Tiger in the Fiscal Room: Beware the Increasing Cost And Number of Orphan Drugs

While Congress worries about physicians’ salaries and employers bemoan the cost of imaging, it’s orphan drugs that might deserve most attention

Earlier this year, NPS Pharmaceuticals surprised nearly everyone who was eagerly waiting for the drug maker to start marketing its recently approved Gattex treatment for short-bowel syndrome, a rare disease in which nutrients are not properly absorbed because a large section of the small intestine is missing or has been removed.

In remarks to Wall Street analysts, NPS executives unexpectedly announced that Gattex would cost $295,000 per patient per year, roughly three times what the company had signaled only weeks earlier. And instead of a potential patient population of as many as 15,000, the pool was now estimated to be between 3,000 and 5,000.

The price was increased after NPS compared the results of several prevalence studies with estimated patient headcounts at several large home-infusion companies. That left the drug maker with a much smaller universe of potential patients than forecast previously, although the lower number also placed Gattex in the so-called ultra category, which can command a higher premium.

“Yes, it was very late in the game when we came up with this surprising number, but Gattex is not unique,” says François Nader, NPS chief executive officer and president. “But it’s not unusual to have a dichotomy between what those [prevalence] studies give you and the actual addressable population” that was obtained after extrapolating patient data and updating forecasts.

“But we don’t have the luxury of running comprehensive and multiple epidemiological studies. This is an art and a science. We talked to payers to estimate the burden of illness based on their data and tried to answer several questions: What does the drug offer to mitigate the condition and meet an unmet medical need? Does it help lower overall health care costs and improve quality of life?”

Sweet spot

These questions speak to the so-called value proposition, that hard-to-define sweet spot between cold calculation and actual benefit. And this proposition is increasingly being scrutinized and refined as more orphan drugs win approval from the Food and Drug Administration and are launched at ever-higher prices that are worrying managed care plans and employers.

Last year, the FDA approved 13 new molecular entities as orphan drugs — one third of the 39 drugs approved that year. This was the largest number of drugs to win this designation in the past seven years. Already this year, two newly approved treatments were granted orphan status by the FDA.

FIGURE 1 Orphan disease designation by the FDA, 1984-2010

As of October 2011, a total of 1,795 projects with FDA orphan designations were in development

Significantly, five of the most ­recently approved orphan drugs will cost at least $150,000 per patient per year and three of these medications cost $300,000 or more annually. And the trend is raising hard questions about the ability of the health care system to absorb the costs and, therefore, about how third-party payers are going to make coverage decisions.

This is a familiar concern, of course, but one that is expected to play out at an accelerating rate in coming years as big drug makers and small biotechnology companies recognize that pursuing orphan indications can fatten their bottom lines. In fact, PhRMA — the Pharmaceutical Research & Manufacturers of America — recently counted 1,795 orphan designations in the development pipeline.

Right now, pharmaceuticals account for about 15 percent of health care spending, but the costs of orphan drugs and other biologics are rising 20 percent to 25 percent a year, says Ed Pezalla, national medical director for pharmaceutical policy at Aetna. And he adds that state insurance commissioners are not often willing to allow managed care companies to increase premiums by a commensurate amount.

For insurers, “what we need are numbers to understand how many patients are really helped,” says Ed Pezalla, national medical director for pharmaceutical policy at Aetna.

“We do cover a number of orphan drugs, but we anticipate the pipeline increasing. And the costs are relatively high compared to other medications, so this is getting our attention,” he says. “The prices are growing faster than premiums can grow and there’s going to be a point where the costs will be an extremely serious concern, and this is a concern that the pharmaceutical industry will have to consider. They can’t hide by saying orphan drugs are only a small portion of our budget when we know that these are the fastest-growing part.”

This means added strain on budgets as it becomes harder to accurately predict actual claims to be paid each year, which will cause increases in premiums to the extent allowable by state agencies and higher hurdles for patients to qualify for coverage.

More than 1 of 4 orphan drugs had sales of over $1 billion. There are very many orphan diseases with no drugs — yet.

But any payer that considers denying coverage will be in a bind because to do so is, simply put, to appear heartless. In the scheme of things, orphan drugs are used by relatively few people, so to refuse coverage — even when costs are rising — runs the risk of creating an enormous public relations problem, since alternative treatments are generally lacking.

“The public, state agencies, and federal government are all in alignment for assuring full coverage and without any pre-existing condition rules,” says Randy Vogenberg, a principal at Bentelligence, a benefit consulting firm, and a member of Managed Care’s editorial advisory board.

Until recently, though, the issue was largely overlooked, because there were fewer orphan drugs. Now, the recent spate of expensive medications is quickly appearing on more radar screens, raising fresh debate about the extent to which the trend can continue and whether it will engulf the health care system.

