House Republicans recently released a tax reform bill which would eliminate the tax credits currently awarded to drug companies for developing drugs for rare diseases. These tax credits are part of a package of incentives awarded to companies under the Orphan Drug Act of 1983, a piece of legislation introduced to try and encourage the development of orphan drugs. Other incentives include fee waivers and seven-years of market exclusivity.
However, although the act was developed with the best intentions, the Orphan Drug Act has come under increased scrutiny in recent years. The incentives awarded under the act have made orphan drugs an extremely lucrative business, and critics claim that companies are taking full advantage of this. For example, many companies have been known to repurpose already approved drugs to treat rare diseases, which allows them to receive tax breaks without having to incur the heavy R&D costs involved in discovering and developing a novel treatment.
Other companies have sought approval in multiple rare subtypes of more common diseases, a practice referred to as salami-slicing. Others still have applied for orphan approval at the outset with the intention of applying for approval to treat a more common indication at a later date. Both of these practices allow companies to benefit from the incentives awarded under the Orphan Drug Act while also benefitting from having a large patient population paying to access their treatments.
House Republicans are hoping removing the tax credits from the Orphan Drug Act will prevent companies from playing the system in these ways, which could save the US government billions of dollars. Current estimates suggest that, unless a change is made, government awarded orphan drug tax credits will increase from $2.3 billion in 2017 to more than $15 billion in 2027.
However, while the overall monetary benefit of removing the tax credits is clear, many within the industry are advising against the tax reform. According to report published by Ernst & Young, “If the ODTC [Orphan Drug Tax Credit] were repealed, the resulting reduction in the number of approved new orphan drugs could have a significant impact on Americans with rare diseases.”
BIO and pharma companies have already written to House Republicans to claim that a removal of the tax credits would severely hamper their ability to bring important new treatments to market for rare disease patients. Several patient advocacy groups, including the National Organization for Rare Disorders (NORD), have also written to Congress to voice their concerns. In an official statement, NORD claimed that removing the tax credits from the act is “wholly unacceptable” and would lead to “an unprecedented decrease in the development of these life-improving therapies.”
It may be some time before we learn whether or not these efforts by industry and patient organizations will be successful. Because the proposition to remove the tax credits from Orphan Drug Act is just one element of a much larger tax reform bill, there will still be much debate to be had, and most likely many amendments to be made, before it is put forward for a vote.