R&D and market size: who benefits from orphan drug legislation?

Since the early 80s, incentives have been introduced to stimulate R&D for rare diseases. We develop a theoretical model to study the impact of push and pull incentives on the intensive and extensive margin of optimal R&D investments. The model describes the mechanisms by which the type of incentives provided may favor R&D for orphan diseases with comparatively high prevalence. In our empirical analysis, we merge data on orphan drug designations by the Food and Drug Administration with Orphanet data on disease characteristics. In line with the theoretical results, we find evidence supporting the idea that the incentives adopted may have contributed substantially to widening the gap between more and less rare diseases classified as orphan. Our theoretical and empirical findings together suggest that, if providing some therapeutic option to patients with very rare diseases is a priority, a revision of the current system of incentives should be considered.