A pharmaceutical industry trend seeking increased profits from medical treatments for rare disorders is colliding with a hospital push for greater discounts on those drugs.
Despite the relatively small number of medications for rare medical conditions—known as “orphan drugs”—such medications are increasingly seen as one of the most profitable components of the pharmaceutical industry, according to industry sources. A variety of factors combine to elevate the financial promise of orphan drugs, including longer exclusivity, an expedited regulatory path and the general lack of low-cost alternatives to the frequently expensive medications.
“There's an increasing recognition within the venture community and within big pharma that orphan drugs can represent attractive investment opportunities,” says Jonathan Leff, managing director at Warburg Pincus in New York.
The elevated financial outlook for orphan drugs was illustrated by a recent survey of the members of the National Venture Capital Association that found recent investment decreases in every area of biopharmaceuticals, except orphan drugs, and that was expected to continue at least over the next three years, according to Leff, a board member of the investor association.
“There is a perception that orphan drugs are relatively more attractive than some other areas and so that area of investment is growing whereas others are shrinking,” Leff says.
Another illustration of the increased focus on orphan drugs is the number of such medications receiving marketing approval from the U.S. Food and Drug Administration, as well as the share they represent of all drugs approved by the FDA. Twenty-six orphan drugs received FDA approval in 2011, up from only six in 2001, according to agency data. During at least the past five years, orphan drugs in 2011 also reached their highest point as a percentage of overall drug marketing approvals, or about 36%.
Such dominance of the regulatory approval process for drugs that by FDA definition treat conditions affecting fewer than 200,000 people in the U.S. is driven in part by the expedited review process for such medications, industry experts say. But it's also fueled by the trend of many broadly applicable treatments moving to generic formulations in recent years. Orphan drugs rarely have such competition and include some of the most expensive medications in the world, such as Soliris, a drug for blood disorders that costs about $500,000 for a one-year supply.
The potential to profit from such costly treatments is limited only by either the reluctance of payers or from the application of mandatory discounts.
Congress expanded a leading federal program requiring such drug manufacturer discounts as part of the 2010 federal healthcare overhaul; however, the expansion explicitly excluded orphan drugs. Regulators generally maintain that exclusion in proposed rules issued in mid-2011 to implement the law.
Use of orphan drugs to treat non-orphan diseases—an expanding market for orphan drugs—was included in the discount program.
Hospitals celebrated that proposed limited rollback of the orphan discount restriction and hope regulators retain it when they issue final rules later this year.
Hospitals and their congressional allies now are pushing to include orphan drugs in that mandatory discount program.
“It's been problematic for these hospitals because their patients are forced to travel sometimes several hundred miles just to get access to new and affordable drugs,” says Ted Slafsky, executive director of Safety Net Hospitals for Pharmaceutical Access. The alliance of about 800 not-for-profit hospitals and health systems was formed in 1993 to increase access to the so-called 340B program. The 340B program requires drugmakers to provide discounts on outpatient drugs to safety net providers.
Quirks in the history of the discount program allow safety net hospitals to acquire the lower-cost versions of the drugs when treating patients in outpatient setting but the cost of the drug for patients increases from 25% to 40% once their condition requires hospitalization, according to the SNHPA.
Rep. Cathy McMorris Rodgers (R-Wash.), a member of the House Republican leadership, introduced legislation in fall 2011 to remove the hospitals' orphan drug discount limitation to outpatient settings. “Our bill will charge the FDA with undertaking the common-sense reforms that are needed to keep America the world capital of medical innovation,” McMorris Rogers says in a written statement.
A Senate version is expected soon, according to supporters. However, the legislative outlook is uncertain and no imminent action is expected, according to a congressional staffer.
The most likely route to enactment, advocates of expanding the 340B discount program and others agree, is if Congress were to add the measure's language to a recent agreement by FDA officials and industry representatives to reauthorize the agency's marketing application fee structure. The agreement, which requires congressional approval, is expected to be one of the few FDA-related measures to clear Congress in the current election year.
Supporters of the expanded discount say they are optimistic Congress will enact it because such a move also would cut costs for drug purchasing in federal healthcare programs, which is seen as a growing priority on Capitol Hill.
“We recognize that it's a tough political environment out there and the drug industry is very powerful and nothing is easy to get accomplished in Washington,” Slafsky says.
The growing number of orphan drugs clearing the FDA has increased the number of patients who could potentially benefit from such treatments. Conversely, the frequently high-cost treatments are among the growing number of drugs that providers are struggling to help their patients afford.
Jeff Davis, associate counsel at the SNHPA, says the trend of orphan drugs constituting a growing percentage of FDA-approved drugs is worrisome because orphan drugs—a small cost within the healthcare sector—can become a significant cost for some hospitals.
“As more drugs become designated as orphan, that's just going to make it more and more difficult for safety net providers to be able to afford purchasing these drugs,” Davis says.
For example, an analysis of 18 critical-access hospitals in Minnesota and Wisconsin by the University of Minnesota Medical Center, Minneapolis, and the University of Minnesota College of Pharmacy found that only 4% of the drugs they bought in 2010 had orphan drug designations, but those medications accounted for 44% of the hospitals' drug spending.
“This indicates that drugs with an orphan indication tend to be very expensive,” says Charles Cooper, 340B manager at the University of Minnesota Medical Center and one of the authors of the study.
Drug manufacturers caution against federal policy changes that would create disincentives for further investment in the orphan drugs. The potential to-date for profits from orphan drug sales is what incentivized the recent investment and led to the surge in new treatments, pharmaceutical industry advocates say.
In his Oct. 24 statement at a hearing on the reauthorization of the Prescription Drug User Fee Act, Dr. David Wheadon, senior vice president of scientific and regulatory affairs at the Pharmaceutical Research and Manufacturers of America, urges regulatory changes “to further encourage research into novel treatments for patients with significant unmet needs today.”
Other drug industry experts say federal policymakers could learn from the orphan drug program and apply aspects of the FDA's approach to such drugs more broadly.
“You don't have a different regulatory standard but you do have specific incentives, which in terms of exclusivities and certain other things are of value to investors. And you do have a certain amount of market protection,” says Gillian Woollett, a vice president at Avalere Health, a Washington-based healthcare consultancy that focuses on regulatory policy, because unless another product is superior “you still hold your exclusivity.”
The most recent effort to apply lessons from the orphan drug program and one that could increase the number of pharmaceuticals with orphan drug designations is bipartisan legislation sponsored by Rep. Cliff Stearns (R-Fla.), chairman of the Energy and Commerce Oversight and Investigations Subcommittee. He introduced legislation in December to create an expedited FDA review process for drug treatments of conditions affecting even smaller numbers of people, described as ultra-orphan conditions.
Treatments for a disease or condition affecting 6,000 or fewer people could obtain marketing approval if their clinical trials establish that the drug affects a “surrogate endpoint,” which predicts a clinical benefit. A surrogate endpoint is an alternative—and looser—standard the FDA uses for orphan drug marketing approval, versus the standard used for other drugs.
Additionally, the legislation says that the FDA “shall not require clinical treatment data or other historical clinical data on the surrogate endpoint as a prerequisite to assessment of the surrogate endpoint under this subsection if such data are not available.”
Stearns says that part of the reason he introduced the bill is because he recently concluded that the FDA's approval rate for drugs and medical devices “has slowed immensely.”
“We found that the FDA has not used all the tools available to them to help bring new drugs to market to treat rare and ultra-rare diseases,” Stearns says in a written statement.
