Is orphan drug pricing blowing a bubble? The unique situation of orphan drugs and why high prices will likely persist

Abstract

The Food and Drug Administration (FDA) data show that there are a growing number of applications and approvals for orphan drugs every year. Newer orphan drugs are generally sold at high prices, which has raised the question about the sustainability of the orphan drug market and the possibility of a bubble. As more orphan drugs enter the market, reimbursement policies from payers could shift away from full reimbursement. But the orphan drug market is not a free market. It is open only to specifically indicated drugs for few numbers of patients. The orphan drug market is unique with its value to patients, comparative costs to hospital stays, time of development, high monetary risk, high entry standards (the FDA marketing approval for orphan drugs), small markets, willing payers and strong patient advocates. Here, we examine classical definitions of bubble assets, and look at specific examples of orphan drugs that seem to be overpriced compared to cost estimates. Currently, there is no evidence for bubble formation in orphan drug pricing.

1. Introduction

To give companies an incentive to develop and market orphan drugs for rare diseases, the US Orphan Drug Act was signed into law in 1983. The act established greater commercial and research and development (R&D) incentives for companies developing drugs for rare diseases, which included a 7-year exclusivity period regardless of patent rights, shorter development timelines, fewer FDA fees, funding aid for trials and more tax credits [1]. Before 1983, orphan drugs were approved for only 10 indications; but in the 30 years since then, new orphan drugs have been approved for over 400 indications. Still, 400 is small compared to the 7,000 known rare diseases [2]. The high pricing for these drugs began in 1994 when Genzyme introduced Cerezyme (Imiglucerase) to the market for type-1 Gaucher's disease and began to charge $200,000 per patient, per year. This has since led to high prices becoming the norm for new orphan drugs, and developing orphan drugs has become a new business model for big pharmaceutical companies [3]. Evidence for this can be seen in Table 1, which lists the ten most expensive orphan drugs in the United States.

Table 1. The 10 most expensive orphan drugs sold in the United States.

Drug name	Cost per Patient/per year($)	Indication
Soliris	409,500	Proxysmal Nocturnal Hemoglobinuria
Elaprase	375,000	Hunter syndrome
Naglazyme	365,000	Maroteaux–Lamy syndrome
Cinryze	350,000	Hereditary angioedema
Myozyme	300,000	Pompe disease
Gattex	295,000	Short-bowel syndrome
Arcalyst	250,000	Familial cold autoinflammatory syndrome & Muckle–Wells syndrome
Fabrazyme	200,000	Fabry disease
Cerezyme	200,000	Gaucher's disease
Aldurazyme	200,000	Hurler syndrome

Herper M [20].

On top of this list is Alexion's Soliris (eculizumab), which costs $409,500 per patient, per year and is life saving for paroxysmal nocturnal hemoglobinuria. The first gene therapy Uniqure's Glybera (alipogene tiparvovec), which has been recently approved for gene therapy for lipoprotein lipase deficiency (LPLD) in Europe is not on the list because it has not yet been approved in the United States. However, the estimated price by the company uniQuire is $1.6 million per patient. Because Gylbera would be a one shot administration of the therapeutic, the projected price is based on some multiple of the yearly costs of the alternative therapy, enzyme replacement. Such pricing raises questions about the upper limit to the pricing of orphan drugs. The future of this market is currently uncertain, and the sustainability of these prices concerns how medical reimbursements rates will change to unmet these costs. The increasing prices for orphan drugs lead to the question of the existence of an economic bubble in orphan drugs. Here, we attempt to analyze whether there is a pricing bubble or not in orphan drugs.

2. Trends in orphan drugs and payer reimbursement

Due to the Affordable Healthcare Act of 2011 and the increasing costs of healthcare in the United States in recent years, payers, patients and the public have become sensitive to the high costs of treatments. McCabe et al. [4] have proposed that the high price of orphan drugs is not sustainable in the medium to long term for payers. Several factors play into their analysis, but chief among them include an anticipated increase in the number of rare diseases being discovered thanks to genetic profiling and the increasing number of new molecular entities probed in rare diseases [4]. A better understanding of diseases thanks to the greater use of biomarkers has led to further reclassification of common diseases into less common disease subtypes. Diseases are classified as being rare if they have fewer than 200,000 patients. This classifies many cancers and many new disease subtypes as rare by definition. If new entrants into the market have premium priced drugs in order to serve an unmet need, it will create problems for payers (insurance, government programs and some patient advocate groups). Hyde et al. [5] argued that we have reached a “tipping point” in pricing as insurance companies that were once able to cover the high price of orphan drugs due to their relative rarity among the patient population might have to reconsider their position as more patients qualify for orphan drug treatments. Additionally, different reimbursement models may need to be implemented for drugs that provide marginal improvements in disease state versus drugs that actually provide a cure for a disease. There must also be consideration for the future of drugs priced near $1 million, as the precedent with Glybera overseas could see similar costs make their way to the United States.

