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In Iraq, One OfficerUses Cultural SkillsTo Fight Insurgents

While Talking Like a Bedouin

He Sees Smuggling Routes;

Spotting a Phony Kurd

Army Has Recalled His Unit

How Drugs for Rare Diseases

Became Lifeline for Companies

Federal Law Gives Monopoly

For Seven Years, Fueling

Surge in Biotech Profits

A Teen’s $360,000 Treatment

It’s White, Gloppy,

Almost Tasteless,

And Malawi Loves iti i i

But Nsima Stocks Are Low

After Bad Maize Harvest;

Yes, We Have Bananas

By JAMES R. HAGERTYAnd RUTH SIMON

The pace of U.S. home sales is show-ing further signs of slowing, amid a wid-ening gap between sellers’ asking pricesand the amount skittish buyers are pre-pared to offer, according to an industrysurvey, real-estate brokerage firms andhousing economists.

Rising mortgage rates, higher en-ergy costs, widespread talk about therisk of a “bubble” in housing and asurge in the number of homes on themarket are among the factors behindthe apparent slowdown. They have com-bined to make home shoppers more cau-tious, economists and real-estate bro-kers say. Buyers are taking their timeto look for bargains, while many sellershave put unrealistically high price tagson their homes. That leads to a stand-off, causing the number of sales todrop—a classic ending to a period ofunusually rapid house-price increases.

In a survey conducted last week, real-estate consulting firm Real Trends foundthat the number of home-purchase con-tracts signed last month dropped 8%from a year earlier at 48 of the nation’slarge real-estate brokerage firms. Thosebrokers responded to an email poll sentto 80 brokerage firms.

To be sure, home sales remainstrong by historical standards, and

prices in most of the country are at ornear records. But even some of the big-gest boosters of housing agree that themarket has finally moved out of theboom phase that has raised prices na-tionwide an average of more than 50%in the past five years and more thandoubled home values in many cities.“The air is coming out of the balloons,”says David Lereah, chief economist atthe National Association of Realtors,the nation’s leading real-estate tradegroup.

The $2 trillion housing market has beenthe primary driver of consumer spendingin recent years and accounts for about one-third of households’ net worth. Therehasn’t been a sustained drop in housingprices in any major part of the U.S. in a de-cadeor more, and housing has become a vi-tal barometer for the financial, retail andhomebuilding industries. (See related arti-cle on page D1.)

“The [house-buying] frenzy is over,”says Steve Murray, president of RealTrends, Littleton, Colo. Mr. Murray saysit may take six to eight months beforesellers accept that the market has soft-ened and reduce their asking prices. Hesaid some of the brokers surveyed weresurprised at how rapidly the market

Please Turn to Page A19, Column 1

Full CabinetThe number of orphandrugs on the market:

0

50

100

150

200

250

300

’052000’95’901985

Note: Includes only orphan drugs approved withseven-year market exclusivity.

Source: U.S. Food and Drug Administration Office ofOrphan Products Development

By YAROSLAV TROFIMOV

BLANTYRE, Malawi—In a recent epi-sode of the radio soap opera “Zima Chi-tika,” which translates as “So it Hap-pens,” a character asks his wife to cookdinner. Although their village home isstocked with sweet potatoes and vegeta-ble gravy, she issues a testy rebuke.“We won’t eat tonight. We have nonsima.”

Then a wise village grandmother inter-cedes. “We can eat whatever is available,there is no need to have just maize!”

The exchange encapsulates thenearly religious feelings inspired bynsima (pronounced: ’n-SEE-ma), athick, white porridge made of finelyground maize. It’s bland and virtuallytasteless but is nonetheless a staple formillions of Africans. They eat it everyday—breakfast, lunch and dinner—oftenaccompanied by little else.

It’s also running out. Without modernirrigation, maize, which is known in theU.S. as corn, doesn’t grow well. A lack ofrain in Malawi this year has created a

shortfall. The country has harvested only1.3 million metric tons, some 500,000 tonsless than is needed to stave off hunger,the government says. In recent weeks,some areas of Malawi have already runout of stocks. By government estimates,unless extra food aid is delivered fromabroad, almost half the country will haveto do without nsima, which is known as

Please Turn to Page A12, Column 3

By GREG JAFFE

MOSUL, Iraq—Last summer, twodozen U.S. Army Rangers headed for theIraq-Syria border to figure out how for-eign fighters were slipping through west-ern Iraq’s barren deserts.

As they had done in the past, theRangers took positions around each vil-lage and Bedouin encampment. At onevillage, an officer named David, accom-panied by a small security team,strode into the center looking for some-one who would talk. Unlike the clean-shaven, camouflage-clad Rangers,David wore a thick goatee and civilian

clothes. The Rangers carried long,black M-4 carbine rifles. David walkedwith a small 9mm pistol strapped to hisleg. The Rangers spoke English. Hespoke Arabic tinged with a Yemeni ac-cent.

As he recounts the day, David met awoman with facial tattoos that marked heras her husband’s property. As they chat-ted, the pale-skinned, sandy-haired NorthCarolina native imitated her dry, throatyway of speaking. “You are Bedu, too,” sheexclaimed with delight, he recalls.

From her and the other Bedouins, the37-year-old officer learned that most ofthe cross-border smuggling was carriedout by Shamar tribesmen who peddle cig-arettes, sheep and gasoline. Radical Is-lamists were using the same routes tomove people, guns and money. Many ofthe paths were marked with small pilesof bleached rocks that were identical tothose David had seen a year earlier whileserving in Yemen.

Col. H.R. McMaster, who overseestroops in northwestern Iraq, says David’sreports allowed his regiment to “focusour reconnaissance assets upon arrival”in Iraq’s vast western desert last sum-mer and immediately begin to interceptsmugglers.

David is part of a small cadre ofcultural experts in the Army known asforeign-area officers. The militarywould only allow him to be interviewedon the grounds that his last name andrank be withheld. U.S. officials say he’llbe spending the rest of his career in theMiddle East, often operating alone inpotentially hostile territory. Naminghim, they say, would make him morevulnerable to attack.

