The explosion of orphan drug treatments is only gaining steam as pharma and biotech stocks look to combine ground breaking science with longer exclusivity over patient populations and astronomically high prices. Because orphan disease patient populations are so small, from just a few hundred to a few thousand in the U.S., and the unmet need, pharma companies are given extra protection and can charge more for treatment. No drug is more expensive than Alexion's (Nasdaq: ALXN) PNH drug Soliris at over $400,000 per year to be taken in perpetuity, but payers accept high prices because of the limited demand.

Since the early 1980's there have been roughly 450 orphan drugs approved, but with another 450 or so in the pipeline the industry's excitement is obvious. Investors should be excited as well, given the strong performance of orphan drug stocks, for instance Alexion is up 700% over the last 5 years, BioMarin quadrupled thanks in part to Naglazyme's $365,000 price tag, and Shire (Nasdaq: SHPG) has seen nearly a 500% run coinciding with its growing orphan drug business. But it is important to stay disciplined and not get caught up in the excitement when picking orphan drug stocks.

In this episode of Where The Money Is, Motley Fool health care analysts David Williamson and Michael Douglass give investors the background of orphan drugs, what makes them different, the type of prices they charge and 2 rules for investing in orphan drug stocks.