Mylan’s Self-Created Risks

Beginning by bluster

Published: Wednesday, September 14, 2016 - 16:42

Clause 6.1 of ISO 9001:2015 requires “Actions to address risks and opportunities” first with regard to section 4.1, “Understanding the organization and its context” and second in section 4.2, “Understanding the needs and expectations of interested parties.” As 4.2 goes on to say, the latter are entities that can affect “the organization’s ability to consistently provide products and services that meet customer and applicable statutory and regulatory requirements.”

It is generally understood that supply chain partners, customers, investors, and employees are all interested parties, but specialty pharmaceutical company Mylan’s recent exorbitant price increase for its EpiPen automatic epinephrine injector should remind us of the existence of hostile interested parties that are not part of our supply chain. Competitors can affect our ability to “provide products and services” by undercutting our prices and/or outperforming us on quality. In his book On War (Princeton University Press, 1989), Major General Carl von Clausewitz put the matter as follows: “War, however, is not the action of a living force upon a lifeless mass (total nonresistance would be no war at all) but always the collision of two living forces.”

This means simply that business competition does not take place in a vacuum where an organization can demand whatever price it wants, as Mylan seems to think it is entitled to do. Mylan’s pricing strategy has simultaneously enraged its customers and invited every pharmaceutical and medical device company in the world to follow the advice given in the Mob Museum in Las Vegas: “Give the people what they want.” This is extremely easy because the EpiPen’s active ingredient, epinephrine, was synthesized roughly 100 years ago and therefore cannot be patented.

The EpiPen’s unique design may still be under patent, but the concept of an automatic injector is emphatically not. U.S. Patent 2866458 was assigned to Becton, Dickinson, & Company by inventor George N. Hein in 1958. The patent, which expired decades ago, describes essentially everything the EpiPen does:

“It is a primary object of the invention to furnish an assembly which may be used for hypodermic self-injection by an unskilled person who, in fact, may be handicapped by injury or shock and by means of which the desired injection will be effectively achieved…

“…An additional object is that of providing a hypodermic injection unit which will be automatic in nature but in which unless the parts are deliberately manipulated there will be no danger of accidental firing or medicament-discharge occurring. Therefore, the unit may be subjected to shocks and other abuse without impairing its functioning. At the same time, the present invention furnishes a mechanism in which, by means of the simplest sequence of operations, the device may be fired with assurance that a proper injection is achieved, even although this may be effected through layers of clothing or covering.”

This means there is no intellectual property barrier whatsoever to market entry by any medical device manufacturer who feels like copying this design. Further, subsequent and improved designs also have fallen into the public domain. Mylan has therefore attempted to jack up its prices on something it cannot possibly defend against competition, of which there is already plenty. Adrenaclick can for example, be purchased from Wal-Mart or Sam’s Club for less than a quarter of the EpiPen’s list price.

Mylan knows it is in trouble

In The Art of War (Lionel Giles’ translation) Chinese general Sun Tzu  wrote, “To begin by bluster, but afterwards to take fright at the enemy’s numbers, shows a supreme lack of intelligence.” This statement’s current counterpart is, “Your mouth is writing checks your body can’t cash.” This is exactly what Mylan did when it jacked the EpiPen list price to $608 per pair, only to then offer enormous discounts. As reported by Reuters in Newsweek, “Mylan said it would launch the first generic version of its allergy auto-injector EpiPen for $300, half the price of the branded product, the drugmaker’s second step in less than a week to counter the backlash over the product’s steep price.”

It is a basic principle of organizational psychology, and especially psychology relevant to warfare, that a single backward step often indicates organizational panic. It is well known in the animal kingdom that any display of fear or irresolution invites attack. Colonel Ardant du Picq described this principle in the 19th century in his book Battle Studies; Ancient and Modern Battle, and then applied it to close combat between humans:

“In a thick forest, a lion and a tiger meet face to face at a turn in the trail. They stop at once, rearing and ready to spring. They measure each other with their eyes, there is a rumbling in their throats. The claws move convulsively, the hair stands up. With tails lashing the ground, and necks stretched, ears flattened, lips turned up, they show their formidable fangs in that terrible threatening grimace of fear characteristic of felines.

