Boston ( TheStreet) -- Last night, NPS Pharmaceuticals ( NPSP) announced that it set the price for Gattex, its drug for short bowel syndrome, at $295,000 per year, or more than triple what analysts had expected.

NPS's decision to price Gattex in the exclusive "ultra orphan" drug club sparked a lot of debate on Twitter last night, with many people, including myself, arguing the drug wasn't worthy of super-premium pricing. This morning, I debated the topic with my good friend and fellow healthcare writer Matthew Herper of Forbes. Herper has done some excellent reporting on orphan drug companies and pricing, so I wanted to get his take on Gatttex.

The orphan drug market grew at an annual rate of almost 26% from 2001 to 2010, faster than the 20% growth for traditional drugs, according to a Reuters analysis. Rare diseases are garnering a lot more attention from small biotechs and Big Pharma, in part, because there's a lot of money to be made. Orphan drugs can be priced sky high and, up to now, insurance companies -- public and private -- are willing to foot the bill.

But is there a limit to how much insurers are willing to pay for orphan disease drugs? And should the definition of an orphan disease reflect more than just the number of patients affected?

Herper and I discuss NPS and orphan drug pricing in the conversation below, which took place over instant messaging this morning.

Adam Feuerstein: NPS Pharma announced Gattex pricing last night -- $295,000 per year -- way above expectations. The news generated a lot of buzz and debate on Twitter last night about whether or not Gattex is truly an ultra-orphan product. What say you, Matt?

Matthew Herper: Well, it does match the ultra-orphan playbook as far as disease prevalence. I'm still trying to figure out whether this is a fair price. NPS says that they've done market research and insurers will be willing to pay.

Matthew Herper: There's been a big increase in the number of these rare disease drugs that cost $200,000 or more. It's high time we had a real conversation about pricing. Is there any way to avoid what happened in cancer, where there seemed no price limit until Dendreon ( DNDN) hit the wall with Provenge?

Adam Feuerstein: Here's what I find interesting. Before Gattex approval, NPS told investors that there were approximately 15,000 short bowel syndrome patients in the U.S. At the FDA panel in October, the company used a 10,000 to 15,000 patient estimate. Last night, NPS revealed new "research" that shows the incidence at 3,000 to 5,000.

Matthew Herper: Right, and I spoke with NPS CEO Francois Nader this morning and he says that if the disease were more common the price would be lower. So part of the question is who decides if it's an ultra-orphan disease? And what if there are a lot more patients than expected? That's one of the reasons Alexion Pharmaceuticals ( ALXN - Get Report) has been so successful.

Adam Feuerstein: I'm skeptical that NPS just realized in the past month that there are far fewer short bowel syndrome patients than they estimated originally.

Matthew Herper: It's hard for anybody to believe it.

Matthew Herper: Well, the other question is what did they have to tell people about the price? If the analysts were low, did they need to clue them in?

Adam Feuerstein: The analyst consensus price for Gattex going into last night was around $80,000 per year.

Adam Feuerstein: Obviously, NPS believes insurers will pay for Gattex. Do you agree with that? At what point do insurance companies start to question these high prices?

Matthew Herper: I think that's the big question. Once you're into ultra-orphan pricing, it's kind of stunning how much the insurers will pay.

Adam Feuerstein: Gets back to your question -- what is an ultra orphan disease? Is it just a patient numbers issue or should there be something more?

Matthew Herper: I think efficacy matters. Look at Kalydeco. That's a super-super-effective drug. Right now just getting FDA approval in a rare disease is enough for ultra-orphan pricing. But it should matter how effective the drug is, right?

Adam Feuerstein: Agreed. Vertex Pharmaceuticals' ( VRTX) Kalydeco, to me, is a great and justified example of a high-priced, ultra orphan disease drug. I think efficacy and safety should matter when determining what constitutes ultra orphan disease.

Matthew Herper: Is Kalydeco's price still justified, though, if it works less well with a combo pill in a wider subset of patients? Or do they have to drop the price?

Adam Feuerstein: Well, that is an issue facing Vertex with Kalydeco combinations.

Matthew Herper: Ideally, some third party would decide what an orphan disease is and what a treatment might be worth before companies started development. I'm also not clear what happens if an insurer does object. So far the history is that if you give away free drug, you eventually get reimbursement even in poor countries.

Adam Feuerstein: A third-party decision maker is tough to do in the U.S., but I wonder if insurance companies, on their own, simply start placing more hurdles in front of some of the questionable orphan drugs.

Matthew Herper: Then an insurance company risks being the only company not paying for something, and facing a PR problem. Who would they make the test case?

Matthew Herper: The real problem is we're not paying for drugs, we're paying for clinical research and even marketing to find these patients with rare diseases. So doing it through drug price creates all sorts of weird effects.

