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05/15/2014

The Price of an Orphan (Drug)

The editors of Nature Biotechnology are concerned that the UK’s National Center for Clinical Excellence, codenamed “NICE,” asked a drug company to justify a very high price for a very effective drug for a very rare disease, by asking the company to explain how much it cost to develop the drug to begin with.  These rare diseases are called “orphan drugs,” and incentives are written into law to induce pharmaceuticals and biotech companies to develop drugs to treat them.

In this case—How rare a disease?  By one way of estimating, about 2 in a million.   How effective?   About 50%-75% of people treated in clinical trials had complete responses lasting up to about 2 years.  (That’s awfully telegraphic; interested readers should follow the link to read the prescribing information.)  How expensive?  Over half a million dollars a year.

The editors fret that this request for development costs is unprecedented for government or private payers.  Because so many experimental new drugs don’t work, the successes have to pay not only for themselves, but also for all the effort spent on the failures.  (That is why the stated cost to develop a new drug—the better part of a $1 billion—is so stunningly high.)  This need to recover costs to stay in business might mean that more scrutiny of by-project development costs would encourage inefficiencies; that is, inflated cost quotes to justify high (and, by implication, inflated) prices.  Companies, the editors say, account for their R+D spending in the aggregate, breaking it down by departments, not by individual drug products; a chemist is hired for many projects, for example, not just one.  Finally, if payers restrict prices for highly effective orphan drugs, companies won’t be able to raise the money to discover and develop them.  Venture investors willing to take big risks for big rewards will decide there are better things to do with their money than support some clever biotech startup, and big companies, who have a lot of employee mouths to feed and a lot of investors (including, say, pension funds and college endowments) to satisfy with returns on investment.

Are the companies price-gouging in these cases?  I wouldn’t be too quick to endorse that charge, although one could argue that gouging is in the eye (or the wallet) of the allegedly-gouged.  After all, we do price discovery in other cases (think of the last time you prepared to shop for a new car by trying to get a read on the dealer’s invoice cost), and one shops around when one can.  When one can’t, one is sort of over a barrel.  That’s exactly the sort of disadvantage that many, if not most people, intuitively reject as unjust—especially when the one over the barrel is a sick person visiting the doctor, whose calling entails being able to prescribe effective treatment if it exists.

How legitimate are the editors’ concerns?  Well, I know from experience that cost accounting by drug program is fairly routine in drug licensing deals between companies, when one company wanting to acquire rights to a drug needs to be sure it will make money after paying the initiating company according to a set of attractive financial terms.  So it can be done.  Would that cost be increased by divvying up fixed costs, like salaries for a wide range of personnel?  Yes.  Too much so?  That would be a haggling point.  Would there be fewer orphan drugs developed?  If the reward came down too much, yes.  How much is too much?  I can’t say.  Perhaps a nation’s health “system” (I use the term loosely) would have to “do that experiment,” so to speak—try it and see what happens.

My contributions to this blog have visited the issue of “just pricing” of new drugs from time to time.  Maybe we should think in terms of “just pricing processes” that might give payers a reasonable amount of bargaining power.  But the devil is certainly in the details, and identifying (much less putting dollar amounts to) the most just responses to those details would certainly be thorny.  Look at the hue and cry over the pressure payers put on payments to doctors and hospitals.  And we might have to address, as a matter of justice, how much society at large values being able to treat the distinct minority of its members who have very rare and otherwise-untreatable diseases.  And we might have to face that question in the foreseeable future.

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