Thinking straight about orphan drugs, Part 3.

In my last post, I argued that the benefits of the Orphan Drug Act are more elusive than commonly assumed. But what are its costs?

The Act’s seven years of market exclusivity operate like a tax—a very large tax—shared between insurers who pay for the orphan drugs and, to a lesser extent, the patients who take them. Through the magic of shared risk pools, private insurers pass the costs along to all of us in the form of higher premiums. The federal government and the states do the same for Medicare and Medicaid, through lower spending or higher taxes.

The magnitude of the tax is hard to estimate, but let’s give it a shot. For any given orphan drug, it’s the difference between the net present value of the money that the drug will earn over its seven years of market exclusivity and the net present value of the money it would have earned without those seven years. (I’ll ignore for now the Act’s substantial tax breaks for research.)

For some drugs, that figure is small. Take Pomalyst, which was approved in 2013 to treat multiple myeloma. It costs about $150,000 per patient per year and is prescribed to about 3,000 people in the U.S. But Pomalyst’s patents don’t expire until 2024, giving it an independent source of market exclusivity. Seven years under the Orphan Drug Act may offer it some protection in case of a patent challenge, but unless its patents are vulnerable, the Act shouldn’t make much of a price difference.

The Orphan Drug Act’s costs come into sharper focus with respect to drugs that no longer have patent protection. Consider 3,4-diaminopryne (3,4-DAP), which has been used for thirty years off-label to treat two rare neuromuscular diseases. A couple of drug companies have recently put 3,4-DAP through clinical trials and are poised to seek orphan drug approval from FDA. They’ve already done so in the EU, where they’ve jacked up the price from $1,600 to $60,000 per year—so high that the UK’S National Health System has refused to pay for it.

If the companies get orphan drug approval, they stand to make a bundle. Perhaps 2,000 people have these rare diseases. If the drug is priced at $100,000 per year—average for orphan drugs—there’s a potential payout of $200 million every year. The difference between the net present value of that revenue stream over seven years and the status quo is more than $1 billion.

Now let’s get back to the benefits side of the ledger. A generous working estimate is that people are willing to pay about $100,000 for an additional quality-adjusted life year (QALY). Our willingness to pay $1 billion for this “new” orphan drug implies that it should improve U.S. health to the tune of 10,000 QALYS.

But that’s impossible. The drug was already in widespread use. So what will we get for that $1 billion? Some clinical trials to demonstrate again the efficacy of a drug that a Cochrane review said was effective. That’s worth something—but $1 billion?

Even if the 3,4-DAP was new and wouldn’t exist without the Orphan Drug Act, remember that it’s only prescribed each year to about 2,000 patients. If you assume the drug will be used for next 25 years and discount appropriately, the drug would, on average, have to add 0.4 QALYs to each patient’s life every year to make it cost-effective. The drug may be good, but it’s not that good. Few drugs are.

* * *

Last year, FDA approved 41 orphan drugs for sale in the United States. Some of those—we don’t know how many—would have been developed even without the Orphan Drug Act. Indeed, some aren’t even new. For those drugs, the Act is a windfall—often a large one—to pharmaceutical companies.

Some of those drugs, however, probably wouldn’t exist without the Orphan Drug Act. A few may even be breakthroughs. But many are pretty marginal. They’re retreads of existing drugs or offer only small improvements over existing treatments. And orphan drugs are, by definition, used to treat relatively few patients, limiting the public health benefits they can confer.

In other words, even if the Act is working as it should, it channels a tremendous amount of resources into the development of niche drugs that command stratospheric prices. Is that really the best use of our money?

Oh, and the Orphan Drug Act isn’t working as it should. Drug manufacturers have discovered how to game it. I’ll talk about that in my next post.


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