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An orphan drug is a pharmaceutical agent that has been developed specifically to treat a rare medical condition, the condition itself being referred to as an orphan disease.

In the US and EU it is easier to gain marketing approval for an orphan drug, and there may be other financial incentives, such as extended exclusivity periods, all intended to encourage the development of drugs which might otherwise lack a sufficient profit motive. The assignment of orphan status to a disease and to any drugs developed to treat it is a matter of public policy in many countries, and has resulted in medical breakthroughs that may not have otherwise been achieved due to the economics of drug research and development.

According to Thomson Reuters in their 2012 publication "The Economic Power of Orphan Drugs", there has been increased investing in orphan drug Research and Development partly due to the U. S. Orphan Drug Act of 1983 (ODA) and similar Acts in other regions of the world and also driven by "high-profile philanthropic funding." The period between 2001 to 2011 was the "most productive period in the history of orphan drug development, in terms of average annual orphan drug designations and orphan drug approvals." For the same decade the compound annual growth rate (CAGR) of the orphan drugs was an "impressive 25.8 percent, compared to only 20.1 percent for a matched control group of non-orphan drugs." By 2012 the market for orphan drugs was worth USD$637 million compared to the USD$638 million matched control group of non-orphan drugs.

By 2012,

""the revenue-generating potential of orphan drugs [was] as great as for non-orphan drugs, even though patient populations for rare diseases are significantly smaller. Moreover, we suggest that orphan drugs have greater profitability when considered in the full context of developmental drivers including government financial incentives, smaller clinical trial sizes, shorter clinical trial times and higher rates of regulatory success.""

- Gaze and Breen 2012

Orphan drug legislation
Orphan drugs generally follow the same regulatory development path as any other pharmaceutical product, in which testing focuses on pharmacokinetics and pharmacodynamics, dosing, stability, safety and efficacy. However, some statistical burdens are lessened in an effort to maintain development momentum. For example, orphan drug regulations generally acknowledge the fact that it may not be possible to test 1,000 patients in a phase III clinical trial, as fewer than that number may be afflicted with the disease in question.

Since the market for any drug with such a limited application scope would, by definition, be small and thus largely unprofitable for pharmaceutical companies, government intervention is often required to motivate a manufacturer to address the need for an orphan drug.

In 2015 Gibson et al. published the results of their qualitative study of "34 key Canadian stakeholders which including drug regulators, funders, scientists, policy experts, pharmaceutical industry representatives, and patient advocates in which they investigated contributing factors to the growing interest of the pharmaceutical industry in "niche markets" such as orphan drugs.

The intervention by government on behalf of orphan drug development can take a variety of forms:
 * Tax incentives.
 * Enhanced patent protection and marketing rights.
 * Clinical research financial subsidization.
 * Creating a government-run enterprise to engage in research and development (see Crown corporation).

Currently there are more than 400 orphan designated drugs in clinical trial process. Majority of these drugs are being developed in the US followed by Europe. The US dominate the development of orphan drugs with more than 300 orphan designated drugs being under clinical trial process.
 * Orphan Designated Drugs in Clinical Phase: 600
 * Marketed Orphan Designated Drugs: 281
 * Highest Number of Drugs in Phase-2 Trial: 231
 * US Dominates Clinical Trial Process: 350 in Pipeline (Research till Registration)
 * Indication for Clinical Trials for Orphan Drug: More than 30% for Cancer Treatment
 * Share of Biological in Orphan Drug: More than 60%
 * Key Market: US (Sales > US$40 billion)

Orphan Drug Act
The Orphan Drug Act (ODA) of January 1983, passed in the United States, with lobbying from the National Organization for Rare Disorders and many other organizations, is meant to encourage pharmaceutical companies to develop drugs for diseases that have a small market. Under the ODA orphan drug sponsors qualify for seven-year FDA-administered market Orphan Drug Exclusivity (ODE), "tax credits of up to 50% of R&D costs, R&D grants, waived FDA fees, protocol assistance and may get clinical trial tax incentives.

Orphan drug designation means that the sponsor qualifies for certain benefits but it does not mean the drug is safe and effective and legal to manufacture and market in the United States.

Rare Diseases Act
In 2002 the Rare Diseases Act was signed into law. This legislation amended the Public Health Service Act to establish the Office of Rare Diseases. It also increased funding for the development of treatments for patients with rare diseases.

European Union
The European Union (EU) has enacted similar legislation, Regulation(EC) No 141/2000, in which pharmaceuticals developed to treat rare diseases are referred to as "orphan medicinal products". The EU's definition of an orphan condition is broader than that of the USA, in that it also covers some tropical diseases that are primarily found in developing nations. Orphan drug status granted by the European Commission gives marketing exclusivity in the EU for 10 years after approval. The EU's legislation is administered by the Committee on Orphan Medicinal Products of the European Medicines Agency (EMA).

