The Winners of the IRS Biotech Grant Program Are…

11/3/10

[Updated: 11:30 am, 11/4/10] The biotech industry was a key beneficiary last spring of the new health care law. $1 billion worth of Qualifying Therapeutic Discovery Project Credits were dangled in front of the small to mid sized biotechs that met the designated criteria. The Treasury Department and IRS were put in charge of this program, which was designed to cover expenses incurred by the companies in 2009 and 2010. If a biotech company had a tax liability, it could get a 50 percent tax credit; if there was no tax liability, it would qualify for a tax-free grant in the same amount. The maximum credit or grant that any one company could obtain was $5 million, based on certification of $10 million in qualified investments, since the credit or grants are funded at a 50 percent rate.

The announcement of this stimulus program ignited a small frenzy among companies that resembled a school of piranha going after a fresh carcass. The awards come at a good time for the industry. Due to the tough economy, some 52 publicly traded biotechs (and an untold number of privately held companies) in the U.S. have gone out of business in the last three years, according to a recent BIO Factset.

By way of comparison, the $1 billion available through this program was equivalent to about half of the total investments made by VC firms in the second quarter of 2010 to 234 biotech and medical device companies in the US. While the government program is (at present) a one-time thing, venture firms often return to further invest in their targeted companies. Still, this was a significant amount of money put into play by the government to kindle the smaller companies in the biotech industry.

The credits and grants covered qualified investments in “therapeutic discovery projects”, which were defined in a previous Xconomy post. The applications were due on June 21st, and the victors were revealed today on the IRS Website on a state-by-state basis. A quick read of the numbers indicates that the entire $1 billion that was up for grabs has been distributed. As predicted, the grants and credits were spread out geographically among 47 states (and the District of Columbia) so as to provide a wider boost to the economy nationwide, and to give local politicos (or at least those that supported the health care legislation) something to crow about. Both traditional biotechs as well as med tech companies received awards.

[Update: 11:30 am, 11/4/10] Mining through the data in more detail revealed some interesting nuggets of information. By my calculation, 41 percent (37 of 90) of the eligible biotech companies in Washington state (where I live) received grant money. Given that we don’t know how many companies actually applied for the awards, the success rate could be considerably higher. These are numbers that would make an academic researcher swoon, given the success rate for NIH grants is measured in the single digits. An unanswered question: did the companies that didn’t get awards get turned down, or did they not apply? This is a subject that their investors should probably raise with them. Finally, despite the fact that these awards were thought of in many quarters as being specifically for biotechnology companies, many medical technology companies were eligible to compete, and they did very well. By my accounting, 40 medical technology companies in Washington State received grants, which is more than the number of awards given to biotech companies. For those who are interested, I have posted some of this analysis on my website.

California, not surprisingly, took home the most money, with $281 million, and Massachusetts landed about $129 million. A few states (Alaska, Idaho, and Wyoming) received no funds at all, and there were three awards to undefined “foreign addresses.” A quick back of the envelope calculation suggests that some 2,400 different companies or so received an award, with a mean value of around $410,000. A number of companies won multiple awards for different projects, and the credits and grants cover expenditures in both 2009 and 2010. The government, to its credit, met the very ambitious timeline that it had set for the collection and review of the applications and the announcement of the awards.

So what impact will these awards have? The amount available to any one company was capped at $5 million, and the majority of companies clearly received much less than this. Overall, the effects will be rather modest on a per company basis. It’s likely that the very smallest companies, those that are just holding on while trying to obtain a critical piece of data or lock down some VC or angel funding, will get the most benefit. This was, in fact, the intention of the program: to stimulate the growth and survival of the smallest companies. That’s why the larger, more mature biotech companies (with greater than 250 employees) were not eligible to compete. The money will not only pay for expensive lab supplies, it should also serve as well as create a number of good, high paying jobs across the industry. Here’s hoping that the winning companies will use the funds to leverage their research and clinical programs into successful businesses.

The other likely big winners? The accounting and grant writing firms that assisted the baby biotechs with putting together their applications. Some of these firms were taking as much as 25 percent of the grant proceeds if their efforts were successful (and zero percent if they were not). When the awards program was first announced and details were non-existent, rumors flew about early application deadlines, submissions that would be judged and funded in the order in which they were received, and the possibility that grant applications might run hundreds of pages (including supporting materials). None of these rumors turned out to be true, nor was it known at the time that the dollar amount of the individual awards was going to be limited. I would guess that many biotechs signed on with these firms early in the rumor phase, only to realize later that they have could have easily completed the brief applications on their own. Given overstretched internal resources, I don’t fault the biotech companies for going down this path. As Henry Ford once put it, “The best we can do is size up the chances, calculate the risks involved, estimate our ability to deal with them, and then make our plans with confidence.”

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 @

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