Investor Reactions to Orphan Drug Designation Strongest for Oncology Therapies, Study Finds

A new study examines the impact that a pharmaceutical’s designation as an orphan drug can have on its manufacturer’s stock prices, and finds that the largest returns were for oncology drugs.

The Orphan Drug Act (ODA) encourages the development of drugs for rare disease treatment through financial incentives. This legislation has contributed to the value that companies and investors place on the orphan drug designation as determined by the increase in average stock prices.

The orphan drug designation, created in 1983 when the ODA was put in place, is administered by the Office of Orphan Products Development at the FDA. The incentives that encourage the development of new drugs for rare diseases include a partial tax credit for clinical trial expenditures, waived user fees, and 7 years of market exclusivity eligibility.

A study recently published by the Orphanet Journal of Rare Disease measures the value investors place on the ODA through a market model. The model is intended to estimate the size of the investors’ reaction to a company’s announcement of receiving an orphan designation from the FDA for one of its drugs.

The researchers compared the daily stock prices leading up to the announcement to the actual stock price on the day the announcement was made. The difference between these prices represented the value the investors placed on the orphan designation. The study included different categories of drug type, company size, and time periods to identify certain effects that could influence the value.

LexisNexis, a news and legal database, was used for 247 observations in the analysis. Of this total, the average company’s stock price increased by 3.36% following the orphan designation announcement. For oncology drugs, the cumulative abnormal return (CAR), or the average value of the announcement, was 3.78%, while non-oncology drugs’ CARs were not statistically significant.

“The increased stock price incentive for the development of an orphan oncology drug versus other types of orphan drugs is worth noting,” the study authors wrote. “Given the difference in CARs, it may be that non-oncology drugs are implicitly receiving a lower value of financial incentives for their development.”

Overall, the researchers concluded, the results illustrate the positive and beneficial value that investors place on orphan drug designation, further establishing the importance of the Orphan Drug Act.