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Archive for October, 2008

Genentech Investments Affected by Down Market

Written by on Friday, October 31st, 2008

The recent plunge in the stock market is not just affecting the investments of the average investor–it is apparently also affecting the investment portfolios of some biotech and pharmaceutical companies such as Genentech, reported the San Francisco Business Times.

According to the San Francisco Business Times, Genentech held preferred stock in Fannie Mae, Freddie Mac, and Lehman Brothers Holdings, and had to take a $67 million third quarter charge for these investments. Genentech’s investment income for the year will reportedly be 50% of what it was in 2007, which was $197 million.

The San Francisco Business Times reports that other biotech and pharmaceutical companies which have been affected by investment losses include Biogen Idec. Inc. and Lexicon Pharmaceuticals, Inc.

While most in the industry would expect that biotech stock prices would be affected by a plunging stock market, it may very well come as a surprise to many to discover that any of these biotech and pharmaceutical companies are so heavily invested in the market themselves.  The San Francisco Business Times article explains that cash-rich companies like Genentech are invested largely in short-term investments due to the high cost of drug development and the need to manage all the cash that is required for the drug development effort.

Upon reading this article, the question comes to mind: how, if at all, will the drop in Genentech’s investment portfolio affect Roche’s acquisition talks with Genentech?  Could a drop in cash on hand could make a new acquisition offer more attractive to Genentech?

In my opinion, the industry expectation is that there will at some point be a Roche acquisition of Genentech, so perhaps this market downturn will not have much of an impact on any deal.  At the same time, it seems likely that Genentech’s investment losses will have some impact on how the talks progress, as a 50% portfolio loss is certainly not inconsequential to any investor–even Genentech.

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IRS Taking Closer Look at Tech Transfer Offices’ Activities

Written by on Friday, October 24th, 2008

The IRS has launched an effort to review universities’ tech transfer office activities, reported Biotech Transfer Week.

The IRS began mailing out compliance questionnaires last week to four hundred (400) colleges and universities.  According to the IRS website, these compliance questionnaires will explore the following:

  • report revenues and expenses from taxable trade or business activities on Form 990-T, Exempt Organization Business Income Tax Return;
  • classify activities as exempt or taxable activities;
  • calculate and report income on losses on Form 990-T;
  • allocate revenues and expenses between exempt and taxable activities;
  • invest and use endowment funds; and
  • determine types and amounts of executive compensation.

Biotech Transfer Week reported on the IRS review as follows:

The questionnaire is not an audit, and schools will not be penalized for refusing to participate, according to the IRS. However, the agency said that it reserves “the option of opening a formal investigation, whether or not the organization agrees to participate in a compliance check.”
The 33-page-long document contains 74 questions intended for all 400 institutions and 20 additional questions applicable only to private organizations. Private nonprofit universities are generally exempt from tax under Internal Revenue Code section 501(c)(3) and, like state universities, are subject to unrelated-business income tax, the IRS said.

It seems apparent that the IRS believes that it is currently losing taxable revenue from technology transfer activities that is going unreported by universities around the country, and that perhaps all universities with a technology transfer office–whether they received a questionnaire or not– would be wise to conduct their own review in parallel to the IRS review, in order to determine what, if any, mistakes in reporting are currently being made by their institutions.

Of course, given the fact universities are typically nonprofit organizations, you might wonder what kind of taxable income exactly could arise at a university.  The IRS website explains this dichotomy as follows:

Even though an organization is recognized as tax exempt, it still may be liable for tax on its unrelated business income. Unrelated business income is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption. An exempt organization that has $1,000 or more or gross income from an unrelated business must file Form 990-T. Form 990-T. . . .

The IRS defines “unrelated business income” as follows:

For most organizations, an activity is an unrelated business (and subject to unrelated business income tax) if it meets three requirements:

  • It is a trade or business,
  • It is regularly carried on, and
  • it is not substantially related to furthering the exempt purpose of the organization.

IRS Publication 598 explains the issue of tax on the unrelated business income of tax exempt institutions.

It will be interesting to watch how the IRS review of technology transfer offices pans out.  As we have previously reported on the California Biotech Law Blog, technology transfer offices often generate tremendous revenue for universities.  Apparently the IRS has been watching the growth of technology transfer offices around the country and wants a larger piece of the action.

The California Biotech Law Blog  will be following this issue as it develops and will keep our blog readers posted on those developments.

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Both Roche and Genentech Remain Silent on Status of Acquisition Talks

Written by on Thursday, October 23rd, 2008

Both Roche and Genentech are continuing to remain silent on the status of the Roche-Genentech acquisition talks.  For now, employees and investors are left hanging as Genentech’s future continues to be uncertain.

Analysts apparently had hoped to get an update this week during Genentech’s earnings call about the status of the acquisition,  but they were unsuccessful, according to Seeking Alpha’s Mike Huckman.

