Required post-approval orphan-drug trials qualify for clinical-testing credit

Plain-English summary

The FDA gave an orphan-designated drug accelerated approval based on a surrogate or intermediate endpoint and required a post-marketing study to confirm its clinical benefit. The drug owner asked whether expenses for that required study could qualify for the orphan-drug clinical-testing credit even though the trial occurred after accelerated approval. The IRS concluded that accelerated approval was not the final approval contemplated by section 45C because continued marketing depended on completing the confirmatory testing. Expenses for the required post-approval trials could therefore qualify until the FDA either determined that the study was no longer necessary or found that it verified and described the drug's clinical benefit.

Ruling snapshot

• Question: Can expenses for an FDA-required confirmatory study conducted after accelerated approval qualify as clinical-testing expenses under section 45C?
• Outcome: approved
• Key authorities: IRC §§ 41 and 45C; FDCA §§ 505, 506, and 526; 21 C.F.R. §§ 314.500 and 314.560

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201802003                                              [Third Party Communication:
Release Date: 1/12/2018                                        Date of Communication: Month DD, YYYY]
Index Number: 45C.00-00
                                                               Person To Contact:
----------------------                                         ------------------------, ID No. -------------
------------------------                                       Telephone Number:
-----------------------                                        ----------------------
-------------------------------                                Refer Reply To:
                                                               CC:PSI:B06
                                                               PLR-112529-17
                                                               Date:
                                                               October 10, 2017


Re: -----------------------------------------------------------------------


LEGEND

Taxpayer          =         ---------------------------
                           ------------------------

Company B =                ------------------------------------------------------

Company C =                ---------------------

Company D =                ---------------------------------------

Company E =                ------------------------

Company F =                -------------------------------------

State A           =        --------------

State B           =        ----------

Country           =        -------------

Drug              =        -----------------------------

Condition 1 =               -----------------------------------------------------------------------------------------
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                           ------------------------------------------------------
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Condition 2 =           ------------------------------------------------------------------------------------------
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                        ---------------------------------------------------------------------------------- -------
                        ------------------------------------------------------------------------------------------
                        ------------------------------------------------------------------------------------------
                        -------------------------------

Date 1          =       --------------------

Date 2          =       ------------------------

Date 3          =       ----------------------------

Date 4          =       --------------------------

Date 5          =       ----------------------

Date 6          =       --------------------

Dear ---------------:

      This letter responds to a request for a private letter ruling dated April 13, 2017,
and subsequent correspondence submitted on behalf of Taxpayer by your authorized
representatives concerning § 45C of the Internal Revenue Code. The relevant facts as
represented in your submissions are set forth below.

                                                     FACTS

       Taxpayer is a State A corporation with its headquarters in State B. Taxpayer is
wholly owned by Company B (a State A corporation), which is wholly owned by
Company C (a State A limited liability company). Company C is the wholly owned
subsidiary of Company D (a State A limited liability company), which is the wholly
owned subsidiary of Company E (a Country corporation). Company D files a
consolidated return for the Taxpayer consolidated group. On Date 1, Company C
acquired Company B and its subsidiary, Company F, which held the rights to Drug.
Company F was then renamed as Taxpayer, and continues to be the legal owner of
Drug.

      On Date 2, the FDA granted Drug orphan drug designation under section 526 of
the FDCA for the treatment of Condition 1. On Date 3, Company F submitted a new
drug application (NDA) to the Food and Drug Administration (FDA) to obtain marketing
approval for Drug. Company F submitted the Drug NDA under section 505(b)(1) of the
Federal Food, Drug, and Cosmetic Act (FDCA) (under which all NDAs are submitted),
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and subsequently amended the pending NDA several times prior to its eventual
approval.

       In a letter dated Date 4, the FDA approved the Drug NDA for the treatment of
Drug for the treatment of Condition 2, under the accelerated approval program
described in section 506(c) of the FDCA and FDA regulations at 21 C.F.R. Part 314,
Subpart H. The section 506(c) accelerated approval provision of the FDCA authorizes
the FDA to approve an application for a product for a serious or life-threatening disease
or condition, including a fast track product upon a determination that the product has an
effect on a surrogate endpoint that is reasonably likely to predict an effect on irreversible
morbidity or mortality or other clinical benefit, taking into account the severity, rarity, or
prevalence of the condition and the availability or lack of alternative treatments.

