Drug manufacturers influence Orphan Drug Regulations to create monopoly market

Through their exponential growth and exorbitant prices, orphan drugmakers have been accused of being monopolies (Tribble & Lupkin). Orphan medications are those that are used to cure rare illnesses. Rare disorders are distinguished by a patient population of less than 200,000 individuals (Tribble & Lupkin). Orphan medications were once thought to have a low profit rate due to their difficulty in commercialization. Since President Ronald Reagan signed "The Orphan Drug Act"" in 1983, manufacturers of orphan drugs have secured long-term payments for the expense of new drug production. Incentivized by past government legislation, companies have continued to capitalize aggressively on the lucrative nature of the industry. As a result of their growing market power, flexibility to set prices and a high barrier of entry, they have been characterized as Monopolies. A study conducted by Kaiser Health News found that drug manufacturers are exploiting the provisions of Orphan Drug Act which are intended to benefit hopeless patients to create their wealth (Tribble & Lupkin). Another study conducted by Makary et al., discovered that drug manufacturing companies usually identify a small patient population in an attempt to gain extra approvals. In fact, currently, many orphan drugs that were initially designed to treat rare disorders are being sold at an inflated price.

Though the term monopoly strictly refers to having one seller in the market, it is often used in economics to refer to firms which have a substantial influence on the price, output, and investment in the industry” (Tribble & Lupkin). Even with insurance, the rising cost of life-saving drugs has proven to be unaffordable to some patients in need. This, in turn, exposes the health of such patients to great risks and uncertainties (Reuters). Government regulation can help in reducing negative consequences of monopoly pricing by reducing the financial burden on consumers. However, Food and Drug Authority lawmakers should also consider the importance of facilitating the development of life-saving drugs by continuing to offer incentives for drugmakers.

Monopoly is a type of market structure dominated by one seller or producer selling distinguished good or service in the market. In the monopoly market the sellers are sole providers of that unique product, and therefore they face no competition (Bresnahan & Peter). In this market structure, the marginal revenue curve is the equal to the demand curve of the firm. . Nevertheless, firms operating in monopoly market structure have the authority to determine the prices at which to sell their product. A study conducted by Tribble and Lupkin in 2014, showed that average price for top hundred orphan drugs sales was six times higher compared to non-orphan drugs. The high prices of orphan drugs can be attributed to monopolistic nature of drugmakers. Also, the study concluded that orphan drugs could generate as much revenue as non-orphan drugs.

Figure 1

Figure2

Source: Bresnahan and Peter. "Entry in monopoly market." The Review of Economic Studies 57.4 (1990): 531-553.

Key

Q: Output, P: Price, D is the Demand, AR stands for Average Revenue, S: Supply, ATC stands for Average Total Cost, MC: Marginal Cost, MR: Marginal Revenue, A: Consumer Surplus, B: Supernormal profits, C: Deadweight Loss

In monopoly market, the curve for demand slopes downwards the right meaning that the price is usually higher than the Marginal Revenue (Bresnahan & Peter). Consequently, the Monopoly would set the optimal price at the height of the intersection between Marginal Revenue (MR) and Marginal Cost (MC). According to figure1, monopoly companies sell their product to all customers at high price (P*) more than they are willing to pay (Bresnahan & Peter). Majority of the firms maximize their profits at a point where Marginal Cost is equal to Marginal Revenue. Profitability of any business is determined by the degree of competition in the market. Unfortunately, the degree of competition for the firm in monopoly market is zero. According to figure1 monopolistic firms make supernormal profits at B when there is consumer surplus (A). Orphan drugmakers operate at B where they make supernormal profits (abnormal profits) by charging the patients exorbitant prices ‘’p*’’ (Tribble & Lupkin). Due to patent rights that safeguard orphan drug manufacturing firms, there are no close substitutes for their products, and therefore they exercise highest monopoly power. The patients have no choice other than buying the drugs at a set price by monopolistic orphan drug manufacturing firms. If the patients decide to boycott the prices, they will suffer from devastating effects of the traumatizing illnesses including death.

Alternatively, to maximize profits, the natural monopolist would charge Q, making super long profits. At Q the drugmakers have a surplus output which they sell to non-orphan patients thus making more profit. According to Bresnahan & Peter, monopolist usually passes the burden of high costs to society due to lack of competition leading to loss of economic welfare (Deadweight loss). Without rules or regulation, price gouging to maximize Price is likely to occur. The C (Deadweight Loss) in figure2 above shows that revenue from the Consumer Surplus is transferred to the Producer Surplus. This gives more value to the Producer or the monopolist. This limits the options for consumers. However, because this is a single firm, the Marginal Cost curve is also the Supply Curve.

