Biotechs scramble for tax credits

Startups have much to gain

Staff WriterMay 8, 2010 

Triangle biotechnology and medical device companies engaged in innovative research are gearing up to compete for up to $1 billion in tax credits and grants from the federal government.

Sam Taylor, president of the N.C. Biosciences Organization, estimates hundreds of companies across the state potentially qualify for what in effect would be reimbursement of 50 percent of the money they've spent on a research-and-development project. "It's real exciting stuff," Taylor said. "North Carolina is probably as well-positioned as anybody in the country to take advantage of this, because of the large number of small biotechnology and pharmaceutical start-ups that we have here."

Start-ups have the most to gain from the new program, which was tucked into the recently passed health care reform law. State and federal tax credits for research and development already exist, but they're worthless to start-ups that aren't profitable - they don't even have a product to sell - and therefore don't pay income tax. The beauty of the new program is that grants as well as tax credits are available.

The federal money is especially welcome right now, Taylor said, because the recession has made it tougher for early-stage companies to raise money from venture capitalists and angel investors.

Art Pappas, managing partner of Durham venture capital firm Pappas Ventures, anticipates that between 15 and 18 of the 25 active companies in his firm's investment portfolio will apply for the money. Some will seek more than $5 million.

"If a [development-stage] company were to pick up $5 million, that could be anywhere from 12 to 18 months of capital," Pappas said.

The interest level is so high that Raleigh accounting firm Hughes Pittman & Gupton is conducting an invitation-only seminar for clients interested in applying for the money next week. Partner Larry Hamilton frets that the room they've booked at the RBC Center, which has a capacity of 80 people, won't be big enough.

Hughes Pittman is advising clients that they need to be ready to "hit the send button" to be in position to get a piece of the $1 billion pie.

"I think the money will go quickly," Hamilton said.

One wrinkle, however, is that the complete set of ground rules for applyinghasn't yet been issued. The Treasury Department is expected to release them no later than May 22.

Some requirements are known, however.

To be eligible, companies must have no more than 250 employees. Projects must have the potential to develop new treatments that address "unmet medical needs" or chronic and acute diseases; reduce long-term health care costs; or represent a significant advance in finding a cure for cancer. Projects that create and sustain well-paying jobs, either directly or indirectly, are a plus.

Applications are open to both publicly traded and privately held businesses.

Many are speculating that the government will impose a cap on the size of grants and credits available.

The only down side to the program, said Raleigh lawyer Ken Eheman of Wyrick Robbins Yates & Ponton, is that some companies inevitably will end up empty-handed.

"I think some of our clients are worried they are going to spend a lot of effort, and not be a winner," Eheman said. "But nothing ventured, nothing gained."

Cempra Pharmaceuticals in Chapel Hill, which is developing treatments for drug-resistant skin infections and pneumonia, plans to file applications for both R&D programs seeking millions of dollars, said Mark Hahn, chief financial officer of the 17-employee company.

"We're working with outside experts so we can be prepared to file as quickly as possible when the regs come out," he said.

david.ranii@newsobserver.com or 919-829-4877

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