A Primer on Orphan Drugs

One of the most intriguing areas in today’s pharmaceutical sector is the topic of orphan drugs. Orphan drugs are drugs that are used to treat rare diseases – for example, Orkambi and Kalydeco, two drugs brought to market by Vertex Pharmaceuticals. Both drugs are highly effective in treating certain variants of Cystic Fibrosis, a rare genetic disease that causes severe respiratory issues in patients. Forty years ago, CF patients were lucky to make to their 20s. Now, because of these two drugs, they can live much longer and without the severe respiratory repercussions that accompany the disease. The variants of CF these two drugs treat, afflict a patient population of fewer than 20,000. Overall, only 70,000 people worldwide suffer from CF. So, you can slowly put the pieces of the puzzle together. It is estimated that the average drug development cost is between $500 million and $1 billion. If there is the potential for hundreds of thousands or millions of patients, for the drug being developed, then any drug approved should have enough patient critical mass for the drug maker to recoup its initial investment costs and subsequently turn a profit. However, if you were considering spending approximately a billion dollars to create and bring to market a drug that would be used by only 10,000 patients… one of two things would likely occur: first, the drug would never see the light of day because the manufacturer would not be able to recoup their costs; or secondly, the drug maker could take a chance and get approval for the drug but then have to charge a price many times the average cost of a typical drug. Kalydeco alone costs about $300,000 a year. It has less than 20,000 patients taking it. People are screaming, politicians are in full, all-out lynching mode. Without charging the high price, Vertex could never have brought this to market, and the sufferers from this dreaded disease would live a life of suffering, complications and likely have years cut from their lives. In fact, Vertex received $300,000,000 from the Cystic Fibrosis Foundation to help develop the novel new drugs—proof positive that venture philanthropy and some smart legislation with incentives can go a long way toward healing patients and providing a better standard of living.


Enter the Orphan Drug Act of 1983

Because of the Orphan Drug Act, dozens of new drugs have been brought to market that might not have otherwise made it. Given that 30,000,000 people suffer from rare diseases, the Act went far to relieve a lot of suffering. Seven-thousand rare diseases have been catalogued so far, and with molecular genetics and advancements in medicine, we will likely identify thousands more in the years to come.

The Orphan Drug Act provides heavy incentives to companies that take the risk of developing drugs with small patient populations. The success of the act was so great, that Europe and Japan adopted similar guidelines in those regions. According to this law, rare disease patient populations fall under the following guidelines:

• In the U.S., the threshold for orphan drug status is less than 200,000 patients.
• In Europe, less than 250,000 patients is the threshold.
• In Japan, less than 50,000 patients is the threshold for orphan status.

Once Orphan status is confirmed, there are financial incentives including marketing exclusivity for 7 years, and in some cases, beyond. Exclusion can be overturned if a competing drug is offered with clinically superior results and pricing. Drug manufacturers for Orphan drugs also receive heavy tax credits on all R&D costs for a new drug. There are also grants (millions of dollars) for Phase 1-3 clinical trials (one of the costliest areas of drug development) and some fees are also waived for those wishing to bring a rare drug treatment to market.

Despite the heavy incentives, the prices of some orphan drugs are truly mindboggling. As a result, this part of the industry has attracted some big pharma players. It has also attracted the attention of the insurance companies that have little wiggle room on the issue, as an orphan drug like Kalydeco is the patient’s only option at a normal life. Hence the insurers pony up the large price tags. But as we mentioned, it’s caught the eye of politicians too and everybody’s favorite punching bag is the drug makers. The growth in the Orphan drug market has been substantial and it’s expected to make up about 10 percent of all drug spending in the next few years, topping $200 billion dollars.

The image of the plucky small biotech striving to develop treatments for the rare diseases largely ignored by big pharma is long gone. Instead, this year we again find big pharma dominating the sector. Seven of the top 10 companies by orphan drug sales are global industry giants who have won approval for their biggest products in various niche markets.”                             – EvaluatePharm 2017 Orphan Drug Report

Our goal at In Sickness and Wealth has always been to uncover opportunities to invest in companies that are saving lives or making life better for patients afflicted with disease. Hence, as the orphan drug market grows, we hope to give you a front row seat, and point out potential investment opportunities.

Stay tuned.
Dave Lerman and Jodie Warner

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