New Healthcare Program Gives $1B in Tax Credits and Grants for Small Pharmaceutical and Medical Device Firms
A major escalation in revenue for pharmaceutical and medical device manufacturers, both large and small, will be the inevitable consequence of the increased number of insured Americans as a result of the recently enacted healthcare legislation. Approximately 30 million more Americans will have access to health insurance as a result of the developing overhaul of the public and private healthcare systems in the United States.
Small businesses in the pharmaceutical or medical device industries, and those small companies wishing to break into these industries, should pay attention to certain the new Therapeutic Discovery Project Program (the “Program”) provided for in the Patient Protection and Affordable Care Act (the “Act”), signed into law by President Obama on March 23, 2010. The program is geared toward promoting the development of new therapeutics by small businesses. Here we outline two of the Acts provisions aimed at encouraging the development and growth of small pharmaceutical and medical device companies that are operating in the development of new therapies.
Small Business Tax Credit to Encourage Development of New Therapies
Under the Act, the government is providing a Qualifying Therapeutic Discovery Project Credit. This is a tax credit available to companies with 250 or fewer employees. The credit is designed to encourage the research and development of new therapies in the pharmaceutical and medical device industries. The tax credit is available for an amount equal to 50% of “qualified investments” made in the years 2009 and 2010. There is a maximum credit of $5 million per firm available with $1 billion available in total. “Qualified investments” are costs directly related to conducting a “qualifying therapeutic discovery project” that are incurred during the taxable year.
“Qualifying therapeutic discovery projects” include three different categories of pharmaceutical or medical device endeavors:
1. Projects designed to treat or prevent diseases through conducting pre-clinical or clinical studies and research protocols;
2. Projects that intend to diagnose diseases or conditions or to develop diagnostic procedures to assist doctors and patients in making therapy decisions; and
3. Projects with the purpose of creating or developing a product or technology to further the delivery of therapeutics.
This credit is geared toward projects that show potential to produce new therapies, address unmet medical needs, reduce the long-term growth of healthcare costs, and advance the goal of curing cancer within the next 30 years. This tax credits allocation will also factor the projects potential to create and sustain jobs in the United States.
Small businesses that have engaged in any of these categories of projects in the tax year 2009 or plan to operate projects of this nature in 2010 are eligible for consideration for this tax credit.
The Internal Revenue Service (IRS) released guidance (more information available here) on May 24, 2010 outlining the process by which firms can apply to have their research projects certified as eligible for this credit. Small businesses interested in taking advantage of this tax credit must submit an application to the Secretary of Health and Human Services (the “Secretary”) for consideration. The Secretary, when determining which businesses will receive the credit, will consider projects that show potential to develop new therapies in areas of medicine where there are unmet needs, projects that are seeking to develop treatment and prevention methods for chronic or severe diseases, and those operations that intend to advance the goal of discovering a cure for cancer. The Secretary will also take into consideration the projects potential for creating jobs and advancing the United States competitiveness in the biological and medical sciences.
Small business owners and operators who have interest in taking advantage of this credit should speak with their tax attorneys as the $1 billion allocated for this tax credit could be utilized rather quickly given the high cost of drug and device research and development. Firms may begin submitting applications for certification beginning June 21, 2010 and applications must be postmarked no later than July 21, 2010.
Research and Development Grant Program
The Cures Acceleration Network (“CAN”) is a program to be implemented by the Act and administered by the National Institute of Health (“NIH”). (More information from the National Cancer Institute here.) The purpose of CAN will be to award grants and contracts to eligible entities. This program is especially relevant to start-up firms that are not yet profitable. These grants are not includable in the taxpayers gross income.
These awards will be for the promotion and acceleration of the development of “high need curesthrough the development of medical products and behavioral therapies.” A “high need cure” is a drug, device, or biologic that “is a priority to diagnose, mitigate, prevent, or treat harm from any disease or condition; and for which the incentives of the commercial market are unlikely to result in its adequate or timely development.” Whether or not a drug, device, or biologic is a high need cure is determined by NIH.
CANs functions will include supporting advances in research, awarding grants to eligible entities to promote the advancement of high need cures, reduce obstacles that often come between laboratory discoveries and clinical trials for new therapies, and facilitate review in the United States Food and Drug Administration (“FDA”) for high need cures. CAN will communicate and coordinate with FDA to help expedite development by ensuring strict adherence to FDA regulations and requirements during protocols and clinical trials.
Entities eligible for a CAN award include any public or private entity, including biotechnology companies, pharmaceutical companies, disease advocacy organizations, medical centers, and research institutions.
The award program supported by CAN includes three different types of awards, described as follows:
1. The Cures Acceleration Partnership Award is available for up to $15 million dollar per project per year with the possibility for renewal after the first year. Under this award, there is a condition that the entity receiving the award must contribute one dollar for every three dollars awarded by the government;
2. The Cures Acceleration Grant Award is also an award of for up to $15 million per project per year with the possibility of subsequent funding after the initial year; and
3. The Cures Acceleration Flexible Research Award is an award that is available at the discretion of the Director of NIH based on the Directors determination that a project is in furtherance of the goals and objectives of the provision.
Companies or organizations interested in obtaining a grant must submit an application describing, in detail, the project, a timeframe for completion, and a description of the protocols to be utilized, among other information. The protocols must, of course, comply with FDAs standards and regulations at all times.
CAN has been allocated $500 million dollars for the remainder of the year 2010 which, given the cost of pre-clinical and clinical studies, could be used very quickly. These grants and awards will be awarded on a competitive basis, therefore, businesses wishing to compete for them need to act decisively and submit complete, structured application materials expeditiously.
Conclusion
With the passage of this new legislation, small companies doing business in the pharmaceutical and medical device industries have opportunity and incentive to move forward with research and development of new drug products, therapies, and medical devices. The Patient Protection and Affordable Care Act represents revolutionary change in the United States healthcare system and, combined with the escalation of Americans with access to health insurance, the potential for increased revenue for pharmaceutical and medical device manufacturers is boundless.
The inclusion of the tax credit provision for the encouragement of new therapies and the awards for research and development of life saving cures presents an excellent opportunity for small businesses to make advancements in pharmaceutical and medical device development which will profit the businesses themselves, the industries, and society as a whole. Operators and owners of small pharmaceutical and medical device companies should look into taking advantage of these credits and awards in their pursuit of new and innovative therapeutics.
For more information on how these tax credits and/or grants could help your business, please contact us at contact@fidjlaw.com.