Republicans on Thursday rolled out their new tax reform bill, which among other provisions to lower taxes for Americans and businesses, proposes to repeal a provision that might cause the biopharma industry some concern.
Under the House bill’s Subtitle E, section 3401 would repeal what amounts to half of the qualified clinical research costs for designated orphan drug products.
Under the Orphan Drug Act of 1983, Congress sought to incentivize the development of drugs to treat rare diseases by offering drugmakers tax credits, fee waivers and a seven-year period of marketing exclusivity for an approved orphan indication. To qualify for the designation, a product must be intended to treat a disease that affects fewer than 200,000 people in the US, or more than 200,000 if the drugmaker can show that it is not expected to recoup its costs to develop and market the drug.
In terms of the tax credit, a sponsor may claim half of the qualified clinical research costs for a designated orphan product. The orphan drug credit is available for qualifying costs incurred between the date the Food and Drug Administration (FDA) designates a drug as an orphan drug and the date the FDA approves the drug, though the research credit can be claimed for the development costs that are qualified research expenses regardless of FDA designation or approval of the drug.
Critics of the law claim it has allowed drugmakers to charge exorbitant prices for many orphan drugs and argue that drugmakers take advantage of the incentives of the law.
Between 1983 and 2016, FDA approved 451 orphan drugs for 590 rare disease indications, though some estimate that there are about 7,000 rare diseases, most of which have no approved treatments.
In 2016, FDA’s Office of Orphan Products Development (OOPD) received 568 new requests for designation – more than double the number of requests received in 2012. And last June, FDA pledged to eliminate the orphan drug designation backlog.
Tax Bill and Comments
The bill’s attempt to repeal the orphan drug research credit follows the recent release of an analysis conducted by the US Department of the Treasury finding that total tax expenditures from the orphan drug research credit are ballooning.
The expenditures are expected to increase from about $2.3 billion in 2017 to almost $6 billion in 2022 to more than $15 billion in 2027.
Although the expenditures and number of orphan drug approvals have risen in recent years, industry groups have been adamant about the importance of the tax credit in encouraging orphan drug research.
According to an Ernst & Young report from 2015, 67 orphan drugs, or 33%, would likely not have been developed over the past 30 years if there had never been an orphan drug tax credit.
"If the ODTC [Orphan Drug Tax Credit] were repealed, the resulting reduction in the number of approved new orphan drugs could have a significant impact on Americans with rare diseases," the report said.
Industry group BIO, which collaborated on the report, said in a statement on Thursday, "As Congress debates and refines this important legislation, we look forward to working with lawmakers to ensure that our nation’s tax code most effectively encourages innovation, investment and American entrepreneurship. This would include maintaining the Orphan Drug Tax Credit."
In a letter sent to Reps. Paul Ryan (R-WI) and Kevin Brady (R-TX) last week, BIO, Novartis, Allergan and other companies said: "We support your efforts to reform America’s corporate tax code to make the U.S. competitive on the global stage, including your drive to lower the corporate tax rate. However, paying for rate reduction by eliminating the ODTC would severely hamper our ability to bring life-saving treatments for rare and devastating diseases to patients. Thus, we strongly support preserving the ODTC in any tax reform legislation."
But the willingness of Republicans to take a stance against the biopharma industry also signaled to some that more reform may be coming in some form.
James Love, KEI Director, told Focus in a statement: "The GOP proposal to eliminate the Orphan Drug Tax Credit may create a new opportunity to reform the incentives for rare diseases, even if the tax bill fails or the tax credit survives. The GOP tax bill shows there is weaker support for the existing regime than many thought."
Designating an Orphan Product: Drugs and Biological Products