When William Baird testified before Congress in support of the Orphan Drug Act he did something he could never have done before. He told a joke.

Baird suffers from narcolepsy, a rare disorder that for years had left him unable to move or control his muscles in moments of emotion.

"Now," he told Congress, "as part of a drug being tested because of the orphan drug legislation, I can do that. I can have these emotions. ... I can tell jokes and stay standing."

Narcoleptics are one group among many that have benefited from the Orphan Drug Act passed by Congress in 1983. The law encourages drug companies through tax credits and the promise of market monopolies to develop drugs for previously neglected rare diseases. In the past four years, the law has worked wonders, providing the economic incentive for more than 100 new medical treatments for everything from lead poisoning suffered by some children to an often fatal pneumonia that strikes people with acquired immune deficiency syndrome.

A legal battle being waged in a federal court in Washington, however, has raised serious questions about the effectiveness of the Orphan Drug Act, and its ability to cope with some of the difficult regulatory issues raised by the advent of biotechnology.

The suit pits Genentech, the pioneer of the biotechnology industry, against the Food and Drug Administration and the pharmaceutical giant Eli Lilly and Co. At issue is the FDA's definition of Human Growth Hormone (HGH), a drug that was given orphan status because it is used to treat several rare forms of dwarfism. As the two sides have argued their cases during the past seven months, both Congress and consumer groups have been drawn into the fray to defend their interpretations of the act.

"The whole lawsuit is very upsetting," said Abbey Meyers, executive director of the National Organization for Rare Diseases. "The Orphan Drug Act was developed out of goodness, kindness and caring. These companies are going head to head out of greed."

In 1985, Genentech received FDA approval and orphan drug status for Protropin, the first genetically engineered version of HGH. According to the terms of the Orphan Drug Act, Genentech said it believed the FDA would not approve any other genetically engineered version of HGH for seven years.

But this spring, the FDA approved another form of HGH, Eli Lilly's Humantrope. Genentech's exclusive marketing rights for Protropin did not prevent the new approval, the FDA said, because Humantrope was substantially different and superior to Protropin. Genentech sued, disputing the decision and seeking an injunction to block the FDA's decisions. When that effort failed, Genentech sought a motion that would effectively remove all HGH products from Orphan Drug consideration. A decision on the suit will come sometime in the next few weeks.

The case hinges on the question of how a "drug" is defined for the purposes of the Orphan Drug Act. Traditional pharmaceuticals are made of distinctive chemical compounds that are relatively easy to categorize for patent or regulatory purposes. But human growth hormone -- along with a number of other genetically engineered products -- is nothing but a synthetic copy of proteins found naturally in the human body. Competing biotech products might be manufactured in a different way, or the long strings of amino acids that make up the protein might be structured in a distinctive fashion, but chemical and clinical differences tend not to be as obvious.

Protropin and Humantrope, for example, differ by one amino acid out of almost 200.

How to interpret these subtle differences is a controversial issue not just within the biotech community but also, according to some sources, within the FDA itself. The agency has yet to issue any public interpretation of the orphan legislation.

"We've gotten no guidance from them at all," said Jeffrey Gibbs, lawyer for Serono Labs Inc., a Massachusetts biotech firm that wants to market an HGH product of its own. "Policy in this area has never been articulated by anyone at FDA."

Humantrope appears to have been approved by the FDA because of evidence that the differences in its amino acid structure made it clinically superior to Genentech's product. During testing, children who took Protropin appeared to form more antibodies than those who took Humantrope. But the evidence supporting that claim has been cast into doubt during the trial. Genentech said the difference in antibody response was due largely to testing error. The company also said that even if the tests were not flawed, the difference in antibody response was of no significance to the effectiveness of Protropin in countering dwarfism.

Complicating the issue is an application before the FDA for Saizen, the growth hormone developed by Serono. Saizen has the same number of amino acids as Humantrope, and company officials said it is clinically identical or even superior to Humantrope, but it is manufactured in a completely different way. Rather than bioengineering from bacteria the way Lilly and Genentech do, Serono uses mammalian cells. Should that make it a different drug under the orphan legislation? Both the Industrial Biotechnology Association and the Association of Biotechnology Companies, the industry's two trade groups, won't comment on the controversy over human growth hormone, but a number of executives at individual companies express concern about the implications of the FDA's silence on the regulatory issues raised by the HGH competition.

Many companies said a legal victory for Lilly's Humantrope could erode protection of their products under either the Orphan Drug Act or patent law.

"I'm worried by the possibility of the FDA winning this case," said one executive, who asked not to be identified. Humantrope, he said, is a "knock-off" of Protropin because the one-amino-acid difference between the two products is trivial. If the case sets a larger precedent, "It would be easy for a company to make a change in someone else's amino acid sequence and get around patent law."

George Rathman, chairman of Amgen, a large biotech firm based in Thousand Oaks, Calif., said: "We're not enthusiatic about a decision that says that after you guys do the work, break the ground and prove there's a market, then suddenly here's some competition you never expected." Rathman said that if Humantrope's orphan status is upheld, the Orphan Drug Act's market exclusivity guarantees will mean little and the incentive for a biotech firm to invest a great deal of time and money in a marginally profitable drug will disappear.

The HGH lawsuit has also exposed a loophole in the Orphan Drug Act's definition of a rare disease. The law offers monopolies for drugs treating diseases with less than 200,000 patients, on the grounds that developing those drugs would otherwise be unprofitable.

But HGH is so expensive that even with no more than a few thousand afflicted children, Genentech grossed $41 million from sales of Protropin in 1986. With a year's worth of HGH treatment averaging between $15,000 and $17,000, and the numbers of potential patients growing steadily, Lilly predicted the HGH market could total in excess of $150 million within the next few years.

Genentech, Lilly and Serono aren't the only firms itching to get a share of this market. Two other firms, Nordisk and Biotechnology General, have developed HGH products, and even Genentech wants to add to its presence with a second-generation version of its original growth hormone.

"The Orphan Drug Act has been a good thing," said Carl Coussan, a spokesman for the Parent Council for Growth Normalcy, a citizen's group representing families with children affected by dwarfism. "But at this point it just limits the marketplace."

The result, Coussan said, is that prices for growth hormones are much higher than they should be.

The sudden controversy surrounding the Orphan Drug Act has taken Congress by surprise. Historically, orphan diseases are so unprofitable that even with the inducements offered by the law, companies undertake the development of drugs in this field largely as a public service. Indeed, when the legislation was first drafted, said Rep. Henry A. Waxman, the California Democrat who authored the bill, "We never thought that a situation like this would be a possibility, because we never thought that more than one company would ever try and develop an orphan drug."

Waxman plans to introduce legislation within the next few months to tighten the definition of a rare disease under the law, but not before a number of other biotech companies have moved quickly to take advantage of the loopholes.

The West Coast firm Chiron Corp., for example, has developed a drug called Urogastrone that will some day have wide application in the treatment of wounds. Initially, however, the company has applied for orphan drug status for specific versions of the drug that can be used in treating rare corneal defects and severe burns. That gives Chiron a working monopoly in two market niches while it moves to develop a more general version of Urogastrone.

This, in the words of Gabriel Schmergel, president of Genetics Institute in Boston, is the "salami technique," whereby biotech firms carve up the applications of potential blockbuster drugs into slices of less than 200,000 patients.

"The act as it presently stands is being seriously misused by industry. I'm amazed that Congress has taken so long to change it," he said.

"Look," counters Chiron Chairman Edward Penhoet, "the law's the law. Clever organizations find out ways to make it useful.