Biotechnology industry campaigning for research tax credit

Companies would return money if they became profitable

Tom Abate / SF Chronicle 4jun01

Biotech lobbyists are trying to take tax breaks where none have gone before.

The industry wants the U.S. Treasury to pay money-losing biotech firms about 5 cents for every dollar they spend on research to speed the delivery of new medicines and help them become profitable corporate taxpayers.

The proposal, which would modify the federal government's existing research- and-development tax credit, was drafted by the Biotechnology Industry Organization (BIO) in Washington, D.C. Robert Matsui, D-Sacramento, and Philip Crane, R-Ill., plan to introduce the bill in the House of Representatives.

BIO tax expert Phil Ufholz likened the proposal to the earned income credit,

a federal subsidy paid to families too poor to pay taxes. In this case, however, the government is being asked to make payments to firms whose research expenses put them in the corporate poorhouse.

"This (concept) has never been applied to the corporate tax provisions, so this would be groundbreaking legislation," said Ufholz.

Ufholz said the proposal would correct an unfairness in the current federal R&D tax credit. Existing law allows companies to take a 20 percent credit for research expenses against their corporate income taxes.

The problem, Ufholz said, is that 98 percent of biotech firms are unprofitable and pay no corporate taxes. This stems from the unusual nature of drug discovery. Biotech firms must put new medicines through clinical trials that can take seven years and cost more than $350 million. During this time, when the companies are running in the red, they can't make use of the current R&D tax credit.

"We're the most research-intensive industry in the world and the way the current R&D credit is structured, most (biotech) companies can't take it," Ufholz said.

BIO's proposal would amend the current law to allow early-stage biotech firms to get a cash payment based on 75 percent of their unused R&D credit.

For instance, a money-losing biotech firm with a $50 million research budget would present $10 million in potential credits to the Treasury (reflecting the current 20 percent R&D tax credit).

Tax officials would take 75 percent of $10 million and multiply it times the 35 percent corporate tax rate. Uncle Sam would then write the company a check, in this case, for $2.625 million.

Ufholz said companies would be required to plow that money back into research. The bill would require companies to reimburse the Treasury by paying taxes -- equal to the amount of all these subsidy payments -- once they become profitable. If a biotech startup is bought by a profitable firm after receiving tax payments, the buyer would inherit the payback liability.

Although the bill doesn't specifically limit the proposed benefit to biotech firms, the language excludes a wide variety of businesses from farming to banking to athletics.

To qualify, a research company would have to have less than $500 million in gross assets, have been unprofitable for three years and not be in bankruptcy.

BIO officials said the proposal's biggest challenge will be objections to its estimated cost. Congressional staffers will fix a dollar value to the benefit once the bill is introduced. If the price seems too high, lawmakers may be frightened off. That's what happened last year after the state biotech lobby, the California Healthcare Institute, asked lawmakers in Sacramento to enact a similar benefit on the state level.

"We're hoping to keep this small," said Lee Rawls, vice president of BIO's government relations office. "We think we have a unique story. We're doing more incremental research than anyone else, but our companies can't use the R&D credit because they're in the red."

STOCK FEVER?
Biotech stocks have had a tough year. The sector began sinking in January and bounced back briefly at the end of the month, only to begin a long, steep slide that lasted until April.

Since then, biotech stock indexes have been struggling back. They closed last week right around their 2001 starting point. Analysts believe the sector will be lucky to remain at current levels during the summer, when the stocks typically experience a lull even in the best of times -- which these most certainly are not.

"I think we're headed for heavy sledding," said Franklin Berger, biotech analyst for J.P. Morgan. "Right now, biotech stocks as a group are trading in step with the tech stocks, and their weakness is dragging us down."

John McCamant, with the Medical Technology Stock Letter in Berkeley, said individual biotech firms may still rise on positive news. For instance, Seattle's ICOS Corp. has been soaring on indications that its experimental drug Cialis could offer strong competition to Viagra.

ICOS, which is developing Cialis with drugmaker Eli Lily, presented new clinical trial data about the drug at a urology conference in Anaheim during the weekend. ICOS shares have gained on the expectation that Lily and ICOS will try to get Cialis approved for sale later this year. ICOS was trading in the low $60s last week after setting a 52-week high of $64.75 at the end of May.

STEMMING DEBATE?
Last week's column about stem cell research prompted many letters and calls from readers, notably from patients anxious for such research to continue without delay.

However, one caller questioned the premise of the column, which suggested the debate wasn't solely about religion versus science and the issue of abortion. I offered as evidence Stuart Newman, a biotech critic who said he was pro-choice and opposed to stem cell research because it might turn the embryo into a commodity.

The caller said Newman's affiliation with New York Medical College made him suspect because that school is administered by the Catholic Church. Moreover, the caller said the college fired one physician in a dispute over abortion. I was unaware of this when I interviewed Newman, so I called back to ask him about it.

Yes, Newman said, the college is run by Catholic administrators, and one doctor did leave the hospital in a dispute centered around abortion. But Newman, who is Jewish, said that as a basic scientist in cell biology, he has not been pressured or censored. He reiterated that he is strongly pro-choice and that his reservations about stem cell work do not proceed from a religious or anti-abortion view.

He referred me to his longtime collaborator Ruth Hubbard, a professor emerita from Harvard University who has authored and edited several critiques of biological sciences written from a feminist viewpoint, including "The Politics of Women's Biology."

Hubbard said she and Newman have long worked together on the board of the Council for Responsible Genetics, a Cambridge, Mass., group that is critical of many aspects of bioengineering. Hubbard said that both the Council as a group and Newman as an individual are secular and pro-choice.

She acknowledged that, until recently, pro-choice scientists such as herself had been reluctant to criticize embryonic research because they did not want to be seen as taking an anti-abortion stance.

"We have to unlink our opposition to these technologies from the abortion debate," she said. "What is naive is to think that one can't be pro-choice and have reservations about embryo research."