Biotech companies are facing the new reality of having to contemplate bankruptcy filing in the bad economy.

Bloomberg.com is reporting that five biotech companies have already had to seek bankruptcy protection in the last month, and that more bankruptcies are likely on the way.  According to Bloomberg.com, the companies most at risk have less than six months of cash on hand, only a few drugs in development, and no "definitive" clinical data.  Bloomberg.com reports that a quarter of biotech companies currently fall into this category.

Bankruptcies have in the past been rare in the biotech world.  Troubled biotech companies have historically been acquired or have entered into licensing and other types of deals to survive.  However, the scope of this particular financial crisis is making bankruptcy filings more likely for biotech companies, since no one is available to bail them out from their current financial situation. 

Bloomberg.com reports on the reasons for this new biotech reality as follows:

The amount raised this year by biotechnology companies fell by $9.7 billion through September, or 54 percent, compared with the same period in 2007. . .  Biotechnology companies in the U.S. are raising less cash than they have in a decade. . . .Financing fell to $8.2 billion through September, from $17.9 billion last year. Venture capital funding fell 16 percent, to $2.9 billion. . . .

So what can biotechs in this situation do to survive?

Well, if they are lucky, they will be acquired by a pharmaceutical company.  Otherwise, they can try to just go into hibernation until the economy is better–a strategy that many businesses out there will likewise be doing.

The biotech community can only hope that this will be a short-lived crisis.  But isn’t that what we all are hoping for right now?

Pharmaceutical companies are currently ramping up their preparations to comply with new regulatatory requirements enacted to fight drug counterfeiting, according to a recent article by Mass High Tech.

Mass High Tech reported on the new regulatory requirements as follows:

[T]he federal government and nearly half of the states have enacted or proposed legislation to protect patient safety. The most far-reaching mandate is California’s electronic pedigree (e-pedigree) law. It requires electronic serialized product pedigrees for all prescription drugs at the item level (i.e., each salable item has a unique identity or serial number) and a secure chain of custody for all transactions involving that drug, starting with the pharmaceutical manufacturer.

Serialized product e-pedigrees enable the tracking and tracing of prescription drugs as they move through the supply chain to prevent counterfeit and diverted drugs from entering and remaining in the legitimate supply chain.

California recently provided the industry with additional time for full compliance, extending the implementation deadline to Jan. 1, 2011.

According to Mass High Tech, compliance with these regulations is a time-consuming and very complex process, which will require that companies comply with the new legislation more than a year prior to the implementation deadline, in order to meet the deadline at all.

The complexities of the implementation process were in fact what prompted the extension of the California deadline, according to a statement issued by Pharmaceutical Research and Manufacturers of America (“PhRMA”) Senior Vice President Ken Johnson.  Johnson wrote as follows:

Clearly, more time was needed for effective implementation of the e-pedigree law. And now there’s an extension of two years, which allows a longer period for a number of things to happen. For example, the makers of blood products — such as those that treat hemophilia — have two additional years to test the effects of radio-frequency identification (RFID) on the treatments. And they have more time to encourage the Food and Drug Administration to provide guidance on how companies should test to determine whether heat generated by the RFID system affects either the safety or effectiveness of blood products.

What’s more, researchers will have more time to address the technology compatibility problem that confronts those trying to implement the law. The fact is, the technology exists to track medicines, but we do not have one standard electronic serialization system everyone can use to monitor medications throughout the pharmaceutical supply chain. In addition, there’s now more time for state and local government agencies in California to resolve the budget crises they face. Organizations like the California Department of Corrections, state mental hospitals, California State University campus clinics and University of California hospitals must purchase many different expensive technologies to be in compliance with the law. And accomplishing that goal by January 1 would have been a daunting task.

In case you missed the passing of the California legislation, a summary of the text and background to the California legislation has been posted for review.

The Boston Business Journal ran a story this past week on the increasing number of contract research organizations in the Boston area and around the nation.

The article profiled Blue Stream Laboratories, a Woburn contract research organization with eight employees that launched the summer of 2006, reporting that Blue Stream Laboratories President Michael Kouchakdjian had indicated that “his client base is growing as biotechnology companies and contract pharmaceutical manufacturers try to save money by farming out development work to companies like his.”

The Boston Business Journal article provides further evidence that  outsourcing is on the rise in the biotech and pharmaceutical industries–a trend we have been following at the California Biotech Law Blog since last year (see our blog postings from May 23, 2007 and April 2, 2007).  As we have indicated previously, it is almost inevitable that outsourcing will continue to play an increasing role in the biotech and pharmaceutical industries, given the success that the high tech industry has had with offshore outsourcing in recent years. If companies can dramatically cut their costs by outsourcing work, why wouldn’t they pursue that option in order to become more profitable?  I think it is difficult to deny the clear business case for utilizing outsourcing to the extent possible.  I expect that we will continue to see more stories on outsourcing in the life sciences industry over the next few years.

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?