It's important to ensure R&D record keeping is in place before making a claim. Cover…
Pharmaceutical R&D: Tax and Funding Incentives
Pharmaceutical development is known to be highly R&D intensive and a long-term process, so it is of great importance to understand what government funding and incentives are available.
Much of the pharmaceutical industry’s work involves pharmaceutical R&D: the discovery, development, production, and marketing of drugs for use as medications to either cure patients, alleviate their symptoms or vaccinate them to prevent illnesses. These pharmaceutical drugs are subject to a variety of laws and regulations regarding their patenting, testing, safety, efficacy, and marketing. For drug development, clinical trials (Phase 1,2,3, etc.) start with testing for safety in a few human subjects, then expand to many study participants (potentially tens of thousands), with the aim being to find out more about side effects, observe how well the treatment works, and compare the new treatment with the standard treatment.
- Information from the Federal Government’s Australian Clinical Trials website (as of January 2021) states that Australia has many advantages as a place for conducting clinical trials. It is home to some of the world’s best researchers and health professionals, has world-class research infrastructure, a stable socio-political environment, and high standards that ensure confidence in the scientific conclusions reached by clinical trials conducted in Australia. Australia has a robust intellectual property system and a simple and efficient regulatory regime — the Therapeutic Goods Administration (TGA), which is Australia’s equivalent of the FDA in the United States. The Australian Government’s commitment to the pharmaceutical sector through improving the clinical trials’ environment is evident in the considerable financial resources it has dedicated to the Research & Development Tax Incentive (RDTI), which encourages more industry investment in R&D by providing businesses investing in eligible R&D with the following generous tax offsets:
- a 43.5 per cent refundable R&D tax offset (i.e., 43.5c per $1 of eligible R&D) for companies with aggregated annual turnover of less than A$20 million; and
- a 38.5 per cent non-refundable R&D tax offset (equivalent to 38.5c per $1 of eligible R&D) for all other eligible companies.
- Other benefits under the new RDTI include:
- Clinical trials (e.g. Phase 1, 2, and 3) can be eligible R&D activities under the program and are considered for eligibility under the same rules as any other activity (generally, Phase 4 clinical trials being conducted to meet regulatory requirements will not be eligible).
- The Incentive provides for increased access by international companies. In particular, there is no requirement to hold the intellectual property in Australia.
- Increased level of expenditure that can be claimed on R&D activities undertaken overseas in support of Australian R&D projects, under certain conditions (i.e., when an “Overseas Finding” granted by Innovation and Science Australia states that this can be done).
Given all this information, it is clear that the financial boost from the RDTI can significantly lower the cost of R&D for global pharmaceutical companies.
A 2016 study conducted in the United States found that, although the amount of money spent on Phase II/III trials depends on numerous factors (therapeutic area being studied and types of clinical procedures are the key drivers), Phase II studies may cost as much as US$20 million, and Phase III as much as US$53 million. And given that the entire process of developing a drug (from preclinical research to marketing) can take approximately 12 to 18 years and often costs well over US$1 billion, programs like the RDTI are essential for encouraging pharmaceutical research, which will also have many flow-on effects for the wider economy.
Commercial pharmaceutical research is often done in some form of partnership with academic institutions, thus enabling the pharmaceutical companies to benefit from the state-of-the-art research facilities and the expertise of personnel dedicated to research. Some examples of Australian tertiary institutes partnering with commercial entities for pharmaceutical research include Monash University and University of Melbourne in Victoria, University of Queensland, and the University of South Australia.
According to the information available on their website, the University of South Australia’s Pharmaceutical Innovation and Development Group (PIDG) has worked with 15 different Australian and foreign (US- and UK-based) commercial partners in pharmaceutical research. As a reminder, with the permission of an Overseas Finding granted by Innovation and Science Australia, the RDTI does allow for certain activities to be conducted overseas; for example, when it is proven that the knowledge/personnel/equipment/facilities/specific population samples are not available in Australia. This flexibility in the RDTI legislation means that many Australian affiliates of foreign pharmaceutical companies can perform research both here and overseas when necessary, while still being able to claim the RDTI.
In most cases, a company is only entitled to a tax offset for R&D activities conducted for itself; that is, when it is the major benefactor of the expenditure on R&D activities. This can be determined by examining enabling agreements such as any in-licence of the background intellectual property and any funding agreements which, in turn, control the extent to which R&D activities are conducted for the R&D entity compared to the extent to which they are conducted for any other entity (some exceptions apply where an Australian resident is conducting activities for an overseas parent company). For whom the R&D activities are conducted can be determined objectively by analysing three key criteria being:
- who effectively owns the newly developed know-how or intellectual property or other results arising from the R&D entity’s expenditure on R&D activities;
- who has effective control over the conduct of the R&D activities; and
- who bears the financial burden of conducting the R&D activities.
