Earlier this year, three members of the U.S. House of Representatives introduced H.R.1234, the Domestic Research Enhancement Act of 2017. The partisan legislation would amend the Internal Revenue Code of 1986, enabling CROs to claim a portion of the Research & Development Tax Credit for qualified research conducted in the United States. Currently, pharmaceutical and biotech (sponsor) companies that outsource clinical research projects only claim 65 percent of the R&D tax credit; the new bill would make CROs eligible for the other 35 percent, which is unused.
If enacted into law, how might this bill affect the clinical trials outsourcing industry? Clinical leader put this question — and several other related questions — to the CEOs of three large CROs. Below, John Ratliff of Covance, Steve Cutler of ICON, and Josef von Rickenbach of PAREXEL share their thoughts on the potentially wide-ranging consequences of H.R.1234.
Was your company able to provide insights to the sponsor and/or co-sponsors of H.R.1234?
John Ratliff, Covance: The Association of Clinical Research Organizations (ACRO) took the lead in educating the sponsors of the bill. The association has a broad perspective across our global industry, and I think it explained well how shifts in the drug development ecosystem had created the context for this kind of legislation. That said, we are supportive of the bill and appreciate the foresight of its sponsors.
[Editor’s note: For ACRO’s perspective on the new bill, read our recent interview with the association’s SVP of policy and affairs, John Lewis.]
Steve Cutler, ICON: ICON didn’t have input into the preparation of the bill, but we were pleasantly surprised when it was introduced. A similar measure was proposed by the Senate back in 2014. It was unsuccessful at the time, but we understood it would be reconsidered as part of the broader tax reform agenda.
How do you see this bill potentially impacting your company?
Cutler: We don’t believe the bill will have a significant impact on how we conduct our operations. We will continue to choose clinical trial locations where we can recruit patients quickly, so we can help our customers remove time and cost from their development programs. The financial benefit of the credit to CROs will only be about 1 to 2 percent of the value of U.S. activity outsourced to that CRO. So while this initiative is very positive, we don’t think it should detract from focusing on doing the right thing from an operational perspective.
Ratliff: I actually think the bill levels the playing field for our entire industry. Drug development is a global enterprise, and the current tax structure creates certain disadvantages to conducting essential research in the U.S. It also recognizes the significant scientific and intellectual capital, and economic value, that CROs contribute to 21st century drug development. The research credit is intended to spur innovation and advance scientific knowledge. Contract researchers are now an essential part of these endeavors.
Do you envision the bill having a different impact on small- and medium-sized CROs, as opposed to large CROs?
Josef von Rickenbach, PAREXEL: The proposed legislation applies to all CROs, regardless of size.
Ratliff: The bill is intended to standardize incentives for all contract researchers around the world, large and small.
Cutler: I would say “possibly.” While the rules are essentially the same for all CROs, the impact on smaller or midsize CROs could differ for a number of reasons. For example, smaller CROs typically do not have the same global footprint as larger CROs. Consequently, they may have a proportionately larger share of their activity and sites in the U.S. and therefore may benefit proportionately more. However, we think that there are significant advantages in terms of time and cost in recruiting patients globally.
To get new medicines to patients, companies have to invest a lot of time and money in research. How will this tax credit help patients get new medicines faster or for less cost?
Cutler: In terms of using R&D tax credits to encourage development of new medicines faster and more cost effectively, we think it would be better to allow sponsors to claim the R&D credits on 100% of their outsourced spend, and so reduce their development costs. In addition, we think that changing the credit to a refundable tax credit, particularly for smaller or newer companies who might not yet be profitable, would be a very positive step. This would allow these companies to monetize the credits at a much earlier stage of their life cycle, when such funding would potentially make a more significant difference.
von Rickenbach: This extension of the tax credit recognizes the increased use of CROs and the significant role biopharmaceutical service providers play in creating greater efficiencies for research sponsors, and in helping them deliver new treatments to patients. It also levels the playing field by providing financial incentives for domestic clinical trials that are offered in many other countries. This legislation will make U.S. companies more competitive in the global market, incentivize clinical investment and innovation, and lead to the development of new discoveries in drug development.
Ratliff: Patient recruitment is one of the greatest challenges in clinical trials, driving up costs and slowing down timelines. The industry’s focus should be on working with high-quality investigator sites anywhere in the world where we can quickly identify eligible patients and recruit them into relevant trials. These should be the primary considerations in where trials are placed globally, rather than considerations of differences in tax treatment. Overcoming the patient recruitment challenge in clinical trials would surely reduce the time and cost of drug development, and this tax credit would support greater efficiencies in patient recruitment.
How confident do you feel about this bipartisan bill becoming law?
Ratliff: This tax reform is unlikely to progress as a stand-alone change. It is likely to be attached to broader tax reform efforts, the outcome of which is hard to predict.
Cutler: The fact that this is a bipartisan bill is a positive step, and it demonstrates that there is a good understanding of the importance of the drug development process across the House. Given the potential for a comprehensive overhaul of the tax system, it is difficult to be certain of the outcome at this stage. We will have to wait and see how the overall reform process progresses.
If the bill does pass, could you reflect on how it might change the clinical outsourcing market 5 or 10 years out?
von Rickenbach: There are several implications this bill could have on the market. For one, it would help promote the continued growth of the contract research industry in the U.S., recognizing and rewarding its important role in the efficient development of new therapies for patients. It would also encourage the creation of biopharmaceutical research jobs and expedite the process of providing treatments to patients who need them most.
Ratliff: All other things being equal, this bill would help the U.S. remain at the heart of innovation and scientific advances in drug development over the long term. We are in the midst of a therapeutic revolution that has led to significant increases in how we live and how long we live. It’s what makes our vision of “improving health, improving lives” so meaningful for us. It’s truly an exciting time to be part of these advances, and I’m looking forward to seeing what comes next.
Cutler: We don’t believe the bill will fundamentally impact the clinical outsourcing market. We expect to see a continued increase in the level of outsourcing over this period driven by the underlying commercial fundamentals. The primary outsourcing drivers will continue to include the desire to leverage the capabilities and knowledge of CROs — particularly in innovative areas such as risk-based monitoring, clinical trial technologies, and adaptive trial design — while also converting fixed costs to variable expenditure with a clear link to well-defined development deliverables.