Orphan Drugs, Intellectual Property, and Social Welfare--Posner

A pair of excellent articles by Geeta Anand on the front page of the Wall Street Journal for November 15 and 16 discusses the little-known but very costly Orphan Drug Act of 1983. The Act is designed, mainly by providing expanded intellectual-property protection (there are also tax incentives and research subsidies, but they are considered less important), to encourage the creation of drugs for the treatment of rare diseases, defined as diseases that afflict no more than 200,000 Americans at any given time. Partly because different cancers are classified as different diseases, an estimated 25 million Americans have a rare disease as defined by the Act. A company that is first to obtain the Food and Drug Administration's approval to sell such a drug has the exclusive right to sell it for seven years. Although this is shorter than the term of a pharmaceutical patent (normally 20 years), establishing patent eligibility is a far more difficult and protracted undertaking and a patent once obtained is subject to court challenges that often succeed in invalidating it. The expansion in intellectual-property rights brought about by the Orphan Drug Act makes the following economic sense: The incentive to create an intellectual work is a function of the size of the potential market for it. The reason is that, by definition, the principal costs of such a work are fixed costs, incurred before the first sale is made; in the case of orphan drugs, they are the cost of R & D plus (what is often greater) the cost of clinical testing, and they greatly exceed the costs of actually producing the drug. The larger the market, the lower the fixed costs per sale, and so the less the seller has to charge in order to recover those costs. If fixed costs are 100 and variable cost (the cost of producing one unit of the product) is 1, then if there are 10 customers the producer must charge each at least 11 (100 divided by 10, plus 1) to break even, but if there are 100 customers he can break even at a price of 2 (100 divided by 100 plus 1). Hence the rarer a disease, and thus the smaller the potential market for a drug to treat it, the higher the price that the producer must charge in order to break even. His ability to charge that high price will depend on his ability to exclude competition; a producer allowed to duplicate the new drug could undercut the price charged by the original producer yet make a large profit because he would not have borne any R & D costs. The higher the break-even price and therefore the greater the profit opportunity for a competitor, the likelier that competition will quickly erode the price and prevent the original producer from recovering his fixed costs. Giving the original producer more than the usual protection against competition that the law provides to creators of intellectual property is thus a method of increasing the incentive to create drugs that have only a small potential market because relatively few people suffer from the diseases that the drugs treat. This is not just a theoretical point. The fixed costs of a new drug are indeed high, even if the industry-sponsored figure of $800 million is, as I believe, an exaggeration. This means, moreover, that even without a threat of competition, the incentive to develop a new drug that would have very few buyers would often be insufficient to induce that development. Suppose a drug cost $500 million to develop and had only 50 potential customers. Then each would have to pay (over his lifetime) $10 million (actually more, because of discounting to present value) to enable the producer to cover its fixed costs. Health insurers might be unwilling to pick up such a tab. The success of the Orphan Drug Act in encouraging the creation of orphan drugs (more than 200 such drugs have been approved since the Act was passed, compared to only 10 in the preceding decade), which in 2003 had total worldwide sales estimated at roughly $28 billion, confirms the economic analysis and shows that intellectual-property protection can have important incentive effects. But has the Act produced a net gain in economic welfare? That is less certain. Of course many people have benefited from the drugs. But the costs per benefited person are frequently astronomical; that is implicit in the rationale for giving producers of such drugs increased protection against competition. The costs are especially high for those orphan drugs, apparently the majority, that alleviate symptoms or prolong life but do not cure the disease, so that the patient has to take them for the rest of his or her life. The Wall Street Journal articles give an example of a woman who suffers from Gaucher disease and spends (or rather her health insurer spends) $601,000 a year for the drug, Ceredase, and its administration. Because by definition the percentage of people who suffer from rare diseases is small, it is feasible for health insurance to cover such extraordinary expenses, provided the insurance pool is large. And Ceredase is at the high end of orphan drug expense. Resources for medical research are finite. The Orphan Drug Act sucks large research expenditures into creating treatments for rare diseases. Without the Act, those resources would be channeled by the market into other investments that might produce a higher social return. The English economist Arnold Plant pointed out many years ago that if the law protects some monopolies, as by granting patents or equivalent intellectual-property protection, the profit opportunities that such protection creates (Ceredase generates an estimated 25 percent annual rate of return on investment for its producer, Genzyme Corp.), which are not generally available in the economy, may attract into the monopoly markets resources that would produce greater consumer welfare if invested in production in competitive markets. As a result of competition, the price of television sets is much less than the price that people would be willing to pay if the sale of television sets were monopolized; the difference is "consumer surplus" and is a measure of the net value that the industry creates. For all one knows, the consumer surplus that would be generated if the resources now devoted to developing orphan drugs were channeled into competitive markets would exceed the net benefits of those drugs, bearing in mind that there are few beneficiaries. The number of people who take orphan drugs is far fewer than the total number of people with rare diseases. Indeed, apparently only 200,000 Americans are taking such drugs. Assuming that most global expenditures on orphan drugs are for Americans (I'm just guessing--I do not have U.S. figures), this would be an average expenditure of $100,000 ($100,000 times 200,000 equals $20 billion). Few people would be willing, if only because few people would be able, to spend anywhere near this much on drugs. As the economist Tomas Philipson points out, however, if people who do not suffer from rare diseases derive a benefit from orphan drugs--whether because they are altruistic or because they fear that they or members of their families might develop such a disease--then the total social surplus created by the Orphan Drug Act may exceed the consumer surplus. Yet if the R & D expenditures induced by the Act were channeled instead into developing drugs for equally serious but much more common diseases, this might well be preferred by most people.

