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Orphan Drugs Valuation: Overview, Market and Pricing

Learn about our orphan drugs valuation methodology based on orphan drugs overview, orphan drugs market and orphan drugs pricing.

Orphan Drugs Valuation: Overview, Market and Pricing

Orphan Drugs Overview

The development of orphan drugs was financially incentivized through US law via the Orphan Drug Act of 1983. Its success led to it being adopted in other key markets, most notably in Japan (1993) and in the EU (2000).

  • Currently there are as many as 7,000 rare diseases and that up to 30 million Americans suffer from a rare disease.
  • In Europe, efforts have been jointly made at national and European levels by industry and health authorities (EMEA – European Medicines Evaluation Agency), in order to offer the incentives required to stimulate the development of orphan drugs.
  • In 1999, the European Parliament and the Council adopted regulation (CE) No. 141/2000 on orphan drugs. The goal was to rapidly make available, for rare diseases, drugs with a level of quality equivalent to that required for any other drug. This policy decisions encouraged the pharmaceutical and biotechnological industry to develop and market orphan drugs in Europe.
  • Rare diseases are rare and serious conditions which are defined in the European Union (EU) as life-threatening or chronically debilitating conditions with a prevalence of no more than five in 10,000 people.
  • In 1993, the Japanese government revised the pharmaceutical law by introducing special provisions relative to research and development of orphan drugs. The Japanese authorities reimburse up to 50% of the development costs. The medical expenses can be covered by National Health Insurance (NHI) in exchange of a control over drug price, that enables both to lower drug development cost and to reach a reasonable drug selling price.
  • There is no official definition of the prevalence of orphan diseases that is recognized by the Chinese government. In China, orphan disease is defined as having a prevalence of less than 1 patient per 500,000 people or a neonatal morbidity of less than 1 patient per 10,000 people, which is more restrictive than the World Health Organization (WHO) definition of 0.65-1 patients per 1,000 people.

Rare disease patient populations are defined in law as:

  • US: <200,000 patients (<6.37 in 10,000, based on US population of 325 million)
  • EU: <5 in 10,000 (<256,000 patients, based on EU population of 512 million)
  • Japan: <50,000 patients (<4 in 10,000 based on Japan population of 126 million)

Financial incentives by law include:

  • Orphan drug exclusivity
  • During the period of marketing exclusivity, the regulatory bodies are barred from approving the same product for the same orphan indication. A product holding several separate orphan designations for different indications can have several separate market exclusivities, which can run concurrently.
    • US: Seven years of marketing exclusivity from approval.
    • EU: Ten years of marketing exclusivity from approval.
    • Japan: Ten years registration validity period (also known as re-examination period).
  • Reduced R&D costs, tax credits, and fees in the United States:
    • 50% Tax Credit on R&D Cost (owing to new tax legislation, likely to decrease to 25%).
    • R&D Grants for Phase I to Phase III Clinical Trials.
    • User fees waived (FFDCA Section 526: Company WW Revenues <$50 million).

Orphan Drugs Market

The growth of the orphan drug market is anticipated to be approximately double that of the overall prescription drug market. Orphan drugs forecast to be 20% of worldwide prescription sales by 2025. This strong growth showcases the industry’s continued commitment to investing in these niche patient populations suffering from rare diseases.

  • The compound average growth rate (CAGR) of orphan drugs between 2019 and 2025 is forecast to be 12-15%, approximately double that of the non-orphan drug market.
  • Drugs being developed for oncology indications dominate the orphan drug pipeline landscape, along with cell- and gene-based therapeutics.
  • In 2018, approximately 70% of indications with the most orphan designations, were oncology indication. Blood, central nervous system and respiratory are the leading therapeutic categories accounting for more than 50% of orphan drug sales.
  • Orphan-designated indications that ranked the highest included Non-Hodgkin lymphoma (NHL), acute myeloid leukemia (AML), pancreatic cancer, ovarian cancer, cystic fibrosis (CF) and multiple myeloma, while brain cancer (glioma) ranked at the 7th position.
  • Celgene is expected to be the leading company by 2025, with an estimated 73% of its total prescription sales coming from orphan drug sales. Other major players in orphan drugs market include Johnson & Johnson, Roche, Novartis, Takeda Pharmaceutical, AbbVie, Sanofi, Vertex Pharmaceuticals, Alexion Pharmaceuticals, and Pfizer.

