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The orphan drug dilemma: How do you price for a tiny market?

In March, Pfizer and its partner Merck KGaA gained approval for Bavencio (avelumab), the fourth PD-1/L1 inhibitor to enter the market. Like the other companies that have these landscape-changing immunotherapies on the market, Pfizer and Merck won approval for a small indication that will allow them to quickly add other indications while already commercializing the drug.

Since Bavencio was approved for a rare type of skin cancer — despite it being a potential blockbuster with approvability in several other indications — the treatment is now considered an orphan disease drug. Pfizer and Merck KGaA priced the drug accordingly at $13,000 a month, or roughly $156,000 a year. (A middle of the road cost in the realm of orphan drugs.)

Where it went wrong

Yet, the pricing model that the companies used to price Bavencio is exactly what has gone terribly wrong with the orphan drug model.

The Orphan Drug Act was passed in 1983 as a way to spur innovation and development of rare disease drugs, or drugs for diseases that affect fewer than 200,000 people each. It was designed to give financial and commercial incentives — like seven years commercial exclusivity, waiving of user fees related to the review and a 50% tax break on R&D costs — to drugmakers who marketed drugs that catered to these small patient populations.

According to the National Institutes of Health, there are more than 7,000 rare diseases that affect a total of 25 to 30 million Americans. Taken as a whole that's a lot of people, but as tiny subgroups, the economics for development needed some incentives.

"These drugs aren’t going to be cheap. You have smaller patient populations and, at least in the U.S., payers have been more receptive to therapies that work in profound ways. We believe that if you do something in these rare diseases, in these fatal diseases, there will be markets out there to keep our company going," said Steven Paul, the CEO of Voyager Therapeutics, which is developing potentially life-altering treatments for patients with diseases like amyotrophic lateral sclerosis (ALS) and Huntington’s disease.

Due to the small patient populations and the burden of testing and developing these drugs, the business model has long relied on pricing these treatments at a markedly higher price point than drugs that would have mass appeal. These higher price tags allow the companies to earn back their costs of development and make a profit, even though only a relatively small number of patients take the drug.

Alexion’s Soliris (eculizumab), for example, was dubbed the ‘world’s most expensive drug’ after the biotech priced the rare genetic blood disorder treatment at more than $410,000 annually in the US and as high as $700,000 elsewhere in the world. Alexion is notoriously tight-lipped about the number of patients actually taking Soliris, but RBC Capital Markets analyst Simos Simeonidis estimates there are about 9,000 patients taking the drug worldwide. Despite the tiny number, the company managed to bring in $2.8 billion in Soliris sales in 2016.

While these prices sound a little insane, the relatively small patient populations meant they weren’t a huge burden on the health system (and patients almost never got stuck with the full cost of treatment after rebates, discounts and other savings programs).

Unfortunately, at some point, pharma companies began abusing the system. Large pharmas began collecting orphan indications for drugs that were anything but in order to benefit from the incentives under the Orphan Drug Act. In fact, several of the world’s top-selling drugs, including AbbVie’s Humira (adalimumab) and Amgen's Enbrel (etanercept), have an orphan indication, giving these drugmakers potentially millions in government incentives.

And sales of orphan drug are expected to double between 2016 and 2022 to reach more than $209 billion, according to a report from EvaluatePharma.

Making it right

Like the larger issues of drug pricing, orphan drug pricing hasn’t escaped criticism, and new concerns are cropping up about innovative treatments that could enter the market in the next few years. Not only is gaming of the system a problem, but new business models are going to be needed to address potentially curative drugs.

Several companies are currently working on treatments for diseases such as hemophilia that could be given once a year — or even less frequently — and have the potential to be life-changing for these patients. There are even gene therapies being developed that theoretically could be given once and cure a patient completely.

While most of these treatments aren’t close to market, the debate has already begun about how to price them. Some critics are suggesting that there needs to be new pricing models developed for treatments like these; ones that may even include a payment plan.

"If gene therapy really worked perfectly and you just have one treatment, what would you charge for that?” pondered David Meeker, outgoing head of Sanofi’s specialty care unit Genzyme, to BioPharma Dive. "Many of the early gene therapies are looking at rare diseases. So you could imagine this $1 million price point. Imagine you have a rare disease that is severe and you need to be treated every year and were charged $200,000 a year for that. In five years, you would have your million dollars."

While Meeker was just speculating, the idea of million dollar drugs is not a new one. UniQure priced its gene therapy Glybera, which was approved in Europe 2012, at $1.2 million. As of 2016, the drug has only been used on one patient and UniQure abandoned it. While Glybera was a colossal flop, the prospect of pricing other gene therapies is still a conundrum.

"I don’t know what the answer is, but what I am convinced of is if you can truly solve the problem, and create the value, then you can create the business model," added Meeker, who has worked on rare disease drugs at Genzyme for more than two decades. Prior to its acquisition by Sanofi in 2011, Genzyme was the creator of several of the world’s first rare disease drugs, and now, under the umbrella of the Paris drug giant, is moving into gene therapies for rare diseases.

"Gene therapy may be one of those that lends itself to outcomes-based pricing, where if you have a true benefit you pay and if you relapsed after two years you were repaid. We don’t have a good example yet," Meeker said. "There will, and should be, different prices depending on how rare a disease is. Pricing isn’t magical; there should be a good rationale behind it."

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