His colleagues in Iraq say his pres-ence has been invaluable. “We ought tohave one of these guys assigned to every[regional] commander in Iraq,” says Col.John Bayer, chief of staff for Maj. Gen.David Rodriguez, the commander of U.S.forces in the northern third of the coun-try. “I’d love to say ‘assign me 100 ofthese guys.’ ”

That’s not happening. Instead, themilitary is pulling David out of Iraq laterthis month along with seven other offic-ers who make up his unit. Before the endof the year, David will resume his previ-ous post in Yemen.

The decision to disband the Iraq unitPlease Turn to Page A10, Column 1

7

Housing Market Shows Further Signs of CoolingGap Between Buyers, Sellers

Is Widening, Realtors Say;

Welcome Trend for the Fed

i i i

Business and Finance

i i i

World-Wide

By GEETA ANAND

When an experimental medicinehelping her son was dropped because itdidn’t seem profitable, Connecticuthomemaker Abbey Meyers turned intoa lobbyist. Her crusade: Change thelaw to create incentives to developdrugs for rare diseases.

Congress re-sponded with theOrphan Drug Actof 1983, giving com-panies a seven-year monopoly forbringing a newtreatment for arare disease tomarket. Withintwo years, a drugwas approved totreat Tourette’ssyndrome, the dis-

ease Ms. Meyers’s son has. At the time,Margaret Heckler, then health and hu-man services secretary, predicted or-phan drugs “will make nobody rich, butthey will help treat a small group oftragically handicapped people.”

It didn’t turn out quite that way.Drugs for “orphan” diseases (so-

called because no one was treating them)have benefited many people with rareillnesses. But what was originally envi-sioned as a modest sideline for drug com-panies has instead become a multibillion-dollar business. With no cap on pricesand patients with few options, companiesfound they could profit in small markets—charging as much as $600,000 a year perpatient for drugs that people would needtheir entire lives.

There are 260 orphan drugs now onthe market and 1,400 under development.Some orphan drugs have revenue ofmore than $1 billion a year, the indus-try’s measure of a blockbuster.

Orphan-drug status is granted by theU.S. Food and Drug Administration. Forseven years, it gives a company, in ef-fect, the same market protection that apatent does, without requiring the com-pany to go through the lengthy process ofgetting a patent. (A patent for a scien-tific discovery is good for 20 years fromfiling, but typically there are about 10years remaining on it by the time it re-sults in an approved drug.) Unlike apatent, which is granted for a new discov-ery, orphan-drug status can be given to adrug that has been on the market in theU.S. for other diseases or used in other

countries for years.While companies often have to battle

competing patent claims in court, orphandrugs are protected by the FDA, which isbarred by law from approving anotherdrug with the same active ingredient un-less it is proven clinically superior forthat disease.

“It’s much more valuable than apatent for that period of time,” says Sher-rill Neff, a managing partner at QuakerBioVentures Inc., a Pennsylvania biotechventure-capital firm. The law alsogranted companies a 50% tax credit forresearch and development, grant moneyto defray the cost of testing, and assis-tance in getting products approved.

The law gave a powerful boost to thebiotechnology industry, which was in itsearly days when the act was passed. To-day, nearly half of all drugs produced bybiotech companies are for orphan dis-eases. Two of the biggest biotech compa-nies in the world, Amgen Inc. and Genen-tech Inc., were built on orphan drugs.Companies have secured millions in fund-ing and gone public based on the pros-pect of an orphan drug.

Even very small markets have provedprofitable. Last year, Genzyme Corp., aCambridge, Mass., biotech firm, postedsales of $840 million on its drug for Gau-cher disease, which affects fewer than10,000 people world-wide. Treating the av-erage patient costs $200,000 annually, thecompany says. But the price of the drug,dosed by weight, can run as high as$600,000 a year for adults on the higher oftwo recommended doses. Although themonopoly period for the drug has runout, like many biotech drugs it remainsfree of competition, in part because fed-eral regulations don’t allow generic-drugmakers to easily sell copies.

The cost of such drugs has grown sodramatically that employers and insur-ers are now pushing back. Some healthplans are excluding coverage of certainorphan drugs. Others are requiring em-

Please Turn to Page A18, Column 1

n BUSH EMBARKED on an Asiantrip hoping to avoid further setbacks.

The president, at an Alaska stop enroute to Japan, South Korea, Chinaand Mongolia, again labeled Iraq-warcritics and Democrats “irresponsible”for suggesting intelligence was manip-ulated to make the case for invasion.After reversals on the Miers nomina-tion and the violent protests that ac-companied his South America trade-summit visit, aides played down theprospect for breakthroughs on issuesfrom North Korean nuclear talks toChinese flouting of laws on intellec-tual property. (Pages A4, A6, A8, A21)

The Senate is expected to adopt adeal giving federal courts a limitedrole in terror-detainee appeals. Sen-ate Republicans dropped an exten-sion of Bush capital-gains and divi-dend tax cuts, hoping to revive it dur-ing reconciliation with a House bill.

i i in Supreme Court nominee Alito saidhe opposed abortion rights and minor-ity quotas when applying for a Rea-gan administration post in 1985, andexpressed disagreement with Warrencourt decisons on criminal proceduresand religious freedoms. Separately,the court raised the bar for learning-disabled students who challenge pro-grams at their school. (Pages A3, D4)

i i in The U.S. military detained a manin Iraq last year with the same nameas one of the Jordan bombers, but re-leased him for lack of evidence. Mus-lim rage at al Qaeda over the attacksgrew as Rice paid a condolence visitto Amman. In Iraq, U.S. forces reportkilling 50 insurgents near Syria. TwoU.S. Marines died. A Baghdad blastkilled two South African contractors.n Rice delayed a Mideast departurea day in hopes of winning a deal onIsraeli-Palestinian border issues. Is-rael killed a West Bank Hamas chief.n The U.N. alleged violations of inter-national law in last month’s westernIraq offensive, saying doctors werearrested and medical sites occupied.

i i in Taliban suicide bombers rammedcars into NATO peacekeeper vehiclesin two attacks in Kabul that killed aGerman soldier and an Afghan child.

i i in Germany’s main parties gave theirblessing to the left-right power-shar-ing deal, clearing Merkel’s path to be-come chancellor Nov. 22. (Page A20)

i i in The French cabinet voted to extendemergency power to fight waning im-migrant riots Chirac sees as a signof a bias-driven “profound malaise.”

