There are more than 7,000 diseases that are considered “rare,” that is, affecting fewer than 200,000 Americans. Yet around one in ten Americans lives with at least one of these rare diseases.
Developing drugs to treat rare diseases is expensive, and it can be hard to recoup those R&D costs.
The Orphan Drug Act was passed in 1983 to encourage the development of drugs for rare diseases – drugs that would likely not experience mass market profits or the blockbuster status of more common prescription drugs. The law offered pharmaceutical manufacturers incentives like tax credits, fee waivers, and market exclusivity for seven years in order to help them recoup some of the high costs of acquiring drug patents and bringing them to market.
It turns out, however, that the law has some loopholes. As a result, orphan drugs are attracting new scrutiny from payers. Part of the scrutiny is due to the astronomically high drug prices for some orphan drugs, and part of it is because of ways drug makers have used the Orphan Drug Law to keep drug prices artificially high. Here are some of the loopholes the FDA is currently trying to close. The results could affect drug prices, and thus be of interest to pharmaceutical investors.
Clearing a Backlog of Drug Applications for Orphan Designation
Attaining orphan drug designation is the critical first step toward winning the incentives that go along with orphan drug status. More orphan drugs are being approved (with 39 percent of new drugs approved in 2017 having orphan drug designation), and requests for orphan drug status have spiked. Getting rid of the backlog of requests has been a top priority of FDA Commissioner Scott Gottlieb, and much progress has been made to that end.
In addition to more requests for orphan drug designation, products are far more scientifically complex than many mass-market drugs, which means they may require specialized review from various FDA sub-agencies. The FDA is working on process changes to ensure that applications are reviewed in a timelier manner.
Requiring Clinical Superiority Before Gaining Orphan Drug Market Exclusivity
You may be surprised to learn that not all orphan drugs are first-in-class products. Over the past five years, from 30 to 35 percent of new orphan drugs were approved as next-in-class products. In other words, they were for existing therapeutic classes. These next-in-class products also have seven-year exclusivity, despite currently not having to prove clinical superiority over existing drugs in the therapeutic class.
Not all new orphan drugs are first-in-class. Some enter existing therapeutic classes.
The FDA has lost lawsuits from drug companies claiming they are owed the seven-year exclusivity despite not having to prove the clinical superiority of their product. However, the FDA Reauthorization Act, passed in May 2017, codified that drugs now have to prove clinical superiority in order to gain seven-year exclusivity and other incentives under the Orphan Drug Act if they are not first-in-class products.
Closing Loophole That Allows Skipping Pediatric Testing
Normally, drugs approved for adult diseases must undergo pediatric testing in order to get FDA approval as a pediatric drug. However, pediatric testing is not required for orphan drugs. The FDA has grown concerned that companies may pursue orphan designation with their primary goal as avoiding the cost, commitment, and risk of pediatric clinical studies.
In 2017, Congress tightened, but did not close, this loophole, requiring that orphan drugs for cancer no longer be exempt from pediatric testing if they are to be used as pediatric drugs. Most orphan drugs will still be exempt from pediatric study requirements, but the tightening of this loophole will affect how some orphan drugs expand into the pediatric drug market.
Orphan drugs are expensive to bring to market, and the Orphan Drug Act sought to encourage the development of such drugs so that drug developers could recoup the costs and have additional relief from drug price competition through seven-year exclusivity. However, some loopholes in the law are being examined, and changes have been enacted that will make it harder for drug companies to “game” the Orphan Drug Act through skipping pediatric tests or not proving clinical superiority in next-in-class products.
It is important for investors to understand whether new orphan drugs are first-in-class or next-in-class and whether they will be required to undergo pediatric testing because these factors can affect orphan drug market success long term.
