The R&D Tax Credit Aspects of Dermatology Innovation



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        The Epidermis is the largest organ in the human body. Although the epidermis protects vital organs within the body, skin is vulnerable to many forms of disease, disorders, rashes, and cosmetic irregularities. Demand for dermatology services has significantly increased in the past decade as a result of alarming increases in skin cancer diagnoses. The recent economic recovery has also driven a "resurgence of demand for cosmetic procedures". As a result of the increase in demand for dermatology services, there will likely be an increase in the availability of R&D tax incentives for dermatology research in coming years.



The Research & Development Tax Credit

        Enacted in 1981, the federal Research and Development (R&D) Tax Credit allows a credit of up to 13% of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:
  • New or improved products, processes, or software
  • Technological in nature
  • Elimination of uncertainty
  • Process of experimentation
        Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent. On January 2, 2013, President Obama signed the bill extending the R&D Tax Credit for 2012 and 2013 tax years.



Medical vs. Cosmetic Dermatology

        The American Academy of Dermatology (AAD) provides a good distinction between medical dermatology and cosmetic dermatology. The AAD provides a plethora of information on dermatology, dermatologists, patient care, and more. On their website, the AAD outlines the different training dermatologists receive for medical dermatology as well as cosmetic dermatology. Although many professionals practice each, medical dermatologists are trained to, "diagnose, treat, and prevent diseases that affect the skin, hair and nails", while training for cosmetic dermatology include, "treating the skin, hair or nails using a treatment that is meant to improve a patient's appearance rather than treat a disease".
   
        Just as there is a clear distinction in the training necessary to provide medical or cosmetic dermatology care, there is also a distinction between the research goals of medical and cosmetic dermatology. R&D efforts in cosmetic dermatology are mainly focused on the aesthetic and therapeutic aspects of skin care science, whereas R&D for medical dermatology strives to find new or improved drugs and treatments for skin disease, disorder, etc.



R&D Activity in Universities

        Academic institutions invest heavily in medical research and development. According to a 2012 study conducted by the National Science Foundation's (NSF) Science and Engineering (S&E) Indicators, over half of all new S&E research space in academic institutions was built as research space for biological and biomedical sciences or health and clinical sciences. One such institution, NY School of Medicine's Joan and Joel Smilow Research Center, was completed in 2006 and received an award of merit from ENR New York. Within the research center, the Ronald O. Perelman Department of Dermatology Cutaneous Biology spearheads dermatology research that focuses on using “clinical observations to guide the direction of laboratory-based research. The ultimate goal is to shorten the time from scientific discovery to improved patient care”.

        Cutting edge cosmetic dermatology research is also being conducted in academic institutions around the country. The Baumann Cosmetic and Research Institute at the University of Miami has promoted research for cosmetic dermatology since its inception in 1997. Led by Dr. Leslie Baumann, a leading cosmetic dermatologist, research at the Baumann Cosmetic and Research Institute led to the FDA approval of Botox, dermal fillers, and a hyperpigmentation lightening cream. Continued research at the institute includes research into new lasers, acne solutions, skin care products and more.

        A majority of research in universities is divided amongst clinical and laboratory research. For medical and cosmetic dermatology, university programs place importance on each form of research. Patients experiencing acne, psoriasis, various forms of skin cancer, chronic wounds, etc. can be ideal participants in clinical research.



High Skincare Costs

        As skin cancer rates increase, demand for dermatologists increases accordingly. High demand and growing costs have lead to expensive dermatology procedures and a high average income for most dermatologists. As a result, the process of diagnosing and removing even the least dangerous form of skin cancer can cost a patient more than $25,000. The high cost of many dermatology treatments may become a future deterrent from people seeking skin care treatments, especially those treatments that require surgery or the involvement of specialists. In order to mitigate these costs, a number of self-examination products and smart phone applications have been developed. Physicians at the University of Michigan Health

        System launched a smart phone application in 2012 that aimed to allow at-risk patients to monitor suspicious looking moles and skin lesions. The continued development of applications such as this and SkinVision , a mobile application similar to that developed by the University of Michigan, give at-risk patients a way to mitigate dermatology costs. While all at-risk patients should seek professional medical consultation, the continued advancement of skin monitoring applications can help dermatology patients and dermatologists eliminate valuable steps in the treatment of certain skin disease.



Drug Development Trends

        New drug discovery remains vital to most major life science companies, including dermatology companies. As a leading investor in dermatology R&D, Galderma USA, headquartered in Fort Worth, Texas, invests nearly 19% of annual revenues into skin research. While this strategy is the more common approach to drug discovery in the dermatology industry, the growing pharmaceutical powerhouse Valeant Pharmaceuticals International has vowed to move in a completely different direction. Valeant's CEO Michael Pearson, former head of McKinsey's pharma practice, plans to cut research in Valeant to 3% of revenues, compared to the 19% industry average. This cut would affect more than 35 companies acquired by Valeant since 2008, which would include drug development giant Bausch & Lomb. Allergan is a large multispecialty healthcare company known for being the developer of botox. In May, Allergan rejected Valeant's $46 billion unsolicited takeover bid in an effort to avoid steep cuts in R&D funding, a move Allergan believes would eventually hurt sales. As other drug developers wait to see the eventual effects Valeant's strategy will have on drug development, opportunities exist for smaller dermatology drug developers to fill the R&D void. If these companies find success, there could be tremendous financial benefits that result.

        Recent partnerships by pharmaceutical companies have increased the possible funding for R&D within dermatology, specifically for dermatology drug development. As one of a series of billion dollar deals proposed between Novartis AG and GlaxoSmithKline, the two companies combined different components of their businesses to form a new consumer health care business focusing on pain management, coughs and colds, and dermatology. Many dermatology companies may be affected by a partnership of this magnitude. These companies may indirectly or directly benefit from the agreement, or they may need to invest in independent R&D to remain competitive in an industry with such a changing landscape. While large companies heavily investing in drug development often see multi-million dollar R&D tax credits, all companies that engage in R&D should take advantage of the credits they are entitled to.



Conclusion

        As the pharmaceutical industry adapts to internal and external disruptors, the medical and cosmetic dermatology industries continue to pursue innovative solutions to a variety of skin care needs. Dermatologists have seen skin care demand rise over the past decade with a corresponding rise in products, treatments, and technologies that supplement professional skin care. Companies that invest in researching these new and improved products, treatments, and technologies, remain great candidates for substantial R&D tax credits. It is important for all companies to realize these incentives regardless of their relative size within an industry.

Article Citation List

   


Authors

Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

Andrea Albanese is a Project Manager with R&D Tax Savers.

Sean Brophy is a Tax Analyst with R&D Tax Savers.


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