Impact of Recent Tax Reform Bill on Orphan Drug Tax Credit

As part of a sweeping tax reform bill, House Republicans on 02 November 2017 proposed eliminating billions of dollars in corporate tax credits that have played a key role in the booming “orphan drug” industry.

The credits were approved as part of the 1983 Orphan Drug Act (ODA). Under current policy, pharmaceutical and biotech companies are allowed a tax credit of up to 50% of certain research costs for rare disease drugs. The new tax bill, if passed, would repeal the credit “for certain drugs, for rare diseases or conditions” starting after this year. 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. Eliminating tax credits for orphan drugs would save the U.S. $54 billion in revenue over the next decade, according to the bill. The National Organization for Rare Disorders (NORD) said that “there would be 33 percent fewer orphan drugs coming to market if the credit vanishes”(drawing results from a 2015 report).

There are approximately 7,000 rare diseases affecting 25 to 30 million people in the United States. Children make up more than half of those afflicted.3 An orphan drug is a pharmaceutical product aimed at rare diseases or disorders. A product must be intended to treat a disease that affects fewer than 200,000 people in the US in order to obtain an orphan drug designation. The development of orphan drugs has been financially incentivized through US law via the Orphan Drug Act of 1983.Through this act, 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. In terms of the tax credit, a sponsor may claim half of the qualified clinical research costs (50%) 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.

Before the Orphan Drug Act was enacted in 1983, drug developers were often hesitant to invest in developing new treatments for rare diseases because the small patient populations made it difficult to recover development costs. For rare diseases, clinical trial costs alone can total thousands of dollars per person diagnosed with the disease. Since 1983, the FDA has granted more than 3,500 orphan designations and approved more than 500 orphan drugs.3

A combination of market and regulatory barriers limited the ability of drug developers to bring new orphan drugs to market, and, while many of those barriers remain in place today, the ODA has significantly reduced their impact. The two most significant market barriers to the development of new orphan drugs are high development costs and limited patient populations. Each new orphan drug requires a substantial investment in research and development with limited chance the drug will make it to market. The small pool of potential patients further reduces a drug developer’s ability to recover their research investment. In addition to high costs and other market-based disincentives, significant regulatory barriers existed prior to the ODA. A robust and comprehensive FDA approval process is important to ensure drugs reaching the market are safe and efficacious, but it also increases the timeline and cost of drug development. As shown in Figure 1, it takes an average of 12.5 years and $1.5 billion (in 2014 dollars) to bring a new drug from the preclinical stage through FDA market approval.4

The ODTC allows orphan drug developers to receive a tax credit for 50 percent of qualified clinical trial costs for new orphan drugs. By lowering development costs, the ODTC makes it more likely that treatments for rare diseases will advance from the lab and be developed. 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. Most provisions in the ODA assist drug developers in the crucial period before their drug reaches the market. It was designed this way to encourage innovation and research into treatments for rare diseases by assisting from the earliest stages of development. The Orphan Products Grant Program awards approximately $14 million for orphan product research grants per fiscal year. When a drugmaker wins approval of a medicine for an orphan disease, the company gets seven years of exclusive rights to the marketplace. The exclusivity is compensation for developing a drug designed for a small number of patients whose total sales weren't expected to be that profitable.4,5

Critics of Orphan Drug Tax Credits 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.5 Kaiser Health News investigation shows that the system intended to help desperate patients is being manipulated by drugmakers to maximize profits and to protect niche markets for medicines already being taken by millions. The companies aren't breaking the law but they are using the Orphan Drug Act to their advantage. And many drugs that now have orphan status aren't entirely new. More than 70 were drugs first approved by the Food and Drug Administration for mass-market use. These medicines, some with familiar brand names, were later approved as orphans. In each case, their manufacturers received millions of dollars in government incentives plus seven years of exclusive rights to treat that rare disease or a monopoly.

Firstly, the cost of developing a drug for a rare disease and bringing it to market can be cut down significantly if we have a consortium for conducting clinical trials, which includes results from multiple sites. If you have a large enough number of individuals to perform the study and if all those individuals are following a single clinical guideline longitudinally over a period of time, it cuts costs enormously.

Secondly, there should be a provision to allow the patents to be extended for the number of years the drug is reviewed by the FDA plus half the time the drug is in preclinical trials (maximum extension of 5 years). Likewise, longer patent terms would incentivize pharmaceutical companies to pursue treatments that might be more costly to develop because they have longer patent terms post-approval to recover their investment.

Lastly, FDA should review orphan drug applications with scrutiny to avoid “Salami Slicing” by drug makers. By salami slicing the disease into subgroups, it allows them to get the orphan drug approval with all the government benefits and even some of the subsidies," Makary said. The prices of such medications often rise because they have seven years without competition for a new set of patients.