With the passing of the Orphan Drug Act in 1983, the FDA established the Office of Orphan Product Development (OOPD) which gives incentives to biotech companies to develop promising products for the diagnosis, treatment and cure of rare diseases. Orphan Drug Status provides tax reductions and the exclusive rights to the cure for a specific condition for a period of seven years post-approval. It encourages companies to enter a market where high costs of drug development are less likely to be recouped quickly, due to the smaller pool of individuals needing the cure. By definition, an orphan drug is one for a disease which affects less than 200,000 Americans, or less than 5 per 10,000 people in a community. The FDA, during approval of an orphan drug, recognizes than Phase III clinical trials on 1000 people might not always be possible, due to a lack of individuals with the condition in question. It provides incentive to continue the research, even when a drug doesn't prove to be the miracle cure it was initially thought, and obtaining funding for research becomes difficult. The OOPD administers the Orphan Products Grants Program which provides funding for clinical research in rare diseases.
What is Orphan Drug Status?, Theresa Phillips, About.com Guide.
US Food and Drug Administration Office of Orphan Product Development.