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The role of orphan and specialty drugs in US hospital costs

19 November 2014 Cameron Lockwood

When is an orphan an orphan? What makes a specialty drug a specialty drug? And, why are these increasingly costly questions for US hospitals?

Hospitals and their costs: no strangers to media scrutiny here in the US. However, these provider groups and their financial matters seem ever-more in the spotlight as a result of recent developments - a number of which raise critical questions over pharmaceutical access. Interestingly, two of these, in their own way, hinge upon the idea of definitions.

An orphan by any other name…?
The first of these developments adds to the long-simmering controversy surrounding "340b," an outpatient drug discount programme attracting accusations that safety-net hospitals and other covered entities are pocketing the associated gains with no benefit for patients. Now, healthcare reform in the US expanded the number of provider groups eligible for 340b - at the same time as it placed an exemption on discounting of orphan drugs.

The nature of that exemption has since prompted a legal battle in the courts, which has seen PhRMA file suit twice: first against a legislative rule issued by HRSA interpreting the orphan exemption narrowly (meaning discounts still apply when the same drugs are purchased for non-orphan indications), and then, this October, against an interpretive rule saying the same thing (after the court ruled back in May that HRSA lacked the authority to issue the rule in legislative form). This round will focus on the actual intent of the statutory language behind the exemption, and thus hinges, in a way, on the critical question: when is an orphan an orphan?

HRSA and entities covered by 340b would argue only when treating the disease or condition for which the drug received FDA designation as such. Industry, meanwhile, would contend that the statute is broader than that - once an orphan, always an orphan, regardless of the indication being treated.

And when is a specialty drug a specialty drug?
Meanwhile, another development has put hospital finance in the spotlight, and similarly has significant implications for pharmaceutical access.

Back in September, Genentech announced that, beginning this October, three of its products - Avastin, Herceptin and Rituxan - will only be available to hospitals and clinics in the US via six authorised specialty distributors. Up until then, these products were available via standard wholesalers, who typically make rebates available to hospitals or their group purchasing organisations based on volume: rebates that purchasers say are not available from specialty.

Furthermore, providers argue that specialty distribution is less predictable, forcing them to either spend more to acquire greater inventory, or buy as needed and thereby risk delays in patient access to treatment.

Genentech argues that the change in distribution model will ensure patient safety and access, and forms part of ongoing review of the supply chain. The company was already relying on specialty for its three newer drugs, Gazyva, Kadcyla and Perjeta, meaning all of its infused cancer products will now adhere to this model.

Infused products may require special shipment and storage - although provider groups have argued that Avastin, Herceptin and Rituxan were previously distributed under the traditional model to no ill effect. In a letter drafted by the CEO of Safety Net Hospitals for Pharmaceutical Access, it is pointed out that an official definition of "specialty drug" is missing - showing how this matter too, in its own way, relies on the issue of definitions. The story probably would not be complete without also calling attention to the counterfeit versions of these products which have been reported both in the US and in Europe.

Increasingly costly questions
As three commonly prescribed products (and, as it happens, especially so for some of the newly covered 340b entities), Avastin, Herceptin and Rituxan going the way of specialty distribution is not without consequence for hospital groups, both traditional and safety-net alike.

For both industry and hospital groups, the question over orphan drug 340b exemption is also increasingly weighty. With orphan drugs accounting for an ever-greater chunk of pharmaceutical expenditure (it has been projected this asset class will account for 19% of prescription drug sales by 2020), and certain orphan products being used extensively by some of the entities newly covered under 340b, both sides have a lot to gain, or a lot to lose. Such has the industry trend toward niche and premium-priced assets coincided with US healthcare reform and the significant expansion of 340b.

Cameron Lockwood is a senior life sciences analyst for IHS
Posted November 20, 2014



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