How Drugs for Rare Diseases Became Lifeline for Companies Federal Law Gives Monopoly for Seven Years, Fueling Surge in Biotech Profits a Teen’S $360,000 Treatment

TUESDAY November 15, 2005 Lucrative Niches How Drugs for Rare Diseases Became Lifeline for Companies Federal Law Gives Monopoly For Seven Years, Fueling Surge in Biotech Profits A Teen’s $360,000 Treatment

By Geeta Anand

When an experimental medicine companies has instead become a Sherrill Neff, a managing partner helping her son was dropped because multibillion-dollar business. With no at Quaker BioVentures Inc., a it didn’t seem profitable, Connecticut cap on prices and patients with few Pennsylvania biotech venture-capital homemaker Abbey Meyers turned options, companies found they could firm. The law also granted companies into a lobbyist. Her crusade: Change profit in small markets—charging as a 50% tax credit for research and the law to create incentives to develop much as $600,000 a year per patient development, grant money to defray drugs for rare diseases. for drugs that people would need their the cost of testing, and assistance in Congress responded with the entire lives. getting products approved. Orphan Drug Act of 1983, giving There are 260 orphan drugs now The law gave a powerful boost to the companies a seven-year monopoly for on the market and 1,400 under biotechnology industry, which was in bringing a new treatment for a rare development. Some orphan drugs its early days when the act was passed. disease to market. Within two years, have revenue of more than $1 billion Today, nearly half of all drugs produced a drug was approved to treat Tourette’s a year, the industry’s measure of a by biotech companies are for orphan syndrome, the disease Ms. Meyers’s son blockbuster. diseases. Two of the biggest biotech has. At the time, Margaret Heckler, Orphan-drug status is granted by the companies in the world, Amgen Inc. then health and human services U.S. Food and Drug Administration. For and Genentech Inc., were built on secretary, predicted orphan drugs seven years, it gives a company, in effect, orphan drugs. Companies have secured “will make nobody rich, but they will the same market protection that a patent millions in funding and gone public help treat a small group of tragically does, without requiring the company to based on the prospect of an orphan handicapped people.” go through the lengthy process of getting drug. It didn’t turn out quite that way. a patent. (A patent for a scientific Even very small markets have proved Drugs for “orphan” diseases (so- discovery is good for 20 years from profitable. Last year, Genzyme Corp., a called because no one was treating filing, but typically there are about Cambridge, Mass., biotech firm, posted them) have benefited many people with 10 years remaining on it by the time sales of $840 million on its drug rare illnesses. But what was originally it results in an approved drug.) Unlike for Gaucher disease, which affects envisioned as a modest sideline for drug a patent, which is granted for a new fewer than 10,000 people world-wide. discovery, orphan-drug status can be Treating the average patient costs given to a drug that has been on the $200,000 annually, the company says. market in the U.S. for other diseases But the price of the drug, dosed by or used in other countries for years. weight, can run as high as $600,000 While companies often have to a year for adults on the higher of two battle competing patent claims in recommended doses. Although the court, orphan drugs are protected monopoly period for the drug has by the FDA, which is barred by law run out, like many biotech drugs it from approving another drug with remains free of competition, in part the same active ingredient unless it because federal regulations don’t allow is proven clinically superior for that generic-drug makers to easily sell disease. copies. “It’s much more valuable than a The cost of such drugs has grown patent for that period of time,” says so dramatically that employers and insurers are now pushing back. found it profitable enough to market. the cost per patient is very high,” says Some health plans are excluding In crowded congressional hearings in James Greenwood, president of the coverage of certain orphan drugs. 