Orphan Drug Tax Credits Save Lives

Orphan Drug Tax Credits Save Lives

Author: Abbey S. Meyers, Founder and President Emeritus of NORD (National Organization for Rare Disorders)

Thirty-five years ago a group of committed rare disease support group leaders joined together in a herculean effort to pass life-saving legislation through the U.S. Congress over the strong objections of the pharmaceutical industry and powerful politicians. Despite overwhelming odds the law was passed by the House and Senate and sent to President Reagan during Christmas of 1982. The President was advised to veto the law but finally signed it on January 4, 1983. Since that time the “Orphan Drug Act” has been universally recognized as one of the most successful public health laws ever enacted by Congress.

If imitation is the sincerest form of flattery, Orphan Drug legislation has spread throughout the world to insure that even those with the rarest diseases will be able to find treatments and cures. Even in countries without a research based pharmaceutical industry nations have enacted laws to speed importation of orphan drugs for seriously ill patients who need them.

In 2017 the United Nations created the “NGO Committee for Rare Diseases” which enables numerous countries to meet and discuss the plight of patients and families with unusual diagnoses who want access to treatments that exist in other countries, most often in the United States. Since 1983 the USA has continued to be the leader in orphan drug research, and that is why other industrialized countries have enacted laws based on the design of the ODA. Our law was created when Congress recognized that the pharmaceutical industry was avoiding development of treatments for small populations of patients with rare diseases. They determined that the best way to spur interest in orphan drugs would be financial incentives for drug companies, specifically tax credits for research, and exclusive marketing rights that would avoid competition for seven years. Today, however, the essential Orphan Drug Tax Credits are under attack by the penny-pinching Congress which will severely disrupt the American engine of new drug discovery if enacted.

The authors of the Orphan Drug Act of 1983 were Congressman Henry Waxman (D-CA) and Senator Nancy Kassebaum-Baker (R-KS), who are now retired. They realized that all corporations are eligible for the R&D tax credit (which even today amounts to 20 cents on every dollar spent on research and development). But pharmaceutical companies were spending their R&D investments on drugs for diseases with the largest markets, and the only way they would develop drugs for small markets would be financial incentives such as exclusive marketing rights and a larger tax credit. Thus the ODA tax credit amounts to 50 cents on every dollar spent on “clinical research”. This means it cannot be applied to pre-clinical research, marketing research, animal model research, etc. It can only be used for research expenses testing their orphan drug on human beings.   

The success of the Orphan Drug Act is rooted in the marketing exclusivity provision and the tax credit for clinical research expenses. Removing either of these incentives would be like cutting an arm or leg off of the Orphan Drug Act. During the first decade after the legislation was enacted, very few orphan drugs were developed, and hardly any tax credits were used. The patient community was very concerned about this slow start so we investigated and found that the majority of companies developing orphan drugs at that time were small start-up corporations, especially biotechnology companies that were not yet profitable. They could not use a tax credit if they were not profitable. Therefore, in 1996 we supported legislation that would provide a 20 year carry-forward, and a 1 year carry-back, so drug companies could use the tax credit in a year when they earned a profit. It was that change that energized the industry and propelled a huge effort to develop drugs for the most rare and hopeless diseases.

Today the press often draws attention to the high cost of pharmaceuticals, and articles usually mention that orphan drugs are the most expensive of all medicines on the market.  As a consumer I absolutely agree, and I truly wish Congress would do something about it. But the issue should be dealt with separately because it affects all drugs and biologics, not only orphan drugs. Obviously the cost of orphan drugs will be higher than other medicines because they are sold to small numbers of customers. Each pill or capsule of a drug for high cholesterol, for example, can carry a small profit of a few pennies because billions of pills will be sold to millions of people. But a treatment for hemophilia is only sold to 10,000 boys, a treatment for cystic fibrosis is only sold to 25,000 Americans, a treatment for Huntington’s disease will be sold to a maximum of 15,000 people in the U.S., etc., and therefore every dose will be more expensive. But what is the alternative? Just brand these patients as not worthy of life because they are too expensive to save? 

There may be other alternatives that Congress could debate with regard to federal budgets. For example, there is no reason to waive allFDA user fees for orphan drugs, especially when the drug sponsor is a big profitable company. And perhaps tax credits could be restricted when a previously marketed drug is being studied for a new indication. But these issues must be debated so all sides are heard. For example, when a drug is being prescribed for an off-label illness health insurance companies often refuse to pay for it. Therefore, some type of incentive should be left in place to insure that pharmaceutical companies will try to get an off-label health condition on to a drugs’ FDA approved label. Another contentious issue involves cancer drugs: There are over 200 different forms of cancer, and most of them are rare diseases, each affecting far fewer than 200,000 Americans. But many cancer drugs obtain FDA approval for several types of cancer, and under current law manufacturers obtain the benefits of several financial incentives to achieve this goal. Perhaps there are ways to condense these incentives or reduce the prices of these drugs as their markets grow bigger.

I sincerely hope that Congress will look at these issues clearly and for the sake of a few more dollars in the federal treasury, please don’t throw the baby away with the bath water. The Orphan Drug Act is something our country should be very proud of, and we should do everything to keep its incentives intact so it continues to thrive. Orphan Drug tax credits are very effective, it is NOT draining the U.S. treasury, and we need to retain world leadership of the orphan drug effort as far into the future as possible. Rare disease patients rely on this.