R&D Tax Credit Aspects of Sleep Innovation



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        It affects the way we work, our daily function, how quickly we recover from illness, our mood, even our survival rate from cancer. Innovation in the sleep industry is growing rapidly due to the growing number of people that are being diagnosed as sleep disorder sufferers and the constant need to make sleep aid technology more comfortable to wear, and effective. Wearables and smart sleep monitoring equipment are generating large streams of sleep "Big Data" that can be used to generate new effective sleep products. R&D tax credits are available to support sleep technology innovation.



The R&D Tax Credit

        Enacted in 1981, the Federal Research and Development (R&D) Tax Credit allows a credit of up to 13 percent 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 December 18, 2015, President Obama signed the bill making the R&D Tax Credit permanent.  Beginning in 2016, the R&D credit can be used to offset Alternative Minimum tax and startup businesses can utilize the credit against payroll taxes.


Sleep Disorders

        Sleep disorders including sleep apnea, snoring, night terrors, insomnia, affect millions of Americans every time their heads hit the pillow. Sleep apnea and snoring can result in serious medical and health issues. While insomnia usually only last for a couple days while your body is adjusting, medications may be prescribed to help the sleep process return to normal. Medications such as Lunesta or AmBien can be taken in order to induce sleep as well as sustain sleep. However, the Washington Post recently stated that Lunesta should start to be taken in smaller doses in order to make sure that the next day people who took the drug aren't too drowsy from taking too large of a starting dose the day before. A reported 168 million adult drivers have said that they drove while drowsy, and a reported 103 million people (unrelated to the drowsy figure) have said that they have actually fallen asleep at the wheel in the past year. Out of the 13% (roughly 10 million people) say that they have fallen asleep at the wheel at least once a month. 4% of the population has admitted that they have either been in an accident due to drowsiness or have almost been in an accident.


Health Concerns

        Lack of sleep can result in a multitude of problems not only to yourself but also impact your work and the people around you. Loss of sleep has been proven to increase risk for Heart disease, heart attack, heart failure, irregular heartbeat, high blood pressure, stroke, and diabetes. Insufficient sleep has been also linked to depression and anxiety. Studies of growing children have increasingly shown that lack of sleep can lead to childhood diabetes, obesity and higher risk of early heart disease. In 2007, a poll by Sleep in America surveyed 10,000 people. The surveys showed that people who suffered from insomnia were five times as likely to develop depression as those without insomnia. In today's 24 hour society, lack of sleep is very common. With new 24/7 mobile technology people stay up later than normal and disrupt their internal clocks, causing increased risk of chronic disease. Lack of sleep can also age your skin as result of the release of a chemical called Cortisol which breaks up skin collagen, which keeps your skin tight and smooth. When you sleep your body releases growth hormone, which is crucial in children so they can grow properly and strengthen their bones and muscle mass. Lack of sleep, makes you forgetful. In 2009 American and French researchers determined “sharp wave ripples” are responsible for consolidating memory. Getting less than 6 hours of sleep has demonstrated a 30% higher probability of becoming obese. It has been shown that lack of sleep causes the release of what is called Ghrelin, which stimulates hunger. But not only that, but your body will also have cravings for high-fat, high-carb foods.

        In 2007, British researchers who conducted the "Whitehall 2 Study" surveyed 10,000 people who reduce their sleep from 7 hours to 5 hours. The results demonstrated that reducing sleep doubled your risk of death by all causes. But in particular it doubled the risk for cardiovascular disease. Lastly, the lack of sleep impairs judgment.

Many leading U.S. universities are engaged in research related to sleep as follows:

University of Pennsylvania Medicine Center for Sleep and Circadian Neurobiology

        Recent Penn medicine studies that were reported in March of this 2014 have shown that chronic loss of sleep is linked to the loss of neurons. Neurons are the building blocks of our brains and by losing these essential building blocks, we lose alertness and optimal cognition. During studies where researchers used mice at different levels of sleep patterns, such as normal rest, short wakefulness, or extended wakefulness, the results showed that in extended wakefulness, the SirT3 protein which is essential for maintaining metabolic homeostasis stopped and resulted in a 25% loss of neurons. The research also states that extended periods of SirT3 loss can lead to nerve damage. The research team plans to examine several specimens post-mortem in order to see if extended SirT3 loss can accelerate the onset of Alzheimer's and Parkinson's. Although it is not yet proven all indications are pointing in that direction. Before these studies no one believed that sleep loss can cause irreversible brain damage. But now it is clear that it can.