Some real-world examples of the RDTI and other government initiatives assisting pharmaceutical R&D
Melbourne-based Telix Pharmaceuticals Ltd — headquartered in Melbourne, and with offices in Japan, USA, and Belgium — received a $11.4M Refundable R&D Tax Offset in relation to activity conducted during the year ending 31 December 2019. At the time, this was one of the largest single year refundable offset receipts in the history of the RDTI and indicated that R&D expenditure of approximately $26 million had been incurred by the company. The underlying activity of the claim related to the development of diagnostic and therapeutic products using molecularly targeted radiation.
The purpose of the RDTI is to encourage companies to conduct experimental R&D activities that might not otherwise be done. Additionally, the Government seeks to encourage industry investment in R&D with research organisations by providing benefits to entities that engage the services of registered Research Service Providers (RSPs). RSPs — including universities and Cooperative Research Centres (CRCs) — are entities registered by Innovation Science Australia as being capable of providing scientific or technical expertise and resources to perform R&D on behalf of other companies. The ability to access the RDTI in relation to payments made to CRCs can help reduce the costs of such an investment by tax-paying entities and also encourage these entities to utilise the research services of the CRCs. Thus, it is in the interests of CRCs to ensure that they are providing their partner organisations (or the parties contracting them to undertake research) with the information required to make an RDTI claim.
An example of this was the multimillion-dollar deal brokered between global pharmaceuticals giant Pfizer and Melbourne-based Cancer Therapeutics CRC (CTx), which was underpinned by research done at a number of Australian higher education institutes, including Griffith University and Monash University. The initial agreement involved a two-year research collaboration and license agreement with Pfizer worth $20 million upfront, but it could be worth as much as $650 million in milestone payments to CTx if the program reaches commercialisation.
Is there any other government funding or incentives for pharmaceutical research?
The Australian Federal Government has classified the Medical Technologies and Pharmaceuticals (MTP) sector as a Growth Sector, which means that businesses performing activities related to this sector are now eligible for funding from the Entrepreneurs’ Programme.
Also, the Victorian Government identified MTP as one of six key growth sectors, and it is supporting the MTP sector through the $200 million Future Industries Fund. The document outlining the specific strategy for the MTP sector as part of the Future Industries Fund can be found here.
And in another significant recent development, scale ups now have access to new equity capital through the government’s new $540 million Business Growth Fund (BGF), which will eventually grow to $1 billion. The financing for the BGF is through the Federal government together with the ANZ, CBA, NAB, Westpac, HSBC, and Macquarie banks. The BGF, which will have an independent management team selecting investments, will invest in around 30–50 high growth SMEs annually in return for a 10–40% equity stake.
Looking into the crystal ball at the future of Australian pharmaceutical R&D
According to Dr. John Moller, the CEO of Novotech (which provides clinical development services across all clinical trial phases and therapeutic areas), there has been an increase in the number of US companies turning to Australia to conduct clinical trials, because Australian clinical trials are already around 28% cheaper than in the US, and up to 60% cheaper once the government’s generous R&D cash incentives are applied.
The Federal Government’s reversal on some proposed cuts to the RDTI in the 2020-21 federal Budget was very positive news for the Pharmaceutical sector. Aiming to remain an attractive option for foreign investment in R&D, the federal government will set the refundable R&D tax offset at 18.5 percentage points above the claimant’s company tax rate, for companies with aggregated annual turnover of less than $20 million starting from 01 July 2021. The proposed $4 million cap on annual cash refunds will not proceed.
For larger companies (those with aggregated annual turnover of $20 million or more), the Government will introduce two intensity tiers (8.5% and 16.5%), which will provide increased benefits and greater certainty for R&D investment, while still rewarding those companies that commit a greater proportion of their business expenditure to R&D.
These are positive signs for Pharmaceutical businesses looking to commit financial resources into a long‐term and resource‐intensive activities such as R&D, because many pharmaceutical activities require rigorous clinical trial data before any product can be approved, and development times are often longer than usual (e.g., it can take 10–15 years and substantial public and private investment).
Whether you’re planning to do pharmaceutical R&D, want to know which activities of your current pharmaceutical research could qualify under the RDTI, Fullstack has the expertise to help you. Contact us to ensure you obtain all the RDTI benefits you’re entitled to.
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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech companies, agencies and entrepreneurs.