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A taxpayer’s research credit is based, in part, on qualified research expenses (QREs) paid or incurred by a taxpayer during the taxable year in carrying on any trade or business of the taxpayer. During the discovery and preclinical stage of the development process, scientists identify and perform initial tests on molecules or new compounds that may be viable candidates for the treatment of a specific condition or disease. In general, clinical trials occur in three generally-accepted phases after a company files an Investigational New Drug Application (INDA) with the Food and Drug Administration (FDA) and the FDA approves the INDA.Pharmaceutical Drugs and Therapeutic Biologics Development Process 1. The development of pharmaceutical drugs and therapeutic biologics (collectively “medicine”) may be broken down into four stages described below: 2. Scientists also conduct extensive laboratory testing of the identified promising molecules or compounds to determine their safety for testing in humans, the possibility of increasing their production, and the potential routes of administration to humans. Generally, these three phases are carried out consecutively such that a subsequent stage is reached only after successful completion of the preceding phase; however in some cases, a taxpayer may enter Phase II or III and then return to an earlier phase. During this phase, researchers typically perform large-scale studies with approximately 1,000 to 5,000 patients to gather more information about the safety, effectiveness, and overall benefits and risks of the candidate medicine.

Additionally, at this stage, companies may perform comparison studies with other products.

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Because, in these cases, the FDA approval comes before certain measures of the medicine’s effectiveness are established, the accelerated approval is contingent upon further post-approval commitment clinical trials to establish the medicine’s effectiveness and benefits and risks profile. If the clinical trials show that the candidate medicine is safe and effective, the sponsor company files with the FDA a New Drug Application (NDA) for a pharmaceutical drug or a Biologics License Application (BLA) for a therapeutic biologic to obtain the FDA’s approval for marketing and manufacturing of the new medicine for the specified indications.

Phase III work may be required even after the accelerated approval by the FDA. Upon review of a NDA or BLA, the FDA may either: (1) approve the medicine, (2) send a letter indicating that the medicine is approvable but require additional information or studies before approval may be granted, or (3) deny approval. Once the FDA grants approval, the medicine may be manufactured and marketed for the approved indications.

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