Orphan Drug Act: Background and Proposed Legislation in the 107th Congress

Orphan Drug Act: Background and Proposed Legislation in the 107th Congress

Order Code RS20971
July 25, 2001
CRS Report for Congress
Received through the CRS Web
Orphan Drug Act: Background and Proposed
Legislation in the 107th Congress
nae redacted
Analyst in Industrial Organization
Resources, Science, and Industry Division
Summary
The Orphan Drug Act (P.L. 97-414) was signed into law on January 4, 1983. The
Act provides incentives for pharmaceutical manufacturers to develop drugs,
biotechnology products, and medical devices for the treatment of rare diseases and
conditions. These products are commonly referred to as orphan products. Incentives
for orphan product development include marketing exclusivity for orphan drug sponsors,
tax incentives, and research grants. Since the Act was passed in 1983, the Food and
Drug Administration (FDA) has approved 183 new orphan products. Critics of the Act
argue that, because the Act relies on market-oriented strategies to promote orphan drug
development, overpricing of drugs can limit patient access to orphan drug treatment,
especially among those who lack health insurance. Others argue that the Act has been
very successful in finding new treatments for rare diseases and conditions, and that any
changes to the incentives provided in the law would suppress research and development.
Legislation has been introduced in the 107th Congress to modify marketing exclusivity
provisions, and to accelerate and expand tax benefits for orphan drug manufacturers.
Background
The Orphan Drug Act (P.L. 97-414) was signed into law on January 4, 1983.1 The
purpose of the law was to address congressional concerns about the lack of
pharmaceuticals to treat rare diseases and conditions. According to the National
Organization for Rare Disorders (NORD)2, about 25 million people in the United States
suffer from an estimated 6,000 conditions known as orphan diseases. The Orphan Drug
Act provides incentive for drug manufacturers to develop orphan drugs for the treatment
of rare diseases and conditions. Incentives for orphan product development include
1 For more information see FDA Office of Orphan Products Development Program Overview
[http://www.fda.gov/orphan/progovw.htm].
2 For more information see the NORD website [http://www.rarediseases.org].
Congressional Research Service ˜ The Library of Congress

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marketing exclusivity for orphan drug sponsors, tax incentives, and research grants. These
drugs are commonly referred to as orphan drugs3 because, prior to the Act, few drug
companies were willing to “adopt” products to treat these diseases. Before the early
1980's, very few orphan products had been developed because pharmaceutical companies
had few financial incentives to develop products for treating small target patient
populations. In addition, firms faced further difficulties in recruiting a sufficient number
of subjects for clinical trials. Amendments to the Orphan Drug Act were passed by
Congress in 1984, 1985 and 1988.
The original purpose of the 1983 Orphan Drug Act was to provide incentives in the
development of drugs for the treatment of rare diseases that would normally be
unprofitable or unpatentable. Initially, to qualify for orphan drug status, manufacturers
had to demonstrate that the development of a particular orphan drug would be
unprofitable. An amendment to the Act in 1984 established a numeric prevalence
threshold to the definition of a rare disease or condition. To qualify for orphan drug
status, a rare disease or condition was defined as any disease or condition (1) affecting less
than 200,000 persons in the United States, or (2) affecting more than 200,000 persons in
the United States, but for which there is no reasonable expectation that the sales of the
drug treatment will recover the costs.4 Prior to this amendment, a drug sponsor was
required to provide financial information regardless of the size of the proposed target
patient population. With the amendment, a sponsor could still seek orphan drug
designation by demonstrating that the financial criteria of the law were applicable, but was
not required to do so if the target patient population was less than 200,000.
In 1985, the Act was amended again, this time to extend marketing exclusivity for
both patentable and unpatentable products. The purpose was to protect those products
that were patentable, but whose patents would expire before or shortly after marketing
approval. Many of these drugs were biotech drugs that had difficulties in obtaining
patents. The earlier assumption about most orphan drugs being unpatentable was found
to not always be true. Patents had been issued for many potential orphan products, but
because of prolonged research, the patent protection had sometimes expired before
marketing approval was obtained.5
In 1988, an amendment to the Act changed the requirement for submitting
applications for orphan drug status. Under the revised Act, the application for Orphan
Drug Designation now has to be made prior to the submission of an application for
marketing approval, New Drug Application (NDA) or Product License Application
(PLA).6 Prior to the1988 amendment, the designation request could be filed at any time
3 Congress did not use the term “orphan drug” in the actual text of the law. Instead, the statute
focuses upon definitions of and treatments for “rare diseases and conditions”.
4 P.L. 98-551.
5 Shulman, Sheila; Bienz-Tadmor, Brigitta; Seo, Pheak Son; DiMasi, Joseph A.; and Lasagna,
Louis. “Implementation of the Orphan Drug Act: 1983-1991.” Food and Drug Law Journal, v.
47, No. 4, 1992.
6 For more information on the drug approval process, see CRS Report No. RL30989, The U.S.
(continued...)

