[Joint House and Senate Hearing, 112 Congress]
[From the U.S. Government Publishing Office]





                                                         S. Hrg. 112-75

  DRIVING INNOVATION AND JOB GROWTH THROUGH THE LIFE SCIENCES INDUSTRY

=======================================================================

                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 25, 2011

                               __________

          Printed for the use of the Joint Economic Committee











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                        JOINT ECONOMIC COMMITTEE

    [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

SENATE                               HOUSE OF REPRESENTATIVES
Robert P. Casey, Jr., Pennsylvania,  Kevin Brady, Texas, Vice Chairman
    Chairman                         Michael C. Burgess, M.D., Texas
Jeff Bingaman, New Mexico            John Campbell, California
Amy Klobuchar, Minnesota             Sean P. Duffy, Wisconsin
Jim Webb, Virginia                   Justin Amash, Michigan
Mark R. Warner, Virginia,            Mick Mulvaney, South Carolina
Bernard Sanders, Vermont             Maurice D. Hinchey, New York
Jim DeMint, South Carolina           Carolyn B. Maloney, New York
Daniel Coats, Indiana                Loretta Sanchez, California
Mike Lee, Utah                       Elijah E. Cummings, Maryland
Pat Toomey, Pennsylvania

                 William E. Hansen, Executive Director
              Robert P. O'Quinn, Republican Staff Director













                            C O N T E N T S

                              ----------                              

                      Opening Statement of Members

Hon. Robert P. Casey, Jr., Chairman, a U.S. Senator from 
  Pennsylvania...................................................     1
Hon. Kevin Brady, Vice Chairman, a. U.S. Representative from 
  Texas..........................................................     3
Hon. Amy Klobuchar, a U.S. Senator from Minnesota................     5
Hon. Mike Lee, a U.S. Senator from Utah..........................     7

                               Witnesses

Dr. Stephen S. Tang, President and CEO, University City Science 
  Center, Philadelphia, PA.......................................     8
Mr. Thomas Kowalski, President, Texas Healthcare and Bioscience 
  Institute, Austin, TX..........................................    11
Dr. Arthur T. Sands, President/CEO/Director, Lexicon 
  Pharmaceuticals, Inc., Woodlands, TX...........................    13
Mr. Mark G. Heesen, President, National Venture Capital 
  Association, Arlington, VA.....................................    16

                       Submissions for the Record

Prepared statement of Representative Kevin Brady.................    34
Prepared statement of Dr. Stephen S. Tang........................    35
Prepared statement of Mr. Thomas Kowalski........................    36
Prepared statement of Dr. Arthur T. Sands........................    38
Prepared statement of Mr. Mark G. Heesen.........................    42
Prepared statement of the California Healthcare Institute, 
  submitted by Representative John Campbell......................    48

 
  DRIVING INNOVATION AND JOB GROWTH THROUGH THE LIFE SCIENCES INDUSTRY

                              ----------                              


                        WEDNESDAY, MAY 25, 2011

             Congress of the United States,
                          Joint Economic Committee,
                                                    Washington, DC.
    The committee met, persuant to call, at 9:31 a.m. in Room 
216 of the Hart Senate Office Building, the Honorable Robert P. 
Casey, Jr., Chairman, presiding.
    Senators present: Casey, Klobuchar, and Lee.
    Representatives present: Brady, Mulvaney, Maloney, 
Cummings.
    Staff present: Will Hansen, Colleen Healy, Andrew Wilson, 
Jesse Hervitz, Jessica Knowles, Jayne McCullough, and Robert 
O'Quinn.

  OPENING STATEMENT OF HON. ROBERT P. CASEY, JR., CHAIRMAN, A 
                 U.S. SENATOR FROM PENNSYLVANIA

    Chairman Casey. Well thanks, everyone, for being here. We 
are still starting early, but we are grateful you are here. I 
am proud to be joined by Vice Chairman Brady and our witnesses.
    I will give an opening statement, and then I will turn the 
microphone to Congressman Brady, and then what we will have is, 
for Members who are here, maybe brief opening statements and 
then of course we want to get to our witnesses.
    I am pleased to be joined by Vice Chairman Brady at this 
hearing. We are going to examine today the key roles that are 
played by the life sciences, and life sciences companies in 
driving innovation and job creation throughout our country.
    We hope to shine light on the opportunities created by this 
vibrant sector and explore new policy actions that can 
incentivize additional research and development in the life 
sciences industry, and have a broader conversation about the 
role the Federal Government plays in supporting R&D.
    As we consider that role, it is useful to remember the 
inspirational leadership of President Kennedy. Today is the 
50th anniversary of the day when he challenged the country to 
put a man on the moon in his historic speech to a joint session 
of Congress.
    That speech drove new breakthroughs in science 
exploration--or space exploration, I should say, and major 
advances in technology. On July 20th, 1969, eight years and two 
months after President Kennedy addressed the Nation, Neil 
Armstrong became the first person to walk on the moon.
    Today, 50 years after President Kennedy laid out that bold 
vision of the successful Apollo 11 Mission, that is a reminder 
of what our country can achieve when we set ambitious goals and 
commit ourselves to reaching them.
    The anniversary is also a fitting backdrop to today's 
hearing on R&D and the life sciences industry R&D that will 
lead to next-generation drugs and devices that can dramatically 
improve quality of life and will enable us to address 
challenges that seem beyond our grasp even today.
    Life sciences include, as you know, fields such as 
biotechnology, microbiology, and genetics. Among the very 
different types of life sciences companies are firms that 
research and produce pharmaceutical drugs, medical devices, and 
of course surgical equipment.
    These firms play a critical role in our economy, employ 
approximately 1.2 million workers across America, and provide 
innovation-fueled economic growth, and job creation. The life 
sciences industry is particularly R&D intensive and is home to 
high rates of innovation.
    Pharmaceutical companies alone, just one piece of this 
industry, account for 16 percent of the firm-powered R&D in the 
country employing just about 115,000 workers.
    While employment in the health care sector is generally 
viewed as recession proof, life sciences employment actually 
declined by 28,000 from its high from October of 2008 to 
February of 2011. That is something we should note and discuss.
    The role of the Federal Government of course is to spur 
innovation through policies and encourage or enable innovation, 
creating investment and research that would not otherwise occur 
in the private sector. This can be done through the government 
stepping in to fund research directly through grants to 
universities, for example, or by using the tax code to 
incentivize the private sector to carry out the investment.
    These different tools can help to address when there is 
market failure in the private sector when, if it is left to its 
own devices, may underinvest in research and development.
    In the past three decades, total R&D spending, both public 
and private, has remained relatively flat between 2.5 and 2.8 
percent of GDP. Recently, the U.S. has lagged behind the rest 
of the world in the growth and the growth of R&D spending.
    From 1996 to 2006 U.S. spending on R&D as a share of GDP 
grew by just .1 percent. China, on the other hand, grew by .9 
percent during the same time period. A continuation of this 
trend can have significant negative effects on our long-term 
competitive position.
    We know that in the post-World War II period there has also 
been a change in how R&D is funded. Federally funded R&D has 
been declining during this period, while industry-funded R&D 
has been increasing.
    In 1980, industry-funded R&D surpassed federal R&D funding 
and, by 2008, the most recent comparative data available, the 
gap had grown substantially, with industry spending a little 
more than $267 billion on R&D, compared to the Federal 
Government's R&D spending of just $103 billion.
    However, the Federal Government continues to play a 
significant role in funding basic research. That research 
increases our general base of knowledge and creates the 
building blocks for future products. Indeed, the Federal 
Government funds over half, 57 percent, of the basic research 
in the United States, the majority of which is conducted in 
universities.
    In addition to the government funding of basic research, 
there are other federal policies that promote innovation. Tax 
credits that reduce the cost to the private sector of 
conducting R&D in the U.S. is one such policy. The Research and 
Experimentation Tax Credit, first introduced in 1981, and 
recently extended through 2011 as part of the bipartisan 
agreement on taxes in late 2010, is yet another prime example.
    Businesses have long argued that the lack of a permanent 
credit leads to uncertainty from one year to the next about 
whether or not the credit will exist, and has limited the 
credit's effectiveness. A permanent credit would give business 
the certainty that they need to make R&D investments, thereby 
boosting R&D spending, innovation, and job creation.
    The President's 2012 budget proposed making the R&D credit 
permanent, and expanding it by about 20 percent. So 
policymakers can also provide targeted incentives to encourage 
R&D in specific industries, amongst certain-sized businesses.
    The Small Business Innovation Research Program, for 
example, provides grants to small businesses, helping them in 
the early stages of their research to navigate the so-called 
``Valley of Death'' where their concept is too high risk for 
private-sector support.
    The Life Sciences Jobs and Investment Act, which I am proud 
to be co-sponsoring with Vice Chairman Brady, will double the 
R&E credit from 20 percent to 40 percent on the first $150 
million of R&D in life sciences, providing a new incentive for 
small and medium-sized businesses to invest in R&D funding.
    We want to ensure that the United States is preparing our 
students in science, engineering, and other skills they need to 
compete in this new economy. That is not the focus of today, 
but we know this is a priority for other hearings and other 
discussions.
    We are fortunate today to have a distinguished panel of 
experts who bring with them vast experience as inventors, 
innovators, job creators, and experts on the important role 
that tax incentives can play in spurring new research, new 
innovation, and new jobs.
    With that, I will turn to our Vice Chairman, Congressman 
Brady.

 OPENING STATEMENT OF HON. KEVIN BRADY, VICE CHAIRMAN, A U.S. 
                   REPRESENTATIVE FROM TEXAS

    Vice Chairman Brady. First, Mr. Chairman, I would like to 
thank you for holding today's hearing on the life sciences 
industry. I would also like to welcome all of today's 
witnesses, especially my fellow Texans, Dr. Arthur Sands and 
Thomas Kowalski--both highly respected in their fields--and 
thank you for taking time out of your busy lives to testify.
    America's life sciences industry leads the world with 
innovations in biomedical science, biotechnology, agriculture, 
and medical devices. This industry's products help Americans 
live longer and healthier lives. It employs 1.4 million 
Americans and accounts for one-third of all research and 
development expenditures by private U.S. firms.
    The Joint Economic Committee is holding this hearing today 
to discover what steps the U.S. Government may take to help the 
life sciences industry prosper and strengthen its 
competitiveness both here and abroad.
    Investment in research and development in life sciences 
creates good, high-paying jobs; keeps the United States on the 
cutting edge of global competitiveness; and enhances the 
quality of life not only for Americans but for people 
everywhere.
    Yet the up-front cost of investment in this industry is 
extremely high. Companies spend years researching and testing, 
pouring millions and at times billions of dollars into the 
research, testing, and trials of medical ideas that may never 
make it to market. Yes, the return can be high, but the 
investment is highly risky as well.
    In this vital area of the economy, America is falling 
behind. Other countries are increasing their incentives for R&D 
in an aggressive effort to attract investment and the high-
paying jobs that go with it. America's share of the world's 
research and development pie is shrinking as our global 
competitors are taking a page from our playbook and beating us 
at it. In 1981, America led the world as the first to create an 
R&D tax credit. By 2009, we ranked 24th out of 28 countries in 
the strength of our R&D incentives.
    We need to rethink our approach to incentives. It is time 
we modernize the R&D tax credit; strengthen it to encourage 
companies to make even more substantial investments in research 
and hiring; and make it permanent so businesses and investors 
have the confidence to make long-term decisions.
    At the same time, we should reform the way our overall tax 
structure operates by lowering the rate and simplifying the 
code. At 35 percent, the United States has one of the highest 
corporate tax rates in the world. Our complicated tax structure 
puts Americans at a disadvantage when competing at home and 
abroad. More than $1 trillion in capital earned by American 
companies and workers is stranded overseas because our tax code 
strangely penalizes companies for bringing profits home.
    As an interim step, we have an opportunity to temporarily 
lower tax barriers to incentivize companies to bring these 
profits back home for investment. The right form of 
repatriation measure would lower the tax gate and allow private 
capital to flow back to the United States to be used to create 
jobs, to expand businesses, and to invest in research.
    Additionally, we should examine ways we can help boost 
incentives even more for the life sciences industry, given its 
unique structure and the benefits it adds to our health and way 
of life. This could include further strengthening the R&D tax 
credit, and allowing life sciences companies to claim research 
expenses paid to universities.
    However, we should not limit our considerations of tax 
provisions only to those benefiting the life sciences industry. 
The competitive challenges which federal policies pose to life 
sciences firms merely reflect the tax, trade, and regulatory 
impediments that all American companies face when competing in 
global markets.
    To begin, we must look at fundamental reform of business 
taxation:
    We must lower the federal corporate income tax rate to a 
competitive level so that both American and foreign firms will 
make new investments in the United States, creating more and 
better paying jobs for American workers.
    We must also lower the after-tax cost of making new 
business investments by moving toward expensing new investments 
in equipment and software and significantly shortening the tax 
depreciation schedules for buildings and other structures.
    Finally, we must enact a permanent and generous tax credit 
for research and development.
    Beyond business tax reform, we must continue to open new 
markets to American exports of goods and services. I continue 
to call on President Obama to submit the pending free trade 
agreements with Colombia, Panama, and South Korea to Congress 
for approval. And we must ensure that intellectual property 
rights, such as those developed by firms before us today, are 
fully respected by all countries.
    Finally, we must reform our regulatory structure to assure 
that the goals we all share for product safety and a clean 
environment are achieved in a cost-effective way that does not 
place undue burdens on American companies or their workers.
    With that said, Mr. Chairman, I look forward to hearing 
today's testimony.
    [The prepared statement of Representative Kevin Brady 
appears in the Submissions for the Record on page 34.]
    Chairman Casey. Thank you, Vice Chairman Brady.
    Next, by order of appearance, which is the way we do things 
here, Senator Klobuchar.

 OPENING STATEMENT OF HON. AMY KLOBUCHAR, A U.S. SENATOR FROM 
                           MINNESOTA

    Senator Klobuchar. Well thank you very much, Mr. Chairman, 
and thank you for holding this hearing. I think it is very 
important.
    I first wanted to mention, my in-laws are here today, Bill 
and Marilyn Hassler, from Mankato, Minnesota. My father-in-law 
taught science biology for most of his life, and I am happy to 
have them here.
    I told Senator Casey it was ``Bring Your In-Laws To Work 
Day,'' but----
    [Laughter.]
    But he did not really believe me. I am very excited about 
this hearing because my State has really built its reputation 
on innovation. Our unemployment rate is at 6.5 percent, one of 
the lower in the country, and that is because of innovation.
    We brought the world everything from the Pacemaker to the 
Post-It Note. 3M started as a little sandpaper company up in 
Two Harbors, Minnesota, and now employs 75,000 people. 
Medtronics started as a garage--in a garage. Target started as 
a little dry goods store in Nicollet Mall. So we have always 
believed in moving ahead.
    I think this country needs to move ahead, and that the 
heart of our progress should be an innovation agenda. It is 
what Tom Friedman, who writes for The New York Times, who is a 
Minnesota native called, ``Nation building in our own Nation.''
    This innovation agenda, we've got part of it in a bill that 
I introduced with Senator Scott Brown, that is co-sponsored by 
Lamar Alexander and Mark Warner, called Innovate America, and I 
think first of all we start with education, doubling our number 
of STEM high schools and making sure that we are training 
students to go into the jobs that are actually available in the 
marketplace today, including technical schools, and making sure 
that we have students trained to run the high-tech assembly 
lines of the day.
    The second thing, which has been mentioned by my colleagues 
and certainly applies in the life sciences, is this idea of 
making sure the R&D tax credit is good, and stable, and that we 
are not playing a game of red light/green light with that tax 
credit, like we have been; that we do things to close loopholes 
and lower rates.
    I think the Deficit Commission had some good ideas there in 
terms of lowering the overall corporate rate, but closing some 
of the loopholes and looking at our revenues, as well. 
Certainly doing something about our debt will be helpful for 
market investment in every new kind of product.
    Third, immigration reform: looking at the H-1B Visas; 
realizing that we are basically having to contract with people 
in other countries because we've made it so hard for them to 
come over here. When students graduate that study at our great 
universities, that we give them that time to get a job so that 
they start the next Google in the United States and not in 
India or some other place.
    The idea of making sure that we do something about red 
tape. Minnesota is the mecca for the medical device industry, 
and I was just reading a statistic from a study that came out 
today out of Chicago that showed, because of problems with the 
FDA approval process, two-thirds of small medical device 
companies engaged in developing new products are obtaining 
approvals in Europe first. Only 8 percent of the 300-some 
companies surveyed felt that the U.S. approval pathway was the 
most predictable in the world; 72 percent found that 
information requested by the FDA reviewers was beyond necessary 
requirements. That is a big problem. We are working to address 
it every single day, but it is basically we are putting up a 
sign that says: Go put your money elsewhere. And I think that 
has to change.
    Last, exports is the key to this in terms of getting out of 
our slump. The President has called for a doubling of our 
exports in the next five years. I think that is doable. And I 
think a lot of the way it is doable is the research that you 
will be talking about, the work in the life sciences, as well 
as medical device and other areas.
    But this has to be an around-the-world effort. Our 
embassies have to be focused on assisting companies in getting 
contracts in other countries, because certainly the embassies 
in other countries is what they're devoted to all the time, and 
we have to make sure that our small- and medium-sized companies 
have an opportunity through the foreign commercial service to 
find out about those customers and potential markets. Because 
there is this growing group of customers across the world that 
we have not appropriately accessed with our small- and medium-
sized companies.
    So in sum, Mr. Chairman, I truly believe that we are not 
going to grow as a Nation in the life sciences, or in any of 
our innovative industries if we are simply a country that 
focuses on churning money on Wall Street, and importing our 
way, and building debt.
    We have to be a country that thinks again, that makes 
things, that invents, that exports to the world. So I thank you 
for holding this important hearing.
    Chairman Casey. Thank you, Senator Klobuchar.
    Senator Lee.

