September 1, 2011 (Vol. 31, No. 15)

Editor’s Note

As the biotech industry moves forward into its fourth decade, much has changed since the early 1980s. There is an ongoing stream of new biopharmaceutical products and diagnostics, novel instrumentation and cutting-edge tools, innovative start-up biofirms based all over the globe, and bright young scientists looking to make significant contributions to the life science field.

What has not changed is the ever-present need for money to found new biotech companies and to fund the activities of those firms already in operation.

Today, there is a wide range of creative financing vehicles available to company officials. But back in May/June 1982, as our GEN 30th Anniversary article indicates, tax-advantaged limited partnerships were beginning to gain in popularity. The reason: these deals not only offered biotechs the opportunity to raise some cash, but they gave investors the chance to have their own “personal stake” in those companies, as Gerry Elman writes.

As such, tax-advantaged limited partnerships were a key driver in the early development of the bioindustry.

—John Sterling, Editor in Chief

“As Seen in GEN—Flashback” Vo. 2, No. 3, May/June 1982

Question: What’s more risky than oil and gas tax shelter deals and more exciting than pornography? The answer, according to lawyer S. Leslie Misrock: Tax advantaged limited partnerships investing in biotechnology R&D projects.

“But,” Misrock adds, “the payoffs are potentially greater.” Speaking in Washington, D.C., at an April conference on “The Biotechnology Industry: Starting-Up and Expanding”, Misrock noted that such partnerships will be marketed to potential investors with a personal stake in the outcome of the research. “If a group is going to work on cardiovascular diseases, you can bet your boots that every salesman will call up a guy that he knows that has had a heart attack and who’s worth a couple of million dollars and [get him to] put in $150,000 into that unit.”

Explaining the substantial tax advantages available to a creatively structured deal, Misrock said that a potential investor might look at the limited partnership deal as “a chance to buy into a biotechnology company—use tax dollars, write it off, and then convert it into 25 percent of the company at a zero basis.”

“I don’t think there’ll ever be royalties paid on a well-structured deal,” Misrock said. Rather, he expects the partnerships to elect rollups, so that there’s a transfer under section 351 of the Internal Revenue Code, with zero-basis stock in the company providing the advantage of a potential capital gain rather than ordinary income to the investor.

Misrock advised against analyzing such investments too technically. The successful partnerships, he suggested, will be based not on curves and statistics, but on people.

“Are these guys the right guys to do something and do they know what they’re doing, or are they just going to tire-kick and fool around?” he asked rhetorically.

Misrock pointed out that Agrigenetics Corporation had recently raised $55 million through a tax-advantaged limited partnership. He explained, “The Agrigenetics model is…a company that did a certain amount of research and recognized early that in order to apply the critical mass that was needed in this field, it had to spend a lot more, and yet its balance sheet couldn’t stand that. The phrase ‘off-balance-sheet financing’ really applies to corporations who get the benefit of this and don’t have to spend their own dollars and show losses quarter-to-quarter.

“Form is crucial in these deals,” Misrock cautioned. “Substance is important, but form is crucial.”

The conference at which Misrock spoke was sponsored by The Energy Bureau of New York City.

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