Companies developing new cancer therapies face tax issues

In this new era of innovation and transformation in health care and life sciences, many believe it's time to move away from the one-size-fits-all approach of the past toward treatments tailored to an individual's genes, environment and lifestyle. This is where precision medicine comes in. 

Often viewed as the future of medicine, precision medicine has begun to transform the healthcare and life sciences industry. In recent years, chimeric antigen receptor T-cell (CAR T) therapy in particular has emerged as one of the most exciting and high-profile front-runners leading innovation in precision medicine. 

CAR T therapy, a type of cell and gene therapy (C&GT), is currently being investigated in clinical trials for many diseases where patients have no other treatment options, even curing diseases in some cases. CAR T therapy reengineers a T cell, a type of white blood cell, to fight cancer. A portion of a patient's blood is extracted in a hospital, and the T cells are separated from the blood before being shipped to a manufacturing facility where a cancer-recognizing gene is introduced using a harmless virus.

In turn, the T cell turns this gene into a protein that sits on the surface of the T cell, allowing it to recognize and kill the cancer. The population of genetically engineered CAR T cells is expanded, and the cells are shipped back to the hospital, where they are infused into the patient. 

With evolving value chains, emerging players and the growing magnitude and risk of investments required to successfully bring precision medicine therapies to market, there are several key tax implications to keep in mind.

• IP considerations: As value chains evolve, a key question with international and state and local tax implications is whether there are new forms of IP that are key value drivers of the business. Any new forms of IP in the C&GT business will need to be considered in the context of global tax planning and in response to a changing global tax legislative environment and a volatile tax controversy landscape. In addition, companies will need to carefully consider the location of development, enhancement, maintenance, protection and exploitation (DEMPE) of intangibles and the treatment of IP in every deal. This may be a particular issue for non-U.S.-headquartered companies, as the U.S. is currently the center of C&GT innovation.
• Transfer pricing: Unlike many other industries, the life sciences industry is rich in transactional data, and taxpayers and tax authorities have been able to rely on transactional methods for price-controlled transactions with greater frequency and reliability than in many other industries when benchmarking for transfer pricing purposes. Routine comparables are widely used for transactions involving manufacturing, distribution, administrative services, and clinical trial management. With the advent of CAR T and the changing role of participants in the value chain, companies will need to ensure parties are appropriately compensated for the activities performed and determine whether existing approaches for benchmarking are still accurate and applicable to such new therapies.
• Business restructuring: If certain types of C&GTs such as CAR T therapies lead to greater decentralization in business models — as some industry watchers anticipate — a key question is whether multinational enterprises will undergo similar decentralization within their groups. While MNEs to date have tended toward centralization of key value drivers and decision-making, it remains to be seen whether CAR T or other innovative therapies will reverse that trend. Increasing decentralization may be associated with business restructurings, with all the accompanying tax and transfer pricing ramifications, such as new transactions pricing and exit tax considerations.
• Indirect tax and trade implications: C&GTs introduce new questions that remain unanswered as they relate to customs, duties, VAT, and sales and use taxes in many jurisdictions. For example, with respect to CAR T therapy, the "drug" and patient's cells are combined, and in the process, in many cases are transported across jurisdictional boundaries. Is this considered human tissue or a supply cost? It this a item subject to trade tariffs/taxes or is it exempt? 

These are only some of the fundamental tax aspects to keep in mind within the larger web of U.S. and international taxation. The business models for these new therapies are likely to impact taxation in various ways beyond transfer pricing. 

As the market evolves, companies should seek a holistic view of all the potential tax implications, so they're prepared and flexible enough to adapt to the new industry norms on the horizon.