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Impact of the Orphan Drug Act Incentives

Impact of the Orphan Drug Act Incentives


The Orphan Drug Act (ODA) of 1983 was created in an attempt to address an unmet pharmaceutical development need in healthcare. At the time of its inception, pharmaceutical manufacturers were focused on the creation of drugs targeted at the largest disease populations and, in the 10-years prior to the ODA being enacted, had developed only 10 drugs for rare diseases or conditions.[1] This left smaller populations impacted by more rare diseases without pharmacotherapeutic interventions. Orphan diseases, also called rare diseases or conditions, affect less than 200,000 people in the U.S. or a larger population with a disease with which there is no ‘reasonable expectation’ the manufacturer will profit from a drug’s development for it.[2]  While there are an estimated 7,000 orphan diseases, 350 diseases make up 80% of the patient population.[3][4] Often touted as ‘one of the most successful pieces of health-related legislation passed in the United States’, the number of drugs for orphan diseases has greatly increased since being enacted.[5] As of 2016, there were FDA approved drugs for 549 orphan indications and 449 orphan drugs.[6]

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Until the ODA, there was little financial incentive for pharmaceutical companies to pursue research and development of drugs for rare diseases, particularly since 1962, when the Kehauver-Harris Drug Amendment to the Federal Food, Drug, and Cosmetic Act was passed. The Kehauver-Harris Amendment required manufacturers conduct clinical trials to prove their drug was safe and efficacious, for advertisements to provide information on adverse effects, and prohibited re-branding of generic drugs as new therapies.[7] This amendment represented a major shift in where the burden of cost lay for the pharmaceutical industry, increasing the burden of up-front costs and restricting access to the drug market to companies with enough capital for early investment. As a result, it was significantly more advantageous to develop treatments for chronic diseases with large populations to ensure continuous drug use over smaller populations. In order to overcome this, the ODA established certain incentives. These incentives include a period of market exclusivity, tax incentives, subsidies for clinical research, and exemption from certain fees or cost-savings lists.[8]

Incentives of the ODA can be classified as either “push” or “pull” incentives.[9][10] The push incentives are those which decrease the cost or financial risk associated with the research, development, and approval of drugs. This includes the waiver of fees, tax credits, subsidies for clinical trials, and FDA review of trial methods. The Orphan Drug Tax Credit can be applied to a period of 15 years prior- and 3 years post-approval for 50% of the expenses associated with clinical trials. Drug sponsors are exempt from Prescription Drug User Fees (PDUFA), which can be in excess of $1-2 million per application.[11] The FDA will also award grants to fund clinical trials and associated research for rare disease products. The pull incentives are those which cultivate a post-approval profit or on-going benefit in the marketplace.910 This includes a period of market exclusivity and a voucher for priority review of any drug product in the future. The period of market-exclusivity is 7 years from the date which drug receives marketing approval and can be applied to patentable and non-patentable drugs. The voucher for priority review allows for the sponsor of an orphan drug to have another drug approved on an expedited schedule or it can be sold to another company for additional profit. The purpose of this paper is to review published literature evaluating what impact these incentives have had in the drug marketplace.

Market Exclusivity

The incentive granting market exclusivity is touted as being the most appealing for pharmaceutical manufacturers to research products for orphan diseases.[12] The reason for this lies in the presumption that orphan drugs will be less profitable over time and there is limited long-term profitability potential for rare diseases. Traditionally, periods of patent exclusivity are limited in that they begin from the time of application. This market exclusivity is unique in that it does not begin until marketing approval has been granted for the orphan drug. This feature is impactful because it maximizes the time in which the sponsor of the orphan drug can benefit from the period of exclusivity without having to deduct the time for research and development. This market exclusivity prohibits other sponsors from obtaining approval for the same drug entity for the same indication and sets a precedent for what will be considered a standard of efficacy and safety.10 This precedent now will require any subsequent drug products seeking approval during this period to prove superiority to the prior product.

The impact of market exclusivity was demonstrated in a retrospective systematic review published in 2018, which sought to evaluate periods of exclusion to traditional patent terms and based on the emergence of generic alternatives to the market between 1985 and 2014.[13] This study found that the period of exclusivity did extend beyond that of the patent term, however, this period only accounted for 17% of the total time of market exclusivity. Between 1985 and 2014, the proportion of time which the ODA extended market exclusivity decreased over time. This is uniquely beneficial in that the patent is not subject to challenges during this period, contrasting the process of ever-greening with traditional drug patents. These results were put into perspective by the continuing increase in orphan drug designations and applications. Authors suggest that the market exclusivity may not be the most influential incentive, as it is often attributed to be.

