Establishing a Reasonable Price for an Orphan Drug

Berdud, Drummond and Towse (2020) propose a method for establishing a reasonable price for an orphan drug. Assuming prices for drugs are set according to incremental value, they propose adjustments to a payer’s ‘normal’ cost-effectiveness threshold (CET) for non-orphan drugs to ensure orphan drug developers achieve no more than the industry-wide rate of return. Adjustments are calculated for differences in R&D costs and population sizes.

What is the maximum allowable price society should be willing to pay for an orphan drug based on allowing a reasonable rate of return? To answer this question, Berdud, Drummond and Towse (2020) propose a method that adjusts an established payer/HTA body incremental cost-effectiveness threshold (CET) to take account of differences in patient populations and costs of research and development in order to generate prices that sustain rates of return from investments in developing orphan drugs that are no greater than the industry average.

The high cost of drugs for rare diseases (often known as orphan drugs) has generated considerable debate. Many health economists argue there is no justification for a premium for ‘rarity’; orphan drugs should not be judged any differently from ‘value-based’ criteria applied to drugs for common diseases (McCabe, Claxton and Tsuchiya, 2005). Alternatively, some argue that there may be characteristics of orphan drugs (i.e. severity, unmet need) that justify departing from standard value for money criteria (Drummond et al., 2007) and recent work has sought to show why risk aversion might lead us to want higher thresholds for treatments for catastrophic diseases (Lakdawalla and Phelps, 2020, Garrison et al., 2019).  However, health care decision-makers are still likely to find themselves asked to provide funding for orphan drugs on criteria other than the ‘value-based’ price whether at standard or adjusted thresholds. They require reassurance that the prices being charged are not ‘excessive’. One possible benchmark, as proposed by Berdud, Drummond and Towse (2020), is to apply the proposition that manufacturers developing orphan drugs should not make higher profits than those researching drugs for non-orphan conditions. Prices paid should not lead to rates of return from developing orphan drugs in excess of the pharmaceutical industry average, after adjusting for risk and other relevant factors. Using the UK as an example, the paper illustrates the implied adjustment that would need to be made to the CET should decision-makers wish to use this as a guide for setting prices.

The paper details formal development of the adjustment approach. The general adjustment formula shows – after applying simplifying assumptions – that two major differences between orphan and non-orphan drugs have to be considered to determine the reasonable price: (i) costs of research and development are likely to be lower for orphan drugs, and (ii) treatment populations for orphan drugs are likely to be smaller than for non-orphans. The study estimates differences in the research and development costs between orphan and non-orphans using the number of patients in clinical trials as a proxy for cost, applying the model developed by Mestre-Ferrandiz, Sussex and Towse (2012). To estimate differences in patient populations, the analysis relies on data on target patient populations of both orphan and non-orphan drugs from the Scottish Medicines Consortium (SMC) and National Institute for Health and Care Excellence (NICE).

Both differences in research and development cost and in target patient populations are estimated and presented in the paper. Applying these differences, and some key assumptions, authors estimate, using  the proposed formula, that the £20K/QALY CET used currently by NICE would need to be increased to £39.1K/QALY at the orphan population cut-off, and to £78.3K/QALY at the orphan population mid-point. For the ultra-orphan cut-off, the adjusted CET is £937.1K/QALY. By joining point estimates, Figure 1 shows how the adjusted CETs relate to the target population.

Figure 1. Adjusted Cost-Effectiveness Thresholds

Source: Berdud et al. 2020

Notes: rare diseases are defined by the European Medicines Agency (EMA) as life-threatening or chronically debilitating conditions that affect no more than 25 in 50,000 people in the EU – the orphan cut-off. In addition, the SMC and NICE define ultra-orphan drugs as medicines granted orphan status by the EMA and treating conditions with a prevalence of 1 in 50,000 people in England and/or Scotland – the ultra-orphan cut-off.

To conclude, the study newly published by Berdud, Drummond and Towse (2020) proposes one method for establishing the reasonable price for an orphan drug. Assuming prices for drugs are set according to incremental value, the method proposes an adjustment needed to a payer’s ‘normal’ cost-effectiveness threshold (CET) for non-orphan drugs in order to ensure that orphan drug developers achieve the industry-wide rate of return. Using their data sources and assumptions, authors show that the CET for orphans would need to be higher in order to secure a price for orphan drugs that enables the manufacturer to achieve a rate of return equivalent to that from non-orphan drugs. Furthermore, the threshold would also need to increase as the targeted patient population size decreases, or reduced if it increases, for example if the drug is approved for use in other patient populations. Finally, the authors point out that this approach only provides a benchmark for price setting and does not imply that particular drugs should be funded or particular prices paid. This will remain a matter for negotiation between the parties concerned.

Further research is required to improve the estimates and assumptions of key parameters (other relative operational costs, treatment populations sizes including multiple indications, average health gains, relative direct cost savings, and degree of in-class and post-patent expiry competition for orphan and non-orphan drugs). In addition, society still needs to tackle the broader issue of determining appropriate priorities for orphan drug research, development and funding.  

Related Research

Berdud, M., Drummond, M. and Towse, A., 2020. Establishing a reasonable price for an orphan drug. Cost Effectiveness and Resource Allocation, 18(1), pp.1–18 https://doi.org/10.1186/s12962-020-00223-x

Drummond, M.F., Wilson, D.A., Kanavos, P., Ubel, P. and Rovira, J., 2007. Assessing the economic challenges posed by orphan drugs. International journal of technology assessment in health care, 23(1), p.36.

Garrison et al., 2019. Value-Based Pricing for Emerging Gene Therapies: The Economic Case for a Higher Cost-Effectiveness Threshold. J Manag Care Spec Pharm, 2019 Jul;25(7):793-799

Lakdawalla and Phelps, 2020. Health technology assessment with risk aversion in health. Journal of Health Economics: https://doi.org/10.1016/j.jhealeco.2020.102346

McCabe, C., Claxton, K. and Tsuchiya, A., 2005. Orphan drugs and the NHS: should we value rarity? Bmj, 331(7523), pp.1016–1019.

Mestre-Ferrandiz, J., Sussex, J. and Towse, A., 2012. The R&D Cost of a New Medicine. [online] Office of Health Economics. Available at: https://ideas.repec.org/b/ohe/monogr/000135.html.