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May 1, 2012 (Vol. 32, No. 9)

Step Up for Biotechnology

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    Ron Cohen, M.D.

    The U.S. is now facing unprecedented competition from around the globe to be the leader in biomedical research. In 2008, China pledged to invest $12 billion in drug development, and in 2011, the Chinese government named biotechnology as one of seven industries that will receive $1.7 trillion in government funding over the next five years.

    The European Union’s Innovative Medicines Initiative is pumping $2.65 billion into Europe’s biopharma industry, and India’s Bioconnect initiative has funded over 200 new biopharma projects. While America has developed more cures and breakthrough medicines than any other country, this is not a position that will be sustained without continued investment and policies focused on supporting and incentivizing the next generation of biomedical discoveries, treatments, and cures.

    The U.S. biotech industry is poised to be a major driver in an innovation-driven economy, and we offer real solutions to our most pressing healthcare needs. Our biotech companies provide high-wage jobs while the indirect effects of increased research funding on the regional economy are significant. In fact, the nation’s 1.42 million bioscience jobs support an additional 6.6 million jobs in the U.S.

    To fully realize these potential benefits, we must have a policy environment that fosters innovation. There are five policy areas necessary to enable us to deliver the next frontier of medical breakthroughs: 1) protection of intellectual property—to protect the main driver in securing private sector investment; 2) funding for basic research and an effective technology transfer system; 3) funding opportunities for early-stage clinical research and development; 4) tax and financial services policies that encourage investment and support biotechnology companies; and 5) a well-funded FDA with transparent and consistent regulatory processes that enable the timely, efficient, and predictable review of innovative medicines.

  • R&D Partnership Structures

    Biotech companies have among the largest capital burdens and longest development pathways of any industry. High costs and long timelines can scare off investors who may be looking for investment strategies with earlier prospects for success. Amending the Internal Revenue Code of 1986 to allow certain tax incentives stemming from R&D to flow from life science projects through to their investors would result in immediate tax benefits and attract more investment in small biotechnology companies.

    Section 382 Net Operating Loss (NOL) Reform: Development-stage biotech companies typically generate significant losses, which can be used to offset future gains if the company becomes profitable. Section 382 of the Internal Revenue Code currently restricts the usage of net operating losses (NOLs) by companies that have undergone an “ownership change.”

    There are two reforms to Section 382 that would be beneficial to many biotechnology companies. First, we should exempt NOLs generated by qualifying research and development by a small business from Section 382.

    Second, we must redefine “ownership change” to exclude certain qualified investments, like those in rounds of venture financing. These reforms would allow small biotech companies to retain their NOLs and include them as tax attributes on the balance sheet, thus increasing their value when preparing for additional rounds of financing like mergers or initial public offerings.

    Section 1202 Capital Gains Reform: Section 1202 provides a small business investment tax incentive allowing taxpayers to exclude 50% of their gain from the sale of a qualified small business stock that has been held for more than five years. This tax exclusion could incentivize investors to invest in biotechnology companies early and hold their investments longer.

    Changing the definition of “qualified small business” to include companies with gross assets up to $150 million, indexing the cap to inflation, and excluding intellectual property and follow-on rounds of financing from the gross assets test would more accurately represent the capital-intensive nature of innovative industries like biotechnology.

    Additionally, a graduated increase in the exclusion for qualified small business stock, rewarding investors who hold stock for longer and incentivizing them to continue to do so, would be extremely beneficial.

    Section 197 Amortization Reform: When the assets of an early-stage biotech company are purchased, the acquirer may amortize certain intangibles under Section 197 over a 15-year period. Accelerating this amortization period to five years could encourage large company investors contemplating acquisitions of specific intangible assets of small biotech companies to invest at an earlier stage in the company’s research.

  • Enabling FDA Regulatory Processes

    Timely reauthorization of PDUFA V, and especially the commitment to timely, interactive communication with biotechnology and life science companies during drug development, are critical to the future success of the biotechnology sector in the U.S.

    There are several specific proposals being considered by Congress that are positioned to improve our ability to develop and deliver innovative medicines in the United States:

    • We need to have a well-funded FDA. While industry user fees play an important role in supporting FDA’s medical product review program, user fees should be complementary and additive to a sound base of appropriated resources for the Agency.
    • FDA’s mission statement should be updated to reflect the Agency’s critical role in advancing innovation. This must be positioned as a core focus and goal.
    • We need to encourage FDA to be more clear and consistent in its application of standards and its communications with drug developers. Standards often appear to be inconsistently applied. Critical guidance for industry often takes years to be published. Communications processes that should be simple often take months. In addition, reasons for nonapproval are often not clearly articulated.
    • Advisory Committee and external expert conflict of interest rules should be reformed to provide FDA with greater flexibility and discretion to select the most appropriate advisors. Current standards often limit access to the best available scientific experts.
    • Processes should be implemented to ensure that the views of patient groups are more actively solicited and heard within the drug approval process.

    In addition to these recommendations, the critical need to expand and modernize the accelerated approval pathway cannot be overemphasized. The Accelerated Approval pathway was implemented by FDA in 1992 in response to patient groups who advocated for earlier access to life-saving medicines to treat HIV/AIDS. Under Accelerated Approval, FDA can approve the marketing of a drug to seriously ill patients based on earlier evidence of effect with a commitment from the sponsor to conduct post-market studies.

    Application of the Accelerated Approval pathway has been largely limited and excludes drugs that treat many rare and serious conditions. This has created some confusion among sponsors on how to apply the pathway to different indications.

    The Accelerated Approval pathway needs to be modernized to incorporate the remarkable advances in life sciences that have been and will continue to be made, in such areas as genomics, molecular biology, and bioinformatics. These and other advances can enable novel drug development strategies, employing tools such as biomarkers, pharmacogenomics, predictive toxicology, clinical trial enrichment techniques, and novel clinical trial designs.

    Clarification of when and how these tools can be utilized in an Accelerated Approval pathway will incentivize drug development for serious and life-threatening diseases and encourage the development and utilization of new tools and methodologies.

    I have discussed laws and proposals that would go a long way in fostering biomedical innovation in the U.S. These recommendations are achievable and will deliver significant competitive advantages and opportunities for expansion in biotech in the U.S. The decisions that Congress makes now will play a key role in whether or not we hold on to our global leadership in this area and maximize the economic and public health solutions that the biopharmaceutical industry has to offer.


Readers' Comments

Posted 05/06/2012 by Dr. Jack Coupal

Dr. Cohen's fine recommendations regarding needed tax law changes are do-able and within a reasonable time frame. Especially in our time of economic recession. The more difficult (and maybe impossible) changes needed are to the US Food and Drug Administration. Its mission and its in-house science and technology expertise is vintage mid- to late-20th century. The FDA is risk-averse in the extreme, and at all levels of the agency.
 
FDA approval/disapproval decisions on drugs or medical devices appear often political, rather than scientific and clinical. Political agendas of those federal employees must be eliminated and play no role in decision making.
 
It will take Congress to rewrite the FDA's mission and operational standards. That must drag FDA's competence into the 21st century. I fear that that won't happen in my lifetime. There are way too many politically powerful entities who demand the status quo.      
 
 

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