  OPENING STATEMENT OF HON. MIKE LEE, A U.S. SENATOR FROM UTAH

    Senator Lee. Thank you, Mr. Chairman. Utah is also a state 
with a strong interest in the life sciences. We have got 600 
different life sciences companies in Utah, employing over 
25,000 people. We have got two institutions in the State of 
Utah that have helped to facilitate this, along with our 
universities.
    One is an organization known as the Bio-Innovations 
Gateway. Another is known as USTR, the Utah Science Technology 
Research Initiative. And so these are both programs that work 
with our institutions of higher learning to help recruit top-
level talent to the State of Utah and to its universities so 
that we can patent and develop and produce more life sciences 
technology.
    And I wish I could claim that the Post-It Note was invented 
in my state, but alas Minnesota beat us to the punch.
    [Laughter.]
    But we are out there looking for the next life sciences 
iteration of the Post-It Note. Maybe we will find some medical 
device delivery system that is a removable adhesive strip like 
the Post-It.
    Senator Klobuchar. Dream on. Dream on.
    Senator Lee. Yes. Exactly. I have to dream. So I welcome 
the witnesses and look forward to your testimony.
    Chairman Casey. Thank you, Senator Lee.
    We will now move to our witnesses. I will provide a 
biographical sketch, brief though it will be, of each witness. 
And then of course we will start with Dr. Tang for his 
testimony.
    Let me start with Dr. Stephen Tang. He is the President and 
CEO of the Science Center in Philadelphia. Before coming to the 
Science Center, Dr. Tang served as Group Vice President and 
General Manager with Olympus America, where he led U.S. 
operations for the company's Global Life Sciences business. Dr. 
Tang earned a Doctorate in Chemical Engineering from Lehigh 
University. We're happy about that. An MBA from the Wharton 
School of Business in the University of Pennsylvania, also a 
Pennsylvania institution, and a B.S. in Chemistry from the 
College of William and Mary. So, Dr. Tang, welcome, and we look 
forward to your testimony.
    Tom Kowalski is the President and CEO of Texas Healthcare 
and Bioscience Institute, a statewide public policy research 
organization promoting medical research, development, and 
manufacturing in the State of Texas. Prior to his appointment 
as President of THBI, Mr. Kowalski served as Executive Director 
of the National Association for the Support of Long-Term Care, 
as well as a senior staff member to Governor Bill Clements of 
Texas; and Senator John Tower of Texas. Mr. Kowalski, welcome 
to you.
    Dr. Arthur Sands is the President and CEO of Lexicon 
Pharmaceuticals, a company he co-founded. Dr. Sands pioneered 
the development of large-scale gene-knockout technology for use 
in drug discovery. Prior to founding Lexicon, Dr. Sands served 
as the American Cancer Society's Post-Doctoral Fellow at Baylor 
College of Medicine. He received his BA in Economics and 
Political Science from Yale University and his M.D. and Ph.D. 
from Baylor College of Medicine. Dr. Sands, thank you very much 
for being here, as well.
    Mark Heesen is the President of National Venture Capital 
Association, which is engaged in public policy issues 
surrounding information technology, life science, and clean 
technology investing. Prior to his work in the NVCA, Mr. 
Heesen--He-sin? Hee-sen, I'm sorry. I'm pronouncing that wrong. 
He was an aid to former Governor Thornburgh in Pennsylvania. He 
received a Law Degree with emphasis in taxation from Dickinson 
School of Law. Thank you very much for being here, as well. So 
we will start with Dr. Tang.
    And I should mention for the record, your full testimony, 
each of your testimonies, will be included in the record in 
full. We will try to keep each of you to five minutes, if you 
can do that, in your opening.
    Thank you.

STATEMENT OF DR. STEPHEN S. TANG, PRESIDENT AND CEO, UNIVERSITY 
             CITY SCIENCE CENTER, PHILADELPHIA, PA

    Dr. Tang. Thank you, Chairman Casey, and Vice Chairman 
Brady, and Members of the Committee:
    I am Steve Tang. I am President and CEO of the University 
City Science Center in Philadelphia. It is an honor and a 
privilege to speak to this distinguished Committee today. And 
may I say, I have had the honor of living in both Pennsylvania 
and Texas, and doing business in each of your States, during my 
career.
    Science and innovation are in my blood and are part of my 
heritage. I am the son of two Chinese-born scientists. I was 
born with high expectations from parents who sought, and 
largely achieved, the American Dream.
    My background is in both science and entrepreneurship. As 
Senator Casey mentioned, I have an undergraduate degree in 
Chemistry from the College of William and Mary and a Ph.D. in 
Chemical Engineering from Lehigh University; as well as an MBA 
from the University of Pennsylvania's Wharton School. So with 
my over-education in full view of the Committee, I want to wish 
everyone Happy Nerd's Pride Day.
    [Laughter.]
    Senator Lee, as a graduate student, I founded and ran my 
own technology assessment consulting firm, while at the same 
time pursuing my doctorate and managing Lehigh University's 
Biotechnology Research Center.
    After I obtained my MBA, I served as a management 
consultant to two international firms, focusing on projects in 
the chemical, environmental, health care, and pharmaceutical 
industries.
    I then served as CEO of a hydrogen fuel cell company, 
guiding its growth as it moved beyond its start-up phase, 
completed a successful initial public offering, and attracted 
subsequent investment and financing.
    Next, as Senator Casey mentioned, I ran Olympus America's 
Life Science Division, overseeing operations, finance, 
strategy, and product and business development.
    Since 2008, I have had the privilege of leading the 
University City Science Center. I was motivated to take this 
position by my passion for science and technology, and their 
ability and potential to make the world a better place. As a 
newly appointed member of the U.S. Commerce Department's 
Innovation Advisory Board, I welcome the opportunity to 
contribute to the national discussion on innovation and 
economic competitiveness, particularly as it relates to life 
sciences.
    The Science Center is a private, nonprofit research park 
and business incubator in Philadelphia. Located in the city's 
heart of the city's ``meds and eds'' community, we have existed 
at the intersection of innovation and economic development for 
close to 50 years. We are the Nation's oldest and largest urban 
research park, with 15 buildings on 17 acres containing over 
2.0 million square feet of lab and office space. More than 
8,000 people come to work each day on our campus.
    We are home to innovative programs such as the QED Proof-
of-Concept Funding Program, which pulls technologies out of the 
labs and into the marketplace by pairing scientific researchers 
with experienced business advisors.
    At the Science Center we firmly believe that our multi-
institutional QED program is a unique and model ``public-
private partnership'' that can be replicated across the Nation 
to help promising ventures cross the ``Valley of Death'' in 
funding.
    I am proud to report that QED achieved a funding milestone 
on its own last month when we received a two-year, $1 million 
grant from the U.S. Economic Development Administration. This 
federal funding is currently being leveraged with funding 
previously awarded to QED by the Commonwealth of Pennsylvania 
and the William Penn Foundation of Philadelphia, plus 
additional funding from the Science Center and the 19 
institutions participating in this program.
    The Science Center is owned by 32 of the leading colleges, 
universities, hospitals, and nonprofit institutions throughout 
Pennsylvania, New Jersey, and Delaware, including the 
University of Pennsylvania, Drexel University, the Children's 
Hospital of Philadelphia, the University of Delaware, and 
Rutgers University.
    More than 350 companies have passed through our doors since 
we were founded in 1963. The 93 that remain in the Greater 
Philadelphia Region account for over $9 billion of annual sales 
and 15,000 current direct jobs. These jobs pay an average of 
$89,000 per year, a remarkable figure considering today's 
economy.
    Our campus features two business incubators, collectively 
known as ``the Port,'' that are home to more than 30 start-up 
companies in life sciences, cleantech/greentech and information 
technology.
    These companies are at the cutting edge of scientific 
innovation. To give you an example, one of our start-up 
residents--Invisible Sentinel--is working on a fast, efficient 
way to detect food contamination. Another--BioNanomatrix--is 
using nanotechnology to decode the human genome. And a third--
Enzybel International--a Belgian company, is dedicated to the 
production and commercialization of sustainable compounds 
derived from nature.
    In our 48 years of operations, we have helped to create the 
model for the modern research park and high tech business 
incubator. Our graduates include Centocor, the maker of 
Remicade, to treat rheumatoid arthritis; global software giant 
Bentley Systems; and financial services powerhouse SEI 
Investments.
    One of our latest incubator success stories--Avid 
Radiopharmaceuticals--exemplifies America's potential for 
innovation and entrepreneurship in the life sciences. Avid was 
founded by Dr. Dan Skovronsky, a neuropathologist at the 
University of Pennsylvania who had an idea for a technology 
that would revolutionize the ability to diagnose Alzheimer's 
and other diseases at an early stage.
    In 2005, Dan moved his brand-new company into the Science 
Center's incubator with one employee--himself. Over the next 4 
years, Avid refined its technology and added jobs. By 2009, the 
payroll had grown to 37 people. The company outgrew its space 
in our incubator and moved into custom-fitted, full-price 
office and lab space on our campus. Since then, the company has 
grown to more than 50 employees.
    Last fall, Avid was acquired by one of our Nation's leading 
pharmaceutical companies, Eli Lilly, for $300 million in cash 
up front, plus another $500 million in additional payments over 
the next few years based on the achievement of certain 
milestones.
    We were thrilled to learn that Avid currently plans to 
remain at the Science Center, continuing to bring new jobs and 
economic growth to Philadelphia and our region.
    Avid represents a classic example of how research and 
development in the life sciences are essential to our Nation's 
economic recovery.
    Let's take a step back and look at the economic impact of 
the life sciences in the Science Center's home State of 
Pennsylvania.
    As noted in the State Bioscience Initiative 2010 Report 
from Battelle and BIO, the biosciences sector in Pennsylvania 
employs 81,000 workers in the state at an average salary of 
$82,000--for a total of $6.7 billion in wages. With a 
multiplier effect of 4.38, the industry has a total employment 
impact of 354,000 people.
    On a national level, according to the same report, total 
employment in the U.S. bioscience sector reached 1.42 million 
in 2008. When you figure in a multiplier effect of 5.8, the 
total employment impact of the bioscience sector is 8 million 
jobs nationwide.
    These are tough numbers to ignore. Yet the life sciences 
industry does more than create well-paying jobs. Scientists and 
researchers are dramatically improving treatments, 
therapeutics, and ultimately patient care and the quality of 
life.
    Think back to our Port business incubator tenant, Invisible 
Sentinel. Their work in detecting food contamination may also 
have applications in the detection of pathogens associated with 
hospital-acquired infections, as well as in cancer detection, 
and homeland security.
    At the Science Center we look forward to helping our 
residents advance science and technology and invent new 
products that will change the world, while creating jobs and 
economic growth along the way.
    I invite you to visit Philadelphia and learn more about us, 
our track record of success in nurturing entrepreneurs and 
their ventures, and our unique self-sustaining business model.
    In closing, I would like to express my strong support, 
along with the Chairman and Vice Chairman, for the proposed 
Life Sciences Jobs and Investment Act. This legislation will 
help strengthen the biosector's culture of innovation, 
discovery, education, and job creation across the Nation.
    The Life Sciences Jobs and Investment Act will offer tax 
incentives for small and medium-sized businesses to invest in 
life sciences research and development on a targeted basis. It 
will also ensure the availability of an educated, skilled 
workforce that will sustain our pipeline of bioscience 
innovations, companies, and jobs over the long term.
    One out of every six jobs in the Greater Philadelphia 
region can be traced back to life sciences. The Life Sciences 
Jobs and Investment Act is key to the long-term success of this 
crucial industry sector. This is the kind of proactive 
legislation that we need to maintain our competitive edge as we 
ensure that biotech in the region--and the entire country--
continues to grow and thrive.
    Thank you for your kind attention, and I welcome your 
comments and questions.
    [The prepared statement of Dr. Tang appears in the 
Submissions for the Record on page 35.]
    Chairman Casey. Thank you, Dr. Tang. Dr. Kowalski.

     STATEMENT OF MR. THOMAS R. KOWALSKI, PRESIDENT, TEXAS 
        HEALTHCARE AND BIOSCIENCE INSTITUTE, AUSTIN, TX

    Mr. Kowalski. Thank you, Chairman Casey, Vice Chairman 
Brady, and the entire Joint Economic Committee, for inviting me 
here today.
    I am Tom Kowalski, President of the Texas Healthcare and 
Bioscience Institute. The Institute was created in 1996. We are 
located in Austin, Texas. Our national partners we consider are 
Pharma, BIO, and Agrameds, so it covers a whole spectrum of the 
life science industry.
    Our organization's mission is to research, develop, and 
advocate policies and legislation that promote biomedical 
science, biotechnology, agricultural and medical device 
innovation in Texas. We have been at this a long time.
    The issues you are considering here today--how targeted tax 
incentives can be used to enhance medical innovation, life 
sciences education, and job creation here in the United 
States--is of great interest to me and of vital concern to our 
industry.
    The impact of the life sciences industry on the U.S. 
economy is significant. It advances medical knowledge, develops 
products that keep our country at the cutting edge of global 
competitiveness, and supports millions of high-quality paying 
jobs.
    As important as the direct benefits to our Nation's 
economy, the innovations produced by these companies are also 
helping Americans live longer, healthier lives.
    I would like to share with you the positive impact the life 
sciences industry has had in Texas, both in improving the 
health of Texans as well as creating a robust job sector. And 
much of this development has occurred because of the very vital 
investments that Texas has been willing to make into the life 
science sector.
    We have a dynamic biotechnology marketplace with an 
estimated economic impact of $75 billion. The State has many 
national top-10 rankings in biotechnology and is home to over 
4,100 biotechnology, biomedical research, business, and 
government consortia, medical manufacturing companies, and 
world-class universities. We employ over 104,000 people at an 
average annual salary of over $67,000.
    A significant number of top global biotechnology and 
pharmaceutical companies have Texas locations, underscoring the 
State's vitality.
    There are significant factors pointing to the robust 
growth, and I would like to point out two:
    First, University research is the lifeblood of our State's 
innovation, medical treatments, and job creation. The Texas 
Life Science Centers in the State, they are the crown jewels by 
which all of this activity centers around.
    Secondly, there has been a significant investment from the 
State into the life science industry which has enabled research 
technology transfer and commercialization to successfully 
occur. Much of the state's investments require academic and 
private sector collaborations, and that has been key. And the 
Life Sciences Investment Act will complement these efforts by 
the potential infusion of industry research dollars and future 
collaborations which extend to increase workforce, which goes 
into the entire R&D process.
    The State is ready to be able to work with these companies 
because of these two programs--because of the problems I am 
about to talk to you about, and focusing on the collaborative 
efforts.
    The Texas Emerging Technology Fund is one of these 
programs. It is known as the ETF. It has allocated more than 
$193 million in funds to 131 early stage companies, and nearly 
$173 million in grant, matching, and research superiority funds 
to Texas universities. And by ``research superiority,'' we are 
going out and actually recruiting talent to the State of Texas 
with the ETF dollars.
    Investments by the TETF attract additional investment 
capital to emerging technology companies. Since the fund's 
inception, more than $407 million in private capital has been 
invested in ETF companies--in ETF-funded businesses, which is 
more than double the state's contribution.
    Another key program in Texas has been the creation of the 
Cancer Prevention and Research Institute of Texas. It is known 
as CPRIT. The Texas Legislature and the Governor authorized the 
program in 2007. It has funded 256 grants totaling more than 
$382 million for cancer research, commercialization and 
prevention in 46 academic centers. More than $500 million 
including matching funds have been invested in Texas' 
extraordinary efforts to lead the Nation in cancer research.
    CPRIT has become one of the largest cancer research grant-
making organizations in the Nation. Our focus in Texas has been 
to create a strong environment. How do we grow our own? How do 
we keep the companies we are creating? How do we attract 
additional companies into the State? And, more importantly, how 
do we put our grads that we are graduating to work into these 
companies?
    The industry has enjoyed a strong growth rate of 14 percent 
from 2003 to 2008. These programs have added stability during 
the last two years to enable our companies to continue to raise 
capital and invest that capital into the R&D process. This is 
what has been helpful for us during this economic recession.
    While individual states can do much to support the growth 
of the life science industry, continued and increased support 
at the federal level is paramount.
    The biotech industry directly provides hundreds of 
thousands of good-paying jobs for American working families. 
However, over the last decade, America's leadership in the life 
sciences industry has begun to erode.
    To retain those jobs and to create new ones, the success 
and growth of the industry's basic research efforts, as well as 
innovations in effective treatments and associated 
technological advancements, must remain in the U.S. where they 
will contribute to our Nation's future economic growth and 
international competitiveness.
    Unfortunately, as the cost of developing new biotech 
products in the U.S. continues to rise, companies are under 
great pressure to find lower-cost locations to conduct their 
research and development.
    We can adjust our tax policies and remain the international 
leader in biotech research, development, and manufacturing, or 
we can watch the industry move overseas like so many before it.
    Narrowly tailored tax incentives aimed at ensuring 
investment in domestic biomedical research and development will 
create a demand for highly skilled workers, promote higher 
education in the life sciences, encourage greater scientific 
collaboration, and improve our Nation's overall economic well-
being and health.
    Thank you for the opportunity to be here today.
    [The prepared statement of Mr. Kowalski appears in the 
Submissions for the Record on page 36.]
    Chairman Casey. Thank you, Mr. Kowalski. Dr. Sands?

