Edited version of private advice

Authorisation Number: 7925164680652

Date of advice: 27 June 2024

Ruling

Subject: Early stage innovation company

Question

Did Company A meet the criteria of an Early Stage Innovation Company under subsection 360-40(1) of the Income Tax Assessment Act 1997 on DD MM YYYY (i.e., at the 'test time')?

Answer

Yes.

This ruling applies for the following periods:

DD MM YYYY TO DD MM YYYY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

Early Stage Test

1.    Company A ('the company) is an Australian proprietary company incorporated on DD MM YYYY.

2.    The company and its 100% subsidiary incurred total expenses of less than $X million in the income year ended DD MM YYYY.

3.    The company and its 100% subsidiary had total assessable income of less than $XXX in the income year ended DD MM YYYY.

4.    The company's equity interests have never been listed for quotation in the official list of any stock exchange, either in Australia or a foreign country.

Background Facts

5.    The company's director is Person A.

6.    The company's registered office and principal place of business is situated at xxx, xxx, xx xxxx.

7.    The company has never been a foreign company within the meaning of the Corporations Act 2001 (Cth).

8.    The company has a wholly owned subsidiary, Company B. The company is the head company of an income tax consolidated group.

9.    On DD MM YYYY, the company engaged Company B to undertake work on the development of the 'product' platform and Company B subsequently provided development services to the company, including throughout the income year ended DD MM YYYY.

Product Development

1.    The company has developed the 'platform', which is an ecommerce service platform that enables patients to access prescribed medications. It enables thesupply and delivery of medication in just a few steps. Everything is all in one place, from ordering prescription medications, tracking deliveries and managing repeats.

2.    The company partners with local pharmacies in communities across Australia to use the platform. Most orders are delivered to the customer's door with Australia Post or DoorDash.

3.    The company has developed:

•         Prescription Interpretation, the only technology in Australia to be able to interpret prescriptions, including those with prescribing errors, missing information, spelling mistakes and for unregistered products.

•         Catalogue Matching, the capability to match prescriptions to a product catalogue, in real time, so that when a patient uploads a prescription the technology can offer the patient a list of products they can buy, based on what the patient has been prescribed. This is unique technology in the Australian market.

•         Medication Pricing, ability to calculate pricing for the medication in real-time for patients for all levels of the pharmaceuticals benefits scheme, including general patients, concessional patients, closing the gap, safety net, and Department of Veterans Affairs cardholders. This is unique technology in the Australian market.

4.    The company has developed technology to licence to other health technology companies including:

•         Pharmacy Application Programming Interface (API): the company has built Australia's first API to provide pharmacy-as-a-service to other technology businesses.

•         Mobile Intermediary Service. Consumer applications connecting to the electronic prescription exchange need to use a technology called a mobile intermediary. This is subject to detailed conformance requirements published by the Australian Digital Health Agency.

Product Development Stages

5.    The company identified a problem within Australia's retail and healthcare industry. There has been a strengthening shift to online retail and digital healthcare ever since the pandemic. The company identified a gap in the market where no pharmacy group offered an ecommerce service for prescription medication.

6.    The company has developed and improved processing methods in the pharmaceutical industry. The processing method developed, combined with specialised technology, is a significant step forward in the Australian market.

7.    The company has undertaken the following product development activities:

•         Developed software that can interpret prescriptions including those with errors, missing information, spelling mistakes and unregistered products.

•         Developed catalogue matching to match prescriptions to a product catalogue. This promotes upselling additional products that can assist with the initial prescription.

•         Developed medication pricing, to calculate pricing based on all the pharmaceutical benefits schemes.

•         Developed pharmacy-as-a-service to other technology businesses.

•         Continued developing features of the platformto stay ahead of competitors.

•         Bult-in practice integrations for doctors using the platform.

•         Integrated the platformwith Medicare and prescription exchange Australian Digital Health Agency conformance.

•         Tested consumer and doctor experience.

•         Launched over the counter products upsell functionality.

8.    The company continues to develop and expand the current innovation and as at the date MM YYYY is still conducting further development and commercialisation of the platform and related innovations in the industry.

Commercialisation Strategy

9.    The company has undertaken the following commercialisation activities:

•         The platform was launched to the market in MM YYYY.

•         Launched partnerships with x referral partners.

•         Signed medical practices with xxx doctors and signed launch pharmacy partners.

•         Onboard practices employing xxx doctors.

•         Expand pharmacy coverage to xx% of the population within local delivery area.

10.  The company created a development roadmap that showcases all integrations to launch its product and to break-even by the end of YYYY. Some activities to assist the launch are to test and iterate the app, launch pharmacy portal and test direct to consumer marketing.

