July 17, 2018 at 5:00 am ET
America’s life sciences industry is thriving, employing more than 1.2 million people and creating life-saving treatments for ailments that would have carried a death sentence if not for biopharmaceutical breakthroughs. Today, a 20-year-old diagnosed with HIV can expect to live into his or her early 70s — a life expectancy comparable to that of a person without the virus.
Biopharmaceutical innovation in our country delivers more new drugs than the rest of the world combined. In fact, 57 percent of all new medicines that treat patients around the world are innovated in the United States. Thanks to our outstanding scientists and savvy entrepreneurs, we’re bringing hope to millions of individuals and families.
Yet, American innovation has slowed in recent years as other countries have developed policies to encourage innovation abroad, as shown in a recent report from the Information Technology and Innovation Foundation. Foreign nations are competing aggressively to attract more life sciences investment, including through tax incentives such as “patent boxes” (which tax patent revenues more favorably than other sources of commercial revenue), regulatory reforms to speed up drug approvals, and workforce and immigration policies designed to attract and educate top talent in the life sciences field.
As other countries adopt policies designed to attract biotechnology firms to their shores, America is losing some of its competitive advantage. We must take action to preserve our global leadership.
The vast majority of America’s biotechnology companies are small, pre-revenue firms that must fight an uphill battle to raise the capital necessary to invest in clinical trials that cost hundreds of millions of dollars.
The journey to take a new drug from a discovery in the lab to a Food and Drug Administration-approved medicine is a grueling one — typically taking a decade or longer and totaling over $1 billion for a single approved drug. That’s why it’s so crucial that our capital markets and tax code are operating efficiently to allow firms to raise the tremendous levels of investment required to continue their life-saving work.
While President Donald Trump’s tax package was an important step in reforming our tax code, we must do more for small, pre-revenue biotech startups that are still years away from making a product or profit. Smaller firms and labs account for 70 percent of all business research and development investment, 59 percent of R&D jobs, and 27 percent of U.S. exports. But R&D companies that aren’t making profit yet do not directly benefit from lower tax rates or tax incentives, requiring alternative ways to support and sustain their ground-breaking research.
As Congress begins work on a further tax reform package, there are a number of relatively simple changes to our tax code that could help cement U.S. leadership in the biosciences for a generation.
For example, Section 382 of the tax code prevents profitable companies from buying non-viable companies with sizeable losses simply to claim those losses against their own tax liability. However, biotech firms are often tripped up by Section 382 in exactly the opposite situation.
These are healthy companies that investors want to invest in because they believe in the underlying technology and want to help the company grow and succeed. Because of the huge capital costs required to bring a new drug to market, these companies have often booked substantial losses over the years as they work to get their drug approved.
Unfortunately, as a result of Section 382, subsequent financing rounds and IPOs often unintentionally trip the “ownership change” rules of Section 382, limiting the company’s net operating losses and making investment less attractive. Simple changes to the scope of 382 can help incentivize investment in financially healthy, innovative companies while still keeping intact the original intent of the rules.
Section 1202 of the tax code encourages investment in small companies by exempting qualified small business stock from tax when sold. This exemption was made permanent in the Protecting Americans from Tax Hikes Act in 2015 and was retained in the Trump tax law. However, the current statutory definition of a QSBS often means biotechs and other innovative industries do not qualify. By expanding the definition of eligible businesses, Section 1202 can help drive investment toward smaller biotechs working on life-saving treatments and cures.
Finally, the payroll R&D credit allows companies in their first five years of operation with less than $5 million in annual gross receipts to deduct up to $250,000 against their payroll taxes. Unfortunately, emerging biotech companies usually take at least twice as long to bring a product to market. Furthermore, the $5 million maximum in annual gross receipts can trip up companies that receive one-time milestone payments after entering into partnership agreements to continue their valuable research.
For young life sciences companies to benefit from the payroll R&D credit, eligibility should be adjusted to less than $100 million in gross assets, and small biotechs should be allowed to offset up to $1 million in payroll taxes. These sensible reforms would help unleash the wave of innovation this provision was intended to generate.
Last year’s tax reform package provided a much-needed shot in the arm to improve the competitiveness of the American marketplace for many larger companies. But we ought not lose sight of the fact that smaller firms provide outsized contributions to our economy and our health. Our tax code should reflect the unique challenges faced by these firms to preserve American leadership in life sciences for the next generation.
Jim Greenwood, a former six-term member of Congress from Bucks County, Pa., is the CEO of BIO, the world’s largest trade association representing the biotechnology industry.
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