While the amount of time which grants a sponsor an extended monopoly may not be significant in itself, it begs the question of what the impact this small time period may be. One study quantified the characteristics of orphan drugs and compare them to the generic market, economic conditions, and revenue.[14] This study showed that 11 orphan drugs with a single indication reported “blockbuster” status sales within their market-exclusivity window in 2008. This suggests that drug manufacturers can achieve great gains during a relatively short window and illustrates how important a small extension to a monopoly may be. This exclusivity is compounded by the addition of multiple indications. While a single indication represents a small population, multiple indications aggregate to a large population. Of 18 blockbuster drugs with solely orphan drug indications in 2008, only 4 had a single indication, and of 19 drugs achieving profitability, 8 drugs had at least 2 orphan indications. Additionally, market-exclusivity is not limited to new drug entities, 12 of 30 blockbuster drugs with orphan drug status were drugs which had previously approved non-orphan disease indications. The results of this analysis demonstrate profitability of orphan drugs and identifies loop-holes within the market-exclusivity which allow for more drugs to obtain a monopoly.

The previous study posed an important contradiction to conventional reasoning that there is no long-term profitability in orphan drugs. One analysis published in 2016 compared the profit of manufacturers of orphan drugs to that of non-orphan drug manufacturers between 2000 and 2012.[15] Results of this analysis indicated that publicly listed European and US manufacturers with orphan drug designations were 10% more profitable than their non-orphan drug manufacturer counterparts. The results of this study are further reflected in the fact that the top 100 orphan drugs cost, on average, 6 times that of the top 100 non-orphan drugs (per patient per year: $137,782 and $20,875, respectively).[16] While these studies are both limited by their inclusion of European data, there is a crucial difference between how the manufacturers determine price which mitigates European inclusion. European countries, as well as Japan, have an evaluation of cost as a part of their drug approval process, thus establishing a limit to the price which manufacturers can set.12 No such cost-effectiveness analysis or restriction is required prior to FDA approval and, due to the niche market of specialty drug, manufacturers have capitalized by increasing prices.

Articles reporting the importance of market exclusivity conflict, though those listed above sought to put a number to the evaluation and prove its impact. To what extent market exclusivity influences manufacturers may be of question, there is no doubt manufacturers are capitalizing on its availability. These studies do broach an important question which should be further considered, one which considers whether the incentive of market exclusivity is necessary anymore. Some would argue that the special access which this grants to the market is no longer needed and is hindering our process of determining the value of drugs in certain disease states.[17] Another avenue of import is the ability for holders of orphan drug market exclusivity may share the monopoly with another drug company conducting research into a rival orphan drug product.11 By doing so, the second drug company will relinquish drug development, further hindering the possibility of a true competitive marketplace. More research is needed to evaluate the economic value of this period and what, if any, impact removing this incentive would have.

Tax Credits and Federal Grants

The Orphan Drug Act Tax Credit allows manufacturers to claim up to 50% of the costs associated with clinical trials of a drug product for an orphan disease.8 These credits continue with the life of the drug and are not limited to the research and development phase prior to approval.10 The cost of clinical trials and development of successful delivery formulations can be extensive, and these credits were put in place as a way to mitigate the risks which manufacturers take in researching orphan diseases. By including a pathway for recoupment of loss via the tax credit and offering federal grants to offset up-front costs of clinical trials, the incentive seeks to make research into orphan disease states more on par with the costs of performing research for more common chronic diseases. Additional research, including post-market research is also subject to the ODA tax credits, as this incentive is permanent.11 A key evaluation of this incentive is seen as an increase in the amount of research conducted in orphan diseases.

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The tax credit incentives of the ODA rationale are two-fold. First, it reduces the burden of investment or financial risk on the part of manufacturers.[18][19] This factor assists in the gathering of sponsors for orphan drugs and helps to alleviate the comparison of clinical trial costs to that of non-orphan chronic disease states. Secondly, it has the long-term impact of reducing the cost of clinical trials after approval or patent. An opposing viewpoint is that the burden of tax credits is born by patients, who later bear the burden of the cost of the orphan drug, or by other federal programs.19 In 2011, the federal government dispersed approximately $750 million in ODA tax credits.13

One study published in 2008 looked at the impact of the tax credit on the trends and growth of the pharmaceutical market and development.[20] This study concluded that “supply-side incentives,” such as those to mitigate upfront costs, were thought to successfully mitigate some of the up-front costs of drug development and stimulate new development. These up-front costs tend to account for two-thirds of total out-of-pocket costs in the drug development process. An increase of 69% occurred in the amount of research into drugs for rare diseases conducted. Though this increase in the amount of research conducted has been seen, the study found that research was still directed towards orphan diseases with the largest populations. Applications for indications were broken into sub-populations of disease for which the manufacturers applied for multiple indications. As of 2007, the ODA tax credit resulted in $2 billion of reimbursements by the federal government and an anticipated $1.9 billion between 2008 and 2012.  This is an important study in that it demonstrates a different kind of value resulting from the tax credit incentive, that of addressing the initial controversy and providing empirical data to support it.

