Empirical economic analysis of orphan drug legislation impact on innovation

Philippe Gorry, Diego Useche and Martin Zumpe

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Abstract: Background: Drug development for rare diseases has been limited mainly by the prohibitive cost of investing in a novel drug with poor market potential. To encourage the development of such drugs, Orphan Drug (OD) legislation was put in place in the United States in 1983 and in the European Union in 2000. The introduction of this status has brought incentives including fee reductions and market exclusivity. However today, the increased availability of OD with their very high cost, and their use for chronic disease raises a debate about accessibility, cost-effectiveness, and reimbursement by health protection systems. Objectives: As most of the incentives are not contingent to an ultimate research success, one may wonder about the effects of such public health policy. Very little empirical research has been performed on the subject. Scholars have proposed cost/effectiveness and value-based pricing as a mean to estimate a drug price that is linked to the benefits it offers to patients and society. However one of the key components of debates on rising health care costs is the cost of R&D and the role of private sector investments. Methods: After an overview of the innovation dynamics and the industrial organization of the OD market is given, an empirical financial analysis of investment attractiveness in OD R&D will be presented focusing on the US market. First, we will explore whether disclosure of information about a firm's innovativeness through OD designation prior to Initial Public Offering (IPO), can reduce problems of asymmetric information and risk, and help firms in attracting investors. The study develops econometric models of the relationship of various metrics of firm quality prior to the IPO and the amount of cash collected at the IPO. Secondly, we will investigate the financial impact of the OD market approval announcement on firm market valuation, with an event-study methodology developed in finance, based on the efficient market hypothesis. Results: We attempted to take into account for endogeneity of OD designations prior to IPO by considering simultaneous relationship between the firm innovative outputs and IPO performance. The signaling power of OD designations is positive and statistically significant. An additional OD application prior to an IPO increases the IPO proceeds by about 10,8% in the US stock markets. OD market approval decisions have also a significant influence on stock price movements and abnormal returns of the pharma-biotechs companies. Conclusion: These results clearly indicate that the OD financial incentives, seven-years marketing exclusivity and tax-credit, constitutes an important financial stimulus. They also suggest that this device favours future OD research via improved fund-raising capacities of the biotechnology firms.

Date: 2016-07-13
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Published in Eur. Health Economic Association Conf., Jul 2016, Hamburg, Germany

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Working Paper: Empirical Economic Analysis of Orphan Drug Legislation Impact on Innovation (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02195798

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