STATEMENT OF DR. ARTHUR T. SANDS, M.D., PRESIDENT/CEO/DIRECTOR, 
          LEXICON PHARMACEUTICALS, INC., WOODLANDS, TX

    Dr. Sands. Thank you. Good morning, Chairman Casey, Vice 
Chairman Brady, Members of the Committee, ladies and gentlemen:
    I am President and Chief Executive Officer of Lexicon 
Pharmaceuticals, and I am honored to be appearing before the 
Committee today on behalf of the Biotechnology Industry 
Organization, BIO.
    BIO represents more than 1,200 companies, academic 
institutions, state biotechnology centers, and related 
organizations in all 50 states.
    When I founded Lexicon in 1995, we were a small, privately 
funded research-stage company. We now employ 290 individuals, 
and we have 7 drugs in development. Currently there are 
thousands of similar companies throughout the United States--
each one with molecules and drug candidates that could change 
the face of modern medicine.
    Biotechnology may hold the answer to medical problems that 
face America from the devastation of cancer and AIDS, to the 
personal losses of Alzheimer's and Parkinson's Disease, and to 
the spiraling costs of health care associated with diseases 
that are reaching epidemic proportions such as Type II 
diabetes.
    Additionally, the biotech industry is a thriving yet I'd 
say constantly struggling industry. It is a growth engine 
directly employing 1.4 million Americans in high-quality jobs, 
and indirectly supporting an additional 6.6 million workers.
    Despite these windows of opportunity that face us in 
biotechnology, the research and development effort is truly a 
difficult, arduous, and very long process. It takes an 
estimated 8 to 12 years for one of these breakthrough companies 
to bring a new therapy from discovery to market, costing 
between $800 million and $1.2 billion.
    These are estimates that of course there have been many 
studies on, which we have all read. I have to say, we are 
actually living these numbers, and we are having to raise the 
capital associated with all these figures. Through this time, 
Lexicon has raised up to about $1.2 billion. We have done that 
through private investment. We are very fortunate to have 
strong investors, but it is a very difficult thing, to 
consistently raise capital like that over 15 years with the 
hope of bringing forward the medicine that we've created. So 
those are very real numbers.
    Due to this capital-intensive process, biotechnology has 
turned to the private-sector investors, and we are publicly 
traded, as well, and collaborative agreements to finance the 
early stages of therapeutic development. We have done over $450 
million worth of collaborations. We've reached out to bigger 
companies, such as Genentech and Bristol-Myers Squibb to help 
fund our discovery process, but now we are trying to develop 
innovative therapies on our own.
    However, I would say the current economic environment has 
made private investment dollars extremely elusive, especially 
during the recent financial crisis. It has been a very 
difficult time, resulting in life-saving therapies for patients 
being delayed or shelved. We've actually seen some of this 
happen at our company.
    Early and midstage companies have been hit the worst; last 
year, Series A initial funding deals brought in half of what 
they did in 2009.
    As U.S. biotech companies face financial uncertainty, other 
countries are moving ahead, including China and India, and we 
have seen business moving to these countries. This lag puts us 
at risk to lose our competitive edge.
    There are certain steps Congress has taken to maintain the 
American leadership in biotechnology. Last March Congress 
enacted the Therapeutic Discovery Project, an important $1 
billion tax credit program designed to stimulate investment in 
biotechnology research and development.
    Under this program, small biotech companies received an 
infusion of capital to advance their innovative projects and 
create and sustain American jobs. Congress should expand and 
extend this program.
    There was a cutoff there of 250 employees to be included in 
the program. At 290 employees actually couldn't be included, 
just because we were 40 employees over the limit.
    Additionally, Vice Chairman Brady recently introduced the 
American Research and Competitiveness Act which would support 
and foster the creation of high-wage jobs associated with R&D 
in the biotech industry by strengthening and making permanent 
R&D tax credits.
    Chairman Casey has introduced a bill, the Life Sciences 
Jobs and Investment Act, which would allow biotech companies to 
elect an increased R&D credit for their life sciences research, 
or to repatriate up to 150 million in foreign earnings to 
invest in job creation. I definitely believe those should be 
passed.
    Given the long R&D timelines and the truly arduous road to 
bring a therapy from bench to bedside, emerging biotech 
companies, which are not currently profitable, and that is most 
companies, are unable to immediately benefit from many of the 
current tax incentives, given the way that they are structured.
    In the reduced capital gains rate for sale of qualified 
small business stock, IRC Section 1202, there is greater 
theoretical and practical impact on companies like ours, and 
throughout the biotech sector. This is due to the complexity of 
the rules, its limited scope, subsequent changes in tax rates 
and alternative minimum tax. Among other challenges, the 
section employs a test in which the corporation's gross assets 
must be less than $50 million in order to be eligible for the 
preferential capital gains treatment. When intellectual 
property is incorporated as an asset, small biotech companies 
are almost always over the $50 million limit, and we don't 
start in garages. We start in very expensive garages, okay, 
with our intellectual property.
    So while modifications to Section 1202 would represent key 
improvements in the biotech environment, Congress has the 
opportunity to enact new tax incentives which would further 
encourage private investment in our industry.
    Historically, Congress has provided tax incentives to high-
risk industries as a means of encouraging investment in these 
new endeavors, which it deems important. Research and 
development in the biotech industry is an extremely high-risk 
undertaking. Small oil and gas exploration companies face 
similar challenges to biotech, and Congress responded by 
including provisions in the code allowing investors to take 
advantage of tax benefits accumulated by these high-risk 
companies.
    If applied to biotechnology, these partnership tax 
incentives would encourage biotech investment.
    In 2000, Lexicon completed one of the most successful IPOs 
in the biotech industry, raising $220 million. Companies today 
with science just as groundbreaking as ours are unable to 
access the capital markets, given the state of the public 
markets.
    The U.S. biotech industry is a thriving and, as I said, 
continually struggling growth engine for the American economy, 
creating high-quality jobs in every state, and improving 
America's health and well being.
    Congress has the opportunity to encourage investment in 
this industry by both improving our current programs and 
incentives, and by creating new ones that will recognize the 
vital part the biotech industry plays in America's future.
    Thank you very much.
    [The prepared statement of Dr. Sands appears in the 
Submissions for the Record on page 38.]
    Chairman Casey. Dr. Sands, thank you very much. Mr. Heesen.

