Establishing a Reasonable Price for an Orphan Drug

Mikel Berdud • Mike Drummond • Adrian Towse
EUHEA Conference 2018
Shaping the Future: the Role of Health Economics
11-14 July
Maastricht, The Netherlands
Establishing a Reasonable Price
for an Orphan Drug

Establishing a Reasonable Price for an Orphan Drug
12/07/17
Table of Contents
1. Introduction
2. Reasonable price for an orphan drug
3. Adjusted CET for an orphan drug
a. Methods and data
b. Results
4. Discussion
5. Conclusion

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INTRODUCTION

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1. Introduction & Background
Should orphan drugs be judged differently by HTAs than
drugs for common diseases?
Is there any justification for a premium for ‘rarity’?
• Some authors argue ‘they should not’→ orphans then should
demonstrate to be value for money as drugs for common
diseases → most orphan drugs would be denied reimbursement
[McCabe et al. 2005; Clarke 2006]
• Some authors argue ‘they should’→ there are characteristics
of orphan drugs (e.g. severity, unmet clinical need) that might
justify departing from the standard value for money criteria →
premium for ‘rarity’ or paying more for severe conditions and
unmet needs
[Drummond et al. 2007; Sussex et al. 2013]

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What should be a reasonable price for an orphan drug?
• There is a risk of too low prices are not generating enough
incentives for R&D and innovation, for therapies that target rare
diseases
• There is a risk of too high prices enabling manufacturers to
exploit society’s willingness to pay to allow therapy for individuals
that have no other effective therapy
• The reality that many orphans have multiple indications
complicates analysis of “small” patient numbers
• To provide funding for orphan drugs health care decision-makers
require reassurance that prices being charged by manufacturers
are not ‘excessive’

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How could then be determined a ‘reasonable price’ for
an orphan drug?
• The rates of return from investments in developing orphan drugs
should be no greater than the industry average (for all drugs)
• Prices for orphan drugs should be adjusted for several factors
including:
i. Costs (e.g. R&D, marketing, manufacturing, commercialization)
ii. Revenue (sales volumes based on target patient populations)
In this work:
1. We propose a formula to determine the reasonable price for an
orphan drug – an adjustment of the Cost Effectiveness
Thresholds
2. We provide an illustration (based on real data) showing the
adjusted CET of the NICE for an orphan drug

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THE REASONABLE PRICE
FOR AN ORPHAN DRUG

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2. The reasonable price for an
orphan drug
Incremental Cost Effectiveness
Ratio (ICER) of a non-orphan:
𝐼𝐶𝐸𝑅 =
(𝑃𝑛𝑜 − 𝑃𝑛𝑜/𝑐)
𝐵 𝑛𝑜 − 𝐵 𝑛𝑜/𝑐
Cost-Effectiveness Threshold
(CET):
𝐶𝐸𝑇 =
(𝑃𝑛𝑜 − 𝑃𝑛𝑜/𝑐)
𝐵 𝑛𝑜 − 𝐵 𝑛𝑜/𝑐
Value based price of a orphan:
𝑃𝑜 = 𝐶𝐸𝑇 𝐵𝑜 − 𝐵 𝑜/𝑐 + 𝑃𝑜/𝑐
Value based price of an non-
orphan:
𝑃𝑛𝑜 = 𝐶𝐸𝑇 𝐵 𝑛𝑜 − 𝐵 𝑛𝑜/𝑐 + 𝑃𝑛𝑜/𝑐
Return for a non-orphan drug developer:
𝜋 𝑛𝑜 = ෍
𝑡=0
𝑡=𝑇 𝐸𝑥
𝛿 𝑡
𝑃𝑛𝑜 𝑞 𝑛𝑜
𝑡
− 𝐶 𝑛𝑜
𝑡
− 𝑅 𝑛𝑜
𝑡
Return for an orphan drug developer:
𝜋 𝑜 = ෍
𝑡=0
𝑡=𝑇 𝐸𝑥
𝛿 𝑡
𝑃𝑜 𝑞 𝑜
𝑡
− 𝐶 𝑜
𝑡
− 𝑅 𝑜
𝑡
Our approach:
෍
𝑡=0
𝑡=𝑇 𝐸𝑥
𝛿 𝑡
𝑃𝑜 𝑞 𝑜
𝑡
− 𝐶 𝑜
𝑡
− 𝑅 𝑜
𝑡
= ෍
𝑡=0
𝑡=𝑇 𝐸𝑥
𝛿 𝑡
𝑃𝑛𝑜 𝑞 𝑛𝑜
𝑡
− 𝐶 𝑛𝑜
𝑡
− 𝑅 𝑛𝑜
𝑡

