Pharmacy benefit managers are not, of course, the only reason for exorbitant drug prices in America. Even if PBMs did not exist, there would still be instances of eye-popping price increases by pharma companies. Compared to the largely anonymous and mostly unfathomable world of PBMs, when a drug company sets an outrageous price, there is often an unlikable CEO cast by the media as the face of pharmaceutical greed. That feeds a widespread perception that the main culprits in rising drug costs are pharma companies themselves. Public sentiment has changed dramatically since the early 1960s. Most Americans were then unaffected by overpriced drugs and few paid attention to Estes Kefauver’s Senate investigation. Today, many feel the effects of the rising costs of medication. The drug prescription component of what Americans spend annually on health care passed a milestone of $1,000 per person in 2015. That was by far the highest of any developed nation, with drugs responsible for nearly 20 percent of all costs.1
Separate from the avarice of pharmacy benefit managers, the pharmaceutical industry’s secret is that exorbitant drug prices often result from widespread exploitation of the quarter-century-old Orphan Drug Act. The manipulation that began with AIDS drugs in 1987 has only picked up pace, fed by pharma’s appetite for ever-larger profits. The industry is so skilled at milking every possible advantage from the Orphan Drug Act that publicly traded biotech companies have seen one-day share price spikes of 30 percent simply on the news of obtaining an orphan designation.2
If success is measured by the number of orphans approved by the FDA, the act has been a success. In the decade before the statute, only three companies had released ten medications for orphaned diseases. After the law, two hundred companies have developed nearly five hundred orphans, with half since 2012.3 They are no longer the industry’s poor stepchild. Seventy orphan drugs approved by the FDA in the last decade were for successful, mass-market medications whose patents were about to expire. Pharma companies had found ways to “repurpose” the medications for a rare disease.4 Eight others have been approved for more than one orphaned disease.I Half the FDA approvals in the last five years have been secondary ones, what the FDA’s Office of Orphan Products Development calls “multiple bites of the apple.”5
As of 2018, the median annual cost for an orphan drug treatment per patient is $98,500, compared with $5,000 for nonorphan drugs. The startling price difference has lured many companies to search for orphan drug designations for their products. Since 2015, half of all new medicines approved annually by the FDA are for orphans.6 That same year, orphan drugs broke $100 billion in sales.7 Analysts project $176 billion by 2020, double the growth rate of the worldwide prescription market.8 Orphans will account then for 20 percent of all global prescriptions, up from only 5 percent in 2000.9
“The industry has been gaming the system by slicing and dicing indications so that drugs qualify for lucrative orphan status benefits,” according to Martin Makary, a Johns Hopkins surgery professor who has written about how “unintended and misplaced [Orphan Drug Act] subsidies and tax breaks fuel skyrocketing medication costs.” The misuse of the statute, says Makary, means that “funding support intended for rare disease medicine is diverted to fund the development of blockbuster drugs.”10 “By “slicing and dicing” Makary refers to when drugmakers take a disease and break it into smaller subsets of patients, qualifying each as a stand-alone disorder eligible for orphan drug status. That had begun with AIDS when drug companies, over the protests of the FDA, arbitrarily created subcategories of “rare diseases” related to HIV and AIDS patients. Evidence of “slicing and dicing” is that there were some two thousand orphaned diseases identified by scientists and the FDA in 1983 when the Orphan Drug Act passed. Today there are more than seven thousand.11 Multiple approvals also provide a loophole around the law’s cap on the number of patients per disease. So long as each disease has fewer than 200,000 patients, there is no limit on how many rare diseases a single orphan drug can treat. And if a drug is approved for a rare disease that later affects more than 200,000, it retains its orphan status (that happened with nineteen drugs that got orphan approvals for treating AIDS; when the number of people infected with AIDS passed 200,000 in 1993, they kept their orphan benefits until their individual patents expired).