However, pharmaceutical advocates argue that high prices are justified by a number of factors: i) the fact that developing an orphan drug is high risk and high cost; ii) by definition the number of rare disease patients and thus the market is small; iii) existing treatments involving hospital visits and procedures can be more expensive then new drugs; and iv) there is a strong demand for orphan drugs by patient advocates. DiMasi et al. [6] estimated the pretax cost of drug development was $615 million for preclinical development and $626 million for clinical trials. Scherer comes to a similar conclusion and estimates that R&D costs for both preclinical and clinical trials cost $403 million per new drug [7]. Assuming that with the benefits of the ODA, a break on taxes, the FDA fees and a shorter time of development, the estimated cost of a new orphan drug is still $375 million to $1,241 million. Therefore, the rare disease market has to be heavily priced or subsidized to incent companies to develop new drugs and be profitable.

The current number of orphan drugs is still a small fraction of all drugs needed for rare diseases and there is plenty of opportunity for growth. The price of most orphan drugs is under $50k per patient/per year, but many newer drugs cost over $200k per patient/per year as seen in Table 1. Although some drugs can justify their high price, others may not [8]. As a result, there is already precedence in Europe to tie reimbursement rates to clinical effectiveness. An analysis of the reimbursement of Laronidase (a drug for muccopolysaccaharoidosis [MPS I]) among countries in the European Union (EU) found that some countries did not reimburse the drug based on cost-effectiveness, while others approved the drug for use on a case-by-case basis pending the availability of funds [9]. Additionally, drugs costing over the $50,000 tend to come under greater scrutiny from payers in the EU with regard to cost effectiveness. In the United States, Medicare functions as a government payer and is similar to the single payer systems in the EU. It is likely that similar trends will be seen in the United States with the advent of healthcare reform and an eye toward cost savings. With the influence Medicare has, changes made by Medicare could influence reimbursement rates of other payers nationally.

3. The formation and propagation of bubbles in asset prices

So is orphan drug pricing experiencing a bubble? Asset bubbles are generally defined as sharp increases in asset prices that are followed by price crashes and subsequent declines in economic activity [10,11]. They are generally believed to be initially sound investments; however, the availability of easy credit and the over extension of collateral can often create a feedback loop that can cause a bubble [11]. All asset bubbles exist within the realm of the free market and generally follow the efficient market hypothesis (EMH) of Malkiel, which states that when new information about an asset becomes available, asset prices change immediately to reflect the new information [11]. The key to this theory is that prices are able to change freely and are not fixed artificially [12]. In order to understand how this applies to the orphan drug industry, we must redefine our definition of the players such that we can make a meaningful comparison to the traditional free market. One can think of pharmaceutical companies as investors in the orphan drug industry the same way one can look as traders investing in the stock market. Additionally, we can look at insurance companies as the invisible hand that controls the trends in the market. However, this analogy stops here, as orphan drugs are fundamentally different from traditional markets due to the high barriers to entry and the fact that individual drugs are approved to treat only one specific indication for an unmet need. This means that orphan drugs as assets do not compete against each other as would normally be the case in a free market environment. They are, however, competing against other drugs for the same indication in an artificially created market. Because of this, the price of each orphan drug is governed by the laws of supply and demand for an individual indication, and not by the value of similar assets. Patient preference for a drug that works for them will out-weigh even the law of supply and demand.

