Business & Finance Issues

BIO’s Annual Convention >

Biotechnology entered 2005 on the heels of one of the industry’s best years ever for investment. In 2004, biotechnology companies raised $20.8 billion in new financing, including a record $4.9 billion for privately held companies. Total financing was up 26 percent vs. 2003, and trailed only the genomicsfever year of 2000.

Even so, most the world’s 4,000-plus biotechnology companies are small, research-and-development businesses eager to attract scientific talent as well as grants, investment and corporate partners. Helping members grow their companies into the next generation of Fortune 500 firms has always been central to BIO’s mission, and in 2005 the organization is taking on a variety of patent and financial policy issues, as well as hosting about a dozen business development conferences.

INTELLECTUAL PROPERTY
PTO Reform

Because patents are key assets for most biotechnology companies, plans to reform the system by which they are granted and challenged are of interest to BIO. In June 2004, the National Academy of Sciences (NAS) issued a comprehensive report entitled A Patent System for the 21st Century, setting forth seven recommendations for updating the patent system. BIO responded by commending the Academy’s efforts and endorsing many of the recommended reforms. BIO has long supported reforms to strengthen and streamline the patent system.

However, BIO disputes the report’s assertion that the Patent and Trademark Office’s (PTO) current practice of dividing a single discovery into multiple applications (termed “restriction practice”) has any place in a 21st century patent system. Reforming restriction practice would improve patent quality and efficiency and will also be necessary for international harmonization of rules.

In 2004, BIO also responded to the Federal Trade Commission’s (FTC) 10 recommendations for reform of the patent system, published in a report called To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy. BIO agrees with some of the recommendations, but has voiced concerns about the remainder, especially recommendations to modify the laws and legal decisions governing previously issued patents.

Patent Fee Increase

Patent fees jumped 15 to 25 percent in December 2004, when President Bush signed the Consolidated Appropriations Act of 2005 (H.R. 4818). The House and Senate approved the increase in fees for fiscal years 2005 and 2006, despite objections from the patent user community.

Biotech companies will feel a bigger bite than other patent applicants because of restriction practice, the PTO’s discretionary practice of dividing a single biotech discovery into multiple inventions (see discussion on previous page). Restriction practice means biotech patent applications will cost 30 to 40 percent more.

BIO opposed the fee increase because it lacked any provision to end the practice of diverting patent fees to fund the operation of other government agencies.

The increase is slated to sunset September 30, 2006, barring additional legislation.

Post-Grant Opposition Reform

If the PTO grants a bad patent—one almost certain to be held invalid—there is no way to challenge that patent, short of infringing it and waiting for the patent holder to sue. The FTC and NAS both recommended reform to create a system of post-grant opposition that allows competitors to seek invalidation of a patent administratively.

BIO supports such reform, provided it does not create an onerous burden for the patent holder. In comments BIO submitted to a House subcommittee hearing on the issue in June 2004, the organization stressed the need for procedural safeguards that guarantee timeliness, identify the real parties in interest, put the burden of proof on those filing opposition and simplify the evidence required to defend against opposition.

“A post-grant administrative proceeding will be valuable only if it permits a review of validity to occur without creating expenses, burdens on companies and delays comparable to those encountered in district court litigation,” BIO stated.

A bill to create post-grant opposition procedures and to effect other reforms was introduced into Congress in October 2004, too late for serious consideration in the 108th Congress. The measure is expected to resurface in some form in the 109th.

Statutory Research Exemptions

BIO is responding to court cases and legislative proposals that would codify a common-law practice of allowing university and industry researchers to use patented materials for noncommercial research. Many private patent owners choose not to enforce patents against researchers, if the research activities do not impinge the patent owner’s commercial interests—a policy known as the “research exemption.”

Because patents are critical to biotechnology companies’ business plans, BIO generally opposes legislative efforts to carve out subject matter from enforcement or patentability. BIO will continue to make the case that intellectual property rights—and the ability to enforce these rights—are fundamental to the development of revolutionary biotechnology products.

CREATE Act

No industry is more collaborative than biotechnology, so it may come as a surprise that it took passage of the CREATE Act of 2004 to permit patenting of inventions researched jointly by public institutions and private entrepreneurs. Such collaborative inventions will now be treated the same as inventions researched jointly by individuals affiliated with the same organization. The new law—formally, the Cooperative Research and Technology Enhancement Act of 2004—will apply only to patents granted on or after enactment.

BIO enthusiastically supported the CREATE Act. “The majority of our members routinely engage in collaborative research, and we believe that encouraging collaborative research will greatly enhance the ability of the biotechnology industry to develop life-saving and life-enhancing products,” BIO stated in a March 2004 letter to Congress.

TAX REFORM

Because of tax inequities, biotechnology companies’ cost of capital is up to 48.6 percent higher than other firms’. During the last session of Congress (2003–04), BIO’s advocacy led to the introduction of corrective legislation in both the House and Senate. The Biotechnology Future Investment Act would have allowed biotech companies to retain credits for net operating losses after technical changes in ownership resulting from new financing. The bill won bipartisan support but did not come to a vote.

BIO is exploring additional tax reform options with the goal of developing a broader package for consideration in the current Congress.

SBIR GRANTS

Under a new interpretation of a 1982 law, biotechnology companies that are majority-owned by venture capital firms are now barred from receiving federal Small Business Innovation Research Grants. These grants, ranging from $100,000 to several million dollars, have helped biotech companies pursue early research in fields such as cancer, cardiovascular disease, diabetes and HIV/AIDS.

A solution appeared at hand in 2004 in the form of an amendment to the Small Business Administration reauthorization bill, but that legislation stalled over issues unrelated to the grants.

