Rare Disease Day: how the market made a home for orphan drugs

Today is Rare Disease Day, which since 2008 has been drawing attention to the need for better diagnosis and treatment of these debilitating and often deadly conditions.

The European Union defines a rare disease as one affecting only one in 2,000 people.¹ Today, there are around 7,000 known rare diseases; most of these are genetic conditions that manifest at a young age, and so far a cure has been found for only 10% of these conditions.² Little is known about the majority of rare diseases, but every week around five new conditions are described in the medical literature.³

In search of cures for rare diseases, scientists are today using a huge array of innovative techniques. PharmaMar*, for instance, focuses on creating cancer drugs based on marine invertebrates,⁴ which lack immune systems and therefore could provide novel approaches to combating cancer in humans.

Drug discovery, development and approval is a lengthy and costly process. In the generic drug market, margins have been under pressure for many years as a result of a wave of patent expirations and intense competition. Given the comparatively small number of patients affected by any given rare disease, how is the huge investment required to find treatments financially viable?

Orphan drugs

Understanding how treatments for rare diseases are funded begins with the term ‘orphan drug’. As with the definition of rare diseases, different countries and regions have different interpretations, but the European Medicine Agency (EMA) defines⁵ an orphan drug as one that meets the following criteria:

• It aims to cure, prevent or treat diseases that are potentially fatal and result in chronic debilitation
• The disease does not affect more than five in 10,000 people
• The treatment results in significant improvement in patient’s condition

If a drug secures orphan status, various incentives come into play, which together create a very different funding scenario from that faced by generic drugs.

For instance, treatments granted orphan status by the US Food and Drug Administration (FDA) qualify sponsors for incentives including tax credits for qualified clinical trials, exemption from user fees, and potential for seven years of market exclusivity after approval.⁶

In Europe, medicines that have been granted an orphan designation by the EMA benefit from the following:  

• ‘Protocol assistance’ (orphan-specific scientific advice)
• Access to the centralised authorisation procedure
• Ten years of market exclusivity
• Fee reductions for regulatory activities when applying for designated orphan medicines
• Additional incentives for micro, small and medium-sized enterprises

In Japan, the National Institute of Biomedical Innovation, Health and Nutrition also offers significant incentives for the development of qualifying medicines, with direct research and development costs eligible for a subsidy of up to 50%.⁷

The investment case

According to drugs industry analyst Evaluate Pharma, the orphan drug market is growing over twice as fast as the non-orphan market, with a projected 2021-2026 compound annual growth rate of 12%. By 2026, they estimate orphan drug sales will account for 20% of all prescription drug sales, at $273 billion.⁸

Given this encouraging outlook, it’s unsurprising that many of the world’s biggest pharmaceutical companies, including names such as AbbVie* and Novartis*, are investing heavily in orphan drugs.

For investors looking to access the theme, it’s worth considering that the incentives offered by the EMA, FDA and others are subject to change, so taking a global approach could mitigate the impact of policy shifts in any given region.

In terms of potential benefits at a portfolio level, returns from orphan drug developers have historically been less correlated to macro events, and more dependent on progress on clinical trials and M&A activity, meaning the theme could help improve diversification.**

*For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.

**It should be noted that diversification is no guarantee against a loss in a declining market.

1. Source: https://ec.europa.eu/health/ph_information/documents/ev20040705_rd05_en.pdf

2. Source: Current estimates from the National Institutes of Health and the European Organisation for Rare Diseases.

3. Source: https://www.ema.europa.eu/en/human-regulatory/overview/orphan-designation-overview

4. Source: https://pharmamar.com/en/company/about-us/

5. Source: https://www.ema.europa.eu/en/human-regulatory/overview/orphan-designation-overview

6. Source: https://www.fda.gov/patients/rare-diseases-fda

7. Source: https://www.nibiohn.go.jp/en/activities/orphan-support.html

8. Source: EvaluatePharma® Orphan Drug Report 2022.