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How Will the New 'Orphan Drugs' Affect Pharmacy Expenditures?

Posted by Kathleen Sabo on February 19, 2016 at 12:08 PM

In recent years, the pharmaceutical industry has experienced slowing growth on a global scale, due in part to patent expirations, increasingly tough regulations and fierce competition from generics. One sector, however, has not suffered the same fate—specialty pharmacy.

You might have heard one of several media stories regarding the increase in specialty drug pricing and sales. The cost of many drugs has continued to rise at annual rates of more than 10 percent. This effect is also seen in the orphan drug market.

By 2020, sales of so-called “orphan drugs” will be worth some $176 billion, making up nearly a fifth of all prescription drug sales. Thanks to skyrocketing sales for drugs like Bristol-Myers Squibb’s cancer immunotherapeutic Opdivo, spending for pharmaceuticals designated as orphan drugs is expected to continue to continue its climb.

With the pharmaceutical industry shifting focus away from manufacturing its traditional, well-known and widely used drugs — many of which will lose exclusivity over approximately the next five years — how will the turn toward orphan drugs affect overall pharmacy expenditures? Understanding the nature of orphan drugs and the reasons for their increasing prominence can help point to an answer.

How will the new orphan drugs affect pharmacy expenditures?

What Are Orphan Drugs?

Orphan drugs treat rare disorders and diseases, which the European Organization for Rare Diseases and the U.S. National Institutes of Health estimate at approximately 7,000. The number of officially recognized rare diseases currently increases by about 250 per year. Each disease may only affect as many as approximately 200,000 patients, but together, the diseases impact some 30 million Americans.

Financial incentives have been added to the development and manufacture of orphan drugs by the Orphan Drug Act of 1983. Before passage of the act, only 38 orphan drugs had gained regulatory approval in the United States. Now, 373 drugs with 468 indication designations have been approved. The provisions of the act have been considered so successful that they also were implemented in other markets, including Japan and the European Union.


Effects of the Orphan Drug Act

The 1983 U.S. Orphan Drug Act sprang from a global eagerness to treat rare diseases. The act—and similar measures in Singapore, Japan, Australia and elsewhere around the world—marked an increase in research on orphan drugs and provided pharmaceutical manufacturers with potentially lucrative incentives to shift focus to rare diseases. When a product receives an orphan drug designation, its manufacturer receives incentives to develop and submit the drug for approval. These incentives include tax credits for the cost of clinical research, annual grant funding to defray costs for qualified clinical testing expense, assistance in clinical research design, and more.

Over the past decade, orphan drug development, designations and approvals have seen significant increases, and the focus on “precision medicine” has grown. Because orphan drugs target illnesses for which few treatment alternatives exist, regulatory approvals often come quickly, and rates of reimbursement are high—making orphan drugs attractive on a commercial level for pharmaceutical companies.


Why Are Orphan Drugs Gaining Prevalence?

Like biologic agents that treat diseases such as multiple sclerosis and hepatitis C, orphan agents have the potential to set high prices in the market. Although individual orphan drugs are used by small numbers of patients, they can be very lucrative for drug companies due to their high pricing. Since patient populations that can benefit are limited, most orphan drugs have few competitors, keeping demand for the drugs relatively high.

And although orphan drugs’ ability to generate substantial profits will lessen once generic versions become available, they will retain an edge because they are protected by additional exclusivity clauses that typical drugs do not enjoy. In the United States, orphan drugs have seven-year exclusivity, while non-orphan drugs have five years of exclusivity after they’re approved.

In addition, the countdown clock on the seven-year exclusivity begins later in orphan drugs’ life cycle if a drug is approved for additional indications after its initial approval. The additional period of exclusivity helps insulate orphan drugs from competition from generics for longer than is the case with traditional drugs.


shutterstock_25064617-2.jpgWhat’s the Bottom Line for Pharmacy Spend?

For individuals suffering from rare diseases, the new orphan drugs offer hope, and health care systems are working to provide patients with the best possible care as pharmaceuticals continue to advance. With those advances, however, come increasing expenditures. Favorable economic and regulatory factors — including shorter timelines for development and better chances for approvals — are likely to continue fueling the power of orphan drugs to command high prices in the pharmaceuticals marketplace.

Preparation is the key to maintaining appropriate utilization and increased patient outcomes and must stand at the forefront of payors as the research and development of orphan drug treatments continues to increase. It is imperative that plans adopt appropriate clinical measures such as ensuring prior authorization criteria that prevents misuse as well as utilization reports to identify trends and patterns in use and prescribing orphan drugs.





Topics: High Cost Medications, Controlling Pharmacy Expenditures, pharmacy spend, orphan drugs, Meaningful Use, Coverage Determination Process, Prior Authorization, Specialty Drug Cost Control, Specialty Drug

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