i i in Russia’s Putin elevated two loyal-ists to deputy premiers as he movestoward picking a preferred successorwhen he departs in 2008. (Page A20)

i i in Uzbekistan found 15 guilty of an Is-lamist terror plot in what critics calla show trial to cover up May’s Andi-jan massacre by government troops.

i i in Mexico and Venezuela pulled am-bassadors after their leaders tradedbarbs over trade disputes on displayat this month’s summit in Argentina.

i i in Canada’s ruling Liberals refused ademand for February elections. Theopposition may try to bring the gov-ernment down as soon as next week.

i i in U.S. terror-suspect handling hurtsits image with Muslims and ex-Sovietnuclear arms aren’t being adequatelysecured, Sept. 11 commissioners said.

i i in Top FDA officials played an unusu-ally active role in a decision to barover-the-counter sales of “morning af-ter” pills, the GAO found. (Page A6)

i i in The FAA after long delay proposedrequiring gear for planes to cut fuel-tank explosions, blamed in the 1996crash of TWA Flight 800. (Page D5)

i i in Sales and auto taxes are raisingthe state and local burden on mid-dle-income homeowners after a five-year hiatus, a study found. (Page A2)

i i in Reported hate crimes rose 2% to7,649 in 2004, the FBI said, with themajority resulting from racial preju-dice. Such racial crimes were up 5%.

i i in Children showed increases in riskfactors for heart disease and diabe-tes if they ate out four times a weekor more, research found. (Page D4)

U .S. HOME SALES are show-ing further signs of slowing,

as the gap widens between whatsellers are asking and what buy-ers will offer. Rising mortgagerates, higher energy costs, fearof a housing bubble and a surgein the number of houses for saleare among the factors. Fixed-rate, 30-year mortgages now av-erage about 6.5%, their highestlevel in more than two years.

(Articles in Column 4 and on Page D1)

i i in Allergan made a preliminaryoffer of $3.2 billion for Inamed,hoping to scuttle a $2.6 billion dealbetween the maker of cosmeticmedical products and Medicis.

(Article on Page A3)

i i in Wal-Mart’s net rose 3.8%, thesmallest increase since 2001, assales rose 10%. But the retailer’sCEO forecast improving prospects.n Lowe’s reported a 26% earn-ings jump on strong sales of big-ticket items and gave a bullishoutlook for the current quarter.

(Articles on Pages A2 and A8)

i i in Greenspan said policy makerscan do little to fix the U.S. tradegap but that market forces willlikely correct the deficit naturally.

(Article on Page A2)

i i in The Dow industrials edged up11.13 to 10697.17, but bonds fell oninflation concerns. The dollar hita two-year high against the yen.

(Article on Page C1)

i i in Knight Ridder put itself up forsale amid pressure from its topshareholder, but a bidding war forthe newspaper firm is unlikely.

(Article on Page A3)

i i in Starwood plans to sell 38 hotelsto Host Marriott for $3.3 billion,but shareholder and former CEOBarry Sternlicht attacked the deal.

(Article on Page C1)

i i in GM and the UAW are discuss-ing possible buyouts to encour-age older workers at the car mak-er’s former Delphi unit to retire.n GM slashed sticker prices by upto $10,000 on some models in a bidto boost sales after a huge loss.

(Articles on Pages A18 and D1)

i i in A potential deal for TDC isheating up, as the first of twoprivate-equity groups nears abid for the Danish telecom firm.

(Article on Page C6)

i i in China’s Sinopec offered to pay$989 million to take 71%-ownedZhenhai Refining private, part ofan effort to buy out its listed units.

(Article on Page C6)

i i in AIG said net fell 36% on catas-trophe losses and that a group ofcurrent and ex-employees had re-ceived Wells notices from the SEC.

(Article on Page B3)

i i in OfficeMax’s largest shareholder,hedge fund K Capital, put morepressure on the office-suppliesretailer to consider selling itself.

(Article on Page A12)

i i in The number of work stoppagesin the U.S. is increasing amid ten-sion between workers and firmsseeking to cut pay and benefits.

(Article on Page B1)

i i in VW is pulling the Phaeton fromthe U.S. market, in a blow to itssupervisory-board chairman, whochampioned the pricey sedan.

(Article on Page A8)

i i in Telstra promised infrastruc-ture investment and a leanerwork force to revive earningsahead of next year’s privatization.

(Article on Page B2)

—Online Today—WSJ.com/JournalLinks

Abreast of the Market ....... C4Agency Issues ................ C13Amex Stocks .................. C11Cars ................................... D5Commodities ............. C6,C12Corrections ....................... A2Credit Markets .................. C5Currency Trading ....... C6,C12Deals & Deal Makers ....... C6Directory of Services ......... C6Dividend News ................ C12Earnings Digest ............... C13Economy ............................ A2Editorials ................... A22,23Heard on the Street .......... C1Index/Options ................. C12

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7

Thinking Global: One-thirdof Muslims now live as mi-norities outside the Middle

East. The future of global Islammay be decided in Europe.

i i in Game On: Long before the Xbox,computer games were played in plaintext. Take a look at how some loyalfans are keeping the genre alive.

i i in Go Figure: Securing an affordableloan amid rising mortgage rates.

7 77

Local Knowledge

A woman in Lilongwe, Malawi, stirs avat of nsima, a maize-based porridge.

–Markets–Stocks:NYSE vol. 1,393,578,880shares, Nasdaq vol. 1,377,165,328.DJ industrials 10697.17, s +11.13;Nasdaq composite 2200.95, t –1.52;S&P 500 index 1233.76, t –0.96.Bonds (4 p.m.):10-yr Treasuryt –16/32, yld 4.610%; 30-yrTreasuryt – 24/32, yld 4.801%.Dollar:118.74 yen, +0.87; euro$1.1694, –0.37 cent against the dollar.Commodities:Oil futures $57.69 abarrel, s +$0.16; Gold (Comex)$468.20 per troy ounce , t –0.10;DJ-AIG Commodity166.010, t –0.116.

Index to Businesses ................................................ B2What’s News Online ............................................... D5Global Business Briefs ........................................... D6Classifieds ......................................................... B6-8,D6

I N D EX

For Crying Out Loud

Dr. Richard Ferber backs off his cry-it-out system for training babies to sleep, while a

critic revises his respond-on-demand approach. Weary parents note the latest round of advice. PAGE D1

WilmaWho?

