Milestones 2004

Outreach: International >

BUSINESS & ECONOMIC ISSUES

After a battering in 2002, biotechnology stocks and investment soared in 2003. The Nasdaq Biotech Index rose 46 percent for the year, while the larger basket of 245 biotech stocks tracked by Recombinant Capital and Signals magazine jumped an average of 110 percent. The Wall Street recovery helped drive biotech financing up 56 percent in 2003, to more than $16 billion — an amount second only to that raised in 2000.

The renewed investor interest reflects biotechnology's solid fundamentals: a record of long-term growth coupled with a deep pipeline of products to meet health, manufacturing, agricultural and environmental needs. The U.S. biotechnology industry has posted double-digit revenue gains every year for the past decade, and internationally the industry is growing even faster.

Vicki L. Sato, Ph.D., president, Vertex Pharmaceuticals, and Roger Perlmutter, M.D., Ph.D., executive vice president, research and development, Amgen, spoke at a panel during BIO's CEO & Investor Conference 2003.

Supporting the industry's growth has been central to BIO's mission since the organization's founding in 1993. That growth begins with the success of individual biotech companies, most of which are small businesses. A majority employ 50 people or fewer and have yet to turn a profit, according to a 2003 U.S. Commerce Department survey.

Making such business models work requires the support of larger industrial partners, investors, and government laws and regulations that encourage and reward innovation. BIO cultivates support on all of those fronts, by hosting investor and partnering conferences and through advocacy on business issues, such as intellectual property law, tax reform and economic development. BIO also helps its members conserve precious capital by offering discounts on essential products and services through the BIO BUSINESS SOLUTIONSsm program.

INTELLECTUAL PROPERTY

The explosion of biotechnology innovation in the last 15 years has triggered controversies over intellectual property and helped create a bottleneck at the U.S. Patent and Trademark Office.

Critics of the current system say it is too liberal in granting gene-related patents; goes too far in favoring patent applicants; and, because patent examiners are overworked, allows too many "questionable" patents. In 2003, the Federal Trade Commission and the National Academy of Sciences issued separate reports outlining the problems and, in the case of the FTC, recommending reforms.

BIO agrees that some changes are needed to accommodate the swelling volume of applications. BIO, for example, advocates ending the practice of diverting patent fees to support other federal agencies and has also urged the PTO and Congress to implement restriction practice reform, which would reduce the number of separate patents required to protect a single biotech discovery.

BIO supports the PTO's own reform proposal, a five-year plan calling for, among other things, a system for electronic patent processing, outsourcing prior art searches, an end to diversion of patent fees to other programs and hiring almost 3,000 new patent examiners over five years. Other major organizations representing intellectual property owners have also endorsed the plan.

As pressure mounts for reform, BIO is developing its own set of recommendations for improving the system, ideally a plan that can accommodate the diversity of opinion within the organization's membership. BIO also is reaching out to the National Institutes of Health and to universities — which hold a majority of patents — as well as to others with a stake in a strong patent system.

International IP Issues Intellectual property issues are increasingly transcending borders. BIO has responded by creating an international intellectual property committee to develop an action plan in 2004.

BIO supports the World Trade Organization's Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement, which governs pharmaceutical intellectual property, and has met with and written letters to WTO officials to make sure they understand the importance of intellectual property to biotechnology.

In 2003, the TRIPS agreement's compulsory licensing provisions were amended to allow manufacture of generic versions of patented pharmaceuticals for export to poor countries with desperate needs but lacking pharmaceutical manufacturing capacity.

OTHER BUSINESS ISSUES

Tax Reform
Because the biotechnology business model is new, some federal laws and regulations unintentionally harm the industry. The U.S. tax code, for example, penalizes companies that undergo a technical change in ownership by almost completely wiping out their credits for net operating losses. This rule, part of the 1986 tax overhaul, was designed to prevent abuses in which companies were acquired solely for the value of their accumulated losses. Unfortunately, biotech companies practicing routine equity financings that result in a change of ownership get caught in that net as well.

The effects on biotech are measurable: Because of tax inequities, biotechnology companies' cost of capital is up to 48.6 percent higher than that of other firms, according to a 2003 BIO-commissioned study.

BIO's advocacy on this issue has led to the introduction of corrective legislation — the Biotechnology Future Investment Act (H.R. 2968 and S. 1773) — in both the House and Senate. The legislation has won bipartisan co-sponsors, and BIO in 2004 is promoting it as an amendment to a larger tax bill.

SBIR Grants
Under a new interpretation of a 1982 law, biotechnology companies that are majority-owned by investment entities, including venture-capital firms and pension funds, are barred from receiving Small Business Innovation Research grants.

SBIR grants, ranging from $100,000 to several million dollars, have been instrumental in helping small biotech companies pursue high-risk, high-benefit research and development in fields such as cancer, cardiovascular disease, diabetes and HIV/AIDS. Innovation grants are an important part of the complex public-private web of support that keeps research moving forward even when investment for untested ideas falters.

But today, small companies — often with fewer than 20 employees — are being locked out of this small-business program if 51 percent or more of their equity is held by investment entities. Ironically, SBIR grants remain available for publicly traded companies that are much larger than many venture-backed firms.