 STATEMENT OF MR. MARK G. HEESEN, PRESIDENT, NATIONAL VENTURE 
            CAPITAL ASSOCIATION, ARLINGTON, VIRGINIA

    Mr. Heesen. Thank you.
    For the last four decades the venture capital community has 
served as a founder and builder of companies, a creator of 
jobs, and a catalyst for innovation in the United States.
    According to a recent study conducted by Global Insight, 
companies that were started with venture capital since 1970 now 
account for 12 million American jobs and $3.1 trillion in 
revenue in the United States in 2010.
    Nowhere has the power of venture-backed innovation been 
felt more strongly than in the life sciences sector. 
Approximately one-third of all venture investment is directed 
into biotechnology and medical device startups each year.
    After funding companies such as Genentech, AmGen, and 
Medtronic, the venture capital industry has helped bring 
countless lifesaving medical innovations to market. In 2010 
alone, venture capitalists invested nearly $6 billion in 
biotechnology and medical device startups.
    Today I want to cover some important ways that you as 
policymakers can help ensure that our life sciences startup 
ecosystem can continue to prosper.
    To begin, Congress must continue to encourage long-term--
and I emphasize ``long term''--investment through tax policy. 
Returns earned by venture capitalists and entrepreneurs as a 
result of successfully building companies should be taxed at a 
capital gains rate that is globally competitive and preserves a 
meaningful differential between ordinary income and capital 
gains.
    This maintains proper incentives for investors who are 
dedicating more than a decade of capital and time to their 
companies. We appreciate the support of many Members of 
Congress, including Chairman Casey and Vice Chairman Brady, in 
recognizing this dynamic.
    While the R&D tax credit is important to many midsized and 
large corporations, it is not a critical component for startup 
biotechnology and medical device companies. Our companies are 
typically losing money and thus cannot use a credit that is 
structured for companies that are profitable.
    As lawmakers consider tax reform, we urge you to build a 
system that supports both emerging companies and multinational 
corporations. Certainly we believe that recent reports of 
possible proposals to force certain partnerships to pay 
corporate tax rates is a move in the opposite direction of such 
a system.
    We are also beginning to look towards protecting future 
sources of venture capital within our industry. Private and 
public pension funds currently represent 40 percent of all the 
institutional venture capital that we receive. At the same 
time, we are beginning to see a movement from defined benefit 
to defined contribution pension plans, particularly at the 
state and local level.
    If this shift continues, the venture industry will risk 
losing a critical source of capital as there are currently no 
viable means by which a defined contribution plan can invest in 
the venture capital asset class. We hope to work together to 
develop viable solutions to this looming concern over the next 
several years.
    We also must address problems at the end of the venture 
capital cycle. Studies show that more than 90 percent of job 
creation occurs after a venture-backed company goes public. In 
the last decade, however, the market for venture-backed IPOs 
has suffered due to unfavorable market conditions and 
ramifications of regulations that attempt to fit everyone into 
the same criteria.
    The NVCA is actively engaging with Congress, the 
Administration, and regulators on ways to make the path to an 
IPO once again smoother, particularly for small-cap companies.
    Regulatory barriers are also impacting medical innovation. 
In recent years, when evaluating new drugs and medical 
technologies, the FDA has become increasingly reticent to 
balance the benefits against the risks of new therapies and 
technologies for seriously ill patients, resulting in less and 
later access to life-saving products when compared to other 
countries.
    We are calling for FDA reform that returns a balance to the 
review and approval process and reflects the importance that 
patients and health care providers place on access to new 
products in the United States.
    The NVCA understands that these reform measures require an 
FDA that is adequately funded. While all agencies should root 
out waste, untempered resource reduction at the FDA will result 
in a reduction in innovation being delivered to the American 
people. We ask that Congress be mindful of the tradeoff here.
    Maintaining America's global innovation advantage also 
requires continued federal funding of basic research and 
development. We understand the need for fiscal responsibility, 
but drastically reducing this research funding will be 
devastating long term to our global economic leadership.
    Further, we remain extremely disappointed regarding the 
once-again stalled SBIR reauthorization bill. The ongoing lack 
of clarification regarding whether venture-backed companies can 
apply for SBIR grants has unquestionably hurt the innovation 
pipeline. We hope that another year does not go by in which the 
most promising, innovative venture-backed projects are not 
eligible to receive SBIR grants and subsequently die on the 
vine.
    The venture capital industry remains committed to the long-
term investment in our country's future. We look forward to 
working with Congress to ensure that our companies continue to 
grow and create significant economic value for years to come.
    Thank you very much.
    [The prepared statement of Mr. Heesen appears in the 
Submissions for the Record on page 42.]
    Chairman Casey. Mr. Heesen, thank you very much. I 
appreciate all of our witnesses' testimony. We will do a round 
of questions, and I will start.
    I first of all wanted to ask--and this is not necessarily 
directed to any one of our witnesses; each and every one of you 
could provide perspective on it--it is the basic question about 
not just the divide between private sector investment in R&D 
versus public sector, but in particular if we can state, as I 
did for the record, about the investment of government dollars 
in basic research, which is still I guess around 57 percent. 
Moving away from that question, I would ask the panel: What are 
the most efficient uses of government resources in R&D? We know 
it is more predominant in basic research, but beyond that 
question, what is the best and most efficient use of federal 
dollars? We can start with Dr. Tang and go down the panel.
    Dr. Tang. Certainly, Senator Casey.
    I think you are absolutely right. There needs to be 
increased spending on basic research. That is, research that is 
pre-competitive. In other words, it is not yet to the point of 
commercialization.
    I think we have become more enlightened about the 
innovation process, though, over the years. And I have to say 
that translational research is now known to be separate and 
distinct from basic research.
    Chairman Casey. Can you define and distinguish the two?
    Dr. Tang. Certainly. So in the life science area, 
translational research is what is known as the work that needs 
to be done to move it from bench, the laboratory bench, to the 
bedside.
    That is a very different set of challenges. It involves a 
clinical approval from the FDA. It involves reimbursement 
definition from CMA. So there are several factors that go 
beyond what the government is funding.
    This area of translational research, I think, has not been 
highlighted from a policy perspective as an area that needs 
more funding, and it certainly does. But it is also an area, I 
think, where there could be better public/private partnerships. 
In other words, the use of not only federal funds, but state 
funds, and regional economic development funds to help them 
along the way.
    Chairman Casey. Anyone else on this? Doctor.
    Dr. Sands. Yes. I think it would be interesting if the 
Federal Government could help fund clinical trials. For 
example, with our diabetes drug alone our Phase III clinical 
trial alone is $200 million. And this is given the rising 
hurdle that we face in diabetes to prove both safety and 
efficacy.
    I know that the Federal Government does conduct a large 
number of its own trials, but I think it would be very 
interesting if companies could also be eligible for that kind 
of funding so that it's not necessarily conducted through the 
federal, you know, NIH and other investigational organizations, 
but actually if companies could apply for such grants.
    Chairman Casey. Could you just walk through that for a 
second? Today, in terms of funding for clinical trials, how 
does that work? If you can just describe the process?
    Dr. Sands. Yes. It is privately funded. We have to raise 
capital from investors, and then invest that money--spend the 
money on clinical trials. We send the money to all of the 
research organizations to sponsor those trials. The money goes 
to numerous centers for each patient on a per-patient basis.
    And I don't know of any methodology where companies can 
apply for grants to actually fund those trials. You can 
collaborate with NIH, but then the NIH is running the trial and 
that is a challenge. We are actually trying to get one of those 
going in schizophrenia with the NIH right now. They are very 
interested in funding that trial. It has taken a long time to 
get that established.
    But I personally believe that more investment dollars by 
the government in translational research outside the walls of 
the government would be very important, in my view.
    Chairman Casey. I am almost out of time. Mr. Heesen.
    Mr. Heesen. Well from a business perspective, a venture 
capitalist is not going to put money into basic R&D. That's not 
the job of the venture capitalist. The job of the venture 
capitalist is to take data and research that's been done from 
the basic research and apply it, and help companies to grow in 
that regard.
    However, there's also a point where government needs to be 
more effective. And I think the real highlight there is the 
SBIR program right now. The fact that a venture-backed company 
cannot take part largely in that program because it is getting 
venture dollars, these are companies that actually were vetted 
by venture capitalists who think that these companies actually 
have potential, and the government is saying, okay, well that 
means that you don't need any more money. So instead, we will 
invest in those companies that did not pass venture capital 
muster.
    And that, to me, demonstrates that you need to be looking 
at companies that have a true potential for success at the end 
of the day. Many of our companies fail but at least give us a 
leg up because we've looked at these companies and we see what 
companies have real expertise, and a potential to move cancer, 
Alzheimer's, et cetera.
    Chairman Casey. Thank you. Mr. Kowalski, and then I'll turn 
it over to Vice Chairman Brady.
    Mr. Kowalski. A decade ago we were losing companies in 
Texas. And by the implementation of the two funds that I spoke 
about, the ETF, what those dollars did is it allowed the 
companies to leverage those state dollars, and to be able to 
take those state dollars and then bring in matching dollars and 
be able to invest those companies.
    Let me just give you two figures. In the biolife sciences 
side, there were awards of $83 million given. They leveraged 
those dollars to $138 million. So there was a return on 
investment. On the research superiority where they were going 
out and attracting research--the best of the best, and the 
George Steinbrenner model, and recruiting them into Texas, 
there was $85 million in grants given. They leveraged that to 
$484 million.
    So it was the way and the approach that these funds were 
set up that allowed that leveragability and, believe it or not, 
10 years now we're keeping our companies in the state. And that 
is the best news.
    Chairman Casey. Vice Chairman Brady.
    Vice Chairman Brady. The ``George Steinbrenner model''? In 
Texas we don't really talk about New York models.
    [Laughter.]
    Tom, you should know that.
    Mr. Kowalski. Sorry, Congressman.
    Vice Chairman Brady. I would first like to ask permission 
to submit for the record from Congressman John Campbell, a 
member of the Committee, the statement by the California Health 
Care Institute related to innovation and job growth, if I may.
    Chairman Casey. It will be submitted for the record.
    [The statement by the California Health Care Institute, 
submitted by Representative John Campbell, appears in the 
Submissions for the Record on page 48.]
    Vice Chairman Brady. Several of you have made the point 
that America is at risk of losing its leadership position in 
this very important industry.
    Dr. Sands, in your written testimony you said many 
countries in Western Europe are implementing biotech-friendly 
tax incentives, including lowering the corporate tax rate for 
innovative industries as a means to grow their 21st Century 
economies.
    Tom Kowalski said, over the last decade, America's 
leadership eroded. We can adjust our tax policies and remain 
the leader, or watch industry move overseas.
    As we explore and move toward a lower tax rate with fewer 
exceptions, deductions, and complexity, knowing that is 
ultimately the goal, what tax changes can we make? What are the 
highest priorities in tax law to make today to ensure that 
private capital flows to the United States, so that this is the 
best tax climate in order to make these investments, and that 
encourages the life sciences innovation to both grow here and 
remain here as well?
    Dr. Sands, and Mr. Kowalski, I will start with ya'all.
    Dr. Sands. Go ahead. You can start.
    Mr. Kowalski. Well we can take a look at state models. I 
think the tax credits that are allowed a company in the life 
science structure, particularly in the biotech arena, because 
many of these companies are so small, it goes to the bottom 
line. And you can see what the states are currently doing.
    Right now--and this is according to the Battelle Report 
that has been produced by BIO--38 states are offering R&D tax 
credits. Twenty states are offering tax credits to angel 
investors who invest in technology companies. Twelve states are 
reported providing tax credits to individuals who invest in 
early stage venture funds.
    One of the things that we have been advocating in Texas--
and by the way, we do not have an R&D tax credit in the State 
of Texas; we're one of 12--and what we are advocating right now 
is a sales tax exemption on the purchase of equipment that 
would also be utilized in the R&D process, as well as the 
manufacturing process.
    And to many of our companies, this is bottom line. It goes 
beyond that, as well. It is an economic development driver. So 
our chambers, our economic development corporations, are also 
advocating for this as well because the money that is saved is 
then reinvested back into the R&D process and utilized in the 
manufacturing process.
    Vice Chairman Brady. Is that a higher priority than making, 
expanding, simplifying, and making the R&D tax credit permanent 
at the federal level?
    Mr. Kowalski. I think making it permanent is--should be a 
priority, because it leaves the industry guessing. And so, yes, 
I would say it should be a priority.
    Vice Chairman Brady. Well it seems like today we are buying 
the R&D car on installment payments, but we are not allowed to 
drive it as far and as fast as it can go by not making it 
permanent.
    Dr. Sands.
    Dr. Sands. Well I would echo what Tom just mentioned. But I 
would say conceptually anything that would reinforce long-term 
thinking and long-term investment.
    I think one of the problems we have that I see in this 
country, and even from the investor side, is very short-term 
thinking. And the R&D process in our industry is extremely 
long, probably one of the longest.
    The repatriation of capital for the large corporation. I 
know we are focused a lot on the small companies, but we do 
deals with big companies. And if their capital is locked 
overseas, there's less to do--less for us to do deals with. And 
we have actually seen that.
    I find that whole concept just bizarre to me. I am not a 
tax expert, but if that capital could come back to the major 
American corporations, I believe they would be another source 
of funding for R&D for the small companies.
    Vice Chairman Brady. Right. Thank you, Doctor. Mr. Heesen.
    Mr. Heesen. I think a venture capitalist looks at things 
from the eyes of the entrepreneur. If the entrepreneur is 
happy, the venture capitalist is going to be happy. You have to 
look at and talk about the long-term dedication that 
entrepreneur has.
    Is that entrepreneur going to leave AmGen or Medtronic and 
go up and create his or her own company? They're going to do 
that if they see a long-term tax potential. And that means a 
capital gains differential that gets that person up every day 
and says, not only am I going to try to help cure cancer, but I 
am also going to see an economic benefit at the end of the day.
    And so making sure that there continues to be a distinction 
between ordinary income and capital gains is critically 
important.
    And then also making sure that capital gains, we believe 
after seven years, you should not be paying capital gain, even. 
If you are going to lock up your money and your time that long 
in trying to create a drug, or a device that is going to 
benefit millions of Americans, that is something that should 
be--if you are risking your time and your money and venture 
capitalist money, at seven-plus years you should be looking at 
that very differently than a hedge fund person doing day 
trading.
    Vice Chairman Brady. I should have warned you. In 
Washington you are really not supposed to talk about the profit 
motive, really. It's a nervous thing around here.
    Dr. Tang.
    Dr. Tang. Right. I certainly agree with the comments made 
by the fellow witnesses. I go back to what Mark just mentioned. 
I think risk taking has to be rewarded for the long term. That 
is very, very key.
    For start-up companies, in terms of policy, net operating 
losses have to be monetized. And the states compete on that 
level, but foreign municipalities put some very attractive 
offers on the table. So I think we need to acknowledge that 
entities outside the U.S. are making it very attractive for 
U.S. companies to do business there.
    How are we going to catch up? And the Life Science 
Investment Job Act I think accounts for that. Repatriating 
foreign profits back into the U.S. But the piece that is the 
most helpful about that potential legislation is that it will 
enable investment in research infrastructure and the startup 
companies that Mark and his members fund, as well as all of the 
organizations that we have represented today.
    So you essentially renew the ecosystem in the U.S. for 
innovation by repatriating these profits.
    Vice Chairman Brady. Thank you very much. I appreciate it.
    Chairman Casey. Congressman Cummings.
    Representative Cummings. Thank you very much, Mr. Chairman.
    You know, when I participate in these hearings I am always 
wondering how it plays back home. In other words, if my 
constituents are looking at this, I am trying to figure out 
what they are thinking. Okay?
    And, you know, Dr. Kowalski and Dr. Tang, you are both 
deeply familiar with the significant role that--and I guess all 
of you are--that university research and public investments 
play in scientific breakthroughs and discoveries. Yet, given 
how long--and just to pick up where we left off--and complex 
the scientific process is, I believe a lot of people--you know, 
my constituents and people looking at this--regular citizens 
are unaware of the connection between the life sciences 
industry and the average citizen's daily life.
    Therefore, they wonder why we need to invest federal 
dollars in what can be an abstract and elusive field. They 
just, sometimes people do not see it.
    And so can you both cite real-world examples of the value 
of university research and federal R&D investment in people's 
everyday lives and whether it be past discoveries, or 
discoveries that may be right on the horizon? And be brief, 
because I have some other things I want to get to.
    Dr. Tang. Certainly. It is a great question. And I will go 
back. The Mayor of the City of Philadelphia, Michael Nutter, 
says the life science industry has to reach not only Ph.D.s but 
GEDs. So we need to do a better job of making this industry 
more approachable for the average citizen. Granted.
    Now, to your question of how has it impacted daily life? I 
could go on for hours. New therapeutics, new devices, new 
diagnostics, better ways to treat diseases early are all part 
of the basic research that has been funded at the federal level 
and then translated by venture capital and by state funding and 
other means into products.
    So from the perspective of the Science Center, companies 
like Centocor with their product Remicade, which was a 
treatment for rheumatoid arthritis and was initially funded by 
federal dollars. Now it is the top-selling product in Johnson & 
Johnson to treat rheumatoid arthritis.
    So just about every malady that is being treated today with 
advanced technology started with federally funded research.
    Representative Cummings. Wonderful.
    Mr. Kowalski. M.D. Anderson Cancer Center in Houston, 
Texas. It is a global destination for the treatment of cancer, 
but the amount of research that is going on at M.D. Anderson 
today. And it is the full package. It is not only the research, 
but there is also a commercialization center attached to it to 
where they are grabbing the latest ideas on the treatment of 
cancer and commercializing those ideas.
    And just in a closing note, the university structure right 
now, particularly our health science centers, they are being 
hammered all across the state with this Recession. And the 
funding mechanism now is so important, particularly with the 
repatriation and the ability to be able to invest in those 
university components.
    Representative Cummings. You know, I was listening to Arnie 
Duncan on CNN about how we've got 2 million jobs that we cannot 
even--we do not have the folks trained to do these jobs because 
they are highly technical. And I would guess that this is the 
stuff we are talking about--he is saying that basically there 
are vacancies. Two million jobs in America.
    And I worry about our pipeline and the STEM program and 
making sure we are preparing our children to take these 
opportunities. I believe that you can have all the options you 
want, but if you are not prepared to take them you might as 
well not have them.
    So I just want you to talk about that whole idea of STEM 
programs and things to prepare our people right here in America 
to take some of these jobs.
    Mr. Kowalski. You know, one of our crown jewels that we do 
not mention often is the role that our community colleges play. 
Our community college in the life science field, it not only 
takes the Ph.D., it not only takes the CEO or the COO, but it 
also takes a front-line lab worker that knows the mechanisms 
and knows the equipment and how to utilize that equipment. And 
those are hourly jobs, high-paying hourly jobs, $18 to $22 an 
hour.
    Our community colleges today I think are able to step into 
the challenge to be able to develop training curriculum. And 
they are already in place to be able to train those hourly 
workers that would be highly skilled and place them in well-
paying jobs.
    And so it works hand in hand, as we are going through this 
paradigm of the Recession and our academic components are 
getting hit, do not forget the role that this curriculum plays 
in our community colleges.
    Representative Cummings. Well I am speaking at a community 
college graduation on Saturday morning and I am going to quote 
you on that.
    Mr. Kowalski. I would be happy to send you some 
information.
    Representative Cummings. Please do.
    Mr. Kowalski. Yes, sir.
    Representative Cummings. I see my time has run out, Mr. 
Chairman. Thank you.
    Chairman Casey. Thank you, Congressman. Good questions on 
the jobs issue.
    Next, by order of appearance, Congressman Mulvaney.
    Representative Mulvaney. Thank you, Mr. Chairman, and 
gentlemen, for your time today.
    I'd like to talk about an issue that I think is relevant in 
sort of a different way. This is Small Business Week in 
Washington, D.C. And, Mr. Heesen, I especially appreciated your 
thoughts on the SBIR program, something we have been working 
on, and I wish we could get some permanent resolution to.
    I had always assumed before I came up here that this was an 
industry that was driven by some of the names that I heard 
earlier, the Genentechs, the Medtronics, the Eli Lillys. I am 
getting the impression that is not necessarily the case. And I 
am wondering, Mr. Heesen, if you could at least maybe help 
educate me a little bit, or perhaps all of you, on the role 
that small business plays in this particular industry.
    Mr. Heesen. Well what happens very often today is that your 
larger pharmaceuticals, your larger medical device companies, 
are not doing R&D in-house. The way they grow today is by 
buying smaller venture-backed companies.
    It is part of the DNA of many of these large corporations 
to basically look at what is happening at these smaller 
companies and cherry-pick and say, you know, we think that this 
company has potential and we will bring it in-house.
    So the small businesses play an absolutely central role 
today, as more and more large corporations forego doing in-
house R&D and go, frankly, shopping around and look at 
acquisitions of venture-backed companies and/or licensing 
agreements, which is becoming more and more prevalent as well.
    So without these smaller companies, your larger companies 
are not going to be successful over the long term.
    Representative Mulvaney. Let me press you on that. I do not 
mean to cut you off, but you mentioned before something that 
caught my attention. Which is, that an R&D tax credit really 
does not have immediate value to a small company that does not 
have any tax obligation.
    Mr. Heesen. If you do not have a tax obligation, you are 
not--yes.
    Representative Mulvaney. So if the small companies are 
doing all of the R&D, then how is a tax credit for R&D helping 
spur research and development?
    Mr. Heesen. That is a good question. I think that the 
smaller companies that try to go public--and there are 
certainly those who will forego an acquisition because they 
really want to become a public company, which is a very 
important public policy goal--those companies eventually are 
going to get, if they continue to grow and go public, they are 
eventually going to get to the point where they are tax paying 
entities and are going to be able to take advantage of that R&D 
tax credit.
    But that is a long time after the venture capitalist has 
gotten out of line.
    Representative Mulvaney. Dr. Sands.
    Dr. Sands. Yes.
    Representative Mulvaney. You all are, what, seven years 
into it? Is that what you said before?
    Dr. Sands. Fifteen.
    Representative Mulvaney. Fifteen.
    Mr. Heesen. Which is typical.
    Dr. Sands. Seven drugs in development.
    Representative Mulvaney. There it is, right.
    Dr. Sands. But I do think the tax credit benefitting large 
companies is also important for small companies. You mentioned 
Genentech. We did a deal with Genentech. If they have more R&D 
dollars, they do deals with small companies. They do not just 
acquire them.
    We studied 500 genes with Genentech. We knocked down and 
studied the functions of 500 novel genes. It was a core part of 
their research program and ours. In total, we've studied 5,000 
genes. And this is all a product of the Human Genome Project, 
which was started of course and led by the United States.
    But now all that information is out there in the rest of 
the world, and they are using it. But I do believe benefitting 
large companies is important, too, and will be important 
indirectly to us, because we seek deals with the large 
companies.
    Representative Mulvaney. Yes, sir.
    Mr. Kowalski. We had also built in, in Texas, at the time 
we did have an R&D tax credit, because the companies would take 
such a long time, we had built in a very healthy carry-forward. 
It was a 25-year carry-forward. So in the event, when they were 
profitable, there was an opportunity to begin to use those 
credits.
    Representative Mulvaney. Got 'cha. Let me ask you a 
different question, because we have heard some discussion here 
today about the issues about repatriation and so forth. I guess 
I am trying to get a fairly simple question here, because I 
have only got 50 seconds left, which is:
    What is preferable? I mean, in the overall scheme of 
things, what would you gentlemen rather see? A world where you 
have to come here every couple of years and ask for an R&D tax 
credit extension? Or a simplified tax system where the 
corporate tax rate is 25 percent; we have a territorial income 
tax system across the board?
    Mr. Heesen. Simplification. And, more important, stability 
is most important, I think, to a long range planning of an 
entrepreneur.
    Representative Mulvaney. Does anybody disagree with that? 
Dr. Tang.
    Dr. Tang. I only disagree to the extent that the rest of 
the world has a different motive and a different method. If 
``simplify'' does not make us globally competitive, then we 
cannot simplify for the sake of simplifying.
    And to an earlier point, I think the R&D tax credit is 
important but it needs to catch up with the model of how R&D is 
being done in the life science industry. It needs to recognize 
that more R&D is being done off balance sheet from the large 
corporations, and that needs to be accounted for and 
encouraged.
    Because the smaller companies unequivocally are the ones 
that are generating the jobs today. The larger companies are 
all consolidating and cutting jobs. So we have got to catch up 
with the model that actually exists in the world today.
    Representative Mulvaney. Thank you, gentlemen. Thank you, 
Mr. Chairman.
    Chairman Casey. Thank you very much. Senator Lee.
    Senator Lee. Thank you, Mr. Chairman.
    I would like to follow up on the point made by Congressman 
Mulvaney. We have talked a lot about R&D tax credits today, and 
I understand the allure that those credits hold for this 
industry. And there is no one who wants more to incentivize and 
encourage research and development, particularly in this area, 
than I do.
    And at the same time, I share many of the concerns that I 
think were underlying Congressman Mulvaney's questions in that 
I wonder whether we could not benefit from an effort to 
simplify our tax system. Even if, as Dr. Tang points out, it is 
not the way the rest of the world does it, it seems to me to be 
one way in which we could offer some value-added to would-be 
investors to invest in the United States.
    So, Dr. Sands, I was noticing you pointed out that 
investment in this area really requires foresight not just of a 
few years but of several decades.
    Dr. Sands. Yes.
    Senator Lee. With an R&D tax credit, with a tax credit of 
any sort, even if you build into the law the ability to carry 
forward the benefit of that 25 years or so, that further 
complicates an already extraordinarily complicated tax code; 
one which, when considered together with all of its 
implementing regulations, occupies tens of thousands of pages.
    Nobody has ever read the whole thing. If they did, they 
would promptly die.
    [Laughter.]
    Just like, as I am told, the guy who ran the first marathon 
collapsed and died right after. Very sad. I ran a marathon 
once; I did not die, but I felt like I was going to.
    [Laughter.]
    So, anyway, Dr. Sands, my question is: In light of your 
comment about how this requires foresight of many decades, 
don't you think we could benefit from moving toward a simpler 
tax code? One that tries to flatten out rate structures? It 
seems to me that regulatory and tax simplification could 
perhaps give the greatest degree of assurance of certainty that 
you would need in your industry.
    Dr. Sands. Yes. I mean, unquestionably. The simpler, the 
better. But I have no idea how to accomplish that. I have never 
seen that done before. But if you guys can do it, I think you 
should.
    [Laughter.]
    Now I can say from the industry perspective, whatever can 
help not only the small companies but also the large companies, 
view research as a long-term investment worth doing, those 
incentives, if it is worth having something special, I think 
this industry is unique in that the basic unit of time is the 
decade. And that is a different way of thinking than most 
industries.
    And given that it is at the core of health costs and other 
things, it may be worth some special attention. But, you know, 
I cannot tell you how that could be done.
    Senator Lee. Okay. Thank you. Another area that I am always 
looking into, I always try to look at areas within government 
where we could simplify and roll back things that government 
does that make things more complicated, I like government 
solutions that do not cost us money in order to implement but 
that will yield the benefit to you.
    In this industry, and this question is open to any of you 
who have an opinion on it, is the current patent structure that 
we have in place for pharmaceutical products sufficiently long 
to enable you to recover what you need to recover for the 
products that you are now developing?
    Dr. Sands. No, it is not.
    Senator Lee. What would, in your opinion, be a better 
solution? One that would still take into account the goal of 
not holding drug patents open perpetually, but would be more 
suitable toward allowing you to recover your investment?
    Dr. Sands. Well I understand the difficulties in extending 
patent life from a statutory standpoint, but I think data 
exclusivity time periods, regulatory exclusivity, perhaps would 
be more manageable. And I know people have tackled that with 
regard to biologics.
    I think it should apply to small molecules, because the 
extended regulatory hurdles that we have to overcome--for 
example, in diabetes trials--eats into the patent life, eats 
into our time frame to actually get a return on the investment. 
And as I said earlier, these numbers are very real.
    Our Phase III trial alone is $200 to $300 million in Type 
II diabetes. And if----
    Senator Lee. And the entire time the clock is ticking.
    Dr. Sands. You are burning, yes, not only the dollars, but 
you are talking about a three- to four-year just Phase III 
period. And we file patents seven years previous to starting 
that. So you have burned up 10 years of your patent life before 
you even get on the market, at least.
    So this concept of a 20-year patent is pure fiction. It 
really does not help you during the vast majority of your time 
there.
    The other thing you mentioned about saving money and 
simplification. If you can cure diabetes, you will save the 
Federal Government billions and billions of dollars in terms of 
health care. You are talking about 35 million Americans with 
diabetes right now, going up to 50.
    Senator Lee. Are you talking about Type I or Type II?
    Dr. Sands. I am talking about Type II, adult onset 
diabetes. And the drug we are working on, by the way, should 
work in both.
    Senator Lee. Great. Happy to hear that. I see my time has 
expired, so thank you.
    Chairman Casey. Thanks, Senator. Congresswoman Maloney.
    Representative Maloney. Thank you, Mr. Chairman. We in 
Congress get an opportunity to take all these ideas and 
translate it into legislation, and we do have a bill that one 
of you, several of you referenced during the hearing. But I 
would like you to comment on how it would help incentivize your 
numbers, and also to follow up on Dr. Tang's statement, catch 
up with models that exist already internationally.
    Specifically, I talk about the bill--I would ask you to 
comment on the bill designed to provide companies with a choice 
between an increased R&D tax credit for the first 150 million 
of research in the life sciences, or the ability to return up 
to 150 million in foreign earnings to the U.S. free of tax, 
provided the earnings are used in life sciences.
    The legislation also provided that 100 percent of qualified 
life sciences research done through nonprofit research areas or 
centers, or schools, would be eligible for the credit. And I 
must note that many of our universities have spoken to others 
about the support for research that is done in the United 
States. So I would like all of you to comment, or give us your 
insight on this legislation. Or if you think it should be 
changed in any way, or modified, or adjusted to what is 
happening internationally. Your comments, and just go down the 
line.
    Dr. Tang.
    Dr. Tang. Thank you, Congresswoman.
    If I may begin, I believe it is a very well-crafted bill. I 
think it accounts for two things. The first is that R&D has 
become more expensive, more risky, and takes much more time, 
and is more expensive than we have ever imagined. And so the 
increase in encouraging more R&D on the one hand is important.
    The other phenomenon is recognizing that countries outside 
the U.S. are making it very attractive for U.S. life science 
companies to do business in their countries. The only way we 
are going to gain from that is if we can repatriate some of the 
profits that are earned in those countries.
    And so in effect what you have in this bill is a way of 
replenishing the ecosystem of life science ventures. Because 
the funds are directed towards improving and increasing the 
likelihood that small companies will thrive and exist who will 
probably be acquired at some point by these larger companies. 
And so it is sustainability, if you will, applied to the 
venture ecosystem in the life science industry.
    Mr. Kowalski. Congresswoman Maloney, if you will think 
about this without repatriation, that money stays with our 
foreign competitors. And it is invested in their communities, 
in their university systems, training their researchers. I 
would rather have it here.
    It is a great bill. We like it, and we support it. I 
particularly like the university component and allowing those 
universities to participate within it.
    Thank you.
    Dr. Sands. I think also it is an excellent bill. I think 
$150 million is not enough. I do not know why that number is 
what it is. It should be significantly more. And I think that 
then we would see our companies spending more on research.
    Pfizer, for example, has been shutting down their research 
program. They are cutting, I think it is about 2- or 3,000 
jobs. And that does not just hurt Pfizer; again, it hurts the 
little companies that seek to do business with the Pfizers of 
the world.
    Mr. Heesen. Well most venture-backed companies will not be 
able to take part in this. It is still, as Dr. Sands says, very 
important that we have larger corporations out there who will 
have the ability to acquire us, or to enter into licensing 
agreements and other types of activities.
    Most biotechnology companies will not have the ability to 
go public. And so they have to have another exit. And that exit 
is working with larger corporations. If they are healthy, we 
will be able to work with them a lot longer and it will be a 
much healthier relationship at the end of the day.
    Representative Maloney. Thank you. Some of you, or many of 
you have also mentioned the fact that we are now in a world 
economy, and we have to compete in a world economy. So could 
any of you, starting with you, Dr. Tang, talk about how the 
U.S. R&D tax credit fares when compared to other countries?
    We used to lead the world. I understand that is not the 
case now, but where do we stand?
    Dr. Tang. I think the statistic you mentioned before is we 
are now 24th. So we are clearly behind. Other countries with 
new sources of capital, the BRIC companies, Brazil, Russia, 
India, China, in particular, are out-maneuvering us. They are 
making it more attractive to do business and create innovation 
on their shores, not our shores. And I think it is a desperate 
situation, and it is one that I think threatens our economic 
development.
    Mr. Kowalski. Our global competitors are reducing their 
costs that makes it attractive for our companies to go over 
there. I think the most exciting thing this week and this year 
has been hearing your comments, and your knowledge level in 
terms now of what it takes to build a successful American life 
science company.
    Mr. Heesen. What you are seeing is an increasing amount of 
interest by U.S. venture capitalists in looking at companies 
that are not domiciled in the United States.
    We follow the entrepreneur, not the other way around. And 
if the entrepreneur has a good idea and they can be funded in 
another country, that entrepreneur is going to get funded with 
U.S. venture capital.
    If it is in Bangalore or in Birmingham, Alabama, we are 
going to make the decision based more on that entrepreneur and 
his idea than anything else. And so if they are located 
somewhere else, unfortunately we have to look at those 
opportunities overseas.
    Representative Maloney. My time has expired. Thank you very 
much, Mr. Chairman.
    Chairman Casey. Congresswoman, thank you very much. And I 
want to thank the other Members who are with us today.
    I have just one question, and then both the Vice Chairman 
and I will wrap up.
    First of all, Mr. Heesen, you mentioned the SBIR. You say 
in your testimony on page 11, ``The ongoing lack of 
clarification regarding whether venture backed companies can 
apply for government grants (such as SBIR grants) to conduct 
early stage research has unquestionably hurt the innovation 
pipeline.'' And others have referred to it.
    It has been stalled in the Senate. It has been a source of 
frustration for lots of us. Can you just speak to that again?
    Mr. Heesen. Absolutely. I mean, the National Institutes of 
Health has stated that they are seeing the quality of their 
applications deteriorate because venture-backed companies, 
which are 50 percent or more owned by venture capitalists, 
those venture-backed medical device companies and biotechnology 
companies are precluded from taking part in the SBIR program.
    And that simply means that the companies that have either 
voluntarily said that they don't want venture capital, or who 
have gone through the venture capital process and frankly been 
rejected by venture capitalists, are the ones who have the 
ability to get these SBIR grants.
    Our view is that you want the best companies to be able to 
get those grants at the end of the day, particularly in these 
budget-conscious days that we are in, and that means that we 
should be able to participate--our kinds of companies should be 
able to participate, just like any other biotechnology or 
medical device company.
    It is an equal footing. It is not like we want preference. 
We just want to be viewed as the same. In many of these 
companies, there are five people working in a lab. If they are 
venture-backed, there are five people working in a lab. If they 
are not venture-backed there are still the same five people 
working in the lab. There is not a lot of difference there.
    Chairman Casey. Thank you. And I know I have other 
questions and I will submit them for the record.
    Chairman Casey. But I want everyone to know that Vice 
Chairman Brady and I did a scientific split here, the exact 
number of minutes, equivalent amounts for Texas and 
Pennsylvania were provided at this hearing.
    [Laughter.]
    We had a timer that was right up to the minute. So we are 
grateful for your testimony.
    Vice Chairman Brady.
    Vice Chairman Brady. Again, thank you, Mr. Chairman, for 
holding this hearing on this important issue. Senator Lee and I 
were noting the irony of the panel's response to his earlier 
line of questioning. Mapping the human genome? No problem. 
Simplifying the tax code? Hmmm, not so sure.
    [Laughter.]
    I appreciate, too, at this point being considered in 
Congress as we strive toward a lower, more competitive, simpler 
tax code, what can be done in the interim. Repatriation is an 
ability to lower that tax gate and allow that private capital 
to flow back, a no-cost stimulus at a critical time. This is 
one of the issues we are weighing very strongly.
    But I wanted to finish with this, real quickly, to put all 
this in perspective. What is the latest data on the cost to 
bring a new drug to market in the U.S.? What range today are we 
looking at?
    Dr. Sands. It is $1 billion to $2 billion. It is up, 
depending on the numbers. The common study, the Tufts study, is 
$800 million to $1.2 billion. That is about an eight-year-old 
study, or a ten-year-old study. So it is enormous.
    And each trial period is expanding in time and cost. And 
this gets to the FDA regulatory burdens being lifted.
    Vice Chairman Brady. Is there an average time, Doctor?
    Dr. Sands. I would say eight years to bring a drug forward. 
And that does not count the discovery phase. That is just the 
clinical development phase, not the laboratory phase.
    Vice Chairman Brady. Once you have made the breakthrough, 
that is the process to bring it to market?
    Dr. Sands. Yes. Yes. And there are programs that are called 
``Fast Track'' programs. Those can actually take longer, 
depending on----
    [Laughter.]
    The disease.
    Vice Chairman Brady. Welcome to Washington.
    [Laughter.]
    Mr. Kowalski. Ten years ago, that cost was $800 million. So 
we have bumped it up over a decade a billion plus, and the time 
has lengthened as well, to bring a drug to the marketplace.
    Mr. Heesen. And the important thing here is, once you bring 
it to market, you also have to get a price for that drug that 
makes that 15 years worth of work and effort worthwhile. And 
that is where CMS comes in, and the ability of the Federal 
Government to price a drug that is available to the public but 
at the same right rewards 15 years of long toil and investment 
on the other side.
    And there are going to be investors who, at the end of the 
day, if that price is not set properly, are going to walk away 
and instead be doing frankly, unfortunately, work in the life 
science area that is not FDA regulated, or not CMS mandated. 
And so you are going to be looking at cosmetology types of 
deals. And is that really what you want this country to be 
looking at, as opposed to looking at these very important drugs 
and devices at the end of the day?
    Vice Chairman Brady. Dr. Tang, any comment?
    Dr. Tang. It is more expensive and more risky. I think that 
is the bottom line. And that needs to be rewarded in the 
overall process. And while I certainly appreciate the work that 
the FDA does, I do not think any business person in the life 
science industry will say that they are particularly easy to 
work with.
    Vice Chairman Brady. We have got some work to do, 
especially if America is to continue its lead in this 
innovative area. So again, Mr. Chairman, thanks for holding 
this hearing.
    Chairman Casey. Vice Chairman Brady, thank you.
    Mr. Heesen, Dr. Sands, Mr. Kowalski, Dr. Tang, we want to 
thank you and your staff for making yourselves available for 
this remarkably good testimony, one of the best panels I have 
ever been a part of, or witnessed, I should say, at a hearing 
in the Senate. You have provided us a lot of perspective and a 
lot to think about. We will submit more questions for the 
record.
    We should note for the record that the record will remain 
open for five business days for Members to submit both 
statements and questions for the record. And with that, we are 
all grateful for your testimony and the healing, the hope and 
the jobs that come from the investments that we want to 
incentivize in the life sciences. So thank you very much for 
your testimony. We are adjourned.
    [Whereupon, at 11:16 a.m., Wednesday, May 25, 2011, the 
hearing was adjourned.]
                       SUBMISSIONS FOR THE RECORD

