Angel and Venture Alert: The Case for Investing in Orphan Drugs

No, we’re not talking about developing drugs for orphans.

But for 25 million Americans, according to the NIH, an “Orphan Drug” (one that serves fewer than 200k users and includes diseases such as cystic fibrosis, Lou Gehrig’s disease, and Tourette’s syndrome, among others) can spell the difference between misery (or worse) and getting through the day.

How are traditional vs. orphan drugs developed, and why should you care?

The Process for Developing Traditional Drugs

Bringing a drug to market is a tedious, expensive process that has limited chances of success. From start to finish, the whole process can take 10-15 years, cost over $100M, with an overall probability of success of finding a compound that is effective and gets approved for distribution as low as 8%.1

First Steps, 1-6 years 

  • Identifying a compound: It all starts with a company trying to address a problem. Pharmaceutical companies often analyze thousands of compounds, attempting to find ones that can may provide therapeutic value.  
  • Preclinical Testing: Once found, it can take one to two years more years of preclinical testing with animals to create and test a usable drug. Of five thousand compounds tested, perhaps five will be promising enough for the company to file an “Investigational New Drug Application” (IND). Only if the FDA approves the IND can the company begin the first phase of human testing.  

Next Steps: Human Testing Phases (6-11 years) 

  • Phase I focuses largely on the safety of the drug in clinical trials using healthy individuals. 
  • Phase II tests the drug’s efficacy in the target demographic. Nearing completion, the manufacturer meets with the FDA to discuss development, continued human testing, any concerns the FDA has at the time, and the preparation for Phase III testing. 
  • Phase III is usually the longest and most expensive phase of development and continues to test efficacy, safety, and side effects of the prospective drug. 
New Drug Application: 

At this point, the company will file a New Drug Application (“NDA”) which the FDA will review for one to two years. The FDA consults experts to obtain advice on drug safety, effectiveness, and labeling. Once the drug receives final approval, the drug may be marketed with FDAregulated labeling.  

The Process for Developing Orphan Drugs

Conversely, where traditional drugs target large groups of potential users, an orphan drug targets medical ailment which affects fewer than 200,000 patients each (U.S. definition) and, sometimes, as few as 100. Until Congress passed the Orphan Drug Act2few pharmaceutical companies were willing to expend the resources (time and money) when they were unlikely to make a profit. Orphan diseases include, among others, cystic fibrosis, Lou Gehrig’s disease, and Tourette’s syndrome, as well as less familiar diseases such as Hamburger disease, Job syndrome, and acromegaly, or “gigantism.” Finding treatment options for these is a high priority.  

Advantages of developing orphan drugs

Bringing orphan drugs to market now is a very attractive prospect for pharmaceutical companies, having reduced the cost and time to produce them (see the chart above). In practice, the FDA incents and helps companies to search for treatments to these diseases. And it regulates drugs that can target orphan diseases far differently from normal drug products by, for instance:   

  • Protecting the intellectual property of the drug from competition; 
  • Requiring less stringent testing; 
  • Speeding up the approval process3 ; and
  • Providing greater leeway regarding drug pricing.  

Furthermore, large pharmaceutical companies often build their portfolio of product candidates by acquiring smaller companies. Smaller companies, therefore, may advance studies to the point that the products show potential viability, when they represent acquisition candidates by larger companies. This is especially important for developing treatment of orphan diseases, in which the early stage research and discovery is often more challenging.  

Orphan drugs currently account for 17.3% of all worldwide prescription sales, up from 6% in 20004 they account for one-third of all new FDA drugs approved, and the likelihood for success is much higher than traditional drugs. Additionally, the FDA requires fewer trials, and physicians are more likely to adopt the drug after FDA approval. Finally, companies developing orphan drugs can receive tax benefits.   

Benefits of choosing orphan drug development:

  1. IP Protection: Approved drugs are protected from competition for 7 years in the U.S. and 10 years in the E.U.
  2. Fast-Track Approval: The FDA will fast-track applicants for approval, waive certain fees, and help with certain parts of the application, such as writing protocols. 
  3. No Pricing Restrictions: Companies with orphan drugs can charge very high prices without challenges from insurance carriers or Medicare.
  4. Higher Revenues per Patient: A 2014 study showed that approved orphan disease companies had a mean charge of $140,443 per patient/year, while traditional non-orphan disease companies averaged just $27,756.5 5
  5. Lowering Testing Costs: Less time spent in testing translates, potentially, to millions of dollars saved in expenses during the testing phases and a shorter time to market. 

Why Should Angel and Venture Investors Care?

Just as with any early stage company investment, there is the potential for a “hockey stick” (rapid growth) return on investment in successful orphan drug companies, with a captive audience for these medicines, albeit small, and the likelihood of large profit margins for each product.  

Naturally, each investor must be diligent, reviewing the company, the investment and, most of all, the owners and management team. However, if your interest runs toward high-risk early stage investments, this may be an area to consider.  

For an extensive look at the orphan drug industry, please read EvaluatePharma’s “Orphan Drug Report 2017 6

  1., “The Drug Development and Approval Process.” The stage referenced above is the New Drug Application stage.
  2. U.S. Food & Drug Administration, “Orphan Drug Act – Relevant Excerpts,” 
  3. Often there is no precedent the developer must follow to create these drugs. Additionally, standard superiority studies compared to existing drugs are not always required.
  4. EvaluatePharma  “Orphan Drug Report 2017”,
  5. Ibid
  6. Rare Disease Report “Orphan Drugs Have Higher Rates of FDA Approval,” .”





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