BREAKTHROUGHS BLOG

November 23, 2011

Shifting the bottom line—can R&D tax credits work for diseases of the poor?

Senior Program Associate
Results for Development Institute

Aarthi Rao is a senior program associate at the Center for Global Health R&D Policy Assessment of the Results for Development Institute. The Center analyzes a range of policy and financing ideas to accelerate the development of drugs, vaccines, and diagnostics for diseases of the poor. Ms. Rao works across many of its initiatives, including the assessment of tax credits for global health R&D and a study of the innovation system in India. This post shares some of the main findings of the Center's recent report, "R&D Tax Credits: A Tool to Advance Global Health Technologies?"

As policymakers scramble to assemble measures that strengthen the US economy, tax credits are often proposed as tools to support domestic industry, spur job growth and encourage innovation with minimal intervention. In a political climate where the global health community worries about shrinking budgets and delivering “value for money,” tax credits to US companies to develop drugs, vaccines, and diagnostics for diseases of the poor seem even more appealing. While most policymakers agree that well-designed, tax credits are a good broad-based measure to support commercial R&D, making them work for global health is more complicated.

Government support for R&D is often justified on grounds that the knowledge that R&D creates is a public good—by increasing overall knowledge, because innovation leads to improvements in general well-being. Nevertheless, firms would pursue a certain amount R&D on commercial grounds alone in order to earn profits from their innovations. But because R&D is high risk and costly, policymakers use tools, such as tax credits, to stimulate commercial innovation by lowering the costs and risks. The tricky part for the government is setting the right level for a tax credit—ideally, the government should offer credits that are high enough to encourage new innovation without paying for too much R&D that would have happened anyway.

For biotechs and pharmaceutical companies doing global health work, tax credits may help offset some of their expenses, but the resulting technologies are unlikely to be profitable in the absence of other incentives since poor patients and countries have limited buying power. A reduction in losses can certainly help companies who are conducting global health R&D out of goodwill, but it will not likely catalyze much new research on its own. The UK, for instance, tried subsidizing research for HIV/AIDS, tuberculosis (TB) and malaria through a 20%-40% tax credit, but the private sector response was underwhelming. One solution is to increase the level of the credit and see if more firms respond, but this risks paying for a large amount of undefined work, much of which will fail in the early stages. However, there may be other ways to position a tax credit so that it does help to accelerate the development of new neglected disease technologies by US firms.

There are new tax credit proposals on the table that challenge us to think past single mechanisms to packages of support that foster innovation. The Innovate America Act not only broadens the research tax credit, but it also suggests creating a pilot program to fund the commercialization of technologies developed through the National Science Foundation and mandates the development of a virtual platform for product developers to connect with public researchers. The Qualifying Therapeutic Discovery Project Tax Credit Extension Act reinforces the program’s focus on grants to emerging biotechs. These bills underscore that tax credits alone are not enough, and bring renewed attention to the challenge of commercialization. A tax credit for global health might encourage companies to do more early stage work, but they are unlikely to take on the full late stage development costs (think of the price tags for phase I-III clinical trials) for promising discoveries. Rather than pushing tax credit rates past 100%, a “package” approach could bring the most cost effective mechanisms for particular stages of R&D together.

The ideas in the new tax credit legislation might not be quite right for global health R&D, but it is important that the global health community comes together to identify the ones that are. Discussions around product development for global health often focus on the role of product development partnerships (PDPs), or philanthropy on the part of industry and international donors—all of these are critical to global health—but there may be a way to make R&D for some diseases of the poor fit into the business models of US companies.

Truly neglected diseases with almost no markets are unlikely to interest firms, but there are some neglected diseases that affect more than just the poor. Type II diseases, which have both donor and modest private sector markets, offer a good testing ground for incentive packages. For example, could a tax credit coupled with a purchase commitment shift the cost and risk equation far enough that firms could dedicate some of their brightest scientists to fighting diseases like dengue and TB? The tax credit could help offset upfront costs, whereas the purchase commitment helps ensure that a technology does in fact get fully developed by guaranteeing a certain level of market demand. This combination is just one possibility, but opens up a range of questions about what diseases have modest markets and what incentives suit particular stages of R&D. If these questions can be systematically laid out in relation to the preferences and strengths of US firms, then putting forward a well-designed package of targeted policies and incentives could be one way that global health advocates can advance the neglected disease pipeline by channeling bipartisan enthusiasm for supporting innovation in the US.

To learn more about tax credits for global health R&D, read “R&D Tax Credits: A tool to Advance Global Health Technologies?”

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