Figure 2 shows that resources are not being allocated efficiently. At C the monopolistic firms operate at DWL meaning that resources are not allocated uniformly (Bresnahan & Peter). Similarly, orphan drugmakers manufacture fewer drugs for treating rare diseases which they offer at a high price and thus making them out of reach for most patients suffering from rare illnesses. There is a loss in economic welfare shown by the Dead Weight Loss in Figure 2.

Whereas in monopoly market structure the firms have no close competitors and have full control of their products, in perfect market structure there are many firms selling similar products and they have no control over the pricing of their products (Bresnahan & Peter). Also in the perfect market, both the sellers and buyers have full knowledge concerning the market products. Moreover, monopolist degree of completion is zero while perfect market experiences stiff market competition (Bresnahan & Peter). Orphan drugmakers operate in the monopolistic market since there are no known competitors in their market and also they have full control of their products. Lack of competition for orphan drugmakers is further strengthened by tough entry barriers enforced by Food and Drug Authority.

Orphan drugmakers companies such as BioMarin maintain their “monopoly power” through barriers to entry. BioMarin Company manufactures unique drugs for treating rare diseases such as Morquio syndrome and mass wasting (Reuters). For instance, in 2004, FDA approved BioMarin's elousulfase alfa drug for treating Morquio syndrome. Due to patents rights issued to firm by Food and Drug Authority, no other company can replicate its drugs.

There are several types of barriers to entry that make BioMarin and other orphan drugmakers maintain their monopolistic nature of the market structure. Firstly, Orphan the company benefits from economies of scale (Reuters). The cost of the specialized facilities, not to mention the investment in research and development provides a huge risk to any potential new entrants. Secondly, BioMarin is protected by legal barriers such as the government declarations (patent) which allow the company seven years of exclusive rights to the marketplace (Tribble & Lupkin). The monopolistic nature of orphan drug manufacturing firms has highly contributed to high costs for orphan drugs. This gives the company the monopoly Power, giving it the authority to raise prices above marginal costs without fearing competition from others. Thirdly, BioMarin firm has advanced technology and scientists, a factor that gives it exclusive access to important resources.

In spite of the fact that orphan drugs are designed for rare diseases, research has shown that economies of scale and potential commercialization of orphan drugs are more profitable than that of non-orphan drugs. The Economic power of orphan drug business has been further boosted by factors such as grants, abandoned FDA fees, tax credits, reduced schedule for clinical development, increased a likelihood of regulatory approbation, premium pricing, reduced marketing costs and prolonged market exclusivity (Reuters).

High profits made by orphan drugmakers firms due to their monopolistic nature can be beneficial in that the extra revenue can be siphoned into research to develop new and effective drugs for curing the rare diseases (Tribble & Lupkin). Moreover, monopolistic nature of orphan drug manufacturing firms puts them in a good position to cater for high costs required for the development of new drugs. Legal barriers to entry such as patents act as incentives to orphan drugmakers’ firms, and consequently, free rider problem is controlled (Tribble & Lupkin). Lack of patent can discourage people since it allows other people to copy their research work. Investing profits made into new technology will lead to reduced cost. Reduction in production costs can be attributed to innovations fetching better prices.

Although monopolistic nature of orphan drugmakers firms can be beneficial, the firms have been accused of taking advantage of the monopoly to exploit the affected people (Tribble & Lupkin). The firms restrict drug output into the market and consequently charge high prices. The high cost of drugs leads to delayed healthcare since the patients cannot afford the drugs even after insurance cover. Operating as monopoly restricts consumer choices since consumers have no alternatives and as a result, they end up purchasing the drugs at exorbitant prices.

In conclusion, the monopoly power of orphan drugmakers firms has created more evil than good to patients with rare diseases and economy (Reuters). For instance, a research conducted by Makary and his colleagues on Gleevec orphan drug has shown that the drug is not used to benefit the orphan population as required (Tribble & Lupkin). Makary further argued that orphan drugmakers make high profits at the expense of desperate patients. To prevent more evil from happening relevant authorities should take preventive measures. Some of the measures that can be taken control or reduce monopoly include price controls and prohibiting mergers. However, there should be enough margins for companies to make a profit without price gouging ill patients.

Works Cited

Bresnahan, Timothy F., and Peter C. Reiss. "Entry in Monopoly Market." The Review of Economic Studies 57.4 (1990): 531-553.

Reuters, Thomson. "The Economic Power of Orphan Drugs." 2013-10-29]. http://thomsonreuters. com/products/ip-science/04_013/1001450. pdf (2012).

Tribble, Sarah Jane, and Sydney Lupkin. "Drugmakers Manipulate Orphan Drug Rules to Create Prized Monopolies." Kaiser Health News (2017).

Tribble, Sarah Jane, and Sydney Lupkin, ‘’Drugs for Rare Diseases Have Become Uncommonly Rich Monopolies’’