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before the U.S. Food and Drug Administration’s (FDA) approval to market the product.7
Incentives for Orphan Product Development
A sponsor seeking to obtain orphan designation for a drug or biological product must
first submit an application to the FDA Office of Orphan Products Development (OOPD),
which was created as part of the Act. The OOPD administers the Act’s incentives of the
Act, reviews sponsors’ applications for orphan designation, and administers the orphan
products grant program. Approval of an orphan designation request does not alter the
regulatory requirements for obtaining marketing approval.
The Act provides various incentives for manufacturers in the development of orphan
drugs including marketing exclusivity for sponsors of designated orphan drugs, tax
incentives, and research grants.8 After obtaining marketing approval by the FDA for a
designated orphan drug, a sponsor has seven years of marketing exclusivity for that
product.9 Marketing exclusivity may be the most motivating incentive provided by the
Act. Without marketing exclusivity, unpatentable products could face competition from
lower-priced generic versions of the drug. The period of exclusivity begins on the date
that the marketing application is approved by the FDA and applies only to the indication
for which the drug has been designated. The FDA could approve a second application for
the same drug for a different use. The FDA cannot, however, approve the same drug
made by another manufacturer for the same indication during the marketing exclusivity
period unless it has the consent of the sponsor or the sponsor is unable to provide
sufficient quantities.
Manufacturers may claim a tax credit of up to 50% for clinical research performed
for designated orphan drugs. Congress extended the tax credit permanently in August
1997 (P.L. 105-34). The Internal Revenue Service administers the tax credit provisions
of the Act. Another financial incentive for orphan product development is a research
grants program administered by the OOPD in which researchers may compete for grants
to conduct clinical trials to support the approval of orphan drugs. The objective of the
grants program is to fund clinical research that will accelerate or assist in the approval of
unapproved products, or unapproved new uses for marketed products that demonstrate
promising uses for rare diseases or disorders. The grants program may also fund studies
leading to publications on the safety and efficacy of designated orphan drugs.10

6 (...continued)
Drug Approval Process: A Primer, by Blanchard Randall, IV, June 1, 1961.
7 OOPD Program Overview, p. 1.
8 Ibid, pp. 2-3.
9 Market exclusivity differs from patent protection and the two rights may actually conflict. See
CRS Report RL30756, “Patent Law and Its Application to the Pharmaceutical Industry: An
Examination of the Drug Price Competition and Patent Term Restoration Act of 1984 (“The
Hatch-Waxman Act”),” December 18, 2000.
1 0 For more information see the orphan drug grants program website
[http://www.fda.gov/orphan/grants/index.htm].