New molecular entity approvals for rare diseases
Calendar years 2006–2012
NMEs and new biologics Rare (% of total approvals)
2012* 31 7 (23%)
2011 30 11 (37%)
2010 21 7 (33%)
2009 26 9 (35%)
2008 24 8 (33%)
2007 18 6 (33%)
2006 22 6 (29%)
*Data as of Nov. 30, 2012
Several NME applications for rare diseases have PDUFA goal dates before Dec 31, 2012.

“The question is whether the pricing will threaten the whole system. I’m not convinced it does, but the problem with saying we’ll charge $300,000 is that the marketplace still requires you to conduct the right studies first,” says Steven Grossman, a former congressional aide who worked on the Orphan Drug Act before its passage in 1983 and now heads the HPS Group, a policy and regulatory consulting organization.

“If you assume the pricing decision is made in the boardroom without being subject to scrutiny, then we’ll see pushback. So if there’s a drug that’s going to cost $300,000 or $500,000, we damned well better have a justifiable price. If the numbers work correctly, then it should be paid for. But that doesn’t mean that any CEO who gets FDA approval can or should arbitrarily charge that price,” says Grossman.

Says Vogenberg: “Ultimately, this kind of pricing is going to force more and more disclosure about what goes into pricing and methodology. At some point, there’ll be a review similar to what England, France, Germany, and Australia have done. They will look at the same questions: Are these prices justifiable and should there be coverage? There has to be more balance between the clinical significance and economic impact when determining reimbursement for new biologic or specialty products.”

Certainly, there is a lot of money to be made selling an orphan drug. An estimated 25 million people in the United States alone live with some sort of orphan disease, and spending on orphan drugs makes up 6 percent of total pharmaceutical sales, assuming a total market value of $880 billion, according to Thomson Reuters.

“I would not be surprised to see more premium prices for orphan indications,” says Alan Carr, an analyst at Needham & Co.

The compound annual growth rate of the orphan drug market between 2001 and 2010 was 25.8 percent, compared with 20.1 percent for a matched control group of non-orphan drugs. And the same report also noted that of 86 orphan drugs examined, 25 were blockbusters, meaning that 29 percent generated annual sales greater than $1 billion.

A prime example is Soliris, used to combat a rare blood disorder known as paroxysmal nocturnal hemoglobinuria. Although the drug is targeted at treating only a few thousand patients, putting it in what is called the ultra-orphan market, Wall Street analysts believe Alexion Pharmaceuticals will reap $2.6 billion in annual sales by 2017, thanks to a cost of $440,000 per patient per year.

“I would not be surprised to see more premium prices for orphan indications,” says Alan Carr, who follows biotechnology stocks for Needham & Co. “For biotechs, in particular, orphans are a way to be less dependent on doing deals with big pharma — their development and approval timelines can be shorter and their sales forces smaller. So it costs less to get out the door and commercialize.”

There is another reason that such pricing may continue, and that is the promised growth in personalized medicine, which can be expected to segment existing disease states into more orphan designations, says Ted Driscoll, a director at Claremont Creek Ventures, a venture capital firm where he heads digital health investments.

“By using rifle shots instead of shotgun blasts, we will actually be able to make medicine cheaper by capturing things earlier,” he maintains. “This personalization and reliance on big data will make certain things cheaper — and others more expensive — in the long run. Medicine will become more precise. But in this transition period, some will go up and some will go down.”

FIGURE 2 Range of designated orphan drugs

Beyond the need to recover years-long investments and generate profits, though, drug makers argue that they are responding to cries to fill a desperate need, which of course was the impetus for the Orphan Drug Act. In their view, the rising price tags are justified and the marketplace is willing to accept this trend.

“I do believe there’s a moral obligation to find treatments for these patients,” says NPS’s Nader. “The orphan space has become very trendy, but until three or four years ago, these were called neglected diseases. As a society, we have to think whether we should continue to neglect the disease and the patient. The answer, so far, has been no; we’ve seen a willingness to pay.”

But the overriding reason that premium prices are expected to continue to rise is that drug makers and biotechnology companies are in the driver’s seat. They do not yet have competition that might prompt one or more companies to lower prices or launch at a lower price. It is a simple matter of supply and demand.

“This means that right now, payers have no leverage. The manufacturer does not have to reduce its price or contract,” says Rhonda Greenapple, chief executive at Reimbursement Intelligence, a market research firm. “Most plans did not care, since these are small numbers of patients, but with the growth in approvals, it becomes much more costly. At some point, payers will have to say, Enough.”

There may be one recent exception, though. In January, Sanofi and Isis Pharmaceuticals won FDA approval for their Kynamro injectable treatment for homozygous familial hypercholesterolemia, a life-threatening form of high cholesterol that can lead to heart attacks and early death. Just one month earlier, the FDA also approved a pill from Aegerion Pharmaceuticals to treat the same condition.

