Johns Hopkins Study Exposes Orphan Drug Act Gaming - Seven of Top 10 Drugs Exploiting Tax Breaks for Rare Diseases

Johns Hopkins researchers published findings demonstrating that pharmaceutical companies were systematically gaming the 1983 Orphan Drug Act by obtaining orphan drug designations—intended for treatments of rare diseases affecting fewer than 200,000 Americans—for blockbuster drugs generating billions in annual revenue. Seven of the top 10 best-selling drugs in the United States for 2014 came to market with orphan designations: AbbVie’s Humira, Roche’s Rituxan, Avastin and Herceptin, Johnson & Johnson’s Remicade, Celgene’s Revlimid, and AstraZeneca’s Crestor. More than 70 orphan-designated drugs were first approved by the FDA for mass-market use, with manufacturers later obtaining orphan approval by subdividing diseases into smaller populations, receiving millions in taxpayer subsidies and seven years of marketing exclusivity for each narrow indication while marketing the drugs broadly for off-label use.

The Orphan Drug Act’s Original Purpose and Industry Exploitation

The 1983 Orphan Drug Act was designed to incentivize development of treatments for rare diseases that would otherwise be unprofitable due to limited patient populations. The law provided substantial benefits: 50% tax credits on research and development costs (up to $500,000 annually for four years), waiver of FDA application fees exceeding $2 million, access to federal grants, and seven years of marketing exclusivity preventing any competitor from treating the designated rare disease. While the Act successfully sparked development of lifesaving therapies for cystic fibrosis, muscular dystrophies, and certain pediatric cancers, pharmaceutical companies discovered they could exploit the law’s structure by obtaining orphan designations for drugs already approved for common conditions or by slicing broader diseases into multiple narrow indications, each qualifying for separate orphan benefits.

Strategic Disease Subdivision and Off-Label Marketing

Companies demonstrated an “increasingly common pattern of gaming the system” by initially listing only a single narrow indication sufficient to qualify for orphan designation—treating one specific subtype of cancer or one rare manifestation of a common disease. After securing FDA approval with orphan benefits, manufacturers marketed these drugs extensively for off-label uses far beyond the designated rare condition, retaining the lucrative seven-year marketing exclusivity and tax breaks while generating mass-market revenues. Nearly 15% of approved orphan drugs subsequently added far more common diseases to their treatment repertoires. About one-third of orphan approvals since the program began involved either repurposed mass-market drugs or drugs receiving multiple orphan approvals, with some companies winning three to five separate orphan designations for a single drug by subdividing diseases into progressively smaller patient populations.

Blockbuster Drugs with Orphan Protections

Analysis revealed that more than 70 orphan-designated drugs were medicines first approved for mass-market use, including familiar brand names later approved for orphan indications. In each case, manufacturers received millions in government subsidies plus seven years of marketing exclusivity—effectively a monopoly—for treating the rare disease. Humira, the world’s best-selling drug generating $20 billion annually by 2018, received orphan designation for treating rare forms of arthritis despite being mass-marketed for common inflammatory conditions. Rituxan, Avastin, and Herceptin—major cancer drugs—obtained orphan designations for specific rare cancer subtypes while being prescribed broadly for multiple cancer types. The system allowed companies to claim tax breaks and exclusivity intended for unprofitable rare disease drugs while generating billions from mass-market sales.

Financial Magnitude: Taxpayer Subsidies for Billion-Dollar Drugs

Under the Orphan Drug Act’s original terms, companies received 50% tax credits on research costs—effectively requiring taxpayers to fund half the development of drugs that would generate billions in profits. For each orphan designation, companies could receive up to $500,000 annually in taxpayer subsidies for up to four years, plus waiver of FDA application fees exceeding $2 million. The seven-year marketing exclusivity was worth far more: for blockbuster drugs, this monopoly protection generated hundreds of millions to billions in additional revenue by preventing any competitive drug from treating the designated rare condition. Companies filing for multiple orphan designations for the same drug multiplied these benefits—receiving separate tax credits, fee waivers, and exclusivity periods for each narrow indication despite using the same underlying drug product.

FDA Attempts at Reform and Congressional Backpedaling

In 2013, the FDA attempted to close the loophole by clarifying that the agency wanted to avoid companies “potentially gaming approvals by seeking successive narrow approvals of a drug.” However, the regulations still allowed breaking larger diseases into smaller groups under certain conditions, and companies could still win multiple orphan approvals for a single drug even if total treated patients exceeded 200,000 across all indications. The FDA’s limited authority to police disease definitions meant companies retained wide latitude to subdivide conditions. More troubling, in 2017, Congress cut the orphan drug tax credit in half from 50% to 25% without oversight hearings or evidence-gathering—a politically palatable response that reduced taxpayer costs while preserving the fundamental gaming structure that allowed blockbuster drugs to claim rare disease benefits.

The Scale of Industry Gaming

Overall, nearly 15% of approved orphan drugs subsequently added common diseases to their treatment uses after gaining orphan approval for rare conditions. The system created perverse incentives: companies could develop drugs targeting common diseases but structure their FDA applications to first obtain orphan approval for a rare subtype, capturing tax breaks and exclusivity before expanding to mass markets. Some drugs received three to five separate orphan designations by progressively narrowing disease definitions—treating “lymphoma” as multiple rare lymphoma subtypes, each qualifying for separate benefits. The total taxpayer cost of subsidizing these blockbuster drugs through orphan designations reached hundreds of millions annually in direct tax credits, plus billions in higher drug costs due to marketing exclusivity preventing competition.

Significance

The orphan drug abuse scandal exposed how well-intentioned legislation to help rare disease patients could be systematically exploited to provide taxpayer subsidies and monopoly protections for the pharmaceutical industry’s most profitable products. The fact that seven of the top ten drugs in 2014 carried orphan designations revealed that “orphan” status had become a standard profit-maximization strategy rather than a narrow exception for genuinely unprofitable rare diseases. The gaming demonstrated pharmaceutical companies’ sophisticated understanding of regulatory systems and their willingness to exploit programs designed to help vulnerable patient populations. The exploitation was particularly egregious because it diverted limited FDA resources and taxpayer funds from genuinely rare diseases to blockbuster drugs that would have been developed regardless of orphan incentives. Congress’s 2017 response—cutting tax credits in half without addressing the structural gaming—illustrated the political challenge of reforming pharmaceutical industry subsidies: reducing costs was politically feasible, but eliminating the fundamental loophole that allowed blockbuster drugs to claim rare disease status faced industry opposition and legislative inertia. The orphan drug scandal exemplified regulatory capture through legal gaming, where companies exploited every ambiguity in statutory language to transform targeted incentives into universal profit-enhancement mechanisms.