"The Biotechnology Future Investment and Expansion Act of 2003"
H.R. 2968 & S. 1773
(October 30, 2003) Background:
Legislation has recently been introduced in the House and Senate to correct a provision in the Internal Revenue Code (Section 382) that has unintentionally affected the progress of research in the biotechnology industry. On July 25, 2003, "The Biotechnology Future Investment Expansion Act of 2003" (H.R. 2968) was introduced in the House by Representatives Tom Reynolds (R-NY), Eric Cantor (R-VA), Bob Matsui (D-CA), Benjamin Cardin (D-MD), and Rush Holt (D-NJ). Companion legislation, S. 1773, was introduced in the Senate on October 22, 2003, by Senators Rick Santorum (R-PA) and Tom Carper (D-DE). H.R. 2968 and S. 1773 would correct this provision in the code in order to encourage further investment in biomedical research.
There are nearly 1,500 biotechnology companies in the U.S. that have produced 130 FDA-approved products. Another 350 biotech drug products and vaccines are currently in clinical trials. Most biotechnology researchers work in promising, but potentially narrow fields along side the few colleagues who are qualified to evaluate the theoretical promise of a particular compound. On average, it takes these researchers more than 10 years and $500 million to develop a new biotech therapy. The overwhelming majority of the firms engaged in this highly capital-intensive research are small to medium sized companies. These factors combine to create an industry structure that is relatively unique in our economic history.
This structure - as well as a natural outgrowth of economic circumstances -- makes the biotech industry vulnerable to unintended consequences of tax policies originally designed to encourage research in more common industrial models. This legislation is intended to tailor the tax code to better apply in this sector. Specifically, current tax treatment of net operating loss carryforwards (NOLs) impairs, rather than fosters, biotechnology research in significant ways. First, the time limits on NOLs severely limit their utility for biotech companies, which often have unusually long product development and no profits against which to apply the potential tax benefits. Less obviously, rules designed to prevent fraudulent trafficking in NOLs after an ownership change often inadvertently trigger restrictions on the use of a biotech firm's NOLs, rendering them useless in many cases. These rules are now being improved to encourage further investment in this vital sector.
Section 382 of the Internal Revenue Code, designed to combat the very real problem of NOL trafficking, describes the many circumstances that can be classified as an ownership change. Unfortunately, the law as written captures the frequent biotech practice of raising equity in successive financing rounds, a practice essential to successfully negotiating the long product development and Food and Drug Administration approval process.
These limitations have the effect of discouraging biotechnology research and leaving the firms that would otherwise conduct that research in dire financial straits. Without these firms, the money that is being poured into research at the National Institutes of Health (NIH) and elsewhere to combat diseases such as cancer, HIV, hepatitis, cardiovascular ailments, diabetes, CNS disorders, as well as many rare diseases will have a significantly reduced potential to lead to new cures. Today, promising therapies are shelved due to inhibited capital formation. We may never know what cures will be lost without action.
The passage of H.R. 2968 and S. 1773 is crucial to reflect the unique structure of the biotech industry, a structure that the architects and stewards of the tax code likely never imagined. We can improve the incentives to conduct research and to invest in the entrepreneurs leading the way. And, we can do so in a manner that continues to prevent the fraudulent use of NOLs, as Section 382 was original constructed to do.
Contact:
For more information, please contact Sharon L. Cohen, vice president for government relations, at (202) 962-9200 or scohen@bio.org.
The Biotechnology Industry Organization (BIO) represents more than 1,100 biotechnology companies, academic institutions, state biotechnology centers and related organizations in all 50 U.S. states. BIO members are involved in the research and development of health care, agricultural, industrial and environmental biotechnology products. For more information on BIO, visit our website at www.bio.org.
|
Printer Friendly
