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SELLING A LIFE SCIENCES BUSINESS finance RESEARCH & DEVELOPMENT FINANCE LIFESCIENCELEADER.COM 40 By Y. Holtzman MARCH 2015 efforts. These costs encompass all phases of the development life cycle, from initial specifications and requirements to FDA approval. However, there are several areas that are often overlooked by taxpayers. In addition to revolutionary projects, the credit can be claimed for performing evolutionary projects involving products and processes. These initiatives may include increase in drug efficacy or sta- bility of existing products; development of a new or improved production line to improve yield, purity, or quality; and other continuous improvement initia- tives in a production or manufacturing setting. One of the best features of the credit is that success is not a requirement. Even projects that ultimately fail can potentially qualify for the credit. After all, failure is the ultimate proof that a project involved R&D.; NEW INDUSTRY TRENDS AND HOW THEY APPLY TO THE R&D; CREDIT One way life sciences companies are combating higher development and commercialization costs for their prod- ucts is through data technologies that increase productivity within their orga- nizations. Companies are now mining information from tools in service, clinical trials, genetics, and demographics to perform analyses to gain insights on trials and new ideas while reducing costs by reaching conclusions more quickly. With the current proliferation of Big Data and cloud technologies, all compa- nies have access to immense processing power to build models and generate analytics to create their next drug or device designs — or to scrap designs that don't meet standards. The costs related to the development of the data analytics In 2011, a total of more than $9 billion in R&D; tax credits was claimed by tax- payers around the United States. The tax credit can be used to offset income tax liabilities dollar for dollar, thereby lowering a company's effective tax rate and increasing cash flow. A pharma- ceutical company client of ours with sales of $300 million claimed a federal credit of $500,000, as well as New Jersey and Iowa state credits totaling $500,000, which will enable them to substantially increase their R&D; efforts going for- ward. Another client, a medical devices company with revenue of $10 million, was able to obtain a $100,000 federal tax credit. For companies in net loss positions, the R&D; credit can be carried back one year and carried forward for 20 years until it can be used. In addition, similar credits and other incentives are offered by 38 states, six of which offer refund- able credits to attract new jobs and industries to the region. The research credit is more important now than ever before, as companies are pressured to improve their earnings per share and ROI in the face of increasing expenses, heightened regulations, and lower reimbursement rates. Examples of typical qualifying activi- ties in the life sciences industry include development of new or improved drugs, medical devices, diagnostic applica- tions, and production techniques. Costs that can be considered for the credit include in-house wages of employees performing, supervising, or supporting the research activities. Also considered are costs related to supplies used or consumed during the development, as well as a percentage of contractor and consultant fees associated with the The R&D; Tax Credit — A Catalyst For Life Sciences Innovation Y A I R H O L T Z M A N oes your company develop new medical products, pharmaceuticals, or innova- tive production techniques in the United States? Does your company create software for the medical industry or for internal discovery or diagnostic tools? Does your company invest resources toward optimizing manufacturing processes? If so, your company may qualify for the Research & Experimentation Tax Credit (or the R&D; Tax Credit), an often overlooked and misunderstood opportunity for taxpay- ers. The CEO at one of our longstanding clients, a New Jersey medical device company, champions the research credit as "the best way to refuel my innovation engine." Yair Holtzman, CPA, MBA, MS, is a partner at Anchin, Block & Anchin LLP. He is the practice leader of the R&D; Tax Credits Group, Life Sciences Industry Group, and Chemicals and Energy Industry Group. D THE R&D; TAX CREDIT — A CATALYST FOR LIFE SCIENCES INNOVATION