Hurricane Wilma’s fallout has been largely unnoticed outside of Florida, where a housing boom in the state’s south makes it tough for displaced residents, especially seniors. B1

Long Before Oprah

In “RestlessSouls,” Leigh Eric Schmidt argues that today’s trend for a spirituality of one’s own has its U.S. roots in the 19th-century religious liberalism of Emerson. LEISURE& ARTS, D7

Aging CausesEconomicWrinkles

A parallel “graying” ofmuch of the develop-ing world lies in store, and it may be far uglier than the crisis facing affluent na-tions. OPINION, A22

Going to the

Store on Faith

Some of the big-gest hedge-fund stars are pulling hard forSears Chairman Edward Lampert—who also runs ESL In-vestments—even as the stock has tumbled. HEARD ON THESTREET,C1

Keeping Track

Dave Finley, Nascar’s senior manager of series operations, plans everything that happens before the green flag drops and after the check-ered flag waves. IT’S ALIVING,B1

I NS I D E TO DAY ’S JOU R NA L

s 2005 Dow Jones & Company. All Rights Reserved

THE MOST EXPENSIVE

DRUGSFirst in a Series

Cold SnapChange in the number of contracts signed in October to purchase homes compared with a year earlier, based on a survey of brokers:

Source: Real Trends

Southwest +1%

–14 West Coast

–8 Mid-Atlantic

–8 Nationwide

–7 Midwest

–7 Northeast

–1.5% Southeast

Lucrative Niches

Yaroslav Trofimov

Foreign RelationsArmy foreign-area officers specializing inspecific regions:

South Asia

China

Southeast Asia

Northeast Asia

Sub-Saharan Africa

Middle East

Eurasia/Russia

Latin America

Europe

39

44

65

75

92

145

180

188

194

Source: U.S. Army

>

What’s News–

* * * * * * * * *! T U ES DAY, NOV E M B E R 1 5, 2 0 05 ~ VO L . C CX LV I N O. 1 05 ~ HHHH $1 .0 0 WSJ.com

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ployees to pay as much as half of the costof the pricey medicines. All this makes ittougher for patients to get the very drugsthat the Orphan Drug Act helped makepossible.

“We have all of these new fantasticnew drugs, but nobody—not employers,not employees—can pay for them,” saysMs. Meyers, who now heads the NationalOrganization for Rare Diseases, a non-profit advocacy group. (Her son, now 37,is doing well on a medicine that isn’t anorphan drug.)

Ms. Meyers hadn’t envisioned suchturmoil would arise from her efforts toget a medicine for her son’s Tourette’ssyndrome, a disease that causes involun-tary muscle movements and sounds. Anestimated 100,000 people in the U.S. haveTourette’s syndrome. McNeil Laborato-ries, a division of Johnson & Johnson,was developing a drug that looked promis-ing for Tourette’s. But the company dis-continued development of the drug afterit failed in tests for treating another,more common disease.

Ms. Meyers helped build a coalition ofpatients that urged Rep. Henry Waxman,a California Democrat, to pursue legisla-tion pushing the drug industry to developmedicines for rare conditions. Ms. Mey-ers argued her case through the prism ofcivil rights: People with rare diseaseswere being discriminated against be-cause of their small numbers.

Testimony by ‘Quincy’Her crusade gained steam when actor

Jack Klugman, whose brother had a rarebone cancer, made an episode of the televi-sion series “Quincy,” in which a patientcouldn’t get a treatment because no com-pany found it profitable enough to market.In crowded congressional hearings in 1981,Mr. Klugman testified in support of pa-tients.

Those initially involved with the lawdidn’t think these niche drugs would be aprofit center. “All we wanted to do wasmake products available for patients whohad these rare diseases,” says MarionFinkel, former head of the FDA’s Office ofNew Drug Evaluation. A report she wrotein 1979, recommending incentives for suchtreatments, called them “SignificantDrugs of Limited Commercial Value.” Shesays: “We were thinking of chemicals thatare relatively inexpensive.”

When President Reagan signed theOrphan Drug Act in 1983, the biotechnol-ogy industry was in its infancy. Unliketraditional medicines, which are madeby mixing chemicals, biotechnologydrugs are typically proteins produced bylive cells, grown in sterile, temperature-controlled containers. The complexity ofthe process of coaxing the cells to makebiological matter makes them more ex-pensive to produce.

“We did not expect to see the high cost oforphan drugs,” Rep. Waxman says today.While the seven-year monopoly guaranteedby the legislation “is obviously quite effec-tive at generating interest in certain drugsby pharmaceutical companies, it also hasthe unfortunate consequence of increasingprices.”He says the priceofdrugs“isunfairacross the board, and Americans every-where are getting fed up.”

Drug company executives say theyneed to make sizeable profits so they caninvest in research and development of newmedicines. They say the high prices reflectthe value of products that save lives. Theynote they help patients who can’t affordcertain drugs by giving some of it away.

“When you have small populations,the cost per patient is very high,” saysJames Greenwood, president of the Bio-technology Industry Organization, aWashington trade group. “Without ourmaking these drugs, patients would haveno alternative but to suffer and die.”

At first, most employers and insurersdidn’t worry too much about the price oforphan drugs. The diseases were thoughtto be so rare that most insurers werelikely to have few patients needing themin their health plans.

But it turned out that there are a lot oforphans. The act defines orphan diseases

as those which affect fewer than 200,000people. In 1989, a congressional commis-sion estimated that, by that measure, onein 10 Americans suffers from an orphandisease. Many different types of cancerare classified as separate orphan dis-eases.

The biggest biotechnology companiesgot their start with orphan drugs. Genen-tech received orphan-drug protection in1985 for its first drug, human growth hor-mone, to treat children who weren’t grow-ing properly because of a hormone defi-ciency—a population of about 20,000 inthe U.S. Revenue grew rapidly as thedrug became more widely used. Lastyear, 19 years after the first versioncame to market, the drug yielded Genen-tech revenue of $354 million.

Amgengot its firstproduct, Epogen,ap-proved in 1989 as an orphan drug for treat-ing anemia in dialysis patients, a popula-tion estimated at less than 200,000 at thetime. Revenue from Epogen grew quicklyto $1.4 billion by 1996 and $2.6 billion lastyear. About 250,000 people are now esti-mated to suffer from the condition.

