Market Valuation of FDA Orphan Drug Regulatory Events

The US Orphan Drug (OD) Act was implemented in 1983 with the aim to incentivize research and development (R&D) for rare diseases. However, there is lack of empirical evidence on investigating any underlying effects and implications of such policies. The aim of this paper is to identify and measure the financial impact that is created, due to announcements, which are related to an FDA orphan drug i) designation, ii) market approval, and iii) end of exclusivity. To address our research question, we exploit the efficient market hypothesis, and therefore we use an event-study methodology, which is frequently applied in the finance literature. Our sample covers 730 events with non-missing returns for 146 firms in the period between 1984 and 2018. Specifically, 260 events are related to orphan designation, 317 are market approval events and 153 are the events related to end of exclusivity. For the construction and the analyses of our dataset, we utilized the FDA Orphan Drug Product designation database, and the Wharton Research Database (WRDS) database. Our findings suggest that OD market approval decisions result abnormal returns and cause increase on the stock prices. On the other hand, we do not find any significant effect, when the events of orphan drug designation and exclusivity end are considered. Overall, our results indicate that stock-market investors react positively to the OD market launch even if this therapeutic class addresses niche market. Therefore, OD status incentives, such as the seven year market exclusivity, as well as the tax-credit, might play an important role for forming the positive perceptions of the stock-market investors. However, this happens only when the regulatory provisions are effective i.e. the market approval. Apart from these, investors do not react to the events of OD designation, because they take into consideration the costs and the uncertainty of a drug R&D. Finally, the fact that the stock market does not negatively react to the end of OD market exclusivity would imply that firms do not rely on the OD market exclusivity, but on their patent protection, to secure their effective market monopoly as was recently suggested in the literature.