Well, unless you have spent the last few weeks stranded on a desert island, you probably know that yesterday was the big health care vote.  As expected, the Democratic majority in the House passed the health care reform bill–despite the fact that the bill was vigorously opposed by a large percentage of the American public.

While the legal battle challenging the constitutionality of the law is just getting started and is likely to continue for some time, the biotech industry is just starting to process what yesterday’s vote will mean for its industry.

BIO,  the biotech industry organization, released a statement on the vote yesterday, which took a decidedly positive tone.  In support of its position, BIO cited three key benefits of the bill:

1. The bill provides hope for Americans living with debilitating diseases.
2. The bill created a pathway to enable the U.S. Food and Drug Administration (“FDA”) to approve biosimilars.
3. The bill included a Therapeutic Discovery Project Tax Credit, which is designed to provide financial relief to some biotech companies that are suffering in tight credit markets.

Why was BIO so positive about this legislation?

Well, the remarks suggest that BIO is happy with several of the carrots that were thrown at the industry in this bill: biosimilar legislation and a tax credit for biotech companies.

Noticeably absent in the BIO statement, however, was any statement to the effect that health care reform will advance the biotech industry in any way.  Instead, the only reference made to reform itself was that it will bring “hope” to Americans suffering from diseases.  Is this an oversight on BIO’s part?  In my opinion, no.

While there is no doubt that most biotech industry members applaud the idea of providing health care to all Americans, and you can certainly say that reform will increase the potential customer base for biotech products, it is a definite  stretch to say that this reform bill will prove beneficial in any way to the biotech industry.   How could it?  Any enterpreneur in the biotech space knows that the U.S. market has always been the most lucrative due to compensation issues–the U.S. consumer finances the world’s drug development costs.  What happens when you impose drug price controls, which are inevitable in government-controlled health care?  It doesn’t take an expert to see that the world’s most lucrative market will become a lot less lucrative.  It will become like most of the other markets in the world, which have price controls, too.  This kind of change will inevitably impact entrepreneurship in the biotech space.  Launching a biotech company requires huge risk and tremendous investment capital.  Will the capital be there when the huge  potential payoff is not?  It will take a huge amount of increased business to make up for the loss of revenues in the U.S. market due to price controls.  Will what is left be enough to encourage drug development?

While the answer to that question is still unclear, I think it is a safe bet that true entrepreneurs will find away to adapt to the new realities of the market.  Many entrepreneurs–me included–have had to do this in the past year to survive the recession.  I have adjusted my business model completely to deal with the new realities of the legal market,  and I think it is a safe bet that many other small businesses who survive this recession will have done the same thing for their markets.  I am sure that there will be biotech entrepreneurs who can adjust their business models to the new realities of the U.S. market after the passage of this bill as well.

Having said this, there is no question that this bill is going to have an impact on the industry.  Change is coming to biotech–and it may not be the kind of change that members of the biotech industry wanted.

So, what about the carrots that got thrown into this bill for the industry?  What kind of impact will those carrots have on the industry?

Well, the tax credit may be beneficial to some companies, but my guess is that it will have a minimal impact on struggling companies who are unable to land the capital they need to survive this recession.   It seems a stretch to say that a tax credit is going to “save and create thousands of jobs across our nation” as the BIO statement claims.  A tax credit only helps if you are generating revenue to pay taxes with, and many stuggling biotechs likely need investment capital more than they need a tax credit at this point in time.

As for the biosimilars piece to the legislation, this topic has been heavily debated for some time and remains controversial.  It is legislation that is going to benefit some companies at the expense of other companies, so it is difficult to say it really will “benefit” biotech.  The legislation will benefit companies seeking to manufacture biosimilars at the expense of the brand.  The California Biotech Law Blog will explore this issue in more detail in a separate blog entry.  The bottom line is that BIO is supporting the legislation simply because it creates a pathway for the approval of biosimilars, which previously did not exist, and BIO is taking the position that this is the right decision for biotech.

All in all, the impact of this bill on biotech is one that may be debated and evaluated in the months to come.  The California Biotech Law Blog will continue to follow the developments as they unfold.

Following up on our recent coverage of the patent reform debate, Genetic Engineering & Biotechnology News recently interviewed me for their article Patent Reform Battle Pits Biotech against High-Tech. The interview addressed the competing perspectives of the biotech and high tech industries on the issue of patent reform.

The biotech industry is beginning to assess what the impact of the new Obama administration is likely to mean for individual biotech companies.

A key concern for the industry is the likely financial implications of the Obama presidency on biotech companies, according to an article by SFGate. 

What financial concerns are at issue?

While biotech companies are definitely concerned about the bad economy and the credit crisis, they are also  concerned about an anticipated push for cheaper drug prices, which could potentially have a very detrimental impact on biotech companies, since any such increase could negatively affect the profits that biotech companies could potentially achieve on their drugs and would perhaps impact companies’ valuations as well.

Another concern for the industry is what will happen to the Food and Drug Administration under an Obama presidency, accoding to the SFGate.  During the Bush Administration, Congress criticized the Administration for how the Food and Rug Administration was run–in particular, they viewed it to be "underfunded" and "ineffective." As Adam Feuerstein of the Street.com reported: "The agency is in turmoil. Morale is low, resources are scarce and too many drug approvals have been delayed at best, or worst, have become politicized."  President-Elect Obama will presumably sink some money into the organization and try to take it in a new direction, which he may begin by choosing new leadership.  According to SFGate and  Feuerstein, a few of the names being considered include: Dr. Steven Nissen, a cardiologist for the Cleveland Clinic;  Dr. Scott Gottlieb, who worked directly under Mark McClellan when he was FDA commissioner; and Janet Woodcock, a veteran agency official who is the favored choice of drug manufacturers.

