwall 2016 for the impact this has within the medical profession). It makes healthcare observers and consumers angry but provides limited leverage for effective intervention on the status quo.

Understanding the financial entanglements of the modern pharmaceutical company with the financial sector, however, casts a different light on these controversies: they are perfectly rational when measured by the standards of the actors who control the purse strings. In other words, like any actors in ethnographic research, pharmaceutical companies make more sense when apprehended on their own terms. And it is those very terms – what I refer to as the logic of finance capital – that set companies down the path of what many analysts, reporters, and members of the public see as bad behavior that inflicts harm on patients.

Works Cited

Dingwall, Robert. 2016. “Why Are Doctors Dissatisfied? The Role of Origin Myths” 21 (1): 67–70. doi:10.1177/1355819615589425.

Dumit, Joseph. 2012. Drugs for Life: How Pharmaceutical Companies Define Our Health. Durham: Duke University Press.

Greene, Jeremy. 2014. Generic: The Unbranding of Modern Medicine. Baltimore: Johns Hopkins University Press.

Ho, Karen. 2009. Liquidated: An Ethnography of Wall Street. Durham and London: Duke University Press.

Jain, Sarah Lochlann. 2013. Malignant: How Cancer Becomes Us. Berkeley: University of California Press.

Kaufman, Sharon. 2015. Ordinary Medicine: Extraordinary Treatments, Longer Lives, and Where to Draw the Line. Durham, NC: Duke University Press.

Mackenzie, Donald. 2006. An Engine, Not a Camera: How Financial Models Shape Markets. Cambridge, MA: MIT Press.

Petryna, Adriana. 2009. When Experiments Travel: Clinical Trials and the Global Search for Human Subjects. Princeton: Princeton University Press.

Riles, Annelise. 2011. Collateral Knowledge: Legal Reasoning in the Global Financial Markets. Chicago: The University of Chicago Press.

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