Free money:
Tucked away on page 759 of the voluminous health-care law signed by
President Barack Obama in March is a provision to aid small companies
doing research and development (R&D) in biotechnology. Starting on 21
June, many of those companies will be racing to take advantage of a
tax credit worth up to $5 million per company and totalling $1
billion.
Called the Therapeutic Discovery Project Program, the initiative aims
to lift an industry that has struggled during the recent economic
crisis. When anxious investors shifted money to low-risk investments,
high-risk biopharmaceutical companies, particularly young firms with
no products on the market, were left scrambling for cash (see graph).
The pressure has taken its toll. According to the Biotechnology
Industry Organization (BIO), there were at least 394 public US biotech
firms in January 2008. By January 2010, 285 remained. Most of those
lost were early-stage firms. "We were seeing literally a generation of
biotech companies being shelved," says Alan Eisenberg, BIO's vice-
president for emerging companies and business development.
The tax credit is targeted at vulnerable young businesses — only those
with fewer than 250 employees are eligible — and covers up to half of
the R&D expense for qualifying projects. Because most biotech
companies don't earn a profit in their early years, and therefore owe
no taxes, they wouldn't benefit from a tax credit. So the programme
allows those firms to convert the credits into grants. In fact, the
programme is largely a grants programme disguised as a tax credit,
says Barry Bozeman, a professor of public policy at the University of
Georgia in Athens, who notes that tax credits tend to be more
politically palatable.
To be eligible, a project must demonstrate the potential to produce
new therapies, reduce the cost of health care or contribute to the
goal of curing cancer within 30 years.
Under the programme there is no limit to the number of projects that
can be funded at a single company, and the $1 billion total will be
distributed among all qualifying projects. Eisenberg estimates that
about 600 of BIO's members will apply for funds, plus about 600
companies that are not part of the organization. This deluge of
applications could lead to smaller awards per proposal. "In all
likelihood, with so many applications, no project is going to get more
than a million dollars," says Kurland. Eisenberg points out that 85%
of BIO's members with fewer than 350 employees have R&D budgets of
less than $30 million.
The grants are clearly tiny compared with the billions often required
to fully develop a new drug, but they are enough to stimulate early-
stage research, says Eisenberg. "Will it mean that you don't have to
go out and do other fundraising?" says Kurland. "No. But maybe it gets
you over the hump, or maybe it encourages others to invest in your
company."
The credit should help address concerns that US biotechnology is
falling behind in the face of increasingly vigorous international
competition. "The United States was the first to have a tax credit for
R&D back in 1981," says Gregory Tassey, a senior economist at the
National Institute of Standards and Technology in Gaithersburg. "Since
then, other countries have come up with their own. Now we're down
around seventeenth in terms of actual financial impact of our R&D
credit."
For now, the credit is only mandated to cover costs incurred in 2009
and 2010, but it's a safe bet that the industry will lobby for the
programme's renewal. Even so, the credit is unlikely to solve the real
challenge facing the sector: how to sustain a high-risk industry that
often takes a decade or longer to generate a viable product.