High Growth Potential

11.  The platform has high growth potential as it aims to solve a problem in the pharmaceutical market. It aims to avoid the time-consuming multi-step process where patients need to obtain a repeat and refill their medication on a monthly basis.

12.  Some factors that the platform seeks to overcome include (but are not limited to):

•         Patients need to visit a doctor to obtain the prescription or repeat (as applicable) and pharmacy to fill their prescription.

•         On average, this process can involve a 40-60 minute round trip.

•         Rural patients who reside far from local pharmacies experience longer travel times to obtain their prescriptions.

•         Older and disabled patients with mobility issues (who may not be able to physically attend the doctor and/or a pharmacy as easily) face additional barriers to access their medication.

•         Patients forgetting to take or refill their medication.

13.  The pharmacy industry in Australia is $25 billion per year ($16 billion in prescriptions and $9 billion in other products). While 18% of Australian commerce is now online, pharmacy is unique in that over 99% of the market is still offline. The reason is that paper prescriptions still need to be given to the pharmacist before they can dispense medication, which makes ecommerce impractical. However, that changed in early 2021.

14.  The Department of Health rolled out electronic prescribing nationally in early 2021, which allowed pharmacist to dispense medication without receiving a physical prescription from the patient. This opened up the opportunity for prescription medication ecommerce for the first time in Australia.

15.  The company has been certified as the first company in Australia to licence a xxx to other companies.

16.  The growth potential of the platform and the business has been successfully proven overseas. The company has based their growth potential on the following information:

•         In the United States, there are at least 6 online pharmacy businesses valued at over $1 billion (Amazon Pharmacy, Packapill, Capsule, Truepill, Blink Health and Alto).

•         The largest online pharmacy in the UK dispensed 14.8 million prescriptions, with revenue of GBP 165 million (AUD $311 million) in the year ending March 2022.

17.  The company is exploring strategic partnerships with Potential Partner A and Potential Partner B, which if entered into would expand the platform's medication delivery capabilities but would also expand offerings to include click-and-collect.

Scale up the Business

18.  The company was able to scale up the business through partnerships with local pharmacies across Australia. This is to ensure that the customers are able to get their prescription no matter where they are located in Australia.

19.  Additionally, the platform is designed for scale using best-in-class cloud technology.

20.  The company is able to scale the business due to consumers with prescribed medication suited for long term repeat ordering. For those who have to frequently visit the pharmacy, this will reduce the time to acquire a prescription.

21.  The company's business plan and financial modelling shows the company forecast to be scaling $xx million in year x of the business plan. The business plan shows growth potential and a plan to upscale the platform.

Broader than Local Market

22.  The company's customer acquisition efforts focus primarily on partnerships, enabling marketing to patients as soon as they're prescribed medication. This makes the platform a product that has scope to expand beyond any local market.

23.  The company targets the platform to pharmacies nationally in order to build profitability.

24.  The company intends to expand into international markets and has already had early discussions with partners about expanding into xxx.

Competitive Advantages

25.  The platform and technology that has been developed (and continues to be developed) is the only straight-through ecommerce platform for prescription medication in Australia. It is the only ecommerce site in Australia that lets patients upload a prescription and check out immediately.

26.  The company engages services from engineers to continue to develop the platform for the purpose of extending its lead on competitors. There is continuous and ongoing development and commercialisation of the platform to ensure it remains competitive within an industry that is frequently subject to innovation.

27.  The company's team has over xx years of partnership experience and have a strong network to build partner pharmacies and deliver medication across Australia.

28.  The company has developed their product to address a number of discrete markets and is continuing to develop the product.

29.  The company's product has been identified as having an available market in all of Australia.

30.  The leading pharmacy chains do not currently have functionality for patients to buy prescription medication online, which can be contrasted to the platform, which does.

31.  All the competitors of the company require human intervention from a pharmacist before patients scan collect an online order. This has resulted in a strong user experience on the platform (the company has the highest xxx score for any pharmacy ecommerce service), market leading conversion rate and high customer retention.

Information provided

32.  You have provided a number of documents containing detailed information in relation to the company's platform, including:

•         Private Binding Ruling ('PBR') Application dated DD MM YYYY.

•         Response to further questions provided DD MM YYYY.

Relevant legislative provisions

Income Tax Assessment Act 1997

•         Subdivision 360-A

•         Section 360-15

•         Section 360-40

•         Section 360-45

CONCLUSION

The company met the eligibility criteria of an ESIC under section 360-40 on DD MM YYYY (i.e. at the 'test time').