A legislative solution may be at hand in 2004, in the form of a Small Business Administration reauthorization bill (S. 1375). The biotechnology industry, joined by the National Venture Capital Association, is urging that the House version of the bill include a remedy for the grant problem.

Stock Options and Accounting Reform
Because they are pursuing high-risk research on investor capital, biotechnology companies typically cannot offer the stability and salaries of well-established firms with steady revenues. To attract the top scientific and business talent they need to succeed, biotech companies usually include stock options in compensation packages for both top executives and rank-and-file employees.

New rules devised in the wake of the accounting scandals of 2002 threaten to undermine these popular programs. The Financial Accounting Standards Board plans to require companies to treat stock options as expenses, with details slated for release in 2004.

As a member of the International Employee Stock Options Coalition, BIO is urging Congress to block the measure. Expensing would discourage the offering of options, and many of the accounting options for expensing are inappropriate for emerging companies with volatile stocks.

BIO supports two bills now pending: one that would provide protection for non-expensing, and a compromise proposal (S. 1890 and H.R. 3574) that would require expensing for only the top five corporate officers at each company.

BIO also is working with the Association of Biotechnology Financial Officers to educate regulators on the small-business effects of the 2002 Sarbanes-Oxley legislation. Sarbanes-Oxley introduced new costs and time-consuming procedures that are heavy burdens for small biotech firms.

BUSINESS DEVELOPMENT CONFERENCES

In addition to industry advocacy, BIO helps individual biotechnology companies by hosting a series of investor and partnering conferences each year. More than 70 percent of BIO members who responded to a 2003 survey said conferences and networking opportunities are an important benefit of joining BIO.

Partnering Conferences
Partnering conferences are especially popular as pharmaceutical and large biotechnology firms look to fill their pipelines, and BIO hosts the two largest events in the industry: the BIO-Europe conference, held every November in Germany, and the BIO Business Forum at BIO's annual international convention. BIO-Europe 2003 offered more than 200 company presentations and attracted 1,200 attendees, who conducted 3,300 partnering meetings. The BIO Business Forum at the BIO 2003 convention accommodated 3,200 partnering meetings, up almost 30 percent from the 2002 event.

A smaller partnering event focused on senior executives, the BIO-Windhover Partnering Conference in April, was also successful, attracting more than 200 companies, including 14 of the world's 18 largest pharmaceutical companies.

In 2004, BIO will once again host this series of partnering meetings and will take the format to Tokyo in February for the first BIO-Asia Clinical Stage Partnering Conference.

Investor Conferences
Biotechnology's 2003 financial upswing was on full display in February at the annual CEO & Investor Conference in New York. Attendance from the financial community was twice that of 2002; the event drew 1,878 participants, a record. Based on the success of its partnering meetings, BIO introduced a new feature to the conference — prearranged one-on-one meetings between investors and CEOs — and scheduled more than 700 such meetings.

BIO also continued to build its VentureForum franchise for privately held companies, offering three new regional meetings instead of one national conference. The regional events — VentureForum East in Philadelphia, VentureForum West in San Francisco, and BIO Mid-America in Chicago — showcased 260 companies and attracted 1,200 participants.

In 2004, BIO will again host regional VentureForum conferences, as well as a new national investor conference in San Francisco. The national conference, slated for Oct. 13–15, will feature 250 presenting companies and will be the industry's largest conference for private and small-cap biotech firms.

BIO 2003 BUSINESS FORUM

BIO's annual convention provides the umbrella for one of the biotechnology industry's largest business development events, the BIO Business Forum, which in 2003 brought together almost 1,700 business development and financial executives from 658 companies for business plan presentations and partnering meetings.

The event attracted representatives of nine of the top 10 pharmaceutical companies, as well as executives from a record number of large-cap biotechnology firms, including Amgen, Biogen, Genentech, Genzyme, Gilead Sciences and Serono.

The partnering component was extraordinarily successful. Ninety-four percent of those who responded to a post-forum survey reported having had meetings that they "believe may lead to successful deals." Turnout for investor presentations was disappointing, however, and in 2004 BIO will reposition the forum as a more purely partnering-oriented event.

BIO BUSINESS SOLUTIONSsm

BIO helps its members conserve capital as well as raise it. The BIO BUSINESS SOLUTIONSsm program offers BIO members discounted pricing and special benefits on products and services such as laboratory supplies, business insurance, news distribution services and 401(k) plans.

The program posted solid growth in 2003. The number of participating companies surged more than 35 percent to surpass 1,000, and total sales also grew by more than 35 percent, reaching $88.5 million.

BIO signed new contracts for laboratory supplies (VWR International), office supplies (Office Depot) and employee background investigation services (ChoicePoint). The program expanded business insurance offerings through Chubb by adding standalone employee practices liability insurance. BIO is studying the feasibility of establishing a captive insurance program for directors and officers liability coverage.

The BIO BUSINESS SOLUTIONSsm program helps both BIO members and members of 22 participating state affiliate biotech associations, which in 2003 garnered almost $400,000 in shared royalty revenues — an increase of more than $100,000 over the previous year. To foster additional growth, BIO has developed marketing materials for state biotech associations to share with their members.

The program is described in detail at www.biobusinessolutions.com.