Orphan Drug Credit: 2025 Policy Shifts & Australian Impact

With rare diseases affecting a growing number of Australians, policies that incentivise the development of orphan drugs—those targeting conditions affecting fewer than 5 in 10,000 people—are under the spotlight. Around the world, governments have used tax credits and other financial incentives to spur pharmaceutical innovation where commercial returns would otherwise be slim. In 2025, global shifts in orphan drug credit schemes are shaping the future of biotech investment, research, and patient outcomes. So, what does this mean for Australia’s health and finance sectors?

Understanding the Orphan Drug Credit: The Global Landscape

The orphan drug credit originated in the United States in 1983 with the Orphan Drug Act, offering a tax credit (recently 25% of qualified clinical testing expenses) to encourage drug companies to develop treatments for rare diseases. Similar incentives have appeared in the European Union and Japan, each with their own eligibility rules and benefits.

• United States (2025 update): After several years of political debate, the US Congress reaffirmed the orphan drug credit at 25% for qualified expenses, with new reporting requirements aimed at transparency and anti-abuse. The Inflation Reduction Act’s provisions on drug pricing are also impacting how credits interact with commercial strategies.

• European Union: The EU maintains a mix of tax incentives, market exclusivity, and fee reductions for orphan drugs, but is reviewing its incentive structure amid concerns about affordability and access.

• Japan: Japan continues to offer a 50% tax credit for clinical trials of orphan drugs, alongside priority review and subsidies, reinforcing its position as a leader in rare disease research.

Australia’s Approach: Incentives, Gaps, and the 2025 Policy Debate

Australia does not currently offer a direct orphan drug tax credit. Instead, local biotech and pharmaceutical companies rely on the broader R&D Tax Incentive, which provides a refundable tax offset for eligible R&D activities. However, this incentive is not targeted at rare disease research, leading to calls from industry and advocacy groups for more focused support.

In 2025, the Australian government commissioned a review into the competitiveness of its biopharmaceutical incentives, with recommendations expected mid-year. Key issues under discussion include:

• Targeted tax credits: Should Australia introduce an orphan drug credit similar to the US or Japan, specifically aimed at rare diseases?

• Market exclusivity: Could enhanced exclusivity periods or fast-track approval processes attract more rare disease research?

• Patient access: How can incentives balance commercial viability with affordability for patients and the public health system?

Industry experts point out that, with more than 7,000 rare diseases and only a fraction having approved treatments, targeted incentives could put Australia on the map for global biotech investment. However, budgetary pressures and the need to ensure value for taxpayer money are part of the ongoing policy debate.

Real-World Impacts: Case Studies and Investor Considerations

The experience of global pharmaceutical firms illustrates the power of orphan drug credits. For example, US-based Vertex Pharmaceuticals leveraged the orphan drug credit to accelerate its cystic fibrosis portfolio, resulting in both financial returns and life-changing treatments. In Japan, Chugai Pharmaceutical has successfully brought multiple orphan drugs to market with the support of local credits and subsidies.

For Australian companies, the absence of a dedicated orphan drug credit means competing for capital with jurisdictions that offer more direct incentives. Investors are increasingly factoring in global policy trends when making decisions about biotech portfolios. In 2025, with the US reaffirming its orphan drug credit and the EU considering reforms, Australian policymakers face growing pressure to act or risk losing out on future medical breakthroughs.

• Startups: May struggle to fund high-risk, high-reward rare disease research without targeted credits.

• Investors: Are tracking the policy landscape closely, with direct credits seen as a catalyst for early-stage investment.

• Patients: Ultimately stand to benefit from a more vibrant rare disease pipeline, but only if incentives are matched by access and affordability measures.

Looking Ahead: The Future of Orphan Drug Credits in Australia

As global orphan drug policies evolve, Australia stands at a crossroads. The upcoming government review will shape whether the country adopts a dedicated orphan drug credit or finds alternative ways to support rare disease innovation. With the US and Japan providing clear models and the EU actively reviewing its approach, Australian stakeholders—pharmaceutical companies, investors, advocacy groups, and patients—are making their voices heard.

In the meantime, Australian firms seeking to develop orphan drugs may need to pursue international collaborations or access overseas credits, but this risks exporting both talent and intellectual property. The coming months will be critical for determining whether Australia becomes a leader or a follower in rare disease innovation.