Repeal of the Orphan Drug Tax Credit: A Step Backwards
In the US, nearly 30 million individuals have a rare disease, yet only 4% of rare diseases have at least one approved treatment.1 Since there are so few treatments for rare diseases, the development of orphan drugs is important to provide treatments for the other 96% of rare diseases. Unfortunately, it can be difficult to get investors for orphan drug development because of the limited market once the drug is approved. Government incentives are key to the creation of orphan drugs because they are often the only way a drug company can gain enough capital to get through the long, expensive drug development period. In the US, the Orphan Drug Act (ODA) was approved in 1983 to incentivize the development of orphan drugs.2 One important facet of the ODA is the Orphan Drug Tax Credit (ODTC) which gives pharmaceutical companies credit for half their clinical trial expenses, which can be as high as $425 million US.1 Although the ODTC has helped with the approval of 486 orphan products, it has recently been repealed as a part of the Tax Cuts and Jobs Act (TCJA) approved by the US Senate. Despite the Senate making an amendment to only cut the credit in half, this is still detrimental to the development of rare disease treatments.3
Prior to the enactment of the ODA, only 34 orphan drugs were approved in the US. Investment in orphan drugs was low due to the high risk and low reward with a limited market.4 It is estimated that without the enactment of the ODTC, there would be 33% fewer orphan drugs on the market today.1 The ODTC has been especially helpful for smaller companies which do not have any prior drug approvals; one-third of companies receiving an orphan drug approval had never received a previous drug approval.1 The ODTC can reduce market barriers by offsetting the cost of clinical trials, which are particularly expensive considering the cost of unsuccessful drugs, only one in five drugs will make it through clinical trials.1 By aiding drug development through the clinical trial phase, the ODTC enables more orphan drugs to reach the market.
Although the ODTC and other provisions in the ODA improve orphan drug, approval they have also been misused by pharmaceutical companies. The ODA incentives help companies get orphan drugs to the market, but they do not protect the consumer by regulating orphan drug prices. Part of the ODA ensures market exclusivity for seven years after FDA approval.4 Although this is a useful incentive, it can be abused. Drugs that are already approved for a non-orphan use can be approved for orphan drug use and receive orphan drug designation.2 When the treatment receives orphan drug approval, the price for non-orphan use and orphan use can skyrocket because of the market exclusivity and non-competitive pricing for designated orphan products. The long duration of the market exclusivity provision can also hinder the development of new treatments for disease. Although the ODA can be misused, it is a positive mandate that provides an incentive for the development of orphan drugs. A repeal of the ODTC would hinder this development.
A lot of the problems with the ODA are concerned with the pricing of orphan drugs once they hit the market. It is important to ensure that investors make their money back, but there is also a responsibility to ensure the drug is affordable. One potential solution is to allow market exclusivity until a certain amount has been made back from the investment, rather than the standard seven-year duration. To reduce extended market exclusivity, the ODA could prohibit multiple market exclusivity periods that are stacked on top of each other for each identified clinical use.2 These changes would improve the ODA as a tool to help patients with rare diseases get the care they require.
The repeal of the ODTC is just a small part of the Tax Cuts and Jobs Act, which is a Republican-led campaign to reform the tax code. The main goal of the TCJA is to simplify the tax code for families and reduce taxes for large corporations.5 The focus of this campaign is tax cuts, but the repeal of the ODTC is also an important issue. The ODTC was repealed in full by the House and reduced by half by the Senate. There was little resistance to the ODTC repeal by large pharmaceutical companies because they benefit from the decrease of the corporate tax rate to 20%.5 Another problem with the TCJA is it increases the federal debt substantially, and due to the PayGo program, funding needs to be slashed elsewhere. It is likely that the Affordable Care Act (ACA) enacted by the Obama administration will be one of the first programs to see these cuts.6 This situation is problematic for rare disease patients because if mandatory health care is cut, many healthy people will opt out of health care, causing insurance for people with illnesses to skyrocket. Therefore, the TJCA manages to negatively affect rare disease patients in two ways: increasing insurance costs and reducing the development of orphan drugs.
In a report by the National Organization for Rare Diseases (NORD), it was estimated that if the ODTC were repealed, there would be 33% fewer rare disease drugs on the market over the next ten years.1 Although the mandate was only repealed by half, it will still result in a significant decrease in orphan drug development. The development of orphan drugs affects multiple dimensions of quality of life, such as longevity, participation in everyday activities, mobility and the ability to work.1. It is important to remember that these mandates are not just about the pharmaceutical companies that use them, but the rare disease patients that are patiently waiting for treatments that can help them live a better life. The NORD is currently leading a campaign to get Congress to not repeal the ODTC. Patient advocacy organizations are uniting to oppose this repeal, and this show of solidarity proves that there is still hope for the rare disease community.
1. National Organization for Rare Diseases. Impact Of The Orphan Drug Tax Credit On Treatments For Rare Diseases. 2015. Available at: https://rarediseases.org/assets/files/white-papers/2015-06-17.nord-bio-ey-odtc.pdf.
2. Waxman H, Corr B, Martin K, Duong S. Getting To The Root Of High Prescription Drug Prices: Drivers And Potential Solutions. The Commonwealth Fund; 2017. Available at: http://www.commonwealthfund.org/~/media/files/publications/fund-report/2017/jul/waxman_high_drug_prices_drivers_solutions_report.pdf.
3. Brennan Z. Senate Tax Plan Seeks to Reform, Rather Than Repeal, Orphan Drug Tax Credit. Regulatory Affairs Professional Society. http://www.raps.org/Regulatory-Focus/News/2017/11/10/28860/Senate-Tax-Plan-Seeks-to-Reform-Rather-Than-Repeal-Orphan-Drug-Tax-Credit/. Published 2017.
4. Aitken M. Orphan Drugs In The United States Providing Context For Use And Cost. QuintilesIMS Institute; 2017. Available at: https://www.iqvia.com/-/media/iqvia/pdfs/institute-reports/orphan-drugs-in-the-united-states.pdf?_=1512424741428.
5. US House of Representatives: Committee on ways and means. Tax Cuts And Jobs Act: Policy Highlights. 2017. Available at: https://waysandmeansforms.house.gov/uploadedfiles/policy_highlights.pdf.
6. Bryan B. The Republican tax bill could force billions of dollars in cuts to programs like Medicare. Business Insider. http://www.businessinsider.com/trump-gop-tax-plan-paygo-forces-medicare-mandatory-spending-cuts-2017-11. Published 2017.
Cite This Article:
Smith E., Chan G., Zhang B., Palczewski K., Lewis K., Ho J. Repeal of the Orphan Drug Tax Credit: A Step Backwards for Rare Disease Research. Illustrated by M. Yao. Rare Disease Review. May 2018. DOI:10.13140/RG.2.2.29881.06246.