According to the Biotechnology Industry Organization (BIO), the upcoming lame duck session of Congress is unlikely to have time to consider the High Technology Small Business Research Incentive Act sponsored by Sens. Olympia Snow (R-ME) and Robert Menendez (D-NJ) and Reps. Jim Gerlach (R-PA) and Richard Neal (D-MA), leaving it for the 113th Congress in the new year. The law, which does not create any new tax incentives, would nevertheless level the playing field for all research and development-intensive industries with respect to tax treatment, Alan Eisenberg, executive vice president of emerging companies and business development at BIO, told BioWorld Today.
The bill was designed to address the financing challenges of high-tech companies. A majority of small, research-intensive companies are not yet profitable, and their long development timelines, plus high-risk research, mean that it could take more than a decade to sell a product or realize any profit. "Innovative firms rely heavily on private investment rather than product revenue to fund their promising research," Eisenberg said.
Under the current passive activity loss (PAL) rules, investors are prevented from using losses or credits from a passive investment, such as an investment in a biotech company, to offset their active income, or salary.
The High Technology Small Business Research Incentives Act would allow small biotech companies, and other highly intensive R&D companies, to enter into a joint venture with investors to support a specific research and development project.
The losses and credits generated by the project would then flow from the joint venture to the investors, who could use the tax assets to offset other income.
"Relaxing the PAL rules would allow investors to enjoy a more immediate return on their investment," Eisenberg said. "Prior to the PAL rules being enacted in 1986 tax reform, many young biotech companies successfully used similar structures to stimulate R&D investment, including industry leaders Amgen Inc., Genentech Inc., a unit of the Roche Group, and Genzyme Corp."
Eisenberg attributed part of the early growth of biotech in the 1980s to the ability of investors, prior to 1986, to support projects in the life sciences through partnerships, like those that would be allowed under the High Technology Small Business Research Incentives Act.
To encourage that type of investment once again, BIO unveiled a comprehensive set of policy proposals at the 2011 BIO International Convention in a report, "Unleashing the Promise of Biotechnology."
The policies in the report were designed to address problems that BIO and other stakeholders saw as roadblocks to innovation.
The High Technology Small Business Research Incentives Act was developed out of the "R&D Partnership Structures" section of that report, and BIO worked with the bill sponsors, Sens. Mendez and Snowe and Reps. Gerlach and Neal, to develop the policy proposal in a bipartisan, bicameral approach.
The bill was introduced in September, but was not brought to a vote by the time the most recent session closed. The House of Representatives and the Senate will not reconvene again until after the election, and at that time, it will have bigger fish to fry, particularly the looming crisis of budget sequestration, set to go into effect in January if Congress does not act.
"Now that it has been introduced, BIO will continue to advocate for it with supportive members, particularly of the Senate Finance and House Ways and Means Committees," Eisenberg said.
If the bill ultimately does not pass, it could mean a continuation of downward trends for investment in biotechnology.
According to the National Venture Capital Association/PriceWaterhouse Cooper MoneyTree Report from the fourth quarter of 2011, the total number of investment deals between biotech companies and venture capitalists dropped 8 percent that year, and an October 2011 study by the National Venture Capital Association found that 41 percent of venture capitalists had decreased their investments in the biopharma sector over the previous three years.
"This trend has hit small companies the hardest, as the number of start-ups receiving funding in 2011 dropped 19 percent from 2010. Further, there were only 98 first-round venture deals with biotech companies in 2011, a significant drop from the industry's peak of 141 in 2007," said Eisenberg. "Small, start-up companies are the innovative heart of the biotech industry, but depressed financing means that potential cures and treatments are often left on the laboratory shelf."
BIO has its fingers in a number of other pots when it comes to advocating for tax code changes favoring biotech. For example, it is looking at reforming the net operating loss (NOL) restrictions in Section 382, allowing growing biotechs to maintain the value of their NOLs during transactions, increasing their value.
It is also interested in expanding the definition of "qualified small business" under Section 1202 to more accurately represent the capital-intensive nature of industries like biotechnology.