Alex Philippidis Senior News Editor Genetic Engineering & Biotechnology News

If Obama and Congress cannot agree, key agencies face cuts while tax changes would dampen new investment.

Just the thought of the fiscal cliff has life sciences advocates over the edge.

If President Obama and Congress strike out on a budget deal by Jan. 2, biopharma activity will slow down in obvious and not-so-obvious ways.

First, the obvious: NIH, FDA, and other nondefense federal agencies face cuts amounting to 8.2% of their budgets. That’s because Obama and Congress agreed last year that absent an accord to cut at least $1.2 trillion in federal spending over 10 years, an equal amount in annual across-the-board budget reductions, or sequestration, would take effect.

“In order to avoid the ‘fiscal cliff,’ the Congress must compromise and protect our economic future by cutting costs and raising revenue, without compromising our nation’s support for critical government programs,” BIO President & CEO Jim Greenwood told GEN last week. “Programs vital to the health of our nation—quite literally—should not suffer dramatic cuts. Making cuts to these programs could actually cost our nation more in the long run. The unintended consequences could impact our economic health, as well as our public health.”

According to PhRMA, biopharma accounts for about 650,000 jobs nationwide, each job supporting about five additional jobs, and an overall annual economic impact exceeding $917 billion.

“It is imperative that public policies preserve and sustain continued medical progress, which improves lives and is an engine of economic development,” Matthew Bennett, svp at PhRMA, told GEN. “We will continue to work with the Administration and Congress on bipartisan solutions that can help spur growth in the U.S. economy, preserve timely patient access to new medicines, maintain market-based competition, and foster future development of life-enhancing and life-saving treatments.”

Forecast: 33,000 Fewer Jobs

The 8.2% across-the-board cuts would subtract $2.529 million from NIH’s budget, already constrained in recent years by flat or barely-rising budgets—except for the extra $10 billion it got to spend in 2009–10 under Obama’s $833 billion “stimulus” or American Recovery and Reinvestment Act.

NIH’s cut comes to nearly 89% of the $2.856 billion awarded by its National Cancer Institute in FY 2012, or 33,000 agency-funded jobs, according to Research!America. The advocacy group for greater federal research funding also projected that:

  • NSF would lose $586 million, funding for more than 19,300 researchers.
  • CDC would lose $490 million, eliminating funds for 2,500 specialized disease detectives retained by state and local health departments.
  • FDA would kiss $319 million goodbye under sequestration, resulting in a loss of $111 million in industry-paid user fees.

“The big institutions have some ability to shift funds, but most of the institutions, if an NIH grant dries up, their research dries up. So regardless of the progress they’ve made, they can’t find another source of funding, because if you think about it, the other major source, the National Science Foundation, is also being cut,” Eleanor “Ellie” Dehoney, Research!America’s vp of policy and programs, told GEN.

Coyote’s Fall

Less obvious are other consequences biopharmas are likely to see emerge if Obama and Congress head over the fiscal cliff, like Wile E. Coyote in those old “Road Runner” cartoons.

One example: Obama and Congress agreed earlier this year to user fees biopharmas and other companies must pay from FY 2013–2017 under the fifth authorization of the Prescription Drug User Fee Act. However, FDA cannot spend user fees from industry until it receives funds appropriated by Congress, without which the pace of those reviews would be slowed.

“That puts sand in the gears of the whole system that the industry relies upon,” David L. Gollaher, Ph.D., president and CEO of the California Healthcare Institute, told GEN.

Dehoney noted that mandatory spending cuts would also include reduced reimbursement to drug developers and doctors for prescription drugs used by Medicare and Medicaid patients. That, she said, would touch off even further disinvestment by venture capitalists, who began leaving the biotech space after the 2008 financial crisis and have only returned to fund later-stage companies. Over the first nine months of 2012, VC investment in biotech fell 18.5% from a year earlier, to nearly $2.9 billion in 325 deals, down 6.9% from Q1–3 2011.

“Think about biologics: They’re very expensive, they’re very expensive to produce, and they’re high risk. If reimbursement goes down, you’ll find a reduction in the availability of venture capital,” Dehoney predicted.

Lower reimbursements, she said, is one of two factors likely to reduce venture capital to startups under the fiscal cliff scenario. The other is the end of the tax cuts enacted by George W. Bush a decade ago. Changes would include:

  • Eliminating the 10% percent bracket, making 15% the lowest tax rate. The 25, 28, 33 and 35% rates would increase to 28, 31, 36, and 39.6%, respectively.
  • Lowering the start-up deduction for businesses from $10,000 to $5,000.
  • Ending the 50% bonus depreciation for businesses on qualified capital investments.

Seeking Funding Alternatives

A weakened VC market might persuade some startup entrepreneurs to think about crowdfunding—but they can’t act on that urge yet.

Back in April, Obama signed into law the Jumpstart Our Business Startups (JOBS) Act, which will exempt from SEC registration rules any transactions to offer or sell crowdfunded securities by businesses raising up to $1 million within a 12-month period—or up to $2 million if the company provides audited financials.

However, the U.S. Securities and Exchange Commission has yet to write the regulations needed to implement JOBS Act. The absence of regs also precludes biopharma startups from benefiting from other provisions of the law, such as exemption from full Sarbanes-Oxley reporting requirements for five years after going public, or until reaching $1 billion in revenue.

The fiscal cliff may also prompt some biopharma startups to consider venture philanthropy.

“They have provided a pathway to innovation, but there’s not a venture philanthropy group for every disease out there. What do you do if you’re diagnosed with something and there’s no great venture philanthropy group? If you’re a company that has a product under development in an area that doesn’t have one of these groups, you’re going to have to look to alternate means,” Margaret Anderson, executive director of FasterCures, the Milken Institute’s Center for Accelerating Medical Solutions, told GEN.

She said stepping back from the fiscal cliff was part of a deeper policy discussion officials must open, quickly, if the U.S. expects to maintain biopharma leadership.

“Europe realized that even though they are facing these incredible trials and tribulations right now with their economic future, they have really staked a lot on the future of life science. And I just don’t think Washington, D.C., has woken up to what this life science economy has done for the United States, and for patients, or what it could do,” Anderson said. “The world is not the U.S. as much. And I just fear for the scientific establishment in the United States, not only what we have built here, but also the secret sauce, if you will, of our entrepreneurialism.”

Congress blew the first chance at avoiding the “cliff” last year, when the 12-member “supercommittee,” or Joint Select Committee on Deficit Reduction, succumbed to political stalemate and failed. The second chance was blown this year as Obama and much of Congress focused on re-election. The next few days will determine if the current third opportunity is the charm—or the step over the edge where, like Wile E. Coyote, biopharma has nowhere to go but down.

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