Comments

[Sylvain Galineau]

This is a lie. I do not even mention the AARP by name in my first post, let alone in bold.Except this is not the claim I was referring to. Which would be obvious if you only bothered to read your own bolded assertion in your first post and compared it to the last statement in your previous answer. But I guess reading others is too tiresome and would stand in the way of the grandstanding. Better keep on keepin' on about the AARP - as if anyone cared - and now even the Nazis, in the same line of argument.

It's official : you are completely off your rocker. It's all right, help is on the way. This is exactly what we invented the Orphan Drug Act for. And goes to show that it might not always be the most effective use of our resources, I guess.

[Sally J]

could it be because the latter are a wee bigger, more extensive, cost slightly more and touch a few more Americans than the Open Drug Act ?

It's the Orphan Drug Act!

[Sylvain Galineau]

(Hey, he knows about LOL....and in italics too...he must be kewl)

Seriously. Apologies to Mr Posner for slapping a troll around in this otherwise excellent space. He shall be ignored from now on. Sorry for all the noise, they're rather loud and messy pets.

Out and over.

[W]

Sylvain: Except this is not the claim I was referring to. Which would be obvious if

Except it is not obvious because of the way you inarticulately worded your post. It appears that you are still talking about the AARP. Try writing with clarity:

Sylvain:

Side note : you brought up the AARP. Not me. I asked what its relevance to this argument was. Still no intelligible or relevant answer except to invent more absurd accusations and conflating more unrelated issues to drown your (dead) fish. Read before you answer. Listen before you speak, you might come across as less of a troll.

By the way, you did make that claim. In bold, in your very first post. That you are now so keen to deny it will be sufficient for now. Thank you.

Who is to know what "that" claim is? The last claim you referred to was me bringing up the AARP.

[Sylvain Galineau]

Sally, oops. Must be that figurative speech thing again. Contagious, I guess.

[Sally J]

Frankly, Sylvain, I think you're the troll, and I hope Posner bans you. I don't even think you read any of the relevant materials before opening your mouth!

[Sylvain Galineau]

Well, if you took the time to read before blowing off steam, a lot of things would clear up.

Someone please tell the guy(gal?) what he(she?) wrote in bold in his first post. The scrollbar must have broken, with all this heat. Ta ta.

[Sally J]

I am not W, or ben, or Ta, or anyone else here. I come here all the time!

[Sylvain Galineau]

Aaaw, Sally. That so hurts my feelings. Really. Tell you what : next time you can be the teacher and discipline the naughty kids yourself instead of begging the prof to do it for you OK ?

Bye now.

[Sally J]

Sylvain: Well, if you took the time to read before blowing off steam, a lot of things would clear up. ... The scrollbar must have broken, with all this heat.

Sylvain: If Posner's title and entire post are about the Open Drug Act but, as an example,...

But they are not. It's called the Orphan Drug Act.

[Sylvain Galineau]

Yes, sweetie. I heard you the last time. Replace Open with Orphan and make a real point.

What's with all the bolding these days anyway ? I got to try that. It seems to prove things or make them important. Neat.

Seriously, kids. It was fun. I really, really got to go now. (He says for the 12th time...children...sigh...)

[ben]

W: ...[Posner's] claim that society as a collective is better off if its weakest members are left slowly to die.