“Unseen, I shudder.

“The situation is disagreeable for both: movement ahead means the death of a beast. Of which? Of both perhaps.

“Slowly, quite slowly, one leg, bent for the leap, bending still, moves a few inches to the rear. Gently, quite gently, a fore paw follows the movement. After a stop, slowly, quite slowly, the other legs do the same, and both beasts, insensibly, little by little, and always facing, withdraw, up to the moment where their mutual withdrawal has created between them an interval greater than can be traversed in a bound.”

The last thing that either animal will do is to turn its back, or indeed show any evidence of indecision or fear whatsoever, because this would invite immediate attack by the other.

Frederick the Great ordered his noncommissioned officers to kill any soldier who stepped out of his position, lest a display of fear invite the enemy to charge home. A cavalry charge against an infantry square could succeed only, in fact, if the infantrymen gave ground.

The takeaway is that the instant an animal, person, or organization takes a step backward in the face of a physical, public relations, or competitive threat, it has as good as lost the confrontation. Mylan’s sudden concessions have similarly told the public and its competitors that it is in serious trouble. In Moving Forward (Doubleday, Doran, & Company, 1930) Henry Ford warned, “If prices are used as baits for buyers, to be raised or lowered as the buyers feel about it, it is in effect a handing over of the control of the business to the buyers to do with as they like. That is a very real control and it is exercised in very drastic fashion.”

This is exactly Mylan’s situation. It tried to impose a price increase it has no way to enforce, and the likely consequences could even include loss of most of its epinephrine injector market.

Mylan’s supply chain muda

The supply chain is a major source of risks and opportunities, and organizations need to consider these regardless of whether ISO 9001:2015 requires it. Mylan’s CEO, Heather Bresch, sought to justify the EpiPen’s price increase as follows:

“‘My frustration is there’s a list price of $608,’ said Bresch, who said that price reflects a system where there are ‘four or five hands that the product touches and companies that it goes through before it ever gets to that patient at the counter.’”

She added that Mylan gets $274 in revenue from the list price of $608, which does not impress me as any kind of excuse. It tells me only that $334 of the $608 list price, or 54.9 percent of it, is waste or muda. If the “four or five hands” that Bresch describes add no value for the customer, why are they even in the distribution chain?

Henry Ford would not have used this problem as an excuse; he would have dealt with it in short order. Ford wrote in My Life and Work (Doubleday, Page & Company, 1922) that “Everything and everybody must produce or get out” and added, “If their money goes to complicating distribution—to raising barriers between the producer and the consumer—then they are evil capitalists and they will pass away when money is better adjusted to work…” It is difficult to envision how the “four or five hands” in Mylan’s distribution system do anything other than raise barriers between the producer and the consumer, except for the pharmacist who has a direct relationship with the patient. Online pharmacies can, however, fill orders for medications that are prescribed by licensed physicians.

The EpiPen controversy, therefore, offers the following lessons and takeaways relevant to ISO 9001:2015 and risk-based thinking beyond the standard’s official scope:
• An action that enrages important interested parties such as customers creates incentives and opportunities for other interested parties, namely competitors, to step in to “give the people what they want.”
• A company that jacks up the price of something it cannot patent, and/or for which substitutes are readily available, exemplifies the concept of what Sun Tzu calls “To begin by bluster,” but then “to take fright of the enemy’s numbers.” A hasty retreat from the pricing policy in question confirms that the company is in very serious trouble.
• A distribution system that eats up 55 percent of the astronomical list price is part of the problem and not the solution. Anything that does not produce must get out, and this applies to the distribution as well as the procurement portion of the supply chain.

About The Author

William A. Levinson

William A. Levinson, P.E., FASQ, CQE, CMQOE, is the principal of Levinson Productivity Systems P.C. and the author of the book The Expanded and Annotated My Life and Work: Henry Ford’s Universal Code for World-Class Success (Productivity Press, 2013).