As the Orphan Drug Act of 1983 nears its second birthday, two federal agencies are locked in a battle over its care, feeding and future.

The law offers financial incentives to encourage drug companies to develop "orphan drugs" -- unprofitable products used to treat rare diseases. But the Office of Management and Budget, which clears federal regulations and the accompanying paper work, has rejected the Food and Drug Administration's proposed shortcut for qualifying drugs as "orphans."

Instead, the OMB wants to require drug companies to provide extensive marketing and cost figures for all products that would be covered by the law. The law's supporters fear that that burden will negate the tax and financial incentives offered by the law.

"OMB's intransigence could bring the efforts to develop such drugs to a screeching halt," said Bill Haddad, chairman of the Orphan Drug Foundation and president of an organization of generic drug manufacturers. The drug companies, he said, "don't want the government in their books, and that's what this would entail."

But, in the OMB's view, the FDA's plan to grant "orphan" status automatically to any drug aimed at diseases that afflict fewer than 200,000 people could apply to some profitable drugs, contrary to the law's intent.

"We believe that the statute was not designed to permit such automatic designation without a reaonable determination that costs could not be recovered," James B. MacRae Jr., chief of the OMB's reports management branch, wrote a Health and Human Services Department official last summer.

As an example, MacRae noted that cyclosporine, a drug that might benefit 75,000 kidney transplant patients, is expected to be profitable since it costs each patient $5,000 to $6,000 annually. Although cyclosporine was not approved under the orphan drug law, MacRae said its per-patient costs show that FDA's proposal "might improperly result in permitting automatic orphan designation of drugs for which there are reasonable expectations of full cost recovery."

The orphan drug law has been a rallying point for many associations formed to fight rare diseases. An estimated 20 million Americans suffer from some 5,000 rare diseases.

Because of the limited sales potential of drugs to treat these diseases, pharmaceutical firms have little incentive to develop them. The law, however, was designed to provide incentives: tax credits, a seven-year exclusive license for the product, possible research grants and some relaxation of the FDA's extensive testing requirements for new drugs.

By law, any new drug must be proved safe and effective before the FDA permits its sale in the United States.

Shortly after President Reagan signed the law in January 1983, the FDA established guidelines that required companies to submit detailed financial data. Then it proposed a shortcut.

The agency said it would not require a company to supply detailed cost and marketing data if the drug would be used to treat fewer than 200,000 victims. Companies seeking to produce drugs for a larger population still would have to demonstrate that the drugs would be unprofitable.

Originally, Internal Revenue Service officials -- who were involved because of the law's tax-credit provisions -- objected to the proposed 200,000-patient cutoff. But they eventually accepted FDA's view.

Then it was the OMB's turn to object. Since the rule changes involved a change in an FDA reporting form, the OMB could review the decision under the Paperwork Reduction Act. OMB officials point out that the law explicitly requires that a drug be unprofitable to gain "orphan" status and that lawmakers could have included a cutoff figure such as FDA's, but declined to do so.

So far, 19 drugs have been desginated as "orphans," according to Marion Finkel, director of FDA's Orphan Products Development Office. Following current guidelines, their manufacturers provided detailed cost and marketing information, she said, but "these drugs were well along in development and the manufacturers could make an estimate of how much had been spent."

"When someone is in the early stage of animal testing and wants orphan designation before doing human studies, they can't predict their costs accurately," she said. The companies, she added, may fear that innaccurate estimates could attract angry federal auditors at a later date. "They worry that they could be in trouble," Finkel said.

Industry officials Haddad and John Adams said that many firms would be reluctant to divulge detailed information about overhead costs. Said Adams, executive director of the Pharmaceutical Manufacturers Association's Commission on Drugs for Rare Diseases: "Most companies, not just drug companies, object to line-of-business reporting -- how much you spend for the sodium chloride, how much you spend for the bottle, and so on."

According to Abbey Meyers, an official of the Tourette Syndrome Association and a key lobbyist for FDA's proposal, drug companies have identified about 300 chemical compounds that have undergone only limited testing but show promise for use in "orphan" diseases. These compounds, she fears, may never be made available to thousands of patients if the OMB's view prevails.

If a manufacturer has to take the time to prove the drug doesn't make a profit, they're not going to bother," said Meyers. "Manufacturers are waiting in the wings. But they have a paranoid feeling if they have to supply any information to a government agency. They just don't want to do it."