An Economic Evaluation of Market Forces on Orphan Drug Research Following Changes in American Tax Law

The US tax code was changed to reduce the Orphan Drug Credit to In addition, the corporate tax rate was cut from 35% to 21%. Assumptions: Firms maximize profit, are rational actors, and are fully informed about the changes in policy; clinical research into orphan diseases commands a higher price for fewer patients; and the rate of success of orphan drugs is higher than non-orphan drugs. Potential return on investment for a new drug consists of the rate of approval, the price the drug can command per person per year, the prevalence of a disease, and the lifespan of the drug, minus the costs to bring the drug to market. For an orphan drug, the value of the tax credit mitigates those costs. That value will be reduced by at least $22 million under the new law. Reducing the corporate tax rate from 35% to 21% reduces the value of all tax credits, unless a business sustains a loss. Reducing the Orphan Drug Credit by half reduces the tax shelter provided by this specific credit, and reduces the incentive of companies to invest in orphan drugs. The corporate tax rate reduction should also result in an increased investment from companies, but this investment will be in all aspects of the company to maximize profit. It is likely that research investments would be made in other disease areas, which have larger markets and greater potential profits[1]—a large disease like diabetes has nearly 17 times the expected profits of a typical orphan disease. Conclusion: A profitable company may reduce its investments into orphan drug research to maximize profits due to the reduction in the orphan tax credit, despite the apparent advantages orphan drugs have, as orphan drug markets are much smaller. [1]Bio.org. (2018). Available at: https://www.bio.org/sites/default/files/EY%20BIO%20Orphan%20Drug%20Tax%20Credit%20Report%202015%2006%2016.pdf [Accessed Jan. 16, 2018].