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Manufacturers may request protocol assistance for research and study design
assistance to ensure a successful and expeditious review process by the FDA. The Center
for Drug Evaluation and Research (CDER) or the Center for Biologic Evaluation and
Research (CBER) conduct the formal review of a request for protocol assistance. The
OOPD ensures that the request qualifies for consideration and monitors the review
process.
Orphan Product Production
The Orphan Drug Act has led to the development of new products for the treatment
of rare diseases and conditions such as cystic fibrosis, complications affecting HIV-
infected people, Gaucher’s disease, hemophilia, and rare forms of cancer. Since the
passage of the Act, the number of orphan product designations and marketing approvals
has risen considerably. To date, the FDA has granted marketing approval to 217 orphan
products and designated orphan product status to 1,090 products, including drugs,
biologics, and medical devices.11 By contrast, in the ten years prior to the enactment of
the Act, the number of orphan products that were marketed by manufacturers was 34, with
only ten of these products developed by the pharmaceutical industry. The remainder came
from research and development funded by the federal government.12
The low number of marketed orphan drugs that existed prior to the Act is usually
attributed to the lack of financial incentives for manufacturers to develop drugs that would
treat a small target patient population. The small size of the market for rare diseases,
combined with the difficulty in predicting the cost of development, created few market
incentives for pharmaceutical manufacturers to develop orphan drugs. The unfavorable
expected return on investment did not encourage much interest in investing in the
development of these products. In addition, the issue of product liability may have also
limited potential interest in developing orphan drugs. The risk of adverse effects in orphan
drugs may be somewhat higher than for other prescription drugs because of the smaller
number of participants in clinical trials. According to one report, in 1991, liability claims
had been filed against nearly one-fifth of industry-sponsored orphan products. However,
because of the lack of comparable data, there is no conclusive evidence that orphan drugs
have higher liability risk than other prescription drugs.13
In addition to seven years of market exclusivity, manufacturing firms that develop
orphan products face no regulatory restrictions in setting prices for the product. Like
other pharmaceutical products, prices are determined by market conditions. Because of
the limited size of the market and the high research and development costs associated with
some orphan drugs, the manufacturing process can lead to very high per unit costs. Also,
the limited market size often prevents companies from acquiring economies of scale in the
production process.
11 For complete list of orphan product designations and approvals see OOPD Orphan Product
Designation website [http://www.fda.gov/orphan/designat/index.htm].
12 Asbury, Carolyn H. “The Orphan Drug Act, The First 7 Years.” Journal of the American
Medical Association, v. 265, no. 7, February 20, 1991. p. 893.
13 Ibid, p. 894.

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Accurate data on the prices, sales, and profit margins for orphan products are very
limited and vary by source. Because of the lack of available data, it is not possible to
provide an accurate analysis on total sales, price ranges, or profit margins of orphan
products. Some reports claim that orphan drugs are among the pharmaceutical industry’s
biggest money producers.14 These reports point out that certain “blockbuster” drugs, such
as a replacement enzyme treatment for Pompe disease which has a treatment cost of
$170,000 to $340,000 per year, can be very costly. Such cases have received media
attention over the years. However, other reports claim that most orphan drugs have
relatively low revenues, while only a very few produce extremely high revenues. Some of
the smaller biotechnology companies that have been successful in producing orphan
products for the treatment of diseases, such as narcolepsy, cystic fibrosis, and Fanconi
anemia, have yet to make a profit.15 A 1991 report stated that 75 percent of orphan drugs
earned less than $10 million in their first year of marketing, while 20 percent had sales of
more than $26 million. Two products had sales in excess of $100 million. The report
found that orphan drug sales had a highly skewed distribution that was similar to the
distribution of sales revenues for other pharmaceutical sales.16
The financial incentives provided by the Act appear to have engendered only limited
interest from the large pharmaceutical firms. According to John McCormick, M.D.,
Deputy Director of the OOPD, only 15 percent of applications for orphan drug designation
have come from the larger pharmaceutical companies. He believes that the provisions of
the Act have encouraged the creation of small companies involved in orphan drug
production, especially in the American biotechnology industry.17
Policy Issues and Concerns
Over the years, Congress has debated several amendments to the Act that would
prevent companies from using orphan drug status as a means to charge excessive prices
or make excessive profits. Some critics of the Orphan Drug Act argue that because the
law relies exclusively on market-oriented strategies to promote orphan drug development,
it has led to overpricing of drugs. They argue that many orphan drugs are often
overpriced, which can limit patient access to affordable treatment, especially for those
patients who do not have health insurance coverage. Critics also argue that the definition
of an orphan drug, one that will treat a disease affecting 200,000 people or less, does not
necessarily mean that the drug will not be profitable. In response, other analysts have said
that dramatic changes to the Act’s incentives would suppress research on orphan drugs,
which, in the long run, would lead to fewer drugs being developed to treat rare diseases.18
They also argue that any retroactive termination of orphan exclusivity by Congress would
14 Denise Gray. “ In Quest to Cure Rare Diseases, Some Get Left Out.” The New York Times On
the Web, November 16, 1999. pp. 1-5.
15 Licking, Ellen. Jekyll and Hyde Drug. Business Week Online, October 23, 2000. pp. 1-3.
16 Implementation of the Orphan Drug Act: 1983-1991, pp. 379-380.
17 Henkel, John. “Orphan Drug Law Matures into Medical Mainstay.” FDA Consumer,
May/June 1999. p. 3.
18 Thamer, Mae; Brennan, Niall; Semansky, Rafael. “A Cross-National Comparison of Orphan
Drug Policies: Implications for the U.S. Orphan Drug Act.” Journal of Health Politics, Policy,
and Law, Vol. 23, No. 2, April 1998. p. 267.

