What will the new federal budget mean for pharmaceutical R&D tax credits?
Innovation is a key "nutrient" for the good health and optimal growth of the biopharmaceutical industry. But, obviously, pharma is not the only industry that thrives on innovation. Innovation is the life-blood of all companies that want to grow financially, while also contributing economically and socially to the greater good.
In fact, for tax reform advocates, including Sen. Orrin Hatch (R-Utah), Chairman of the Senate Finance Committee, Sen. Ron Wyden (D-Oregon), and their allies—both Democratic and Republican—spurring innovation through tax relief tops the list as one of the most important economic issues of this decade.
Monday, February 2, is the release date for the fiscal year 2016 federal budget, and the industry is watching closely to see how the new budget deals with the issue of R&D tax credits.
R&D tax credits
Although there is disagreement in Congress about how the U.S. tax code should be reformed, there is a broad bipartisan coalition pushing for a reformed tax code that supports growth and innovation in the pharmaceutical industry, including generous tax-credit support for biotech companies that have not started to generate revenue, but have been raising money from various investors.
There is also a widespread belief that the pharmaceutical industry has been growing and innovating in spite of a system of taxation that hurts U.S.-based pharma companies and slows down the pace of innovation.
The perspective from BIO
Jim Greenwood, President and CEO of the Biotechnology Industry Organization (BIO), says, “Placing disproportionate tax burdens on U.S. industry disadvantages American biotech companies and stymies the cutting-edge R&D critical to meeting our nation’s health challenges. Freeing up more than one trillion dollars that is currently trapped overseas due to the inefficiencies of the tax code will boost economic growth and capital investment here at home.”
He adds, “The U.S. has one of the highest effective corporate tax rates in the world. Current U.S. corporate tax laws, including the lack of a territorial system of taxation, impede America’s ability to compete with other industrialized countries on the global stage.”
Sen. Hatch has laid out his broad principles for what constitutes effective tax reform, including growing the economy; fairness; simplicity; permanence; promoting American competitiveness; promoting savings and investment—and revenue neutrality.
Tax-reform goals that support industry growth
While Greenwood agrees with Hatch’s basic reform principles, BIO outlined very specific and concrete "requests" for reforming the tax code in a press release last fall, including:
- Sec. 469 R&D Partnership Structures to relax passive-activity loss limitations for small R&D-focused companies
- Sec. 1202 Capital Gains reform to allow investors in companies with gross assets up to $150 million to be eligible for a reduced gains rate
- Sec. 382 Net Operating Loss Reform, which would allow small companies the freedom to raise capital for innovative research without fear of losing research-related net operating losses
BIO has also promised to defend the integrity of the tax-credit component of the Orphan Drug Act of 1983, which allows for tax credits equal to 50% of development costs associated with clinical research and drug testing of drugs for rare diseases. But although the Congressional Joint Committee on Taxation supports rolling back some of those credits, the success of this program speaks for itself.
Between 1973 and 1983, only 10 drugs were developed for rare diseases. In contrast, in the 31 years since the Orphan Drug Act was implemented, roughly 360 drugs for rare diseases have been approved by the FDA under the Orphan Drug Act, and 2700 drugs and therapies for rare diseases are currently in the pipeline.
Implementation of the Orphan Drug Act was a game-changer that spurred innovation and undoubtedly saved lives. Until specific reforms are in place it’s impossible to fully understand the far-reaching implications of those changes—either positive or negative. One thing is clear, however. Change is inevitable and reform is underway.