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2. The reasonable price for an
orphan drug
Reasonable price for an orphan drug:
𝐶𝐸𝑇𝑜 =
σ 𝑡=𝑇 𝑃
𝑡=𝑇 𝐸𝑥
𝛿 𝑡
𝐶𝐸𝑇 𝐵𝑛𝑜 − 𝐵 𝑛𝑜/𝑐 𝑞 𝑛𝑜
𝑡
+ 𝑃𝑜/𝑐 𝑞 𝑜
𝑡
− 𝑃𝑛𝑜/𝑐 𝑞 𝑛𝑜
𝑡
− 𝐶 𝑛𝑜
𝑡
− 𝐶 𝑜
𝑡
− 𝑅 𝑛𝑜
𝑡
− 𝑅 𝑜
𝑡
σ 𝑡=𝑇 𝑃
𝑡=𝑇 𝐸𝑥
𝛿 𝑡 𝐶𝐸𝑇 𝐵𝑜 − 𝐵 𝑜/𝑐 𝑞 𝑜
𝑡
Assumptions – illustration:
1. Cost and health benefit of
comparators:
𝑃𝑜/𝑐 = 𝑃𝑛𝑜/𝑐 = 0; 𝐵 𝑜/𝑐 = 𝐵 𝑛𝑜/𝑐 = 0
2. Equal operational costs: 𝐶 𝑛𝑜
𝑡
= 𝐶 𝑜
𝑡
3. Average health gain non-orphans
(per patient): 𝐵 𝑛𝑜 = 1
4. Equal average health gain for
orphans and non-orphans (per
patient): 𝐵𝑜 = 𝐵 𝑛𝑜
5. Assumption 2 does not apply for
ultra orphans
Adjusted CET for orphans:
𝐶𝐸𝑇𝑜 =
σ 𝑡=0
𝑡=𝑇 𝐸𝑋 𝛿 𝑡 𝐶𝐸𝑇𝑞 𝑛𝑜
𝑡 − 𝑅 𝑛𝑜
𝑡 −𝑅 𝑜
𝑡
σ 𝑡=0
𝑡=𝑇 𝐸𝑋 𝛿 𝑡 𝑞 𝑜
𝑡
(1)
Adjusted CET for ultra-orphans:
𝐶𝐸𝑇𝑢𝑜 =
σ 𝑡=0
𝑡=𝑇 𝐸𝑋 𝛿 𝑡 𝐶𝐸𝑇𝑞 𝑛𝑜
𝑡 − 𝐶 𝑛𝑜
𝑡 −𝐶 𝑢𝑜
𝑡 − 𝑅 𝑛𝑜
𝑡 −𝑅 𝑢𝑜
𝑡
σ 𝑡=0
𝑡=𝑇 𝐸𝑋 𝛿 𝑡 𝑞 𝑢𝑜
𝑡
(2)

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ADJUSTED CET FOR AN ORPHAN DRUG

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2. Methods – data
• Sample: Novel Drug Approvals (NDA) of the Food and Drug
Administration (FDA) for the period 2011-2015 (n=182) have been
considered for the study (71 orphans and 111 non-orphans)
• The costs of R&D (cost adjustment): differences between orphans and
non-orphans
• Number of patients in clinical trials by phase of development:
ClinicalTrials.gov for NDAs issued in 2015
• We estimated the R&D cost of developing an orphan/non-orphan drug using
calibrated versions of Mestre-Ferrandiz et al. (2012) model
• Treatment population size (revenue adjustment): differences
between orphans and non-orphans
• Consulted in health technology appraisals of National Institute for health and Care
Excellence (NICE) and Scottish Medicines Consortium (SMC)
• Average treatment population sizes were taken for non-orphans while for orphans
definition cut-off populations (and mid-points) were taken
• Information about drug’s ICERs: also collected from NICE and SMC
appraisal documents when available

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3. Results – R&D costs
Cost of R&D:
• σ 𝑡=0
𝑡=𝑇 𝐸𝑋
𝛿 𝑡
𝑅 𝑛𝑜
𝑡
= $1,939.7𝑚
• σ 𝑡=0
𝑡=𝑇 𝐸𝑋
𝛿 𝑡
𝑅 𝑜
𝑡
= $521.2𝑚
211 361
929
1501
289
793
6273
7273
0
1000
2000
3000
4000
5000
6000
7000
8000
Phase 1 Phase 2 Phase 3 Total
Patients
Orphan (21)
Non-Orphan (24)
196
307
790
1293
214
173
808
1195
0
200
400
600
800
1000
1200
1400
Phase 1 Phase 2 Phase 3 Total
Patients
Oncology Orphan (11)
Oncology non-orphan (3)
Patients in clinical trials (all indications) Patients in clinical trials (oncology)

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3. Results – target population
Cut-off patient populations of orphan and
ultra-orphan by definition:
• Orphan drugs (EMA): 25 patients in
50,000 people
• Ultra-orphan drugs (SMC-NICE): 1
patient in 50,000 people
We take 100 per 50,000 people (NICE’s rounded) as reference anchor to
calculate the adjustment factor for revenue
Target patient populations:
• 𝑞 𝑛𝑜 = 107,732
• 𝑞 𝑜 = 26,932
• 𝑞 𝑢𝑜 = 1,077