1981, Mr. Klugman testified in support Biotechnology Industry Organization, Others are requiring employees to of patients. a Washington trade group. “Without pay as much as half of the cost of Those initially involved with the our making these drugs, patients would the pricey medicines. All this makes law didn’t think these niche drugs have no alternative but to suffer and die.” it tougher for patients to get the would be a profit center. “All we At first, most employers and insurers very drugs that the Orphan Drug wanted to do was make products didn’t worry too much about the price Act helped make possible. available for patients who had these of orphan drugs. The diseases were “We have all of these new rare diseases,” says Marion Finkel, thought to be so rare that most insurers fantastic new drugs, but nobody— former head of the FDA’s Office were likely to have few patients needing not employers, not employees—can of New Drug Evaluation. A report them in their health plans. pay for them,” says Ms. Meyers, who she wrote in 1979, recommending But it turned out that there are a now heads the National Organiza- incentives for such treatments, called lot of orphans. The act defines orphan tion for Rare Diseases, a nonprofit them “Significant Drugs of Limited diseases as those which affect fewer advocacy group. (Her son, now 37, Commercial Value.” She says: “We than 200,000 people. In 1989, a is doing well on a medicine that were thinking of chemicals that are congressional commission estimated isn’t an orphan drug.) relatively inexpensive.” that, by that measure, one in 10 Ms. Meyers hadn’t envisioned When President Reagan signed Americans suffers from an orphan such turmoil would arise from her the Orphan Drug Act in 1983, the disease. Many different types of efforts to get a medicine for her son’s biotechnology industry was in its cancer are classified as separate Tourette’s syndrome, a disease that infancy. Unlike traditional medicines, orphan diseases. causes involuntary muscle movements which are made by mixing chemicals, The biggest biotechnology and sounds. An estimated 100,000 biotechnology drugs are typically companies got their start with people in the U.S. have Tourette’s proteins produced by live cells, grown orphan drugs. Genentech received syndrome. McNeil Laboratories, in sterile, temperature-controlled orphan-drug protection in 1985 for a division of Johnson & Johnson, containers. The complexity of the its first drug, human growth hormone, was developing a drug that looked process of coaxing the cells to make to treat children who weren’t growing promising for Tourette’s. But the biological matter makes them more properly because of a hormone company discontinued development expensive to produce. deficiency—a population of about of the drug after it failed in tests “We did not expect to see the high 20,000 in the U.S. Revenue grew for treating another, more common cost of orphan drugs,” Rep. Waxman says rapidly as the drug became more disease. today. While the seven-year monopoly widely used. Last year, 19 years after Ms. Meyers helped build a guaranteed by the legislation “is obviously the first version came to market, the coalition of patients that urged quite effective at generating interest drug yielded Genentech revenue of Rep. Henry Waxman, a Califor- in certain drugs by pharmaceutical $354 million. nia Democrat, to pursue legislation companies, it also has the unfor- Amgen got its first product, Epogen, pushing the drug industry to develop tunate consequence of increasing approved in 1989 as an orphan drug medicines for rare conditions. Ms. prices.” He says the price of drugs “is for treating anemia in dialysis patients, Meyers argued her case through unfair across the board, and Americans a population estimated at less than the prism of civil rights: People with everywhere are getting fed up.” 200,000 at the time. Revenue from rare diseases were being discriminated Drug company executives say Epogen grew quickly to $1.4 billion by against because of their small numbers. they need to make sizeable profits 1996 and $2.6 billion last year. About so they can invest in research and 250,000 people are now estimated to Testimony by ‘Quincy’ development of new medicines. suffer from the condition. They say the high prices reflect the Even after the seven-year monopoly Her crusade gained steam when value of products that save lives. expires, there is often no competition actor Jack Klugman, whose brother They note they help patients who for many orphan drugs. That’s because had a rare bone cancer, made an can’t afford certain drugs by giving there is no federal process for gaining episode of the television series some of it away. approval of generic versions of biotech “Quincy,” in which a patient couldn’t “When you have small populations, drugs. For regular pills such as Prozac, get a treatment because no company WSJ November 15, 2005 2of5 a generics company merely must show ing how difficult it was to produce: Gaucher medicine, Genzyme has that its product is identical to the Originally, it took enzyme from 22,000 bought other companies and today original in order to win FDA approval. human placentas to make enough develops and sells medicines for cancer, But it’s harder to prove equivalence in medicine to treat one adult patient cardiology and kidney disease, as