The market growth in developed regions is highly impacted by growing incidence of diseases and availability of modern diagnostic techniques compared to developing countries in Asia Pacific and Latin America regions. 

The low-income regions lack access to the highly specialized services needed to treat these complex diseases. These disparities are likely to result in both a delay in diagnosis and an inability to effectively implement treatment regimens that would prevent or delay mortality.

Orphan Drugs Pricing

  • Orphan drug provides a variety of benefits, including expedited review, smaller trial sizes, superior pricing power, 10-year patent extension, and reduced costs associated with regulatory proceedings.
  • The mean orphan drug cost per patient of the top 100 US orphan drugs was almost 4.5 times greater than the non-orphan drug cost in 2018. It is estimated that the mean cost per patient per year of an orphan drug was $150,854 versus $33,654 for a non-orphan drug, based on the top 100 drugs in the US in 2018 (data not shown).
  • Additionally, despite increasing pricing pressures in key markets like the US, these products are still able to command lucrative pricing premiums over non-orphan drugs. Cost per patient is an estimate for the retail cost of a drug to a patient, for a given year, based on a 100% compliance to the treatment guidelines outlined in the FDA label.
  • Orphan diseases, despite a small target population, can support multiple drugs at high prices. Most first-to-market orphan treatments have strong market penetration and corresponding sales.
  • Most drugs for diseases with 10,000 or more patients are priced between $25,000 and $150,000 per year, whereas most drugs for indications with less than 10,000 patients in the US are priced at or above $200,000 per year.
  • There is an inverse relationship that exists between the cost per year for a therapy and the number of patients, with less expensive therapies typically for larger patient populations. Price per patient is likely to be increasingly high, while the number of patients treated by these therapies will be fewer.

Average drug price per patient

For drugs still in development, the price of similar approved drugs can be used to determine if the drug should be priced at an equivalent value, at a premium, or at a discount. It is also important to consider what the market will bear, especially when no drugs with similar mode of action have been approved for an indication.

Opportunity and revenue model

A drug that confers durable response in some patients could be transformative. For the purposes of the model, it is necessary to understand if the company will sell directly into the US and Europe, as the market is relatively compact. However, this may also be indirect through a marketing partner.

Orphan drug valuation parameters

  • Percentage of the patient population to be eligible (compliance rate) for a treatment given the relapse rate from standard care and the lack of alternatives. Of course, the forecast scenarios will depend on the final efficacy and tolerability of the drug evaluated in future clinical trials.
  • Probability of success (%) for the drug to market, based on drug development status (Phase I/II/III).
  • The final drug pricing (accepted cost-effectiveness thresholds) will also depend on the final efficacy and tolerability of the drug and significant associated survival advantage.
  • There is also scope for early compassionate use of the drug. This could generate meaningful income as soon as the cGMP is in place, perhaps before its official launch.
  • Annual royalty payments to a drug development partner and/or marketing partner can be included in this model.
  • Peak penetration rate (%) for drug annually, that is about 4-5 years post market launch.
  • Price of drug per patient per year by region/country
    • For drugs still in development, the price of similar approved drugs is used to determine if the drug should be priced at an equivalent value, at a premium, or at a discount.
    • The drug price for developing and underdeveloped regions to meet the willingness-to-pay threshold and to reach a reasonable drug selling price.
    • In addition, medical expenses can be covered by national health insurance in exchange of a control over drug price, that enables both to lower drug development cost and to reach a reasonable drug selling price.
    • In developing countries, high priced orphan drugs are regulated to be included in the national insurance price lists.
    • The reasons for low orphan drug-treatment rates in Asia Pacific, Latin America, rest of the world (Middle East and Africa) include undiagnosed patients, high cost of drugs,  and the availability of newer non-orphan therapies that supersede older orphan drugs.

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