PLR counts clinical testing expenses incurred after accelerated approval date toward orphan drug credit

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February 2018


The Internal Revenue Service (IRS) on January 12, 2018 released a taxpayer-favorable private letter ruling (PLR 201802003), concluding that a taxpayer claiming the orphan drug credit (ODC) for qualified clinical trial expenses (QCTEs) may include QCTEs incurred after the date on which the Food and Drug Administration (FDA) granted a drug ‘accelerated approval.’

The PLR is noteworthy in that it seems to recognize that not all drug development post-marketing study activities are excluded as post-commercialization under Reg. sec. 1.41-4(c)(2)(ii). This is consistent with the general principle that the post-commercial research exclusion is not intended to disallow from credit eligibility expenditures that otherwise meet the general research credit (and ODC) eligibility requirements.

Under that exclusion, expenses related to post-commercialization activities generally are not allowed in calculating the research credit under Section 41 of the Internal Revenue Code, and therefore not in calculating the Section 45C ODC as well.

The takeaway

Taxpayers seeking to claim the ODC should consider the PLR’s conclusion when calculating their QCTEs to potentially benefit from the credit. Taxpayers also should evaluate trials associated with new indications, as well as all Phase IV trials, to determine whether they satisfy the requirements of Reg. sec. 1.41-4(c)(2)(iv) or Section 41 more generally.

Note: When considering both domestic and global clinical trials for rare diseases as well as new indications, taxpayers should consider clinical trials that satisfy the FDCA Section 505(i) definition regardless of location. Section 45C(b)(2)(A)(i) states that the clinical testing has to be carried out under an exemption for a drug being tested for a rare disease or condition under Section 505(i), which allows taxpayers to consider expenses for trials performed outside the United States as provided by Section 45C(d)(2)(A).

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Michelle Lee

Health Industry & Pharma Life Science Tax Leader, PwC US

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