Even after the seven-year monopolyexpires, there is often no competition formany orphan drugs. That’s becausethere is no federal process for gainingapproval of generic versions of biotechdrugs. For regular pills such as Prozac, agenerics company merely must showthat its product is identical to the origi-nal in order to win FDA approval. But it’sharder to prove equivalence in biotechdrugs—biotech companies with big-sell-ing products say it’s impossible. A gener-ics maker would have to spend tens ofmillions of dollars for full clinical trialsto win FDA approval. This is usually con-sidered too expensive.

Henry Blair had been making an exper-imental enzyme under government con-tracts while he was a researcher at TuftsUniversity School of Medicine. The en-zyme was developed by scientists at theNational Institutes of Health as a treat-ment for Gaucher disease, a rare, some-times fatal, condition that causes certainorgans to swell and bones to deteriorate.

In 1981, when Mr. Blair co-foundedGenzyme, the government transferredthe contract to make the enzyme to hisnew company. At first, the experimentaltreatment didn’t seem to have much com-mercial potential because of the smallmarket. Before the Orphan Drug Act, in-vestors’ “eyes would roll back in theirheads when I said there were, maybe,4,000 patients” in the U.S. with Gaucherdisease, he says.

Genzyme hired Henri Termeer from acompany that sold a $50,000-a-year prod-uct for hemophiliacs. Mr. Termeer envi-sioned an even higher price for the Gau-cher drug. “I never dreamed we couldcharge that much,” says Mr. Blair, who re-mains on Genzyme’s board and is chief ex-ecutive of another biotech firm developingan orphan drug.

In 1991, Genzyme brought the treat-ment to market, charging an averageprice of $200,000 a year per patient.

Enzyme From 22,000 PlacentasGenzyme explained the price by not-

ing how difficult it was to produce: Origi-nally, it took enzyme from 22,000 humanplacentas to make enough medicine totreat one adult patient each year. Thecompany also gave the drug free to cer-tain patients.

Still, the cost was so high that in 1992,the federal Office of Technology Assess-ment, conducted an investigation into thedevelopment of the drug. The report esti-mated Genzyme spent $29.4 million to de-velop the drug. It said much of the initialresearch was done by scientists at theNIH and paid for by the government.

The report said the company losesmoney on each unit given free but makesfar more by charging insurers the fullprice. Genzyme may have experiencedmore “resistance to the pricing amongpatient advocates” if it weren’t for thefree drug program, the report said. Nomajor legislative change resulted afterthe report, and the cost of the drug re-mained the same.

In 1994, Genzyme figured out acheaper and safer way of producing thedrug, growing the enzyme in geneticallymodified cells. The Orphan Drug Act enti-tled the company to another seven-yearmarket exclusivity for the new version.Today, after 14 years on the market, theGaucher drug remains at an averageprice of $200,000 per patient each year.

Mr. Termeer, Genzyme’s chief execu-tive, says that given inflation, “the priceis somewhat lower today.” He says econo-mies of scale have reduced the cost ofmaking the Gaucher drug, but he de-clines to say what the production cost istoday.

Asked why the company hasn’t low-ered the price, he says, “What’s the dif-ference between charging $200,000 orcharging $175,000 to a patient? No onecan afford it without insurance. We pre-fer to give it away for free if people can’tafford it.” About 10% of the people nowtaking the drug get it at no cost, he says.

Propelled by revenue from the Gau-cher medicine, Genzyme has boughtother companies and today develops andsells medicines for cancer, cardiologyand kidney disease, as well as orthope-dics and diagnostics. Still, the orphandrug for Gaucher remains by far the com-pany’s biggest source of profit.About one-third of the compa-ny’s $2.2 billion in revenue lastyear came from the drug.

Like other medicines, there isno limit on what companies cancharge for orphan drugs. “We livein a free economy,” says MarleneHaffner, director of the Office ofOrphan Products Development atthe FDA. That office reviews appli-cations and decides which prod-ucts receive orphan-drug status.“I don’t want companies to gougepatients, but I also want to seegood innovation and excitementin the health-care arena,” shesays.

When companies profit on or-phan drugs, it spurs interest inthe field, she says. Yet when itcomes to Genzyme’s Gauchertreatment, Dr. Haffner says: “Ijust find it unconscionable thatsomeone can charge that much.”

Current ways of coping with explodingorphan-drug costs “are bad things—theydon’t accommodate well the needs of pa-tients,” says Scott Howell, vice presidentof pharmacy affairs at Highmark Inc., anonprofitBlueCrossand BlueShield insur-ance company in Pittsburgh. Insurers areusing “blunt-instrument approaches” tomanage costs such as making employeespay a big percentage of the bill, even asthey scramble to develop better methods,he says.

Annual spending on specialty pharma-ceuticals—the term health-insurance pro-viders use for biotech medicines thattreat smaller patient populations includ-ing orphan drugs—rose 23% per memberfrom 2002 to 2003, according to a studyfunded by the Blue Cross and Blue ShieldFoundation on Health Care.

To manage these costs, WellPointInc., an Indianapolis-based insurer with30 million members, and others are start-ing or acquiring units that specialize incontrolling costs for biotechnology drugs.These companies try to bargain with bio-tech companies, as insurers do, to getdiscounts by buying in volume or buyingseveral products. But because there isn’tmuch competition and the markets aren’tbig, there’s less room to negotiate dis-counts. “We now recognize this is an ex-traordinary cost,” says Sam Nussbaum,chief medical officer at WellPoint.

A Savior for BrianFor patients, orphan drugs have been a

savior. When their son Brian was 2 yearsold, Ed and Peggy DeGrenier of Lombard,Ill., learned the boy had Gaucher disease.It caused his liver and spleen to become soswollen the toddler had trouble walkingand getting up when he fell.

In 1991, Brian got his first treatmentwith Genzyme’s new medicine. Within two

years, he looked and acted like any otherkid. Today a high-school senior, Brian con-tinues to receive biweekly infusions, and isso strong he swims competitively, specializ-ing in the 100-meter butterfly.

