May 14, 2008

Life sciences boost needed

Guest Opinion

By Matthew M. Gardner and Jeffrey N. Peterson

Without showing their cards, California's elected officials are betting the house on short-term economic gains when they need not gamble on the returns the state's life sciences industry provides. California's life sciences companies are a fountain of scientific discovery and innovation, and the state has enjoyed a period of leadership as the global epicenter of the life sciences industry.

Many of the world's best minds are attracted here, to this rewarding challenge, where the prohibitively expensive investments, long development timelines and failure risk demand incredible focus on efficiency and effectiveness in pursuit of these valuable treatments and cures. This has created one of California's most productive industries and its most promising economic growth engine for the future.

For the future of California, our elected leaders should be pursuing the path laid by Congress and many other states: an economic stimulus package designed to encourage, not stifle, biotechnology and medical device companies considering investment, hiring and growth in our communities. To begin, we must correct existing disincentives. Legislative action is needed to bring net operating loss (NOL) carry forward, single sales factor, and R&D tax credits into parity with competing states. At this point, California will have at least "anted up" to sit at the table, where the global poker game for life sciences leadership is already under way, and players like Singapore, Ireland and China are betting with long-term vision and stakes that California barely comprehends.



Long wait for the payoff

Over the next five to 10 years, the Northern California life sciences industry will invest $10 million annually in research, facilities and jobs to produce the 492 treatments currently in the development pipelines. On average, it takes 15 years and $1.2 billion to develop a new treatment and bring it through regulatory approval. Throughout this long development cycle, our companies depend upon consistent state policy to intelligently guide our many long-range investment decisions.

The hordes of entrepreneurial startups spinning out of our universities and existing life sciences companies are critically dependent upon a stable and attractive state policy environment in order to attract the venture capital investments upon which they are so dependent.

Unfortunately, our state's policy does not recognize or accommodate the unique challenges inherent in developing a biotechnology product and neglects the industry's role and promise as a major source of long-term economic growth for California.



What to do

Specifically, the state needs to increase the current 10-year carry forward provision for NOLs. Designed on the assumption that a life sciences company reaches profitability in three to five years after incorporation, the reality is that the average biotech firm doesn't generate profit until year 15 or later. Therefore, 30 percent or more of life science company losses cannot be written off against future earnings.

Assembly Bill 1370, currently in the Senate Revenue and Tax Committee, would extend NOLs for life sciences companies to 20 years, consistent with 28 other states and federal levels. A 20-year carry forward allows companies to reinvest that capital back into further research and development of new products. According to the Franchise Tax Board analysis, AB 1370 has no effect on the California Treasury until 2019, and then will only result in a $400,000 debit. This example is just one of several ingredients needed in an economic stimulus package that can help one of California's most renowned homegrown industries into maturity and a tax base on which the state can build its future.

We also must address the proactive measures that can make it possible for California-headquartered life sciences companies to invest billions more in our state that will otherwise be lost to competitor states and nations. Shifting the state's corporate tax apportionment policy to a single sales factor will provide an incentive for companies with a large footprint in facilities and payroll to expand those commitments in California. A suspension of sales tax for manufacturing equipment would further stimulate job growth and investment, particularly in job categories served by high school and community college graduates.

California requires proactive policies from Sacramento that support the growth of innovative companies and sectors upon which our future can be built. Californians need visionary and courageous leadership in state government that understands and takes action to build new long-term economic growth, spur major investment, create thousands of jobs and help drive the state and the nation forward into recovery and back on course for a brighter and economically competitive future.



Matthew M. Gardner is CEO and President of BayBio, an independent, nonprofit trade association serving the life science industry in Northern California. Jeffrey N. Peterson serves on the board of BayBio and is the CEO of Target Discovery, Inc., a Palo Alto company working on the next generation of diagnostics for the personalization of medical treatments to improve the outcomes and economics of health care.