well as biotech drugs—biotech companies with each year. The company also gave the orthopedics and diagnostics. Still, the big-selling products say it’s impossible. drug free to certain patients. orphan drug for Gaucher remains by far A generics maker would have to spend Still, the cost was so high that in the company’s biggest source of profit. tens of millions of dollars for full 1992, the federal Office of Technology About one-third of the company’s $2.2 clinical trials to win FDA approval. This Assessment, conducted an investigation billion in revenue last year came from is usually considered too expensive. into the development of the drug. the drug. Henry Blair had been making The report estimated Genzyme spent Like other medicines, there is no an experimental enzyme under $29.4 million to develop the drug. It limit on what companies can charge government contracts while he was said much of the initial research was for orphan drugs. “We live in a free a researcher at Tufts University done by scientists at the NIH and paid economy,” says Marlene Haffner, School of Medicine. The enzyme for by the government. director of the Office of Orphan was developed by scientists at the The report said the company loses Products Development at the FDA. National Institutes of Health as a money on each unit given free but That office reviews applications and treatment for Gaucher disease, a rare, makes far more by charging insurers decides which products receive orphan sometimes fatal, condition that causes the full price. Genzyme may have drug status. “I don’t want companies certain organs to swell and bones to experienced more “resistance to the to gouge patients, but I also want to deteriorate. pricing among patient advocates” if it see good innovation and excitement In 1981, when Mr. Blair co-founded weren’t for the free drug program, the in the health-care arena,” she says. Genzyme, the government transferred report said. No major legislative change When companies profit on orphan the contract to make the enzyme to his resulted after the report, and the cost of drugs, it spurs interest in the field, she new company. At first, the experimental the drug remained the same. says. Yet when it comes to Genzyme’s treatment didn’t seem to have much In 1994, Genzyme figured out a Gaucher treatment, Dr. Haffner says: commercial potential because of the cheaper and safer way of producing the “I just find it unconscionable that small market. Before the Orphan Drug drug, growing the enzyme in genetically someone can charge that much.” Act, investors’ “eyes would roll back modified cells. The Orphan Drug Act Current ways of coping with in their heads when I said there were, entitled the company to another seven- exploding orphan-drug costs “are maybe, 4,000 patients” in the U.S. with year market exclusivity for the new ver- bad things—they don’t accommodate Gaucher disease, he says. sion. Today, after 14 years on the market, well the needs of patients,” says Scott Genzyme hired Henri Termeer the Gaucher drug remains at an average Howell, vice president of pharmacy from a company that sold a $50,000-a- price of $200,000 per patient each year. affairs at Highmark Inc., a nonprofit year product for hemophiliacs. Mr. Mr. Termeer, Genzyme’s chief Blue Cross and Blue Shield insurance Termeer envisioned an even higher executive, says that given inflation, company in Pittsburgh. Insurers are price for the Gaucher drug. “I “the price is somewhat lower today.” using “blunt-instrument approaches” never dreamed we could charge that He says economies of scale have to manage costs such as making much,” says Mr. Blair, who remains reduced the cost of making the employees pay a big percentage of on Genzyme’s board and is chief Gaucher drug, but he declines to say the bill, even as they scramble to executive of another biotech firm what the production cost is today. develop better methods, he says. developing an orphan drug. Asked why the company hasn’t Annual spending on specialty In 1991, Genzyme brought the lowered the price, he says, “What’s the pharmaceuticals—the term health- treatment to market, charging an difference between charging $200,000 insurance providers use for biotech average price of $200,000 a year per or charging $175,000 to a patient? No medicines that treat smaller patient patient. one can afford it without insurance. populations including orphan drugs— We prefer to give it away for free if rose 23% per member from 2002 to people can’t afford it.” About 10% of 2003, according to a study funded by Enzyme From 22,000 the people now taking the drug get it the Blue Cross and Blue Shield Foun- Placentas at no cost, he says. dation on Health Care. Genzyme explained the price by not- Propelled by revenue from the To manage these costs, WellPoint WSJ November 15, 2005 