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 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 >>
  5. What process does a company need to follow to bring a new drug to market?

    Learn about the costly price of bringing new drugs to market. Discover why the pharmaceutical industry invests billions of ... Read Answer >>
  6. How does the profit margin compare for a generic drug versus a brand name drug?

    Learn how the profit margins compare for generic drugs and brand-name drugs. Brand-name drugs cost three to four times more ... Read Answer >>
Related Articles
  1. Stock Analysis

    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. Fundamental Analysis

    Evaluating Pharmaceutical Companies

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

    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.
  4. Investing Basics

    The Industry Handbook: Biotechnology

    Biotechnology uses of biological processes in the development or manufacture of a product or in the technological solution to a problem. Since the discovery of DNA in 1953, and the identification ...
  5. Savings

    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.
  6. Stock Analysis

    It's No Accident That Drugs Are Expensive

    Branded drugs are expensive in large part because it's expensive and risky to develop them
  7. Investing

    Using DCF In Biotech Valuation

    Valuing firms in this sector can seem like a black art, but there is a systematic way to pin a price on potential.
  8. Investing News

    Drug Prices: Name Brands Doubled in Last 5 Years (ESRX)

    Express Scripts' Drug Trends Report, released Monday, revealed that the average price of brand name drugs rose 16.2% in 2015, with over one third of brand name drugs seeing price increases over ...
  9. Personal Finance

    The Cancer (and Other Drug) Shortage

    Your doctor may not tell you, but even in the U.S., life-saving drugs can be in short supply. Here's what to know and do.
  10. Savings

    Why Drug Prices Keep Rising & How to Fight Back

    Despite pushback from politicians and disgruntled consumers, the cost of drugs keeps going up. Is there any relief on the horizon?
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. Abbreviated New Drug Application (ANDA)

    A written request to the U.S. Food and Drug Administration to ...
  6. New Indications

    A term used by medical companies and professionals to signify ...
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center