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

[W]

Sylvain: Now, can you really answer ben's question and explain when and how Posner said what you claimed he did ?

I addressed that above, actually.

Sylvain: 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 ?

I say that you don't read ANY newspapers not because you failed to read the Wall Street Journal article that prompted this post, which you now admit, but because you had no idea that the AARP was responsible for the ad campaign that tabaled President Bush's Social Security reform until 2009. That has, quite literally, been in every major American newspaper and on news television programs for months.

You just want to restart the debate because you lost. Have a good night.

[Sylvain Galineau]

No you didn't address this above. You lectured about the meaning of the word 'obfuscate' and pontificated on the alleged deconstructions of others. You still have no justified the bolded claim of your first post.

Where did I just admit that I did not read that article ? Where, pray, did I do such thing ? This is truly fascinating. We are witnessing the manufacturing of yet another W 'fact'.

And where is the evidence that I did not know of the AARP and its Social Security proposal ? I asked what its relevance was to the Orphan Drug Act argument we are having. Since it has no relevance to it that I could think of, it stand to reason that I would ask what it is you were talking about. Which you never answered clearly. Now that this is finally clarified, however, I still have no idea why this is relevant to this argument, or how on Earth it can support your original claim.

Actually, I just wanted to start the debate since there hasn't been any yet. A litany of unsupported allegations is no debate.

I agree. Expecting a debate was a pretty dumb idea, considering. And I did lose; too much time. It is kind and considerate of you to give up.

[Sylvain Galineau]

One closing note for Sally. The kind that should go over email but no such avenue is available.

Earlier on, I did call you 'sweetie'. I also referred to the Act as the Open Drug Act. Twice. (After naming it correctly four times prior).

Apparently, this entitled you to poke fun at my first name. So your idea of a proper answer to a foreigner whose tone or style you dislike is to make fun of his name - your son would get away with it, at his age; but you ? - and pounding on an innocent and quite irrelevant lexical mistake in his second language, all with the sole support of penis-size psycho-babble ?

And I'm the one with aggression and intolerance problems ? I'm the one prone to snarky comments ?

Sure I am.

[Sally J]

Sylvain: I'm the one prone to snarky comments ?

Sylvain: (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.

YES.

[Sylvain Galineau]

OK, I guess you're saying you're no better so I shouldn't be surprised by cheap xenophobic jibes.

Point taken.

[Sylvain Galineau]

My American neighbor helpfully points out that making light-hearted fun of the infatuation of some with HTML style tags and sissy online chat abbreviations, as well as calling a troll a troll does entitle others to insult you on the basis of your first name, among other things.

He does think I am nuts for using my own name. Insulting others from the safety of anonymity is the preferred approach, he says.

Wise man.

[ben]

W,

It isn't usual practice to concoct a position for somebody else, declare what they write is merely obfuscating that position, and then attack that position. Perhaps you could try addressing what Posner actually wrote. And instead of using shorthand, just be explicit.

Thanks

[W]

Ben,

Perhaps you could try addressing what Posner actually wrote. And instead of using shorthand, just be explicit.

I didn't use "shorthand" in my first post. I used shorthand in my second post to refer to my first post. I did address what Posner wrote. In my first post. You can scroll back up to my first post and read it, instead of continually referring to my second.

Ben: It isn't usual practice to concoct a position for somebody else, declare what they write is merely obfuscating that position, and then attack that position.

Really? Because that's exactly what you do by continually referring to my second post without tackling any of the substance in my first post.

[Ta]

Ok, first, Sally no offense but unless you find something to say that isn't about Sylvain's typo, please shut up.

Secondly, lets try to get back to the relevant issue.

As far as W's assertion about the intent of Posner's post, I feel that he goes too far in saying that Posner implies "society as a collective is better off if its weakest members are left slowly to die." In truth, Posner doesn't actually state his opinion on the matter and he merely poses a question. There is some bias against the Orphan Drug act in his post, but that is probably to help us see why the legislation might not be seen as good.

W, you responded to my post about the issue not being the government's money by talking about how the government is the one funding this act and that being the source of the debate. However, the issue is not whether the government should fund this act, it is whether the act should exist or not and to what level. Posner's post does not refer to the cost to the government of implementing this act, it does mention costs to drug companies for financing R&D for rare diseases. The issue is not "what should the government spend its money on?", the issue is should the government encourage spending on rare disease research and to what level.

My opinion to the first part of the question was stated in a previous post and is yes. As to the second part, which Silvain and Ben both address as the primary focus, I don't really think a proper answer can be given without a thorough knowledge of the numbers inlvolved.

[W]

Ta: As far as W's assertion about the intent of Posner's post, I feel that he goes too far in saying that Posner implies "society as a collective is better off if its weakest members are left slowly to die." In truth, Posner doesn't actually state his opinion on the matter and he merely poses a question. There is some bias against the Orphan Drug act in his post, but that is probably to help us see why the legislation might not be seen as good.

I never made any assertions about the intent of Posner's post; Sylvain did in one of his attempts to distort my actual statements. But I will agree that "there is bias against the Ophran Drug Act in [Posner's] post." Is that bias explicit and express? No, it is obfuscated by the rigor of his analysis. As should be clear from reading my first post.

Ta: However, the issue is not whether the government should fund this act, it is whether the act should exist or not and to what level.

You cannot separate whether the act should exist from whether the governmment should fund the act: those are two ways of saying the same thing -- the act cannt exist unless the government funds it. We are agreeing in substance and disagreeing in forms of words.

