In response to a scathing report by Kaiser Health News, Senator Charles Grassley has announced an inquiry into the exorbitant prices for orphan drugs. Now seems like a good time to highlight my series, published at The Incidental Economist, on how to think straight about orphan drugs:
- Background on orphan drugs and the Orphan Drug Act
- Has the Orphan Drug Act worked?
- The costs of the Orphan Drug Act.
- Gaming the Orphan Drug Act, Part 1.
- Gaming the Orphan Drug Act, Part 2.
- The Orphan Drug Act’s enormous tax incentives.
As a bonus, I’m also linking to a short, draft paper on orphan drugs that I compiled during my stint at the World Health Organization. It hasn’t found a home yet, but I’ll try to get it published soon. Here’s the takeaway:
Some orphan drugs are immensely valuable, but many of the most valuable would have been developed even in the absence of orphan drug legislation. At the same time, manufacturers can receive orphan drug approval for repurposed drugs and for drugs that are sold to large numbers of people, which in turn fuels high prices for orphan drugs. Those prices strain pocketbooks in the developed world and leave patients in low- and middle-income countries with no way to access them. The costs of orphan drug laws may well outweigh their benefits; at a minimum, reform is needed.
In particular, terms of regulatory exclusivity should end when a drug is prescribed to a patient population exceeding the orphan-drug threshold—in other words, when the drug is no longer an orphan drug. EU law already allows a reduction of the exclusivity period to six years when a drug is deemed sufficiently profitable, but the authority has not been exercised. In addition, exclusivity should be available only where a manufacturer has developed a genuinely new compound, not when it has repurposed an old drug.
Manufacturers should also be required to pay back R&D subsidies once drug sales exceed any plausible estimate of development costs. In Japan, for example, manufacturers must repay R&D subsidies for drugs with annual sales that exceed 100 million yen (Wellman-Labadie 2010). The same approach should be adapted elsewhere.
It is crucial to recognize, however, that reforming orphan drug laws may not much reduce the prices of orphan drugs. Most would still be patented and the demand for the drugs would still remain high. To reduce prices, payers will have to consider the value of the drugs that they purchase. Where an orphan drug is not cost-effective—where yields only incremental health improvements at an enormous price tag—payers must be empowered to say “no.” Some governments have taken steps in that direction. Sweden, for example, has declined to pay for about half of newly approved orphan drugs (Garau 2009). If a critical mass of developed nations followed Sweden’s lead, drug manufacturers would come under considerable pressure to cut their prices.