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Orphan Drug Credit


The Orphan Drug Credit is a tax incentive provided by the U.S. federal government. It is designed to encourage pharmaceutical companies to develop drugs for rare diseases (orphan diseases) that affect a small percentage of the population. This credit provides a tax reduction equivalent to 50% of the clinical testing costs for these drugs.


The phonetic pronunciation of ‘Orphan Drug Credit’ is ‘ˈɔːrfən drʌg ˈkrɛdɪt’.

Key Takeaways

  1. Boost for Rare Disease Treatments: The Orphan Drug Credit encourages pharmaceutical companies to invest in the development of treatments for rare diseases that affect fewer than 200,000 people in the United States. This addresses a significant market gap as, without incentives, these diseases might be too rare to attract sufficient research investment.
  2. Tax Incentives: The Orphan Drug Credit provides manufacturers with a tax credit worth 50% of the clinical testing expenses incurred in the process of developing drugs for rare diseases. This substantial incentive can significantly offset the cost of drug development for such illnesses.
  3. Controversies and Criticisms: While the Orphan Drug Credit plays a crucial role in fostering new treatments for rare diseases, it has faced criticisms. Some critics argue that it is exploited by some drug companies to make large profits. Others believe that it encourages companies to focus on rare diseases at the expense of more common ones, potentially distorting public health priorities.


The Orphan Drug Credit is an important aspect of business finance, particularly in the pharmaceutical sector. This U.S. federal tax credit encourages drug companies to invest in researching and developing treatments for rare diseases, often referred to as ‘orphan drugs’. The credit is significant because, due to the small potential market size, companies might not otherwise find such developments financially viable without it. The Orphan Drug Credit, therefore, not only stimulates investment in the biotech and pharmaceutical industry, it also promotes medical advances and can result in life-saving drugs for patients who would otherwise have limited or no treatment options.


The Orphan Drug Credit serves an important role in the healthcare and pharmaceutical sector by providing financial incentive to drug companies to undertake research and development for treatment of rare diseases. These diseases are commonly referred to as orphan diseases as they affect a small fraction of the population – in the U.S., it’s those affecting fewer than 200,000 people. The development of drugs for such rare diseases, known as orphan drugs, is often not economically viable for pharmaceutical companies without some form of governmental assistance as high R&D costs and limited market potential often deter these companies. The Orphan Drug Credit, therefore, exists to stimulate investment in R&D for these orphan drugs.Administered as part of the U.S. Internal Revenue Code, the Orphan Drug Credit allows a tax credit of 25% of the qualified costs of clinical testing undertaken to develop the orphan drugs. This significant financial incentive motivates drug manufacturers to allocate resources towards creating treatments for these rare conditions that might otherwise be neglected. Furthermore, it also offers societal benefits as it aids in increasing available treatment options and potentially improving the quality of life for those suffering from these rare diseases.


The orphan drug credit is relevant to the pharmaceutical industry, particularly companies that develop drugs for rare diseases. Here are three real-world examples:1. “Alexion Pharmaceuticals”: This global pharmaceutical company used the orphan drug credit for the research and development of Soliris, a treatment for paroxysmal nocturnal hemoglobinuria, a rare and life-threatening blood disease. The tax credit allowed Alexion to offset some of the costs associated with developing this drug.2. “Alnylam Pharmaceuticals”: Alnylam was able to utilize the orphan drug credit while developing Patisiran, a treatment for hereditary transthyretin-mediated amyloidosis, a rare, progressive, and life-threatening disease. 3. “BioMarin Pharmaceutical”: Known for focusing on rare genetic diseases, BioMarin has made use of the orphan drug credit several times, most notably in the development of Vimizim, a treatment for Morquio A syndrome, a very rare, inherited metabolic condition. In all these cases, the orphan drug credit allowed these companies to financially manage the high costs associated with developing drugs for rare diseases, helping them to bring life-changing medications to market that might not otherwise have been financially feasible.

Frequently Asked Questions(FAQ)

What is Orphan Drug Credit?

The Orphan Drug Credit is a federal tax credit in the United States under section 45C of the US tax code. It provides a financial incentive for pharmaceutical companies to research and develop drugs for diseases affecting fewer than 200,000 people nationwide, which is labelled as ‘orphan diseases’.

Who can take advantage of the Orphan Drug Credit?

Pharmaceutical companies and organizations that develop drugs for rare illnesses are eligible to request the Orphan Drug Credit.

How does the Orphan Drug Credit help companies?

This credit helps offset the financial costs of developing treatments for lesser-known diseases. It allows pharmaceutical companies to recover up to 50% of qualified clinical testing expenses.

How is the Orphan Drug Credit calculated?

The credit is calculated as a percentage (usually up to 50%) of the qualified clinical testing expenses that a pharmaceutical company incurs while testing drugs for rare or ‘orphan’ diseases.

Are there any specific requirements for the drugs to be eligible?

Yes, they must be intended to combat illnesses affecting fewer than 200,000 people in the U.S., or ones that lack financial viability. The drug also needs to be designated as an Orphan Drug by the FDA (Food and Drug Administration) before it undergoes clinical testing.

Can the Orphan Drug Credit be carried over, back, or refunded?

Much like other tax credits, if a company’s Orphan Drug Credit exceeds the amount they owe in taxes for a particular year, that excess can be carried back one year and carried forward up to twenty years. It is not refundable, so if there’s still a remaining credit after 20 years, it will be lost.

Can a company claim Orphan Drug Credit for a drug discontinued?

No. If the development of a drug is discontinued, the company cannot claim the Orphan Drug Credit.

Has the Orphan Drug Credit been successful in spurring on the development of orphan drugs?

Yes, it has substantially increased the number of orphan drugs brought to market since its inception in the 1980s. Despite the potential for high costs, financial risk, and a small target market, these incentives have made the development of orphan drugs more appealing for pharmaceutical companies.

Related Finance Terms

  • Orphan Drug Designation
  • Food and Drug Administration (FDA)
  • Pharmaceutical Tax Credits
  • Clinical Testing Expenses
  • Rare Disease Treatment

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