Encouraging Biotech Innovation

Posted March 31st, 2014 by Bill Marshall, in Biotech financing, From The Trenches

Let’s face it, biotech entrepreneurs are innovation junkies.  We desperately want to deploy the most novel technologies to solve difficult problems in medicine and deliver new, life changing medicines for patients who need our help.  Independent of additional factors that drive people to pursue a career in this field, I firmly believe that this trait is embedded in our DNA.

In addition to the big picture importance of innovation, the general notion of being innovative, which is most simply stated as introducing good new ideas and changing established procedures for the better, should be encouraged in every facet of a biotech company’s operations.  At miRagen, our corporate values are a key aspect of performance evaluation with one prominently featured value being, “Be passionate, energetic and innovative”.  We strive to reward innovative thinking in everything we do, from laboratory support to clinical trial design.  We firmly believe this helps drive innovation into the DNA of our organization.

Funding Innovation

A truism of the biotech business is that what we are trying to accomplish is incredibly challenging, burdened by necessary regulatory oversight, and requires a very high proof of product safety and benefit.  This coalescence of factors results in a product development lifecycle that is very long and costly, directly affecting the attractiveness of investment in our industry.

I often fondly remember overseeing the development of products in the life science research tools business where discovery to product launch could be measured in months.  As ethical pharmaceutical developers, the bench to bedside lifecycle will likely be more than a decade.  Funding these operations, particularly at the earliest stages of discovery has become more challenging in the last five years.  This was driven by the financial meltdown of 2008 and the consequential restriction in the flow of capital into high risk endeavors.  The resultant capital rationing provided a Darwinian natural selection of the opportunities in early stage biotech.  While funding is available, it’s just harder to come by.

Given the probability of success for any early innovation in biotech and the fact that objective measures of validation are necessary to assess the potential of any new technology, in my view it is better to fund more shots on goal.  To that end, I’ve been an advocate for tax reform that could help to add to the pool of available capital for early stage biotech innovation.

Funding early stage innovation in biotech has received a lot of attention and was highlighted in a BIO sponsored report, “The Road to a Brighter Future for Biotech” by Elias Zerhouni and his team, which provides a comprehensive overview of opportunities to encourage growth of the industry.  One important aspect that was prominently featured in the report is providing tax incentives to investors in high-risk, R&D intensive endeavors like biotech.

It is great to see that there has been recent traction on this front.  Last November, the bipartisan Start Up Jobs and Innovation Act was introduced by U.S. Senators Pat Toomey (R-Pa.) and Bob Menendez (D-N.J.).  A nice summary of the bill was put together by the Coalition of Small Business Innovators.  Foremost, I’m just really happy to see ANY bipartisan actions in our current Congress!  Seriously though, the bill is an important step toward tax reform that would encourage investment in research intensive companies that rely on private investment to fund their operations.  It proposes changes to the treatment of net operating losses (NOL) and capital gains tax rates for investors in R&D intensive companies.

In short, the bill would relax passive activity loss (PAL) rules under Section 469 of the tax code by allowing for the creation of R&D Partnership Structures.  These structures would allow for NOL generated in R&D projects at a biotech to pass through to investors in the biotech where they could offset other taxable income.  The PAL rules relaxation would allow investors to enjoy a more immediate return on their investments in long product development lifecycle organizations.  The bill would also allow investors in these companies to benefit from lower capital gains tax rates under section 1202 which allows for a partial exclusion for gains from certain small business stock sales.  The capital gains changes would increase the pool of companies for investment that can benefit from the provision by increasing gross asset limits to higher levels.

These changes would provide important incentives for additional investment in early stage biotech that would likely be very significant.  Estimates are that alterations to the handling of NOL alone could result in $1.5B in additional investments annually.  I encourage everyone to reach out to their Senators with a message of support for the Start Up Jobs and Innovation Act.