But his father worries about how hisson will fare in the future. Mr. DeGreniersays he once felt pressured to leave a jobwith a small employer because the costof his son’s drug made everyone’s insur-ance premium unaffordable. He says herealized he needed to work for a largeemployer so the price of the Gaucherdrug could be spread among thousandsof people. After searching for threeyears, he finally found such a job thisyear, selling cable services door-to-doorfor Comcast Corp. “At age 57, I have toget used to knocking on 60 to 70 doors anight,” he said. “But I’m here for as longas Comcast will have me.”

Mr. DeGrenier, who has become anoutspoken critic of the drug’s high price,fears it may make it hard for his son toget a job or health insurance. Brian nowweighs 143 pounds and his treatmentcosts about $360,000 a year. “Think of thewake this is creating,” Mr. DeGreniersays. “Think of how many employersBrian is going to bankrupt.”

Abbie Leibowitz, a former Aetna

Inc. chief medical officer who now runsHealth Advocate, a private firm advis-ing 800 employers and their employeeson health insurance, says he oftenhears from people who say they havebeen targeted for layoffs because of thehigh cost of their medicines. It’s illegalto fire a person because of health costs,but Mr. Leibowitz says it can be hard toprove that was the reason a worker wasterminated. “It’s all a reflection of thefact that in the present environment,the people paying for health care can’tafford to cover everything,” he says.

The rising cost is especially hard onsmaller companies. In 2002, Jerry Kelley,then overseeing benefits at Fruth Phar-macy Inc., a chain of 22 drug stores in WestVirginia and Ohio, faced a tough choice.Staying with the company’s existing healthplan, which covered even the most expen-sive drugs, would have raised the compa-ny’s health-insurance costs by 35%. “Wejust couldn’t afford that,” he says.

Mr. Kelley switched the company to anew Blue Cross and Blue Shield plan thattrimmed benefits in several ways. One ofthem was to make employees pay 30% ofthe cost of expensive medicines, includ-ing orphan drugs.

John Ash, 51, a cashier at the FruthPharmacy in Pomeroy, Ohio, was diag-nosed with chronic myeloid leukemia inMarch 2003. The government defines thistype of leukemia as an orphan disease.Mr. Ash’s doctor prescribed one of thenew orphan drugs, Gleevec.

Mr. Ash learned he would be requiredto pay $771.72 of the medicine’s nearly$2,600 retail price. That would have ab-sorbed more than his entire take-homepay for the month. He and his wife of 20years, Diana, a dental assistant, eachmake about $7 an hour. To pay for thedrug, they say they emptied their sav-ings account of $3,000 and cashed in Ms.

Ash’s $4,300 IRA.A year and a half later, at Mr. Ash’s

checkup, oncologist Vinay Vermanilooked at his blood report and saw hiswhite blood cell count had soared to fivetimes the normal level.

“Maybe the medicine is not working,”Dr. Vermani says he told Mr. Ash.

“I can’t afford the prescribed dose,”Mr. Ash replied. “I’m taking half.”

To find a way for him to afford the fulldose, the doctor, his nurse, and Mr. Ash’swife began calling his employer, his in-surer and the manufacturer of the drug,Novartis AG of Switzerland.

Like most drug companies, Novartisoffers free medicine only to uninsuredpeople. The company eventually directedMr. Ash to a charity, funded in part byNovartis, that would make his monthlyco-payment. One month after Mr. Ashwent on the full dose, his white-blood-cellcount fell into the normal range, where ithas stayed ever since.

“It’s terrible having this kind of tech-nology when nobody can afford to pay forit,” says the nurse, Sandy Corbin. “Itbankrupts our patients.”

A Novartis spokeswoman says thecompany has a hotline to advise patientson Gleevec who need help paying for themedicine. She said Novartis couldn’t dis-cuss any particular patient’s case.

Even with its employees payinghigher co-pays, Fruth Pharmacy’s health-insurance costs rose 15% in 2004 over theprevious year. Over the past five years,the cost of insuring its employees hasincreased to $1.5 million from $600,000.“We’ve tried to take an analytic businessapproach with a heart,” says Mr. Kelley,who has since retired.

Attracting Start-Up CapitalThe orphan-drug market has helped

companies attract start-up capital. In1999, BioMarin Pharmaceutical Inc., aCalifornia firm, raised $67 million in aninitial public offering based mostly onthe promise of a single orphan drug stillin clinical trials—a potential treatmentfor a rare genetic disease called muco-polysaccharidosis I. Fewer than 4,000 peo-ple in the developed world are estimatedto suffer from the disease, caused by adeficiency in an enzyme that leads to

delayed mental developmentand impaired vision, amongother symptoms.

Within months of going pub-lic, BioMarin had a market capi-talization of more than $1 bil-lion.

BioMarin, in a joint venturewith Genzyme, brought thetreatment to market in 2003 atan average cost of $175,000 perpatient each year. The joint ven-ture is projected to have salesof about $70 million for the drugthis year.

Orphan-drug status can alsobe given to older medicines, ifthey are being used in newways. This has allowed compa-nies that didn’t originally paydevelopment costs of a drug toreceive protection from competi-tion.

Celgene Corp. brought a tha-lidomide pill to market at the price of $6 apill in 1998 and has since raised the priceto about $53. Though thalidomide hasbeen around for decades, it received or-phan-drug status for its use in treating aside effect of leprosy, then later for acertain kind of cancer.

The drug is so inexpensive to makethat it is sold by other companies in Bra-zil for seven cents a pill.

Thalidomide was pulled off the marketin the 1960s for causing birth defects. Cel-gene was able to persuade the FDA to ap-prove the medicine under a tight distribu-tionsystem, requiringpatients to take reg-ular pregnancy tests, among other things.

Soon after the drug came to market in1998, doctors discovered it helped treat arare type of cancer called multiple my-eloma. The company’s chief executive,John Jackson, raised the price—not be-cause it cost more to make or market,but because, he says, many cancer drugswere priced much higher.

A new orphan drug, Velcade, came tomarket for the same cancer in 2003. Millen-nium Pharmaceuticals Inc. of Cambridge,Mass., which says it spent many years andmillions of dollars developing Velcade,priced it at about $4,400 a month. Mr. Jack-son saw the price of Velcade as an opportu-nity to raise the price of his company’sdrug further. “We certainly felt that from acompetitive perspective that would be justi-fiable,” he says.

