Some regulators, most importantly the US Food and Drugs Administration (FDA), designate certain drugs orphan drugs.
The company developing the drug needs to apply for this designation and it needs to meet certain criteria - the most important is that the disease should be rare. Once a drug is designated an orphan drug it receives a number of incentives:
- a period of marketing exclusivity - once it is approved, approval of other drugs to treat the same condition will be delayed
- access to grants and tax credits to offset R & D costs
- waiving of regulators fees
- faster or simpler clinical trial and approval processes.
The exact incentives vary from country to country. The single most important incentive is seven year market exclusivity in the US.
Market exclusivity is a strong incentive because it grants a much stronger monopoly that that granted by a patent, albeit for a shorter period. A patent merely stops anyone else from selling the same drug. Marketing exclusivity stops anyone else from selling any drug to treat the same condition. This does not affect sales of existing treatments, only new ones.
From an investment point of view, the consequences of an orphan drug designation are:
- lower costs to get the product to market
- less risk of new competition in the first few years of sales.
The costs are lower and the potential sales volumes and prices are higher than without the orphan drug designation.