A:

In 1982,

The U.S. Food and Drug Administration (FDA) recognized the lack of incentive for pharmaceutical companies to develop cures for rare diseases and established the Office of Orphan Product Development. This branch of the FDA provides incentives to companies that work toward curing rare diseases by exercising the rights given to them under the Orphan Drug Act of January 1983. One type of incentive is the orphan drug status, which provides tax reductions and the exclusive right to develop the cure for a specific condition for a period of seven years to companies attempting to cure rare diseases.

Developing drugs to treat the vast number of diseases in the world is a line of business that can lead to massive fortunes, but unfortunately not all developed drugs become the golden ticket. In the world pharmaceuticals, the largest amount of money can be made by developing drugs that become the standard for curing common diseases.

From a business perspective, having a large market ensures that a company can quickly recuperate the cost of development and can also realize the largest possible gain. For this reason, there is little incentive for pharmaceutical companies to develop cures for rare diseases - those that affect fewer than 200,000 people in the United States - because the small market and high cost associated with finding these types of cures discourages these companies from entering this market.

For related reading, check out Measuring The Medicine Makers.

RELATED FAQS
  1. What does it mean when a company in the drug sector has orphan drugs?

    Understand what it means when a company in the pharmaceutical industry has drugs within its portfolio that are designated ... Read Answer >>
  2. How does government regulation impact the drugs sector?

    Learn about how drugs are regulated by the U.S. government as well as the role of the Food and Drug Administration during ... Read Answer >>
  3. What are the primary risks associated with investing in the drugs sector?

    Learn more about the primary risks facing investors in the pharmaceutical and biotechnology industries. Find out how regulation ... Read Answer >>
  4. What is the drugs sector?

    Learn more about the drug industry and how new drugs are brought to market. Find out about how drug research is financed ... Read Answer >>
  5. What are the major barriers to entry for new companies in the drugs sector?

    Find out why barriers to entry for U.S. drug companies are so high and how the Food and Drug Administration, or FDA, inhibits ... Read Answer >>
  6. What does it mean that an investor faces binary outcomes when investing in drug companies?

    Learn why investments in biotech and drug companies can result in what are called binary outcomes, and understand why these ... Read Answer >>
Related Articles
  1. Investing

    3 of America's Most Expensive Drugs and Who Profits From Them

    Learn about orphan drugs that are some of the most expensive drugs in America. Read about the companies that manufacture these drugs.
  2. Investing

    Evaluating Pharmaceutical Companies

    Learn how to find a healthy pharmaceutical investment in a market full of weak drugs.
  3. Markets

    A Primer On The Biotech Sector

    Investing in the biotech sector can involve both huge losses and major gains.
  4. ETFs & Mutual Funds

    CURE: Direxion Daily Healthcare Bull 3X ETF

    Learn about the Direxion Daily Healthcare Bull. This is a leveraged ETF that tracks the health care sector, which is a leader in this bull market.
  5. Investing

    How Pharmaceutical Companies Price Their Drugs

    Learn more about how pharmaceutical companies price drugs, why prices are often very high and why it can be difficult to settle on a suitable price.
  6. Markets

    Why Do Prescription Drugs Cost So Much?

    In 1975, it cost about $100 million in 2005 dollars to develop one drug from the lab to FDA approval. By 2005, that figure was $1.3 billion.
  7. Markets

    The Industry Handbook: Pharma Industry

    Learn about the pharmaceutical industry and discover the forces that influence this highly profitable and dynamic sector.
  8. Personal Finance

    Pharmaceutical Sector: Does The FDA Help Or Harm?

    We look at how the FDA affects the pharmaceutical industry, and how investors can avoid the pitfalls.
  9. ETFs & Mutual Funds

    PJP: PowerShares Dynamic Pharmaceuticals ETF

    Learn about the PowerShares Dynamic Pharmaceuticals exchange-traded fund, which specializes on investing in pharmaceutical companies.
  10. Investing

    The Risks And Rewards Of Pharma Stocks

    While pharmaceutical stocks have certain risks, big pharma companies have stable cash flows and pricing power, offering opportunities for profit.
RELATED TERMS
  1. Orphan Drug Credit

    A federal tax credit that provides an incentive for pharmaceutical ...
  2. Orphan Drug

    A drug or biological product that treats a rare condition or ...
  3. Drug

    A substance that cures, treats, prevents or reduces the symptoms ...
  4. New Drug

    A new medication or therapy that has not been used before in ...
  5. Food And Drug Administration - FDA

    A government agency established in 1906 with the passage of the ...
  6. Abbreviated New Drug Application (ANDA)

    A written request to the U.S. Food and Drug Administration to ...
Hot Definitions
  1. Put Option

    An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security ...
  2. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  3. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  4. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  5. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  6. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
Trading Center