Johns Hopkins University

        Johns Hopkins University School of Medicine in the Baltimore Marshland has been doing to research on how sleep apnea might have even more serious risks than previously believed. A study was conducted using 18 people that just started using a Continuous Positive Airway Pressure (CPAP) machine to treat sleep apnea and 18 people who were not currently being treated. All of whom had to perform a simulated driving test. The results overwhelmingly showed that the participants, who were being treated, even just after three days of use, had much faster reaction times to simulated accidents. The control group who was not being treated had no results improvement, which rules out the argument of becoming familiar with the simulation. A study was also done to see if the use of a CPAP machine would reduce Left Ventricular Hypertrophy of the heart, which means the left ventricle's muscular wall was thickening due to the heart trying to pump more blood during sleep to compensate for the sleep apnea. After 6 months of complying with the CPAP therapy, all patients had significant reduction in the size of the left ventricle. Left Ventricle Hypertrophy is a direct link to cardiac-related death.


American Academy of Sleep Medicine

        A new study, which was conducted at Stanford University in California, has shown that women with advanced stages of breast cancer, who get better sleep, have a much higher survival rate then women who don't. Although it is not completely clear why, we do know that increased levels of sleep increase immunity function. Mean survival was 68.9 months of women who were classified as efficient sleepers as compared to 33.2 months of women who were not so efficient. Analysis has shown that just a 10 percent increase in sleep efficiency increases survival rate by 32 percent. The study consisted of 97 women all of whom had advanced stage breast cancer. Each spent about 8 hours in bed and slept for approximately 6.5 hours. Although the exact mechanism of the relationship between sleep quality and advanced breast cancer is not yet clear, it is clear that better quality of sleep leads to improved immunity and a better survival rate.


University of California: San Francisco

        Drs. Ying-Hui Fu and her Husband Louis Ptacek are researching how genes can play an important role in the quality of our sleep. They have discovered that only 1% of Americans can actually wake up feeling refreshed after just 6 hours of sleep. They have also found that those people are more energetic, optimistic and have a go getter mentality. Dr. Ptacek is hoping to begin research on how certain drugs can alter our circadian rhythms, which controls our entire biological cycle. Disruptions in this circadian rhythm have been shown to lead to chronic illnesses such as cancer, obesity, and metabolic syndrome. Conclusive results could eliminate jet lag and a more curative process to cancer treatments. Dr. Ptacek says that a drug of this nature is going to require at least 10 years of development. Dr. Fu also is hoping to, in the future, to begin research on drugs that can reduce the amount of time that we need to sleep in order to feel refreshed and energetic. Together, they gather data from 100s of families in order to find the "needle in a haystack" so to speak to try and find that one family that has the short sleeper genome. It is extremely time consuming work that rarely comes up with a helpful result. But researching each family is very "important and helpful in order to further understand the implications of sleep deprivation" (Sumathi Reddy).


Big Data Opportunities

        The opportunities presented for data analysis, thanks to new sleep software, will lead the way in not only how we think about sleep but also how we see sleep. The large increase in wearables and sleep monitoring devices presents a tremendous amount of new sleep "Big Data." As a result of this new data, sleep device and mattress industries will respond with new products.


Continuous Improvements in Mattress Technology

        Not having the right mattress can also lead to problems in one's sleep cycle, such as back pain, fatigue and muscle soreness. Mattresses should be evaluated every seven years in order to make sure that you are using the right mattress for your lifestyle and your body.

        The following table presents the research budgets of some of the largest publicly traded manufacturers including; Tempur-Pedic headquartered in Lexington, Kentucky, and Select Comfort headquartered in Minneapolis, Minnesota. Along with ResMed Inc. from Australia but headquartered in San Diego, California and Leggett & Platt from Carthage, Missouri.


*Note: The listed Tempur-Sealy expenses and employees for years 2011 and 2012 are before the Tempur-Pedic and Sealy merger.

        Tempur-Sealy and Leggett and Platt made a large transaction on July 1, 2014 in which Leggett and Platt bought all of Tempur-Sealy's U.S. inner spring production facilities and equipment. Leggett and Platt is now the exclusive long term supplier of inner spring Tempur-Sealy mattresses and box springs for sealy in the U.S. and Canada. The transaction creates significant benefits as it leverages the strengths of two key players of the global bedding industry. Importantly, the agreement paves the way for multi-year strategic product development initiatives between the two companies. Now that Tempur-Sealy no longer has control over the inner spring mattress production, they can concentrate their efforts on innovation and improve their working capital position.

        The mattress industry provides 9 different kinds of mattresses as well as varying sizes. The mattress industry is constantly working on finding new materials and foam compounds in order to maximize comfort for the sleeper and to reduce pain.

