Biotechs execs plan to visit Congress today to ask for a temporary change in the tax law that would let money-losing companies get cash from the government now, in exchange for tax credits they would pledge not to take if they eventually become profitable, The New York Times writes.

The change, if approved, could enable biotechs to receive potentially hundreds of millions or even billions of dollars, on the condition that the money would be used for R&D. The moves comes as many smaller biotechs face a severe cash shortage that is forcing them to dismiss workers, curtail research and even file for bankruptcy protection or liquidation. But prospects for the proposal are unclear.

Allyson Schwartz, a Democratic member of the House Ways and Means Committee, which handles tax matters, will push to include the proposal in the forthcoming economic stimulus package and expected many of her colleagues to view it favorably. “Innovation and technology are growth areas for American businesses and American workers and should be part of this package,” Schwartz, whose district in the Philadelphia area is home to some drugmakers and biotechs, tells the Times.

Big, profitable biotechs such as Amgen and Genentech remain financially sound, the Times writes. But only 125 publicly traded American biotechs - out of 370 - have less than six months cash on hand, which is nearly double the total last year, according to the BIO trade group. With financial markets in turmoil, investors have become reluctant or unable to provide cash infusions (back stories here, here and here).

In seeking assistance, the industry is quick to distinguish itself from the automakers or banks, portraying itself as a model of innovation and American competitiveness. “This is not a question of our companies operating with what some perceive as a flawed business model,” Alan Eisenberg, a BIO exec, tells the paper. “This is about our companies taking a decade to get a product on the market, and during that time they need to have investor capital, and that capital is not available.”

The industry wants to huge losses into an asset. Under current law, net operating losses can eventually be used to offset some taxes once a company is profitable, the Times writes, noting that does little good for companies struggling with losses and a lack of cash now. The proposal would let biotechs receive government payments now in exchange for giving up tax deductions later. The industry would agree to a cap, perhaps $30 million, on the amount any single company could receive.

BIO’s Eisenberg tells the Times the proposed change would be in effect only for a year and would apply to companies outside of biotechnology as well. Few other industries, though, require as much time and money to develop a product.

Biotechnology might not seem an obvious candidate for a bailout. The industry employs only about 200,000 people in the United States, according to the accounting firm Ernst & Young. “Research-based companies that employ 30 people don’t necessarily stimulate the economy,” a Washington lobbyist for a big drugmaker, who was skeptical the proposal would win backing, tells the Times.

This person, who spoke on the condition of anonymity because he was not authorized to talk to the media, says opponents could argue that assistance was not needed because a company with a truly promising product would be able to sell the rights to that product, or the entire company, to a larger drugmaker, the Times writes.

Biotechs ares also notoriously risky, with many never achieving profitability despite spending hundreds of millions of dollars. Genentech’s ceo estimated the industry as a whole has lost about $100 billion since the field’s inception in 1970s. Even as of last year, the American biotech industry was not profitable, although it was getting close, according to Ernst & Young data cited by the Times.

The biotechnology industry will argue that it is responsible for creating a large number of drugs now being tested that will be needed by an aging population in the future. And it will argue that it is a bastion of American competitiveness.

“It’s one of the few places where the US is the undisputed leader of the world,” Alexis Borisy, ceo at CombinatoRx, a biotech that recently cut 80 employees, or two-thirds of its work force, to conserve its cash after two drugs did not perform well in clinical trials. “Do we allow that to be cannibalized?”

The industry has paved the way in developing ways to treat rheumatoid arthritis and multiple sclerosis as well as cancer drugs like Genentech’s Avastin, ImClone’s Erbitux and Celgene’s Revlimid. OSI Pharmaceuticals, which developed the lung cancer drug Tarceva, lost a cumulative $1.3 billion from its inception in 1983 through 2006 before finally breaking into the black, the Times notes.

Since many will never reach profitability, the industry acknowledges an upfront cash payment would have to be significantly less than the value of the deductions. BIO’s Eisenberg tells the paper a company with $100 million in net operating losses would be entitled to about $35 million in lower federal taxes when it eventually became profitable. So perhaps it could be paid about $20 million now.

Source: The New York Times