Ta: As to the second part, which Silvain and Ben both address as the primary focus, I don't really think a proper answer can be given without a thorough knowledge of the numbers inlvolved.

Ah, and here we come to the cost of the legislation and how such reform will be tarred and feathered. Literally, all covered in my first post.

[Sally Johanssen]

Listen, Sylvain:

You insulted that guys' sister who has Gaucher's disease, you have called men sissies and women sweetie, you made fun of my 3-year old son, you have insulted just about everyone who has posted in this thread, and you have the nerve to call me a cowardly because I didn't put my last name on here so weirdoes like you could stalk me? There it is, you fallacy-using bully. J-O-H-A-N-S-S-E-N. Now why don't you hop over to your neighbor's and consult him about what to say now, you bilious frog.

[Sylvain Galineau]

I never made any assertions about the intent of Posner's post

Interesting. "...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."

'His' being Posner. Most of the quote above being bolded in the original. The author being you, not me.

Nobody needs to do any 'attempts'. It's on the record. You did not complain about a mere 'bias' against the Act. You asserted that a) Posner believes society to be better off by letting some to die slowly, but b) that he obfuscated this 'claim' behind his 'analysis'. Which you also referred to in your preamble as a 'poison pill'.

That none of your posts has been able to justify this gross distortion of Posner's position is clear. That you would then flatly state you never made any such comment when confronted with it multiple times is beyond belief; that you would try to deflect the blame on others who have been holding you accountable for your misjudgment is simply unreal.

Unless 'leaving people to die slowly' was another of those figures of speech ?

[Ta]

Ok, Sally please shut up. So far you haven't made any posts about the topic. Ok fine, so he wrote open instead of orphan big deal. At least he has made some relevent posts.

[W]

Sylvain, your assertions about what I wrote are demonstrably false.

"...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."

This is not a statement of "intent." Your claim, Sylvain, is that one can infer intent from the fact of the cover-up. In other words, Posner is covering up his claim because Posner intended to make the claim. But I don't say that. Look above: Posner isn't doing the obfuscation here. The rigorous analysis is. I never claim Posner believes XYZ and does ABC because he believes XYZ (i.e., he has the specific intent to do ABC); I'm simply focusing on the claims, whether implicit or explicit, in his post.

[W]

Sylvain: That you would then flatly state you never made any such comment when confronted with it multiple times is beyond belief

I simply did not make any assertions about Posner's intent. You outright misinterpreted what I wrote by not reading it carefully.

[Sylvain Galineau]

Sally,

I did not insult anyone's sister, I did not make fun of your son - telling you to ask your son is making fun of him ? And who uses her son to insult people and score cheap points anyway ? - and I certainly did not insult you in any way that justified your answer. I did not call any 'men' sissies - I characterized one specific online chat abbreviation as sissy; if you can't tell the difference, don't correct my use of the language - and I did not called women sweetie, I called you sweetie.

That you can only justify your self-righteous anger by gross exaggerating or fabricating a series of accusations is rather revealing. You obviously care very deeply about the level of intellectual stimulation around here.

I am glad we have clearly established who has anger projection issues around here. Thank you.

[W]

Sylvain: Which you also referred to in your preamble as a 'poison pill'.

At least now you recognize it was a preamble! Still, you must not know what "poison pill" means in corporate law. I was not saying he was intending to poison anyone! Again, you misinterpreted my post!

[W]

http://en.wikipedia.org/wiki/Poison_pill

[W]

Ta: Ok, so you are saying that the government has laws about wills and contracts because thats how they like their money spent, not because there needs to be some organization of private business?

Hmm, I didn't say that at all. What you said was that the legal system exists to combat crime. Wills and contracts have nothing to do with combatting crime. You were wrong. That's all.

[Sylvain Galineau]

W, you claimed Posner believes society would be better by letting some of its members die slowly. You even bolded it. You can mistreat your own words and those of others as long as you wish, the record is there.

I will take your exceedingly poor and repeated attempts at tortured semantic evasion as an admission of regret for your gross distortion of Posner's statements. Thank you.

[Sylvain Galineau]

Right. Corporations use poison pills to complain about bias. We all know that.

[W]

Ta: The cost to the government is not the issue

Yes, it is, because you can't sanely pretend that the government does not fund the ODA. If the money from the ODA goes to something else (i.e., pork), the market for medicines of rare diseases would no longer exist, and that would hurt people with Gaucher's disease. The point is you can't obfuscate the direct harm this government choice will have on those people, when there are no guaranteed benefits on the other half of the scale. That private investment will dry up in the asbence of a viable market is just a way of describing the effect of the government canceling the ODA.

[W]

Sylvain: W, you claimed Posner believes society would be better by letting some of its members die slowly.

I literally NEVER said that "Posner believes that". You keep making it up, it still won't be true. I keep directing you back to the first post for a reason. Try reading it.

[Ta]

W: "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."

"This is not a statement of "intent." ... Look above: Posner isn't doing the obfuscation here. The rigorous analysis is. I never claim Posner believes XYZ and does ABC because he believes XYZ (i.e., he has the specific intent to do ABC); I'm simply focusing on the claims, whether implicit or explicit, in his post."

Ok, so you are saying he makes a claim about slow death, but that isn't his intent? I beleive you contaridict yourself there, I recomend you just admit that you were being a bit extreme when you stated that this is his claim.

[Sylvain Galineau]

W, What are you, nine years old ? The literal defense wouldn't save you, even if you were. This is what you said of Posner's beliefs. Unless you're now saying Posner does not believe in his own 'claim' ? Is that the new line of defense ?

Keep digging yourself a hole.