Life sciences companies were pleased to see President Obama sign a new executive order that ended an eight-year ban on federal funding for most stem cell research. The Bush administration had banned federal funds from being used in the creation of new embryonic stem cell lines. These previous restrictions had forced researchers and scientists to conduct their stem cell research with complete separation of private versus federal funding and to use different lab equipment, and oftentimes lab space, based on the funding source. Researchers and scientists were held back from collaborating due to their research being funded privately versus by the government.
The new executive order will allow research projects to be eligible for federal funding and will also bring this research under the National Institutes of Health (NIH) oversight. (Currently, privately funded embryonic stem cell research is not subject to any government oversight.) While signing the executive order, President Obama said, "We will never undertake this research lightly. We will develop strict guidelines, which we will rigorously enforce, because we cannot ever tolerate misuse or abuse." Under the new executive order, life sciences companies, researchers, and scientists will now have the ability to receive federal funding to help advance their studies and better understand the treatments for heart disease, Alzheimer's, Parkinson's, leukemia, various cancers, and diabetes.
Because of the industry's costly, research-intensive nature, development tends to be concentrated in large urban areas that are home to universities and research institutions, well-educated work forces, and healthy entrepreneurial and venture capital markets. These criteria have made the Unites States the primary location for the biotech marketplace. Scientific research and economic development are complementary. With the ban on federal funding for stem cell research being lifted, the United States will experience yet another boost from an economic development perspective as more life sciences companies, researchers, and scientists receive the federal funding they so desperately needed to move their research initiatives forward.
The R&D Tax Credit
Over the past 25 years, one of the most important economic development incentives in the United States for life sciences companies and research-intensive firms has been the Research and Development Tax Credit (R&D Tax Credit). The R&D Tax Credit provides companies with an effective and proven incentive to increase their R&D spending in the United States. Since the credit was established in 1981, investments in R&D have spurred unparalleled economic growth in the life sciences industry.
On October 3, 2008 the U.S. Congress passed the Emergency Economic Stabilization Act of 2008 (EESA). As part of EESA, Congress extended the R&D Tax Credit through 2009. This extension applies to U.S. R&D activity for tax years 2008 and 2009. The R&D Tax Credit induces billions of dollars of U.S. economic activity and keeps thousands of highly skilled and high-paying jobs in the United States.
However, the extension of the R&D Tax Credit is just a temporary step in the promotion of research and development activity in the United States. In order for this incentive to have a long-term and sustained impact on the U.S. economy and assist with the siting of large R&D investments, the credit needs to be strengthened and be made permanent.
In addition to extending the R&D Tax Credit through 2009, Congress made two major changes to the program. The extension terminated the Alternative Incremental Credit (AIC) at the end of the 2008 tax year, and it increased the Alternative Simplified Credit (ASC) from 12 percent to 14 percent in 2009. The AIC had an extremely confusing calculation method that could only be used in the current year, and companies could not go back and amend tax returns and use the AIC. The ASC is much easier to calculate and allows companies to use this method if they cannot calculate their base percentage or if their base percentage is too high. Small to mid-size life sciences companies will most likely opt to use the ASC in 2009.
The 2009 Stimulus Bill
The real federal incentive boon for life sciences companies comes in the form of the American Recovery and Reinvestment Act (ARRA) of 2009 otherwise known as the "2009 Stimulus Bill." The ARRA will have a significant impact on companies making decisions on capital investments and specifically affects a number of business incentives that could impact the life sciences industry. In particular, ARRA extends current incentives and creates a variety of new incentives for life sciences companies. Several measures are highlighted below:
Bonus Depreciation: The Stimulus Bill extends a temporary benefit for capital expenditures incurred in 2009. Specifically, the provision allows businesses to recover the costs of capital expenditures made in 2009 faster by permitting these businesses to immediately write off 50 percent of the cost of depreciable property. Alternative Minimum Tax (AMT) and loss taxpayers may receive 20 percent of the value of their old AMT or R&D tax credits, provided that taxpayers invest in assets that qualify for bonus depreciation. The amount is capped at the lesser of 6 percent of outstanding and unused AMT and R&D tax credits or $30 million.
Production Tax Credit: The bill extends and modifies the renewable energy Production Tax Credit. Specifically, the provision extends the placed-in-service date for wind facilities for three years (through 12/31/12). The bill also extends the placed-in-service date for three years (through 12/31/13) for certain other qualifying facilities including closed-loop biomass, open-loop biomass, geothermal, small irrigation, hydropower, landfill gas, waste-to-energy, and marine renewable facilities.
Investment Tax Credit (ITC) in lieu of the Production Tax Credit (PTC): Qualified renewable facilities can now elect to claim the Investment Tax Credit in lieu of the Production Tax Credit. Property eligible for the credit is tangible personal or other tangible property. Depreciation or amortization is allowable only if the property is used as an integral part of the qualified facility.
