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You’re Invited: BIO Board Member to Discuss Challenges Facing Emerging Biotechs – and How to Fix Them

May 3, 2018
Next week, MaxCyte CEO and Biotechnology Innovation Organization (BIO) Board Member Doug Doerfler will speak on a panel at the Capitol hosted by the Information Technology & Innovation Foundation (ITIF). The panel, taking place at 12:00 pm ET on Wednesday, May 9 in room SVC 201-00 at the Capitol Visitor’s Center, will highlight ITIF’s release of its newest report, How to Ensure That America’s Life-Sciences Sector Remains Globally Competitive.

The report highlights America’s life-sciences sector and its impact as a major contributor to the US economy -- and why we can no longer afford to take American life-sciences leadership for granted. Over the last several decades, the US has lost some of its competitiveness as other countries have vied to implement policies to attract more life sciences companies. It is true that American investment in the biotech sector is still strong – venture funding nearly hit $8 billion in 2017 alone, and the US markets saw 25 US biotechs go public and raise another $2.4 billion in financing – however, the US has not been doing enough to keep pace with the tax incentives and other pro-business, pro-growth policies that other countries have put in place to bolster their life-sciences industries.

According to an earlier ITIF study on the role of technology-based start-ups in the US, since 2007, the number of pharmaceutical and medicine manufacturing startups has increased 56 percent, from 1,000 firms in 2007 to 1,600 firms in 2016. These companies account for 71% of all treatments currently being developed in the clinical-stage pipeline and a majority of the 53 novel treatments approved by the FDA in 2017. Simply put, emerging biotechnology companies are leading the way in research and development of breakthrough treatments in the US. American innovation still outpaces the rest of the world –studies show that 57% of approved medicines were developed by companies headquartered in the US – but if Congress wants to ensure that America does not lose its place as the world’s powerhouse for biotechnology innovation, it needs to develop stronger policies to encourage innovation and spur growth today.

Biotechs across the country are already facing an incredible challenge in bringing new cures to patients.  To ensure they have the best chance of success, Congress should step in and take steps to improve the business environment for these fledgling companies.  Mr. Doerfler, Co-Chair of the Capital Formation Committee of the BIO Emerging Companies Section Governing Board, will discuss the challenges these small pre-revenue companies face, as well as how policymakers can help ensure these smaller innovators have access to sufficient capital to succeed.

Because of the lengthy drug development process, biotechnology innovators are unique among small businesses and require tax policies that recognize these realities. The drug development timeline from concept to FDA approval can be as long as 15 years, and only about 10 percent of drugs that enter Phase I testing make it all the way through to FDA approval. Over that period, an average of over $1 billion is spent in total R&D.  In short, the drug development timeline is long and arduous, and as The Economist puts it, “creating new drugs through biotechnology is at the risky end of a business in which superhuman stamina and bottomless pockets are minimum requirements.”

While the Tax Cuts & Jobs Act was an important step in reforming our tax code, regrettably, it did not go far enough to spur investment and encourage innovation in one of the highest growth sectors of our economy, technology-based start-ups like biotechs.  While firms in these industries account for 70% of all business R&D investment, 59% of R&D jobs, and 27% of U.S. exports, as pre-revenue companies, they do not directly benefit from lower tax rates or tax incentives, as they do not themselves face current tax liabilities.

This does not mean, however, that changes to tax policy will have no impact on these businesses or their investors.  To the contrary, a variety of tax policies can provide additional support to this sector and help maintain American competitiveness. In fact, there are many fixes to the existing tax code that will have a substantial benefit for these small innovators without creating new tax incentives or adding additional complexity to the tax code.  These changes can have a tremendous impact on America’s emerging innovators – allowing them to invest more of their money in the lab and continue on their path in pursuit of the next great cure – rather than forcing them to spend their money on outdated tax regimes and regulatory compliance that offers no tangible benefit to them or their investors.

These tax changes include:

Section 382: provide a safe-harbor from certain requirements of section 382 to small start-ups to prevent investment in these companies from inadvertently triggering Section 382 limitations on the company’s net operating losses.  Such a safe harbor can help relieve the investment disincentive and compliance burden of section 382 without undermining the provision’s anti-abuse purpose.

Section 1202: Enact a number of fixes to the tax-preferred treatment of Qualified Small Business Stock under section 1202, including raising the maximum gross assets threshold, clarifying the “substantially all” test of qualified small business assets, and shortening the ban on redemptions from 4 years to 2 years.

R&D Payroll Tax Credit: The payroll R&D credit offers an immediate tax benefit to young companies with significant R&D. The current version, unfortunately, is of limited usefulness as it is too narrowly drawn.  Expanding eligibility to include start-ups with less than $100 million in gross assets and allowing them to offset up to $1 million in payroll taxes could unleash the wave of innovation the provision was intended to generate.

There are many other ways policymakers can help facilitate biotechs’ access to sufficient capital.  For example, strong patents are the lifeblood of the biotech industry.  They are critical in ensuring a steady stream of capital to biotechnology companies and they are essential to the technology transfer process that leads from inventions in the lab to products on the shelves.  The majority of biotechnology companies are small businesses that have no products on the market, and thus their research and development activities are funded through massive amounts of private sector investment over many years, sometimes even decades. Without strong, predictable and enforceable protections for patented inventions, investors will shy away from investing in biotech innovation, degrading the ability to provide solutions to the most pressing medical, agricultural, industrial and environmental challenges facing our nation and the world.

In addition to strong patents, a predictable regulatory environment encourages investments in the biopharmaceutical pipeline.  As such, it is imperative that the FDA continues to recognize its national role in advancing innovation by reviewing innovative products in a timely manner and promoting a consistent and science-based decision-making process that is reflective of patient needs.

For more information about the event and to register to attend live, please visit Mr. Doerfler will be joined by the author of the study, Joe Kennedy (Senior Fellow, ITIF), as well as Joe Devaney (Vice President, Policy & Government Affairs, Astellas), Mitch Horowitz (Principal – Managing Director, TEConomy Partners, LLC), and Amy M. Miller Ph.D (President and CEO, Society for Women’s Health Research).

For more information about BIO’s tax innovation agenda, click here.

BIO is a leader in cutting edge analysis of the biotechnology industry.  Click here to read our recent reports on the state of innovation in highly prevalent chronic diseases: Depression Therapeutics and Pain and Addiction Therapeutics.  You can also register to receive BIO’s upcoming report on emerging therapeutic company trends (2008-2017) and many other reports.