Eric Douglas Published

WVU Professor: Pharma Industry Making Billions On Orphan Drugs

Close up of an older woman's hands taking pills out of a bottle.Fizkes/Adobe Stock

Prescription drugs have changed many lives around the world, treating illnesses that were once thought untreatable — mainly because they were considered to be too small a population for a pharmaceutical company to research. 

An early 1980s law passed by Congress changed all of that, encouraging companies to develop what was called orphan drugs. But today, many of those companies are using the same law to drum up even larger profits. 

News Director Eric Douglas spoke with Sean Tu, a WVU law professor with a Ph.D. in pharmacology who researches these issues. 

This interview has been lightly edited for clarity. 

Douglas: As an adult who watches the evening news, I see an awful lot of specialty advertising for drugs and pharmaceuticals. 

Tu: We’re one of two countries that allow direct to consumer ads. It’s the U.S. and New Zealand. That’s it. No other country allows that.

Douglas: And the pharmaceutical companies want you to go to your doctor and ask for a drug by name.

Tu: Exactly right. And it’s really nefarious. You’ll see these drugs, and they go, “Oh, and you can lose weight on this too, right?” And so you’re like, “Okay, I’ll take this as a weight loss drug,” which, by the way, insurance doesn’t cover weight loss drugs, but they will cover diabetes drugs. So you go in and you say, “Hey, I want to use this new drug.” 

The average launch price of a new drug nowadays is over $150,000, compared to Metformin, which is a very good diabetes drug, which costs like $10. They want you to switch to the new one and some of these new drugs are actually less effective than older ones. 

Douglas: In the 80s, Congress passed a law to encourage pharmaceutical companies to make medications for smaller ailments. Am I summing this up correctly?

Tu: They’re called rare diseases and rare diseases are defined as a disease that affects less than 200,000 Americans.

Douglas: From a financial, money-making standpoint, the pharmaceutical company would love to have a million people or two million people taking their drug. But your research has shown that now the pharmaceutical companies are taking advantage of all those benefits of rare diseases, to the point where they’re maybe not necessarily doing the bigger drugs.

Tu: Right. First of all, drug companies control their prices. They get to decide how much they charge for a drug. The Orphan Drug Act came from a really good place in that there’s a rare disease that only affects 1,000 Americans. But you know, those 1,000 Americans could get left behind because we don’t invest in those drugs because the market is small. 

What we did, we gave them benefits, like huge tax breaks, we gave them seven years of exclusivity, instead of five years. We made the FDA process go faster and cheaper for them. 

And how do we get repaid? They just set the prices so high that they make the same amount of money on those orphan drugs as they do on non-orphan drugs. And that’s what we’ve shown, right? 

The idea that Congress said, “Hey, we want to give you these incentives to invest in these rare diseases, because you’re not going to make enough money on these drugs,” is erroneous now, and that you’re making just as much money on these orphan drugs as you do with the non-orphan drugs. 

Douglas: For less effort, I can make just as much money.

Tu: Not only that, but because these are orphan indications, and because Medicare and Medicaid and insurance companies have to cover a drug, if it’s the only one in class, if I have this rare disease, I can charge $10 million for a dose and insurance companies have to cover it, because it’s the only option you have. 

That’s the real bad downside of this. In the early 2000s, only like 10 percent of new drugs were orphan drugs, over 40 percent of our new drugs now are orphan drugs. The case has been almost flipped now in that we have too much investment in these rare diseases. I understand why because the money is there, the risk is less, and the risk being less, meaning that I will get paid. I’ll get paid for sure with these orphan drugs, versus non-orphan drugs.

Douglas: And they’re amortizing over five to seven years, they’re making any developmental money back in just a couple of years? 

Tu: Not even a couple of years, like a couple of months. The question is why are we giving them all of these bonuses when the underlying assumption was incorrect, which is these things aren’t going to be making a lot of money?

Douglas: In 1983, 40 years ago, I assume it was accurate at the time. 

Tu: We revisited the average launch price of a new drug in the early 2000s, and it was about $2,000. Today, the average launch price of a new drug is over $150,000. 

Douglas: You say the average launch price. You’re talking about the price to the consumer?

Tu: Part of the problem is, consumers don’t really feel the pain of these prices. Insurance and Medicare actually picks up the majority of the cost, because once you hit your deductible, you don’t see the price. 

Douglas: People say, “Well, if you control the pharmaceutical industry, then they won’t have money for new programs, new product development.”

Tu: A total bogus argument. And the reason why is most of the innovation is not coming from the pharmaceutical companies, it’s coming from the universities, like the National Institutes of Health (NIH). One of our studies has shown that 100 percent of all drugs have some NIH funding associated with it. And 25 percent of all drugs have late-stage NIH funding associated with it.

Where all of this revenue is going, it’s going to stock buyback. The brand companies spend about 20 percent of their revenue on r&d (research and development), they spend about 30 percent of their revenue on advertising and marketing. So they actually spend more on marketing than they do on r&d. All of those commercials that you see, they have to come from somewhere.

Douglas: That’s exactly what I was just thinking back to where we started with the commercials during the six o’clock news there. So they’re paying more to advertise their new drugs than they are to develop them in the first place by a significant amount.

Tu: Yeah. Billions of dollars. Why? Because all of this research, all of that risky stuff is happening at the university level. And this is what’s really bad, who sponsors the universities? Our taxpayer dollars, so we’re paying twice for the same thing.

If you really want to incentivize new innovation, double the budget for NIH, you’re gonna get way more for your money.

Douglas: What is the next step? What do we need to do? Do we need to change the 1983 law? 

Tu: As far as the orphan drug stuff goes, we suggest clawing back some of those benefits. If we give you these huge tax breaks that amount to millions of dollars, sometimes hundreds of millions of dollars, maybe you should pay that back. I don’t blame Congress for any of this. It came from a good place. I blame the manufacturers for exploiting a group that really has no other options. To me, that is predatory behavior. 

I think drug firms have kind of come to the realization that they can charge whatever they want for two reasons. One is the actual patients don’t see the cost. It’s being borne by insurance companies and Medicaid and Medicare. And then second, what is the quote? “They charge as much as they can and are only really limited by two things. One is shame and the fear of being called into Congress.” Even now, the fear of being brought into Congress is mattering less and less to them.

Douglas: Why doesn’t the insurance industry push back? I mean, I get why Medicare, Medicaid they have to do what Congress allows them to do. And the members of Congress have been lobbied to the point that that will not go down that road right now. But why don’t the insurance companies push back harder on this?

Tu: If Medicare and Medicaid cover the drug, insurance companies have very little choice, but to cover the drug. Okay. This is why our insurance rates have gone out of control, because these drugs are getting very expensive. And the formularies have to cover stuff that’s covered by Medicaid and Medicare usually. So hopefully, the IRA, the Inflation Reduction Act, will help with these negotiations because before the IRA, the government, by statute, was not allowed to negotiate pricing, which is crazy to me. Whatever lobbyists got that into the bill gets a lifetime achievement award. 

And the funny thing is, they’re complaining about the negotiation now, but Medicaid has been allowed negotiations for decades. Same with the VA. And their drug prices are way lower, like 30 cents to the dollar, compared to Medicare. Why? Because they’re allowed to negotiate.

Douglas: I don’t guess I realized that. I assumed Medicare and Medicaid were the same. 

Tu: The problem is because Medicaid covers poor people. They can’t afford this kind of stuff. So, Medicare covers old people, and they can cover more of the share here.