Thinking straight about orphan drugs, Part 2.

As I said in my first post in this series, the Orphan Drug Act of 1983 sure seems like it worked. Over the past few decades, and in the last five years in particular, more and more orphan drugs have come on-line. Today, they account for one in three drugs approved for sale in the United States.

In general, the growing numbers of orphan drugs is taken to mean that “orphan drug legislation remains a critical part of the drug development process.” The assumption is natural. After all, we all know that the patent system will yield too few orphan drugs because of the restricted market for those drugs, right? That’s the premise behind the adoption of the Orphan Drug Act, and it’s one that holds sway today.

Notice, though, the premise is flawed. What drives drug manufacturers is the total amount of money they anticipate earning on a given drug. Total revenues, in turn, are the product of the price of the drug and the number of units sold.

For orphan drugs, manufacturers won’t be able to move that many units. But what if they can charge up the wazoo for the units they do sell? Due to a combination of market forces and legal obstacles, payers (public and private) find it nearly impossible to resist paying for efficacious drugs, however much they cost. The inelasticity of the market gives manufacturers extraordinary pricing power during periods of monopoly protection.

That pricing power helps explain why the median price of an orphan drug is a jaw-dropping $100,000 per year. For a market of 50,000 patients—well under the 200,000 cap for orphan designation—total revenue for a median-priced drug would be $5 billion per year. Yes, you read that right: that’s billion with a b.

Not all orphan drugs will have a market of that size. Nor will all orphan drugs command a $100,000 price tag. But lots of them will—and lots of them do. For those drugs, a brief period of market exclusivity would be more than enough to cover the costs of drug development, even under dubious and inflated estimates of those costs. Seven years of market exclusivity is just gilding the lily.

So you can’t tell me that we’d have no orphan drugs without the Orphan Drug Act. We might not have as many as we do today: as Aaron Kesselheim concluded in a 2011 review, “[t]he most methodologically rigorous studies of the Orphan Drug Act indicate that there was a response to [its] incentives.” But we’d still have some: as Kesselheim notes, “other market forces, such as anticipated revenue, may also have affected orphan drug development.”

To measure the effects of the Orphan Drug Act, you’d want to know how many orphan drugs would have been developed in its absence. Once you figured that out—and we aren’t close to doing that—you’d need to weigh the benefits of those new drugs against the social costs associated with their development. I’ll turn to that question in the next part in the series.


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