Treasury Department Energy Grants in Lieu of Tax Credits: The bill allows taxpayers to receive a grant from the Treasury Department in lieu of tax credits. The grant will operate like the current-law Investment Tax Credit, and the Treasury Department will issue a grant in an amount equal to 30 percent of the cost of the renewable energy facility within 60 days of the facility being placed in service.
Modification of the Business Energy Credit: The cap on small wind energy property has been eliminated and the basis reduction for subsidized energy financing has been repealed.
Advanced Energy Investment Credit: The bill creates a new 30 percent Investment Tax Credit for facilities engaged in the manufacture of advanced energy property. Credits are available only for projects certified by the Secretary of Treasury, in consultation with the Secretary of Energy, through a competitive bidding process. The Treasury may allocate up to $2.3 billion in credits. Advanced energy property includes technology for the production of renewable energy, energy storage, energy conservation, efficient transmission and distribution of electricity, and carbon capture and sequestration.
Credit for Carbon Dioxide Sequestration: A $10 per metric ton credit is allowed for the sequestering of carbon dioxide through permanent geologic storage.
Clean Renewable Energy Bonds (CREB): The bill authorizes an additional $1.6 billion of CREBs to finance facilities that generate renewable energy. Qualified renewable sources include wind, closed- and open-loop biomass, geothermal, small irrigation, hydropower, landfill gas, marine renewables, and trash combustion.
Qualified Energy Conservation Bonds: The bill authorizes an additional $2.4 billion of qualified Energy Conservation Bonds to finance certain energy conservation programs and initiatives.
From and a state and local perspective, the life sciences industry continues to be the holy grail for economic development officials for business attraction and retention. In recent years, a number of states have pursued aggressive tax- and non-tax incentives programs with these objectives in mind.
Some states, such as New Jersey and Massachusetts, have created programs with the intention of "incentivizing" existing firms to remain and grow in their current locations as opposed to relocating their operations to lower-cost states. Other states, such as Florida, have created large-scale private-public partnerships required to invest in the development of research activities and intellectual capital formation, realizing that the success of life sciences firms in their states depends on reliable access to intellectual capital and research-oriented universities.
Massachusetts has set the bar particularly high for incentives targeted toward life sciences firms. In June 2008, Massachusetts Governor Deval Patrick (D) signed the $1 billion Life Science Initiative (LSI) into law. The LSI provides $500 million for tax- and non-tax incentives over a 10-year period and $500 million for bond-financed capital improvements to a variety of public and private institutions throughout the state. Specifically, the LSI provides for a number of refundable tax credits. These credits can be monetized or refunded for up to 90 percent of their value. Currently there are refundable credits available for investments in tangible personal property and R&D activities. Additionally, the LSI provides for a 15-year net operating loss carry forward, a sales tax exemption on construction materials and equipment, and access to the LSI Investment Program, which makes a number of grants and low-cost loans to life sciences companies. It's important to note that the Massachusetts LSI program entails a highly competitive application and certification process.
New Jersey, which has more than 10 percent of the national employment base of pharmaceuticals and other industry subsectors, has also established the standard with regard to incentives for the life sciences industry. The New Jersey Economic Development Authority (NJEDA) has led these efforts and has established the Angel Guarantee Fund, which provides equity-like and near-equity financing for life sciences start-ups. Additionally, the NJEDA administers the Edison Innovation Fund, which allows life sciences companies to access a large array of incentives, including work force training grants, commercialization loans, and the Life Science & Technology Business Tax Certificate Transfer Program (BTCTP). The BTCTP allows companies with less than 225 employees to sell unused net operating losses and R&D tax credits for at least 75 percent of their value.
Florida, which has a desire to establish a stronger life sciences presence, has continued to recruit nonprofit research institutions to the state and to invest in university-based centers of excellence. Over the previous three years, Florida has seen a total of $682 million in bioscience venture capital investments, and an increasing number of patents flow out of the state.
Lee County, Florida, has taken the lead with regard to incentives for the life sciences and has recently established the Financial Incentives for Recruiting Strategic Targets (FIRST) initiative, a performance-based cash-grant program that has been initially funded with $25 million. The FIRST program is aimed at luring life sciences and other high-wage industries to the county.
The Future of Life Sciences Decision-Making
In the current recessionary period, economic development programs and incentives have been bolstered, as both the federal government and state and local jurisdictions have increased certain funding. The life sciences industry is well positioned to take advantage of these programs. Non-traditional U.S. locations are aggressively targeting and winning large investment projects in the high-tech and life sciences industries due to very competitive incentive packages that help reduce the otherwise high occupancy and operating costs.
Now we are seeing the federal government taking on an unprecedented role in providing incentives for domestic economic growth by enacting the 2009 Stimulus Bill and taking equity positions within failing U.S. corporate giants. The federal and state incentives that are in place for the life sciences industry for 2009 will have a major impact on future site selection and domestic capital investment decision-making.
Scot Butcher is managing director of the Business Incentives Advisory at Duff & Phelps, LLC in Boston.
He can be reached at 617-378-9406 or Scot.Butcher@duffandphelps.com.