Pharma companies and biotechs get help navigating the Orphan Drug Act and the FDA’s unique approval process from a couple of consulting firms founded by former FDA officials who ran the orphan drug division and are intimately familiar with its idiosyncrasies. Drug firms pay for what Tim Coté, the ex–FDA orphan drug director, boasted on his company’s website was “the inside track.”12 He told NPR in 2017 that his Coté Orphan sent more orphan submissions to the FDA than anyone else. “We write the entire application.”13 Coté’s competition is Haffner Associates, founded in 2009 by Marlene Haffner, an internist and hematologist who had directed the FDA’s Office of Orphan Products Development for twenty-one years. Haffner is often acknowledged as the “mother of orphan drugs.” When she took charge in 1986 the Orphan Drug Act was only three years old.14 She left the government in 2007 to become Amgen’s executive director of global regulatory policy. After two years there she established her own consulting firm. On her LinkedIn profile, Haffner notes, “Have extensive experience in writing orphan designation requests, Fast Track, pediatric vouchers and basically every enhanced approval product for the development of new products for rare diseases.”15
Coté and Haffner oversaw nearly three hundred orphan drug applications when they were at the FDA. Both know how to expedite the orphan application process. Starting in 2015, every year a remarkable seven to eight of the top ten selling drugs in America are orphans. Genentech and Biogen, for instance, developed rituximab, a monoclonal antibody therapy the FDA approved as an orphan in 1994 to treat follicular B-cell non-Hodgkin’s lymphoma. It was a cancer estimated to affect about fourteen thousand Americans. Since then, rituximab has gotten eight additional orphan approvals. Some are smaller subsets of the original disease.16 Through 2018, it is the sixth best-selling drug of all time, with almost $90 billion in sales.17 II 18
Many of the drugs submitted by large pharmaceutical companies to the FDA are orphans in name only. They were never developed to eradicate a rare disease but are repackaged mass-market medications. The FDA approved Amgen’s Repatha in 2013. Amgen developed it to treat a genetic condition, FH (familial hypercholesterolemia), that resulted in “very high LDL [bad cholesterol]… that can lead to premature cardiovascular disease as well as other complications.” The number of Americans with FH ranges from 600,000 to Amgen’s estimate of 11,000,000.19 Amgen priced Repatha at $14,000 a year per patient. On the same day, the FDA approved Repatha as an orphan drug to treat a much smaller genetic subset, HoFH (homozygous familial hypercholesterolemia). It covered patients who had inherited the faulty gene from both parents, affecting between 900 and 2,200 people in the United States.20
The underlying genetic condition of extremely high LDL cholesterol was the same. The treatment was also the same. The only difference was that the vast majority of patients with FH inherited only a single dominant gene from one parent.21 Their LDL cholesterol levels run two to three times higher than what doctors deem safe. In the small subgroup in which both parents pass on the genes, LDL cholesterol levels are three to six times greater than normal.
If Amgen had not gotten the separate orphan designation, those afflicted with HoFH would have simply taken the regular Repatha prescription. However, by simultaneously processing the drug as an orphan, Amgen got a multimillion-dollar tax credit and additional write-offs for its huge research costs.22
AstraZeneca went one step further when it tried to repurpose Crestor, its successful cholesterol-lowering medication, as an orphan. It was a last-ditch effort to stave off generic competition. In 2016, Crestor was the second most widely prescribed drug in America (Synthroid, a thyroid medicine, was at the top). Crestor was about to come off patent. A slew of generic competitors were prepared with products when AstraZeneca surprised the industry by applying to the FDA for Crestor to treat pediatric HoFH. It was the same genetic disorder that Amgen had relied on a couple of years earlier except that AstraZeneca had “sliced and diced” a pediatric subset that affected anywhere from three hundred to one thousand children.III23
The Orphan Drug Act had special incentives for companies to create drugs for pediatric diseases. The Rare Pediatric Disease Priority Review Voucher Program provides a voucher to any pharmaceutical company “who receives an approval for a drug or biologic for a ‘rare pediatric disease.’ ” The drug company can redeem that voucher “to receive a priority review of a subsequent marketing application for a different product.” It was the equivalent of an expedited pass for the firm’s next drug application, even if that was for a mass-market therapeutic.
