Biotech’s Second Big Win in Healthcare Reform: A Tax Credit Bonanza

4/8/10

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.

Stewart Lyman is Owner and Manager of Lyman BioPharma Consulting LLC in Seattle. He provides strategic advice to clients on their research programs, collaboration management issues, as well as preclinical data reviews. Follow @

By posting a comment, you agree to our terms and conditions.

  • June

    How is it that Biotech will benefit in the long term, since tax credits can be taken away as easily as they are given? Ultimately, what investors will put millions upon millions of dollars into drug therapies that the federal government may or may not cover and which will most likely determine what the drug should be sold for (and to whom)?

    I find Biotech’s “victories” self serving and short-sighted. If healthcare is socialized, government run and dictated to in the next few years, how can Biotech remain innovative & a good investment?

    Won’t Biotech ultimately feel the pinch of government intervention and control? Under the coming healthcare umbrella how will expensive, new drug candidates get through trials,let alone to the market?

    I’ve seen a lot of cheering, but very little long term speculation on how we’re going to keep a vibrant sector fresh, innovative, free of even more government controls and ultimately (isn’t this the point?) capable of helping people who are ill, incapacitated or dying?

  • http://www.lymanbiopharma.com Stewart Lyman

    June, thanks for sharing your thoughts. You ask a number of important questions that are beyond the scope of my brief article and which would take pages to answer. The tax credit that I describe is likely designed to be a one-time stimulus package for the industry. At a time when numerous small biotech companies are cutting back on their research programs and struggling just to survive, these credits may allow them to stay in business until the financial climate improves and they can raise capital via other sources. The biotech and especially the pharmaceutical industries are in the midst of a large scale transformation that will continue for years to come. These changes were in the works years before the health care reform legislation was passed. I suggest you look at some of my previous Xconomy pieces where I have addressed in detail a number of the issues you mention.

  • Paul

    Bait and Switch?

    If you look at the exclusions to the “tax credit” (labor, rent, maintenance, overhead, etc.) it boils down to only being a “tax credit” for pieces of equipment that you pay cash for and agree not to amortize (for tax purposes). That will not be a “boon” to cash-starved companies that don’t have the cash to spend up front on the equipment. So the choice is amortize the full cost over 3-5 years OR take 50% of cost tax credit or rebate. Doesn’t seem like much benefit, just a political sound-bite.

  • http://www.lymanbiopharma.com Stewart Lyman

    Paul, I must admit I am not an expert on this legislation, which is why I quoted the facts as presented in the Dean Zerbe authored Forbes piece. According to that article, the only employees NOT covered by the legislation are those that are covered by 162(m)(3) status, which would generally be the CEO of a company. I went to the Library of Congress website and found a draft of the legislation from the fall, which states “Qualified research expenses eligible for the research tax credit consist of: (1) in-house expenses of the taxpayer for wages and supplies attributable to qualified research; (2) certain time-sharing costs for computer use in qualified research; and (3) 65 percent of amounts paid or incurred by the taxpayer to certain other persons for qualified research conducted on the taxpayer’s behalf (so-called contract research expenses)”.

    Based on Zerbe’s commentary as well as the language of the draft legislation, it appears that there is significantly more to the savings within this credit than you suggest.I’m not sure if the wording of the legislation has changed in the final version of the bill, which I regret to say I have been unable to track down. If you (or another Xconomy reader) can find other language that contradicts this, please weigh in again. Where did you find your information on exclusions?

  • Correcting Paul

    Stewart you are right, it’s the CEO whose salary is deducted. One probably shouldn’t be classing CEO pay as R&D expense anyway, it’s G&A. Labor as a whole clearly qualifies for this credit. What is not clear: can one deduct salary for a VP of R&D? They may be one of the top 4 salaried officers, but we don’t have any obligation to disclose the VP’s salary under SEC rules, since we are a private co.