            Prepared Statement of Representative Kevin Brady
    Mr. Chairman, I would like to thank you for holding today's hearing 
on the life sciences industry. I would also like to welcome all of 
today's witnesses, especially my fellow Texans, Dr. Arthur Sands and 
Thomas Kowalski--both highly respected in their fields--and thank them 
for taking time out of their busy lives to testify today.
    America's life sciences industry leads the world with innovations 
in biomedical science, biotechnology, agriculture, and medical devices. 
This industry's products help Americans live longer and healthier 
lives. It employs 1.4 million Americans and accounts for 1/3 of all 
research and development expenditures by private U.S. firms.
    The Joint Economic Committee is holding this hearing today to 
discover what steps the U.S. government may take to help the life 
sciences industry prosper and strengthen its competitiveness both here 
and abroad.
    Investment in research and development in life sciences creates 
good, high-paying jobs; keeps the United States on the cutting edge of 
global competitiveness; and enhances the quality of life not only for 
Americans, but for people everywhere.
    Yet the upfront cost of investment in this industry is extremely 
high--companies spend years researching and testing, pouring millions 
and at times billions of dollars into the research, testing and trials 
of medical ideas that may never make it to market. Yes, the return can 
be high--but the investment is highly risky as well.
    In this vital area of the economy, America is falling behind. Other 
countries are increasing their incentives for R&D in an aggressive 
effort to attract investment and the high-paying jobs that go with it. 
America's share of the world's research and development pie is 
shrinking as our global competitors are taking a page from our playbook 
and beating us at it. In 1981 America led the world as the first to 
create an R&D tax credit. By 2009 we ranked 24th out of 28 countries in 
the strength of our R&D incentives.
    We need to rethink our approach to incentives. It's time we 
modernize the R&D tax credit; strengthen it to encourage companies to 
make even more substantial investments in research and hiring; and make 
it permanent so businesses and investors have the confidence to make 
long-term decisions.
    At the same time, we should reform the way our overall tax 
structure operates by lowering the rate and simplifying the code. At 35 
percent, the United States has one of the highest corporate tax rates 
in the world. Our complicated tax structure puts Americans at a 
disadvantage when competing at home and abroad. More than $1 trillion 
in capital earned by American companies and workers is stranded 
overseas because our tax code strangely penalizes companies for 
bringing profits home.
    As an interim step, we have an opportunity today to temporarily 
lower tax barriers to incentivize companies to bring those profits back 
home for investment. The right form of repatriation measure would lower 
the tax gate and allow private capital to flow back to the United 
States to be used to create jobs, to expand businesses, and to invest 
in research.
    Additionally, we should examine ways we can help boost incentives 
even more for the life sciences industry given its unique structure and 
the benefits it adds to our health and way of life. This could include 
further strengthening the R&D tax credit, and allowing life sciences 
companies to claim research expenses paid to universities.
    However, we should not limit our considerations of tax provisions 
only to those benefiting the life sciences industry. The competitive 
challenges which federal policies pose to life sciences firms merely 
reflect the tax, trade, and regulatory impediments that all American 
companies face when competing in global markets.
    To begin, we must look at fundamental reform of business taxation:

      We must lower the federal corporate income tax rate to a 
competitive level, so that both American and foreign firms will make 
new investments in the United States, creating more and better-paying 
jobs for American workers.
      We must also lower the after-tax cost of making new 
business investments by moving toward expensing new investments in 
equipment and software and significantly shortening the tax 
depreciation schedules for buildings and other structures.
      Finally, we must enact a permanent and generous tax 
credit for research and development.