4. A possible bubble?

Asset bubbles can be defined as a situation where an asset's price is much higher than its fundamental value. Several authors have stated or hinted that there is a case for the formation of a bubble in orphan drugs [13,14]. Consider one of the newest available therapies for a rare disease, NPS Pharmaceuticals' Gattex (teduglutide), also known as Revestive in Europe. Gattex was FDA approved on December 21, 2012 for use in the treatment of short-bowel syndrome (SBS), a condition affecting less than 20,000 individuals in the United States, and costs $295,000 per patient/per year. SBS is caused by either congenital defects or the physical resectioning of the intestines, and causes a decrease in the absorptive surface area of the intestines. Individuals suffering from SBS are often dependent on total parenteral nutrition (TPN) treatment, which involves daily intravenous infusions of nutrients [15]. Gattex increases villus height, mucosal surface area and intestinal blood flow, thereby promoting improved intestinal absorption and decreasing the need for TPN therapy. Hence, Gattex seems promising as a therapeutic option, but one has to question whether or not the drug is overly priced. The costs associated with TPN therapy range from $100,000 to $150,000 per patient/per year [15]. Phase III trials of Gattex revealed a 35% reduction in the TPN volume required per week by SBS patients in the treatment group, and 6% of patients were completely weaned off of TPN [16]. According to Morgan Stanley, this reduction TPN volume allows for approximately $67,000 in cost savings per patient/per year [17]. Morgan Stanley projected that Gattex would be priced at $85,000 per patient/per year, but the $295,000 price tag of the drug creates a $210,000 discrepancy between the price Morgan Stanley projected and the price that NPS Pharmaceuticals set in early January 2013 [17]. Could this price not be based directly on cost savings, but rather be inflationary and contributing to a pricing bubble?

5. Will prices drop?

There may be price drops due to the introduction of biologics and or generics copying orphan drugs for a particular indication. Payers may attempt to tie the reimbursement rates of orphan drugs to their efficacy, which could have an effect on those drugs that only marginally improve patient outcomes. The idea of “market resistance” to pricing recently came into the vocabulary when doctors at Memorial–Sloan Kettering Cancer Center objected so strongly against the high price of Sanofi's Zaltrap (Ziv-aflibercept), which oncologists rated no better than its less costly competitor Avastin (bevacizumab) that Sanofi cut the price of the drug in half [18]. However, demand for drugs that are very effective such as Soliris is unlikely to decrease independently. As noted earlier, a key difference between the pharmaceutical industry and traditional assets is the definition of the market and whether or not it is able to operate freely. Because orphan drugs have high barriers to entry and can only be used for approved indications, they operate within the framework of an artificially created market. The price of each individual drug is thus determined by the law of supply and demand, and not affected by the price of other unrelated drugs. However, the main concern of a bubble in orphan drugs assumes that such a bubble would eventually burst. Traditionally, bubbles burst due to a loss of buyer confidence, but insurance companies and patients will always want a treatment for their disease if it is effective and available. While we see that new entrants priced to exert some downward pressure on prices, we do not see the deflationary pressure that might be expected. Treatments for type-1 Gaucher's disease provide a good example of this. Cerezyme (imiglucerase) was released in 1994 at a price of $200,000 per patient/per year, while VPRIV (velaglucerase alfa) was released in 2010 for 15% less than the price of Cerezyme, and Elelyso (taliglucerase alfa) was released in 2012 for 25% less than the price of Cerezyme [19]. Thus, even when there is competition among orphan drugs for the same indication there, does not seem to be great demand for drugs at lower prices. Patients seem to prefer to stick to their initial treatment even if it is more expensive than a similar competitor. This is most likely the result of a payer–user disconnect stemming from the fact that patients are not generally the payers but are the users. They are not as concerned about drug pricing as they generally only pay a fraction of the final cost. Thus, although the prices of some orphan drugs may decrease due to competition for the same indication, it is likely that the market as a whole will still see drugs with prices in the range of hundreds of thousands of dollars.

6. Expert opinion

Although there have been voices raised on the Internet and elsewhere with concerns about the pricing of orphan drugs, and the fear of a bubble about to burst, such fears appear to be unfounded. Because of the peculiarities of the rare disease market, with its high entry barriers, high specificity, strong patient advocacy groups, and patient preference, price bubble formation does not seem to happen. Current high prices can be attributed more to supply and demand then to any other factor. The prices are based on the costs of any alternatives if available. Thus, there is no evidence yet that orphan prices have reached a “tipping” point.

Declaration of interest

The authors state no conflict of interest and have received no payment in preparation of the manuscript.