Mr. Jackson says price increaseshelp his company develop new drugsand don’t affect patients. “Either peopleare wealthy enough to pay or healthinsurance pays or our company givesthe medicine available for free,” hesays. Celgene gives the drug free to pa-tients without insurance, if they earnless than $38,000 a year and have assetsvalued at less than $10,000. A spokes-man says Celgene also donates togroups that help low-income patientswith high co-payments.

The orphan-drug market has become sohot that five different companies are nowvying to bring to market the first treat-ment for hereditary angiodema—a diseaseestimated to affect about 6,000 people inthe U.S. “We couldn’t have raised millionswithout the Orphan Drug Act’s protectionagainst competition,” says Judson Cooper,chairman of Lev Pharmaceuticals Inc.,one of the five companies.

The company was founded in 2003with the goal of getting FDA orphan-drug approval to market a treatmentthat has been sold in Europe for 30years. The disease causes sudden swell-ing in the hands, feet, abdomen andthroat, which is painful and sometimesfatal.

Joshua Schein, Lev’s chief executive of-ficer, says he’s sensitive to the wishes of apatient-advocacy group for the disease thathas urged his company to price the drugclose to the European price of about $1,500a dose or $18,000 annually. But he says healso needs to consider the wishes of hisinvestors. They are looking for him to pricethe drug close to the market price for otherblood products in the U.S. that can costwell over $100,000 a year.

Continued From First Page

By JEFFREY MCCRACKEN

General Motors Corp. and theUnited Auto Workers are discussingthe possibility of having the car makeroffer buyouts to encourage older work-ers at Delphi Corp., GM’s formerparts division, to retire, people famil-iar with the matter said.

Such a deal could help Delphi, whichis operating under bankruptcy protec-tion, pare its payroll and ease the tran-sition to retirement for some of the autosupplier’s 34,500 UAW workers. GM isn’tunder any obligation to buy out Delphiworkers, but such buyouts could helpreduce the threat of a strike and laboruncertainty stemming from Delphi’sbankruptcy filing.

GM is liable for an undeterminedamount of pension and health-care obli-gations for former GM workers whomoved to Delphi when the parts unitwas spun off in 1999. GM has esti-mated its liability at anywhere fromnothing to $12 billion.

The outlines of any deal are stillup for discussion, and the talks couldstill fail. Any buyout would likely bedependent on GM receiving assur-ances that Delphi-UAW workerswouldn’t follow through with recentthreats to strike to protest wage cutsproposed by Delphi management, peo-ple familiar with the talks said.

Strikes at certain Delphi plants couldforce some GM assembly plants to shutdown, depriving GM of revenue at atime when it is piling up massive lossesin North America and struggling toshore up investor confidence.

Delphi has said it needs to cut hourlywages for union workers to around $10 anhour from about $25 an hour.

At this early stage, it is unclearwhether Delphi workers who accept abuyout would go into the Delphi pensionfund or into GM’s pension fund as theUAW would prefer, people familiar withthe matter said. About half of Delphi’s24,500 active UAW workers are withinfive years of the 30 years typically re-quired for UAW workers to become eligi-ble for retirement, according to Delphi.

The two sides are also discussing theextent of GM’s obligation to Delphi’sUAW workers and retirees. Under the1999 spinoff of Delphi, GM agreed to guar-antee the layoff benefits, pensions, re-tiree health care and life insurance ofUAW-Delphi workers, though the extentof that guarantee isn’t clear.

At issue is which Delphi hourly work-ers and hourly retirees GM is responsiblefor and how much of their pensions or re-tiree health care GM would have to pay.

Delphi, which filed for bankruptcyprotection Oct. 8, is by far GM’s largestparts supplier, selling it $15 billion ayear in a variety of parts from steeringsystems to electronics. Delphi has saidit needs to slash wages to make its U.S.operations competitive with global ri-vals. If no agreement on wage cuts isreached with the UAW, it can ask abankruptcy judge on Dec. 16 to void itsexisting labor contract.

Under the bankruptcy code, Delphicould eventually terminate its $8.5 bil-lion pension plan, though no decision isexpected to be made on that pensionplan until next year.

GM spokeswoman Toni Simonetti de-clined to comment on GM’s discussionswith the UAW regarding Delphi.

In a recent interview, Delphi Chair-man and CEO Robert S. “Steve” Milleracknowledged that GM, the UAW and Del-phi are in continuing discussions aboutthe fate of Delphi’s UAW workers butdeclined to elaborate on them.

“I’m not going to get into what is go-ing on in terms of negotiations. What isnot outlandish is to assert that this isreally a three-party discussion with GM,particularly in regards to the contingentbenefit guarantees they have for Delphiworkers. GM is inextricably intertwinedwith everything we do,” Mr. Miller said.

He added that GM has “a lot of rea-sons to help us, such as the assuranceof no production disruptions” and that“however this turns out, GM will be apart of it.”

Under its 1999 spinoff arrangementwith Delphi, GM has an indemnityclause stating that money it spends onpensions, retiree health-care and otherbenefits for Delphi’s union workerswould give the auto maker a general,unsecured claim on Delphi’s assets inbankruptcy proceedings, much likewhat a bondholder might have.

Mr. Miller said this indemnityclause, which could give GM a sizableownership stake in Delphi after the sup-plier exits from bankruptcy, gives GManother reason to help Delphi.

David Cole, chairman of the Centerfor Automotive Research in Ann Arbor,Mich., and a consultant with ties toGM, said he expects the UAW, GM andDelphi could announce “somethingfairly significant” by the end of theyear “that wraps together GM’s planfor Delphi workers with work-force re-ductions and plant closures at GM.”

Before Delphi’s bankruptcy filing,the UAW and GM had been discussing$25,000 per-person buyouts of both GMand Delphi workers, with the hope thatthe GM buyouts would clear the wayfor some Delphi hourly workers to flowback to GM, according to UAW officialfamiliar with the union’s discussionson the issue.

That plan fell apart after Delphi filedfor bankruptcy protection, but GM-funded buyouts of Delphi workers to en-courage early retirement is “part of thediscussion again,” said the UAW official.