Regulatory harmonization
In an effort to reduce the burden on manufacturers applying for orphan drug status, the FDA and EMA agreed in late 2007 to utilize a common application process for both agencies. However, the two agencies will continue to maintain separate approval processes.

Other countries
In addition to the United States and the European Union, legislation has been implemented by Japan, Singapore, and Australia that offers subsidies and other incentives to encourage the development of drugs that treat orphan diseases.

Effectiveness
Under the ODA and EU legislation, many orphan drugs have been developed, including drugs to treat glioma, multiple myeloma, cystic fibrosis, phenylketonuria, snake venom poisoning, and idiopathic thrombocytopenic purpura.

The ODA is nearly universally acknowledged to be a success. Before Congress enacted the ODA in 1983 only 38 drugs were approved in the USA specifically to treat orphan diseases. In the USA, from January 1983 to June 2004, a total of 1,129 different orphan drug designations have been granted by the Office of Orphan Products Development (OOPD) and 249 orphan drugs have received marketing authorization. In contrast, the decade prior to 1983 saw fewer than ten such products come to market. From the passage of the ODA in 1983 until May 2010, the FDA approved 353 orphan drugs and granted orphan designations to 2,116 compounds. As of 2010, 200 of the roughly 7,000 officially designated orphan diseases have become treatable. Some critics have questioned whether orphan drug legislation was the real cause of this increase (claiming that many of the new drugs were for disorders that were already being researched anyway, and would have had drugs developed regardless of the legislation), and whether the ODA has really stimulated the production of truly non-profitable drugs; the act also received some criticism for allowing some pharmaceutical companies to make a large profit off of drugs that have a small market but still sell for a high price.

Although the European Medicines Agency grants market access its 27 member states, in practice, medicines only reach the market when each member state decides that its national health system will reimburse for the drug. For example, 35 orphan drugs reached the market in Belgium, 44 in the Netherlands, and 28 in Sweden in 2008. 35 such drugs reached the market in France and 23 in Italy in 2007.

Though not technically an Orphan Disease the research and development into the treatment for AIDS is heavily linked to the Orphan Drug Act. In the beginning of the AIDS epidemic the lack of treatment for the disease was often accredited to a believed lack of commercial base for a medication linked to either HIV or AIDS. This encouraged the FDA to use the Orphan Drug Act to help bolster research in this field and by 1995 13 of the 19 drugs approved by the FDA to treat AIDS had recieved orphan drug desigination, with 10 recieving marketing rights. These are in addition to the 70 designated orphan drugs designed to treat other HIV related illnesses.

Orphan diseases
A rare disease, also referred to as an "orphan disease", is any disease that affects a small percentage of the population. Most rare diseases are genetic, and thus are present throughout the person's entire life, even if symptoms do not immediately appear. Many rare diseases appear early in life, and about 30 percent of children with rare diseases will die before reaching their fifth birthday. With a single diagnosed patient only, ribose-5-phosphate isomerase deficiency is presently considered the rarest genetic disease. No single cutoff number has been agreed upon for which a disease is considered rare. A disease may be considered rare in one part of the world, or in a particular group of people, but still be common in another.

Research has found that as many as one-in-ten Americans suffers from rare disease. Over 55 million people are estimated to suffer from a rare disease in Europe and in the US. Global estimates are between 5000 to 7000 rare diseases. New rare diseases are discovered every week and many have no treatments available. Currently, 350 orphan drugs have been approved for sale in the US.

Cystic fibrosis
In the 1980s, cystic fibrosis patients rarely lived beyond their early teens. However, drugs like Pulmozyme and Tobramycin, both developed with aid from the ODA, revolutionized treatment for cystic fibrosis patients by significantly improving their quality of life and extending their life expectancies. Now, cystic fibrosis patients often survive into their thirties and some into their fifties.

Homozygous familial hypercholesterolemia
The 1985 Nobel Prize for medicine went to two researchers for their work related to homozygous familial hypercholesterolemia, an orphan disease that causes large and rapid increases in cholesterol levels. Their research led to the development of statin drugs that are commonly used to treat high cholesterol.

Wilson's disease
Penicillamine was developed to treat Wilson's disease, a rare hereditary disease that can lead to a fatal accumulation of copper in the body. This drug was later found to be effective in treating arthritis. Bis-choline tetrathiomolybdate is currently under investigation as a therapy against Wilson's disease.

Activism
Numerous advocacy groups such as the National Organization for Rare Disorders, Global Genes Project, Children's Rare Disease Network, Abetalipoproteinemia Collaboration Foundation, Zellweger Baby Support Network, and the Friedreich's Ataxia Research Alliance have been founded in order to advocate on behalf of patients suffering from rare diseases with a particular emphasis on diseases that afflict children.

Industry involvement
Key orphan drug developers are Synageva BioPharma, Swedish Orphan Biovitrum, Shire plc, GlaxoSmithKline, Pfizer, Novartis, Genzyme, Lundbeck, Prosensa, Agilis Biotherapeutics, QOL Medical, BioMarin and Alexion Pharmaceuticals. These pharmaceutical companies work together with national bodies such as the U.S.'s National Organization for Rare Disorders (NORD), Avella Specialty Pharmacy and the European Organization for Rare Diseases (EURORDIS) to advance this field.