Besides the voucher program, the FDA has two others—the Orphan Products Clinical Trials Grants and the Pediatric Device Consortia Grants Program—both of which underwrite most of the research costs for pediatric rare illnesses. A drug that targeted a pediatric disease on the list qualified automatically for a six-month extension to its seven-year exclusive selling period.24 Finally, the 21st Century Cures Act, which President Obama signed into law in 2016 with the intent of encouraging more pharmaceutical lab research, gave an extra six months of protection from generic competition to any existing drug if it got approved for an orphaned disease.25
When the FDA approved Crestor for HoFH it did not initially seem important since it only gave Crestor a seven-year selling monopoly for the several hundred affected children. AstraZeneca, however, cleverly argued to the FDA that its seven-year mini-patent should extend the expiring patent on mass-market Crestor to its 21 million patients. Generic drugmakers and public advocacy groups petitioned the FDA to reject Crestor’s claim. It was, they contended, a flagrant abuse of the Orphan Drug Law.26 In fact, in 2002, Congress had passed a statute prohibiting drug companies from extending their patents on a brand-name drug originally approved for adults by simply reapplying to have it okayed for children.27 That law did not specifically preclude, however, a pharma company from applying for their drug to treat a pediatric orphaned illness.28 As a result, it took a federal court to determine whether the law applied. The court rejected AstraZeneca’s novel argument, but it still pocketed all the financial incentives from the Orphan Drug Act.29
AstraZeneca is not alone. Otsuka Pharmaceuticals avoided the patent expiration on its hit antipsychotic, Abilify, by getting it approved for an orphaned diseased, Tourette syndrome. Genentech got two orphan drug extensions for its cancer blockbuster, Herceptin.30
Not every pharma company is satisfied at getting one orphan designation for their hit mass-market drug. Novartis’s Gleevec was the first targeted cancer biologic approved in 2001 to treat chronic myelogenous leukemia, a blood-cell cancer that starts in the bone marrow and affects nine thousand patients in the U.S. It was priced at a then unprecedented $26,400 per year.31 By the time its patent expired in 2013, Novartis had more than quadrupled the price to $120,000.32 IV 33 Gleevec has gotten eight additional orphan designations for closely related cancers as well as immune disorders, resulting in several billion dollars in revenues.34 All that “repurposing” of a single drug for nine orphan illnesses has little scientific benefit. It flies in the face of the Orphan Drug Act’s original intent of one new drug for one untreated rare disease. The law, contends Johns Hopkins professor Martin Makary, was never intended to allow drugs like Gleevec to be designated for an orphan population. Instead, Gleevec had become a star example of how a drug company returned to the FDA with the same medication again and again, each time testing it against a related but “new” rare disease.
