Creditworthy

Last week, the team at the Center for Global Health R and D Policy Assessment (CGHRDPA), a subsidiary of the Results for Development Institute (R4D) released another “consultation draft” on R and D policy for global health, this one entitled “Can a R&D Tax Credit Expand Investment in Product Development for Global Health?” (Tax Credit Assessment).  And although I am banging the same drum again, I’m offering a review.  My first quibble is that the author should be explicit about the difference between research and development, drop references to a “research gap” (page 3), and focus, as the draft’s title states, on the role of tax credits in product development for global health.  Hence, in the section on governmental polices aimed at “R&D” (starting on page 4), the author (Aarthi Rao) should distinguish the extent to which the policies are intended, and actually do, increase research or development or both.  Clearly, the grand-daddy of US research tax credit programs, dating from 1981 and described on page 5, is called the “Research and Experimentation” credit for a reason and, as it applies to pharmaceutical product development, is aimed at and limited to, preclinical research not development.

My next quibble is that the author is takes a side trip into the economics of R and D policy (page 7) without identifying the role of tax credits vs. other fiscal incentives.  I’m sure there are thousands of papers on this topic (e.g., those listed in Table 2), but I’d like to know which are relevant to stimulating product development.  Also I’d like to know which support the statement that “Firms are unlikely to use the standard industry R&D credit for goods with little to no market value unless a credit is large enough to make these products profitable.”  It seems to me that no amount of credit will make a product profitable; the question what level of tax credit is needed to yield a favorable return on R and D expenditures for the company not a single product.  I also think that the next section, starting on page 8 and describing a tax credit proposed by Genzyme that was the basis of a bill, HR 3156, in 2009, should follow the later description of existing tax credit programs for several reasons.  HR 3156 was proposed, not passed, likely reflects the best of current policies (one would hope), and may be a good case study of the current politics around federal policies aimed at non-clinical neglected disease research.  Also it would be interesting to know more about Genzyme’s objectives, for example, for limiting the credit to preclinical research (so companies would not to be pressured to doing the more expensive clinical research?), since the tax credit incentive will need to align with the beneficiaries’ (companies’) objectives to be used.

On pages 9-13 the author summarizes well four existing R and D tax credit programs and their utility:

  • the Research and Experimentation Tax Credit: “mixed value … due to its design” but moreover not relevant to most biotech/pharma companies (see below);
  • the Orphan Drug Credit:  “hailed as successful” and the author notes the need for a constituency for advocating;
  • the UK’s Vaccine Research Relief Programme:  not enough data to assess outcomes and utilization is low; and
  • last year’s Qualifying Therapeutic Discovery Research Project Tax Credit (TDP):  deserves a stronger review by the author since it was wildly popular.

The TCP was a refundable credit (essentially a grant for companies without tax liabilities) for small companies (fewer than 250 employees) and applied to a wide range of potential products.  It was reviewed and managed by the IRS so the application process was more about accounting than good science, but a survey by BIO, the biotech industry trade group, found (not surprisingly) that the TDP created jobs, advanced research, and kept companies in the US (BIO TDP survey).  It’s worth noting that since the money was capped ($1 billion) and the applicants many (5600), the average award was small ($250K) and most went to a “popular” disease target, cancer (26%), although infectious disease projects got a decent 12%.

My last criticism, as I have noted on the previous draft reports by Center, is the lack of input from the biotech/pharma industry.  The discussion of potential participation in a global health tax credit program on page 14 reflects this.  It seems to me that the reason big pharma is not interested in tax credits is that the credits are not relevant to their economics.  The top ten pharma companies spent about $67 billion on R and D in 2010 (Fierce Biotech article), a big number of which about half is spent on development, but have tax liability lower than the nominal 35% due to lots loopholes (the average may be as low as 5.6% according to Baker NYT editorial).  Huge expenses and low taxes do not a credit make.  For biotechs without profits, a nonrefundable credit is useless (unless made transferable), but a refundable (grant-equivalent) credit is helpful (c.f., the TDP).  For the mid-tier companies, a tax credit may be attractive but there are more attractive options, such as large infusions of nondilutive funding for small-market, but innovative, new products, e.g., Vertex receiving $75 million from the Cystic Fibrosis Foundation for treatments for the US’s 30,000 CF patients (Xconomy article).  As for other disincentives whose explication may benefit from an industry perspective, the author states “Firms may be unwilling to use a credit that requires them to share intellectual property as they may seek to maintain the exclusive rights to their intellectual property to reap profits” (page 14).  This may be the case, but how companies may be interested in sharing IP should be explored.  I noted the author lists five industry people from three companies as being consulted for this draft.

The author describes several specific design elements for a tax credit (pages 16-17) which is helpful but, without comparison to other alternatives, not useful.  For example, it is stated but not supported that “Direct funding to companies’ global health programs or their affiliated non‐profit research institutes could be as or more effective with less uncertainty about whether the program will be used or not” (page 17).  I think so but such a policy would open a big can of worms.  Clearly another draft is needed. On pages 18-19, the author lists five outstanding questions, three of which require a better understanding of the markets and business, so I hope more industry-types are consulted.  As for this draft, I agree with the author on what needs to be done:  “To better understand the potential of tax credits for serving these smaller markets [really big but low-margin markets], more research would have to be done to illuminate which products for global health have potentially profitable markets and to decipher whether firms have an interest in pursuing them.”  If the Center needs my help, they know where to reach me.

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