Senator Michael Enzi (R-Wyo.), the new chair of the Health, Education, Labor and Pensions Committee, plans to hold a hearing on the issue early this year. Supporters of reform include the head of the National Institutes of Health, Dr. Elias Zerhouni, who has told members of Congress that the current eligibility interpretation hurts the SBIR program.

STOCK-OPTIONS EXPENSING

For young R&D-based companies, offering employee stock options is a must. Options have allowed shoestring enterprises to attract top minds while conserving cash and giving employees a stake in the companies’ success—all at no direct cost other than that associated with administering the plans.

That system could be in for radical changes beginning mid-year 2005. Despite opposition from BIO and dozens of high-tech organizations and companies, the Financial Accounting Standards Board (FASB) has determined that there is in fact a cost—or more precisely, an expense—associated with stock options. In an accounting standard finalized in December 2004, FASB ordered all public companies to begin expensing options by June 15, 2005, using what BIO and allies contend are flawed valuation methods. Those methods can generate valuations that vary as much as 100 percent depending on the projected volatility of a given stock.

BIO is urging the Securities and Exchange Commission (SEC) to intervene and consider extending the implementation date to the end of the year—or later—and to allow use of models that will provide a fairer and more accurate estimate of option values for small and mid-size companies.

On October 5, 2004, BIO arranged for a group of chief financial officers to meet with Donald T. Nicolaisen, SEC chief accountant, to discuss the unique problems faced by biotech companies in the expensing of stock options and compliance with the reporting requirements of the Sarbanes-Oxley Act of 2002.

BUSINESS DEVELOPMENT CONFERENCES

Deal activity between biotech and pharmaceutical companies soared 57 percent in 2004, to 495 new or modified agreements, and deal activity between biotech companies jumped 18 percent. Merger and acquisition activity also set a new record with 153 deals, up 16 percent.

Such deals don’t just happen. Biotech companies—especially small firms struggling to break through the Wall Street clutter—need opportunities to tell their stories to prospective investors and partners, as well as venues in which to explore mutual needs and potential collaborations.

That’s where BIO steps in, acting as the industry’s matchmaker through an annual series of about a dozen investor and partnering conferences and an online profiling and scheduling system for one-on-one meetings between companies and corporate partners or investors.

BIO’s first 2005 event was the Jan. 31–Feb. 1 BIO-Asia Clinical Stage Partnering Conference in Tokyo, followed just a few weeks later with the seventh annual BIO CEO & Investor Conference in New York, which drew record attendance. This spring brings the launch of a new conference, Convergence: The Drug/Device Summit, March 21–23 in Pittsburgh. BIO also hosts its first-ever event in Atlanta, BIO VentureForum East, May 9–11.

BIO Emerging Company Investor Forum

In October 2004, the BIO Emerging Company Investor Forum was launched to provide an annual West Coast showcase for small to mid-size biotechnology companies. The inaugural event featured more than 200 company presentations, 30 keynote and panel sessions and support for hundreds of one-on-one meetings between biotech companies and prospective investors and partners. BIO tapped as hosts and co-hosts for the meeting some of the industry’s mo st prominent investment banksupporters: Lazard, Banc of America Securities, CIBC World Markets, Pacific Growth Equities and Citigroup. In addition, more than 30 venture capital firms served as advisors for the forum.

Bio CEO & Investor Conference

BIO CEO & Investor Conference

Almost 18 months into a biotech stock rally, the mood among investors and executives at BIO’s 2004 CEO & Investor Conference was enthusiastic. For the first time ever, registration topped the 2,000 mark, packing the Byzantine corridors of New York’s Waldorf Astoria Hotel, home to the conference since its inception in 1999.

Growth continued in 2005, on the heels of an outstanding year for the industry. Once again, attendence surpassed 2,000, including more than 900 investors.

BIO Business Forum

The Business Forum at the BIO annual convention has emerged as the biotechnology industry’s largest partnering meeting and networking opportunity. The 2004 event in San Francisco set new records, with participation up nearly 50 percent vs. 2003. More than 3,000 people attended the forum, and 832 companies participated in formal presentation, partnering and executive training programs. A record 5,250 one-on-one partnering meetings were scheduled, a gain of 64 percent over 2003.

The BIO 2005 Business Forum will be held in Philadelphia, June 19–22.

BIO Mid-America VentureForum

Long home to some of the nation’s largest pharmaceutical, device and agricultural firms, Midwestern states are now seeking to cultivate a new generation of life sciences companies. And BIO is helping them, with the BIO Mid-America VentureForum, now in its third year. The 2004 investor conference in St. Louis attracted more than 440 people, including opening-day speaker Missouri Gov. Bob Holden. The 2005 conference, this time in Minneapolis, is slated for September.

BIO BUSINESS SOLUTIONSsm

BIO not only helps members raise money—it helps them save money, too, through the BIO BUSINESS SOLUTIONSsm program, which offers discounted pricing and special benefits on products and services such as laboratory supplies, business insurance, news distribution services and 401(k) plans.

Participating companies now number 1,125 and sales are estimated at more than $120 million. In 2004, BIO added a packaged and bulk gases contract with Airgas Inc. and BOC Gases. BIO also expanded a contract with Office Depot to include Tech Depot, which offers discounts on computer and technology products.

Perhaps the program’s most visible recent development was the launch of BIO SmartBriefs, a daily e-mailed news compilation service that now has more than 8,000 subscribers.

BIO BUSINESS SOLUTIONSsm benefits not only BIO and its members, but state and regional biotechnology associations as well. Twenty-seven such associations now provide the benefits to their members, including five that joined in 2004: BayBio, the Idaho Bioscience Association, the Indiana Health Industry Forum, the Kansas Bioscience Association and the Biotechnology Association of Maine.

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