House Republicans aim to yank tax credits for orphan drugs

Nov 2 2017

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

For more than three decades, pharmaceutical and biomedical companies have claimed a 50 percent tax credit for the cost of clinical trials on orphan drugs, or those that treat rare diseases affecting fewer than 200,000 people.

The credits were approved as part of the 1983 Orphan Drug Act, which has been under scrutiny in the past year as the country grapples with skyrocketing drug prices. Drugs that win special orphan status get a package of financial incentives, including the credits and seven years of market exclusivity. The drugs routinely have five-digit price tags and have become a sought-after market for drugmakers.

The National Organization for Rare Disorders (NORD) predicted, drawing from a 2015 report, there would be 33 percent fewer orphan drugs coming to market if the credit vanishes — "an unprecedented decrease in the development of these life-improving therapies," NORD's statement read. The group said advocates had sent over 500 letters to Congress in support of the credit.

The powerful Biotechnology Innovation Organization, along with 20 drug companies such as Novo Nordisk, Horizon and Sanofi, wrote to Congress late last month urging them to keep the credit in the tax overhaul bill. BIO vowed Thursday to work with lawmakers to save the credit. If they fail, the repeal would be effective in January.

Yet, James Love of the think tank Knowledge Ecology International welcomed the potential repeal as a way to begin a conversation about "deeper reform" in the financial incentives for rare diseases.

Love noted that cancer drugs and "huge blockbuster drugs [have] qualified for orphan tax credit[s] … and certainly provided no relief from high prices."

Earlier this year, the high prices caused one of the bill's creators and champions, former U.S. congressman Henry Waxman (D-Calif.), to co-author a report that suggested restricting or replacing the tax credit in some manner.

A KHN investigation in January this year, which was published and aired by NPR, found that many drugs that now have orphan status aren't entirely new. Of about 450 drugs that have won orphan approval since 1983, more than 70 were drugs first approved by the Food and Drug Administration for mass-market use. Those include cholesterol blockbuster Crestor, Abilify for psychiatric disorders and rheumatoid arthritis drug Humira, one of the world's best-selling drugs.

In March, the Government Accountability Office confirmed it would investigate potential abuses to the law after Sens. Orrin Hatch (R-Utah), Chuck Grassley (R-Iowa) and Tom Cotton (R-Ark.) sent a letter to the agency, asking if the law needed to be changed.

This summer, the FDA announced an orphan drug modernization plan and promised to eliminate a backlog in drugs applying for the rare disease status. In a September update, FDA Commissioner Scott Gottlieb wrote he wants to ensure financial incentives are granted "in a way that's consistent with the manner Congress intended" when it passed the law decades ago.

Orphan drugs hit $36.1 billion in sales last year, according to a report released last month by QuintilesIMS and NORD. And, according to EvaluatePharma's 2017 Orphan Drug Report, orphan drugs will account for nearly 22 percent of global prescription sales, excluding generics, by 2022.

With that growth, the cost of the orphan drug tax credits to the U.S. government also grows.

"A billion here and a billion there and eventually it's real money," said Nicholas Bagley, a law professor at the University of Michigan who has studied the credits.

In 2018, the U.S. is expected to grant nearly $2.8 billion in orphan drug tax credits to companies, according to estimates from the Treasury Department. And, the reduced tax revenue for the U.S. government increases every year, to total $75 billion from 2018 to 2027.

"Repealing this credit will effectively increase the cost of doing research on orphan drugs," said Kathy Michael, an analyst with PricewaterhouseCoopers' US Pharmaceutical & Life Sciences Tax Sector.

"It's significant," she said, adding that a number of companies have used the credit and that many have drugs in the pipeline that could qualify for the credit down the road.

KHN's coverage of prescription drug development, costs and pricing is supported in part by the Laura and John Arnold Foundation.