(More on this topic here: https://www.keionline.org/orphan-drugs and here.)
This is from: United States Senate, Committee on the Judiciary, Subcommittee on Antitrust, Monopolies and Business Rights, Anticompetitive Abuse of the Orphan Drug Act: Invitation to High Prices, January 21, 1992, Serial Number J-102-48, pages 259-283. A copy of the full hearing is available here.
The Orphan Drug Act
Most people think of an orphan drug as one that is used to treat rare diseases, and are surprised to learn that the Orphan Drug Act classifies as orphan diseases such ailments as asthma, anorexia, AIDS, colitis, glaucoma, heart disease, hemophilia, hepatitis, liver disorders, chronic pain, lead poisoning, tuberculosis, leukemia and most forms of cancer, including cancer of the bladder, brain, cervix, esophagus, head and neck, lung, lymphoma, ovary, and pancreas.
Because the Orphan Drug Act provides substantial tax benefits and exclusive marketing protection, the pharmaceutical industry has considerable incentives to ask for new FDA orphan designations. Under the current law, obtaining an orphan designation is easy. The Act does not require any consideration of a drug’s economics. The Act requires only that the drug be used to treat a disease with a client population less than 200,000. The way the arithmetic is done, 200,000 is a large number. For example, an estimated 6.8 million Americans suffer from cancer, but under the Orphan Drug Act a firm can distinguish
particular types of cancer for designation. For example, ovarian cancer, which is the fifth-leading cause of death among women victims of cancer, has an estimated client population of 164,000, well under the 200,000 limit.
Drug companies are also allowed to file for orphan drug status for very narrowly defined treatment groups and later add new orphan designations for different applications of the drug. This technique is called “salami slicing.” Thus, the same drug can be approved by the FDA to treat large populations, but still retain its orphan drug protections, if each application receives its own designation. Moreover, a drug which receives an orphan drug approval for one disease can be prescribed for others, a practice that some companies encourage.
As these proceedings have clearly shown, the lack of any kind of a means test has often led to “Daddy Warbucks” outcomes. This phase was coined by Eli Lilly and Company in a legal pleading opposing Genentech’s successful effort to have the human growth hormone (hGH) Protropin designated as an orphan drug:
Congress thought exclusivity would encourage development of drugs that could not hope to recoup the cost of research, development, and manufacture. The Orphan Drug Act rests upon a Congressional finding that “because so few individuals are affected by any one rare disease or condition, a pharmaceutical company which develops an orphan drug may reasonably expect the drug to generate relatively small sales in comparison to the cost of developing the drug and consequently to incur a financial loss.” Congress therefore provided
marketing exclusivity as an incentive for drug manufacturers to develop drugs that otherwise would be unprofitable. [the words from “marketing exclusivity” to “develop drugs” were not included in the printed hearing record due to a production error, but are included here from the original. ]. . . Genentech certainly has a reasonable expectation of recovering the costs of developing and manufacturing Protropin. . . The actual size of the market . . may be as high as 15,000 patients, which could yield sales of $150,000,000. . .
If Protropin is an “orphan” drug, it has found its Daddy Warbucks. Genentech’s efforts to swell its good fortune still further by stretching the exclusivity provisions of Section 527(a) to the breaking point — and beyond — should be rejected.
Today both Lilly and Genentech sell “orphan” human growth hormone drugs at prices as high as $30,000 per year per patient. The Lilly product is Humatrope, which differs slightly from Genentech’s Protropin. According to a June 16, 1991 story in the New York Times Magazine, 1990 U.S. sales for Genentech’s Protropin “orphan” drug were $157 million.
A drug company can drive a Brinks truck through the loopholes in the Orphan Drug Act. The Act ignores foreign drug sales. Drug companies can “salami slice” any way they choose to obtain orphan drug designation for drugs with large markets. The Act makes no distinction between a drug that requires daily use and a drug that is used episodically.
The 200,000 target for the client population is extremely high when one considers that some drugs with client populations less than 10,000 have several firms competing vigorously to win FDA races for orphan drug approval.
The legislative history of the Orphan Drug Act illustrates the shifting perception of the definition of the orphan drug problem. The first Congressional initiative in this area was
Congresswoman Elizabeth Holtzman’s H.R. 7089, introduced in 1980. H.R. 7089 would have defined an orphan drug as a new “diagnosis, prevention or treatment of the disease or condition” that was commercially unavailable due to the small market for the drug, or because exclusive rights to the development of the drug could not be obtained. Companies seeking designation for a “drug of limited commercial value” would have had to estimate expenses and revenues for the drug over a ten-year period.
The Holtzman bill would have begun collecting information on the extent of the rare disease problem and would have provided financial assistance to firms to bring such drugs on the market. The Holtzman bill also contained a provision that would have allowed the government to condition financial assistance on a developer’s agreement to reimburse the federal government if the drug turned out to be particularly profitable.
While the Holtzman bill did not pass, hearings on the bill attracted wide attention and resulted in a dramatization of the issue in a March 4, 1981 episode of the television series “Quincy.” The actor Jack Klugman followed up with a personal appearance before the Subcommittee.
In December 1981, Congressman Henry Waxman introduced H.R. 5238, which
eventually became law as the Orphan Drug Act.