A report prepared by the Biotechnology Industry Organization and the National Organization for Rare Disorders (NORD) analyzed data associated with the research and development of orphan diseases and how the ODA tax credit has influenced this.11 This report concluded that 33% of orphan drugs approved since the ODA was enacted would not have been developed had the tax credit incentives not been in place. Manufacturers are eligible for research and development tax credits; however, the ODA tax credit solely covers costs associated with clinical trials. In 2014, the costs associated with clinical trials were estimated to be $425 million per drug. This report went a step further and investigated what the potential effects would be if the ODA tax credits were to be repealed. Based on an average of estimates, the impact would be an increase of 36.3% in out-of-pocket expenses for manufacturers who have a history of drug approvals and 27% for manufacturers who have not yet obtained any approval for drugs. The report further extrapolates there would be 57 fewer orphan-drugs in the next decade. This study illumnates several important points, the first of which is that there is a large cost associated with clinical trials for which manufacturers are eligible to receive a tax credit and the second is that this study does not reflect actual expenses in the amount reimbursed by the federal government in the form of ODA tax credits.

Grants awarded for the research of orphan drugs is a smaller cost burden to the federal government but is still worth careful consideration. As of 2015, $14 million is dispersed in the form of grants through the Orphan Products Grant Program per year.11 This program has facilitated the approval of 60 orphan drugs through grants alone. Having received one such grant reportedly correlates with obtaining marketing approval later.[21] As research is often conducted in a much smaller setting than that of a larger pharmaceutical subsidiary, grant applications are often numerous and applied for independent from drug company involvement. Applications for such grants number at approximately 1,800 per year with 12-15 applications for academic studies being awarded funding.1119 While the amount awarded is significant in the sphere of academic funding, the federal burden of $14 million per year in grants pales in comparison to the estimated $457 million per year to be paid in tax credits between 2008 and 2012.

An important consideration in the cost of clinical trials is the nature of orphan drug approval. Orphan drugs are frequently granted either a priority review or accelerated approval through the FDA’s expedited approval process and clinical trials with a lower burden of cost via smaller populations and based on surrogate end-points.1819  This has implications which promote drug companies spending less in clinical trials for a larger number of drugs or indications, foregoing the traditional costs of a single, large study targeted to a wider population. Therapies for chronic diseases impacting large populations are approved based on a higher threshold of efficacy and safety than that of orphan diseases. The result of which is to accept less robust clinical trials.


Much like the study characteristics for orphan drugs, evaluations of these incentives are based on surrogate end-points. There is no direct measure of how each incentive has influenced the market or any single manufacturer, but as an aggregate they have dramatically increased the number of orphan drugs on the market.21 While there has been an increase in the number of orphan drugs, with the anticipation for this number to increase in the future, there is a question as to whether these incentives are still necessary. The market for specialty pharmaceuticals today has allowed for a higher-cost of drugs which would not have been possible in the past, when consumers were bearing more of the cost. When evaluating the incentives on an individual level, the market-exclusivity has shown to extend a drugs monopoly by a small margin which continues to diminish over time, the waiver of fees is a relatively small amount when considering the total expenditures associated with drug development, and grants for research are likewise relatively small. The tax credits for clinical trials does appear to be a significant cost-savings for drug development.

There is not enough evidence to support that restricting or eliminating some incentives contained in the ODA would result in significant savings federally. Neither is there significant evidence supporting that these incentives play the same role in influence drug manufacturers as it once did. With no cost-containment in place restricting price, there is no anticipated change in how pharmaceutical companies will determine the cost of newly approved drugs and these continue to increase. There is a question as to whether it is beneficial to develop orphan drugs which patients burdened with orphan diseases cannot afford. That is not to say there should be no incentives for orphan drug development, only that it warrants consideration as to whether the value of these incentives are as influential on current research and development trends as they once were and if some restrictions on drug spend should be incorporated to ensure patients have continued access to orphan drugs.


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