Official Architect of the Capitol photograph
This month, Congress passed the Jumpstart Our Business Startups (JOBS) Act, which is now headed to the White House for President Obama's signature. The Act will make the pathway to capital formation more attainable for small biotechnology companies, clearing the way for American innovation and ingenuity by removing bureaucratic hurdles and red tape to speed cures and medical breakthroughs to patients.
It takes eight to 12 years to bring a new medicine from discovery, through Phase I, Phase II, and Phase III clinical trials, and on to the Food and Drug Administration (FDA) approval of a product, according to the Tufts Center for the Study of Drug Development. The entire endeavor can cost more than $1.2 billion. Due to this capital-intensive process, biotechnology companies must cultivate a wide range of public and private investors to finance the early stages of development. In addition to the research and development hurdles that biotechnology companies face on their search for cures and breakthrough medicines, biotech leaders must also deal with the day-to-day challenges of running a small business with the hopes of one day entering the public market. Of great import in the biotechnology industry is the constant struggle to find working capital.
The JOBS Act would create an “on-ramp” to the public market for emerging growth companies, allowing them five years to focus on conducting critical research before having to divert funds to costly regulations. In particular, emerging growth companies would be exempt for their first five years on the public market from the compliance burdens of Sarbanes-Oxley (SOX) Section 404(b), which SEC studies estimate cost companies up to $2 million per year. Additionally, an on-ramp would ease certain accounting and disclosure requirements for a company’s first five years.
In addition to its provisions that help emerging companies go public, the JOBS Act contains proposals to strengthen the fundraising potential for small companies that are not yet ready to enter the public markets. The JOBS Act would reform SEC Regulation A by expanding its eligibility requirements to include companies conducting direct public offerings of up to $50 million, an increase from the current threshold of $5 million. BIO believes this increase would provide a valuable funding alternative for small biotech startups, giving them access to the market at an earlier stage in their growth cycle and allowing them to raise valuable innovation capital.
The JOBS Act also includes provisions to help growing biotech companies broaden their investor base, including reforms of the SEC private shareholder limit and SEC Regulation D. The legislation would increase the limit that requires private companies to register with the SEC from 500 to 2000 shareholders, giving growing biotech companies more investor options to finance their early-stage research. Additionally, the shareholder limit would be amended to keep it from being triggered by employees who received shares in their compensation package, allowing biotech companies to attract and hire the most qualified researchers and scientists. The JOBS Act would also require the SEC to revise Rule 506 of Regulation D to permit general solicitation in direct public offerings, further broadening the investor base. BIO supports these efforts to enhance fundraising options for growing, innovative companies.
These reforms are especially important to innovative biotechnology companies that do not yet have product revenue and must spend investor dollars on compliance rather than the search for cures and breakthrough medicines. The legislation would make capital formation easier for small, emerging biotechnology companies. Bringing groundbreaking cures and treatments from bench to bedside is a long and arduous road, and biotechnology companies are at the forefront of the effort.
For the majority of biotechnology companies that are without any product revenue, the significant capital requirements necessitate fundraising through venture capital firms. These venture capital investors need to know that the companies they support will have the opportunity to be successful on the public market. Unfortunately, due to the current economic climate, it is becoming harder for biotech companies to go public. As a result, venture capital firms are turning elsewhere to make their investments, leading to a dearth of innovation capital in the biotechnology industry.
A recent survey conducted by the National Venture Capital Association (NVCA) found that 41 percent of venture capital firms have decreased their investments in the biopharmaceutical sector in the past three years. Additionally, 40 percent of venture capitalists reported that they expect to further decrease their biopharmaceutical investments over the next three years. Therapeutic areas that affect millions of Americans will be hit by this change in investment strategy, including cardiovascular disease, diabetes, and cancer.
These alarming trends in venture investing could be ameliorated by allowing emerging growth companies increased access to the public markets. If burdens on public financing were removed, private investors would have greater certainty that the companies they help take public will have the chance to succeed. This confidence will lead to augmented venture capital investment, the lifeblood of the biotechnology industry.