The Waxman bill introduced the idea of granting a seven-year period of exclusivity for the first NDA approved for an unpatented drug for a rare disease. Congressman Waxman also sought a system of tax credits to provide further financial incentives to drug firms.
According to one observer, “the role of the pharmaceutical industry during this early stage of defining and developing a response to the orphan drug problem was first one of disinterest and then one of opportunism.” At first the exclusivity section of the Orphan Drug Act was considered of minor importance. In an 1984 article, Donna Brown Grossman wrote:
The effectiveness of the seven-year period of exclusivity offered manufacturers for unpatentable orphan drugs is . . questionable. Concern about patent protection undoubtedly is a major factor in drug development decisions, and unpatentability was often mentioned as one deterrent to orphan drug development. Yet in light of the small market for orphans, it is difficult to understand why exclusivity should be a significant concern. As discussed above, orphan drugs are unlikely to face competition from a generic version, because the small market provides little incentive for a competitor to spend the resources necessary to gain approval for a generic copy and gear up for production. The fear that a competitor will take a “free ride” on the resources spent by the initial developer therefore seems illusory. The one instance in which exclusivity could prove valuable is where an orphan drug turns out to have wider uses, and a wider market than originally thought. The protection afforded by the Act is insurance against this small risk; it is harmless and cost-free, but it cannot be considered a significant inducement to a prospective orphan drug developer.
The Department of Health and Human Services was slow to respond to the 1983 Act’s requirements for carrying out means tests for orphan drug applications, and in 1984 the
Orphan Drug Act was amended to replace the means test with the 200,000 client population criterion. In 1985 the Act was amended to allow patentable drugs to qualify as orphans.
The elimination of the means test and the inclusion of patentable drugs led to an explosion of orphan drug designations. Today drug companies routinely ask for orphan drug designation, for both defensive and offensive reasons. Since the first firm to win an FDA NDA approval for an orphan drug is automatically given seven years of exclusivity by the FDA, firms have an incentive to obtain an orphan drug designation and NDA approval before their rivals do.
Under the Orphan Drug Act, the FDA has become an ad hoc imitation of the Patent and Trademark Office (PTO). The PTO allocates patents on the basis of well established rules and precedents to the first firm to make a discovery. The FDA is just now adopting rules for orphan drug approvals. It awards exclusivity to the first firm with NDA approval — a far different criterion than is used for a patent. There are cases where one patented orphan blocks entrance by other drugs which have their own patents and arguably different medical characteristics. For many drugs, the Orphan Drug Act actually adds a new element of risk to the drug development process, as it is possible to be barred from marketing a drug with a valid patent. Firms with patents have even been beaten to the punch by firms that don’t hold patents, creating cases where the firm that holds the FDA orphan drug exclusivity must license the patent from the firm barred from the market.
The Orphan Drug Act has had such a large impact on the FDA approval process that
it will be difficult to reform the Act to refocus it on its original purpose, which was to promote drugs that were genuinely uneconomic due to small patient populations. An indication of the pharmaceutical industry’s influence was seen last session of Congress when President Bush vetoed modest amendments which would have allowed the FDA to consider rates of growth of client groups (largely to remove AIDS drugs from the Orphan Drug Act) and which would have granted marketing rights to companies that develop drugs simultaneously.
Congress should return to the original plan of means testing orphan drug applications, and it should require detailed financial disclosure for drugs that benefit from orphan drug subsidies and marketing exclusivity protections.
 The Orphan Drug Act provides a 50 percent tax credit for expenses related to clinical tests on humans for drugs used to treat rare conditions or diseases.
 Comments of Eli Lilly Company, In the Matter of the Petition of Genentech, Inc., For Advisory Opinion, Rulemaking, and Stay of New Drug Application Approvals. Docket Number 86P-0452. United States of America Before the Department of Health and Human Services, Food and Drug Administration. January 15, 1987. Reprinted in U.S. House of Representatives, Committee on Energy and Commerce, Subcommittee on Health and the Environment, Orphan Drug Act, Hearings, Serial Number 101-130. February 7, 1990, pp 96-7.
 Barry Werth, “How Short is Too Short?” The New York Times Magazine, June 16, 1991.
 An excellent history of the Orphan Drug Act is provided in David M. Richardson, “The Orphan Drug Tax Credit: An Inadequate Response to An Ill-Defined Problem,” The American Journal of Tax Policy, Vol. 6:135. pp. 135-210, 1987. See also, Patricia J. Kenney, “The Orphan Drug Act–Is it a Barrier to Innovation? Does it Create Unintended Windfalls?” Food Drug Cosmetic Law Journal, Vol. 43, pp 667-679, 1988. James T. O’Reilly, “Orphan Drugs: The Strange Case of ‘Baby M,'” Food Drug Cosmetic Law Journal, 42, 516-526, 1987. Donna Brown Grossman, “The Orphan Drug Act: Adoption or Foster Care?” Food Drug Cosmetic Law Journal, 39, 128-151, 1984.
 Public Law 97-414, 1983.
 David M. Richardson, “The Orphan Drug Tax Credit.”
 Donna Brown Grossman, “The Orphan Drug Act,” 1984.
 Orphan Drug Regulations,” Proposed Rules, Federal Register, Vol. 56, No. 19, January 29, 1991, pp. 3338-3351.
 U.S. House of Representatives, Orphan Drug Amendments of 1990. Report 101-635.