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Jul 18, 2011

Revival of Tax Credit Program Depends on Job Creation and Scientific Results

Members of Congress are trying to expand the Qualified Therapeutic Discovery Program through 2017.

Revival of Tax Credit Program Depends on Job Creation and Scientific Results

QTDP delivered all its available $1 billion for the 2009 and 2010 tax years to 2,923 biotech companies. [© Orlando Florin Rosu - Fotolia.com]

  • Tucked into the 759th page of President Obama’s healthcare measure, at Section 9023 of the Patient Protection and Affordable Care Act of 2010, was a program that set aside $1 billion in tax credits and grants for biotechnology and pharmaceutical companies working on new therapies or other biomedical innovations.

    Unlike the bulk of the healthcare bill, which is being challenged in court on constitutional grounds, or arguably the stimulus bill enacted a year earlier, the Qualifying Therapeutic Discovery Project (QTDP) has fulfilled its promise, delivering all its available $1 billion for the 2009 and 2010 tax years to 2,923 biotech companies.

    Now some members of Congress along with industry supporters are looking to transform the one-shot QTDP into a longer program. On May 25, Rep. Susan Davis (D-CA) introduced HR 1988, the Qualifying Therapeutic Discovery Project Tax Credit Extension Act of 2011, both on her own and on behalf of Rep. Alyson Y. Schwartz (D-PA). The measure extends QTDP from the 2011 through 2017 fiscal years, at $1 billion a year.

    “Susan is working to get more co-sponsors and support from both sides of the aisle; everybody should be for innovation,” a spokesman for Rep. Davis, Aaron Hunter, told GEN. “It’s hard to predict whether it will be renewed, but there is movement in the Senate to get it done.”

    Since both Reps. Davis and Schwartz are Democrats, additional co-sponsors that include Republicans could prove especially important in the GOP-controlled House, let alone the Democratic-controlled Senate. At the moment, both chambers of Congress are focused on hammering out a debt reduction agreement with President Obama, so if anything happens on QTDP this year, it is not likely to occur soon.

  • QTDP's Success Story

    If and when QTDP is revived and extended, Washington can be sure it will see the same interest from biotech companies that it saw during the program’s maiden year. After all, the 2,923 companies that won tax credits or grants for 4,606 projects in 47 states under QTDP were among 5,600 applicants seeking a total of about $10 billion in awards.

    “There was a massive show of interest from the industry,” Jonathan Forman, principal of R&D tax services at BDO, told GEN. “Anyone who heard about it wanted to be involved in it.”

    The credit covered up to half the cost of a qualifying biomedical research project, up to a maximum $5 million per company of up to 250 employees, with a per-project limit of just $244,479. Startups could elect to receive their award as cash if they could prove they had yet to make a profit, a provision that has made QTDP especially attractive to early-stage life science companies.

    “The industry is approximately one-quarter smaller than it was in 2008,” pointed out Alan Eisenberg, evp for emerging companies and business development for the Biotechnology Industry Organization (BIO), which strongly supports HR 1988. “Companies need gap or bridge financing in the present economic environment to prevent the loss of innovation and scientific advancements that have the potential to lead to life-saving cures and treatments.

    “Upon renewal, Congress should take steps to make QTDP funding more impactful by ensuring that companies receive credits more in line with the high costs of groundbreaking therapeutic research,” Eisenberg added. He said BIO plans to work closely with Congress and federal regulatory agencies, namely the Treasury Department, the IRS, and NIH.

  • Trends in Money Doled Out

    A BIO analysis of QTDP winners offers some interesting observations. One is that the number of grants won when counted state by state correlates roughly to the amount of biotech activity in those states. California topped the list of winners with $281 million in tax credits or grants awarded, followed by Massachusetts with $131 million, then New Jersey at $52 million, Pennsylvania and Maryland tied with about $49 million each, and New York with $48 million.

    The next tier of winners is the next tier of biotech states: North Carolina, Texas, Washington, Florida, and Minnesota. In all, the top 10 states won 74% of the total tax credits and grants available.

    As befitting its name, drug discovery projects won the bulk of QTDP awards, with 71% going to drug or drug formulation/delivery work. Another 16% of winners were diagnostic companies and 11% specialized in making devices for implanting or delivering drugs. And nearly three-fourths of winners (72%) received tax credits or grants through QTDP for a single project.

    Forman noted that QTDP winners fell into two categories: very small startups with fewer than 25 employees and companies close to the 250-employee limit. The wobbly economy has tightened the supply of funds for all businesses, helping generate interest for the program. Forman added that it was, however, less a key factor in driving applications than the fact that startups pursue funding just about anywhere they can find it. “I don’t think there would have been leftover money even if the economy had been booming,” he added.

    William Kitchens, a lawyer with Arnall Golden Gregory, told GEN that QTDP is especially needed by earlier-stage life science companies. “The recession has affected capital investment in biotech, just like it has in a lot of other parts of the economy. This program is pretty critical, especially for the smaller companies, which this program is totally designed for.

    “If those companies don’t get funding, they have to shut down even if they have some great technology. If they don’t have the capital to commercialize the technology, then it’s not going to go anywhere. And that capital has been pretty hard to get.”

    Venture capital, for example, is harder to come by than before the recession, forcing many startups to either pursue huge first rounds or wait for funding until they have results from at least some clinical trials. And while the amount of VC awarded in Q1 was higher than a year earlier, as reported here in May, the number of deals fell during the same period.

  • Ways to Improve the Program

    One aspect of QTDP that should be changed if the program were revived, as Forman correctly noted, is requiring closer vetting of companies to ensure that tax credit or grant winners use the funds as they say they will. The tight timeframe between the signing of the healthcare act and the writing of rules for the QTDP program all but precluded such a process as well as a process for losing companies to challenge award decisions.

    “We know of situations where companies received denial notices, and the reason they were denied was patently false. Somebody said they were doing ‘A,’ and in reality they were doing ‘B.’ But there was no way to fix that because the decision was made, the money was handed out, and because there was a finite amount of money, there was no more money to give,” Forman explained.

    He suggested allowing for preliminary decisions weeks before final award decisions were made, so that QTDP could not only adjust funding for companies that appeal their rejections but for the other companies approved for awards as well.

    Writing in GEN last year, Forman and Chris Bard, BDO’s national leader of R&D tax services, also suggested prorating the awards that companies apply for, rather than allowing equal smaller amounts awarded per application, to prevent companies from simply breaking down their projects into multiple applications to ensure they received more funding. “Anybody who was providing advice on this topic was advising their clients to apply for as many projects as possible,” Forman said.

    All those changes would be moot unless Congress acts to revive QTDP. While Forman and BIO say the program can be justified in part based on the jobs that were created or retained as a result, members of Congress and the taxpayers who vote for them will likely want to know how many. Getting that answer shouldn’t take much time if indeed the program has been as successful as the numbers potray.

    And at a time when Washington has little to show in terms of job creation despite spending nearly a trillion on economic stimulus programs, QTDP could prove to be a shining successful exception. It will have to demonstrate, though, that sizeable numbers of jobs were indeed created and that those jobs led to some pretty significant science.

    Job creation along with advancing cutting-edge science may help justify the billions it would take to revive the program, especially after Congress seals a deal to tame the beast of trillion-dollar annual deficits, which is still expected despite the heated rhetoric of recent days.


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