By Chris Kachinsky, National Life Sciences Tax Industry Leader, and Mark Shelton, National Exempt Healthcare Leader, KPMG
Scientific advances. The global pandemic. Tightening supply chains. The increasing adoption of digital technologies. These and other forces have spurred the rapid evolution of the life sciences industry in the past few years.
In our positions as KPMG National Life Sciences Tax Industry Leader and KPMG National Exempt Healthcare Leader, we are constantly scrutinizing the intersection of industry trends and the changing tax rules and regulations to help clients understand the tax-related implications of their business decisions. We see three major trends with potentially significant tax implications that are currently reshaping the life sciences industry in the Houston market and beyond: digital transformation, innovation in R&D, and transactions.
- Digital transformation
Digital transformation and automation are impacting every aspect of the life sciences industry. Researchers are increasingly relying on artificial intelligence to help identify promising drugs during the initial stages of the drug development process. Pharmaceutical companies are using new technology to help manage remote clinical trials and procure data from patients through wearable devices. And doctors and other healthcare providers are increasingly gathering and using data — and the technology to process that data — to inform decisions.
- Innovation in R&D
In the past decade or so, innovative research and development (R&D) has driven both scientific breakthroughs and economic growth. For instance, precision medicine tailored to an individual’s unique genetics and lifestyle is enabling doctors to target specific diseases more effectively. And groundbreaking cell and gene therapies are providing new hope in the fight against certain types of cancer and other frightful illnesses. Therapies like these look very different from traditional therapies and they can raise a lot of questions – many of which have tax implications, too. Can a person’s blood be considered a “supply”? How are intellectual property rights defined and determined? What are the trade and tariff considerations as this “product” moves across borders? What is the platform technology associated with developing and manufacturing gene and cell therapies, where has this been developed, and how has it been funded? In what jurisdiction will future revenues associated with these new therapies be subject to tax?
- Transactions
The life sciences industry has seen a surge in mergers and acquisitions in recent years, as large companies divest off non-core assets and divert newly raised capital to refresh or advance their drug development pipeline. Indeed, in 2021 alone, the life sciences industry saw 702 acquisitions with a value of close to $280 billion, as found in a recent KPMG report.
The COVID-19 pandemic has also driven new collaboration activity as companies join forces to develop vaccines and therapies at record speed.
Transactions and joint development agreements require careful consideration from a tax perspective to avoid unintended consequences related to the tax structure, the treatment of intellectual property, the compensation/reimbursement of parties for current and future revenues/expenses, and the treatment of prior and future R&D costs, to name just a few important elements.
As life-science companies make strategic business and investment decisions, it’s never been more important for the tax to have a seat at the table. In fact, a recent survey by KPMG Tax revealed that 61% of C-suite leaders are still not leveraging tax data to inform overall business strategy – a big miss. By carefully considering the tax implications of their decisions, companies may be able to divert more resources to the pursuit of life-saving R&D breakthroughs while paying just their fair share of their global tax liability