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3. Results – assumptions
Additional assumptions have been applied for the
estimation of the adjusted CET for orphan and ultra-orphan
drugs:
1. We take the £20,000/QALY threshold currently used by NICE
as the anchor
2. The R&D cost and operational variable cost have been
weighted using the UK’s market share of global
pharmaceutical sales (IMS World Review ExecutiveTM 2016)
3. Effective patent term: ten years after market launch
4. Non-orphan drugs only achieve 50% of the potential sales due
to in-class competition
5. A discount rate of 11% is used for the revenues (same as
used for the estimation of R&D cost)

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3. Results – Normative ACETs
Adjusted CET
Orphan cut-off
population
£39.3k
Orphan mid-point
populationa
£78.5k
Ultra-orphan cut-off
populationb
£938.4k
Table 6. Adjusted cost effectiveness thresholds
for orphan and ultra-orphan drugs – base case
Source: Authors calculations

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3. Results – Normative ACETs &
actual decisions
SMC and NICE decisions (recommended drugs only) have been superposed to
adjusted CETs
Non-orphans targeting orphan
populations with ICERs
significantly higher than NICE’s
CET are mostly oncology drugs:
• End of Life treatments?

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DISCUSSION

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4. Discussion
1. This work examines how accepted CETs could be adjusted to ensure an equal
expected rate of return for orphan and non-orphan products: an illustration is
provided by adjusting for (i) the costs of R&D (or total costs), and (ii) in the size
of treatment population
2. Our approach could be viewed as one way of determining the maximum society
should be willing to pay to allow a “fair” rate of return for orphan drug
developers, but it does not indicate what society should be willing to pay for
treatments for rare diseases since this depends on societal judgements
3. Further research is required (limitation on data):
• For better estimating the average treatment populations of orphan and
particularly non-orphan drugs (the anchor)
• To estimate to what extent other components of the lifecycle cost of a drug are
lower for orphans than for non-orphans
4. Assumptions have been made about the differences in drug lifecycle costs other
than R&D:
• Orphan drugs: the costs of manufacturing, marketing and/or distribution don’t
differ from non-orphans (more conservative approach)
• Ultra-orphan drugs: the costs of manufacturing, marketing and/or distribution
differ on the same proportion as R&D costs between ultra-orphans and non-
orphans

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4. Discussion
6. Appraisals performed by the SMC and NICE in the UK may not reflect the total
populations for drugs:
• Stratification and orphan indications expanded to non-orphan indications
• Appraisals for non-orphans often cover only a sub-set of the whole patient
population
7. Patient populations are an imperfect predictor of likely revenue: other factors
like the market exclusivity granted for orphan or in-patent competition in non-
orphan products may also play a role to be considered
8. Implementing a policy of adjusting the threshold ICER based on treatment
population size, how granular should this be?
• Drug-by-drug analysis would be possible but we argue for the use of bands of
patient population sizes – it avoids a complete ‘cost-plus’ pricing policy and
consequent incentives for R&D inefficiency
7. Our approach do not tackle the issue of determining appropriate research
priorities for the development of orphan drugs: setting a reasonable price for
the orphan drugs does not, of itself, drive the direction of future research.
Example: the proposal in England to allow higher ICER for specialised products but constrained to
£300,000/QALY - according to our data, this would guarantee the average industry rate of return
for most orphan drugs with patient populations as low as 3.1 per 50,000, but not for the target
populations for drugs designated ‘ultra-orphan’ (ie 1 per 50,000 individuals).

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CONCLUSION

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5. Conclusion
I. Our research proposes one method for establishing the
reasonable price for an orphan drug based on the proposition
that the expected return for orphan should be no greater than
the industry average
II. Our estimates establish that 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, the cost-
effectiveness threshold for orphans would need to be higher
III. The threshold would also need to increase as the targeted
patient population size decreases
IV. Further research is required to improve the estimates of key
parameters (ie other relative operational costs, population sizes,
average health gains, relative direct costs)
V. In addition, society still needs to tackle the broader issue of
determining appropriate research priorities for the development
of orphan drugs.

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Thank you for listening

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References
Clarke JTR. 2006. Is the current approach to reviewing new drugs
condemning the victims of rare diseases to death? A call for a
national orphan drug review policy. Canadian Medical Association
Journal; 174:189-90.
Drummond MF, Wilson DA, Kanavos P, Ubel P, Rovira J. 2007.
Assessing the economic challenges posed by orphan drugs.
International Journal of Technology Assessment in Health Care;
23:36-42.
McCabe C, Claxton K, Tsuchiya A. 2005. Orphan drugs and the
NHS: should we value rarity? British Medical Journal; 331:1016-9.
Mestre-Ferrandiz, J., Sussex, J. & Towse, A.(2012). The R&D cost
of a new medicine. London: Office of Health Economics. Available
at: https://www.ohe.org/publications/rd-cost-new-medicine [last
accessed: 10 July, 2018]

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APPENDIX

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3. Results – sensitivity analysis
Summary of sensitivities (except R&D to life-cycle cost assumption):
Results 1: R&D to life-cycle cost assumption

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3. Results – sensitivity analysis
Results 2: non-orphan population size, competition in non-orphan
markets and market exclusivity for orphans

Establishing a Reasonable Price for an Orphan Drug

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