Another concept in tax reform that could help to spur investment in biotech innovation is linking repatriation of foreign corporate profits to investment in R&D at U.S. based biotechnology companies.  In other words, provide a tax holiday for pharma and biotech companies by significantly lowering the taxes on such profits, so long as the repatriated assets are plowed into biopharma innovation.

The latest estimates show that there is a massive amount of capital from foreign corporate profits, nearly $3 trillion, which currently resides outside of the U.S.  And it will stay there until Congress acts to remove the current incentive for keeping it there.  Pfizer, Merck, J&J, Amgen, Abbott and BMS have about $250 billion combined residing off shore.

There is precedent for such action in that the 2004 Homeland Investment Act provided a tax holiday on repatriation of foreign profits and it is estimated that it resulted in the repatriation of about $360 billion.  How the repatriated capital was actually deployed (was it reinvested or paid to shareholders) is a bone of contention, but clearly the tax holiday provided an incentive that resulted in active participation.  Perhaps a more focused act that allowed participants in long product life cycle, R&D focused industries to repatriate at a steep tax discount only in exchange for additional investment in R&D could be more effective in goals of directly stimulating economic growth.  Personally, I would love to see any actions that can help bring this capital back for use in growing innovative, R&D based companies in the United States.

Innovation Pays Off

Also engrained in the DNA of biotech entrepreneurs is the need for analytical proof, “show me the data!”  If biotech innovation is so important, we should be able to measure its benefits.  A really compelling analysis was recently published by Evens and Kaitlin in Clinical Pharmacology and Therapeutics that helps close the loop.  The authors were able to sift through a very large amount of data to produce some insights on the impact of biotechnology innovation (bioinnovation) on the pharmaceutical enterprise.  I’ll provide some statistics that really struck me, but would encourage everyone to digest the analysis and draw their own conclusions.

By many measureable endpoints, the effect of bioinnovation on pharmaceutical development has been profound.  The above analysis defined biotechnology as a rather broad series of activities targeted on defining new pharmaceutical entities.  Many are focused on classes of molecules other than small molecules.  It is inherently biased by the influence of protein and monoclonal antibody therapies as these represent the first wave of bioinnovation as applied to pharmaceutical development.  The impact of biotechnology was a long term effect culminating over 30 years and was marked by multiple steps of innovation rather than single disruptive advancements.

  • The biggest indicator of success is that biotechnology is a major focus of the pharmaceutical and biotechnology industries.  That combination now accounts for about 19% of global prescription drug product sales.
  • Of the top ten prescription medicines by sales in 2012, six were biotechnology products.
  • In 2012, 39% of the blockbuster products by sales (>$1B/yr.) were biotechnology products.
  • Biotech products in clinical development increased by 144% from 2002 to 2012.
  • The clinical development success rate of biotech products over more than a decade ranges from 25-32%, whereas small molecules range from 10-13%.

All of this culminated in real value creation for biotech investors.  The total value of biotech acquisitions by big pharmaceutical companies from 1998 to 2002 was about $26B.  From 2008 to 2012, it was about $215B or an eight fold increase.  Of course the stock market performance of the biotech industry leaders, reflected in the S&P Biotech index, is another measure of biotech innovation paying off and has helped to open the door to the public markets for innovative biopharma startups.

It is important to stress that “large molecule” contributions have been a major driver for the returns reported above.  However, the biotech revolution has and will continue to contribute to making us better at small molecule innovation.  Many innovative startups in our space are focused on novel small molecule approaches where “biotech” contributes via advancements in target validation and the ability to drive novel computational approaches to small molecule drugs.  Biotech also provided an impetus for thinking outside the box and pursuing small molecule approaches that would have historically been discarded as impossible or highly improbable.

Working on innovative approaches to biopharma is incredibly exciting and equally difficult.  Cutting edge approaches typically take longer than we’d like and often throw curve balls that make us adjust our game plans on a regular basis.  But it sure is cool to be addicted to something that has the potential to do so much good and provides such important benefits to mankind.

Bill Marshall

CEO of Miragen
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