Healthcare Reform Provision Gives Boost to Small Device Firms

It’s been nearly three months since Congress passed the historic but divisive healthcare reform bill, and medical device executives are still bristling over a 2.3 percent excise tax their companies must pay to help fund the cost of expanded insurance coverage.

Though the tax does not take effect until 2013, device manufacturers have said the levy will trigger layoffs, stifle innovation and significantly curtail profits. “Many small to midsize medical device companies will owe more to the federal government in taxes than they make in profits,” Mark Leahy, president and CEO of the Medical Device Manufacturers Association, has said.

Small and mid-size firms could recoup some of those profits, however, under a little-known provision of the healthcare bill that gives a tax credit to biotechnology companies investing in life-saving treatments for unmet medical needs (such as cancer). The federal government has set aside $1 billion to reimburse small biotech firms (those with 250 or fewer workers) for 50 percent of their qualifying therapeutic research costs in 2009 and 2010, up to a maximum credit of $5 million. Companies either can opt for the tax credit or take the money in the form of a grant.

Costs covered by the tax credit include money spent on wages, supplies, laboratory expenses, depreciable property and contract work. Chief executive officer salaries, building maintenance costs and interest expenses are not covered under the program.

Financial analysts claim the tax credit could help struggling medical technology companies bridge the gap between early stage funding—typically supplied through National Institutes of Health grants—and later stages when venture capitalists step in to subsidize projects (often referred to as “the valley of death”). “One to $5 million can really bring them far enough along to bridge that valley of death, maybe to get some further investment rounds,” Teresa Lavoie, a patent attorney in the San Diego, Calif., office of Fish & Richardson P.C., told the Orange County Business Journal.

According to a technical explanation by the Joint Committee on Taxation, projects that are eligible for the tax credit include those that “result in new therapies to treat areas of unmet medical need or to prevent, detect, or treat chronic or acute disease and conditions; reduce long-term healthcare costs in the United States; or significantly advance the goal of curing cancer within a 30-year period.” The government also will consider a project’s potential to create or sustain “high-quality, high-paying jobs in the United States,” and advance the nation’s competitiveness in the lifesciences, biological and medical technology sectors.

Despite being overshadowed by opposition to the 2.3 percent medical device tax, the Investment Credit for Qualifying Therapeutic Discovery Projects is steadily gaining interest and popularity among small biotech firms. Joseph Panetta, president and CEO of the San Diego life sciences trade group BIOCOM, told the Journal that he expects most qualified companies to apply for the credit. “The program is already enormously popular,” he said. “When you take $5 million and run it across a number of companies over two years and a billion dollars, it’s pretty easy to see that money going very quickly.”

He advises startup companies without much expertise in grant applications to hire an advisor. “Those who can most afford to hire competitive expertise are probably going to be most likely to win the dollars,” he noted in the Journal article. BIOCOM has created a Therapeutic Discovery Project Credit General Guide that can be accessed on its website, www.biocom.org.