    Beyond business tax reform, we must continue to open new markets to 
American exports of goods and services. I call on President Obama to 
submit the pending free trade agreements with Colombia, Panama, and 
South Korea to Congress for approval. And we must ensure that 
intellectual property rights are fully respected by all countries.
    Finally, we must reform our regulatory structure to assure that the 
goals we all share for product safety and a clean environment are 
achieved in a cost-effective way that does not place undue burdens on 
American companies or their workers.
    I look forward to hearing today's testimony.
                               __________
               Prepared Statement of Dr. Stephen S. Tang
    Thank you, Senator Casey. I'm Steve Tang, President & CEO of the 
University City Science Center. It is an honor and a privilege to speak 
to this distinguished committee today.
    Science and innovation are in my blood--and a part of my heritage. 
I'm the son of two Chinese-born scientists. I was born with high 
expectations from parents who sought--and largely achieved--the 
American dream.
    My background is in both science and entrepreneurship. I have an 
undergraduate degree in chemistry from the College of William and Mary 
and a Ph.D in chemical engineering from Lehigh University--as well as 
an MBA from the University of Pennsylvania's Wharton School.
    As a graduate student, I founded and ran my own technology 
assessment consulting firm, while at the same time pursuing my 
doctorate and managing Lehigh's biotechnology research center. After 
obtaining my MBA, I served as a management consultant at two 
international firms, focusing on projects in the chemical, 
environmental, health care and pharmaceutical industries. I then served 
as the CEO of a hydrogen and fuel cell company, guiding its growth as 
it moved beyond its start-up phase, completed a successful IPO, and 
attracted subsequent investment and financing. Next, I ran Olympus 
America's Life Science division, overseeing operations, finance, 
strategy, and product and business development.
    Since 2008, I've had the privilege of leading the University City 
Science Center. I was motivated to take the position by my passion for 
science and technology--and their ability and potential to make the 
world a better place. And as a newly appointed member of the U.S. 
Commerce Department's Innovation Advisory Board, I welcome the 
opportunity to contribute to the national discussion on innovation and 
economic competitiveness, particularly as it relates to the life 
sciences.
    The Science Center is a private, nonprofit research park and 
business incubator in Philadelphia. Located in the heart of the city's 
``meds and eds'' community, we have existed at the intersection of 
innovation and economic development for close to 50 years. We are the 
nation's oldest and largest urban research park, with 15 buildings on 
17 acres containing over 2.0 million square feet of lab and office 
space. More than 8,000 people come to work on our campus each day.
    We are also home to innovative programs, such as the QED Proof-of-
Concept Funding Program, which pulls technologies out of the lab and 
into the marketplace by pairing scientific researchers with experienced 
business advisors. At the Science Center, we firmly believe that our 
multi-institutional QED program is a unique and model ``public-private 
partnership'' that can be replicated across the nation to help 
promising ventures cross the ``Valley of Death'' in funding. I'm proud 
to report that QED achieved a funding milestone of its own last month 
when it received a two-year, $1 million grant from the U.S. Economic 
Development Administration. This federal funding is currently being 
leveraged with funding previously awarded to QED by the Commonwealth of 
Pennsylvania and the William Penn Foundation of Philadelphia, plus 
additional funding from the Science Center and the 19 institutions 
participating in the program.
    The Science Center is owned by 32 of the leading colleges, 
universities, hospitals and nonprofit institutions throughout 
Pennsylvania, New Jersey, and Delaware, including the University of 
Pennsylvania, Drexel University, and The Children's Hospital of 
Philadelphia.
    More than 350 companies have passed through our doors since we were 
founded in 1963. The 93 that remain in the Greater Philadelphia region 
account for over $9 billion of sales and 15,000 current direct jobs. 
These jobs pay an average of $89,000 per year--a remarkable figure, 
especially in today's economy.
    Our campus features two business incubators--collectively known as 
the Port--that are home to more than 30 start-up companies in life 
sciences, cleantech/greentech, and information technology.
    These companies are at the cutting edge of scientific innovation. 
To give you an example, one of our start-up residents--Invisible 
Sentinel--is working on a fast, efficient way to detect food 
contamination. Another, BioNanomatrix, is using nanotechnology to 
decode the human genome. And a third, Enzybel International, a Belgian 
company, is dedicated to the production and commercialization of 
sustainable compounds derived from nature.
    In our 48 years of operation, we have helped to create the model 
for the modern research park and high-tech business incubator. Our 
graduates include Centocor, the maker of Remicade, global software 
giant Bentley Systems, and financial services powerhouse SEI 
Investments.
    One of our latest incubator success stories, Avid 
Radiopharmaceuticals, exemplifies America's potential for innovation 
and entrepreneurship in the life sciences. Avid was founded by Dr. Dan 
Skovronsky, a neuropathologist at the University of Pennsylvania who 
had an idea for a technology that would revolutionize the ability to 
diagnose Alzheimer's and other diseases at an early stage.
    In 2005, Dan moved his brand new company into the Science Center's 
incubator with one employee--himself. Over the next four years Avid 
refined its technology and added jobs. By 2009, the payroll had grown 
to 37 people. The company outgrew its space in our incubator and moved 
into custom-fitted, full-price office and lab space on our campus. 
Since then the company has grown to more than 50 employees.
    Last fall, Avid was acquired by one of our nation's leading 
pharmaceutical companies, Eli Lilly, for $300 million in cash up front, 
plus another $500 million of additional payments over the next few 
years, based on the achievement of certain milestones. We were thrilled 
to learn that Avid currently plans to remain at the Science Center, 
continuing to bring new jobs and economic growth to Philadelphia and 
the region.
    Avid represents a classic example of how research and development 
in the life sciences are essential to our nation's economic recovery.
    Let's take a step back and look at the economic impact of the life 
sciences in the Science Center's home state of Pennsylvania.
    As noted in the State Bioscience Initiative 2010 Report from 
Battelle and BIO, the biosciences sector in Pennsylvania employs 81,000 
workers in the state at an average salary of $82,000--for a total of 
$6.7 billion in wages. With a multiplier effect of 4.38, the industry 
has a total employment impact of 354,000.
    On a national level, according to the same report, total employment 
in the U.S. bioscience sector reached 1.42 million in 2008. When you 
figure in a multiplier effect of 5.8, the total employment impact of 
the bioscience sector is 8 million jobs nationwide.
    Those are tough numbers to ignore. Yet, the life sciences industry 
does more than create well-paying jobs. Scientists and researchers are 
dramatically improving treatments, therapeutics, and ultimately patient 
care and quality of life.
    Think back to our Port business incubator resident Invisible 
Sentinel. Their work in detecting food contamination may also have 
applications in the detection of pathogens associated with hospital-
acquired infections, as well as in cancer detection and homeland 
security.
    At the Science Center, we look forward to helping our residents 
advance science and technology and invent new products that will change 
the world--while creating new jobs and economic growth along the way.
    I also would like to express my strong support for the proposed 
Life Sciences Jobs and Investment Act. This legislation will help 
strengthen the biotech sector's culture of innovation, discovery, 
education, and job creation across the nation.
    The Life Sciences Jobs and Investment Act will offer tax incentives 
for small and midsized businesses to invest in life sciences research 
and development on a targeted basis. It will also ensure the 
availability of an educated, skilled workforce that will sustain our 
pipeline of bioscience innovations, companies, and jobs over the long 
term.
    One out of every six jobs in the Greater Philadelphia region can be 
traced back to the life sciences. The Life Sciences Jobs and Investment 
Act is key to the long-term success of this crucial industry sector. 
This is the kind of proactive legislation that we need to maintain our 
competitive edge as we ensure that biotech in the region--and the 
entire country--continues to grow and thrive.
    Thank you for your kind attention! I welcome your comments and 
questions.
                               __________
              Prepared Statement of Mr. Thomas R. Kowalski
    Thank you, Chairman Casey, Vice-Chairman Brady and the entire Joint 
Economic Committee for inviting me here today.
    I'm Tom Kowalski, President of the Texas Healthcare and Bioscience 
Institute.
    Our organization's mission is to research, develop, and advocate 
policies and legislation that promote biomedical science, 
biotechnology, agriculture, and medical device innovation in Texas.
    The issue you are considering today--how targeted tax incentives 
can be used to enhance medical innovation, life sciences education, and 
job creation here in the United States--is of great interest to me and 
of vital concern to our industry.
    The impact of the life sciences industry on the US economy is 
significant. It advances medical knowledge, develops products that keep 
our country at the cutting edge of global competitiveness, and supports 
millions of high-quality jobs.
    As important as the direct benefits to our nation's economy, the 
innovations produced by these companies are also helping Americans live 
longer, healthier lives.
    I would like to share with you the positive impact the life 
sciences industry has had in Texas both in improving the health of 
Texans, as well as in creating a robust job sector. Much of this 
development has occurred because of the very vital investment Texas has 
been willing to make into the life sciences.
    Texas has a dynamic biotechnology marketplace with an estimated 
economic impact of 75 billion dollars. The state has many national top 
10 rankings in biotechnology and is home to over 4,100 biotechnology, 
biomedical research, business and government consortia, medical 
manufacturing companies, and world-class universities and research 
facilities, employing over 104,400 at an average annual salary of over 
67,300 dollars. A significant number of top global biotechnology and 
pharmaceutical companies have Texas locations, underscoring the state's 
vitality. Government support; a highly trained workforce, excellent 
educational, medical, and research institutions; a first-rate 
transportation and logistics infrastructure; and a top-ranked business 
climate all strengthen the state's status as a biotechnology leader.
    There are significant factors pointing to the robust growth of the 
Texas Life Science Industry.
    First--University research is the lifeblood of our state's 
innovation, medical treatments, and job creation. The Texas Health 
Science Centers are the crown jewels of our industry.
    Secondly--There has been a significant investment from the State 
into the life science industry which has enabled research technology 
transfer and commercialization to successfully occur. Much of the 
state's investments require academic/private sector collaboration, and 
the Life Sciences Investment Act will compliment these efforts by the 
potential infusion of industry research dollars and future 
collaborations which extend to increase workforce and added clinical 
trials.
    The Texas Emerging Technology Fund is one of those programs. The 
ETF, as it is known, has allocated more than 193.7 million dollars in 
funds to 131 early stage companies and nearly 173 million dollars in 
grant matching and research superiority funds to Texas Universities.
    Investments by the TETF attract additional investment capital to 
emerging technology companies. Since the fund's inception, more than 
407 million dollars in private capital has been invested in ETF-funded 
businesses--more than double the state's contribution.
    Another key program in Texas has been the creation of the Cancer 
Prevention and Research Institute of Texas. It is known as CPRIT. The 
Texas Legislature and the Governor authorized the program, which the 
voters approved in 2007. The program has funded 256 grants totaling 
more than 382 million dollars for cancer research, commercialization, 
and prevention in 46 academic institutions, nonprofits, and private 
companies. More than 500 million dollars, including matching funds, 
have been invested in Texas extraordinary efforts to lead the nation in 
cancer research. CPRIT has become one of the largest cancer research 
grant-making organization in the nation. Our focus in Texas has been to 
create such a strong life science environment that we keep our 
companies in our state and attract additional companies to Texas. By 
these investments, we continue to fine tune our workforce and more 
importantly put our graduates to work in Texas companies.
    The industry has enjoyed a strong growth rate of 14% from 2003 to 
2008. These programs have added stability during the last two years to 
enable our companies to continue to raise capital and invest that 
capital into the R&D process.
    While individual states can do much to support the growth of the 
life sciences industry, continued and increased support at the federal 
level is paramount.
    The biotechnology industry directly provides hundreds of thousands 
of good-paying jobs for America's working families. However, over the 
last decade, America's leadership in the life sciences industry has 
begun to erode. To retain those jobs and to create new ones, the 
success and growth of the industry's basic research efforts, as well as 
innovations in effective treatments and associated technology 
advancements, must remain in the U.S., where they will contribute to 
our nation's future economic growth and international competitiveness.
    Unfortunately, as the costs of developing new biotechnology 
products in the U.S. continue to rise, companies are under great 
pressure to find lower-cost locations to conduct their research and 
development.
    We can adjust our tax policies and remain the international leader 
in biotechnology research, development, and manufacturing, or we can 
watch the industry move overseas, like so many before it.
    Narrowly tailored tax incentives aimed at ensuring investment in 
domestic biomedical research and development will create a demand for 
highly skilled workers, promote higher education in the life sciences, 
encourage greater scientific collaboration, and improve our nation's 
overall economic well-being and health.
    Thank you.
                               __________
               Prepared Statement of Dr. Arthur T. Sands
    Good morning Chairman Casey, Vice Chairman Brady, Ranking Member 
DeMint, Ranking Member Hinchey, Members of the Committee, ladies, and 
gentlemen. I am President and Chief Executive Officer of Lexicon 
Pharmaceuticals, Inc. I am appearing before this Committee on behalf of 
the Biotechnology Industry Organization (BIO). BIO represents more than 
1,200 companies, academic institutions, state biotechnology centers, 
and related organizations in all 50 states.
    I have been a part of the biomedical industry since the early 
1990s, beginning with my work as an American Cancer Society 
postdoctoral fellow at the Baylor College of Medicine's Department of 
Human and Molecular Genetics. It was an extremely exciting time, as 
Baylor was one of the major genome sequencing centers of The Human 
Genome Project. In 1995, I co-founded Lexicon Pharmaceuticals and 
helped pioneer the development of large-scale gene knockout technology 
for use in drug discovery. Gene knockout technology allows us to turn 
off and/or modify any gene in order to study human disease. Since most 
drugs act by inhibiting the function of the products of genes, this 
technology enables us to genetically model what a drug would do in an 
animal before embarking on the arduous task of inventing such a drug. 
With the DNA sequence of all genes now available, Lexicon has focused 
on knocking out those gene products that are ``druggable''--
approximately 5,000 genes, or almost a quarter of the entire genome. In 
particular, Lexicon targets those genes that, when blocked, confer a 
favorable effect that could be used to create a new medicine to fight 
disease. This powerful approach to drug discovery has been the source 
of our drug pipeline now in development, including drug candidates with 
breakthrough potential in diabetes, cancer, rheumatoid arthritis, and 
gastrointestinal disease.
    When I founded Lexicon, it was just a small, privately funded 
research stage company. Currently, there are thousands of similar 
companies throughout the United States, each one with molecules and 
drug candidates that could change the face of modern medicine. 
Biotechnology may hold the answers to the medical problems that America 
faces, from the devastation of cancer and HIV/AIDS to the personal 
losses of Alzheimer's and Parkinson's to the spiraling costs of health 
care associated with diseases of epic proportions, such as Type 2 
diabetes. Of the 118 scientifically novel drugs approved from 1998 to 
2007, 48% were discovered and/or developed by biotech companies. These 
revolutionary cures and treatments save lives and reduce healthcare 
spending. As Congress continues to look for ways to reduce our nation's 
deficit, it is important that we remember the impact that innovative 
therapies can have on increasing overall health, especially by 
combating costly chronic diseases. These advances will save taxpayers 
money by decreasing the outlays necessary to care for our aging 
population.
    Additionally, the biotech industry is a thriving economic growth 
engine, directly employing 1.42 million Americans in high-quality jobs 
and indirectly supporting an additional 6.6 million workers. The 
average biotechnology employee makes $77,595 annually, far above the 
national average salary. President Obama has called for the United 
States to lead in the 21st century innovation economy, and 
biotechnology can be a key facet of our nation's economic growth.
    Despite these windows of opportunity, biotechnology research and 
development is often a difficult process. Bringing groundbreaking 
therapeutics from bench to bedside is a long and arduous road, and 
small biotechnology companies are at the forefront of the effort. It 
takes an estimated 8 to 12 years for one of these breakthrough 
companies to bring a new therapy from discovery through Phase I, Phase 
II, and Phase III clinical trials and on to FDA approval of a product. 
The entire endeavor costs between $800 million and $1.2 billion. Due to 
this capital-intensive process, biotechnology companies lacking 
research and development funds turn to private-sector investors and 
collaborative agreements to finance the early stages of therapeutic 
development.
    However, the current economic climate has made private investment 
dollars extremely elusive. In 2010, venture capital fundraising endured 
its fourth straight year of decline and its worst since 2003. 
Biotechnology received just $2 billion in venture funds, a 27 percent 
drop from its share in 2009. Even worse, the biggest fall was seen in 
initial venture rounds, which are the most critical for early stage 
companies. Series A deals last year brought in just over half of what 
they did in 2009. Decreasing upfront investment could mean cures and 
therapies being shelved in labs across the nation and ultimately not 
reaching patients.
    In 2000, Lexicon completed one of the most successful initial 
public offerings (IPO) in biotech history, raising $220 million from a 
range of investors. By putting our company on the public market, we 
were able to provide our initial backers with a return on their 
original investment as well as open ourselves to myriad other sources 
of funding. IPOs like ours used to be the standard for the industry--
after we showed proof of concept in our gene knockout technology, we 
knew a successful public offering was in the cards. However, companies 
today with science just as groundbreaking do not have the same support 
on the public market. From 2004 to 2007, the United States had an 
average of 34 IPOs in biotechnology per year. From 2008 to the first 
quarter of 2010, we had a total of 8. While the numbers have ticked up 
slightly this year, the weak demand for these offerings is restricting 
access to capital. This then hampers critical research and depresses 
valuations of later-stage venture rounds.
    As U.S. biotech companies face financial uncertainty, other 
countries are increasing their investments and enacting intellectual 
property protections to encourage domestic biotech growth. We still 
hold our place as the leader in global biotechnology patents thanks to 
our large head start, but China and India rank first and second in 
biotech patent growth. These emerging powers are heavily investing in 
science, and particularly in biotechnology. Meanwhile, the U.S. has 
fallen to twentieth out of twenty-three countries in new biotech patent 
applications. Additionally, many countries in Western Europe are 
implementing biotech-friendly tax incentives, including lower corporate 
tax rates for innovative industries, as a means to grow their 21st 
century economies. This lag has put us at risk of losing our place at 
the forefront of this important and innovative economic driver.
                     therapeutic discovery project
    There are certain steps that Congress has taken to maintain 
American leadership in the biotechnology space. Last March, Congress 
enacted the Therapeutic Discovery Project (TDP), an important tax 
credit program designed to stimulate investment in biotechnology 
research and development. Under this program, small biotech companies 
received a much-needed infusion of capital to advance their innovative 
therapeutic projects while creating and sustaining high-paying, high-
quality American jobs.
    In total, the Therapeutic Discovery Project awarded $1 billion in 
grants and tax credits to nearly 3,000 companies with fewer than 250 
employees each. These small companies were eligible to be reimbursed 
for up to 50% of their qualified investment in activities like hiring 
researchers and conducting clinical trials. The impact of this funding 
was felt across the American biotech industry, as companies in 47 
states received awards. The average company received just over 
$200,000, an important shot in the arm in these rough economic times. 
While Lexicon was not eligible for the program because we have 290 
employees, my colleagues at other emerging companies in Texas greatly 
benefitted from this important investment. In fact, Texas was among the 
top ten states in total TDP funds awarded.
    The infusion of capital for small biotech companies provided by the 
Therapeutic Discovery Project is an essential incentive for companies 
to keep their research and development, manufacturing, and operations 
here in the U.S. The critical funding will also accelerate the movement 
of cures to patients who need them. This program was a step in the 
right direction by Congress to invest in growing the U.S. biotech 
industry to keep pace with our global competitors. Given the imbalance 
between the extraordinarily high demand by small biotech companies and 
the limited pool of funds, I hope that Congress will extend and expand 
this oversubscribed program and assist more American companies in 
pursuing breakthrough medical discoveries and supporting American jobs.
                             r&d tax credit
    As you know, Congress has also striven to aid the life sciences 
industry through the research and development (R&D) tax credit. Most 
biotechnology companies working toward new cures and therapies are 
small, research-intensive companies that are not profitable because 
they do not yet have an FDA-approved product on the market. As 
companies like mine struggle to raise capital to finance their cutting-
edge research, we rely on a stable and predictable R&D credit as part 
of our investment decisions.
    Vice Chairman Brady recently introduced the American Research and 
Competitiveness Act, which would support and foster the creation of the 
high-wage jobs associated with R&D in the biotechnology industry by 
strengthening and making permanent the R&D tax credit. A permanent R&D 
credit would provide greater certainty and assist American 
biotechnology companies as they plan future research investments in the 
U.S. The legislation would also increase the Alternative Simplified 
Credit (ASC) rate to 20 percent, making U.S.-based R&D more attractive 
relative to the research incentives offered by many foreign governments 
seeking to foster their own biotechnology industries. I strongly 
believe that enacting this legislation would be a boon to our industry.
                 life sciences jobs and investment act
    I also believe that Chairman Casey's efforts to support job 
creation in the life sciences industry will be beneficial to biotech 
companies like mine. The Life Sciences Jobs and Investment Act, 
introduced by Chairman Casey, would incentivize research and investment 
in the life sciences industry on a very targeted basis. Under the bill, 
a taxpayer engaged in the life sciences could elect an increased R&D 
tax credit for their first $150 million spent on life sciences 
research. The taxpayer would also have the option to return up to $150 
million of foreign earnings to the United States free of taxation in 
lieu of the increased R&D credit. The repatriated funds would be 
earmarked specifically for investment in new jobs, and would have to be 
kept in a special account or trust, to be disbursed only for permitted 
activities. Through this legislation, biotechnology companies would 
have the resources necessary to hire additional scientists and 
researchers, increase partnering with American universities, and invest 
in new research facilities, so I support its enactment.
 modifications to current tax incentives impacting innovative biotechs
    Given the long R&D timeline and arduous road necessary to bring a 
therapy from bench to bedside, emerging biotechnology companies--which 
are not currently profitable--are unable to immediately benefit from 
various tax incentives in the current tax code. These incentives do not 
provide much-needed capital to small research-intensive companies 
because their lack of profits makes tax benefits unredeemable.
    There are two specific areas of the Internal Revenue Code which 
provide opportunities for Congress to invest in America's future 
through biotechnology: with modifications, Section 1202, which covers 
reduced capital gains tax for the sale of qualified small business 
stock, and Section 382, which imposes limitations on the use of net 
operating losses, could encourage private investments into biotech.
Reduced Capital Gains Rate for Sale of Qualified Small Business Stock 
        (IRC Section 1202)
    Congress's original intent in enacting Section 1202 was to 
stimulate investment in small businesses. President Obama and the 111th 
Congress further emphasized the importance of small business investment 
by enacting a law temporarily allowing 100% of gains from the sale of 
qualified small business stock to be excluded from capital gains 
taxation. Thus, investors in qualified small businesses are eligible 
for a zero percent capital gains rate on their sale of certain stock 
through the end of 2011. However, despite Congress's support for 
stimulating investment in small and start-up businesses, Section 1202, 
which defines the qualified small business stock eligible for an 
exclusion from capital gains tax, is too limited and presents technical 
challenges which investors in small innovative companies are unable to 
overcome. Among other challenges, Section 1202 employs a test in which 
a corporation's gross assets must be less than $50 million immediately 
before and after the stock is issued in order to be eligible for 
preferred capital gains treatment. When IP is incorporated as an asset, 
small biotech companies are almost always over the $50 million limit. 
The high value of our IP belies the fact that our emerging companies 
are small businesses that need support if they are going to continue to 
work toward important medical breakthroughs. Given the emphasis placed 
on small business job growth through innovation by Congress and the 
President, it is important that Congress take a look at modifying the 
small business stock rules in Section 1202 to more accurately represent 
the state of innovative small businesses in America.
Limitations on the Net Operating Losses (IRC Section 382)
    As I have mentioned, many of these tax incentives are necessary 
because of the capital-intensive nature of the long development process 
in the biotechnology industry. During the early years of development, 
biotech companies are generally not profitable. As such, they may 
accumulate net operating losses (NOLs) for years before they ever have 
a product on the market. NOLs may be carried back two years and carried 
forward twenty years to offset positive income. Unfortunately, many 
biotech startups are not able to utilize their NOLs within this time 
period, and these tax assets expire unused. Additionally, Section 382 
operates to further limit the utilization of NOLs by many biotech 
companies. Section 382 was designed to combat the very real problem of 
NOL trafficking, wherein profitable companies buy companies with losses 
in order to acquire their NOLs. The Section describes the many 
circumstances that can be classified as an ownership change and 
prohibits NOLs from flowing to the new controlling entity if an 
ownership change occurs. Unfortunately, the law as written captures the 
frequent biotech practice of raising equity in successive financing 
rounds, a practice essential to successfully negotiating the long 
product development and FDA approval process. Thus, these limitations 
have the effect of discouraging investment in biotechnology research, 
leaving the companies that would otherwise conduct that research in 
dire financial straits. Vice Chairman Brady proposed a bill in 2007 to 
ease Section 382 restrictions, and I believe that the passage of 
similar legislation by Congress would represent an important step 
forward in research financing in the biotechnology industry.
        new tax proposals encouraging private biotech investment
    While modifications to Sections 1202 and 382 would represent key 
improvements to the biotechnology investment environment, Congress has 
the opportunity to enact new tax incentives which would further 
encourage private investment in our industry. There are a number of new 
proposals, including partnership structures to support high-risk 
industries, incentives for industry collaborations, and angel investor 
tax credits, which could open up new sources of capital for biotech.
Partnership Structures
    Congress' support for biotechnology is critical in this uncertain 
economic climate. Historically, Congress has provided tax incentives to 
high-risk industries as a means of encouraging investment in new 
endeavors which it deems important. For example, the oil and gas 
industry often invests significant amounts of capital to determine 
whether a particular well will be successful. When Congress wanted to 
spur oil and gas exploration, it included provisions in the Code 
allowing investors to take advantage of tax benefits accumulated by 
high-risk drilling and exploration companies. This encouraged 
investment despite the uncertain nature of the oil and gas business.
    Similarly, research and development in the biotechnology industry 
is a high-risk undertaking with substantial start-up costs, a lengthy 
R&D period, and the possibility that the technology will not be 
commercially viable. The challenges that smaller oil and gas 
corporations face in finding and developing new resources and 
diversifying risk are analogous to the hurdles that small biotech 
companies must overcome. These companies expend substantial financial 
resources on research and development before successful FDA approval.
    As Congress looks to continue America's leadership in the 21st 
century innovation economy, it should look to tax incentives available 
to the oil and gas industry that would be equally beneficial to the 
biotechnology industry. These incentives, when combined with the 
research and development tax partnership structure, would encourage 
investment in the biotechnology sector. For example, allowing biotech 
companies to drop their R&D projects into joint ventures with investors 
to provide tax benefits to those investors would create a powerful 
incentive structure for private investment in this high-risk industry.
Incentives for Collaborations, Liquidity, and Initial Public Offerings
    While most investment in the biotechnology industry comes from 
private sources, companies within the industry often collaborate with 
one another to pursue their research and development objectives. 
Collaborative arrangements provide an opportunity for specialization--
small companies can focus on innovation while larger companies utilize 
their greater expertise in downstream clinical trial management. Each 
company uses its strength in order to bring cures to patients faster. 
These agreements involve upfront, milestone, and reimbursement payments 
for research and development undertaken by the small biotech. Given 
that these agreements have been pervasive throughout the industry and 
are critical to its success, I would suggest encouraging this important 
financing mechanism through tax incentives. A greater proliferation of 
these types of collaborations would provide substantial capital for 
small biotechs and would leverage the ``know how'' found in the larger 
companies in the industry to speed medical breakthroughs to patients.
    Separately, as I have mentioned, there has been a dearth of initial 
public offerings for biotech companies. This is problematic for two key 
reasons: first, it means that the early investors, generally angels or 
venture investors, cannot sell their shares. That means that they 
cannot return their initial capital or any return to their limited 
partners, who are primarily large institutions such as public pension 
funds or endowments. Second, it means that companies are unable to 
access the considerable resources available in the public markets.
    Accordingly, Congress should consider a set of incentive 
structures, perhaps through capital gains rate advantages or otherwise, 
that increase opportunities for liquidity for investors and expand 
public appetite for public offerings.
Angel Investor Tax Credits
    Congress can also look to the states for examples of how to spur 
biotech innovation. Over 20 states have implemented angel investor tax 
credit programs, in which high-net-worth individuals are incentivized 
to invest in small innovative businesses like mine. Angel investors 
play a valuable role during the seed stage of therapeutic development. 
They are the main source of capital for about 50,000 companies each 
year, but that number could decrease significantly unless action is 
taken to promote investment and minimize risk. The states have 
recognized the importance of angel investors and implemented tax credit 
programs reimbursing angels for 25% to 50% of their qualified 
investments in biotechnology and other small businesses. This 
investment by the states makes clear the important impact that 
innovation can have on the national level. It is imperative that 
Congress look at measures the federal government could take that would 
spur seed investing vital to the beginning of the research and 
development process.
                            closing remarks
    The U.S. biotechnology industry is a thriving growth engine for the 
American economy, creating high-quality jobs in every state. 
Additionally, the medical breakthroughs happening in labs across the 
country could unlock the secrets to curing the devastating diseases 
that affect all of our families. Congress has taken admirable steps 
toward supporting this valuable industry. However, if the United States 
