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Biotech Firms Vie for Federal Funds

New federal biotech grants and tax credits will create winners - and losers.

Michael P. Drzal, Chair, Venture Capital Practice Area Team, LeClairRyan (September 2010)

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The Application Game
It is anyone's guess how the review process will actually play out. (The IRS will issue certifications by October 29.) The stated review criteria for these tax credits and grants are quite broad. According to the federal government, priority will be given to those projects that show a reasonable potential to:
• Result in new therapies to treat areas of unmet medical need or prevent, detect, or treat chronic or acute diseases and conditions;
• Reduce the long-term growth of healthcare costs in the United States; or
• Significantly advance the goal of curing cancer within 30 years.

According to the government, the incentives will be given based partly on the potential of research projects to "create and sustain high-quality, high-paying U.S. jobs and to advance U.S. competitiveness in life, biological, and medical sciences." These criteria make sense, but it is hard not to wonder how reviewers will make some of these speculative and subjective judgments.

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In discussions, companies were urged to carefully weigh these criteria, however broad. For example, novelty stood out as a review factor, as did the ability to address "unmet medical need." It was also wise to examine the federal government's public health priorities. The focus on childhood obesity and diabetes is visible in First Lady Michelle Obama's "Let's Move" campaign, as well as in the raft of fresh-food incentives included in the proposed federal budget. As firms weighed what to submit for review, those that considered the current public health agenda might have boosted their odds for success. The bottom line, however, is that federal review processes are always something of a black box, and there is no guarantee that the most promising science will win out.

One cannot help but wonder about the role of language in the application process. This arises periodically with biotech clients - there are a lot of jargon junkies in the field. Accuracy and technical detail are important, but many proposals have been so impenetrable that even a scientist would struggle to get through them. For the current grants, some firms might beat out their competitors simply because they were smart enough to ask a wordsmith - perhaps the general counsel or head of corporate communications - to edit their applications for tone and clarity. Such small details can make a big difference.

And those details, while not arbitrary, may not directly relate to improving American health and wellness. Playing the odds in Las Vegas is a lot more fun than dealing with the federal government's bureaucratic application process in this incentives "lottery." Whether or not their efforts prove successful, firms will be forced to deal with the competitive implications of this program. It is common for multiple biotech firms to compete within the same niche. Sometimes the solutions offered by these companies are remarkably similar. So a scenario in which one firm sees its competitor get a leg up partly because of a decision made by an application reviewer in Washington is plausible.

Those that succeed in the application process might enjoy a significant advantage in obtaining follow-on funding from private-sector sources, and they could even gain a first-to-market advantage. Those that go unnoticed by the money-givers will have no choice but to race against their competitors' head start.

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About the Author

Michael P. Drzal, Chair, Venture Capital Practice Area Team, LeClairRyan
Michael P. Drzal is a LeClairRyan shareholder and chairman of its Venture Capital Practice Area Team. Based in Blacksburg, Virginia, he serves as general counsel to several biotech, medical device, and other emerging companies, and serves as lead counsel on cases of debt and equity financing, mergers and acquisitions, strategic alliances, joint ventures, management buyouts, intellectual property licensing transactions, and domestic and international transactions.

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