Huckman wrote regarding the earnings call as follows:

[Roche officials would] only say they remain “totally committed” to the Genentech offer and wouldn’t make any comments or answer any questions about a “negotiated agreement” or its ability to finance the deal. . . .

So many analysts, investors and reporters dialed into the Roche call yesterday morning after it had started that one company official later repeated for the benefit of the latecomers that it wasn’t going to show its hand. Some analysts and investors were banking on a new treatment to force Roche to come back with a much higher offer, but it didn’t pan out Sunday night when Genentech announced the test of Avastin as an add-on drug for colon cancer will continue through the end.

Analysts were similarly unsuccessful in the case of the Genentech earnings call earlier this month, although the subject of the acquisition was at least raised there.  Following the Genentech call, at least one analyst, Eric Schmidt of Cowen and Co., still decided to upgrade Genentech shares from an equivalent of “Buy” to a “Hold.” Schmidt stated in the Genentech call as follows:

While management refused to discuss the Roche situation, we believe a deal is inevitable, and that an agreement would be facilitated by a recovery in the credit markets. We believe large-cap investors seeking economically resilient growth at a reasonable valuation will find Genentech shares attractive.

So, the question remains: will they or won’t they do the deal?

I personally agree with Schmidt that the deal is going to eventually happen–that Roche will come up with a share price that will make it worth Genentech’s while to sell.  It is not so much a question of if but when. . . .

The California Biotech Law Blog will continue to keep you posted as any new developments regarding the deal emerge.

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Status of SBIR Reauthorization Unclear

Written by on Monday, October 20th, 2008

The status of SBIR reauthorization is unclear, according to an update by Rick Shindell of the SBIR Insider..

In his October 3rd newsletter, Rick Shindell had pronounced SBIR reauthorization dead.  Shindell wrote in his email update the following:

Over the last month and through today, October 3, 2008, there has been a flurry of intense efforts in the Senate to get an SBIR Reauthorization bill passed. . . .  Unfortunately the valiant efforts on SBIR reauthorization by the leaders and staff of the Senate Committee on Small Business and Entrepreneurship (SBE), John Kerry (D-MA) chair and Olympia Snowe (R-ME), were rebuffed by a few and ultimately could not be brought to the full Senate for a vote, in spite of the fact that the original bill S.3362 was passed unanimously 19-0 in the SBE committee back in July. . . .

In today’s update, however, Shindell appears to have changed his opinion somewhat, stating:

In our October 3rd issue we announced that SBIR reauthorization was dead in the 110th Congress. Although this scenario is still likely, the events of the last few weeks heighten the chances for more action in a “lame-duck” Congress which “may” present an opportunity for additional SBIR reauthorization activity.

So, the question is this: will the current economic climate push the Senate to move forward on this reauthorization effort?

In all honesty, I doubt it.  I have a bit of a bias when it comes to the subject of the SBA, since I started my law firm in a down economy following the sudden closing of my large law firm, and I found it disappointingly difficult to obtain funding through the SBA.  At one bank, I asked about SBA funding, and to my surprise, I was asked what my spouse’s salary was.  When I replied in some shock that I was single, I was told the bank could not assist me.  At another bank, I received the run-around on SBA funding on the basis that law was a “highly risky profession” and I wouldn’t be able to do anything other than practice law if my business failed.   Of all the businesses I could have started, I honestly would never have thought that a law practice would have been placed in a high risk category–particularly when I had already practiced law for a number of years.   Wnile I did eventually obtain a small SBA loan, I never obtained the loan I really needed to build my business. I must admit I became somewhat disenchanted with the whole concept of the SBA.  In my opinion, the whole program would benefit from an overhaul.

So, having disclosed my personal bias on the SBA program, I would argue that the SBA program is exactly where Congress should be focusing its attention in a down economy.

Why do I say this?

Well, in a down economy, there are generally a number of layoffs, and a number of laid off employees will not be able to find the right job.   Rather than sitting home, collecting unemployment, and potentially losing their home to foreclosure, many of the unemployed will contemplate starting a small business.  As anyone who has ever started a small business can tell you, securing adequate financing is often critical to the success of a small business.  So, in my opinion, it makes perfect sense for Congress to focus its efforts on improving the SBA program in a down economy, if it is serious about taking steps to invigorate the economy.

So, how does this relate to SBIR reauthorization?  Well, I would argue that Congress should ensure that the SBIR gets reauthorized for the very same reason–to promote small business and invigorate the economy.

Unfortunately, however, to date I have heard absolutely nothing of any plans by Congress to focus on the SBA as part of its economic relief efforts.  Instead, Congress and the administration are busy taking all kinds of economic steps that have little or nothing to do with small business.  For this reason, I doubt that SBIR reauthorization is going to get much attention by the Senate before the end of the year either.

The California Biotech Law Blog will continue to keep you posted as any new SBIR reauthorization developments occur.

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