By Kurt R. Karst –
The Orphan Drug Tax Credit (“ODTC”) is not an incentive you hear about all too often, but it’s been around for quite some time – since the enactment of the Orphan Drug Act of 1983 – and is a strong incentive for companies to develop products for rare (i.e., “orphan”) diseases and conditions. So when Congress considered repeal of the ODTC last year (see here and here) in June 2015 by the Biotechnology Industry Organization (“BIO”) (soon to be renamed the Biotechnology Innovation Organization) and the National Organization for Rare Disorders (“NORD”), and titled “Impact of the Orphan Drug Tax Credit on treatments for rare diseases,” the industry groups quantify the benefits of the ODTC, which has amounted to $750 million in awarded tax credits between 1996 and 2011 (as illustrated below in Figure 7 from the report).
By way of background, 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 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.”)
The key findings from the BIO/NORD report are that:
- Without the ODTC, it is estimated that investment in orphan drugs would have been smaller by a third both historically and in the future;
- In the absence of the ODTC, 67 orphan drugs, or 33%, would likely not have been developed over the past 30 years; and
- Going forward, if the ODTC were repealed, it is estimated that 57, or 33%, fewer new orphan drugs would be approved over the next 10 years.
These findings and others are illustrated throughout the report, and, in particular, in Figures 9, 10, and 11 (reproduced below).
Things appear to be quiet thus far in 2015 insofar as efforts to repeal the ODTC are concerned. But if there is a renewed effort, the BIO/NORD report may be an important advocacy piece to sustain the tax credit.