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constitute an uncompensated “taking of a property right in violation of the Fifth
Amendment.”19
Since its enactment in 1983, Congress has considered amending the Orphan Drug Act
on several occasions. In the late 1980s and early 1990s, proposed amendments to the Act
addressed concerns that orphan products developed with federal assistance were
producing excessive profits for drug companies. Proposed changes to the Act included
sales cap provisions, but these were not passed. Some analysts cautioned that such
changes could damage the incentives and success of the Act.20 One proposal, which
limited market exclusivity, was passed by Congress in October 1990. It was subsequently
vetoed by President Bush, who believed that it would weaken the exclusivity provision and
discourage the development of orphan drugs. The amendment would have allowed more
than one manufacturer of the same drug to share market exclusivity of the drug and
terminated market exclusivity if the prevalence of the disease increased to more than
200,000 people.21 The President believed that changing the provisions on population limit
would send a “troublesome signal of unilateral rule change to developers.”22
Legislation in the 107th Congress. In the 107th Congress, measures have been
introduced to modify some provisions of the Orphan Drug Act. The Orphan Drug
Program Improvement Act of 2001 (H.R. 386) was introduced to amend the Federal
Food, Drug, and Cosmetic Act to require that an orphan drug’s designation and approved
labeling conform with each other, and to modify the scope of marketing exclusivity for
clinically superior orphan products. The bill would require that the description of the
disease or condition on the labeling for an orphan product be the same as the description
on the OOPD list of orphan drug designations. In addition, the bill would limit marketing
exclusivity awarded to a clinically superior product so that the exclusivity would apply
only to the characteristic or feature that rendered the drug clinically superior to a
previously approved drug. The bill was referred to the House Subcommittee on Health.
The Orphan Drug Tax Credit Act of 2001 (H.R. 1298) was introduced to amend the
Internal Revenue Code to move up the date for which the developer may claim the credit
for clinical testing of orphan drugs from the date of designation to the date the application
for designation was filed. Another measure, the American Breakthrough Research Act of
2001 (H.R. 2153 and S. 1049), would provide manufacturers the option to exchange
research-related tax benefits for a refundable tax credit. H.R. 1298 and H.R. 2153 were
referred to the House Ways and Means Committee. S. 1049 was referred to the Senate
Finance Committee.
19 Implementation of the Orphan Drug Act: 1983-1991, p. 368.
20 Levitt, Joseph A.; Kelsey, John V. “The Orphan Drug Regulations and Related Issues.” Food
and Drug Law Journal, Vol. 48, No. 4, 1993. pp. 530-531.
21 Implementation of the Orphan Drug Act: 1983-1991, p. 367.
22 The Orphan Drug Act, The First 7 Years, p. 896.

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