Life Sciences Alert: Biotechnology Industry Executives Propose Bailout for Struggling Companies
12/12/2008
As you may have seen, the New York Times business section gave prominent coverage early this week to an innovative proposal to provide a form of bailout relief to the biotechnology industry—especially to smaller companies struggling with cash flow as they work to develop new drugs.
According to the Times report, and other publicity on the proposal, biotechnology industry executives plan to petition Congress for a temporary change in federal tax law—to be in effect for one year—that would allow U.S.-based, “research-intensive emerging companies” to accelerate the utilization of their losses. Under current law, companies can generally use net operating losses (NOLs) incurred in early-stage operations to offset their federal income tax liability once the business becomes profitable. Under the industry proposal, eligible companies would receive an “advance” against NOLs at a discounted rate in lieu of carrying these losses forward to offset future income. The companies would also agree not to carry forward tax credits for qualified research expenses, as defined by section 41(b) of the Internal Revenue Code, attributable to years in which these losses were incurred. A cap would be placed on the amount that any single company could receive, and—in support of job creation—the advance would be earmarked for research and development.
The proposed program would not be limited to life sciences companies, but industry insiders argue that the “notoriously risky” biotech industry—with its long lead times for product development, and its need for substantial infusions of investor capital before profitability—faces unique challenges in the current economic climate. In view of a variety of factors, including the fact that many biotech companies never become profitable, the proposal acknowledges that the value of any bailout payment could and should be less than the amount recoverable through the future use of NOLs. As an illustration, the Times reported that a company with $100 million in NOLs would be entitled to a $35 million reduction in taxes when (and if) it eventually becomes profitable, assuming a 35% corporate tax rate. Under the bailout proposal, that company would forego that future reduction in taxes in exchange for a current payment of $20 million.
The proposal is in its early stages, and will certainly face intense scrutiny and comment. Mintz Levin will continue to monitor and keep you informed of developments.
For further information regarding this topic, please contact:
William T. Whelan
Co-Chairman
Life Sciences Practice Group
(617) 348-1869
WWhelan@mintz.com
Jeffrey M. Wiesen
Co-Chairman
Life Sciences Practice Group
(617) 348-1759
JWiesen@mintz.com
Stephen C. Curley
Member
(212) 692-6217
SCCurley@mintz.com
