Drugmakers' Rare Disease R&D Incentives Cut in GOP Tax Bill

(Bloomberg) -- Drug and biotechnology companies researching treatments for rare diseases would lose a tax incentive that helps lower the cost of their development programs under the Republican tax bill unveiled Thursday.

Under current law, drug manufacturers can claim a tax credit for 50 percent of the costs of clinical testing expenses for treatments for rare diseases and conditions, according to a summary of the provision. The GOP bill would eliminate that credit for “certain drugs for rare diseases or conditions,” raising $54 billion in revenue over the 10-year period starting in 2018, according to the summary.

The rare disease provision was released as part of a broader tax overhaul proposal that would cut the U.S. tax rate on corporations from a 35 percent rate to 20 percent.

Congress created a number of incentives for drugmakers to discover and develop new treatments for rare diseases through the 1983 Orphan Drug Act, including the tax credits as well as extended periods of sales exclusivity. They’re meant to prod the industry into developing medicine for rare disorders, which can affect only a few thousand people and otherwise might be ignored.

Huge Business

The incentives have helped turn orphan drugs into a huge business, particularly in recent years as drugmakers have seen rare treatments as an opportunity for higher prices since patients have few other options and health insurers and government are willing to pay. That’s raised questions about whether the law’s incentives are being abused by industry and if an overhaul is needed.

In some cases, the tax credit has benefited firms that would have been doing research anyhow, according to a 2009 study by Wesley Yin in the Journal of Health Economics. Some drugmakers were also dividing up non-rare diseases into smaller subsets to gain the tax benefits, the study found.

Industry association Biotechnology Innovation Organization praised the bill overall, saying that the lowered corporate tax rate and other measures would “make the U.S. more competitive on the world stage.” Still, BIO said it would urge lawmakers to maintain the orphan drug tax credit as it refined the legislation.

The National Organization for Rare Disorders, a nonprofit group, said in a statement that the repeal of the tax credit is “wholly unacceptable,” and that its elimination would “directly result in 33 percent fewer orphan drugs coming to market.”

Under U.S. law, an orphan drug is defined as one that treats a disease affecting fewer than 200,000 Americans at a given time, including conditions like cystic fibrosis and Lou Gehrig’s disease.

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