Financial and Economic Implications of Orphan Drugs the Canadian Economy in Perspective

IntroductionOrphan drugs are used to treat rare diseases or conditions. While a rare disease is defined by both the prevalence and severity of the condition, the actual definition of a rare disease, and the orphan drug used to treat it, vary by jurisdiction. Serious or/and chronic rare diseases typically have incidences of less than five in 10,000 people, according to the European Commission* 1; in the U.S.A, the Orphan Drug Act (ODA) refers to rare diseases as having less than 200,000 total patients (Winegarden,2). Simoens3 provides the most exhaustive definition in outlining that a rare disease typically affect fewer than five people per 100,000, is generally life threatening, and causes serious debilitation resulting in a serious chronic condition. Regardless of its definition, the need for orphan drugs cannot be underestimated. Currently, there have been 6,000 to 8,000 rare diseases identified in humans. Health Canada4 puts the number around the mid-point at 7,000. Many of these diseases tend to be genetic. Approximately one-half of these conditions affect children.Unlike the broader market for prescription drugs that are used to treat the more prevalent common diseases, the demand for orphan drugs is limited by the small number of patients, given that they are few in number, can often go undiagnosed for long periods of time, and have high mortality rates. This means that the high costs of research and development (R&D) of orphan drugs need to be recouped from a smaller market. Moreover, the financial barriers to entry for new firms into the pharmaceutical industry are quite extensive and high. Accordingly, there are few potential manufacturers of orphan drugs and prices, if left solely to the free market, the cost may become prohibitively high for buyers. Moreover, as the rare disease is not easily identified, the orphan drug may not be covered by health insurance plans, and, if they are, may still be subject to additional approval by the insurance provider. Approval may subsequently be limited to certain specific doses and a predetermined number of refills.Market StructureIn a free market system, the prices of products are determined by supply and demand, but there may well be various tiers that affect pricing by pharmaceutical companies. With high barriers to entry and comparatively few companies undertaking R&D, oligopolistic pricing is prevalent within certain market segments. When a company is successful in obtaining a patent for a new drug, there may also be monopolistic pricing in other segments until the patent expires. Then, the market for generic drugs reflects a perfectly competitive model, particularly if the drug has been reverse engineered and generic substitutes are available for distribution once the patent expires. There is, however, the potential for competition not based solely on price, but rather by other product attributes or marketing efforts to make a drug appealing to consumers. (Swamy5)The pharmaceutical industry is perhaps best examined as an example of a structural oligopoly or domination of the market by comparatively few players. The contributing factors of high R&D costs, patent protection, brand name recognition, and merger and acquisitions (M&A) have reduced the number of competitors and dissuaded new entrants from the market. It should be noted that in an oligopolistic market competition not only is price a consideration but also innovations in the product markets, which occur in the pharmaceutical industry. In addition to new products, firms also present healthcare providers and consumers with enhanced characteristics and upgrades to their existing product mix. The actions of one firm affect other firms and vice versa. Companies earning economic profits have an incentive to keep other firms from entering and capturing a portion of their profits. Pharmaceutical companies spend extensively on innovation in order to gain a competitive advantage in terms of technological and product expertise. …