Humira is one of the most profitable prescription drugs ever. Humira (HUman Monoclonal antibody In Rheumatoid Arthritis) was the first monoclonal antibody made from entirely living cells instead of synthetic chemicals. The FDA approved it in 2002 to treat rheumatoid arthritis. Humira was the result of an ambitious multiyear joint venture between a group of British academics, a small U.K. biotech (Cambridge Antibody Technology), and Germany’s largest chemical conglomerate (BASF). Much of the research funding came from the government-funded U.K. Medical Research Council. The pharmaceutical company Abbott spent $6.9 billion to buy all the patents to Humira and then shepherded it through the FDA.35
Humira, as are most biologics, was always expensive. When it went on sale in 2003 it cost $13,200 a year. Abbott forecast $250 million in revenues in its first year and the marketing department predicted sales could build to a peak year of $1 billion annually.36 Humira blew past the most optimistic projections. Its strength was its dosing advantage over two competitive biosimilars. Humira was a “self-injection pen” used at home every two weeks. Johnson & Johnson’s Remicade required a weekly visit to a clinic. Amgen’s Enbrel was an autoinjector, but required twice-a-week dosing. All three drugs are among the top ten selling in pharma history: Enbrel, #7, Remicade, #4, and Humira, #2. The three have more than $300 billion in sales.37
After its 2002 debut for rheumatoid arthritis, Humira got a near-record eight orphan drug approvals. Three of those were for orphaned diseases that were tiny pediatric subcategories of illnesses it had already been approved to treat for adults (rheumatoid arthritis, Crohn’s disease, and ulcerative colitis).38 Humira’s original patent for treating rheumatoid arthritis was set to expire in 2013. An approval for an orphaned illness in 2011, pediatric ulcerative colitis, extended it. That year Humira’s price jumped from $13,200 annually to $19,000. Three additional orphan drug approvals in 2014 and 2015 again added some “pediatric patent extensions.” By 2018, Humira’s price had doubled to $38,000. From the time of its first orphaned approval for pediatric ulcerative colitis in 2011, through 2018, Humira has had $108.5 billion in sales. It holds the record as the drug with the most consecutive years of sales exceeding $10 billion a year (six, from 2013 through 2018).39
Another manipulation of the Orphan Drug Act is when drug companies either use an orphan approval to expand off-label dispensing or use an orphan drug to later get approval for a mass-market therapy. Eighty firms have done so during the last decade. One, Allergan, managed to do both at once. When Botox was developed in 1990 it was submitted and approved for two orphan illnesses related to involuntary eye muscle spasms. Allergan, which had distributed the drug for its ophthalmologist inventor, bought the rights the following year.40 A decade later, Allergan got Botox approved to treat another orphaned diseased, cervical dystonia, a condition marked by neck and shoulder muscle spasms that result in an abnormal head position. Allergan used that orphan approval to grow its off-label sales illegally. It dispatched sales representatives nationwide to convince doctors to dispense more Botox to treat headaches and generalized pain, conditions for which it was not approved. The company disingenuously claimed that cervical dystonia was “greatly underdiagnosed” and that even when physicians “did not see any cervical dystonia” in their patients, Botox was an effective therapy to relieve any “pain in the head, neck, and shoulders.” Allergan’s detail team focused on the most prolific off-label dispensers: physicians. It held workshops demonstrating how to disguise off-label Botox injections when billing insurance companies in order to get reimbursed. Allergan paid for weekend getaways, physician conferences, workshops, and dinners, all concentrating on expanding off-label therapies. It created an online “patient information” organization that tilted its advice to recommending off-label Botox use. Doctors were mostly receptive because Botox was dispensed in their clinics or offices. By cutting out retail pharmacies, there was more money to be made by physicians, who bundled fees for their services into the price they charged patients for the drug.41
In 2010, after a two-year Department of Justice investigation, Allergan pled guilty to a single criminal misdemeanor for “misbranding” Botox with its off-label promotion. It was the same criminal violation that Purdue pled guilty to in 2007 over its misuse of OxyContin. Allergan paid a criminal fine of $375 million, and a separate civil settlement with the federal government and the states cost the company an additional $225 million. The civil settlement was because Allergan had helped doctors file false claims to Medicare, Medicaid, Veterans Affairs, and other government-funded prescription drug programs.
Allergan, as did Purdue with its OxyContin settlement, executed a Corporate Integrity Agreement that instituted a strict compliance program. Any further “material breach” would result in Allergan being excluded from federal health care programs.42 The Corporate Integrity Agreement did not prohibit Allergan from submitting Botox for additional orphaned diseases. Subsequent to its criminal plea, the FDA approved Botox for other orphan diseases, including severe primary axillary hyperhidrosis (excessive sweating in the armpits), Meige syndrome/oral facial dystonia (lip spasticity), urinary incontinence resulting from neurologic conditions such as spinal cord injury and multiple sclerosis, and adult upper and lower limb spasticity.43 V 44
Because of the Orphan Drug Act, taxpayers had offset much of Allergan’s R&D for each of its orphan drugs. Every time the FDA approved Botox for another orphaned disease, Allergan got a new round of government tax credits, subsidies, fee waivers, and extended exclusive selling periods.
