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GOP Tax Fix Could Zero Out Orphan Drug Tax Credit

GOP Tax Fix Could Zero Out Orphan Drug Tax Credit
11/27/2017
thestreet.com

thestreet.com 

Companies that produce orphan drugs have come under criticism in recent months over allegations of manipulating the system and now they are set to take another hit as the GOP-led tax reform may take away tax incentives tied to drug development.

While a final version of tax reform isn't expected in the Capitol until sometime in December, the House bill calls for eliminating the credit, and the Senate version calls for the tax advantage to be slashed in half. Ending the credit would save the feds an estimated $54 billion over the next decade.

Since 1983, the Orphan Drug Act has given tax credits and other incentives to pharmaceutical and biotech companies to encourage them to develop drugs for conditions and diseases with known patient populations fewer than 200,000.

Currently, companies developing a drug granted orphan status receive a tax credit for half the cost of the clinical trial costs and if the drug is approved, the company is granted seven years of market exclusivity.

Since the act was passed, more than 500 drugs have gained orphan status and been approved by the Food and Drug Administration. But only about 4% of the diseases classified as rare by the FDA have an approved treatment.

While the patient populations affected by diseases or conditions termed orphan are small, in total they add up to 30 million in the U.S or roughly 10% of the total population. The probable impact of eliminating the tax incentives according to accounting firm Ernest and Young would be to decrease orphan drug discovery by 33%.

Though the patient populations impacted by the changes may not be large by typical medical standards, the protests over any changes to the tax structure will be loud as patients and physicians as well patient advocacy groups will join companies focused on orphan drugs.

Advocacy groups like the National Organization for Rare Disorders (NORD) are fired up. A trip to the NORD's website showed an alert stating, "Save The Orphan Drug Credit!" and imploring visitors to take to social media with the #SaveOrphanDrugs and to reach out to Congress and the Senate.

Statements by coalitions representing almost 300 patient groups and organizations including the American Lung Association and the American Cancer Society Cancer Action Network were sent to representatives in Washington. One of them in part read, "Our organizations support the Orphan Drug Tax Credit because it saves lives. We will not stand idly by as Congress deliberates on diminishing the hope of the 95 percent of individuals with a rare disease still waiting for their very first treatment. Any proposal that stands in their way to finally obtaining a safe and effective therapy is unacceptable."

Larger advocacy organizations such as Pharmaceutical Research and Manufacturers of America, the lobbying arm of large pharma, praised Congress for taking up the issue of tax restructuring and called for maintaining incentives for companies serving rare disease patients. The Biotechnology Innovation Organization also applauded pro-growth tax reform and stated that the Orphan Drug Tax Credit should be retained.

It's worth noting that corporate tax cuts will mean more to larger pharmaceutical companies than the loss of the orphan tax credit, but smaller companies, especially in the biotech sector will likely be impacted more deeply by the tax credit going away.

The less than full-throated support of PhRMA is a little bit of a head scratch given the embrace of the orphan designation for marquee drugs like Humira, primarily a drug to treat rheumatoid arthritis but one granted orphan status to treat HS, a chronic immune-mediated skin disease for AbbVie as well as uveitis, an eye disease. And AstraZeneca's Crestor won approval from the FDA for orphan status to treat HoFH.

Clearly, Big Pharma has a dog in the fight regarding orphan drugs.

Indeed, according to Evaluate Group's 2017 report on the orphan drug sector, large pharmaceutical companies like Celgene Inc. (CELG), Roche, AbbVie Inc. (ABBV) and Bristol-Myers Squib (BMY) dominated the top 10 selling orphan drugs in 2016.

Drug companies in the orphan sector have come under fire for working the orphan designation in what is known as salami slicing. A generally pejorative term in the healthcare industry, it means to take an already existing drug and either alter it slightly and offer it up as a new drug, or to push for the drug's use for a new patient population in the hopes of gaining seven years of exclusivity.

Companies both large and small have also been trashed for charging very high prices for orphan drugs since they have no competition.

BioMarin Inc. (BMRN), a company focused on the orphan space with half a dozen approved orphan drugs, said in a statement that the possible change in tax credit would hurt patients. "BioMarin believes the Orphan Drug Tax Credit should be preserved for the benefit of patients with rare diseases. These patients are often children, who are born with a rare disease, and often have no treatment options. Legislative proposals that eliminate or significantly reduce the orphan drug tax credit are bad for patients with rare diseases. The total elimination of the credit proposed by the House will likely stifle innovation and the development of rare disease therapies. Further, the proposal discourages capital investment in companies that develop treatments for patients with rare diseases. The result would be fewer and fewer new treatments for patients with rare diseases."

Ultragenyx Pharmaceutical Inc. (RARE), another orphan drug specialist which gained an FDA approval for the drug Mepsevii just a week ago, said the change could make the company think twice about developing drugs like Mepsevii, which has a patient population of just 150.

The politics of the tax reform that is on the table can't be discounted. The Trump White House is starving for a high-profile win following serial failures to repeal the Affordable Care Act. Likewise, the GOP-led House and Senate have been unable to pass much in the way of legislation and it's no secret that political donors and corporate leaders have made it the clear passage of meaningful tax reform is an expectation if elected officials are to receive further donations.

But the political reality is difficult in that deficit hawks are saying loudly the tax cuts need to be paid for, which is where proposed tax changes like the orphan tax come in. On the one hand, no public official wants to be viewed as slamming the door on patients with no approved treatments. And in his address to Congress last February, President Trump pointed in the gallery to Megan Crowley, a 20-year old patient with the rare Pompe disease. Trump called Crowley a "miracle." Her father John Crowley founded a company to search for a treatment for Pompe's, eventually selling the company to Genzyme.

A change to the tax credit would put orphan drug patients like Megan Crowley in peril and make it look like Trump favors corporate tax breaks over 30 million orphan patients.

Those patients have an ally in the Senate in Orrin Hatch, R-Utah, one of the original authors of the Orphan Drug Act and chairman of the Senate Finance Committee. Hatch's office says he is continuing to work on the issue.

In a session of the finance committee last week, Sen. Pat Roberts, R-Kan., defended the orphan tax cut. "We're talking about drugs for cancer kids. The House completely repealed the orphan drug credit. We took care of a limitation and then restored at least a 27.5% credit."

 

 

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