One highly anticipated change by the new administration is the likely adoption of a new view on stem cell research, reported Yahoo News, which reported that  Obama’s Transition Chief John Podesta indicated this weekend that Obama is currently reviewing President Bush’s executive order on stem cell research and may reverse that order fairly quickly.

As for other changes that might be in the works which would affect the industry, the Patent Baristas have provided an extended list of potential changes that we may see under the new administration, including but not limited to doubling federal funding for basic research over the next ten years, making the research and development tax credit permanent, and reforming the Patent and Trademark Office.

All in all, it seems clear that the new administration will bring "change" to the biotech industry; however, the jury is still out as to whether any such "change" will be for the better or for the worse.   The industry is hoping–like the majority of Americans that voted for Obama on election day–that the "change" Obama will bring will be for the better.

The biotech industry may run into problems in 2008, despite having a banner year in 2007, according to a report by SF Gate.

The SF Gate reported:

[B]iotech companies may face some rough weather ahead, said Scott Morrison, Ernst & Young’s U.S. life sciences director. New product approvals will slow as drug regulators scrutinize applications in the post-Vioxx era, Morrison said.

Drug prices may face more pressure in a political environment focused on health care reform and the federal budget deficit. Beyond that, constriction in the larger capital markets has finally started to affect biotech companies this year, he said.

"Biotech has not been immune from the ills of the subprime mortgage meltdown," Morrison said. "Total fundraising year to date in 2008 is down by 60 percent."

Yet, according to a recent Ernst & Young report, biotech had a record year in 2007.  The Jacksonville Business Journal wrote of fthe findings from this report as follows:

European and American companies raised nearly $30 billion in overall financing in 2007, a banner year only surpassed by 2000.

Global venture financing reached a new high in 2007, surpassing $7.5 billion, of which $5.5 billion helped seed or nurture companies in the United States.

Global biotechnology net losses were at $2.7 billion as of 2007, down from $7.4 billion in 2006.

Ernst & Young has also concluded that the U.S. biotechnology sector is almost profitable for the first time. 

 As a result of a good 2007, the tight economy is not expected to hit the biotech industry as hard as is expected in other industries.  According to SF Gate, the Ernst & Young report indicated that nearly half of the 386 publicly traded U.S. biotechnology companies have more than two years of cash on hand, and another 27 percent have more than five years of cash. In addition, venture capitalists remain interested in biotech–more so than in other industries.

All in all, the SF Gate article suggests that the outlook is mixed for the biotech industry in 2008; however, I think that those of us working in the industry would agree that we are not overly worried about the industry’s future.  I think that it is safe to say that the future remains very bright for biotechnology.

Following up on our posting yesterday regarding the Boston Globe’s critique of stem cell research in California, Governor Schwarzenegger made some remarks yesterday on California’s experiences with stem cell research in the context of a short speech on the state of the California biotech industry generally, and he presented a very different perspective on the issue.     Unlike the Boston Globe which viewed California’s experiences as providing a "lesson for Massachusetts," Governor Schwarzenegger applauded California for providing a shining example for the rest of the country to follow and for investing in the state’s future.  Clearly, the Governor has a very different view of the state’s stem cell research program, and perceives it already as being a success.  While there is no doubt that as the Governor, he may at times view the program through rose-colored glasses, as a member of the biotech community, I think many of us in the industry and in the state generally share that same vision and perspective on our state’s stem cell accomplishments. 

To view the video of the Governor’s remarks, click here.

California biotech companies are rallying behind proposed new state legislation, which would extend the time period that biotech companies have for claiming a tax deduction based on net operating losses.

The Mercury News reports:

The business leaders say their companies often labor for 15 years or more at a cost of hundreds of millions of dollars before they can get a drug approved for sale and generate enough revenue to climb out of the red. Yet under California law, they typically have only 10 years to claim a tax deduction based on their net operating losses.

Consequently, by the time they earn enough to pay state income taxes, many of them have lost the opportunity to claim the deduction. .  . .

That’s why [Assemblywoman Sally] Lieber has introduced a bill to double that deduction period, mirroring federal law. The measure, AB1370, which specifically gives biopharmaceutical businesses 20 years to claim their tax credits, was unanimously approved by the Assembly on June 6.

If it becomes law, it could give the biotech industry a big boost, according to Matthew Gardner, president of BayBio, an industry trade group based in South San Francisco.

While similar measures have failed twice before, supporters claim that this time is different, as there is more biotech support within assembly than existed in the past.  Three states–Florida, Illinois, and New York–already have a law on the books similar to this one being considered.

According to The Mercury News, this bills is not  the only way in which states are attempting to establish tax breaks for biotech companies:

Some[states] – including New Jersey and Hawaii – allow the firms to sell or trade their net operating loss credits to other businesses.

The article raises an interesting issue regarding tax deductions.  Is the bill a good idea for California’s taxpayers, or does it mean that we just have to bear more of the state’s tax burdens?