[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
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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
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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.