What Is the Orphan Drug Credit?
Let me explain the orphan drug credit to you directly: it's a federal tax credit that incentivizes pharmaceutical companies to develop medications and treatments for rare diseases impacting small populations. I see it as a way to help these companies offset their development costs.
You get a credit for 25% of qualified clinical testing expenses. A rare disease qualifies if it affects fewer than 200,000 people in the United States, or more than that but without any reasonable expectation of profitable treatment development.
Key Takeaways
- The Orphan Drug Act incentivizes drug companies to develop treatments for rare diseases, including a 25% tax credit on qualified clinical trials.
- Other incentives include rebates on application fees and a seven-year period of drug exclusivity.
- Adopted in 1983, the act has resulted in approvals for more than 780 products treating over 250 rare diseases.
- About half of these approved treatments focus on oncology, which is the treatment of cancer.
Understanding the Orphan Drug Credit
You can claim the orphan drug credit whether your pharmaceutical company handles the clinical tests itself or outsources to a third party. In most cases, the testing has to occur in the U.S. Orphan drugs target what we call 'orphan diseases'—extremely rare conditions like Gaucher's disease, Tourette's syndrome, Huntington's disease, and many others.
Even though these diseases are rare, they affect a significant number of people overall. I note that an estimated 30 million people in the U.S. suffer from 7,000 rare diseases, but 95% of them lack any treatment or cure.
This tax credit exists to push forward the development of treatments for these rare diseases. Without it, pharmaceutical companies would need to set prohibitively high prices that patients couldn't afford.
History of the Orphan Drug Credit
Back in 1982, the U.S. Food and Drug Administration (FDA) acknowledged the lack of incentives for pharmaceutical companies to create cures for rare diseases. This led to the Orphan Drug Act of 1983.
Before this act, companies and researchers simply couldn't or wouldn't invest in treatments for such rare conditions. There weren't enough patients per disease to recoup costs, much less profit. Clinical trials run thousands of dollars per patient, even when you can find enough participants.
From 1983 to 2018, the orphan drug tax credit offered a 50% credit for qualified clinical testing costs under section 505(i) of the Federal Food, Drug, and Cosmetic Act. Then, in 2017, tax code changes under the Trump administration cut it to 25% starting in 2018. Groups like the National Organization for Rare Disorders campaigned against this reduction.
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