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Biotech Industry Seeks Help via Change in Tax Law
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By ANDREW POLLACK
Published: December 9, 2008
Move over Big Three. Little Biotech is joining you in seeking federal assistance.
Biotechnology industry executives plan to visit Congress on Wednesday to ask for a temporary change in the tax law that would let money-losing companies get cash from the government now, in exchange for tax credits they would pledge not to take if they eventually become profitable.
The change, if Washington approved of it, could enable the industry to receive potentially hundreds of millions or even billions of dollars, on the condition that the money would be used for research and development.
The effort comes as many smaller biotechnology companies, particularly those trying to develop drugs, are facing a severe cash shortage that is forcing them to dismiss workers, curtail research and even file for bankruptcy protection or liquidation.
Prospects for the proposal are unclear.
But Allyson Y. Schwartz, a Democratic member of the House Ways and Means Committee, which handles tax matters, said she would push to include the proposal in the forthcoming economic stimulus package and expected many of her colleagues to view it favorably.
“Innovation and technology are growth areas for American businesses and American workers and should be part of this package,” said Ms. Schwartz, whose district in the Philadelphia area is home to some pharmaceutical and biotechnology offices.
A spokeswoman for President-elect Barack Obama said his transition team was not commenting on individual provisions of the stimulus package beyond what has been revealed publicly.
The big profitable biotech companies like Amgen and Genentech remain financially sound. But of the 370 publicly traded American biotechnology companies, the number with less than six months cash on hand is approximately 125 — nearly double the total last year, according to the Biotechnology Industry Organization, a trade group. Developing a drug can require hundreds of millions of dollars and 10 years or more, so even in good economic times some small companies struggle to raise money.
But with financial markets in turmoil, investors have become reluctant or unable to provide the infusions of cash, pushing many biotech companies to the brink.
In seeking assistance, the industry is quick to distinguish itself from the automakers, banks and other supplicants in Washington, portraying itself as a model of innovation and American competitiveness.
“This is not a question of our companies operating with what some perceive as a flawed business model,” said Alan F. Eisenberg, an executive vice president of the Biotechnology Industry Organization, which is known as BIO. “This is about our companies taking a decade to get a product on the market, and during that time they need to have investor capital, and that capital is not available.”
The industry’s idea is to let companies turn their very weakness — their huge losses — into an asset. Under current law, net operating losses can eventually be used to offset some taxes once a company is profitable. But that does little good for companies struggling with losses and a lack of cash now.
So the industry’s proposal would let companies receive payments from the government now in exchange for giving up those tax deductions later. The industry would agree to a cap, perhaps $30 million, on the amount any single company could receive.
Mr. Eisenberg of BIO said the proposed change would be in effect only for a year and would apply to companies outside of biotechnology as well. Few other industries, though, require as much time and money to develop a product as the biotechnology industry.
Biotechnology might not seem an obvious candidate for a bailout. The industry employs only about 200,000 people in the United States, according to the accounting firm Ernst & Young; the automobile industry employs millions.
“Research-based companies that employ 30 people don’t necessarily stimulate the economy,” said a Washington lobbyist for a large pharmaceutical company, who was skeptical the proposal would win backing.
This person, who spoke on the condition of anonymity because he was not authorized to talk to the media, said the proposal’s opponents could argue that assistance was not needed because a company with a truly promising product would be able to sell the rights to that product, or the entire company, to a larger drug company.
The biotechnology industry is also notoriously risky, with many companies never achieving profitability despite spending hundreds of millions of dollars. The chief executive of Genentech has estimated the industry as a whole has lost about $100 billion since the field’s inception in 1970s. Even as of last year, the American biotechnology industry as a whole was not profitable, although it was getting close, according to Ernst & Young.
The biotechnology industry will argue that it is responsible for creating a large number of drugs now being tested that will be needed by an aging population in the future. And it will argue that it is a bastion of American competitiveness.
“It’s one of the few places where the U.S. is the undisputed leader of the world,” said Alexis Borisy, the chief executive of CombinatoRx, a biotech company in Cambridge, Mass., that recently cut 80 employees, or two-thirds of its work force, to conserve its cash after two drugs did not perform well in clinical trials. “Do we allow that to be cannibalized?”
The industry has paved the way in developing ways to treat rheumatoid arthritis and multiple sclerosis as well as cancer drugs like Genentech’s Avastin, ImClone’s Erbitux and Celgene’s Revlimid. OSI Pharmaceuticals, which developed the lung cancer drug Tarceva, lost a cumulative $1.3 billion from its inception in 1983 through 2006 before finally breaking into the black.
Since many companies will never reach profitability, the industry acknowledges that an upfront cash payment would have to be significantly less than the value of the deductions.
For instance, Mr. Eisenberg said, a company with $100 million in net operating losses would be entitled to about $35 million in lower federal taxes when it eventually became profi
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