In Case You Missed It: Key Takeaways from CohnReznick’s Life Sciences Industry FMLF Session

According to BioNJ, there are more than 3,100 life sciences companies in the state of New Jersey. This was one of the many statistics presented at a session of CohnReznick’s Financial Managers Learning Forum (FMLF) program, held earlier this summer exclusively for members of the life sciences industry. Key trends in the industry, as well as insights to stimulate thoughts on research and development credits, revenue recognition, and accounting methods were discussed. 

Our event began with a panel discussion on the state of the life sciences industry in New Jersey. CohnReznick senior manager Shaune Scutellaro served as moderator, and panelists included: Debbie Hart, president and CEO of BioNJ; Basil Krikelis, a partner at McCarter & English; Ravi Raghunathan, a partner at CohnReznick; and Judith Sheft, AVP of Technology & Enterprise Development at the New Jersey Innovation Institute at NJIT. The panelists shared valuable information concerning the continued growth of the life sciences industry within the state. Key discussion points included: 

• New Jersey’s great reputation as a commercialization state attracts many life sciences companies when they are preparing to introduce a new product to the market.
• In 2015, more than 50% of the drugs approved by the FDA came from New Jersey-based companies.
• On average, development for new drugs takes 10 years and $2.6 billion, and only two out of every 10 drugs recoup their initial investments.
• Life sciences companies should continue to take advantage of research and development credits and angel investor credits. Those companies who take advantage of the Net
• Operating Loss (NOL) must remember to file by June 30th.
• Mergers and acquisitions and IPOs are on the rise again. Life sciences companies should consider the dual-track process to maximize the benefits of the transaction.
• Virtual reality and artificial intelligence are starting to make their way into clinical trials and pain management.
• The New Jersey Department of Labor and Workforce Development offers a program that will pay a portion of a college student’s salary so he or she can intern with a technology or life sciences company in the state.
• The Trump Administration seems to be more patent-friendly instead of working to reform the patent approval process.
• The life sciences industry in New Jersey, as well as in the rest of the U.S. and internationally, is starting to create more ecosystems, where start-ups, venture capital firms, universities, and experienced industry professionals all work together to improve the industry and assist those who are entering the space.  

CohnReznick partner Scott Hamilton, who leads the Firm’s Research and Development (R&D) Group, then discussed an overview, qualifications, and current events relating to the R&D credit. Below are some things to remember when determining whether to claim the credit:

• Life sciences companies can take both the R&D credit and the Orphan Drug Credit in the same year.
• Qualified activity includes new drug development, clinical trials, and manufacturing process improvements. Additionally, basic research also qualifies.
• When assessing who on the team spent time doing qualified activity, a company should consider all employees who contributed to the development effort.

Marisa Roel-Garcia, a managing director with CohnReznick Advisory, provided an introduction to the new revenue recognition standards. Here are some of her insights on how these standards will impact the life sciences industry:

• ASC Topic 606: Revenue from Contracts with Customers outlines a 5-step process companies must complete: 1. Identify a contract with a customer;
• Identify the performance obligations; 3. Determine the transaction price; 4. Allocate the transaction price to the performance obligations; and 5. Recognize revenue when/as performance obligations are satisfied.
• When a customer arrangement includes a license and other goods or services, each good or service constitutes a distinct performance obligation IF:  1. The customer can benefit from the license on its own or together with other resources that are readily available; AND 2. The license is separately identifiable from other goods or services in the context of the contract.
  
  Example: A drug compound that requires proprietary R&D services from the entity is NOT distinct because the customer cannot benefit from the license without the services. Accordingly, the bundle is one performance obligation. However, if the customer can go to other vendors for that good or service, the license and services would be separate performance obligations.
•  One major difference to current revenue standards is a greater level of management estimation required for the determination of transaction pricing, including a requirement to estimate variable consideration, such as contingent fees, and a requirement to update these estimates periodically. Defaulting to a cash-basis for such types of revenue is not permissible under the new standard.
• In an agreement with more than one identified performance obligation, the transaction price should be allocated proportionally based on the standalone selling price of each performance obligation.
• The Milestone Method of recognizing revenue is no longer applicable. Instead, companies must use an input or output method to measure progress and recognize revenue over time if the performance obligations are satisfied over time.
• Companies should not underestimate the amount of time and effort it will take their finance organization to assess the impacts of the new standard and develop a strategy for implementation, which could affect people, processes, and systems. 

For further information on the new revenue recognition standard and how it may impact your business, visit CohnReznick’s Countdown to Revenue Recognition thought leadership series.

Finally, Richard Shevak, a CohnReznick principal and leader of the Firm’s National Tax Practice fixed assets and accounting methods group, and Selvan Boominathan, a manager in CohnReznick’s Bethesda office, provided an update on accounting methods that could impact life sciences companies. Here are some of their highlights:

• If a company is going to start implementing the new revenue recognition standards, leadership should make sure to inform their tax professionals. Depending on how the company is set up, it may have to either change its books or its Schedule M.
• Life sciences companies can still benefit from Section 199: Domestic Productions Activities Deduction (DPAD) even if they don’t manufacture a product. If they work with a contract manufacturer who is benefiting from DPAD, the life science company can reduce its own costs.  
• Drug rebates can be paid by manufacturers to customers, retailers, and/or third parties (such as state Medicaid agencies). These rebates can be treated as either a purchase price agreement or as an expense, but each type of rebate has to be analyzed separately for tax purposes.
• If a company develops software and bears the risk from it, the company can deduct the costs in the current year instead of amortizing the costs in the three prior years. 

Stay tuned for future insights in upcoming blog posts and alerts. We encourage you to read our 1H 2017 Healthcare and Life Sciences Transaction Report, which includes an analysis of the first half of 2017.

Visit our Life Sciences Industry Practice page for additional resources and insights on how to effectively minimize business challenges and maximize profit.