Congress Continues Spree of Proposing Alternative Incentives for Product Development: the Qualified Infectious Disease Tax Credit (Part 2)October 25, 2015
By Kurt R. Karst –
Last week we posted on one of two bills recently introduced in Congress that continues a trend to push for (or reward) new product development by offering an incentive different from the standard grants of patent and non-patent marketing exclusivities (S. 2055, the Medical Countermeasure Innovation Act of 2015). We promised we would address the second bill in a post in the coming days. This post concerns H.R. 3539, the Reinvigorating Antibiotic and Diagnostic Innovation Act of 2015, which was introduced by Representative Charles Boustany (R-LA) in September. While most recent legislative proposals focus on offering some variation of the current Priority Review Voucher programs (see here and here), H.R. 3539 takes a different tack: tax credits.
Offering tax credits as an incentive to develop products by offsetting clinical trial expenses is not new. But to our knowledge you have to go back to the early 1980s to find the last time Congress amended the tax code to provide tax credits to FDA-regulated industries. Specifically, under the Orphan Drug Act of 1983, a tax credit for certain clinical testing expenses for an orphan drug incurred in that taxable year is permitted under the Internal Revenue Code and under the Internal Revenue Service’s implementing regulation at 26 C.F.R. § 1.28. The tax credit permits a firm paying United States taxes to credit against its federal income tax 50% of “qualified clinical testing expenses” relating to orphan drug development. To qualify for the credit, the clinical testing must, under 26 U.S.C. § 45C: (1) be conducted under an IND; (2) relate to a drug and indication that has received an orphan drug designation from FDA; (3) occur after FDA designation as an orphan drug and before FDA approval; and (4) be conducted by or on behalf of the taxpayer to whom the orphan drug designation applies.
Expenses eligible for the orphan drug tax credit include both in-house testing expenses, such as wages and non-depreciable supplies, and contract research expenses (i.e., amounts paid to persons other than employees to conduct the research). Under 26 U.S.C. § 39(a), companies can carryback unused tax credits “to each of the 1 taxable years preceding the unused credit year,” and can carryforward unused tax credits “to each of the 20 taxable years following the unused credit year.” Although the law sets a baseline that “[n]o tax credit shall be allowed . . . with respect to any clinical testing conducted outside the United States,” there’s an exception when “testing is conducted outside the United States because there is an insufficient testing population in the United States . . . .” (A regulation – at 26 C.F.R. § 1.28-1(d)(3)(ii)(B) – defines “insufficient testing population” to mean “[t]he testing population in the United States is insufficient if there are not within the United States the number of available and appropriate human subjects needed to produce reliable data from the clinical investigation.”)
This past June, the Biotechnology Industry Organization (“BIO”) and the National Organization for Rare Disorders (“NORD”) released a report touting the success of the orphan drug tax credit program. We covered that report in a post here.
Why all this background on the orphan drug tax credit? Because the Reinvigorating Antibiotic and Diagnostic Innovation Act of 2015 borrows heavily from, and is modeled after, the orphan drug tax credit program. . . . but with a significant twist.
H.R. 3539 would amend the Internal Revenue Code to add Sections 45S (“Clinical testing expenses for qualified infectious disease products”) and 45T (“Clinical testing expenses for rapid infectious diseases diagnostic tests”) to provide a tax credit for certain “qualified clinical testing expenses” related to both a “qualified infectious disease product” and a “qualified rapid infectious diseases diagnostic test.” The bill links the tax credit to the Generating Antibiotic Incentives Now Act, which is codified at FDC Act § 505E and provides for a 5-year exclusivity extension for drugs designated as a qualified infectious disease product.
H.R. 3539 defines a “qualified infectious disease product” to mean any human drug or biological product that (1) “is intended to treat a serious or life-threatening infection, including those caused by— (i) an antibacterial or antifungal resistant pathogen (including novel or emerging infectious pathogens), or (ii) qualifying pathogens listed by the Secretary of Health and Human Services under [FDC Act § 505E(f)];” and (2) “is intended to treat an infection for which there is an unmet medical need as defined by the Secretary of Health and Human Services.” The bill also defines a “qualified rapid infectious diseases diagnostic test” to mean “an in-vitro diagnostic (IVD) device that provides results in less than four hours and that is used to identify or detect the presence, concentration, or characteristics of a serious or life-threatening infection, including those caused by (1) an antibacterial or antifungal resistant pathogen, including novel or emerging infectious pathogens or (2) qualifying pathogens listed by the Secretary of Health and Human Services under [FDC Act § 505E(f)].”
A lot of the rules for the orphan drug tax credit program would also apply to the proposed qualified infectious disease tax credit. For example, foreign clinical testing expenses are excluded from the credit unless there is an insufficient testing population in the United States. There is also the possibility to carryback and carryforward unused tax credits as with the orphan drug tax credit.
What makes the proposed qualified infectious disease tax credit unique, however, is the ability to transfer by sale allowable credit. Specifically, H.R. 3539 provides that “[a]ny taxpayer holding a credit under this section may transfer for valuable consideration unused but otherwise allowable credit for use by” either a “qualified pharmaceutical research taxpayer” or a “qualified diagnostics research taxpayer.” A “qualified pharmaceutical research taxpayer” is defined in the bill to mean “any domestic corporation the primary mission of which is pharmaceutical research or development.” A “qualified diagnostics research taxpayer” is defined to mean:
any domestic corporation that derives—
(A) any gross income from research or development on diagnostic tests used to identify or detect the presence, concentration or characteristics of a serious or life-threatening infectious disease or pathogen; or
(B) any gross income from research or development on qualified infectious disease products within the meaning given to such term in section 505E(g) of the Federal, Food, Drug, and Cosmetic Act; or
(C) more than 50 percent of its gross income from activities related to health care.
A taxpayer that transfers any amount of qualified infectious disease tax credit is required to file notice of such transfer with the Treasury Secretary in accordance with procedures and forms that would be prescribed by the Secretary.
We’re likely to see more initiatives to incentivize product development as Congress ramps up efforts to pass legislation, such as the 21st Century Cures Act, to revamp product development and approval processes. Indeed, earlier this week, one United States Senator announced his “Medical Innovation Agenda” to streamline FDA approval processes. The announcement was accompanied by the introduction of two new pieces of legislation: the FDA Regulatory Efficiency Act (S. 2187) and the Rare Device Innovation Act (S. 2188).