Hooray to healthcare reform legislation. I recently attended an Ernst & Young webinar
that discussed the newly announced $1 billion therapeutic discovery project program. If ever there was a must see (and must do) source of non-dilutive financing for our biotech and pharma clients, this is it.
In one of the more inspiring exhibitions of the Federal Government’s might to do right, as envisioned by the Obama Administration’s overhaul of US Healthcare, the IRS and the Department of Health
and Human Services are promoting the $1 billion program, which will offer cash to pay for 50% of "qualifying therapeutic discovery projects” incurred in either 2009 or 2010. The credit can either be a reduction of the taxpayer’s Federal tax liability or a straight grant for the same amount tax free.
In an effort to encourage development of new and innovative therapeutic technologies here in the States, this broad-based program is targeted to taxpayers with 250 employees or less that are engaged in a wide range of therapeutic discovery projects.
So who should be doing this? Any qualifying companies that are in the midst of or are planning to undergo R&D projects to treat, prevent or diagnose disease. And if you’ve got programs in the pipeline that can be accelerated, don’t hesitate. These can include pre-clinical or clinical programs, or ongoing research. According to the IRS/HHS, programs that show the most potential to develop new therapeutics in areas of unmet medical need, including those that prevent, detect or treat chronic or acute diseases and conditions – even companion diagnostics – will be eligible.
The government’s overarching goal here is to improve treatment regimens while, at the same time, reducing long-term health care costs. Given our out-of-control spending, that’s a good start. It’s a good bet, as well, that oncology programs are likely to be seen as favorites of the agencies, given the clear unmet need exhibited by the market.
Not surprisingly, those programs/companies that exhibit a greater likelihood of creating high-paying jobs here in the US, while advancing our competitiveness in the life sciences, will be favored by HHS (and critics of healthcare reform on either side of the aisle).
What costs are covered? It seems like anything and everything from direct labor to clinical and/or research supplies… even royalties.
There’s no time to waste, as applications are due by the end of May. The IRS has indicated that it hopes to reply to applicants within one month, though that may be as challenging as it was for the recent oversubscribed Challenge Grant program.
With $1 billion at stake, there’s no question that this will be a competitive process as well. Key to receiving consideration will, for sure, be a timely application that is compelling and easily understood. Those companies that have ever (successfully) pitched the VC community will know what needs to go into this, i.e., strong data, a well thought out and convincing story, and a realistic and achievable business plan. That being said, the good news is that HHS may be a bit more “community” focused than the typical institutional investor and likely will be more geared towards positively impacting society, whether by improving treatment or expanding jobs. Funding well run and well managed programs will be key, though they’re likely not to be as focused on years to profitability or generating the 3 to 5x as the typical VCs will be. Kudos to the Great Society.
This is a broad and well funded program. Anyone that meets the tax and employee qualifications and who is funding research programs or clinical trials, in any form, should be sitting down right now to draft. This is the American Way at its best, no? Just remember to get your applications in early!
Steve Mermelstein is a Managing Director at Covington Associates. He can be reached at 617-314-3950 or ibankerblog@covllc.com.
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