Allergan next did something that was a first in the drug industry. It used its orphan drug research to focus on getting mass-market approvals for Botox. It has succeeded over time in getting the FDA to approve Botox for treating overactive bladders, migraines, and its bestknown therapy, cosmetic improvements of facial wrinkles.45 Because of its many financial breaks as an orphan drug, what Allergan paid for its R&D as a cosmetic treatment was a fraction of what a typical drug would have cost.
Allergan has another advantage over rivals in its applications. No competitor has figured out Botox’s complex chemical structure. Instead of protecting its precise formulation with a patent, Allergan holds it as a trade secret. It is as critical to Botox as Coca-Cola’s secret formula is to its soda. Fewer than a dozen Allergan employees know all the reagents utilized and the exact settings of its anaerobic fermentation process. So long as it alone knows that recipe, it will continue to apply for new disease subsets of its existing orphaned drugs, getting the financial benefits of the law as well as additional seven-year selling monopolies on each. After a voluntary hiatus in the wake of two children with cerebral palsy who died in Botox trials in 2008, as of 2019, Allergan is testing Botox for a dozen additional orphaned illnesses.46
The problem under the Orphan Drug Act—even for the best-intentioned biotech companies using gene mapping technology to produce treatments for different cancers, muscular dystrophy, and cystic fibrosis—is the temptation to make outsized profits during its seven-year sales monopoly by setting often a jaw-dropping price.47 The world’s most expensive drug from 2011 until December 2017 was Soliris, developed by Connecticut-based Alexion Pharmaceuticals. The FDA approved Soliris for atypical hemolytic uremic syndrome (aHUS), a genetic illness in which the body’s immune system attacks blood platelets and cells. It affects an estimated six to seven hundred Americans.48 When it went on sale in 2011 it was priced at $18,000 a dose, $500,000 annually.49
Soliris was dethroned as the world’s most expensive drug in December 2017 when the FDA approved Luxturna, a novel gene therapy to treat a genetic eye disease that leads to progressive loss of vision for 1,500 to 2,000 affected patients.50 The price was set at $850,000. Luxturna lost its “most expensive” title in May 2019 when Novartis introduced Zolgensma to treat pediatric spinal muscle atrophy for a one-time treatment cost of $2.1 million (at one stage it had considered setting the price as high as $5 million).51 In defending its pricing, Novartis claimed it had priced its drug at less than half the cost of chronic medical care in the first years of an afflicted child’s life. After discussions with fifteen American insurance companies, Novartis announced the industry’s first ever installment plan by which the insurance firms would pay for it over five years.52
Not every orphan drug that promises an innovative treatment of a rare disease that had previously stumped researchers enters the market at a record-setting price. But when real-world use confirms the drug is in fact a radical breakthrough, companies frequently race to raise their prices. When Genzyme, for instance, introduced Cerezyme in 1991 to treat Gaucher disease, a progressive genetic disorder of the liver and spleen, its annual cost was $150,000 per patient. Its popularity meant that by 2014, Cerezyme’s price had more than doubled to $310,000.53 Similarly, Vertex got approval in 2012 for Kalydeco, a bioengineered drug targeting a genetic mutation carried by 1,200 of the 30,000 with cystic fibrosis. Vertex priced it at $294,000. Six months later it raised Kalydeco to $307,000. In another year it was $373,000.54
Academic researchers and scientists were angered about the Kalydeco price hikes. Twenty-eight scientists and physicians who treated cystic fibrosis signed a letter to Vertex’s CEO condemning its pricing as “unconscionable.”55 They were particularly enraged because significant portions of Kalydeco research funding, as is the case for many novel biosimilar orphans, was possible only because of National Institutes of Health grants. Between 2010 and 2016, every one of the 210 drugs approved by the FDA had early research partly funded by the NIH, more than $100 billion in total.56 (Since the 1930s, the NIH has invested $900 billion into research that drug companies used to patent brand-name medications).57
That taxpayer money was often indispensable for biotechs with an ambitious idea but not the money to develop it. What researchers found particularly distressing was how many ways the companies relied on the federal grants and assistance and then kept all profits. In the case of Vertex, buzz over Kalydeco made its stock pop more than $6 billion in one day. The company’s executives raked in over $100 million when they cashed in stock options. All the time they kept increasing the drug’s price, not lowering it.
