The R&D Tax Credit Aspects of Liquid Biopsy Testing

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        A liquid biopsy is a new type of test that is being utilized to determine if patients may have cancer . It can pinpoint cancer cells in a patient and determine whether they are mutating and/or reacting to treatment differently. Detecting any form of disease early on reduces the chances of the disease escalating in an individual.

The Research & Development 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 $250,000 per year in payroll taxes.

Cancer Facts

        Cancer is the second largest cause of death to people in the United States. Approximately, 14.5 million people in the United States alone were diagnosed with cancer  at one point in their lives.  It is estimated that in 2016 a total of 1,685,210 U.S. individuals will be diagnosed with cancer. Utilizing new forms of technology and innovative processes can help decrease the number of deaths caused by cancer.

Cancer Cell
Figure 1. Cancer cell

Cancer Biopsy Testing

        Currently, different types of biopsies are utilized depending on the type of cancer. The various types of biopsies available to patients include a Fine Needle Aspiration, Core Biopsy, Excisional or Incisional, Endoscopic, Skin, Sentinel Lymph Node Mapping, Laparotomy, and Thoracotomy Biopsies.  All of these types of biopsies are invasive and vary in the amount of surgical activity that is conducted on a patient.

        For example, a fine needle aspiration biopsy is the least invasive form where a needle takes a small amount of fluid and tissue from the tumor. Although this is the least invasive, sometimes there may be issues in determining an accurate diagnosis due to the small amount of tissue that is collected. One of the most invasive biopsies is an excisional biopsy where skin is cut through to retrieve a whole tumor. Although this form of testing is more invasive, it provides a better understanding of an individual’s cancer to provide a more accurate diagnosis.

Liquid Biopsy Tests

        A liquid biopsy test is still a relatively new method and requires technological advancement particularly in sequencing technology.  Liquid biopsies consist of collecting cancer cells (CTCs) or DNA (ctDNA) in order to examine tumors and determine what procedure can be done to treat individuals.

        The two main essentials of gathering CTCs and ctDNA are key to detecting whether a patient has cancer or noticing if there are any changes that are occurring in a tumor. CTCs are cells that are located in the bloodstream after being released from a tumor cell. ctDNA are pieces of DNA from tumors that can be found in the bloodstream as well.
        Liquid biopsies arise due to the availability of sequencing technology. Although this technology is available, it is still difficult to determine the exact number of mutations with cancer cells. At times the method utilized to gather data from a patient doesn’t fully gather all of the information needed to correctly identify if an individual may have cancer. Improvements need to be made in sequencing technology in order to achieve an accurate diagnosis for a patient.

        Researchers have experimented with the concept of liquid biopsies by conducting the test mainly on cancer patients who have lung, breast and prostate cancers. The procedure for a liquid biopsy is quicker than surgery.  Tests can be conducted to detect cancer or identify changes in cancer. Doctors can perform a liquid biopsy as an early detection method to accelerate preventative measures. The earlier the detection, the better the outcome will be for a patient.

        In the past, many researchers were skeptical of utilizing liquid biopsy tests as a replacement for tissue biopsy tests. They weren’t sure if liquid biopsies would generate results that were as accurate as tissue biopsies.ix Although the acceptance of liquid biopsies has been increasing, there are still multiple unknown factors that have to be determined before fully implementing these tests. For example, liquid biopsies aren’t available to test for all forms of cancer and it hasn’t been determined how often tests should be conducted on a patient. Although with the continuation of research and experimenting by professionals the future of liquid biopsies looks promising.

New Research Studies

        Researchers from the Stanford University School of Medicine have created a solution for conducting a liquid biopsy test by improving the technique to detect DNA associated with tumors in an individual’s blood sample. This newly developed technique is known as the integrated digital error suppression (iDES).  The method ultimately functions by collecting small amounts of DNA and looking at a section of mutations associated with cancer.

        The general process consists of amplification which multiplies small fragments of DNA . Amplification is required in order to create an accurate sequence which can be examined. The issue with amplification is that errors may be introduced and researchers have to figure out if the error is a mutation or was developed during amplification. To resolve this issue, Stanford researchers invented a method to keep track of DNA by creating bar codes designated to each DNA molecule that was obtained from an individual’s bloodstream.

         Another process being utilized is known as background polishing to further detect if there are any errors that are created. During the study it was found that sequencing errors have a greater chance of happening at certain places in DNA particles. By developing innovative techniques for the liquid biopsy procedure, detecting cancer can be much easier for physicians.


Guardant Health, Inc.
        Guardant Health, Inc. headquartered in Redwood City, California developed Guardant360 which is a form of cancer detection consisting of a genetic scan that looks for any mutations in cancer cells. Guardant is studying treatment selection and monitoring as well as early detection of cancer. Almost $200 million was contributed to the company from OrbiMed Advisors, Khosla Ventures, Formation 8, Lightspeed Venture Partners, and Sequoia Capital.xii

        Liquid biopsies are beneficial because they are less invasive tests and can be conducted more often compared to tissue biopsies. These tests can be utilized to determine if tumors are mutating and are becoming resistant to the current cancer treatment a patient is receiving.  This test is important because it gives doctors the ability to determine if a certain drug therapy isn’t performing well. Doctors can then diagnose a patient and provide him or her with the right treatment that is needed. Recently, the Guardant360 test was implemented in a study conducted by the American Society of Clinical Oncology.

