Orphan Drug Designations as Valuable Intangible Assets for IPO Investors in Pharma-Biotech Companies

Orphan Drug (OD) legislation has been implemented with regulatory and financial incentives to encourage the drug innovation in order to treat rare diseases. This study aims to test whether OD Designations (ODD) granted by the Food and Drug Administration (FDA) to pharmaceuticals and biotechnology start-up companies may be considered as relevant signals in, attracting entrepreneurial finance and increasing the amount invested at the time of the Initial Public Offering (IPO) in the US stock markets. We found that the signaling power of ODD is positively and statistically significant for IPO investors in stock markets. Regression results also suggest that ODDs are stronger than patents applications in attracting IPO investors. Scholarly and policy implications are discussed in the light of the signaling theory and drug development policies.