Research centers
The Center for Orphan Drug Research at the University of Minnesota College of Pharmacy provides help to small companies with insufficient in-house expertise and resources in the areas of drug synthesis, formulation, pharmacometrics, and bio-analysis. The Keck Graduate Institute Center for Rare Disease Therapies (CRDT) in Claremont, California, supports projects to revive potential orphan drugs whose development has stalled by identifying barriers to commercialization such as problems with formulation and bio-processing.

Cost
According to a 2014 report by Andreas Hadjivasiliou, published by EvaluatePharma, the economics of orphan drugs mirrors the economics of the pharmaceutical market as a whole but has a few very large differences. Unlike most drug production by large companies the market for orphan drugs is by definition very low, but while the customer base is drastically smaller the cost of research and delevolpment is very much the same. This causes the producers to charge extremely high amounts for treatment, sometimes as high as $700,000 dollars a year, placing a large amount of stress on insurance companies and patients.

The government has implemented steps to bring down these high research and development cost by providing subsidies and other forms of financial assistance to companies that produce orphan drugs. The largest of this assistance comes in the form of tax breaks that can be as high as 50% of research and development costs. Orphan drug manufacturers are also able to take advantage of the small customer base to cut cost on clinical trails due to the small number of cases to have smaller trials which reduces cost. These smaller clinical trials also allows orphan drugs to move to market faster as the average time to receive FDA approval for an orphan drug is 10 months compared to 13 months for non-orphan drugs. This is especially true in the market for cancer drugs as a study in 2011 found that between 2004 and 2010 orphan drug trials were more likely to be smaller and less randomized then their non-orphan counterparts but still had a higher FDA approval rate, with 15 orphan cancer drugs being approved while only 12 non-orphan drugs were approved. This allows manufactures to get cost to the point that it is economically feasible to produce these treatments. These subsidies can total up to 30 million dollars per fiscal year in the United States alone.

The 2014 Orphan Drug report that orphan drug designations continue to increase rapidly. There are soaring forecasts for sales of orphan drugs and the percentage of sales of total share of prescription drug sales is increasing at rapid rate. By 2020 the total is predicted to be $176 billion.

Although orphan disease populations are the smallest, the cost of per-patient outlays are the largest. Hadjivasiliou argues that there will be more pressure on pharmaceuticals that "represent the biggest budgetary drain" particularly as more people with rare diseases—in the United States for example—will be eligible for public subsidies through the Affordable Care Act.

Evaluation criteria for public-funding of orphan drugs
By 2007 the use of economic evaluation methods regarding public-funding of orphan drugs, using estimates of the incremental cost-effectiveness, for example, became more established internationally. The QALY has often been used in cost-utility analysis to calculate the ratio of cost to QALYs saved for a particular health care intervention. By 2008 the National Institute for Health and Care Excellence (NICE) in England and Wales, for example, operated with a threshold range of £20,000–£30,000 per Quality-adjusted life year (QALY). By 2005 doubts were raised about the use of economic evaluations in orphan drugs. By 2008 most of the orphan drugs appraised had cost-effectiveness thresholds "well in excess of the ‘accepted’ level and would not be reimbursed according to conventional criteria." As early as 2005 McCabe et al argued that rarity should not have a premium and orphan drugs should be treated like other pharmaceuticals in general. Drummond et al argued that the social value of health technologies should also be included in the assessment along than the estimation of the incremental cost-effectiveness ratio.

Abuse of public-funding for orphan drugs
The large incentives given to pharmaceutical companies to produce orphan drugs has led to what some people believe is an abuse of the financial support afforded to make these drugs possible. Companies will take drugs that we filed with the government of there region as orphan drugs to receive the financial assistance that comes with that and then take the final product and market it to a wide population, greatly increasing their profit margin. The best example of this practice is company AstraZeneca's cholesterol drug Crestor. This medication was billed as a treatment for the rare disease pediatric homozygous familial hypercholesterolemia, but once the drug was approved for orphan drug tax breaks and the other advantages associated with this classification, AstraZeneca was able to get FDA approval for the drug to be used to treat cholesterol in all diabetics. With more and more orphan drug's being filed every year it seems that companies are looking to take advantage of these loop holes to minimize research and development cost and make a larger profit margin.

NICE
By 2008 if an orphan drug cost more than £30,000 NICE required other arguments for funding.

In 2015 NICE held consultations with "patient groups, the Department of Health, companies, learned societies, charities and researchers" regarding the appraisal of medicines and other technologies. There was a call for more research into new processes including the

""model of pharmaceutical research and development, the expectations that companies and patient groups have about how risk and reward is shared between the industry and a publicly funded NHS, and in the arrangements for commissioning expensive new treatments.""

- NICE 2014