House Republicans Aim To Eliminate Tax Credits For Orphan Drugs

As part of a sweeping tax overhaul bill, House Republicans on Thursday proposed eliminating billions of dollars in corporate tax credits that have played a key role in the booming industry to develop drugs for rare diseases.

For more than three decades, pharmaceutical companies have claimed a 50 percent tax credit for the cost of clinical trials of orphan drugs, medicines intended to treat diseases affecting fewer than 200,000 people.

Sales of orphan drugs hit $36.1 billion last year, according to a report released last month by QuintilesIMS and the National Organization for Rare Disorders. 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

Companies whose drugs are deemed orphans by the Food and Drug Administration get a package of financial incentives, including tax credits and seven years of market exclusivity.

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. Orphan drugs routinely carry five-digit price tags and have become a lucrative market for pharmaceutical companies.

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 under the current law would increase every year, to a projected total of $75 billion from 2018 to 2027.

As sales rise, so does the cost of the orphan drug tax credits to the U.S. government. "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.

The National Organization for Rare Disorders said in a statement that there would be 33 percent fewer orphan drugs coming to market if the tax credit vanishes, calling it "an unprecedented decrease in the development of these life-improving therapies." NORD said advocates for people with rare diseases had sent over 500 letters to Congress in support of the credit.

The Biotechnology Innovation Organization, a trade group, and 20 individual drug companies, including Novo Nordisk, Horizon and Sanofi, wrote to Congress late last month urging legislators to keep the credit in the tax overhaul bill. BIO vowed Thursday to work with lawmakers to save the credit.

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. He said 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, former Rep. Henry Waxman, one of the Orphan Drug Act's creators and champions, co-wrote a report on high drug prices for the Commonwealth Fund that suggested restricting or replacing the tax credit. The authors of the report said they don't take a position on the Republican tax bill.

A Kaiser Health News investigation in January, 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. These medicines 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 of the Orphan Drug Act after receiving a letter from Sens. Orrin Hatch, R-Utah, Chuck Grassley, R-Iowa, and Tom Cotton, R-Ark., that asked if the law needed to be changed.

This summer, the FDA announced a plan to overhaul how it handles orphan drugs and promised to eliminate a backlog in applications for drugs' 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.

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