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Darwin's Medicine blog

Professor Brian D Smith is an authority on the pharmaceutical industry and works at SDA Bocconi University and Hertfordshire Business School.

Malthus’ orphans

Firms focusing on small, high-profit niches risk falling into a 200-year-old trap

Just as Darwin is the inspiration for my research, one of Darwin’s most important influences was Thomas Malthus, whose dire predictions have made his name an adjective. I was reminded of Malthus, and what his work might mean for the life sciences industry, as I discussed the orphan drug and rare disease market with some clients this week. As usual, allow me to digress for a moment into the science and the history before returning to the practical and thought-provoking implications for our industry.

Thomas Malthus was an 18th century clergyman. His book, An Essay on the Principle of Population, contains a key idea: increased food production, which might be expected to lead to improved standards of living, actually leads to an increased population. This ‘Malthusian trap’, as it became known, means that rather than a better-fed society, the population would grow until it outstripped food supply and the lower classes starved. His thinking influenced many Victorian scientists, including Darwin, but his worst fears were not realised. Technological developments, such as birth control and industrial food production, that he did not foresee, changed the course of history. But his logic persisted in the thinking of Darwin. Competition for limited resources is central to Darwinian evolution.

Malthus came to mind this week as I read a valuable report from EvaluatePharma, which predicts that orphan drugs will capture no less than 20% of spend on prescription drugs by 2024. The parallel with Malthus might not be obvious, so let me clarify that. The life sciences industry feeds, as it were, on the amount of money that governments and other payers have to spend, which is related, ultimately, to GDP. In economically developed markets at least, there is enough money to pay for a good standard of basic healthcare and then spend more on therapies and treatments that our ancestors would have considered expensive luxuries. This latter category includes many orphan drugs and rare diseases, whose health economic outcomes are often much less than other parts of the market, such as antibiotics or vaccines, for example. To a rough approximation, the growth of GDP has enabled the growth of the number of conditions we can treat, much as Malthus noted that increased crop yields led to higher populations.

Looked at in that way, there may be a Malthusian trap lying ahead for those companies who have invested in orphan drugs, such as Takeda with its recent acquisition of Shire. The attractiveness of rare diseases, orphan drugs and other ‘ultra niche’ strategies is their high relative profitability; governments tolerate high cost per patient because the patients are few and often tragically high-profile. But if EvaluatePharma is right and the proliferation of such treatments means that 20% of drugs spend is on these expensive products, that toleration may not be sustainable. It’s easy to see governments limiting the benefits of orphan drug status or starting to limit the prices paid for rare disease treatments. If so, the projections on which orphan drug investments are premised may prove optimistic.

Of course, it’s possible that unforeseen developments might save the day. Some people argue that the costs of specialised treatments may come down over time. They point to Moore’s Law-type trends in information technology. But I fear this may be unduly optimistic. Price decline depends on economies of scale, learning curves and competition. By and large, rare diseases and orphan drugs don’t lend themselves to the former or the latter. That’s the nature of niche strategies. It’s true that learning curves and other effects might drive down prices somewhat, but my instinct tells me that small volume treatments will remain very expensive, in relative terms at least.

And if prices don’t decline significantly, rare diseases, personalised therapies and other expensive niche therapies will consume much more than the modest growth expected of mature economies. It’s hard to imagine a scenario when such disproportionate growth in costs does not force governments to collectively treat these specialist diseases much more like their larger but cheaper cousins. Failure to apply some cold-hearted cost-benefit analysis to orphan drugs, rare diseases and other niches would inevitably lead to the ‘lower classes’ being starved of healthcare spend. Given the political nature of healthcare spend, such neglect is likely to be concentrated on conditions that don’t vote, such as disease prevention and ‘elective’ procedures and therapies, such as fertility treatment.

Malthus is often ignored because his impeccable logic did not, in this particular case, pan out as predicted. But, to adapt Richard Feynman’s famous quote, for a successful business model, reality must take precedence over hope because the payer will not be fooled. Life sciences companies that see orphan drugs and other diseases as their future might do well to consider the threat of Malthus’ trap.

5th July 2018

From: Sales

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