Nothing in the Orphan Drug Act requires pharma companies to reimburse the government for research funding or to share any profits with either the National Institutes of Health or the National Cancer Institute. Several legislative efforts to close the loopholes exploited in the Orphan Drug Act have failed.58
Not all extravagantly priced orphan drugs are from biotech labs. Some of the most notorious are decades old, approved by the FDA before the Kefauver Amendments required the agency to rely on clinical trials. These are instances in which companies stopped making the older medications because the market was too small. It took number-crunching Wall Street entrepreneurs to realize that notwithstanding a small market, the way to make an orphaned drug profitable was to set a high enough price.
Acthar was such a drug, approved in 1952 by the FDA primarily to treat West syndrome, an uncommon but often fatal epileptic disorder that strikes infants younger than one. Acthar’s main ingredient was a hormone extracted from the pituitary glands of slaughtered pigs. It was discovered by the drug division of meatpacking giant Armour.59 Sanofi Aventis bought it and through the 1990s unsuccessfully tried expanding the therapies for which it was dispensed.
Acthar was priced at $40 per vial.60 After losing money every year, Sanofi stopped making it. In 2001, Questcor, a small and unprofitable drug company that was looking for new products, bought the rights at a fire sale price of $100,000.61 Over the next few years it raised Acthar from $40 to $1,650 a vial.62 Still, the patient market was so tiny that Questcor lost money and considered abandoning the drug.63 That changed in 2007 when Don Bailey became Questcor’s CEO. He was a business executive with no drug industry experience but a great résumé as a turnaround artist for struggling firms. For Bailey, Acthar was not a difficult problem to solve. He knew the company’s costs and how many patients were in the market. The only calculation Questcor had gotten consistently wrong, he concluded, was the price necessary to turn a good profit. If the price he picked was too high and the drug failed, then at least Questcor would know with certainty that nothing could save its drug.
One of the first things Bailey did was to raise the per-vial price to $23,000. He was unapologetic about the stratospheric increase, telling Wall Street analysts that “We have this drug at a very high price right now because, really, our principal market is infantile spasms. And we only have about 800 patients a year. It’s a very, very small—tiny—market.”64
Bailey got the FDA to give his slightly reformulated Acthar Gel a seven-year orphan drug patent. Under Bailey, Questcor expanded the indications for which Acthar could be dispensed to nineteen autoimmune and inflammatory illnesses. Its biggest promise was possibly treating multiple sclerosis patients who did not respond to more traditional IV steroids.65 It also had tentative FDA approval for nephrotic syndrome (kidney disorder), rheumatoid arthritis, and lupus. In the five years after Bailey had set the $23,000 price, Questcor’s stock went from 60 cents to $50, one of the top ten performing stocks in the entire market. (Insiders sold more than $100 million of stock over two years.)66
Smart CEOs like Bailey knew how to limit or avoid patient protests about high prices. As do many other companies selling exorbitantly priced drugs, Questcor gave some of its drugs free to those in need. It had a separate department devoted to helping patients get assistance with copays. The company’s profit comes from the 70 percent of sales to private insurance companies and to Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and Veterans Affairs.67
In the case of Acthar, Questcor not only managed to pull off the price increase from $40 to $23,000, but it turned into a profitable company that won accolades in the business world. In 2013 it was ranked as #1 on Forbes’s “Best Small Companies in America.” The company that had been losing money before it bought the rights to Acthar had a market cap of $3.5 billion.