W, where does Posner actually write this, or words to this effect?

[Sally J]

Sylvain,

You're a posturing hypocrite. You didn't even read Posner's post carefully. You do a tremendous disservice to everyone who comes here to be intellectually stimulated with your cheap misquotations and snarky comments. And now you are sexist! Sweetie? Sweetie? Where the hell do you get off?

You didn't just make a casual error. You typed Open instead of Orphan because you are too intellectually lazy to pay careful attention! You are the one who was upset and angry. You're the one who didn't bother to scroll up. You're the one who is full of bull. You're a classic case of projection.

Instead of comparing your penis-size with Internet foes, you might try contributing something of worth. I suppose my 3-year old son would have insecurities like yours at your age if I had named him Sylvain! However many times were you pounded during recess, this blog is no place to take out your aggression.

[Sylvain Galineau]

ben, my dear friend, this was in bold. Do not dare question the bold sentences ! They are not open to inquiry and are not subject to the burden of proof. Figurative speech ! It's the new Science ! We must always prove to W. he said what he did, not the other way around. Where have you been ?

OK I'll stop. Again.

[W]

Ben,

W: ...[Posner's] claim that society as a collective is better off if its weakest members are left slowly to die.

W, where does Posner actually write this, or words to this effect?

This is an example of distorting what I wrote by selectively quoting it. What I wrote was this:

As always, Posner has clearly presented an economic analysis with disastrous, provocative results, and expected us to swallow the poison pill. His analysis is lucid, illuminating, and cautious and there is little with which to disagree. And yet the rigorous analysis obfuscates his claim that society as a collective is better off if its weakest members are left slowly to die.

When I later state that Posner is "saying" XYZ, it's just a shorthand way of referring to the earlier post, quoted above. I did not mean to revise the original post, which refers to a claim obsfuscated, and replace it with the assertion that such a claim was explicit and express.

But to someone who cares about deconstructing the text of your post, rather than dealing with its substance, that doesn't matter.

[W]

ob∑fus∑cate ( P ) Pronunciation Key (bf-skt, b-fskt)
tr.v. ob∑fus∑cat∑ed, ob∑fus∑cat∑ing, ob∑fus∑cates
To make so confused or opaque as to be difficult to perceive or understand: ìA great effort was made... to obscure or obfuscate the truthî (Robert Conquest).
To render indistinct or dim; darken: The fog obfuscated the shore.

[Sylvain Galineau]

Well, speaking of lazy posturing and aggression, I am glad you could let me know why I typed one instead of the other. The depth of your psycho-analysis does indeed leave me in awe. As for the soft kindness of your overreacted put-down, it is indeed humbling.

As far as sexism, I must admit I have erred. I mean, look at you bringing penis size in the melee. Now *this* is nuanced female sophistication at work. Only guys have to go below the belt.

As for your ability to keep the debate on its tracks, it is clearly unmatched.

OK, guys. Time out : so far we've had Gaucher type 1 and 2, the AARP, the Nazis and now penis size.

Anyone have anything related to Mr Posner's post ? Once.... ? Twice... ?

[Sally J]

You mean his post about the Open Drug Act?

[Sylvain Galineau]

OK so Posner's analysis obfuscates - look Ma ! Bold ! - "his" (Posner's right ?) "claim that society as a collective is better off if its weakest members are left slowly to die."

In other words, he didn't say anything of the sort, it's just obfuscated but visible to those....who are more interested in deconstructing the text of a post, rather than dealing with its substance.

We finally agree on something. Joy.

[Sylvain Galineau]

Ask your three-year old son. He knows.

[W]

Uh, not really, Sylvain.

Actually, if you go back to first post, you'll recognize that we've come full circle. Any questions you want answered? Go back there and simply read it more carefully.

[W]

Yes, it is mere "deconstruction of text" to say that:

I take Posner's point that a dollar spent to earn two dollars is a waste when one has the costless opportunity to make three.

You're a fool.

[Sylvain Galineau]

I am glad you do not need to call me names.

And your point is ?

[W]

Just stating a fact. I know you have problems with that. Perhaps it explains why you don't read the newspaper.

[Sylvain Galineau]

Stating a fact ? A fact like the one according to which I don't read 'the newspaper' - there is only one apparently - or a real fact, one you can actually back up ?

Now, can you really answer ben's question and explain when and how Posner said what you claimed he did ? Or are we just going to get more tiresome evasion and long-winded tirades about everything and nothing ?