The R&D Tax Credit Aspects of Medical Foods

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        As the old saying goes, “some people eat to live; others live to eat.” Now, with an increasing convergence of food and medical science, some people will eat to maintain their health or become healthy.

        The term “medical foods” refers to food that is developed to target an array of diseases and health issues. Medical foods commonly treat metabolic diseases, oncology, diabetes, Alzheimer’s, and osteoarthritis. With an aging population, this market is expected to grow significantly in following years.  The industry reported approximately $9 billion in sales in 2011, and is expected to grow at an annual rate of 10%.  In 2013, there was a total of 82 medical foods on the U.S. market.

        In this market, as with every other industry, research and development is critical for product success. The leading medical food manufacturers have contingents of food scientists and engineers constantly developing new products that treat an increasing number of diseases.  Industry start-ups are also developing innovations with the hope of reaping the rewards of breakthrough product innovation. When companies of any size engage in activity such as this, they may be eligible for Research and Development tax credits that are intended to stimulate innovation.

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 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.

Medical Foods Definition

        Medical foods, by federal definition, are those which are intended for the specific dietary management of a disease or condition. They are foods that are specifically formulated and processed for sick patients.  Medical foods are often confused with dietary supplements.  The two are very different products.

        Unlike dietary supplements, medical foods are intended for people with chronic diseases rather than for healthy people. They ought to be used under medical supervision because they are intended to manage serious illnesses, such as Alzheimer’s. Similarily to dietary supplements, medical foods are composed of a combination of vitamins, minerals, and botanicals. The difference is that medical foods are formulated specifically to manage nutritional deficiencies that impact disease progression. While many nutrients contained in medical foods are also commonly taken as supplements, medical foods contain specific formulations that are intended to improve risk factors associated with a particular disease. These foods can be consumed orally or via a feeding tube.

        The term medical food, as defined in Section 5(b) of the Federal Orphan Drug Act (21 U.S.C. 360ee (b) (3)), is "a food which is formulated to be consumed or administered enterally under the supervision of a physician and which is intended for the specific dietary management of a disease or condition for which distinctive nutritional requirements, based on recognized scientific principles, are established by medical evaluation."

        In order to be considered a medical food, the product must, at a minimum, be:

  • For oral ingestion or tube feeding (nasogastric tube)
  • A food labeled for the dietary management of a specific medical disorder, disease, or condition for which there are distinctive nutritional requirements
  • Intended to be used under medical supervision.


        The first commercially developed medical food debuted in the late 1960’s. It is known as Lofenalac, an infant formula created by Mead Johnson to treat the inborn error of metabolism phenylketonuria (PKU)2. Since the introduction of Lofenalac, the use of medical foods has grown steadily to include varying products for the treatment of illnesses and disorders with a nutritional association. Chronic conditions influencing the development of medical foods include diabetes, cardiovascular disease, osteoporosis, inborn errors of metabolism, mitochondrial disease, wound healing, pain management, gastrointestinal disorders, and neurological and psychological disorders such as Alzheimer’s and depression.   
Some common medical foods are highlighted below.

        I. Axona: This prescription medical food is intended for clinical dietary management of metabolic processes associated with mild to moderate Alzheimer’s disease.   Axona targets brain cells to nutritionally support cognition (the way someone thinks, reasons, solves problems, and makes memories). The brain is a hungry machine that requires a lot of fuel to function effectively. The engines inside brain cells (called neurons) normally use glucose (a type of sugar) as the primary fuel source to power the brain’s activities. Because the brain cannot store energy, it needs a constant supply from the blood. Glucose primarily comes from carbohydrates. If glucose levels drop too low, brain cells cannot function properly. This can impact the way someone thinks, reasons, solves problems, and makes memories.  

        Luckily, brain cells can use a back-up fuel source called ketone bodies. When glucose levels are low (for example, when carbohydrate intake is minimal), the liver naturally produces ketone bodies as an alternative fuel source for the brain. Clinical studies indicate that raised ketone body levels can enhance memory and cognition in some people with mild to moderate Alzheimer’s.  

        Axona is an innovative non-drug prescription therapy that works by supplying the ketone bodies that a mild to moderate Alzheimer’s brain requires to power its activities and function properly.  

        II. Nepro: This is a tasty nutritional drink designed for people on dialysis. It helps restore protein and other nutrients that are lost during dialysis treatment.  Nepro is high in protein and low in phosphorus, potassium, and sodium.

        Nepro has a Carb Steady carbohydrate blend designed to help manage blood sugar responses. Because Nepro contains a unique carbohydrate blend designed to help manage blood sugar levels, it is also appropriate for people with diabetes and on dialysis.

        III. Sentra PM: This Medical Food is designed to meet the nutritional requirements that induce sleep, promote restorative sleep, and reduce snoring in patients who have sleep problems associated with depression.   Sentra PM provides the amino acids that are precursors to the neurotransmitters depleted in humans. These neurotransmitters induce sleep, promote restorative sleep, and reduce snoring.  

        Sentra PM provides the nutrients required by the brain to induce and maintain higher quality restorative sleep. This is used as part of a program to manage sleep, mood, and symptoms associated with fibromyalgia. The ingredients of Sentra PM are derived from nutrient-based compounds found in the normal food chain.

Technological Challenges

        The creation and development of a medical food product is a surprisingly complex process. Fortunately, the developmental process for a specific medical food is not as rigorous or as tightly regulated as that of a pharmaceutical agent. This is because of laws enacted in the late 1980’s that are aimed at stimulating innovation. However, numerous factors unique to the enteral formulation of a new product come into play during product development. This includes physical/chemical compatibility, pH, stability, bioavailability, decay, and even palatability. The consequences of tweaking ingredients even slightly may impact any of these factors. 

        Additional considerations, such as strength of health benefit claims, packaging, or presentation, also incorporate engineering aspects.   Moreover, food scientists must establish the proper formulation and demonstrate the product’s added value through clinical trials.  Most of this activity involves research and development, making efforts related to creating or improving medical foods eligible for federal and state R&D tax credits.  

Insurance Reimbursement

        Obtaining insurance reimbursements for medical food is under much consideration by many families and individuals that have health disorders.  The insurance policies have different coverage criteria, and each state also has different laws covering provisions for various medical foods.  

        One study uncovered that 11% of families’ spending was on purchasing medical foods. In that same study, 21% of families using medical foods reported additional treatment-related expenses of $100 or more per month for these products.

Nestle Enters the Medical Foods Market

        Nestle is planning on entering the medical foods market. The food products manufacturing giant recently set a $500 million budget through 2021 to undertake research efforts in medical foods. The company performed well in functional foods and nutritional supplements categories. Perhaps they also see the medical foods market as a potentially large area for growth.  


        Medical foods are increasingly being used to treat a wide array of diseases and medical conditions. Development of these products is a scientific process that requires significant engineering. When companies develop products like these, they may be eligible for R&D tax credits available to stimulate innovation. 

Article Citation List



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

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

Michael Wilshere is a Tax Analyst with R&D Tax Savers.

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