Shire’s $30 billion offer for Baxalta is the latest in a string of deals for drugmakers that target uncommon diseases. Therapies costing over $400,000 a patient and regulatory incentives are encouraging fast growth and acquisitions. Pricing pushback from patients, insurers and politicians will test the model around the edges.
What are so-called orphan or rare diseases?
These are uncommon illnesses that range from inherited diseases such as cystic fibrosis to unusual cancers that affect only tens of thousands of people. Many strike just a handful. While each disease is unusual, there are many of them. One study by the National Institutes of Health estimated that 30 million Americans suffer from one.
Up until recently, pharmaceutical companies typically would ignore these illnesses and instead invest scarce R&D funding on developing treatments for more common afflictions such as infections, high blood pressure and high cholesterol. The thinking was that treating common diseases promised higher profit while also maximizing the number of lives saved.
Why have companies changed their minds?
The success enjoyed by the likes of Alexion, Shire and Genzyme, which is now part of Sanofi, has shown there are riches in these niches. They dared to charge astonishing amounts for drugs that respectively treat a rare blood disorder, short bowel syndrome and an inherited disease where waste builds up in cells. In most cases, insurers and other buyers, such as overseas governments, have paid without squabbling. That’s because most of these ailments are deadly, commonly affect children and have no competing therapies. Denying a drug would be a public relations nightmare.
Moreover, the returns on capital are appealing. While a new cholesterol drug requires thousands of patients to be followed for years, orphan drug studies can be performed on dozens of patients and conclude in several months. Since there are few patients, a small sales team is also sufficient.
Alexion, a $38 billion rare drug specialist, reported a net margin of almost 50 percent last year. That’s about twice as high as Pfizer’s and four times Eli Lilly’s.
Is this the market simply at work?
Not really. Governments around the world, whose citizens were frustrated by the lack of cures for so many diseases, have done a lot to encourage the scientific and corporate communities. In the United States, Europe and other developed countries, there are tax incentives, paths to faster regulatory review and other goodies for developers, including promises of years of exclusive sales.
The results are obvious. Last year, 17 of the 41 new drugs approved by the U.S. Food and Drug Administration were for orphan diseases. That’s by far the most ever.
Can this pace be sustained?
It will probably accelerate from here. The accommodative position by national authorities and the willingness of buyers to take over rare drug companies at rich prices means it’s very easy to raise new money. Alexion’s $8.4 billion acquisition of rival Synageva, for example, involved a premium of 136 percent to the target’s undisturbed share price.
Regulators are making things easier, too. Companies that develop an approved therapy for an orphan disease now receive a voucher that allows the holder to move into the FDA’s express lane for a drug application. That means the agency will decide whether to approve it in six months instead of 10.
That doesn’t sound like such a big deal.
In the world of pharmaceuticals, it’s huge. In fact, the vouchers have developed a market of their own. A year ago, the first sale of one occurred at $67 million. The price tag at the most recent sale in August was $350 million. There’s good reason for the inflation.
Sanofi and Regeneron, which bought the first voucher, used it to shave four months off the time it took to obtain FDA clearance for their new treatment for high cholesterol. As a result of the voucher, their drug hit the market ahead of a rival’s. The four months of extra sales, according to analysts, eventually could be worth at least $1 billion.
It can now even make sense to develop a drug for the voucher itself. In early September, the FDA approved a startup firm’s therapy for a disease with 20 known sufferers worldwide. The recipient immediately transferred the voucher to AstraZeneca. Of course, the more success the voucher system has, the greater the chance R&D money gets misallocated.
How long can this particular boom last?
Quite a while. Thousands of illnesses defy treatment. The big question is how much the market can bear the eye-popping prices.
Orphan drug revenue should grow about 11 percent annually in developing markets, according to research group EvaluatePharma. That’s about three times as fast as more traditional drugs. That has led to louder grumbling by insurers and governments over escalating costs. For now, however, the relative sums are pretty small. Rare drugs account for about 5 percent of all pharmaceutical spending, and less than 1 percent of all healthcare spending.
So what will stop the gravy train?
Greed, for one thing. Companies that try to charge maximum prices for unclear benefits is one potential problem. Mallinckrodt, for example, paid $5.6 billion to acquire Questcor last year. Questcor earlier had bought a drug approved to treat infantile spasms at $50 per 5-milliliter vial, and proceeded to jack up the price to over $30,000 and market it for other conditions. Several states are probing the sales tactics. Insurers also have pushed back against the drug being prescribed for maladies for which it is unproven.
What’s more, when U.S. presidential hopeful Hillary Clinton on Monday blasted a gigantic increase in the price of a drug used to treat parasitic infections, it sent biotech stock prices falling. It also prompted one drugmaker, Rodelis Therapeutics, which had raised the price on cycloserine from $16.67 a capsule to $360 after buying the tuberculosis treatment last month, to return the drug to its former nonprofit owner.
Clinton is proposing to contain the high price of specialty pharmaceuticals by, among other things, limiting how much patients can be forced to pay out of pocket, limiting tax deductions on marketing costs and allowing medicines to be imported. Her plan also specifically targets firms that spend little on R&D.
For the time being, though, most companies that are developing effective drugs for untreated diseases, such as Alexion, BioMarin Pharmaceutical and Vertex Pharmaceuticals, probably don’t have much to worry about – except maybe competing buyout bids.