Adam Feuerstein: Right. This is why Questcor ( QCOR) is coming under so much scrutiny and criticism. They invested nothing in Acthar R&D yet dramatically raised the drug's price.

Matthew Herper: Not only has Questcor invested nothing in R&D, they have an incredibly broad label that allows them to market for all sorts of diseases. They don't actually have ultra-orphan pricing for infantile seizures, but they get close in some other indications.

Matthew Herper: Why don't you think Gattex should be priced this high, aside from disease prevalence?

Adam Feuerstein: I question the drug's benefit relative to the price. Short bowel syndrome patients can survive on parenteral nutrition (which costs about $100,000 per year, by the way.) How much benefit do they derive from Gattex and is it worth $295,000 per year? I don't know but my gut says no. This is not like cystic fibrosis or even HOFH in terms of disease severity.

Matthew Herper: There's some data that shows short bowel syndrome does cause increased mortality, and it's obviously disabling. My question is that Gattex helps what, 15% of patients get off parenteral nutrition?

Adam Feuerstein: That's right. So for 85% of SBS patients, is Gattex at $295,000 per year justified when parenteral nutrition costs $100,000 per year?

Matthew Herper: If Gattex only allows 15% of patients to get off parenteral nutrition, how many is it actually curing? This might be one of those drugs where we should be paying for the successes.

Adam Feuerstein: As we have this conversation, NPS is trading up 10 cents, so perhaps investors are asking the same questions we are.

Adam Feuerstein: NPS has consistently estimated peak Gattex sales of around $350 million. Even going back to early 2011 before the phase III trials, Francois Nader said Gattex could do $350 million, but that was based on 15,000 SBS patients. Last night, they cut the number of patients by two thirds and maintained the $350 million peak sales estimate. This, to me, illustrates how ultra orphan designation can be manipulated unfairly.

Matthew Herper: Fair. But you can say the same thing about cancer drugs, where it seems you can estimate price by the equation (monthly price)=$90k/(number of months of average treatment)

Adam Feuerstein: Absolutely.

Matthew Herper: The real problem is that drug pricing isn't much of a free market. And there are a lot more market pressures with say, diabetes drugs, where you tiered copays and manufacturers grant big discounts in order to get volume.

Adam Feuerstein: Agreed. Cancer drugs and orphan disease drugs have been granted a free pass from these market pressures. I just wonder if we're nearing a tipping point where that changes. If we're talking about this, the insurance companies certainly are too, internally.

Matthew Herper: I think that the main question is how it changes. With cancer, it really was Medicare standing up to Provenge, even though it eventually began to pay. Companies don't want to deal with that headache. And then, more recently, we saw Sanofi ( SNY - Get Report) cut the price of Zaltrap. That was unprecedented.

Adam Feuerstein: Yes, Zaltrap is a great example. So far, it's rather unique but it bears watching to see if more hospitals and insurers start to balk at rising prices.

Matthew Herper: The counter argument is that the pressure won't be on the ultra-orphans, but traditional orphan diseases like multiple sclerosis drugs, which are much more common and where there are multiple insurers. I think that's basically what Lenny Bell at Alexion said he expected.

Matthew Herper: If you think about it, ultra-orphans are actually the drugs best adapted to a medical system where government is the payer. Individuals could never afford them, but to a government they could even be cost-effective.

Adam Feuerstein: With ultra orphans, each insurer may only have a handful of patients to cover.

Matthew Herper: And those patients are already very expensive, usually. The insurer could be seeing some savings to offset costs.

Adam Feuerstein: Do you think NPS succeeds with Gattex priced at $295,000?

Matthew Herper: I think the launch may be harder than they expect, but I generally think that it's unwise to short ultra-orphan companies. The pricing model is so powerful when it works. (See Alexion.) But this current batch could have more trouble. I'm also worried about Aegerion Pharmaceuticals ( AEGR), which I think has a good drug but I'm unconvinced on how many HoFH patients there are. Cardiologists have been telling me 400 for years; are there really 4,000?

Adam Feuerstein: I agree, the Gattex launch will be slow, the company acknowledged that last night. NPS succeeds only if there the short bowel syndrome patient population is as small as the company now predicts. If you start to get "label creep" insurance companies will clamp down -- or at least I hope they will.

Matthew Herper: If NPS has already identified 1,000 patients, their launch could go very well even if they're going to hit trouble later on. I guess I don't know.

Adam Feuerstein: But I also hope that cases like NPS -- and the Questcors or KV Pharma ( KV-A) -- start a dialog about what it means to be an orphan disease or an ultra orphan. It should be more than just the number of patients. At some point, efficacy, safety, cost-effectiveness need to be addressed.

Matthew Herper: I hope so. Getting insurance companies to talk about ultra-orphan drugs. Not easy. They should call us.

Adam Feuerstein: Definitely. Thanks, Matt.

Matthew Herper: Thanks, Adam.

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.