Republican tax reforms could hit rare-disease research

Pills in dollar sign
Support for a corporate tax rate cut is mixed with concerns about allowances.

A tax credit that allows biopharma companies to recoup some of the cost of developing drugs for rare diseases could be abolished if a Republican tax reform bill goes through.

As it stands, companies can claim a tax credit of 50% of the costs for clinical testing required by the FDA for drugs that treat rare diseases, a policy that has been in place ever since the 1980s when the Orphan Drug Act was enacted to encourage research into new treatments for diseases affecting fewer than 200,000 people.

That break could now be eliminated for “certain drugs for rare disease or conditions” after Dec. 31, 2017, according to the GOP bill.

It’s the only measure specifically affecting the biopharma industry within the 429-page “Tax Cuts and Jobs Act” proposal, and it could have an impact on the orphan drug category, which has seen steady and inexorable growth both in R&D spending and sales in recent years that has been mirrored by a hike in federal tax expenditures.

EvaluatePharma estimated recently that sales of orphan drugs—which often have very high prices—would hit $209 billion in 2022, and is increasingly dominated by big pharma rather than smaller biotechs. Earlier this year, lawmakers asked the Government Accountability Office to look into the Orphan Drug Act and assess whether its provisions are being exploited to subsidize mass-market meds.

On the other hand, biotech companies as well as patient representative groups such as the National Organization for Rare Disorders (NORD) have long argued that without the incentive, many drugs for rare diseases would never have been made available to patients.

The Biotechnology Industry Organization (BIO) has broadly welcomed the reforms, but made specific reference to the rare disease tax credit in its official statement, saying: “As Congress debates and refines this important legislation, we look forward to working with lawmakers to ensure that our nation’s tax code most effectively encourages innovation, investment and American entrepreneurship. This would include maintaining the Orphan Drug Tax Credit, and the inclusion of incentives for prerevenue innovation and for the development of advanced biofuels, renewable chemicals, and biobased products.”

That sentiment was echoed by NORD, which said that repealing the orphan drug tax credit would be “wholly unacceptable,” pointing out that 95% of the estimated 30 million Americans with rare diseases are still waiting for a treatment.

Overall, the reforms promise to be a movable feast for biopharma and other sectors. On the one hand, a headline reduction in the corporate tax rate from 35% to 20%—which has been pushed for by business leaders for years—is seen as cause for widespread celebration. However, new rules on tax avoidance could hit U.S. companies that deployed tax inversion deals to shift headquarters overseas, as well as foreign-owned groups with affiliates in the U.S., as they would now have to pay a 20% excise tax on payments within the company.

Jefferies analyst Steven DeSanctis estimates that a 20% tax rate would boost 018 S&P tech earnings growth to 17% from 13%, and healthcare companies would do better with a rise to 16% from 8%. The changing rules on income generated overseas could also make it easier for companies to repatriate cash held overseas.

Giving the big-picture response on behalf of industry, the U.S. Chamber of Commerce said that the reform bill is “exactly what our nation needs to get the economy growing faster,” but also cautioned that “a lot of work remains to be done to get the exact policy mix right and move from a legislative draft to an enacted law.”