James Love
Michael Palmedo
Consumer Project on Technology
http://www.cptech.org
November 28, 2001
Summary
According to the US Internal Revenue Service (IRS), US taxpayers received Orphan Drug Tax Credits totaling $80.1 million in fy 1998, and $61.4 million in fy 1997, the most recent years for which data are available. The credit represents half the costs of qualified clinical testing on all drugs which are considered orphans under FDA and IRS rules, including both successful and unsuccessful products under development.
For the two year period, US private sector expenditures on clinical testing, including the costs of failures, was $283 million before taxes, and $141 million after the 50 percent tax credit. During this same period, the US FDA granted marketing approval for 36 orphan products, for 39 indications.
Thus, according to IRS tax returns, US pre-tax expenditures on clinical testing, including the costs of failures, was only $7.9 million per approved orphan product (283/36), before tax, and $3.9 million after the benefits of the tax credit.
While the tax credit is officially for rare diseases or conditions, it is in practice available to a significant number of new drugs, because of the liberal definition of a rare disease and the lack of a means test. The credit is available both for new drugs and testing for new uses of older products. In some years a significant number of new drugs qualify as orphans. For example, in 1998, of the 30 FDA approved new molecular entities, 7 were classified as orphans, or 23 percent of the total.
A number of blockbuster drugs have qualified as orphans, including for example Norvotartis’ new cancer drug Gleevec, Amgen’s Epogen ($1.96 billion in fy 2000 sales) and Neupogen ($1.2 billion), Eli Lilly’s Humatrope ($301 million), Glaxo’s AZT, Roche’s Roferon-A, and Genzyme’s Ceredase ($537 million), as well as drugs for much smaller markets. Drugs for many severe illnesses, including many of the highest priced drugs, qualify as orphans.
In 1997 to 1998, there were 106 orphan designations, and 39 FDA marketing approvals (involving 36 drugs). From 1983 to 2000, there were 1063 orphan designations, and 218 orphan marketing approvals — 20.5 percent of tested orphan products received FDA marketing approval.
What is the Orphan Drug Tax Credit?
The credit is available for testing expenses for drugs, vaccines, diagnostic drugs, or preventive drugs, used to treat rare diseases or conditions. A rare disease or condition is defined as one which:
(A) affects less than 200,000 persons in the United States,
or
(B) affects more than 200,000 persons in the United States, but there is no reasonable expectation that the cost of developing and making available in the United States a drug for disease or condition will be recovered from sales in the United States of such drug.
The credit is available for any indication that meets these criteria, even if the product itself is used for other indications that are not qualified. Thus, for example, BMS’s Taxol has qualified for use for AIDS-related Kaposi’s sarcoma, an indication that qualifies as a rare disease, while the largest market for Taxol is for breast cancer, a disease with a client population much greater than 200,000.
The tax credit is normally for 50 percent of the costs of clinical testing expenses, which the IRS defines (see form 8820) as human clinical testing for a disease or condition under section 505(i) of the Federal Food, Drug and Cosmetic Act. The full 50 percent applies to contract research expenses as well as in-house research expenses, but does not apply to expenses that are funded under a government contract or grant. Both successful and unsuccessful products qualify for the tax credit. Normally the credit is limited to clinical testing that takes place in the United States, although it is available for foreign trials when there is an insufficient testing population in the US.
Table 1
FDA Orphan Designations and Marketing Approvals, Orphan Drug Tax
Credit and Pre-tax expenditures on testing, and number of returns
claiming credit
FDA
Marketing Orphan # tax
Orphan approvals Tax returns
Desig- Products/ Credit/ claiming
Year nations Indications Expenditures+ credit
1995 57 11/11
1996 60 21/23
1997 53 18/19 61.4/122.8 55
1998 67 18/20 80.1/160.2 74
1999 78 20/20
2000 69 13/15
+ Millions of US dollars
For More Information about the Orphan Drug Act, see:
http://www.fda.gov/orphan/
http://www.fda.gov/orphan/oda.htm
http://www.fda.gov/orphan/designat/index.htm
http://www.fda.gov/orphan/designat/list.htm
http://www.fda.gov/orphan/designat/Approvals.htm
http://www.fda.gov/orphan/designat/faq.htm
http://www.cptech.org/ip/health/orphan/
http://www.cptech.org/ip/health/orphan/orphan92.html