Marketing battle

The sudden emergence of two medications to treat the same ultra-orphan ailment — there are roughly 3,000 patients in the United States — suggests to some that a marketing battle may emerge and give payers some unexpected relief. The Juxtapid pill from Aegerion costs about $295,000 per patient per year; Sanofi’s injectable Kynamro is about $176,000. But whether a horse race develops is yet to be seen.

Although both drugs carry great risk of liver toxicity, the Alegerion pill is more convenient and there is no concern about injection site reactions. There is also greater implied safety since studies showed lower levels of liver fat, according to Robyn Karnauskas, a biotechnology analyst at Deutsche Bank. For these reasons, she believes there will not be much of a contest.

In a bid to appeal to health plan medical directors, Isis Pharmaceuticals Chief Executive Officer Stanley Crooke argues that there are important distinctions between the medications. “It really is very superficial to say that a pill is better than a shot without talking about the different properties of the drugs,” he says. “You have to look at the overall profiles and the challenges in using both.”

At the moment, though, the tools with which to sort out the utility and value of these high-price medications remain limited. These include standbys: prior authorization, tiered benefit designs, ensuring proper use that matches approved FDA labeling, and shifting costs to the patients, although this approach has limits when the treatment costs hundreds of thousands of dollars.

“Even if you’re generous in ascribing cost offsets and counting productivity gains, most of the prices far exceed the values,” says Aetna’s Pezalla. “But what we need are numbers to understand how many patients are really helped. At these prices, we have to focus on the population that will get the most benefit.”

As some cost is shifted to patients, drug makers are relying on not-for-profit groups to pick up the slack. NPS, for instance, has enlisted the National Organization of Rare Diseases and Patient Access Network Foundation to help patients who lack insurance or sufficient funds to pay for Gattex. NORD President Peter Saltonstall, however, says that philanthropic donations are getting rarer.

Patients may also find some relief from drug makers themselves, joining patient assistance programs created with corporate funds in exchange for tax breaks. Yet another boost for patients is the Affordable Care Act, which will cap out-of-pocket costs and lifetime benefits starting next year, says Bruce Leavitt, managing director of Core Access Group, a managed care consulting firm.

“This means that plans will have to pay the difference. They’ll have to require more genetic testing and confirmation of diagnoses and become more restrictive to determine who benefits.”

One consumer advocate offers a suggestion about the pricing dilemma — have payers create payment funds and require drug makers and biotechnology companies to compete for shares.

Such an arrangement would encourage investment and innovation while rewarding additional indications for the initial new chemical entity, says Jamie Love of Knowledge Ecology International.

“The current system doesn’t make any sense. Why don’t we have a drug that costs $1 million a year? That could be a possibility,” he says. “The best thing would be to eliminate the [marketing] exclusivity [which is seven years for orphan drugs] or make it easier to break exclusivity if the price is too high. And in exchange for doing this, there could be a payment floor for that category of drug.”

What it delivers

“Exclusivity is a double-edged sword,” Love says. “It’s used to encourage investment and development, but then it’s abused. You don’t want to leave people out of the insurance system, but on the other hand, you can’t be locked into allowing companies to have carte blanche on pricing. Unfortunately, there’s insufficient disclosure of drug development economics. The answer is not to cap revenue at a ridiculously low level, but we all need better data to understand the pricing.”

Ed Silverman is editor of Pharmalot.com, a popular Web site that covers the pharmaceutical industry. Contact him regarding this article at [email protected]

Personalized medicine can be expected to segment existing disease states into more orphan designations.

Facing a diminishing patient headcount

So how exactly did NPS Pharmaceuticals come up with the $295,000 price for Gattex? At first, the drug maker believed that there would be as many as 15,000 eligible patients and expected to charge about $100,000 per patient per year, based on three prevalence studies. But after a close examination of patient headcounts, the results looked very different.

NPS Chief Executive Officer François Nader says the drug maker approached the top five home infusion therapy companies, which believe that they manage a combined 20 percent of the market for treating short bowel syndrome. Together, these providers estimated they have roughly 1,000 patients. Suddenly, NPS was looking at a much lower potential pool of patients.

Nader acknowledges that this revelation occurred “late in the game.” To make sure NPS had not missed anything, the drug maker approached others and learned that “it was not unusual for companies to rely on prevalence studies in their external communications until they were able to count patients.” For this reason, he says, the discrepancy was not unique.

As Needham & Co. analyst Alan Carr notes, this sort of discovery does not necessarily have to work against a drug maker with an ultra-orphan medication. Thanks to the unusual dynamics of the ultra-orphan drug market, there is a widely held belief that payers may be more willing to absorb very high prices if the total patient population is minuscule.

“In the fall, NPS had started to warn that it was a prevalence number, which is not the same as the number of eligible patients. So it changes how much you can charge for the drug in terms of what payers are willing to pay,” he says. “But since you’re looking at a smaller universe of patients and, therefore, less pressure on their budgets, you can charge that higher premium.”