3of5 Inc., an Indianapolis-based insurer made everyone’s insurance premium Shield plan that trimmed benefits with 30 million members, and others unaffordable. He says he realized he in several ways. One of them was to are starting or acquiring units that needed to work for a large employer make employees pay 30% of the cost specialize in controlling costs for so the price of the Gaucher drug of expensive medicines, including biotechnology drugs. These companies could be spread among thousands orphan drugs. try to bargain with biotech companies, of people. After searching for three John Ash, 51, a cashier at the Fruth as insurers do, to get discounts by years, he finally found such a job this Pharmacy in Pomeroy, Ohio, was buying in volume or buying several year, selling cable services door-to-door diagnosed with chronic myeloid products. But because there isn’t much for Comcast Corp. “At age 57, I have leukemia in March 2003. The competition and the markets aren’t to get used to knocking on 60 to 70 government defines this type of big, there’s less room to negotiate doors a night,” he said. “But I’m here leukemia as an orphan disease. Mr. discounts. “We now recognize this for as long as Comcast will have me.” Ash’s doctor prescribed one of the is an extraordinary cost,” says Sam Mr. DeGrenier, who has become new orphan drugs, Gleevec. Nussbaum, chief medical officer at an outspoken critic of the drug’s high Mr. Ash learned he would be WellPoint. price, fears it may make it hard for his required to pay $771.72 of the son to get a job or health insurance. medicine’s nearly $2,600 retail price. A Savior for Brian Brian now weighs 143 pounds and his That would have absorbed more treatment costs about $360,000 a year. than his entire take-home pay for For patients, orphan drugs have been “Think of the wake this is creating,” Mr. the month. He and his wife of 20 a savior. When their son Brian was 2 DeGrenier says. “Think of how many years, Diana, a dental assistant, each years old, Ed and Peggy DeGrenier employers Brian is going to bankrupt.” make about $7 an hour. To pay for of Lombard, Ill., learned the boy had Abbie Leibowitz, a former Aetna the drug, they say they emptied Gaucher disease. It caused his liver and Inc. chief medical officer who now their savings account of $3,000 and spleen to become so swollen the toddler runs Health Advocate, a private firm cashed in Ms. Ash’s $4,300 IRA. had trouble walking and getting up advising 800 employers and their A year and a half later, at Mr. Ash’s when he fell. employees on health insurance, says he checkup, oncologist Vinay Vermani In 1991, Brian got his first treatment often hears from people who say they looked at his blood report and saw his with Genzyme’s new medicine. Within have been targeted for layoffs because white blood cell count had soared to two years, he looked and acted like any of the high cost of their medicines. five times the normal level. other kid. Today a high-school senior, It’s illegal to fire a person because of “Maybe the medicine is not working,” Brian continues to receive biweekly health costs, but Mr. Leibowitz says Dr. Vermani says he told Mr. Ash. infusions, and is so strong he swims it can be hard to prove that was the competitively, specializing in the “I can’t afford the prescribed dose,” reason a worker was terminated. “It’s Mr. Ash replied. “I’m taking half.” 100-meter butterfly. all a reflection of the fact that in the To find a way for him to afford the But his father worries about how present environment, the people pay- full dose, the doctor, his nurse, and Mr. his son will fare in the future. Mr. ing for health care can’t afford to cover Ash’s wife began calling his employer, DeGrenier says he once felt pressured everything,” he says. to leave a job with a small employer his insurer and the manufacturer of the The rising cost is especially hard drug, Novartis AG of Switzerland. because the cost of his son’s drug on smaller companies. In 2002, Jerry Like most drug companies, Novartis Kelley, then overseeing benefits at offers free medicine only to uninsured Fruth Pharmacy Inc., a chain of 22 people. The company eventually directed drug stores in West Virginia and Mr. Ash to a charity, funded in part by Ohio, faced a tough choice. Staying Novartis, that would make his monthly with the company’s existing health co-payment. One month after Mr. Ash plan, which covered even the most went on the full dose, his white-blood- expensive drugs, would have raised cell count fell into the normal range, the company’s health-insurance costs where it has stayed ever since. by 35%. “We just couldn’t afford “It’s terrible having this kind of

