The Exorbitant Costs of Orphan Drugs

The Wall Street Journal ran an article this week on the unintended consequences of the Orphan Drug Act of 1983. (Now available free on the web here. )

The Orphan Drug Act was meant to facilitate production of drugs for rare diseases. A product granted orphan drug status by the US Food and Drug Administration (FDA) gets seven years of patent-like protection, without the need to go through the patent application process. Orphan drug status can be given to a product already on the market. Orphan drug status also gives companies tax credits for research and development, grant money for drug testing, and assistance in getting products approved. Furthermore, it is harder for generic drug companies to gain approval to market generic versions of former orphan drugs than of drugs that go off patent.

Although the law was envisioned as likely to apply to only a few products, there are now 260 orphan drugs on the US market, with 1400 in development. "Today, nearly half of all drugs produced by biotech companies are for orphan diseases."

The Wall Street Journal showed that the protections afforded by the Orphan Drug Act enabled pharmaceutical and biotechnology companies to make huge profits off orphan drugs, often by charging staggering prices for them.

• "Last year, Genzyme Corp. a Cambridge, Mass. biotech firm, posted sales of $840 million on its drug for Gaucher disease, which affects fewer than 10,000 people world-wide. Treating the average patient costs $200,000 annually, the company says. But the price of the drug, dosed by weight, can run as high as $600,000 a year for adults on the higher of the two recommended doses." The Journal documented how this drug was first developed at the US National Institutes of Health (NIH), and a contract to manufacture the drug was given to Genzyme. Genzyme first justified the drug's price because it was produced with difficulty, from human placentas, of which 22,000 were required to make one adult's yearly supply. However, an Office of Technology Assessment study estimated that Genzyme only spent $29.4 million on drug development, because most of the initial work was done by the NIH. Furthermore, in 1994, Genzyme began making the drug using genetically modified cells. The CEO of Genzyme, Henri Termeer "declines to say what the production cost is today." When asked why the price is not lower, he responded, "What's the difference between charging $200,000 or charging $175,000 to a patient? No one can afford it without insurance." The current director of the FDA Office of Orphan Products, Marlene Haffner, commented, "I just find it unconscionable that someone can charge that much."
• "Genentech received orphan-drug protection in 1985 for its first drug, human growth hormone, to treat children who weren't growing properly because of a hormone deficiency - a population of about 20,000 in the US. Revenue grew rapidly as the drug became more widely used. Last year, 19 years after the first version came to market, the drug yielded Genentech revenue of $354 million."
• "In 1999, BioMarin Pharmaceutical Inc., a California firm, raised $67 million in an initial public offering based mostly on the promise of a single orphan drug still in clinical trials - a potential treatment for a rare genetic disease called mucopolysaccaridosis I. Fewer than 4,000 people in the developed world are estimated to suffer from the disease...." "BioMarin, in a joint venture with Genzyme, Inc., brought the treatment to market in 2003 at an average cost of $175,000 per patient each year. The joint venture is expected to have sales of about $70 million this year."
• "Orphan-drug status can also be given to older medicines, if they are being used in new ways." "Calgene Corp. brought a thalidomide pill to market at the price of $6 a pill in 1998 and has since raised the price to about $53. Though thalidomide has been around for decades, it received orphan-drug status for its use in treating a side-effect of leprosy, then later for a certain kind of cancer [multiple myeloma]. The drug is so inexpensive to make that it is sold by other companies in Brazil for seven cents a pill." "The company's chief executive, John Jackson, raised the price - not because it cost more to make or market, but because, he says, many cancer drugs were priced much higher." "A new orphan drug, Velcade, came to market for the same cancer in 2003. Millennium Pharmaceuticals Inc., of Cambridge, Mass., which says it spent many years and millions of dollars developing Velcade, priced it at about $4,400 a month. Mr. Jackson saw the price of Velcade as an opportunity to raise the price of his company's drug further." (See our previous post on thalidomide here.)

"All we wanted to do was make products available for patient who had these rare diseases," said Marion Finkel, former head of the FDA Office of New Drug Evaluation, who wrote to recommend incentives for orphan drugs in 1979. Representative Harvey Waxman, who supported the Orphan Drug Act, said "we did not expect to see thie high cost of orphan drugs."
The article noted that the cost of orphan drugs is now an important part of the huge and growing national cost of health care. For example, "annual spending on specialty pharmaceuticals - the term health-insurance providers use for biotech medicines that treat smaller patient populations, including orphan drugs - rose 23% per member from 2002 to 2003, according to a study funded by the Blue Cross and Blue Shield Foundation on Health Care."
"These companies try to bargain with biotech companies, as insurers do, to get discounts by buying in volume or buying several products. But because there isn't much competition and the markets aren't big, there's less room to negotiate discounts."
The high cost of orphan drugs can be devastating for small businesses who can see their total health insurance bills soar when a single employee starts requiring one of these drugs. A health insurance consultant "says he often hears from people who say they have been targeted for layoffs because of the high cost of their medicines. It's illegal to fire a person because of health costs, but ... it can be hard to prove that was the reason a worker was terminated."
The exorbitant prices of some orphan drugs seems to be an unintended consequence of the way the Orphan Drug Act was written. Although the current director of the FDA Office of Orphan Drug Products noted, "we live in a free country," the Orphan Drug Act clearly did not lead to anything resembling a free market in the products it protected. But it has taken over 20 years for the unintended consequences of this well-intentioned but badly designed law to be noticed. We'll see how long it takes for it to be changed.
This should be a cautionary tale for those who advocate more direct intervention by governments in health care markets.