Prior to COVID-19, orphan drugs were on track to continue their robust growth. According to EvaluatePharma, worldwide sales of orphan drugs are expected to reach $140BN in 2020 and, at anticipated growth of 12% per annum, will reach $217BN in 2024.
Growth has been fueled by a range of government incentives that have accelerated R&D and the pace of scientific breakthroughs and new product launches, including:
However, as orphan drugs become a larger part of pharmaceutical spending (estimated at 18% of total drug spend by 2024), payor attitudes have soured, and incentives are in jeopardy, even in those cases where there is a strong economic case for generous support. COVID-19 has placed further pressure on government finances and is accelerating pressure to reduce funding for rare diseases.
Most governments employ a siloed annual healthcare budgeting process which seeks to cap or minimize increases in annualized pharmaceutical spend. As a result, increased spending on a new drug in one year is frequently funded by reduced spending on other drugs in that same year. This zero-sum budgeting practice is common even when a new drug reduces costs across other budget silos (e.g., medical device, healthcare services, social services, etc.) or over an extended period.
As a result, larger diversified pharmaceutical companies find that their businesses are increasingly cannibalized by their own innovations. They also face threats from smaller companies that sometimes have a do-or-die mentality with respect to pricing that sullies the reputation of the industry. The result is increasingly erratic reimbursement for orphan drugs and a growing political will to reduce reimbursement and scale back the programs that have made these therapies possible.
Although the near-term impact of COVID-19 has been to lower government spending on healthcare, reduced economic growth and higher deficits are expected to accelerate mounting pressure on pharmaceutical budgets. Increasing scrutiny of orphan drug pricing has raised the threats to both reimbursement and access.
In the face of these evolving dynamics, companies in the rare disease space must:
A wave of incentive programs launched in the 1980s fostered the development of new drugs to address the needs of underserved rare disease populations. As a result, orphan drugs have become one of the fastest growing and most profitable sub-segments of the pharmaceutical industry.
As an unexpected consequence of their success, payor attitudes toward orphan drugs have deteriorated and the barriers to market access are increasing. Budgetary concerns resulting from COVID-19 have augmented this pressure. In the current environment, it is even more important for pharmaceutical companies to proactively engage healthcare systems to shift the conversation from one in which drug budgeting is a zero-sum game to one in which drugs are funded based on their value to patients as well as their net budgetary impact on the system over the long-term.
When rare becomes common
According to EvaluatePharma, in 2020, the orphan drug market is estimated to reach $140BN. Prior to COVID-19, the industry was on track to grow at a CAGR of 12% to reach $217BN in 2024. At this trajectory, orphan drugs will reach 18% of prescription pharmaceutical spending in 4 years. What were considered individually to be rare diseases will, in aggregate, become a relatively common part of the healthcare budget.
Exhibit 1: Orphan drug sales are forecasted to maintain robust growth
The success of the industry has been fueled by a range of incentives that have helped to simultaneously increase the pace of research and development and speed time-to-market. Examples of common orphan drug incentives, include:
These programs have led to breakthrough treatments; however, they have also led to more modest innovations which have tested budgetary boundaries and raised increasing concern regarding their budgetary impact and overall benefit to society.
An antiquated annual budget mentality…
Most governments employ a siloed annual healthcare budgeting process which seeks to cap or minimize increases in annualized pharmaceutical spend. As a result, increased spending on a new drug in one year is frequently funded by reduced spending on other drugs in that same year. This zero-sum budgeting practice is common even when a new drug reduces costs across other budget silos (e.g., medical device, healthcare services, social services, etc.) or over an extended period. In an ideal world, payors would incentivize the development and use of drugs by linking their funding to systemwide cost savings and benefit over a patient’s lifetime.
As a result, larger diversified pharmaceutical companies find that their businesses are often cannibalized by their own innovations. They also face threats from smaller companies that sometimes have a do-or-die mentality with respect to pricing that sullies the reputation of the industry. The result is increasingly erratic reimbursement for orphan drugs and a growing political will to reduce reimbursement and scale back the programs that have made these therapies possible.
Exhibit 2: Emphasis on a fixed drug budget provides a sub-optimal cap on spending
… now reinforced with an HTA window dressing
Healthcare Technology Assessment bodies (HTAs) promise to upset the fixed budget paradigm; however, the reality is that, for rare diseases, they often serve to reinforce it. By definition, orphan drugs benefit smaller patient populations. Given the high cost of drug development, many cannot be priced to meet the established QALY standards envisioned by HTAs. As a result, HTAs often serve as gatekeepers that ultimately force companies to enter the market through negotiated managed entry agreement (MEAs) whose terms reflect the sub-optimal fixed budget principles outlined above.
Orphan drugs frequently represent true first-in-class innovations for patients that have no other effective therapeutic option. Investments in their development comes with high risk which, when coupled with small patient numbers, make it difficult for healthcare systems to effectively value and reward their contribution.
COVID-19 raises the stakes
The global COVID-19 pandemic has led to near-term decreases in healthcare spending in most developed markets, primarily due to the delayed utilization of more expensive treatments. However, near-term expectations are that healthcare demand will rebound amidst lower GDP growth, declining tax revenue, and ballooning government deficits. The hopeful launch of a COVID-19 vaccine in 2021 will likely further strain government coffers. As a result, the net impact of the crisis is likely to be accelerated pressure on pharmaceutical spending, specifically on market access and reimbursement for orphan drugs.
As an indirect result of COVID-19 related budgetary pressures, manufacturers can expect:
Exhibit 3: Increasing budget deficits drive greater pressure on pharmaceutical spending
These increases in access barriers are likely to be implemented as the industry struggles to manage the direct consequences of COVD-19, including:
Opportunity in uncertainty
Although COVID-19 has augmented the threats to market access for orphan drugs, the current crisis has also raised awareness regarding inequitable access to care. Even in well-funded systems, lower-income patients and the elderly have been disproportionately affected. Significant political change is underway in several major markets, including the U.S., creating an opportunity for the industry to engage to help shape the future of funding.
Pharmaceutical companies will need to take several steps to help pave the path toward a more sustainable future, specifically they will need to:
A call for leadership and a need for experimentation
Success to date has made the industry reticent to accelerate the pace of change and alter the existing system. Larger diversified pharmaceutical companies have the greatest resources and are in the strongest position to lead the charge; however, public opinion regarding these same players is at an all-time low. Change requires engaging a variety of key stakeholders to explore a mix of potential solutions to the funding dilemma. The right solutions will likely vary by country and even therapy.
Exhibit 4: Solutions require coordination across multiple stakeholders
Governments are in search of solutions, but similarly hesitant to evoke significant reforms to the current system – one with eroding support for orphan drugs. As a result, the status-quo will likely mean reduced incentives, lower reimbursement, and increasing barriers to access. Change will require engaging patient groups, physician thought leaders, and hospital systems to drive regional success stories that can be implemented on a larger scale. Solutions will need to be win-win with an earnest effort at solving pain points within the existing system.
Exhibit 5: Success requires pro-actively addressing pain points in the system
Road to sustainability
The additional pressure created by COVID-19 provides an opportunity for orphan drug companies to preemptively take action to help shift the funding model. Emerton’s outreach to key stakeholders in both government and industry suggests the potential for significant change. If the industry fails to act, patients and healthcare providers risk losing access to the next generation of therapies, including gene therapies, which are likely to further push the boundaries on both funding and affordability.
Exhibit 6: Case study: Louisiana “Netflix” subscription pricing model enhances access