The R&D Tax Aspects of Respiratory Diseases

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        Every year, 11 million people die of treatable respiratory diseases. A recent study has shown that one in every ten deaths in Europe is caused by lung diseases. These numbers are expected to grow in the next two decades due to high smoking rates and mounting air pollution levels.

        According the World Health Organization, lower respiratory infections, chronic obstructive pulmonary disease (COPD), along with lung, trachea, and bronchus cancers figure among the top ten causes of death worldwide.

        The article presents an overview of major respiratory diseases and discusses the federal R&D tax credit available for companies investing in innovative methods to overcome this major public health challenge.

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

        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.

Respiratory Diseases

        The respiratory system is responsible for supplying the blood with oxygen and, therefore, allowing it to be distributed throughout the body. The respiration process involves airways, lungs, and respiration muscles. Needless to say that breathing is essential to the body's functioning - the average human being breathes about 25,000 times per day.

Disorders of the respiratory system are multiple and can be divided into the following categories:

  1. Obstructive conditions are characterized by the impossibility of normal gas flow caused by, among other conditions, the reduction of airway volume. COPD, which includes emphysema, chronic bronchitis, and asthma are examples of obstructive respiratory diseases.

  2. Restrictive conditions involve a loss of lung compliance. The lung's inability to expand properly and its consequent reduced volume result in insufficient ventilation and oxygenation. Restrictive lung conditions are divided into two groups: 1) intrinsic lung diseases (e.g. idiopathic fibrotic diseases, sarcoidosis, etc.) 2) extrinsic disorders that affect the chest wall, pleura, or respiratory muscles.

  3. Vascular diseases are characterized by pulmonary circulation disorders. Notable examples are pulmonary edema, pulmonary embolism, and pulmonary hypertension.

  4. Respiratory tract infections are infectious diseases affecting the respiratory tract. Upper respiratory tract infections are fairly frequent and include pharyngitis, laryngitis, sinusitis, and even the common cold. Lower respiratory tract infections are usually more severe than upper ones. Pneumonia, tuberculosis, and asbestosis are a few examples.

  5. Respiratory Tract Neoplasms are tumors that affect any portion of the respiratory system.

    The impact of respiratory diseases is massive. Chronic lower respiratory diseases are the third leading cause of death in the U.S., having killed more than 138,000 in 2010 alone. In the same year, influenza and pneumonia killed more than 50,000, representing the ninth leading cause of death in the country. Lung cancer represents 15% of all cancer diagnoses and 29% of cancer deaths. In the United States, more than 23 million people suffer from asthma and the annual health care expenditures for this condition alone are around $20.7 billion.

    In addition to genetics and infections, tobacco smoking is a major cause of respiratory diseases. According to the World Health Organization, tobacco-related deaths are expected to reach 8.3 million by 2030. Similarly, workplace exposure to hazardous substances, such as dusts and chemicals, is at the heart of occupational lung diseases. Air pollution, both indoor and outdoor, is also responsible for the multiplication of respiratory disorders.

Rising Regulatory Standards

        Power plants are responsible for the emission of a number of life-endangering substances, such as mercury, acid gas, and other toxic chemicals. These substances are hazardous to human health and are responsible for various disorders, from heart disease to neurological damage.

        These emissions are also highly damaging to the respiratory system. The acid gases emitted by some power plants can aggravate cases of bronchitis, asthma, and other chronic respiratory diseases, not to mention the possibility of lung damage.

        In the case of coal-fired plants, the effects of emissions on the respiratory system are particularly alarming. Exposure to air pollutants and fine particulate matter negatively affects lung development among children, often resulting in pulmonary diseases. Asthma attacks and the development, or exacerbation, of COPD are also to blame on pollutants produced by coal combustion. Furthermore, exposure to ozone and particulate matters can be correlated to the advancement of lung cancer mortality.

        The 2011 American Lung Association report "Toxic Air: The Case for Cleaning Up Coal-fired Power Plants" pointed out that the hazardous air emissions from coal-fired plants surpass those of all other industrial pollution sources. The document affirms that 400 plants throughout the U.S. release 386,000 tons of 84 different air pollutants every year.

        In response to this scenario, the Environmental Protection Agency is implementing three regulatory measures under the Clean Air Act. The coordinated approach relies on emission control technologies, which will hopefully induce the modernization of power plants. The regulatory effort aims at limiting emissions that form ozone and fine particle pollution, greenhouse gases, mercury, and other toxic air pollutants.

        Similarly, new standards have been established for respiratory masks. The C.B.R.N. certification, from the National Personal Protective Technology Laboratory, aims at guaranteeing protection from chemical, biological, radiological, and nuclear hazards. Inadequate respiratory masks were responsible for the exposure of thousands of workers to highly contaminated air in the aftermath of the September 11, 2001 attacks.

        A new generation of masks is expected to emerge, offering effective protection not only in cases of disasters, but also for outbreaks of diseases, and the accidental release of hazardous nanoparticles. Better respirators could improve the quality of life for over five million Americans who currently work in contaminated environments. A few challenges stand out, such as the use of interchangeable and effective filters, the possibility of communicating easily while wearing the masks, and the development of respirators that fit different face shapes and sizes.

        Companies investing in innovative ways to meet rising regulatory standards are strong candidates for receiving federal R&D tax credits.

University Efforts

Major U.S. research universities are engaged in a wide range of respiratory disease R&D, as briefly summarized below:

University of Washington:

        Created in 1965, the Division of Pulmonary & Critical Care Medicine at the University of Washington is one of the largest pulmonary divisions in the country. It has four general chest clinics at different affiliated medical centers and several specialty clinics, including a pulmonary fibrosis clinic, a pulmonary hypertension clinic, among others. Numerous clinical research programs and innovative efforts give patients access to state-of-the-art treatment. Key areas of research include lung immunity and repair, integrative respiratory physiology, clinical investigation of acute lung injury and acute respiratory distress syndrome, and genetic epidemiology.

