BIO Applauds House Measure to Correct U.S. Tax Code

WASHINGTON, D.C. (July 28, 2003) — Before recessing for the August break on Friday, July 25, the U.S. House of Representatives introduced legislation that will change the U.S. tax code to help encourage further investment and innovation in the biotechnology industry.

The "Biotechnology Future Investment Expansion (BIOFIX) Act (H.R. 2968)," which is sponsored by Reps. Eric Cantor (R-Va.), Thomas Reynolds (R-N.Y.), Benjamin Cardin (D-Md.), and Robert Matsui (D-Calif.), would amend Section 382 of the Internal Revenue Code to ensure that biotech companies are able to take advantage of tax incentives intended by Congress to spur research and development.

"BIO strongly supports the 'Biotechnology Future Investment Expansion Act' as an important and necessary change to the U.S. tax code that will help foster the medical innovations that the biotechnology industry can produce," said Sharon Cohen, vice president for federal government relations at the Biotechnology Industry Organization (BIO).

Section 382 of the tax law was originally written to prevent corporate fraud and abuse by penalizing companies for tax-motivated acquisitions. Unfortunately, however, the law has inadvertently hindered biotechnology companies because of their unique financing structures. BIO has been working with members of Congress to explain why corrective legislation is needed.

On average, it takes more than 10 years and between $500 and $800 million to develop a new drug or vaccine, with a rapidly growing percentage of this capital-intensive research and development performed by small to mid-size biotechnology companies. To pay for this lengthy product development stage, biotech companies frequently undergo multiple equity financings that, under the tax code, can trigger a technical change of ownership. Under Section 382, once a technical change in ownership has occurred, the net operating losses (NOLs) accumulated by a biotech company do not transfer to the purchaser. As a result, a biotech company's accumulated NOLs may be severely restricted in many cases.

This disadvantages biotech companies because NOLs can be used as a significant tax deduction once a company becomes profitable. If a company's accumulated NOLs have no value, it can discourage investment, which is particularly harmful to biotech companies as they navigate the lengthy and costly product development pipeline.

"This unintended flaw in the tax code has inadvertently penalized biotech companies for their unique equity funding requirements and lengthy product development processes required by the Food and Drug Administration," said Morrie Ruffin, BIO's vice president for business development and emerging companies. "BIO applauds Congress for introducing legislation that will level the playing field and give biotech the research incentives afforded to other industries."

BIO represents more than 1,000 biotechnology companies, academic institutions, state biotechnology centers and related organizations in all 50 U.S. states and 33 other nations. BIO members are involved in the research and development of health-care, agricultural, industrial and environmental biotechnology companies.