R&D Tax Credits for the Pharmaceutical Industry

R&D spending in the pharmaceutical industry tends to follow this process:

• invention
• development
• incremental innovation
• product differentiation
• safety monitoring or clinical trials.

According to the IRS’ Pharmaceutical Industry Research Credit Audit Guidelines – Revised – 4/30/04, the pharmaceutical product development process can be broken down into four stages:

1. Preclinical/Discovery Research – where new compounds are discovered.
2. Clinical Development – conducted in three (3) phases.
   Phase I – first trials in humans that test a compound for safety, tolerance and pharmacokinetics. The trials usually employ normal, 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 assigned for magnitude and duration of effect 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.
3. 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.
4. Post-Marketing – activities occurring 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; to determine the longterm effect of a drug; to study a patient population not previously studied; and for marketing comparisons against other products and other uses.

When deciding whether to award an R&D tax credit claim, the IRS seeks these types of documentation:

• tax work papers
• qualified wages
• qualified supplies
• qualified contract research
• interviews
• tour of research facility
• organizational chart and
• job titles, grade levels, and position descriptions.