       As set forth in section 506(c)(2) of the FDCA, the FDA can subject a product
approved under accelerated approval to the limitation that the sponsor conduct
appropriate post-approval studies to verify and describe the predicted effect on
irreversible morbidity or mortality or other clinical benefit. Depending on the outcome of
the required confirmatory studies, or if the sponsor fails to conduct the required studies,
the FDA could move to withdraw the approval of an accelerated approval product.
Section 506(c)(3) of the FDCA authorizes the FDA to expedite the withdrawal of an
accelerated approval for several reasons, including if a sponsor fails to conduct any
required post-approval study of the drug with due diligence, or a study required to verify
and describe the predicted effect on irreversible morbidity or mortality or other clinical
benefit of the product fails to verify and describe such effect or benefit.

       Specific requirements of the accelerated approval program are described in the
FDA’s accelerated approval regulations, which predate the FDCA section 506
accelerated approval provisions. In the Drug approval letter, the FDA cites to those
regulations, explaining that the NDA, as amended, “is approved under the provisions of
accelerated approval regulations (21 CFR 314.500), effective on the date of this letter…
Marketing of this drug product and related activities must adhere to the substance and
procedures of the referenced accelerated approval regulations.”

The Drug approval letter further provides:

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       Regarding the confirmatory study that the FDA required for Drug, as described in
the Date 4 Drug approval letter, the FDA required a Post Marketing Requirement (PMR)
study to verify the Drug clinical benefit. Also included in the approval letter was a
schedule with the trial requirements and required completion dates.

       Following the acquisition of Company B, Taxpayer reviewed the PMR study for
Drug, and determined that the study was not feasible, given the required sample size
and limited patient population for the orphan indication. Taxpayer met with the FDA on
Date 5 to discuss an alternative study design, and revised completion milestones. The
FDA agreed with Taxpayer’s proposal for an amended study design. In a letter dated
Date 6, the FDA released Taxpayer from the original PMR and conveyed a new PMR.
Additionally, PMR completion dates were updated.

       Taxpayer represents that Company F submitted the NDA to obtain marketing
approval for Drug under section 505(b)(1) of the FDCA. Final approval of the NDA is
under section 505(b) of the FDCA, as contemplated in § 45C(b)(2)(A)(ii)(II). Further,
Taxpayer represents that the PMR study is being carried out under an exemption under
section 505(i) of the FDCA (or regulations issued under such section) applicable to the
NDA application.

                                  RULING REQUESTED

        Taxpayer requests a ruling that Taxpayer’s qualified clinical testing expenses, as
defined in § 45C(b)(1)(A), may include expenses for clinical trials that occur after the
date the FDA granted Drug accelerated approval under 21 CFR 314.500, and which
were required as a condition of the accelerated approval of that NDA, and before the
date Taxpayer receives FDA notification that such Drug condition of approval post-
marketing study requirements are no longer necessary for the safe and effective use of
Drug, or the date the FDA determines that the required Drug post-marketing study
verifies and describes the drug’s clinical benefit, pursuant to 21 CFR 314.560.

                                   LAW AND ANALYSIS

        Section 45C provides a general business credit in an amount equal to 50 percent
of the qualified clinical testing expenses for the taxable year. Section 45C(b)(1)(A)
defines the term “qualified clinical testing expenses” as the amounts which are paid or
incurred by the taxpayer during the taxable year which would be described in § 41(b) if
§ 41(b) were applied with certain modifications set forth in § 45C(b)(1)(B). Section
45C(1)(B)(i) provides that § 41(b)(A) shall be applied by substituting “clinical testing” for
“qualified research” each place it appears in § 41(b)(2) and (3).

       Section 45C(b)(2)(A) defines the term “clinical testing” as any human clinical
testing which is carried out under an exemption for a drug being tested for a rare
disease or condition under section 505(i) of the FDCA (or regulations issued under that
PLR-112529-17                                  5

section), which occurs (i) after the drug is designated under section 526 of the FDCA
and (ii) before the date on which an application with respect to such drug is approved
under section 505(b) of the FDCA. Section 45C(b)(1)(B) applies § 41(b) by (i)
substituting “clinical testing” for “qualified research” each place it appears in paragraphs
(2) and (3) of § 41(b), and (ii) substituting “100 percent” for “65 percent” in § 41(b)(3)(A).

       Section 1.28-1(c)(1) of the Income Tax Regulations provides, in relevant part,
that the term “clinical testing” means any human clinical testing which occurs before the
date on which an application for the designated drug is approved under section 505(b)
of the FDCA.