University of Colorado:

        The University of Colorado Division of Pulmonary Sciences and Critical Care holds 12 highly specialized clinical research centers focused on different respiratory disorders, such as acute lung injury, adult cystic fibrosis, emphysema, interstitial lung disease, occupational lung disease, etc. Major topics of research include therapies and pathophysiology of acute lung injury/acute respiratory distress syndrome. The University of Colorado Hospital (UCH) in Aurora is ranked number two in pulmonology in the U.S. Through its innovative Integrated eHealth Program, UCH has enabled patients with chronic obstructive pulmonary diseases to monitor their health at home. With the help of self-monitoring devices, participants send their physical readings to the hospital on a daily basis. This continued access to professional help can revolutionize the quality of life for people suffering from COPD.

Duke University:

        Duke University Medical Center in Durham, NC, is the fourth best hospital for pulmonary treatments in the country. With the goal of exploring new and more effective treatments for lung and respiratory disorders, Duke Medicine is engaged in various innovation efforts. Ongoing clinical trials include the assessment of the efficacy and safety of three idiopathic fibrosis drugs, the differentiation of asthma symptoms in smoking and non-smoking patients, the research of the impact of positive airway pressure on reducing airway reactivity in asthmatics, and the study of bronchial thermoplasty in severe persistent asthma cases.

Johns Hopkins:

        For over 60 years, the Division of Pulmonology and Critical Care at Johns Hopkins University has been committed to cutting edge research in the field of respiratory disorders. With a research budget of over $20 million, the division's innovation efforts cover a wide range of subjects, from the societal aspects of medicine to the genetic and molecular mechanisms of disease. Ongoing studies include the reduction of asthma morbidity among preschool children, early intervention in pulmonary exacerbation in individuals with cystic fibrosis, prevention of nosocomial respiratory infections in ICUs, and the diffusion of smoke free homes.

University of Pittsburgh:

        The Division of Pulmonary, Allergy, and Critical Care Medicine at the University of Pittsburgh is committed to research and scientific discovery. Thanks to years of fruitful research efforts, the Division is now one of the most highly funded pulmonary programs in the nation. Research is organized in 11 specialized Centers of Excellence, among which: pulmonary hypertension, HIV lung research, vascular biology, transplantation immunology, and acute lung injury. The Asthma Institute, for instance, was created in 2009 with the goal of improving the scientific understanding of asthma and translating it into innovative approaches. Recent advances include the discovery of a novel type of severe asthma, which has been successfully treated with non-traditional therapies .

Corporate R&D

        The considerable amount of ongoing university research has driven an ensuing wave of corporate R&D aimed at improving the lives of those suffering from respiratory diseases. Business engaged such R&D efforts, particularly the application of novel information into marketable alternatives, are likely to qualify for federal R&D tax credits. The following paragraphs present remarkable examples in this domain.

        Acton, a U.S. firm recently acquired by the Swedish pharmaceutical company Meda, has developed an inhaled corticosteroid product called Aerospan. According to Meda, this innovative prophylactic therapy for asthma is the first approved hydrofluoroalkane-propelled inhaler in its class to feature a built-in spacer device, which improves drug delivery to the lungs.

        The pursuit of more effective and personalized treatments has lead to a new focus on complex molecules, also known as biological medicines. This is not different for respiratory conditions. Novartis, which has two biomedical research centers in the U.S., is currently investigating the effects of the monoclonal antibody Xolair in cases of uncontrolled severe allergic asthma. The company is also developing QGE031, another biological drug targeted at severe uncontrolled asthma. Similarly, Pfizer is currently investigating the effectiveness of Prevenar 13, a widely used pneumococcal conjugate vaccine, in preventing community-acquired pneumonia in adults 65 years of age and older.

        In collaboration with British drug maker GlaxoSmithKline PLC, Theravance, headquartered in San Francisco, CA, has developed a new drug for COPD. Recent studies have provided substantial evidence of Anoro Ellipta's efficacy and safety. The new drug is expected to receive FDA approval by December 2013.

        3M, important manufacturer of respiratory masks, is yet another example of innovation. The company has developed a special line of masks targeted at people not familiar with the equipment. The "smart safety" respirators feature an automatic battery-powered air-purifying system, including a blower motor that provides air in case of filter obstruction and an alarm system that warns when battery is running low.

Emerging Issues in Respiratory Diseases

The Healthy People 2020 initiative presents a list of emerging issues around respiratory diseases. Such issues also constitute important guidelines for future innovation:

  • The impact of climate change on asthma.
  • Indoor air quality as a cause of work-related respiratory disorders.
  • The growing exposure to engineered nanoparticles and respiratory hazards such as isocyanates used in "green" building materials.
  • The use of gene-environment interactions and epigenetics in respiratory disease prevention.
  • The development of effective prevention strategies targeted at different asthma phenotypes.
  • The development of novel treatments to alter the progression of disease severity.
  • The use of personalized medicine.
  • The identification of new respiratory hazards.

Companies investing in any of these points are strong candidates to receive federal R&D tax credits.


        Respiratory diseases constitute a major public health concern. Emerging issues and rising regulatory standards accelerate the need for innovative responses to this threat. Companies investing in novel treatments along with more effective prevention strategies and equipment may be entitled to substantial R&D tax credits.

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.

Andressa Bonafé is a Tax Analyst with R&D Tax Savers.

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