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Orphan Drug Pricing

Orphan Drug Pricing

Orphan Drug Pricing

Orphan Drug Pricing : Orphan drugs are pharmaceutical drugs produced with the purpose of treating rare diseases that are helped by the government.

Without this government aid, the drugs would not be economically profitable enough to be produced, as the target market is so small.

In 1983, the Orphan Drug Act was passed, which states that if a disease affected less than 200,000 people, it qualified to receive government assistance in forms such as tax credits and a 7 year period of market exclusivity.

Under these conditions, companies are given an incentive to produce an otherwise unprofitable drug, and patients can receive the treatment they need.

However, not all of the consequences of this act are positive. The market exclusivity means that other companies cannot begin development of the same drug during the 7 year period, creating a monopoly. 

We can apply a basic economic monopoly model to a firm developing an orphan drug.

Looking at this model, the initial development of a drug is costly, meaning it incurs high fixed costs, but after a drug is developed, the actual material cost of producing a marginal dose is extremely low compared to the fixed cost.

This creates a high average total cost that decays rapidly and a straight line low marginal cost. Demand is relatively inelastic, as those who have the disease generally must buy the drug.

Therefore, there will always be willingness to pay, but there are some who lack the ability to pay. The firm will produce at the profit maximizing quantity instead of the socially optimal point which is at a much lower price. This socially optimal point is where there is no deadweight loss, or in other words, no inefficiency.

At the profit maximizing quantity and price, deadweight loss is a large triangle between the demand and marginal cost to the right of the quantity produced, as those are transactions that did not happen because of the quantity produced.

So what does all this mean?

Basically people in need of these orphan drugs are being charged extremely high prices, so even though they are getting the treatment they need, the exceedingly high prices are not very sustainable to pay.

This can be seen in cases such as with Luke Whitbeck, a child with Gaucher disease.

He is treated with Cerezyme, but the treatment is so costly that his family is draining all their resources to pay, which is unsustainable out of the short term.

There are a few ways that this problem could potentially be fixed. The first is a per unit government subsidy to increase production, but the main issue with this solution is the high amount that the subsidy must be.

Since the demand is so inelastic, the government would have to pay an extremely high per unit subsidy in order to shift the marginal revenue curve over to the socially optimal point.

Another solution would be to impose a price ceiling on the firm at marginal cost. This would push the firm to produce at the socially optimal point, but there would be no incentive for the firm to produce as they would be incurring a loss. 

An effective solution would be to place limitations on the market exclusivity.

That is to say, make the period of time shorter, with the option to apply for renewal. That way, the government can determine if a company has made sufficient profits from the drug and allow other companies to start producing, or see that the company needs more financial assistance and extend the market exclusivity.

In addition, many companies currently extend their market exclusivity period by changing the drug slightly and applying as a different orphan drug. This can be regulated under a shorter renewal period and stricter rules for renewal.

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However, another issue arises in that many orphan drug producing companies aren’t using the majority of the government money to treat those with the corresponding rare diseases.

There are some drugs labeled “partial orphan drugs” that are actually used to treat common diseases, but also have effectiveness against certain rare ones. In fact, according to University of Michigan Health, “70% of spending on “partial orphan” drugs – those approved to treat both rare and common diseases – goes toward treatment of common diseases”.

There are 2 types of orphan drug funding classifications: discovering the rare disease first and treating it, or a drug was initially developed for a common disease and later discovered to be useful in treating a rare one.

This raises the concern that companies will always apply for “orphan drug first”, since it is much easier to attain, with less clinical trial participants and less evidence. Basically, with this knowledge, some companies have motivation to apply as “orphan drug first” even if they think their drug may have effectiveness against some common disease, which allows them to attain market exclusivity and make profits unintended by the government.

There are 2 sides to this dilemma. For one, using common disease drugs for rare diseases is safer, as they have more usage and documented safety records. However, it is much more expensive to create a new drug than to reuse an existing one. Thus, regulation of orphan drug companies is an increasing issue that may call for policy changes in the near future.

Orphan drugs are pharmaceutical drugs produced with the purpose of treating rare diseases that are helped by the government.

Leading Artificial Intelligence and Financial Advisor – Rebellion Research