“Orphan drug” is a designation given to certain pharmaceutical and biological products (drugs) that would likely not be developed due to a relatively small patient population and limited potential for profitability. In the U.S., the Orphan Drug Act and subsequent regulations define an orphan drug as intended to treat a disease or condition that affects fewer than 200,000 persons in the U.S. Benefits of an orphan drug designation include seven years of market exclusivity (from the date of approval of a new drug application or issuance of a license for a biological product) and tax credits for clinical testing.

Conducting clinical trials to gain Food and Drug Administration (FDA) approval of drugs may be costly for biotechnology and pharmaceutical startups. To significantly reduce costs of FDA approval, a startup company may choose to seek an orphan drug designation for only a small patient population even when FDA approval for a larger patient population may be possible. The average per-study costs across Phases 1, 2, and 3 for a (non-orphan) drug can be more than $70 million, an amount that a startup likely cannot afford. However, the costs for conducting clinical trials to seek approval of an orphan drug may be much lower. For example, while a regular Phase 3 clinical trial can involve testing efficacy in 3,000 people, a Phase 3 clinical trial for a drug seeking an orphan drug designation can involve testing efficacy in fewer than 200 people. If the startup company is successful in gaining the orphan drug designation on the limited patient population, the seven year of exclusivity period would then allow for securing of profits gained during the seven year exclusivity period to support and conduct clinical trials seeking broader indications for the drug. An enterprising startup company may also choose to sell the orphan drug designation and indication to raise funds to support research and clinical trials for a different indication of the same drug with a larger patient population.

Orphan drugs have received negative press recently. In February 2017 the FDA approved Emflaza™ (deflazacort) for treating patients age 5 years and older with Duchenne muscular dystrophy, a disease that occurs in about every 3,600 male infants. Before receiving the orphan drug designation, there had been no FDA approval for deflazacort to treat this indication. Instead, American patients may choose to import deflazacort from overseas. Thus no insurance would cover the cost of deflazacort. With the FDA orphan drug approval, the proposed cost of treatment per patient was expected to be approximately $89,000 per year. Over political outrage of the $89,000 price tag ($50,000-$54,000 after rebate) of Emflaza™, Marathon Pharmaceuticals delayed its launch and then sold the orphan drug designation and exclusivity period to PTC Therapeutics. The political outrage also led to a letter from a U.S. Senator and a U.S. Congressman urging PTC Therapeutics to reduce the proposed price of treatment. (For comparison purposes, competitor Sarepta Therapeutics announced that its drug for Duchenne muscular dystrophy, Exondys 51TM, will cost about $300,000 per patient, per year.) Without commenting on the debate about appropriate pricing of the drug, the orphan drug designation provided enough of an incentive for Marathon to fund the research and clinical trials to get the approval of deflazacort to treat an indication that previously did not have approval in the U.S.

Although debates over drug pricing has provided recent negative press on orphan drug designations, startup companies should consider whether seeking an orphan drug designation may be used to save costs in clinical trials or may be used to provide an increased valuation for the company. With the profits gained during the seven year exclusivity period or through profits gained from sale of the orphan drug designation on a drug for a particular indication, the startup company may then pursue broader indications for the drug.