Unlocking the Patent Box
SummaryA growing demand for drugs and the potential for blockbuster returns make the pharmaceutical sector a rare bright spot in the current economic gloom.
A growing demand for drugs and the potential for blockbuster returns make the pharmaceutical sector a rare bright spot in the current economic gloom. But financial pressures and the looming patent cliff are having a potentially devastating impact on pharmaceutical R&D. Whilst pharma companies must adapt with the times, it is vital that the need to innovate is not overshadowed by the pressure to cut costs.
These are challenging times for the once “recession-proof” pharmaceutical and biotech industries. The sector has been left exposed by the fast-approaching patent cliff and its devastating impact on revenues as some of the biggest earning drugs lose out to competitive generic companies – a trend set to continue next year with the patent expiration of Viagra. To survive, companies must abandon the broken blockbuster business model and look to diversify their pipelines or develop replacement products. But with drugs typically taking 12 to 15 years to develop and costing millions of pounds – with no guarantee of success – many pharma companies are cutting back on vital R&D to diversify into more gainful areas. Unless something is done to give R&D a boost, the pipelines are in danger of running dry.
This need for action is being taken seriously in the UK where the lifesciences industry is the third largest contributor to economic growth and has an annual turnover of £50 billion. With concerns for the economy still top of the political agenda, the UK government has recognised that it must tackle the problem of dwindling R&D activity, invest in growth for the industry in the UK and attract inward investment. To do this, the Chancellor, George Osborne, announced a number of measures to support R&D in the sector in his Autumn Statement last year, including a £180 million catalyst fund to support biomedical start-ups, a consultation on opening up the NHS to lifesciences companies and a shake-up of the R&D tax credits system.
Now, we are six months away from the launch of Patent Box, a preferential tax regime that the government hopes will re-establish the UK’s position as a world leader in patented innovation. When it comes into force in April 2013, Patent Box will reduce UK Corporation Tax on patent profits to 10%, giving a welcome boost to R&D and providing incentives for companies to retain Intellectual Property in the UK. Patent Box aims to encourage innovation across high growth industries which rely heavily on cutting-edge R&D, such as pharmaceuticals and biotechnology, with the added benefits of Intellectual Property ownership in the UK helping to protect these investments.
These incentives are sorely needed. Other European countries, like Ireland, Switzerland and Luxembourg, have had similar systems in place for years, giving them a competitive edge over the UK. Whilst the existing system of R&D Tax Credits has given some relief for spending on R&D, until Patent Box there has been no similar incentive for businesses to retain Intellectual Property in the UK once it has been created. Even now, if we cannot measure up to competing regimes and offer patent-rich lifesciences businesses a competitive tax rate, there is a risk that they will emigrate overseas – at a huge loss to the British economy where much early stage R&D is currently invested.
The UK Patent Box draft legislation is certainly a step in the right direction and has already received a warm welcome from the industry. However, whilst this measure is welcomed to drive investment and innovation in UK R&D, we must ask whether the draft legislation really goes far enough. Even once the regime is in place, the UK’s overall effective tax rate of 10% will still be higher than those of Europe’s Patent Box trailblazers – Belgium and Luxembourg, for instance, offer maximum effective tax rates of 6.8% and 5.9% respectively. What’s more, phased in over time, the full effect of the relief will not be felt until 2017.
The introduction of Patent Box may also have an impact on regulatory issues in the UK. In 2009 the European Commission suggested that strategies for secondary patents – those covering new products or processes that use existing ingredients already under patent – were often aimed at preventing generic companies entering the market rather than actually protecting a new innovative product. Now these strategies may also be driven by tax incentives: pharmaceutical companies may divert much needed R&D investment towards quick-win secondary patents to boost their Patent Box relief. The competition authorities may consider stepping in to examine any excessive use of weak secondary patents for such tax benefits.
This year we’ve already seen changes to above the line R&D tax credit, but Patent Box will be vital if we want to overcome these challenges and ward off competition from European rivals who have had similar regimes in place for years. As we have seen in these countries, businesses and governments alike can reap huge rewards from an attractive Patent Box system. However, the proposal for the UK still lags behind the regimes of our European counterparts. In order to give a much needed boost to pharmaceutical R&D, the UK government will need to consider where it can push these incentives further and straighten out the anomalies.
What’s more, the clock is ticking for businesses to make the most of these changes – 1 April 2013, when they come into force, is only six months away. With the Autumn statement just around the corner, one year has now passed since Patent Box was first announced – yet many businesses still aren’t prepared for the new measure. Whether or not Patent Box goes far enough, those who want to take full advantage must act now.
Sandra Rafferty is a partner in the lifesciences team at leading law firm CMS Cameron McKenna. She advises on a wide range of corporate matters including domestic and cross-border M&A, corporate finance, joint ventures, restructurings, structuring and establishing limited partnerships.