American Society of Clinical Oncology
        The American Society of Clinical Oncology operated a study involving over 15,000 participants to examine how effective liquid biopsies can be in detecting cancer.  Specifically, the liquid biopsy test utilized in this study was the Guardant360. Blood samples were collected from each patient to analyze their ctDNA and look for tumors. The tumors found in ctDNA were compared to the tumors found in tissue to determine the accuracy of the Guardant360 test.  The test was found to be fairly accurate with the same mutations discovered in ctDNA 94 to 100% of the time.

        In the study, there were some difficulties in detecting ctDNA for some forms of cancer, such as brain cancer. A reason for this may be due to the blood brain barrier that exists, restricting ctDNA from entering the blood stream. More studies and research have to be conducted to develop liquid biopsies that are able to detect all forms of cancer.

Liquid Biopsy Test Development

        There are already companies who see the potential in the industry for liquid biopsy tests and have invested time and money to develop these tests. Foundation Medicine, Pathway Genomics, Grail and Trovagene are some of the companies who are involved in this specified medical industry.

        Foundation Medicine, Inc. located in Cambridge, Massachusetts created the FoundationACT which is a ctDNA assay that displays a picture of DNA when tumor tissue isn’t accessible. Pathway Genomics Corporation, headquartered in San Diego, California, developed the CancerIntercept Detect test to search for any ctDNA in nine various cancer cells. Trovagene, also from San Diego, invented a urine-based liquid biopsy test. From San Francisco, GRAIL, Inc. is focusing on developing a cancer blood screening test to determine if a patient has cancer.

        There are several well-known startups that have been successful in receiving funding to further research and develop liquid biopsy tests. In particular, GRAIL has received over $100 million from Illumina, Gates, Venture Partners, and other investors to proceed in researching early detection of cancer.xii All of these investors strongly believe that the medical field involving developments for liquid biopsy tests will be successful in helping individuals. Although it is harder to accomplish, companies such as GRAIL are involved with creating tests for early detection providing the most optimal precaution when screening patients.

        During June 2016, the FDA approved the first liquid biopsy test developed by Roche Diagnostics for non-small lung cancer (NSCLC).xii This test specifically looks at the epidermal growth factor receptor (EGFR) gene mutations which occur in individuals who have NSCLC. The test was developed with the goal of determining if a certain drug called Tarceva would be successful for certain patients. Overall, liquid biopsy tests offer many advantages for doctors and patients.

        One of the challenges companies face when developing liquid biopsy tests is going through a review from the U.S. Food and Drug Administration.  This method is relatively new for detecting cancer cells and establishing what treatments should be established for patients, which is why the FDA is taking major precautions to ensure that this alternative is safe. Research and experimentation has to be done by companies before providing this alternative testing to individuals.


        Theranos, Inc. is a blood testing company that has been front page news recently. The company stated that they offer cheaper and faster blood tests to individuals, which has come under scrutiny by the public.  The company offers a variety of tests to patients including cancer, cholesterol and diabetes.  Theranos’ technology utilized finger prick tests, which take just a drop of blood, compared to typical blood tests. The Theranos blood sample could then be utilized for up to 30 lab tests to be analyzed by Theranos technology.

        Allegedly, the test procedure and technology that was being utilized by Theranos wasn’t providing accurate results. The Theranos machine, known as Edison, wasn’t working properly which resulted in Theranos diluting blood samples and resulting to standard blood testing machines. One of the issues that occurred within the company was a blood clotting test that was conducted on 80 patients within a six month period and produced incorrect test results.  

        As a result of these issues, the FDA published 2 Form 483 inspection reports identifying 13 “objectionable conditions.” The Theranos situation demonstrates that new products often require new manufacturing processes to insure reliability. Qualified new and improved processes are also eligible for the R&D tax credit.  

        On August 1, 2016 Elizabeth Holmes recently gave a presentation about a new device Theranos was developing called the miniLab. During the presentation, Holmes spoke about the new machine and displayed data backing up the functionality of the device.  With the spreading issue of the Zika virus around the world, a significant aspect of this new device is whether or not it will be able to detect if any blood samples contain Zika. Although this type of technology has already been utilized in the past, the main significance of this technology is developing equipment at a small scale in order to be used in a doctor’s office.   While Theranos is still waiting for approval for these tests, there is a chance that the miniLab will be available in the near future. Theranos’ miniLab will provide the company with an opportunity to rise up from their past conflicts.

        By introducing the miniLab, Theranos is moving towards a different direction within the medical industry of selling medical testing machines rather than their previous business practice of conducting laboratory tests. The proposed medical machines will be able to perform several tests that would be able to be conducted within a doctor’s office. This technology will be able to perform specific activities including DNA testing, cell counting and chemical measurements. The device itself functions by utilizing a robot , centrifuge, image sensors  and technology to amplify DNA. Theranos’ previous method of taking small blood samples will be utilized and the proposed tests will need to receive approval from the Food and Drug Administration (FDA).


        Liquid biopsy tests have a huge potential in the future to replace invasive forms of treatment, such as tissue biopsies. An increasing amount of research is being conducted by professionals and companies are beginning to recognize the significance of this type of testing. With the utilization of new technology and innovative processes, R&D tax credits are available for companies who are involved with the development of liquid biopsy tests.

Article Citation List



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

Lauren Chin is a Tax Analyst at R&D Tax Savers.

Peter Saenz is a Tax Analyst with R&D Tax Savers.

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