DEFINITION of 'Orphan Drug Credit'

A federal tax credit that provides an incentive for pharmaceutical companies to seek treatments and cures for rare diseases affecting Americans. Normally, companies may not be motivated to make a drug for a small population because sales may be insufficient to justify the research and development costs of creating the drug. The Orphan Drug Credit provides a credit of 50% of clinical drug testing costs for drugs being tested under section 505(i) of the Federal Food, Drug and Cosmetic Act.

BREAKING DOWN 'Orphan Drug Credit'

The credit can be applied whether the clinical tests are performed directly by the pharmaceutical company or are contracted out to a third party. In general, the testing must be conducted within the United States. Orphan drug credits allow pharmaceutical companies to create orphan drugs that target rare conditions.

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