Senate Tax Plan Seeks to Reform, Rather Than Repeal, Orphan Drug Tax Credit

Regulatory News

The Senate’s tax plan, running counter to the House’s call to eliminate the orphan drug tax credit for research on drugs to treat rare diseases, seeks to modify the credit instead.

The proposal would limit what level of expenses will qualify and limit qualified clinical expenses if they are related to the use of a drug which has previously been approved for diseases or conditions affecting more than 200,000 persons in the US.

The tax credit is part of a law from 1983 meant to incentivize the development of drugs to treat rare diseases by offering tax credits, fee waivers and a 7-year period of marketing exclusivity for an approved orphan drug indication. To qualify for the orphan drug 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 a drugmaker can show that it is not expected to recoup its costs to develop and market the drug.

Proposal

The Senate's proposal unveiled Thursday seeks to limit the orphan drug credit to 50% of qualified clinical testing expenses for the taxable year that exceeds 50% of the average qualified expenses for the previous three taxable years, according to a description of Senate Finance Committee Chairman Orrin Hatch’s (R-UT) Tax Cuts and Jobs Act, which is scheduled for markup by the committee on Monday. 

And if no qualified clinical expenses occurred during at least one of the three preceding taxable years, the proposal says the credit is equal to 25% of qualified expenses.

On whether the proposal is basically a halving of the tax credit, James Love, executive director of the nonprofit, non-governmental organization KEI, told Focus: "Not exactly in half, but half for a steady state company. Plus, they nuke the credit for drugs with multiple indications that add up to 200,000 or more. But they do nothing to exclusivity... where the worst abuses happen. The Senate proposal is similar to the general R&D [research and development] tax credit, you get the most credit when you increase R&D spending."

In terms of estimated revenue effects, the Senate committee estimates say there would be $29.7 billion in orphan drug tax credits from 2018 to 2027. That compares with an October Treasury department estimate of expenditures of $75 billion over the same period, based upon tax law enacted 1 July 2017.

In contrast to the Senate’s modifications, the House bill put forth a plan to repeal the tax credit entirely, a move opposed by BIO and the National Organization for Rare Disorders.