Pilots at Northwest Airlines Corp.voted to extend an agreement that tempo-rarily allows the airline to save moneywhile the two sides continue to negotiatepermanent pay cuts. The Air Line PilotsAssociation, representing more than 5,000pilots at Northwest, hasn’t been able towork out a permanent deal with the St.Paul, Minn., air carrier. The union saidthe interim agreement would provide 60%of the cost savings Northwest had askedfor. The agreement is also contingent onthe airline achieving similar accords withtwo other unions, representing flight atten-dants and ground workers. While theflight attendants have agreed to interimcost cuts, ground workers haven’t, and thecompany has asked the U.S. BankruptcyCourt in Manhattan to impose contractchanges for the ground workers. North-west filed for bankruptcy protection in mid-September. —Dow Jones Newswires

Investment firm Kohlberg KravisRoberts & Co. agreed to buy FL SeleniaSPA, Europe’s largest independent man-ufacturer of branded auto lubricants, formore than $1 billion, including an un-specified amount of assumed debt.Based in Turin, Italy, Selenia’s productsrange from lubricants, anti-freeze,transmission and engine fluids for au-tos, trucks and tractors. KKR said itplans to support Selenia’s strategy ofgrowth through acquisitions in Europe,Asia and North and South America. Sele-nia which has annual revenues of about$650 million, was founded in 1912, as adivision of Fiat Auto. Selenia is KKR’sfirst acquisition in Italy, but this is notthe New York investment firm’s firstforay into the auto-services industry. Itinvested in AutoZone Inc., an auto-partsretailer based in Memphis, Tenn., andowns Auto-Teile-Unger Holding AG, aGerman operator of automotive retailstores and repair shops with outlets inAustria and the Czech Republic.

Designer Medicines, Designer Prices

ORPHAN DRUG COMPANY DISEASEU.S. 2004REVENUE

AVERAGE PRICE PER PATIENT

Rituxan Genentech,Biogen Idec

Non-Hodgkin’slymphoma

$1.6 billion $12,500 per year

Cerezyme Genzyme Gaucher disease $840 million1 $200,000 per year

Gleevec Novartis Chronic myeloid leukemia $368million $37,000 per year

Epogen Amgen Anemia from renal failure $2.6 billion Unavailable2

Avonex Biogen Idec Multiple sclerosis $922 million $14,000 per year

Velcade Millennium Multiple myeloma $143million $22,000 for 4 months

1Figure represents world-wide sales because company does not break out U.S. sales, which account for less than half of thetotal.2Amgen and Centers for Medicare and Medicaid Services unable to provide average cost per patient annually, saying dosagevaries widely.

Note: Prices are average sale prices charged by drug manufacturers, as reported to CMS . For Gleevec, the price reflects thediscount CMS receives from the average wholesale price. Price paid by consumers is typically 20% to 50% higher.

Sources: Drug makers; Centers for Medicare and Medicaid Services

government has argued in the SupremeCourt that racial and ethnic quotasshould not be allowed and that the Con-stitution does not protect a right to anabortion,” he wrote while seeking atransfer from his job as assistant to thesolicitor general to a job as deputy as-sistant attorney general.

The comments, reported earlier bythe Washington Times and releasedyesterday with dozens of other docu-ments by the Reagan and George H. W.Bush presidential libraries, are signifi-cant because they offer insight intoJudge Alito’s personal views on issuesthat could affect the course of his Su-preme Court confirmation. Chief Jus-tice John Roberts, by contrast,shielded his personal views by sayinghis arguments in abortion cases simplyreflected the views of his clients, whowere Republican presidents.

The remarks come to light at a timewhen Judge Alito is trying to ease con-cerns of Senate moderates about hisabortion stance. In private meetings,he has told senators he has “great re-spect” for the precedent power of Roev. Wade, the landmark 1973 abortion-rights ruling.

Some senators may also take offenseat Judge Alito’s political giving. In addi-tion to a handful of New Jersey Republi-cans who opposed abortion rights, hesaid he gave money to the National Con-servative Political Action Committee,one of the first independent politicalgroups that spent millions of dollars ontelevision advertisements aimed at de-feating liberal senators in the early1980s. Among their targets: Massachu-setts Sen. Edward M. Kennedy, a keySenate Judiciary Committee Democrat;Maryland Democratic Sen. Paul S. Sar-banes; and the fathers of Democratic

Sen. Evan Bayh of Indiana and Republi-can Sen. Lincoln Chafee of Rhode Island.

The White House played down theessay’s importance and said it doesn’tprove how Judge Alito would rule inabortion cases today. “Twenty yearsago, he was among the vast majority ofAmericans who supported the policies ofthe Reagan administration,” said SteveSchmidt, an administration spokesman.

The nominee’s allies pointed outthat, as a member of the Third CircuitCourt of Appeals in Philadelphia, JudgeAlito sided with abortion-rights advo-cates in three cases. That consistency,they said, demonstrates that, despitehis political views—in 1985 or today—hewould respect precedent and operatedas a “modest” judge.

But the strongly worded commentarydoes suggest that Judge Alito holds viewsconsiderably more conservative than de-parting Justice Sandra Day O’Connor,whose seat he would fill. It places himamong the conservative backlash to theWarren Court’s aggressive move to en-force civil rights and to deter police mis-conduct. Judge Alito writes that he tookparticular exception to that court’s opin-ion “in the areas of criminal procedure,the Establishment Clause and reapportion-ment.”

Liberals jumped on the document asevidence that Judge Alito’s conservatismis too extreme for the court. “Judge Alitofaces a heavy burden of demonstratingthat he no longer holds these extremelytroubling views” and would have an“open mind” if he is confirmed to thecourt, Sen. Kennedy said.

Continued From Page A3

Northwest Airlines Corp.

Pilots Union Votes to ExtendInterim Accord on Cost Cuts

How Drugs for Rare Diseases Became a Lifeline for Companies

Ralf-Finn H

estoft

Alito’s Bid for Job Reveals Views

1Online Today: WSJ.com subscrib-ers can see the full text of a 1985Alito letter outlining his position

on abortion, legal activism and more, atWSJ.com/OnlineToday.

GM, UAW Weigh

Possible Buyouts

Of Some at Delphi

Deal Could Help Parts Firm

Pare Payroll, Avert Strike

As Chapter 11 Case Proceeds

Ed and Peggy DeGrenier with their 17-year-old son, Brian,whose drug for Gaucher disease costs about $360,000 a year.

Kohlberg Kravis Roberts & Co.

* * * *A18 TUESDAY, NOVEMBER 15, 2005 T H E WA L L ST R E ET JO U R NA L .