Empirical Economic Analysis of Orphan Drug Legislation Impact on Innovation

Background: Drug development for rare diseases has been limited mainly by the prohibitive cost of investing in a novel drug with poor market potential. To encourage the development of such drugs, Orphan Drug (OD) legislation was put in place in the United States in 1983 and in the European Union in 2000. The introduction of this status has brought incentives including fee reductions and market exclusivity. However today, the increased availability of OD with their very high cost, and their use for chronic disease raises a debate about accessibility, cost-effectiveness, and reimbursement by health protection systems. Objectives: As most of the incentives are not contingent to an ultimate research success, one may wonder about the effects of such public health policy. Very little empirical research has been performed on the subject. Scholars have proposed cost/effectiveness and value-based pricing as a mean to estimate a drug price that is linked to the benefits it offers to patients and society. However one of the key components of debates on rising health care costs is the cost of R&D and the role of private sector investments. Methods: After an overview of the innovation dynamics and the industrial organization of the OD market is given, an empirical financial analysis of investment attractiveness in OD R&D will be presented focusing on the US market. First, we will explore whether disclosure of information about a firm's innovativeness through OD designation prior to Initial Public Offering (IPO), can reduce problems of asymmetric information and risk, and help firms in attracting investors. The study develops econometric models of the relationship of various metrics of firm quality prior to the IPO and the amount of cash collected at the IPO. Secondly, we will investigate the financial impact of the OD market approval announcement on firm market valuation, with an event-study methodology developed in finance, based on the efficient market hypothesis. Results: We (This abstract was borrowed from another version of this item.)