The following year its stock reached $92.35 just as it was acquired for $5.6 billion by Mallinckrodt Pharmaceuticals.68 Mallinckrodt was best known for a complicated tax inversion that left its headquarters in St. Louis but its tax domicile in Ireland. Some of the money saved in taxes went to CEO Mark Trudeau, whose annual salary jumped from $6 million to $14 million. At at the same time Mallinckrodt raised a vial of Acthar to $38,892 and then to $43,000.69
A study in JAMA disclosed that Acthar dispensing in Medicare had increased several hundred percent, driven by a very small number of physicians. Those doctors were prescribing it to more patients and with greater frequency even though there were comparable generics that cost thousands of dollars less per treatment.70 The government paid more than $2 billion from Medicare on over 45,000 Acthar prescriptions from 2011 to 2016.
“I was shocked for my profession,” said Dr. Dennis Bourdette, one of the study’s authors and chairman of neurology at Oregon Health and Science School of Medicine. Since some of Acthar’s competitors cost one fiftieth as much, Bourdette said, “It’s a mystery to me why someone would be prescribing the drug.”71 One reason is that the U.S. rights to an almost identical Canadian drug, Synacthen, which sells for $33 for a comparable dose, were bought by Mallinckrodt and killed.72 About 60 percent of the big spike in Acthar’s sales to seniors in Medicare were for off-label ailments including rheumatoid arthritis. A researcher told 60 Minutes in 2018 there was “no evidence” Acthar helped treat arthritis. Saate Shakil, a UCSF professor, wrote a blistering accompanying editorial to the JAMA study, highlighting the “lack of high-quality evidence” to support Acthar’s supposed benefits and called the price increases “unconscionable.”73
In April 2019, under increasing scrutiny about its Acthar marketing, Mallinckrodt announced it would change its corporate name to Sonorant Therapeutics. Two months later the Justice Department announced an investigation of Mallinckrodt based on two whistleblowers who reported the company bribed doctors to overprescribe Acthar (two months later it settled the matter for $15.4 million).74 Fortunately for Mallinckrodt, not many people outside the drug industry know who CEO Mark Trudeau is or what he looks like. For firms trying to squeeze the last dollar from an old grandfathered drug, the personality of the CEO can affect public perceptions. When Martin Shkreli, a thirty-two-year-old ex–hedge fund manager, raised the price of an inexpensive orphan drug that was long off patent by 5,000 percent in 2015, he became overnight the villainous poster boy for unconscionable drug prices.75 Denounced in both mainstream and social media, Shkreli appeared before Congress where he invoked his Fifth Amendment right against self-incrimination. All the time, he smirked at lawmakers on live television. It was bad enough that Shkreli had paid $55 million for the rights to Daraprim (the FDA approved it in 1953) and raised its price from $13.50 to $750 a pill. What made it somehow worse was that the pill treated a rare parasitic infection that affected immunosuppressed infants and HIV/AIDS patients. Daraprim was indispensable for some two thousand patients: there were no generic competitors.
Shkreli was arrested in December 2015 on securities fraud and conspiracy charges unrelated to the pricing of Daraprim. Pharmaceutical Research and Manufacturers of America (PhRMA), the drug trade’s powerful lobbying association, knew the outspoken and unapologetic Shkreli was bad for an industry already held in low esteem by a majority of Americans (a 2019 Gallup poll revealed that Americans had a more negative opinion of the pharmaceutical business than any other industry).76 “I think the image of the sector has been hijacked by some bad actors, and we have to do a better job of telling our story,” said Stephen Ubl, PhRMA’s president, when he announced a $60 million ad campaign that emphasized “more lab coat, less hoodie” (a reference to the gray hoodie Shkreli wore when he was arrested).77
Shkreli, who was convicted in 2017 of two counts of security fraud, is serving a seven-year prison sentence.78 Although he mostly dropped out of the news after his conviction, Turing, the drug company of which he had been CEO, quietly kept Daraprim’s price at $750 a pill. The federal government continued paying $35,556.48 for a month’s supply for Medicaid patients.79 The same prescription had cost $608 before the price increase.