        Sleep Innovation, a mattress producer, announced that they have created a mattress that now adjusts to your optimal comfort level, but that air that is inside the mattress also monitors how you sleep and every morning gives you a report card on a tablet that is provided when you purchase the mattress. The tablet also has a lifestyle and nutrition application that coincides with your sleep patterns every night to see what kind of daily choices affect your sleep the most. This product is not offered in all of Sleep Innovations Sleep Number beds, but is in the process of becoming available in other model sizes. The bed only records when you want it to record with a privacy button for those private moments. The stand alone technology will be available independent of the mattress for $999 as compared to the $7,999 for the starting queen.

        In 2012 Advent International, purchased Serta International as well the sister company Simmons Bedding Company. Together they compose a 34% mattress market share and both have large R&D departments to improve their mattresses.

Company

Year

R&D Expenses

Number of Employees

R&D Expenses Per Employee

Leggett & Platt

2013

$ 24,000,000

18,800

$1,277

2012

22,000,000

18,300

1,202

2011

20,000,000

1,924

10,395

ResMed, Inc.

2013

$ 120,100,000

3,900

$30,795

2012

109,700,000

3,700

29,649

2011

92,000,000

3,450

26,667

Tempur-Sealy Internatial Inc.

2013

$ 21,000,000

6,700

$3,134

2012

15,000,000

1,950

7,692

2011

9,900,000

1,800

5,500

Select Comfort Corporation

2013

$ 9,478,000

2,858

$3,316

2012

6,194,000

2,791

2,219

2011

4,175,000

2,328

1,793



Mattress Recycling

        In September of 2013 the state of California enacted the Used Mattress Recovery and Recycling Act, which requires mattress manufacturers to create statewide recycling program for discarded mattresses. The program is paid for by a new fee that is attached to buying a new mattress. The fee pays for the pick-up and recycling of the old mattress. Connecticut and Rhode Island followed suit in also passing recover and recycle acts. However, changes were made in early June of 2014 in order to help clarify what defines a mattress, as well as to help retailers make the necessary changes. This presents a good opportunity for mattress producers, to begin creating mattresses from sustainable materials and established recycling programs.


Sleep Monitoring Wearables

        Wearable sleep technology such as mouth guards for snorers and ram air masks for people with sleep apnea are also constantly improving technology and comfort of the wearables in order to give the consumer the best possible sleep. 28 million Americans suffer from sleep apnea which can be lethal if not treated properly. Nullifying the treatment, investors data indicates that about half of people who are diagnosed with sleep apnea, and advised to wear a mask during sleep, shed or rip their masks off within the first one to three weeks. A new patch called Provent is placed below the nostril and two small plugs create enough air pressure to keep the airway open all night. However, Provent isn't for everyone since it is only effective on 1/3 of users. Provent is also more expensive than a traditional CPAP machine due to monthly replacements of the patch. These developing technologies give users a better healthier sleep.

        One of the fastest growing new product categories is health and wellness monitoring wearables with sleep related applications. Fortune Magazine reports that an increasing number of companies are purchasing wrist bracelets such as the Fitbit made by the Fitbit Inc. of San Franciso and the Jawbone made by Jawbone also of San Francisco, in an effort to improve the health of their employees. BP the global oil company in particular has lead the way, partnering with StayWell Health Management, and offers employees Fitbit wrist bands to measure how many steps that each user takes as well as monitoring other physical activities. The more an employee exercises the more "wellness points" they will receive. Not only does BP want to make sure that their employees are healthy, but want to manage escalating health care premiums. The use of the products motivates the employees to try and make a difference with his or her health while trying to make it fun and easy at the same time. Users of the Jawbone or Fitbit are encouraged to share their progress online to motivate users. After only a short period of time, since the implantation of these new wearables, results are conclusive that employees are sleeping better due to healthier habit changes.

        The Jawbone and the Fitbit wearable wrist sensors monitor your daily activities as well as your sleep habits. Jawbone's UP retails for $129.99 and only requires that you download the accompanying UP app that presents you your data for the day. The Jawbone also includes a vibration feature that alerts the user when they should wake up based on his or her natural sleep pattern or if they have been sedentary for too long. The Fitbit requires a $49 a year subscription in order to download the users data. The advancements in sleep aid technology are just another branch of this new wave of technology.

        Kickstarter company, Hello, raised almost $13 million in angel investor contributions for the sleep monitoring wearable, Sense. The Sense device, which will retail for $129, sits at your bedside and measures pollen, humidity, light, and sound disturbances throughout the night.  The Sense also has a small pillow attachment that tracks sleep movements.


Conclusion

        While research from leading universities demonstrates that a better night sleep will lead to a healthier life, it is important to develop the tools that will allow people to obtain that good quality sleep. The R&D tax credit supports the advancement of these technologies which result in a healthier society.

Article Citation List

   


Authors

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

Charles G Goulding is the Manager of R&D Tax Savers.

Patrick Zalesky is a Tax Analyst with R&D Tax Savers.


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