        Section 45C(b)(2)(A), does not refer to accelerated approval, which was first
formally established in the FDA’s New Drug, Antibiotic, and Biological Drug Product
Regulations; Accelerated Approval, 57 Fed. Reg. 58942 (Dec. 11, 1992) (the “1992
FDA Regulations”). The preamble to the 1992 FDA Regulations states, “these new
procedures are intended to provide expedited marketing of drugs for patients suffering
from such illnesses when the drugs provide meaningful therapeutic benefit compared to
existing treatment.” In 2012, Congress wanted to expand the FDA’s authority to
approve drugs on an accelerated basis, and as part of the Food and Drug
Administration Safety and Innovation Act (FDASIA), provided statutory rules in section
506 that are largely consistent with the FDA rules for accelerated approval. Although
provisions governing accelerated approval are now also found in section 506 of the
FDCA, those provisions were not added to the FDCA until enactment of the FDASIA in
2012. They were not part of the FDCA in 1983, when the Orphan Drug Act was first
enacted, establishing the tax credit and the type of clinical testing that would be eligible
for the credit.

        The “accelerated approval” process is described in section 506(c) of the FDCA,
which includes various provisions governing expedited approval of drugs for serious or
life-threatening disease or conditions. For accelerated approval drugs, the initial
approval is based only on an effect on a surrogate endpoint or an intermediate clinical
endpoint that is reasonably likely to predict a drug’s clinical benefit. For the drug to be
able to remain on the market, a post-approval study is typically required as a condition
of approval to verify and describe the anticipated clinical benefit. When a confirmatory
study is required for an accelerated approval drug (as is the case of Drug), and the
study is not conducted, the FDA could withdraw approval of the drug.

        Post-marketing studies required as conditions of approval for accelerated
approval drugs are clinical testing within the meaning of § 45C. Accelerated approval is
not a final approval as contemplated by the cross reference to section 505(b) in
§ 45C(b)(2)(A)(ii)(II). The preamble to the 1992 FDA Regulations states:

       Where a drug’s approval under these provisions is based on a surrogate
       endpoint or on an effect on a clinical endpoint other than survival or
PLR-112529-17                                6

      irreversible morbidity, the applicant will be required to conduct clinical
      studies necessary to verify and describe the drug’s clinical benefit and to
      resolve remaining uncertainty as to the relation of the surrogate endpoint
      upon which approval was based to clinical benefit, or the observed clinical
      benefit to ultimate outcome. The requirement for any additional study to
      demonstrate actual clinical benefit will not be more stringent than those
      that would normally be required for marketing approval; it is expected that
      the studies will usually be underway at the time of approval. The
      proposed regulations have been revised to clarify that required post-
      marketing studies must also be adequate and well-controlled.

The preamble further provides that approval “under these procedures is
dependent on compliance with certain additional requirements, such as timely
completion of studies to document the expected clinical benefit.”

         In section 901(a)(1)(C) of the FDASIA, Congress provided that in enacting
section 506 of the FDCA, it hoped to provide the FDA additional authority to grant
approval for drugs in limited circumstances “without compromising or altering the high
standards of the FDA for the approval of drugs.” Section 506(e)(1) and (2), provides
that FDASIA amendments to the FDCA are “intended to encourage the Secretary to
utilize innovative and flexible approaches to the assessment of products under
accelerated approval for treatments for patients with serious or life-threatening diseases
or conditions and unmet medical needs… [and that] [n]othing in this section shall be
construed to alter the standards of evidence under subsection (c) or (d) of section 505.”

        Based on the foregoing, we conclude that Taxpayer’s qualified clinical testing
expenses, as defined in § 45C(b)(1)(A), may include expenses for clinical trials that
occur after the date the FDA granted Drug accelerated approval under 21 CFR 314.500,
and which were required as a condition of the accelerated approval of that NDA, and
before the date it receives FDA notification that such Drug condition of approval post-
marketing study requirements are no longer necessary for the safe and effective use of
Drug, or the date the FDA determines that the required Drug post-marketing study
verifies and describes the drug’s clinical benefit, pursuant to 21 CFR 314.560.

      Except as specifically set forth above, no opinion is expressed or implied
concerning the federal income tax consequences of the above described facts under
any other provision of the Code or regulations.

      This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of
the Code provides that it may not be used or cited as precedent.

      This ruling is based upon information and representations submitted by Taxpayer
and accompanied by penalty of perjury statements executed by an appropriate party.
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While this office has not verified any of the material submitted in support of the request
for rulings, it is subject to verification on examination.

         In accordance with the Power of Attorney on file with this office, a copy of this
letter is being sent to your authorized representatives.


                                       Sincerely,



                                       David A. Selig
                                       Senior Counsel, Branch 6
                                       Office of Associate Chief Counsel
                                       (Passthroughs and Special Industries)

Enclosure: 6110 copy