Despite the urgent need for scientific breakthroughs in biotechnology, current government policies are holding back the potential and promise of the scientific potential that resides in the thousands of biotech companies.
The Biotechnology Industry Organization had looked at the changes to our policy environment that would incentivizes companies to develop the breakthrough cures, treatments, enhanced agricultural products, vaccines and biofuels.
BIO notes that biotech research and development is a particularly high-risk undertaking because of the substantial start-up costs, lengthy experimentation period, and possibility that the technology will not prove viable.
BIO believes that fully realizing the promise of biotechnology requires a comprehensive national strategy that fine-tunes some policies and overhauls others.
BIO’s set of policy proposals address two vital needs for ensuring biotechnology innovation and industry growth:
1) the need to re-engineer the biotech economic model, and
2) the need to re-invent the idea-to-market pathway for biotech cures and other products.
Below is that plan:
I. Promoting Investment in Innovation
Congress has historically provided tax incentives to high-risk endeavors (such as oil and gas exploration, alternative energy, and high-tech start-ups) as a means for encouraging new investment. However, current tax law does not do enough to foster investment in health care, green technology, or energy-focused biotechnology companies. Given the economic and societal benefits of ensuring a robust biotech industry in the United States, it is imperative that Congress and the Administration adopt policies that recognize the unique financial structure and capital needs of biotech companies.
Features Of The Typical Biotech Company
• Unprofitable—3 or more years away from having product revenue
• Private company (70% of the biotech industry is private)
• Fewer than 50 employees
• Completed one round of venture capital financing
The proposals are designed to incentivize investors, strengthen small business, and promote innovation.
Small Business Investor Incentives
Incentivizing Small Biotech Investment: Angel Investor Tax Credit
Modeled after numerous state programs, a federal Angel Investor Tax Credit would provide an incentive for individuals to invest in emerging biotech companies researching innovative technologies. To be eligible, investors would have to invest in a company with fewer than 500 employees performing qualifying research. The credit would be equal to 50% of their investment.
Worldwide, 35% of pharmaceutical companies
outsourced projects to Asia in 2009, with
China and India the top two destinations.
Source: “Annual Outsourcing Survey,” Contract Pharma (2009)
Stimulating Private Capital for Biotechnology: R&D Partnership Structures
Due to the lengthy drug development process, small biotechnology companies often have difficulty obtaining early-stage financing for their research and development and, because they are not yet profitable, are unable to immediately use their tax assets (i.e., tax credits and losses) to offset income. The development of new partnership structures that allow a biotech company’s investors to offset their income with the company’s tax assets would significantly stimulate much needed private investment in biotechnology.
Improving Capital Gains Treatment for Small Businesses: Section 1202 Reform
Section 1202 of the Internal Revenue Code provides for a reduced capital gains rate for qualified investments in certain small business stock. However, due to the valuable intellectual property and successive rounds of financing inherent in biotech innovation, biotech companies do not meet the definition of qualified small businesses under Section 1202. Modifications to the small business definition and other changes in Section 1202 would encourage investment in research performed by capital-intensive, small biotech companies.
In India, the Biotech Industry Partnership
program provides grants and soft loans to
companies conducting high-risk research, which
has fostered a 20% annual growth rate.
Source: Global Biotechnology Report 2008, Ernst & Young
Doubling Private Funding: Matching Grants for Investments in Start-Ups
A small business early-stage investment program would provide matching grants to venture capitalists that specialize in funding small, innovative companies. The government grants would match investments in targeted small businesses, including emerging biotech companies, essentially doubling their financing by enabling seed financing to spur further investment.
Venture Capital Investing In Biotech Has Declined and Remains Largely Stagnant
• According to Pricewaterhouse Coopers, the first quarter of 2011 marked
the fewest biotech venture deals of any quarter since 2003.
• The average deal for the first round of funding in the first quarter of 2011
was $2.2 million, the smallest average size for such deals since 2005.
• In 2007, U.S. biotech companies raised $5.2 billion in venture financing.
In 2010, the industry raised just $3.7 billion in venture capital, 30% less than 2007’s total.
• The troubled IPO market and financial crisis have contributed to
the reduced size of the United States biotech industry.
The number of public biotech companies in the U.S. has decreased by 25% since January of 2008.