Formulating Tax Benefits: R&D Credits in the Pharmaceutical Industry

According to the IRS' Pharmaceutical Industry Research Credit Audit Guidelines, the pharmaceutical product development process can be divided into four stages:

1. Preclinical/Discovery Research: This is the stage where new compounds are discovered.
2. Clinical Development: This stage is conducted in three phases:

Phase I: Initial trials in humans that test a compound for safety, tolerance and pharmacokinetics. These trials usually involve healthy volunteers.

Phase II: Pilot studies to determine efficacy and safety in selected populations of patients with the disease or condition to be treated, diagnosed or prevented. Dose and dosing regimens are determined during this phase.

Phase III: Expanded clinical trials intended to gather additional evidence of effectiveness for specific indications and to better understand safety and drug-related adverse effects.

1. Regulatory Review: The New Drug Application (NDA) is submitted to a regulatory agency, such as the Food and Drug Administration, for marketing and manufacturing approval.
2. Post-Marketing: These activities occur after approval to market has been granted by the appropriate regulatory agency. These activities include Phase IV studies performed to determine the incidence of adverse reactions, the long-term effect of a drug, to study a patient population not previously studied and for marketing comparisons against other products and other uses.

When evaluating an R&D tax credit claim, the IRS seeks documentation such as tax work papers, qualified wages, qualified supplies, qualified contract research, interviews, a tour of the research facility, an organizational chart and job titles, grade levels and position descriptions.