is to hold its place at the forefront of the 21st century innovation 
economy, further investment is needed. Congress has the opportunity to 
make that investment, both by improving current programs and incentives 
and by creating new ones which recognize the vital part that 
biotechnology will play in America's future.
                               __________
                Prepared Statement of Mr. Mark G. Heesen
                              introduction
    Chairman Casey, Vice Chairman Brady, and members of the Committee, 
my name is Mark Heesen, and I am president of the National Venture 
Capital Association (NVCA) based in Arlington, VA. The NVCA is the only 
national trade group representing venture capitalists. Our 400+ member 
firms invest in start-up companies across the country as well as 
globally in high-tech industries such as life sciences, information 
technology, and the clean technology sectors. We estimate that our 
membership comprises more than 90 percent of the venture capital under 
management in the U.S.
    It is my privilege to be here today to share with you the role of 
venture capital investment in start-up companies--and how that role 
contributes to economic growth and innovation in the United States, 
particularly in the areas of life sciences. We appreciate the 
opportunity to offer a transparent view into our world and answer any 
questions the Committee might have.
             the fundamentals of venture capital investing
    Venture capital funds typically are organized as private 
partnerships with a significant percentage of capital provided by 
qualified institutional investors such as public and private pension 
funds, universities and endowments, private foundations, and to a 
lesser extent, high-net-worth individuals. These investors, referred to 
as the limited partners (LPs), have benefited greatly from the high-
risk/high-reward exposure afforded by venture capital as a relatively 
small component of their diversified investment portfolio. The venture 
capitalists that seek out start-ups for investment are the general 
partners (GPs), and they also supply capital for the fund from their 
own personal assets.
    A venture fund is typically structured with a fixed term of at 
least 10 years, sometimes extending to 12 or more years. At the outset, 
a limited partner commits a fixed dollar amount to the fund. As the GPs 
identify a new idea or company for investment, they make ``capital 
calls'' from their LPs, essentially collecting a portion of the capital 
commitments to make the investment. Further capital calls are made as 
each portfolio company becomes ready for a new tranche of investment by 
meeting milestones or growth trajectories. When a portfolio company has 
reached either stand-alone stability and sustainability, or when it 
needs to access the deeper resources of the public capital markets, the 
GPs ``exit,'' through an initial public offering (an IPO) or an 
acquisition by a larger company, and the liquidity from these ``exits'' 
is distributed back to the limited partners. Limited partners may not 
otherwise withdraw capital during the life of the venture fund.
    After the venture fund is formed, the GP's job is to find the most 
promising, innovative ideas, entrepreneurs, and companies that have the 
potential to grow exponentially with the application of the venture 
capital expertise and investment. Often these companies are formed from 
research that spins out of university and government laboratories. 
Because the venture industry has historically focused on high-
technology areas such as information technology, life sciences, and 
clean technology, we rely a great deal on these labs to feed our 
pipeline.
    Once a promising opportunity has been identified, venture 
capitalists vet the entrepreneur and his or her management team and 
conduct due diligence research on the market, the financial 
projections, and other areas. For those opportunities that clear this 
investigation, VCs make an investment in exchange for equity ownership 
in the business. Venture capitalists also generally take a seat on the 
company's board of directors and work side by side with the company 
founders to grow the business. In many cases, particularly in the area 
of life sciences, the company founders are scientists with limited 
business experience. Therefore, the venture capitalists can play a 
crucial and complimentary role by helping to recruit talent, secure 
customers, implement budgets, and develop long-term strategic plans. In 
other words, venture capitalists are not passive investors. In fact, 
many are scientists and technologists by trade and are therefore able 
to apply their technical and business experiences directly to the 
growth of the company.
    Venture capitalists expect to hold a typical investment for 5-10 
years, often longer in the area of life sciences, and rarely much less. 
During that time, VCs continue to invest additional capital into those 
companies that are performing well and cease follow-on investments into 
companies that do not reach their agreed-upon milestones.
    The ultimate goal is described above--an exit--which is when the 
company is strong enough to either go public on a stock market exchange 
or become acquired by a strategic buyer at a price that ideally exceeds 
the investment. At that juncture, the venture capitalist ``exits'' the 
investment, though the business continues to grow. In recent years, the 
venture-backed acquisitions market has far exceeded the IPO market in 
terms of volume. This is especially true in the life sciences industry 
where larger corporate pharmaceutical companies have come to rely on 
the purchase of smaller venture-backed companies to support their R& D 
efforts.
    Because at least one-third of venture-backed companies ultimately 
fail, and those that succeed usually take 5-15 years to do so, there 
have historically been no other asset classes that have the long-term 
patience and fortitude to withstand the high-risk nature of providing 
capital to these businesses. Commercial banks lack the appetite to 
invest in companies that have little or no collateral and such a high 
failure rate. Hedge funds and buyout shops typically balk at the long-
term nature of our investments and the required level of engagement in 
the company's operations. Friends and family and angel groups have 
become more active in recent years--mostly in the technology sector, 
less in life sciences--but they do not have the capital necessary to 
take their companies all the way to a public offering or acquisition. 
Because of these dynamics, the venture industry has been the only 
source of capital for many of these companies as they move through 
their life cycles.
    It is important to recognize that, despite the growing value 
created by venture capital, we remain a small industry that is actually 
shrinking still. In 2010, the venture industry invested just $22 
billion--representing less than 0.15 percent of GDP. We currently have 
approximately $177 billion under management as an industry, compared to 
the buyout or private equity industry which manages approximately $800 
billion and the hedge fund industry which manages an estimated $2 
trillion. We estimate that there are about 790 venture capital firms in 
the U.S. of which 58 percent are actively making new investments. Our 
small investment goes a long, long way.
          contribution of venture capital to the u.s. economy
    For the last four decades, the venture capital community has served 
as a founder and builder of companies, a creator of jobs, and a 
catalyst for innovation in the United States. This contribution has 
been achieved through high-risk, long-term investment of considerable 
time and dollars into small, emerging growth companies across the 
country and across industry sectors. According to a 2011 study 
conducted by econometrics firm Global Insight, companies that were 
started with venture capital since 1970 accounted for 12 million jobs 
and $3.1 trillion in revenues in the United States in 2010. In doing 
so, our industry has collectively earned above average returns for our 
country's pre-eminent institutional investors and their beneficiaries, 
including public pension funds, university scholarship endowments, and 
charitable foundations.
    Venture capital has been behind such technology innovations as 
computer chips (Intel), search engines (Google), operating systems and 
routers (Microsoft and Cisco), hardware (Apple), online social media 
(Facebook and Twitter), and online retail and auctions (Amazon and 
eBay). We have also supported business model innovations such as 
superstores (Home Depot and Staples), quality food chains (Whole 
Foods), and coffee houses (Starbucks).
    Within the last five years, the venture capital industry has 
committed itself to investing in the clean technology space, 
specifically renewable energy, sustainable materials, and environmental 
innovations. Since 2006, the industry has invested nearly $14 billion 
dollars in companies innovating in the areas of solar and wind power, 
electric cars, advanced battery technology, efficient energy grids, and 
water purification. I can say with confidence that the clean tech 
economy of the future will be powered by venture capital.
    Nowhere has the power of venture-backed innovation been felt more 
than in the life sciences sector. Approximately one-third of all 
venture investment is directed into biotechnology and medical device 
start-up companies each year. After funding companies such as 
Genentech, Amgen, and Medtronic, the venture capital industry has 
helped bring life-saving medical innovations to market over the last 
four decades. The results have been astounding. In 2010 alone, venture 
capitalists invested nearly $6 billion into biotechnology and medical 
device start-ups. We estimate that more than 100 million Americans have 
been positively impacted by a venture-backed medical innovation. 
Without venture capital, companies that have brought to patients 
medical devices such as the pacemaker, ultrasound, MRI, angioplasty, 
and blood glucose monitoring and drugs such as Integrillin, ENBREL, and 
Epogen would likely have never come into existence. At one time, these 
lifesaving innovations were simply ideas put forth by scientists who 
had little experience in growing a business. The infusion of venture 
capital dollars and expertise moved their products to market and, in 
doing so, these companies created new markets that have made our lives 
healthier and more productive.
    Despite popular belief that our industry only resides in Silicon 
Valley, venture capital is a national phenomenon with investment going 
to all 50 states. While certain regions of the country--such as 
Northern California and New England--have successfully established 
thriving venture-backed communities, other areas such as Pennsylvania, 
New York, Colorado, Virginia and Minnesota continue to successfully 
support their own start-up ecosystems.
    Political leaders in these states and others are seeking to do for 
their states what venture-backed companies such as Dell have done for 
Austin or Medtronic for Minneapolis. The positive economic impact of a 
successful venture-backed company headquartered in a region can be 
measured not only in jobs and revenues of that particular company but 
also by the spinouts of companies that inevitably emerge. A culture of 
entrepreneurship feeds on itself and can organically grow if the 
environment is properly nurtured.
    Despite the value and economic strength created by venture capital 
investment, we are still a small and fragile industry. Our investing 
dynamics are highly susceptible to changes in our ecosystem. The one 
commonality for innovation and entrepreneurship to succeed is a 
consistent alignment of critical investment drivers including robust 
capital markets, access to talent, and a regulatory and tax environment 
that supports risk-taking and long-term investment. Over the last 
several years, we have faced challenges--both market and policy 
driven--but with these challenges comes opportunity to mitigate the 
uncertainty and continue to encourage long-term investment in America's 
start-up companies.
        protecting the american start-up economy and innovation
    Public policy plays a significant role in the health of the venture 
capital industry and in the companies in which the industry invests. 
Given the dynamic and evolutionary nature of our ecosystem, we need 
policies and programs that promote certainty, supporting and 
encouraging the formation and growth of companies that are innovating 
in a meaningful way. The following represents some of the most 
important ways that policymakers can help ensure our start-up ecosystem 
continues to prosper.
    Encouraging Long-Term Investment Through Tax Policy--NVCA has long 
advocated for a tax structure that fosters capital formation and 
rewards long-term, measured risk taking. We believe that the returns 
earned by venture capitalists and entrepreneurs as a result of building 
successful companies that are out-innovating others over the long term 
should be taxed at the capital gains rate. In recent years, this tax 
rate has been threatened by those who do not understand the importance 
of encouraging venture investment. It is critical that the capital 
gains tax rate is globally competitive and preserves a meaningful 
differential from the ordinary income rate so that proper incentives 
remain for investors who are often dedicating more than a decade of 
capital and time to each of their companies. We appreciate the support 
of many members of Congress, including Chairman Casey and Vice Chairman 
Brady, in recognizing this dynamic.
    To encourage truly long-term investment, serious discussion 
regarding the holding period required to qualify for a long-term 
capital gain should be made part of any upcoming debate on tax reform. 
The NVCA has been supportive of increasing the holding period generally 
for capital gains and also developing a tiered capital gains rate so 
that the longer an investment is held, the lower the tax rate on the 
ultimate gain. One area where a longer holding period would be helpful 
is in the capital markets where many investors are buying and selling 
shares of our venture-backed companies quickly. Offering capital gains 
tax incentives for investors to buy and hold public stock of small cap 
companies for longer periods of time will help encourage investment in 
our companies once they go public, increasing the appeal of an IPO.
    Ironically, although the R&D tax credit is important to many 
midsize and large corporations--many of whom are venture 
``graduates''--it is not a critical component of tax policy for start-
ups that are still in the venture fold. Companies receiving current 
venture support generally are losing money--which is why banks and 
other traditional sources of finance find them too risky--and thus 
cannot use a tax credit that is structured for companies that are 
profitable. As lawmakers consider broad-scale tax reform to create a 
simpler, fairer tax code, the NVCA urges both Congress and the 
Administration to build a system that supports small companies and 
their investors as well as those that address the concerns of large, 
multinational corporations.
    Protecting Sources of Future Capital--As previously stated, venture 
capitalists receive more than 90 percent of their money from 
institutional investors who commit a small percentage of their 
portfolio to alternative assets of which VC is but one. These investors 
typically enjoy above-average returns in exchange for the risk factors 
associated with venture investing. We estimate that public and private 
pension funds represent approximately 40 percent of the institutional 
investor base for venture capital, making this investor group the 
largest overall for the venture industry. The share is significant to 
the future of our industry as we are beginning to see a movement from 
defined benefit to defined contribution pension plans, particularly at 
the state and local level. If this shift continues in a meaningful way, 
the venture industry will be at risk for losing a critical source of 
capital as there is currently no viable means by which a defined 
contribution plan can invest in our asset class.
    In 1978 Congress and the Department of Labor worked with the then 
fledging venture community to develop rules which permitted defined 
benefit pension plans to take part in venture capital. The result was 
the beginning of the American venture capital process we know today. 
Not since that time has the issue of institutional investor pools been 
more important to the future of the venture industry, and we hope to 
work together to develop some viable solutions to this looming concern 
over the next several years.
    Encouraging More Small Cap IPOs--Studies show that more than 90 
percent of job creation occurs after a venture-backed company goes 
public. In the last decade, however, the market for venture-backed 
initial public offerings (IPOs) has suffered due to unfavorable market 
conditions and ramifications from one-size-fits-all regulations. From 
Sarbanes Oxley (SOX) to the Global Settlement to Reg FD, regulations 
intended for larger multinational corporations have raised burdensome 
obstacles and compliance costs for start-ups trying to enter the public 
markets. From 2008-2010, only 62 venture-backed companies have gone 
public compared to the same time period one decade ago when 583 
companies had IPOs. At the same time, venture-backed acquisitions have 
been taking place in record numbers. While venture capitalists can 
return money from an acquisition, the IPO is the exit which translates 
into job creation for the U.S. Imagine if, instead of going public, 
Genentech was acquired by Johnson & Johnson. While one would hope that 
the innovation would prevail, the job creation that would have 
inevitably been quashed in the consolidation is almost unimaginable. 
The IPO dearth must be addressed or we face serious economic risks for 
our country.
    The NVCA is actively engaging with Congress, the Administration, 
and regulators on ways in which we can make the path to an IPO once 
again smoother, particularly for small cap companies. We feel there is 
an appetite for regulatory right-sizing so that our capital markets can 
once again be a viable--and preferred--exit for venture-backed 
companies.
    Implementing Health Reform that Promotes Innovation--Improving the 
quality of care and fostering the advancement of innovation that 
improves the efficiency and cost-effectiveness of healthcare delivery 
are critical pieces to venture capital investment and our health care 
system. While not the focus of today's hearing, we do have concerns 
regarding the medical device excise tax as well as the Medicare capital 
gains tax and the potential impact of those measures on our portfolio 
companies and our industry. As the law is implemented, we hope that all 
Members of Congress will remain open to hearing from our industry on 
those issues.
    Other elements of the health care reform law, such as the increased 
emphasis on comparative effectiveness (CER), have the potential to 
improve patient outcomes and increase the efficiency with which our 
system delivers them. However, it is essential that CER be undertaken 
with the proper focus and context, to ensure that CER does not create 
undue hurdles for innovative new drugs and technologies.
    Similarly, we are concerned that the Independent Payment Advisory 
Board (IPAB) has the potential to be an unbalanced regulatory authority 
that could stifle advances in medical innovation and hobble free market 
competition. NVCA believes that, to be effective, entities such as the 
IPAB and the CER must include persons with deep expertise in medical 
technology innovation. These members would serve as needed advocates 
for innovation, ensuring that attempts to cut costs are balanced by an 
understanding of both the benefits of innovation and the potential 
impact that certain reforms may have on the future of medical 
innovation in our country. This will ensure a proper balance between 
saving money, continuing to invent life-saving treatments for the 
future, and continuing to allow patient access to innovative 
technologies and therapies.
    Supporting Broad-Based FDA Reform--Just as one-size-fits-all 
regulation has impacted the public stock markets, so too has it 
impacted medical innovation. The Food and Drug Administration (FDA) is 
one of the most influential government agencies in the United States, 
regulating 25% of the products in the domestic economy and impacting 
millions of patients each year. In recent years, when evaluating new 
drugs and medical technologies, the FDA has become increasingly 
reticent to balance the benefits against the risks of new therapies and 
technologies for seriously ill patients. In many cases, the evidence 
demanded to support approval has become unnecessarily extensive and 
cumbersome, deterring investment in innovative therapies and 
technologies for serious diseases. This is particularly troubling in 
areas where there are unmet medical needs and is resulting in less and 
later access to life-saving products when compared to other countries. 
Moreover, the regulatory burden is having a negative impact on job 
creation and is threatening our country's leadership in life sciences 
innovation.
    Within the last year, our organization has formed the Medical 
Innovation and Competitiveness Coalition (MedIC) which comprises both 
venture capital firms and companies operating in the life sciences 
arena. The mission of the coalition is to advocate for policies that 
improve certainty and transparency within the FDA approval process 
which will, in turn, encourage investment in life sciences companies. 
Specifically, we are calling for FDA reform that returns the balance to 
the review and approval process, ensuring seriously ill patients access 
to breakthrough therapies and technologies in a timely fashion. The 
regulatory assessment of benefit and risk should reflect the importance 
that patients and healthcare providers place on access to new products 
in the United States.
    NVCA MedIC will be asking Congress to enact a set of focused and 
targeted policies that would restore the balance of patient benefits 
and risks in FDA decision-making, reform the regulation of innovative 
technologies, hold the Agency more accountable to patients, healthcare 
providers, and sponsors, and strengthen the FDA's role in the 
innovation economy to restore U.S. competitiveness. A copy of our 
priorities in this regard is attached as addendum A.
    Also, it should be stated for the record that the NVCA understands 
that these reform measures require an FDA that is adequately funded. 
While the 2011 fiscal budget largely spared the FDA from significant 
cuts, we have concerns regarding future cuts in the 2012 budget. While 
all agencies should root out waste and duplication, untempered resource 
reduction at the FDA will result in a reduction in innovation being 
delivered to the American people. We ask that Congress be mindful of 
the trade-off here.
    Filling the R&D Pipeline--Maintaining America's global innovation 
advantage requires continued federal funding for basic research and 
development. Discoveries in federal labs and universities remain the 
germination points for the breakthrough ideas that can be 
commercialized by entrepreneurs and venture investors and transformed 
into the promising new companies that will drive job creation and 
economic growth. This unique public-private partnership has delivered 
countless innovations to the American public and a decisive competitive 
advantage to the U.S. economy for decades. Yet, recently, fiscal 
realties have threatened the funding levels for basic research grants 
in such areas as life sciences and energy. We understand the need for 
fiscal responsibility, but drastically reducing the funding those types 
of companies that can participate will be devastating long term to our 
global economic leadership. As Congress reviews ways to cut spending 
and balance the budget, we urge lawmakers to take a longer-term 
approach and protect those areas that are innovating for the future.
    Further, we remain extremely disappointed regarding the once again 
stalled SBIR Reauthorization bill. The ongoing lack of clarification 
regarding whether venture-backed companies can apply for government 
grants (such as SBIR grants) to conduct early stage research has 
unquestionably hurt the innovation pipeline. We hope that another year 
does not go by in which the most promising, innovative projects are not 
eligible to receive SBIR grants and subsequently die on the vine.
    Embarking Upon Legal Immigration Reform--The U.S. must continue to 
attract and retain the world's best and brightest minds if it wants to 
maintain its global economic leadership. However, a number of factors 
have hindered our ability to keep foreign-born entrepreneurs here in 
the U.S. The first is that developing countries such as India and China 
have been hard at work over the last decade growing their own start-up 
ecosystems that today rival the U.S. market. In many cases, they are 
offering tax and other incentives for entrepreneurs to form their 
companies on their shores. Foreign-born entrepreneurs now have a number 
of good choices in terms of where they start their businesses. Second, 
and more importantly, it has been increasingly difficult for these 
foreign-born entrepreneurs to come to the U.S. and build their 
companies here due to our immigration policies. Even students who have 
studied at the best American universities are finding it difficult to 
remain and innovate here. We estimate that 25 percent of the largest 
venture-backed companies that today are thriving public entities were 
founded by one or more foreign-born nationals. Unless our government is 
able to reform our legal immigration policies, we remain at high risk 
for losing these innovators to other countries.
    For this reason, NVCA supports policies that allow foreign-born 
entrepreneurs to come to America to build their companies and create 
U.S. jobs. Proposals such as the Start-Up Visa Act will allow 
enterprising professionals to come here to develop their ideas and then 
remain here to build their companies, as opposed to innovating and 
creating economic value overseas. Further, the NVCA supports a 
streamlining of the pathway to ``green cards'' for foreign-born 
graduate students who wish to remain in the United States upon 
completion of their studies.
    Protecting Small Innovators and Inventers with Patent Reform--We 
continue to have significant concerns regarding the patent reform 
legislation that has passed the Senate and which is currently being 
taken up in the House. While we strongly support the provisions that 
would end the diversion of fees from the patent office, giving 
examiners critical resources, we remain concerned that other sections 
of the bill may not adequately protect small innovators. Small venture-
backed companies use every dollar for research, product development, 
and scaling their enterprise. They do not have the deep reserves 
necessary to protect themselves from large companies that infringe on 
their patents or that may use some of the new procedures in the 
legislation, such as postgrant review, as a harassment tool. We will 
continue to work with Congress to amend the current bill to help these 
small companies as the implications for investment in this sector are 
significant.
                               conclusion
    In many ways, America is at a cross roads when it comes to enacting 
policies that support start-ups' job growth and innovation across all 
industry sectors, including the life sciences industry. Market forces 
have challenged the U.S. venture capital industry over the last several 
years while foreign countries have grown their own ecosystems at a 
rapid pace. At the same time, the regulatory restrictions placed upon 
those companies that are innovating in meaningful ways have weighed 
down the growth trajectory these start-ups once enjoyed. Our global 
leadership in innovation can no longer be taken for granted; in fact we 
are at risk for losing it in certain areas if we do not address the 
challenges that we face.
    The opportunity remains to encourage long-term investment in start-
up companies through smart and fiscally sound tax policy. The 
regulatory environment can be right-sized and adjusted to ensure that 
the best companies are able to bring their most innovative products to 
market and thrive in our country's capital markets system. And policies 
can be enacted so that the best and brightest minds can build their 
businesses in the U.S., and the best and brightest breakthroughs can be 
funded in their earliest stages. If we take the proper paths here, 
there is no doubt that innovation will prevail. We appreciate your 
willingness to better understand our industry and its key drivers so 
the path towards growth and protecting innovation will indeed be taken.
    The venture capital industry remains committed to long-term 
investment in our country's future. We look forward to working with 
Congress to ensure that our companies continue to grow and create 
significant economic value for years to come.
                               __________
Prepared Statement of The California Healthcare Institute, Submitted by 
                      Representative John Campbell
                              introduction
    CHI is the statewide public policy organization representing 
California's innovative biomedical sector, including the state's 
premier research universities and institutes, venture capital firms, 
and medical device, diagnostics, and biotechnology companies. Our 
mission is to identify and advocate for policies that encourage life 
sciences research, investment, and innovation. We are grateful for the 
opportunity to provide comment on innovation and job growth within the 
life sciences sector and to address the importance of certain federal 
policies to the continued vibrancy of the sector, especially given 
broader macroeconomic factors and conditions as the financial markets 
crisis and increased global competition.
                               background
    California's biomedical industry is responsible for breakthrough 
treatments, therapies, and technologies that are improving and 
extending the lives of millions in the United States and around the 
world. It is also a key component of our state and national economy. As 
reported in our CHI/PricewaterhouseCoopers/BayBio 2011 California 
Biomedical Industry Report, California is home to over 2,200 biomedical 
companies, employing 268,000 people, making it one of the top high-tech 
employers in the state. The sector is responsible for over $114 billion 
in annual revenues, $15.4 billion in exports, and $19.4 billion in 
wages and salaries. Last year, California's biomedical innovators also 
attracted $3.2 billion in National Institutes of Health (NIH) research 
funding and $2.6 billion in venture capital (VC) investment.
    Over the past generation, California has developed a remarkably 
rich and diverse ecosystem that has fostered the growth of vibrant 
biopharmaceutical and medical technology industries. This ecosystem is 
shaped and influenced by many factors that can bolster or weaken it. At 
the federal level, these factors include policies set by Congress and 
government agencies in areas such as science funding, tax policy, and 
regulation by the U.S. Food and Drug Administration (FDA). It is also 
shaped by other external economic factors. Below is an overview of each 
of these themes.
    Federal Biomedical Research Funding has historically served as the 
fuel priming the pump of biomedical innovation. In fact, the 
biotechnology industry was born in California with the founding of 
companies like Amgen and Genentech based upon biomedical research at 
institutes such as Stanford and the University of California. Today, 
one-third of our state's biotechnology firms were founded by University 
of California scientists.
    California has averaged 15 percent of NIH-awarded funding over the 
past decade. In 2009, NIH grants, excluding R&D contracts as well as 
stimulus bill-funded projects, totaled $21.483 billion. That year, 
7,082 California applicants were selected for funding that totaled $3.2 
billion. As NIH funding helped make California and the United States 
the global leader in biopharmaceutical innovation, the future of the 
industry will likewise be tied to the commitment of Congress to 
continue its support for such funding, even in such fiscally 
challenging times as today. Moving forward, CHI is hopeful that 
Congress will better recognize the value of NIH funding as an 
investment into the innovations, jobs, and medicines of the future and 
commit to a more thoughtful approach to strengthen and sustain support 
for the nation's biomedical research infrastructure.
    Numerous Federal Tax Policies exist to encourage increased 
investment into the research that enables companies to develop new 
treatments, technologies, and therapies for patients here at home and 
around the world, while also creating quality jobs that fuel economic 
growth in California and across the nation. This includes, of course, 
the federal Research and Development (R&D) tax credit. As important as 
this policy is, the requirement of annual extensions instead of long-
term or permanent extension results in uncertainty and makes long-term 
investment planning difficult. R&D uncertainty drives capital away as 
companies seek out other markets or apply the credit less when making 
assessments about whether to invest in new, costly projects. According 
to the Information Technology and Innovation Foundation, the United 
States ranks No. 17 in R&D tax incentives out of the top 30 
Organizations for Economic Co-Operation and Development (OECD) 
countries. The United States ranked No. 1 as recently as the 1990s.
    Two more recent tax policies enacted as part of the new healthcare 
reform law demonstrate seemingly contradictory goals. In the case of 
the Therapeutic Discovery Project Credit, Congress created grants and 
credits, limited to companies with less than 250 employees, to 
purposely encourage investment into new therapies. Specifically, the 
program allotted $1 billion over FY2009 and FY2010 for investments that 
demonstrated potential to result in new therapies to treat areas of 
unmet medical needs or to prevent, detect, or treat acute conditions, 
reduce long-term health costs in the United States, or significantly 
advance the goal of curing cancer within 30 years, and advance U.S. 
competitiveness and create and sustain high-quality, high-paying jobs 
in the country. The provision was hugely successful. California-based 
firms alone were awarded with over $280 million in grants and credits 
for projects targeting conditions and diseases such as cancer, spinal 
cord injury, tuberculosis, Parkinson's, hepatitis, diabetes, and heart 
disease.
    Unfortunately, the same law enacted a $20 billion excise tax on the 
medical device industry, which will, without a doubt, negatively impact 
R&D and job creation to some, likely considerable, extent. There are 
over 8,000 medical device firms throughout the nation employing over 
400,000 people. California is home to over 1,200 of these firms--more 
than any other state in the nation--and the more than 107,000 medical 
device jobs in California represent roughly one-quarter of the total 
U.S. medical technology workforce. Given our still uncertain economy, 
it is especially important that we do everything we can to encourage, 
not hamper, investment, entrepreneurship, and innovation. Again, for 
most companies, the device tax would threaten payroll reductions and 
slash R&D investments--anything but foster innovation. This is 
especially the case for small firms, which make up the bulk of the 
sector in California and across the country. It is difficult to 
quantify the precise number of jobs or lost R&D the tax would pose to 
California companies, however, it is reasonable to worry that as home 
to the largest segment of the nation's medical technology industry, our 
state will be disproportionately impacted by the device tax.
    FDA Regulatory Consistency, Predictability, Transparency, and 
Efficiency helped the United States become the global leader in life 
sciences innovation. Indeed, history shows that a strong, science-based 
FDA and well-articulated, predictable, and consistent regulatory 
process are essential to biopharmaceutical and medical technology 
investment, innovation, and patient care. And, until recently, FDA 
policies and organizational structure have served as models for 
regulators around the globe.
    Beginning in approximately 2007, however, evidence clearly confirms 
that FDA biopharmaceutical and medical device regulation has become 
increasingly slow and unpredictable.
    As documented by the FDA's own data in our recent CHI report, 
``Competitiveness and Regulation: The FDA and the Future of America's 
Biomedical Industry,'' comparing the latest data with the 2003-2007 
period:

