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Insight & Intelligence : Sep 16, 2011
As Obama Pitches Jobs Bill, Biobusinesses Link Growth to R&D Incentives and Early-Stage Funding
Payroll tax cuts detailed in American Jobs Act could spur hiring, but only more life science focused policies would do the trick.!--h2>
During his 32-minute speech unveiling the $447 billion American Jobs Act before a joint session of Congress, President Barack Obama uttered the word “jobs” 37 times and pleaded with lawmakers to “pass this jobs bill,” “pass this bill,” or “pass it right away” a combined 13 times. Four days later, when Obama submitted his measure to Congress, the bill had already sunk into the proverbial quicksand of political squabbles, as the president and lawmakers bickered over how to pay for the legislation.
Even if the prospects for the bill were smooth sailing, the American Jobs Act announced by President Obama on September 8 has a long way to go toward addressing numerous challenges for life science businesses tied to expanding their staffs. As proposed by Obama, the American Jobs Act is a package of short-term tax cuts, tax credits, spending programs, and other measures intended to jumpstart the economy by encouraging job creation by businesses and state and local governments.
Barbara Gebhardt, president and CEO of life science staffing agency Opus Scientific and its nonbiotech counterpart Opus Staffing, told GEN the jobs bill has some encouraging provisions for life science businesses thinking of expanding their staffs. She cited the $30 billion for repair and modernization projects for more than 35,000 schools including science and computer laboratories.
“I think that’s significant for the industry only because it promotes the bioscience culture through education and hopefully brings about some more interest right here, where we can keep the talent here and encourage the talent in an industry that creates high-paying jobs and lots of ancillary jobs,” Gebhardt said.
Addressing Job Creation
The bill’s largest single cost is the $175 billion projected as the cost of further cutting the Social Security employee payroll tax rate for a year from 4.2% to 3.1%. Obama says the reduction would benefit 160 million U.S. workers and produce a $1,500 annual tax savings for “typical” households.
Obama has also proposed halving, from 6.2% to 3.1%, the payroll taxes paid by employers on the first $5 million of wages to employees next year. Payroll taxes would be eliminated for businesses that increase their payrolls by up to $50 million, either by adding new workers or raising the wages of their current employees. It would cost $65 billion and the only exceptions written into the bill are household workers and federal, state, and local governments except for state colleges and universities, which do qualify.
Obama has also repeatedly spoken of the bill as benefiting small businesses. That may technically be true since most businesses are small. In Washington, though, where a spending “cut” isn’t always a cut, a “small” business isn’t always, well, small.
According to the US Small Business Administration (SBA), small businesses in most manufacturing and mining industries can employ several hundred people, while nonmanufacturers are defined as small if they generate as much as $7 million in average annual receipts.
Helping Small Businesses
A 500-employee small business limit applies to companies focused on R&D in biotechnology; R&D in the physical, engineering, and life sciences; and manufacturing of in vitro diagnostic substances, of biological products, and of pesticide and other agricultural chemical manufacturing. Businesses in two life science specialties can employ up to 750 people and still be considered small: medicinal and botanical manufacturing; and pharmaceutical preparation manufacturing.
Safi Bahcall, Ph.D., CEO of Synta Pharmaceuticals, agrees that policies that encourage R&D small businesses would indeed be helpful. The company focuses on developing small molecules for cancer and chronic inflammatory diseases. “Our goal is to become the next Genentech, the next Merck and own our drugs, and that would of course create a lot of jobs. What we would like to do is keep those jobs in the United States,” Dr. Bahcall, member of a working group on the future of the U.S. science and technology research enterprise, which consults with the President’s Council of Advisors on Science and Technology, told GEN.
He pointed out, though, that “right now the United States is not really competitive in terms of the incentives being offered for job creation in R&D small businesses,” Dr. Bahcall said. For example, France offers a much more generous research tax credit.
That credit, according to the Invest in France Agency, amounts to 30% of total annual expenditure on research activities of up to €100 million (about $137.4 million) and 5% of yearly expenditure above that level. The 30% rate rises to 40% and 35% in the first and second years, respectively, for first-time research tax credit applicants.
With nothing comparable in the U.S. to consider, Synta and other R&D-intensive companies are listening closely as other nations beckon. France as well as Canada have approached Synta, offering incentives if the company relocates R&D jobs from the U.S. Nearly a third of small U.S. biotech companies have been approached to move their R&D operations offshore, according to a survey prepared for BIO.
CEOs surveyed named China and India as two prime destinations. While Synta maintains a 120-person headquarters in Lexington, MA, Dr. Bahcall said the company also carries out some operations overseas, working with Chinese and Canadian companies on part of its R&D and with firms in Western Europe in manufacturing.
Nonetheless, Gebhardt and Dr. Bahcall both said that the payroll tax cuts are welcome and believe that it could sway at least some employers still on the fence about expanding their workforces.
Kick-Starting New Firms
For smaller biopharma companies, outsourcing is one response to what one consultant who works with startups says is the key barrier to hiring in the life sciences—the shortage of early-stage funding.
“What we’re finding is that our companies’ hiring practices are more constrained by that lack of funding than it is by the general economy,” Michael P. Kurek, Ph.D., partner with Biotechnology Business Consultants, told GEN. “This dearth of funding means that we’re seeing a lot more virtual companies, so instead of hiring full-time employees, they’re using contractors. They’re doing more collaborative projects, temporary workers, that type of thing, as opposed to the permanent hires.
“Will the jobs fund and the credits that are involved with hiring new employees change that? I would think probably not for the early-stage company,” Dr. Kurek said. “That decision to hire full-time is really dependent on how much fuel they have in the tank, how much funding they have in their bank account to set up a project team and do the R&D in house.”
“Companies are certainly tentative about their hiring,” Gebhardt agreed. She too noted the uptick of firms using contract or temporary employees. “So I think that, absolutely, there’s still some pullback on making decisions to hire permanently.”
Many biotech startups are looking to federal and state governments to supplement their R&D funding, according to Dr. Kurek. But states are also struggling to cut budgets. And Washington’s flagship R&D funding program, the SBIR program spread across 11 federal agencies, will expire at end of this month unless reauthorized by Congress.
As welcome as the American Jobs Act’s incentives might be in biopharma circles, they won’t likely be enough for many smaller biotechs, waiting for the moribund economy to revive. The President’s Council of Advisors on Science and Technology has been discussing since spring, and is now preparing, a series of recommendations intended to improve American business competitiveness.
“There is some initial high level of interest in doing those kinds of policies that can encourage science and technology innovation, and I know President Obama has been very much in favor of science and technology,” Dr. Bahcall said, given how American innovation has historically spawned job and business growth. “We are at an inflection point where other countries may overtake us. That is why this group is preparing a report on what we can do for the 21st century, to be as good or better as we were in the 20th century.”
Gebhardt noted, “Companies are watching the economy very closely.” And as long as that cloud hangs over the economy, anything but a package of incentives targeted to biotech employers is unlikely to lead to anything resembling a biotech hiring boom.
The American Jobs Act may not have been the right vehicle for that since it is more a general economic stimulus. The right vehicle would be a bill that translates the ideas of Dr. Bahcall and the rest of Obama’s science-technology council into policy.
Alex Philippidis is senior news editor at Genetic Engineering & Biotechnology News.
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