What happened with Daraprim was condemned as heartless. It was not, however, against the law.VI80 Legislators and the FDA have complained about that since Burroughs’s price-gouging thirty-two years ago with AZT, the first drug to combat AIDS. To industry veterans familiar with the Orphan Drug Act, none of the news from AZT to Botox to Shkreli is surprising. Marlene Haffner, who ran the FDA’s Office of Orphan Products Development for twenty-one years before she opened her own successful orphan drug consulting firm, believes it was all to be expected.81
“What we are seeing is a system that was created with good intent being hijacked,” according to Bernard Munos, an ex–corporate strategy consultant at Eli Lilly who reviewed the FDA Orphan Drug databases as part of a 2017 investigation by Kaiser Health News. It is “quite remarkable that it has gone on for so long.”82
I. A half dozen of the most profitable pharmaceutical firms have gotten their drugs designated as treatments for up to nine orphaned diseases. After the drug is developed the first time, research and development costs drop substantially for future approvals. While the companies must conduct clinical trials, because the targeted diseases are so rare the FDA sometimes only requires a single study with as few as a dozen subjects. Despite much lower R&D costs, pharma companies still receive all the monetary benefits of the Orphan Drug Act for every drug they get designated to another rare disease.
II. In 2014, Genentech made its branded version of rituximab available only through specialty distributors instead of the industry’s regular wholesalers. It did the same for two other blockbuster cancer biologics, Avastin and Herceptin, both of which had a slew of orphan drug approvals. Genentech claimed the move was to “improve the efficiency and security of the supply chain.” In fact, its action meant that hospitals and oncology clinics lost out on traditional industry discounts, resulting in an effective overnight price hike of $300 million annually.
III. Crestor is a good example of the often substantial difference between what the FDA requires for clinical testing for a mass-market drug, and what it requires for an orphan drug, even when the drug treats the same condition. Fifteen years earlier, for mass-market Crestor, AstraZeneca conducted the largest ever New Drug Application for a statin. It submitted twenty-seven Phase II/III clinical trials from 12,569 patients. Crestor for those affected by pediatric HoFH was based on a single clinical study of fourteen children, in which Crestor was given to half. Their cholesterol was tested only once, after six weeks of treatment, and those who had taken the pill had a slightly lower bad (LDL) cholesterol level.
IV. When Gleevec’s patent was about to expire, Novartis introduced Tasigna, an almost structurally identical drug, and launched a massive advertising campaign to coax oncologists to prescribe the drug. Tasigna had a list price of $115,000 per patient annually, and is under patent protection until 2026. It became a $2 billion drug within a year of its 2014 release.
V. Allergan has been creative in satisfying the statute’s requirement that an orphaned disease cannot affect more than 200,000 patients. While more than a million people eighteen and older suffer from upper limb spasticity, Allergan only tested Botox for stiffness in seven muscles in the elbow, wrist, and one finger. It later sought and received FDA approval to treat two additional fingers. All the slicing and dicing of symptoms and treatment areas was to satisfy the limitations for the number of patients in an orphan disease.
VI. Some states have tried controlling prices, but most substantive drug regulation is a federal power. Vermont, for instance, in 2016 became the first to require drug manufacturers to demonstrate cause for price hikes. If the pharmaceutical companies do not comply, they can still sell their drugs, but are subject to a $10,000 fine. Also in 2016, California voters defeated a proposition that would have capped drug prices at whatever Veterans Affairs paid. The industry spent $120 million to defeat it.