      Drug and biologics review times have increased by 28 
percent
      510(k) device clearances have slowed by 43 percent
      PMA device approval times have lengthened by 75 percent

    No single factor explains this decline. Clearly, part of the 
problem lies beyond the direct control of the FDA and its leadership. 
In recent years, for example, Congress has enlarged the Agency's scope 
into new fields (e.g., tobacco) and added to its responsibilities and 
authority. Yet federal appropriations have largely failed to keep up 
with new mandates, forcing greater reliance on industry-funded user 
fees. Similarly, expanded and tightened responsibilities under the FDA 
Amendments Act of 2007 (FDAAA), such as intensified conflict of 
interest rules on advisory committees, have constrained the Agency's 
capacity.
    Perhaps the most important factor in the Agency's recent history, 
though, has been a change in its culture. Faced with accusations from 
the press, consumer groups, and some in Congress that its reviews were 
too lax and failed to protect the public from safety problems with 
drugs and devices, the FDA has shifted emphasis in product reviews from 
the benefits of new products to an increasing weight on their possible 
risks. When broken down, industry anecdotes about Agency uncertainty, 
unpredictability, ``moving goalposts,'' and the like all seemingly 
revolve around ever-increasing demands that are not justified by 
science or by any increased risk profile of the medicines or devices to 
which those demands are associated. From the perspective of an FDA 
device reviewer, this is understandable. After all, an individual 
reviewer has nothing to gain by approving a product but much to lose by 
approving a product that has a problem in the future.
    In a larger sense, a serious problem for device and drug innovation 
alike is that there is no shared understanding of the benefit-risk 
calculus. Most medical advances carry some risks. And a basic principle 
of medicine is that the risk of any intervention--a procedure, a drug, 
a device--should be commensurate with the seriousness of the patient's 
disorder. Accordingly, for example, patients with advanced coronary 
artery disease are typically willing to accept risks for new minimally 
invasive procedures and technologies that have a chance to not only 
treat the condition but result in faster recovery times and shorter 
hospital stays. What has happened within the FDA, though, is that more 
and more attention has been focused on the potential direct risks of 
new medicines and technologies without sufficient appreciation of 
potential benefits.
    But just as important to consider are indirect risks--distortions 
in the regulatory process, for example. How do we calculate and 
consider the public health loss to patients if investors and companies 
avoid entire diseases and conditions because the FDA's demands for 
clinical data are so extensive and its standards for approving new 
products so uncertain?
    With this in mind, CHI believes that it is critical that Congress, 
the FDA, industry, patient groups, and other stakeholders come together 
with the will and ideas to restore Agency performance--to rejuvenate, 
support and sustain a strong, science-based FDA and efficient, 
consistent, and predictable review processes to ensure safe and 
innovative therapies, treatments, and technologies for patients in 
need.
    In addition to these federal policies, a number of important 
External Macroeconomic Factors have combined to worsen the environment 
for the life sciences industry.
    Beginning in 2008, the Great Recession devastated investment 
portfolios, including the pension funds and institutional endowments 
that historically have been the main source of life sciences venture 
capital. Meanwhile, VC firms themselves also sought to reduce risk, 
trending away from early stage investments--ones that combine the 
greatest innovation with the greatest risk. To make matters worse, the 
initial public offering (IPO) market for biotechnology and medical 
device companies all but vanished. After the collapse of iconic firms 
such as Lehman Brothers, Wall Street had little interest in offerings 
from young companies with no operating revenues that would need 
continuing infusions of capital over many years.
    Smaller companies were forced to adapt by redesigning the 
biomedical business model--receive regulatory approval, demonstrate 
adoption by physicians and patients, and present to potential acquirers 
as a lower-risk investment. From the perspective of company and 
investor alike, winning approval sooner in any market became far more 
valuable than gaining FDA approval later.
    Levels of regulatory uncertainty--delays, missed timelines, doubts 
about eventual approval--that had been uncomfortable in good economic 
times became intolerable after the economic downturn. Especially, as 
investors and executives came to realize, there are practical, more 
efficient routes to market outside the U.S.
    Overseas regulators have recognized that regulatory efficiency can 
bolster biomedical innovation, investment, and job creation without 
undermining patient safety. The European Medicines Agency (EMA) has 
been especially forthcoming about its ambitions to encourage and 
facilitate biomedical investment and innovation in the EU. For example, 
in its strategic document, ``Road Map to 2010: Preparing the Ground for 
the Future,'' the EMA stated that ``its role in enabling the 
pharmaceutical industry to achieve the objective of industrial 
competitiveness is crucial.'' They have begun to succeed. Today, 
complex medical devices approved via the PMA process in the United 
States are approved in Europe on average nearly four years ahead of the 
United States, up from just over a year earlier this decade. And where 
new medicines were approved first in the U.S. by an average on nearly 
seven months between 2004 and 2006, recent years show products approved 
on average two-and-a-half months earlier in the EU, a shift of nine 
months. Of course, in either case, the result is that European patients 
benefit from U.S. innovations before Americans do. And no evidence 
exists to suggest that these faster approval times in Europe have led 
to systemic patient safety-related problems.
    These elements--macroeconomic factors and increased global 
competition--emphasize the important consideration that must be given, 
including through constructive congressional hearings such as today, to 
the costs of regulation. As this Committee and the Congress seek paths 
to create new jobs and promote innovation, the costs of the regulatory 
system should be carefully weighed. As the global economy grows ever 
more connected, American leadership in the life sciences sector faces 
intense competition: for capital, for markets, for talent and for jobs. 
As these competitive forces gather momentum, investors, managers, and 
policymakers ignore them at their peril. If FDA regulation, for 
example, is just one factor among several, it nonetheless can be 
pivotal.
                               conclusion
    California's life science sector is a critically important element 
of our state and nation's continued vitality in the increasingly 
competitive 21st century global economy. It is also, just as important, 
critical to improving patient care and public health here in the United 
States and around the world. However, the biomedical innovation 
ecosystem in California and nationwide is under tremendous stress. And 
in today's still uncertain economic environment, it is especially 
important that policymakers thoughtfully weigh the full consequence of 
decisions and trends in areas such as NIH funding, tax policy, and the 
FDA in the context of broader macroeconomic factors and the global 
economic competitiveness framework in order to help foster and 
stimulate the environment to encourage job creation, attract 
investment, and promote continued life sciences innovation.
    Again, we thank you for the opportunity to have our remarks be a 
part of the record.
  

                                  
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