Does Gilead's (withdrawn) orphan designation request for a potential coronavirus treatment deserve your outrage?

Many commentators were outraged by the FDA's announcement on Monday that Gilead received orphan drug designation for using the drug remdesivir to treat COVID-19. The backlash led to a quick about-face by Gilead, which announced today that it is asking the FDA to rescind the orphan designation. For those trying to understand what happened here and the underlying policy questions, here's a quick explainer:

How could the Orphan Drug Act possibly apply to COVID-19?

Under 21 U.S.C. § 360bb(a)(2), a pharmaceutical company can request orphan designation for a drug that either (A) treats a disease that "affects less than 200,000 persons in the United States" at the time of the request or (B) "for which there is no reasonable expectation that the cost of developing and making available in the United States a drug for such disease or condition will be recovered from sales in the United States of such drug." An ArsTechnica explainer suggests that remdesivir received orphan designation under option (B), but this email from the FDA indicates that it was option (A).

The designation seems correct based on the plain language of the relevant statute and regulations: As of Monday, there were 44,183 cases diagnosed in the United States (and even fewer at the time of Gilead's request), and the Orphan Drug Act regulations indicate that orphan designation "will not be revoked on the ground that the prevalence of the disease . . . becomes more than 200,000 persons." But given the CDC's low-end estimates of 2 million Americans eventually requiring hospitalization, commentators have noted that this feels like a loophole that gets around the purpose of the Orphan Drug Act.

What benefits would Gilead have received from an orphan designation?

The main effect would have been a tax credit for 25% of Gilead's expenses for the clinical trials it is running to figure out whether remdesivir is actually effective for treating COVID-19. (The tax credit was 50% when the Orphan Drug Act became effective in 1983, but was reduced to 25% by the December 2017 tax reform.)

Gilead would also have received a 7-year market exclusivity period if remdesivir is approved, but this would have had little practical effect because (1) it would already receive a 5-year data exclusivity period for approval of a new chemical entity (because remdesivir has not yet been approved for any use) and (2) Gilead has later-expiring patents, including a patent on the remdesivir compound that expires no earlier than 2035. In theory those patents could be invalidated, but patent litigation is a time-consuming process. So it does not seem likely that the 7-year orphan exclusivity would meaningfully enhance Gilead's pricing power during the peak of the COVID-19 pandemic.

Jamie Love of Knowledge Ecology International has argued that the government could use 28 U.S.C. § 1498 to overcome the patents and buy generic versions of remdesivir (an approach generally advocated by Amy Kapczynski and some of her students at Yale), and that there is no equivalent for regulatory exclusivity. But (1) 21 U.S.C. § 360cc allows generic approval of an orphan drug during the 7-year exclusivity if the sponsor "cannot ensure the availability of sufficient quantities of the drug to meet the needs of persons with the disease" (though invoking either this or § 1498(a) seems unlikely politically) and (2) as noted above, if remdesivir is approved, Gilead will still receive a 5-year data exclusivity period.

Should we celebrate that Gilead will no longer get this tax credit?

Not necessarily. It's true—as noted by commentators such as Laura Pedraza-Fariña—that the Orphan Drug Act seems like an odd fit for a COVID-19 drug, and that little about the orphan designation process requires an assessment of whether additional incentives are needed for developing a drug. And perhaps, as Mark Lemley suggests, Gilead will "go full steam ahead with trying to cure COVID-19" without an orphan designation. But "full steam" may not be a corner solution—there's usually a fuller steam.

There are of course a lot of uncertainties here, but the error costs seem very asymmetric: it is much worse to set incentives for addressing this pandemic too low than too high. The social cost of delaying access to a treatment—even by weeks or days—is huge; the cost of awarding an unnecessary tax credit to Gilead is just a transfer. There should probably be much more public funding for COVID-19-related R&D than there is, so allowing companies to be reimbursed for some of their clinical trial expenses may be the right move from a policy perspective. Giving Gilead an unnecessary transfer isn't ideal, but it seems pretty low on the list of things to be outraged about these days.

Right now, one of the first-order public policy concerns should be getting COVID-19 treatments and preventatives that are demonstrated to be safe and effective. Once those products are approved and marketed, widespread low- or zero-cost access will of course be important, particularly given the positive externalities associated with use. But as I have explained with Daniel Hemel, both in general and in the context of COVID-19 vaccines, innovation and affordability are not either/or. And innovation is the problem we should focus on first.

3/27/20 Update: Jamie Love thinks I am underestimating the importance of the extra exclusivity, and he could be right. The 5-year data exclusivity period for NCEs would prevent a generic manufacturer from obtaining approval based on Gilead's clinical trial data through the Hatch–Waxman process, but another firm could obtain a approval if it has enough clinical trial data to support its own application. But even if it is true that the more robust market exclusivity for orphan drugs would have added to Gilead's profits, that's not obviously a bad thing. There are so many anti-profiting-from-coronavirus stories these days, but I think we want COVID-19 to be the most profitable thing biomedical firms could be working on now. We don't yet have effective treatments, and patients desperately need them.