By Bill Frezza
April 3, 2012 | The Skeptical Outsider | It's not a crisis. Yet. Bigger health care issues loom. Right now. There are still fortunes to be made. While it lasts. But one could hardly ask for a more interesting case study on the collision of medicine, economics, and democracy than the explosive growth of so-called orphan drugs. These are drugs designed to extract extraordinary amounts of other people's money serving the needs of tiny, desperate patient populations.
The figures are indeed large: $500,000 per patient per year in the case of the current record holder, Soliris, which treats a rare blood cancer; $30,000 per year for the “cheap” stuff. And many of these, particularly the enzyme replacements, are treatments, not cures. Which means that the health care system bleeds money for the life of the patient.
Fatal but rare diseases are an integral part of the human condition. Experts estimate that there are more than 6,000 serious maladies that each affect less than 1% of the population. It's a difficult number to digest because it seems to imply that we must all be sick. Then again, it is certainly true that every one of us will die of something someday.
The interesting question is: How much is "society" willing to spend to forestall that day, for whom, and why? Framing the question and seeking a mechanism for its solution is the hardest part of the problem. Unfortunately, dodging the question—in a cultural milieu where the notion of health care as a “right” is ascendant—seems to be the order of the day.
The Orphan Drug Act of 1983 was designed to encourage pharmaceutical manufacturers to develop drugs for diseases that affect less than 200,000 Americans. While many industries serve niche markets without special government encouragement, few face the extraordinary regulatory barriers that pharmaceutical companies face. These barriers add hundreds of millions of dollars to the cost of product development. Recouping these costs—including costs of products that fail—traditionally forced the industry to focus on large markets with blockbuster potential.
So Congress, in response to the clamoring of advocacy groups, decided to: a) lower the procedural barriers for the approval of drugs that are awarded orphan status; and b) grant seven-year market exclusives, allowing manufacturers to command extraordinary prices. And, oh, by the way, we've all been signed up to pay for it through both Medicare reimbursement policy and insurance mandates.
Making Hay While the Sun Shines
It took a while, but orphan drugs are now the hottest segment of drug development. Big Pharma has become particularly adept at "slicing the salami" to the point where more and more drugs are awarded orphan status. Drugs that treat multiple orphan conditions have become billion-dollar blockbusters in their own right. All while serving tiny patient populations.
The good news is that thousands our fellow citizens who otherwise would have died are still with us. Every survivor story warms the heart. Each advocacy group that achieves success encourages three more to spring up. Social media spreads the word, knitting pockets of isolation into communities—vocal communities, ready to work the levers of democracy.
Economist Frederic Bastiat's allegory of the "seen and unseen," originally formulated to challenge protectionist trade policy, frames the problem. When benefits are concentrated and visible and costs are spread across the population as a whole, buried in a sea of other costs, politicians become quite skilled at fishing for votes with your money.
The total cost to the nation's health care system is still down in the single-digit percentage range, too low to set off alarm bells. But it's growing fast. In 2011, 37% of new-drug approvals were for orphan drugs, the largest portion in the three decades since the FDA started offering incentives to develop treatments for rare diseases.
As Big Pharma struggles to deal with looming patent cliffs and declining R&D productivity, the orphan premium pricing bonanza is attracting a lot of attention. Estimates indicate that if current trends continue, orphan drugs can become a trillion-dollar business—larger than the entire global pharmaceutical industry today.
It gets scarier. The normal mechanisms that encourage manufacturers to invest in a cycle of cost reductions—which in turn lead to price reductions that help expand the market, increasing profits even as prices decline—are entirely absent when prices are fixed and costs are paid for by someone else. Demand is inelastic for maintenance drugs without which patients will die.
The only way out of this economic box canyon is profit regulation, which ultimately leads to consolidation and then nationalization. Which leads to stagnation. Which is how these stories usually end because if something can't go on forever, it won't.
All of this is playing out just as our health care system is moving toward a regime where therapies will have to be economically justified (please don't call it rationing). The process has already started in Europe, where it has become the norm for cash-strapped governments to deny or delay coverage for new therapies.
Our turn will come. When it does, orphaned R&D dollars could be the last nail in Big Pharma’s coffin.
Bill Frezza is a Fellow at the Competitive Enterprise Institute and a Boston-based venture capitalist. He can be reached at email@example.com. If you would like to subscribe to his weekly column drop a note to firstname.lastname@example.org.