Ralf-Finn Hestoft Ralf-Finn that,” he says. technology when nobody can afford Ed and Peggy DeGrenier with their 17-year-old Mr. Kelley switched the com- to pay for it,” says the nurse, Sandy son, Brian, whose drug for Gaucher disease costs pany to a new Blue Cross and Blue about $360,000 a year. Corbin. “It bankrupts our patients.” WSJ November 15, 2005 4of5 A Novartis spokeswoman says pill to market at the price of $6 the company has a hotline to advise a pill in 1998 and has since patients on Gleevec who need help raised the price to about $53. paying for the medicine. She said Though thalidomide has Novartis couldn’t discuss any particular been around for decades, it patient’s case. received orphan-drug status Even with its employees paying for its use in treating a side higher co-pays, Fruth Pharmacy’s effect of leprosy, then later health-insurance costs rose 15% in for a certain kind of cancer. 2004 over the previous year. Over the The drug is so inexpensive past five years, the cost of insuring its to make that it is sold by Celgene also donates to groups that employees has increased to $1.5 million other companies in Brazil for seven help low-income patients with high from $600,000. “We’ve tried to take an cents a pill. co-payments. analytic business approach with a heart,” Thalidomide was pulled off the The orphan-drug market has says Mr. Kelley, who has since retired. market in the 1960s for causing birth become so hot that five different defects. Celgene was able to persuade companies are now vying to bring the FDA to approve the medicine to market the first treatment for Attracting Start-Up Capital under a tight distribution system, hereditary angiodema—a disease The orphan-drug market has helped requiring patients to take regular estimated to affect about 6,000 people companies attract start-up capital. In pregnancy tests, among other things. 1999, BioMarin Pharmaceutical Inc., in the U.S. “We couldn’t have raised Soon after the drug came to market a California firm, raised $67 million in millions without the Orphan Drug in 1998, doctors discovered it helped an initial public offering based mostly Act’s protection against competition,” treat a rare type of cancer called on the promise of a single orphan drug says Judson Cooper, chairman of Lev multiple myeloma. The company’s still in clinical trials—a potential Pharmaceuticals Inc., one of the five chief executive, John Jackson, raised treatment for a rare genetic disease companies. the price—not because it cost more to called mucopolysaccharidosis I. Fewer The company was founded in 2003 make or market, but because, he says, than 4,000 people in the developed with the goal of getting FDA orphan- many cancer drugs were priced much world are estimated to suffer from the drug approval to market a treatment higher. disease, caused by a deficiency in an that has been sold in Europe for 30 A new orphan drug, Velcade, came enzyme that leads to delayed mental years. The disease causes sudden swelling to market for the same cancer in 2003. development and impaired vision, in the hands, feet, abdomen and throat, Millennium Pharmaceuticals Inc. of among other symptoms. which is painful and sometimes fatal. Cambridge, Mass., which says it spent Within months of going public, Joshua Schein, Lev’s chief executive many years and millions of dollars BioMarin had a market capitalization officer, says he’s sensitive to the wishes developing Velcade, priced it at about of more than $1 billion. of a patient-advocacy group for the $4,400 a month. Mr. Jackson saw the disease that has urged his company to BioMarin, in a joint venture with price of Velcade as an opportunity to price the drug close to the European Genzyme, brought the treatment to raise the price of his company’s drug price of about $1,500 a dose or $18,000 market in 2003 at an average cost of further. “We certainly felt that from a annually. But he says he also needs to $175,000 per patient each year. The competitive perspective that would be consider the wishes of his investors. joint venture is projected to have justifiable,” he says. sales of about $70 million for the They are looking for him to price the Mr. Jackson says price increases help drug this year. drug close to the market price for other his company develop new drugs and Orphan-drug status can also be blood products in the U.S. that can cost don’t affect patients. “Either people well over $100,000 a year. given to older medicines, if they are wealthy enough to pay or health are being used in new ways. This insurance pays or our company gives has allowed companies that didn’t the medicine available for free,” he says. originally pay development costs of Celgene gives the drug free to patients a drug to receive protection from without insurance, if they earn less than competition. $38,000 a year and have assets valued Celgene Corp. brought a thalidomide at less than $10,000. A spokesman says WSJ November 15, 2005 5of5