Patients, Price, and Profit: Are Incentives in Balance for Orphan Drugs?

Adam Hutchings
Managing Director
Dolon Ltd.


are diseases represent one of the biggest areas of unmet health needs in developed countries. Of approximately 7,000 identified rare diseases—many of which are severe—only five percent have a licensed treatment available.

This great health need can only be met through a large and sustained investment in biopharmaceutical research for rare diseases. For this to happen, it requires a sustainable business model for orphan medicines that makes such research economically viable for biopharmaceutical companies and investors. What does that business model look like?

A Sustainable Business Model

The economics of drug development are complex, but, fundamentally, they involve the balancing of uncertain income from drug sales in the future against the costs of drug development incurred in the present. Future income from development assets is estimated by combining the number of potential patients who could be treated, the likely price of the drug, and the expected duration of intellectual property (IP) protection. Crucially, when drug research investment decisions are being made, this potential future income has to be adjusted for the probability of the development programme being successful – the chances of which are very low (approximately one in ten) for all medicines, both rare and otherwise. In contrast, research and development (R&D) costs, expended many years in advance of a possible approval, are both large and certain.

Whether or not a particular drug development programme or a class of diseases is economically viable depends on the interplay between these factors. Historically, rare diseases were not economically attractive, because the patient populations were very small and the projected income insufficient to balance the cost and risk of development.

Improved Balance Between Risk and Return Drove R&D Investment

Orphan drug regulations, introduced in the US, EU, and Japan from 1983 onwards, explicitly recognised this economic dynamic and sought to shift the balance of incentives to increase investment in rare diseases. The regulations achieved this in two main ways: (1) reducing the cost of development through tax breaks, and (2) improving IP by offering marketing exclusivity for between six and ten years, depending on jurisdiction.

As helpful as these reforms were, perhaps the more important factor in stimulating investment in rare diseases was payer willingness to reimburse orphan drugs at high per-patient prices as well as the subsequent commercial success of early orphan drugs such as Cerezyme, Tracleer, Novoseven, Gleevec, and more recently, Soliris.

The combination of financial support to development and higher willingness to pay for orphan medicines led to a boom in R&D investment in rare diseases. By 2017, over 7,000 orphan designations had been awarded to development assets across the US, EU, and Japan.

New Backlash Against Orphan Medicines Has Shifted Balance of Incentives

While orphan regulation has been successful, complaints have been increasing that incentives are too generous. Specifically, it is charged that orphan drug prices are too high, patient access is incomplete, and manufacturers make too much profit. This has caused the political temperature to cool around orphan drugs, leading to tighter control of price and access.

In the US, the most tangible consequence of this shift has been the halving of orphan R&D tax credits as part of the 2018 tax reform bill.

In Europe, incentives included in the 2000 EU orphan regulation are also subject to scrutiny, following a 2016 Council of Ministers declaration that questioned the pricing and value of orphan medicines. The EU Commission is subsequently undertaking a review that could lead to a reduction in the marketing exclusivity period for such treatments.

Yet, while this threat to exclusivity periods lies in the future, constraints on orphan price and reimbursement in Europe have been tightening for years. Indeed, the shift in payer sentiment can be traced back to the financial crisis. Prior to the great recession, the relatively small number of orphan medicines approved in Europe, combined with favourable public finances, led to a benign environment for orphan reimbursement decisions. In France in 2007, 80 percent of orphan drugs were given an ASMR I-III, the highest levels of added value. Since then, in more austere times, payer willingness to reimburse orphans has decreased. In 2015, only 16 percent of orphan drugs received the highest ASMR ratings.

Budget caps have also become routine for orphan medicines in most European countries, significantly constraining revenue and leading to substantial rebates in situations where the threshold is exceeded. And in many instances, orphan drugs are not reimbursed at all. A 2016 report from the Office of Health Economics found that in England, Spain, and Italy less than 60 percent of licensed orphan drugs were reimbursed.

Diminishing Incentives in Europe: Further Pressure May Undermine Patient Access and Rare Diseases Investments

European legislators are considering further reducing orphan incentives at a time when payer action is starting to bite. Orphan manufacturers are increasingly finding that potential returns from European countries—constrained by caps and rebates—are insufficient to justify investment decisions.

This is leading to a situation in which rare disease R&D investment is increasingly underwritten by expected US sales. To date, despite widespread political and media pressure on drug pricing, US payers have routinely covered orphan medicines. Yet the reliance on US expenditure to support orphan investment is not sustainable in the long term.

Worryingly, some larger companies, such as GSK and Astra Zeneca, have recently decided to divest from rare diseases, and it is large companies like these that will be necessary to substantially change the prognosis for rare disease patients.

Savings Through Generics and Biosimilars Will Reduce Financial and Political Pressure on Orphans

Perhaps the biggest driver of payer constraints on orphan reimbursement is budget sustainability. Payers are concerned that orphan costs are growing at a time when expenditure on non-orphan medicines has been largely flat, leading to an increase in the orphan share of total spending. This shift in resources is not surprising; indeed it is essential if the unmet need in rare diseases is to be met. But it is important that the mechanisms that maintain the long-term sustainability of health system drug budgets, especially falling prices at the loss of IP, are seen to be working in rare diseases. To date, the picture is not clear.

Older orphan products appear to be continuing to grow in revenue, even after the loss of marketing exclusivity or patent protections, raising concerns about whether generics and biosimilars will penetrate the rare disease space and release funding to finance new innovation.

For small-molecule orphan drugs, the concern is probably unwarranted. For example, after the entry of generic competition for imatinib in 2016, expenditure fell approximately 65 percent within one year. But for large-molecule orphan drugs, there is more uncertainty. So far, there has been no precedent of biosimilar competition in orphan medicines. But this situation may be changing. Biosimilars of eculizumab are being developed by companies like Amgen, and other orphan products with lower sales may become targets as the biosimilar market becomes more established.

For now, the fear is that an inability to release savings from older products at the loss of IP is leading payers to seek greater savings from new orphan medicines. This is problematic, because it is the success of these new products—rather than the old products—that influences investment decisions in new development programmes in rare diseases.

Responsibility for the sustainability of the orphan drug business model therefore falls on both manufacturers and policy makers. The former must accept that the fundamental contract between industry and society dictates that innovation is funded on the condition that prices fall when patent protection expires. The latter must recommit to the goal of meeting the need in rare diseases and refrain from diminishing incentives at the very moment when the promise looks greatest.