Biopharma Seeks Escape from Regulatory Chokehold
By Mari Serebrov
While the SEC is still trying to wrap its regulatory arms around the Jumpstart Our Business Startups (JOBS) Act, biopharma is pushing for more financial reforms to loosen the bureaucratic chokehold that threatens to strangle small biotechs.
"Regulatory burdens that impose significant costs . . . have become increasingly damaging," Jeffrey Hatfield, president and CEO of Vitae Pharmaceuticals, testified last week before the House Subcommittee on Capital Markets.
As a result, he said, biotechs that would "otherwise look to the public market to fund their late-stage trials are reconsidering, fearful of the costly regulations that often stifle their progress by siphoning off research dollars."
One part of that burden is compliance with the Sarbanes-Oxley (SOX) Act, passed 10 years ago to increase investor protection in response to scandals at Enron and WorldCom. Last year, the SEC found that the costs of complying with Section 404 of SOX is nearly $1 million for companies with a public float between $75 million and $250 million.
That figure is in line with an internal analysis that showed if Vitae were to go public, the cost of complying with SOX Section 404(b), which requires an annual external attestation of a public company's internal controls, would be about $1 million each year plus a steep learning curve and corresponding costs, Hatfield said.
For a company like Vitae, which has 55 employees and its lead candidate in Phase I, the compliance cost would be borne by its investors, diverting much-needed funding from R&D to regulatory compliance. The irony is that biotech "investors make their decisions based on scientific results and development milestones, not the statements and reports mandated by Section 404(b)," Hatfield said in his testimony, submitted on behalf of the Biotechnology Industry Organization (BIO).
Through its on-ramp for emerging-growth companies looking to go public, the JOBS Act offers five years of relief from SOX reporting so long as the company's revenue is less than $1 billion and its public float stays under $700 million. (See BioWorld Today, March 26, 2012, and July 16, 2012.)
Since the JOBS Act was signed into law April 5, 46 emerging-growth companies 12 of which are biotechs have filed a new S-1 or amended their filing to take advantage of the on-ramp, Hatfield said. But the act is only retroactive to Dec. 8, 2011, so small companies that went public before then are still locked into SOX compliance. And the act provides no relief after the initial five years.
If Vitae were to go public, Hatfield said it would likely have a public float of $75 million to $250 million, which is typical for small biotechs. At that float level, biotechs would be considered accelerated filers and would be subject to SOX's more onerous regulatory and compliance costs.
To address that burden, BIO is supporting the Fostering Innovation Act, H.R. 6161, which was recently introduced in the House to update the SEC filing status classifications for public companies. The bill, sponsored by Rep. Michael Fitzpatrick (R-Pa.), would raise the minimum public float for accelerated filers to $250 million. H.R. 6161 also would add a revenue component to the accelerated filer definition to ensure that companies with less than $100 million in revenues are not burdened by the more costly SOX regulations.
Under those proposed changes, small public biotechs would be considered nonaccelerated filers. As such, they would be exempt from Section 404(b), Hatfield said. They also would have a relaxed timeline for their quarterly disclosures and would have certain allowances within those filings, including exemptions from compensation discussion and analysis reporting, the elimination of some disclosures about market risk and other risk factors, and exclusions for some financial data.
Meanwhile, to call attention to the cost of government regulations and their impact on business, the House passed the Regulatory Freeze for Jobs Act, H.R. 4078, last week. The bill would put a moratorium on new regulations that would cost $100 million or more until the unemployment rate falls to 6 percent with exceptions for federal rules necessary for national security, trade agreements, enforcement of criminal and civil rights laws, and imminent threats to health or safety.
Current federal regulations cost $1.75 trillion every year, according to a Small Business Administration study. Small businesses, in a number of surveys, have cited government regulation as a major obstacle to growth.
Sponsored by Rep. Tim Griffin (R-Ark.), the regulatory freeze bill also calls for the SEC to conduct a more thorough cost-benefit analysis of its proposed regulations and for increased transparency and judicial scrutiny of "sue-and-settle" litigation. The bill is mainly a statement as it is not likely to be voted on in the Senate, and Pres. Barack Obama has said he will veto it if it hits his desk.
Sequestration Cuts Loom Big
Created as a heavy-handed threat to force Congress to get serious about tackling the national debt, sequestration and its across-the-board cuts in defense and discretionary spending is five months away from becoming reality.
To help prepare for the impact, the Senate last week passed H.R. 5872, giving the president 30 days to submit a detailed report to Congress on how government agencies will implement the required cuts. The president has indicated he will sign the bill, which cleared the House a few weeks ago.
But "there is no amount of planning or reporting that will turn the sequester into anything other than the devastating cut in defense and domestic investments that it was meant to be," White House Press Secretary Jay Carney said in a news briefing.
Sen. Tom Harkins (D-Iowa) released a report last week that showed the impact sequestration is likely to have on key Health and Human Services (HHS) programs, including the National Institutes of Health (NIH). The total cut to NIH would be $2.4 billion, which would be spread across all its programs. As a result, the NIH would offer 700 fewer research grants, according to the Office of Management and Budget. (See BioWorld Today, June 22, 2012.)
Other HHS programs that would be affected by the mandatory cuts include public health emergency preparedness grants, childhood immunizations, AIDS drug assistance, HIV prevention and testing, and breast and cervical cancer screening.
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