Biotech’s Second Big Win in Healthcare Reform: A Tax Credit Bonanza
The biotech industry won a major victory last month when President Obama signed healthcare reform into law. Biologic drugs, those developed through genetic engineering techniques and incubated in living cells, will now be granted a 12-year period of data exclusivity on the market, to protect them from cheaper copycat competitors. That will allow the innovative companies to recoup their long investment in R&D.
But that’s not the only significant benefit for biotech tucked into this piece of legislation.
In a recent Xconomy op-ed piece I mentioned the Therapeutic Tax Credit, details of which have now been spilling out. This portion of the legislation, now officially called the Qualifying Therapeutic Discovery Project Credit, looks like another big win for the biotechnology industry in general and its research efforts in particular. Indeed, this legislation was backed by the Biotechnology Industry Organization and is especially favorable to startups and small companies. Dean Zerbe provided a detailed description of this program in a recent posting on Forbes.com. People running the tax and finance departments of biotech companies employing less than 250 workers (i.e. the vast majority of them) should evaluate this program to see if they qualify for this tax credit. Here are the highlights of the program, according to the Forbes article:
If your biotech company has a tax liability, you can get a 50 percent tax credit; if you have no tax liability, you can get a grant in the same amount that is tax-free. The credit covers qualified investments in “therapeutic discovery projects.” What defines this? In order to receive the tax credit, the research program must fulfill at least one of the following three criteria:
1) It is designed to treat diseases via preclinical research or clinical studies for the purpose of getting FDA approval of the treatment.
2) It is designed to diagnose diseases or find molecular factors (e.g. biomarkers) related to diseases by developing diagnostics that can be used to make therapeutic decisions.
3) It is designed to develop some methodology that would advance the delivery or administration of therapeutics (e.g. technologies that are being developed to deliver siRNA).
By my reckoning, a very large percentage of biotechnology companies would qualify to apply for these tax credits. However, there are some additional criteria that will also be used to judge the research applications:
The research should have direct or indirect medical benefits. The emphasis here will be to finance programs that “will treat areas of unmet medical needs or prevent, detect or treat chronic or acute diseases or conditions.” Programs that will cut long-term health care costs are also favored, as are projects that have the potential of curing cancer. Finally, applications that will create sustainable, high quality jobs and advance U.S. competitiveness in the life sciences will also be preferred.
The program will be a financial boon to those who qualify and have their applications accepted. However, this program is limited in scope: The total amount of tax credits and grants is only $1 billion , and once that money is gone, it’s gone. It is designed to cover expenses incurred in 2009 and 2010.
The Treasury Department, which will be administering this program, is supposed to have this program in place 60 days after the legislation is approved, and applications are supposed to start being approved some 30 days after that. These are very ambitious timelines which, if met, would mean companies could begin getting credits or grants as early as late June. My suggestion: review the legislation in detail and, if you believe you qualify, get your application in as soon as possible. There is significant money available here, especially for smaller companies and startups.
There are a number of questions that I have not yet seen answered as regards this new program: Are there any caps as to how much money any one company can receive? Will applications be handled, graded, and approved in the order in which they were received, or will they be held and then ranked by some committee? Does this program apply to medical devices that meet the criteria outlined above? Exactly who will have responsibility within the government (from Treasury, the IRS, and the Department of Health and Human Services) for making these decisions? Where do you find the applications?
In addition to the Qualifying Therapeutic Discovery Project Credit described above, there is another provision within the legislation that should be quite beneficial to patients—although I can imagine companies might frown on it. This is the Physician Payment Sunshine Provision, which regulates the disclosure of payments made by biopharmaceutical companies to doctors. According to this new legislation, any payment of $10 or more to a doctor (or in aggregate $100/year worth of gifts, such as pens, clocks, etc) will need to be disclosed to the public.
This is a big win for healthcare consumers, as it will shine a light on (and likely help curtail) the corrupting influence of these payments to the nation’s physicians. Financial remuneration provided by biopharmaceutical companies to doctors can amount to hundreds of thousands of dollars per year. This usually takes the form of consulting fees, but also includes direct payments, expensive dinners in fine restaurants, tickets to entertainment events, continuing medical education junkets, and similar expenditures that are primarily designed to influence a physician’s prescribing practices.
I didn’t appreciate the scope of this problem fully until reading Melody Petersen’s excellent book “Our Daily Meds,” a detailed expose illustrating how marketing groups have taken over Big Pharma to the detriment of consumers. To cite just one example from the book, in 2004 pharma and biotech companies hosted an astounding 536,734 dinners and other events for physicians. This averages out to some 1,470 events per day and costs the industry tens (hundreds?) of millions of dollars per year. Would the industry spend this kind of money if they didn’t see some direct benefits? There are approximately 661,000 doctors in the U.S., according to the Bureau of Labor Statistics. There was almost one dinner for every doctor in the country! Forcing biopharmaceutical companies to publicly disclose their payments may discourage doctors from attending these events, and might inhibit companies from putting them on. By removing these potential conflicts of interest, the net result will hopefully be an increase in prescriptions written based solely upon their medical merits.