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Calif.’s New Budget Sets Stage for Life-Sci Shops to Double NOL Carry-Forward Duration

SAN FRANCISCO — California’s $143 billion compromise budget, hammered out late last week by Gov. Arnold Schwarzenegger and legislative leaders after an 81-day stalemate, has a provision that will eventually enable life-science companies to double the amount of time they can carry forward tax deductions on their net operating losses.
As life science-industry advocates expected, Schwarzenegger and lawmakers agreed to suspend for two years the ability of life-sciences and other tech companies to carry forward their net operating losses for 10 years. The move will save the state about $900 million of the $15.2 billion shortfall both sides struggled to plug as they crafted the new budget.
But under the deal, penned Sept. 19, the governor and state Legislature also agreed that at the end of the two-year suspension, the life-sciences industry, and other tech-based industries, will get what they have sought for three years: The will be able to double, from 10 to 20 years, the amount of time they can carry forward tax deductions on their net operating losses.
“Every one of the leaders during this compromise process told us they were ultimately going to support us with the net-operating-loss situation, to help the biotech industry in California,” Matthew Gardner, executive director of BayBio, the life-sciences industry group for the San Francisco Bay Area and northern California, told BioRegion News last week.
“Consider what kind of a miracle that is that we’re talking about, in a year when they have to make up [a shortfall once pegged as high as] $17 billion, that they actually find a way to create an improved business climate for this industry,” Gardner said. “We’re very, very pleased with the partners that we had in this process being able to put this together, especially given the difficulty everyone’s having with the bad economy and the budget.”
Gardner was among key industry supporters of the portion of the bill that extended NOL for 20 years. He and others argued that California’s current 10-year period needs to be lengthened because companies need more than a decade to conclude the clinical trials and other US Food and Drug Administration requirements to getting new drugs on the market.
The measure was originally included in a broader biotech bill. After that bill died in committee, the Assembly’s second-most powerful member, Assembly Speaker Pro Tem Sally Lieber (D-Mountain View), re-introduced the provision separately as Assembly Bill 1370, available here [BRN, July 9, 2007].
The bill cleared the Assembly after a year of review, and was before the state Senate Appropriations Committee prior to being absorbed into the series of bills that comprise the state budget.
In July, when the budget stalemate began, a budget conference committee dominated by Democratic leaders of California’s Assembly and state Senate recommended suspending the net-operating-loss provision for three years. Conferees projected that the move would generate $1.1 billion for the state, while opponents warned it would discourage life-sciences and other tech companies from relocating to or expanding within California.
“We worked with the leadership to shorten the term,” Gardner said. “Cutting it down to two years when they’re going through trying to determine how to make up that deficit is something that we consider a small victory.”
With the NOL extension, Schwarzenegger fulfilled a promise he made to life-sciences leaders during his June 18 keynote address to the 2008 Biotechnology Industry Organization International Convention, held in San Diego [BRN, June 23].
“I think it is so important, [both] California’s research and development tax credit, and the program that allows companies to carry forward net operating losses to deduct them later when they show profits,” Schwarzenegger said at the time. “I will fight for that in my budget negotiation.”
“Trust me on that,” he added.

“Cutting it down to two years when [Democrats in the state legislature were] going through trying to determine how to make up that deficit is something that we consider a small victory.”

The end of the budget impasse allowed lawmakers to advance to Schwarzenegger’s desk 890 bills that passed both the state Assembly and state Senate during the legislative session that concluded on Aug. 31, but that lawmakers had temporarily shelved to avoid a promise by the governor to veto bills that arrive at his desk before a budget had been finalized.
Among them was Senate Bill 1565, a drug-accessand -governance measure opposed by California’s stem-cell agency. The California Stem Cell Research and Cures Act, available here, made its way to Schwarzenegger on Sept. 17, two days before the Assembly and state Senate approved the budget compromise.
The bill requires drug makers, research centers, and other recipients of funding from the California Institute for Regenerative Medicine to ensure that the drugs they develop are accessible to uninsured state residents.
The drugs are to be made available through Medi-Cal, California’s Medicaid program, and the state’s other publicly funded drug programs, at any of three benchmark prices in the California Discount Prescription Drug Program, unless waived from the rule by CIRM’s governing board, the Independent Citizens Oversight Committee
CIRM supports that portion of the bill but objects to a provision that would lower, from two-thirds to a simple majority, the margin needed for an advisory panel to recommend funding for applications that present what lawmakers consider a “vital research opportunity.”
That provision was added to the original bill by state Sen. George Runner (R-Lancaster) — the state Senate’s second-most powerful Republican and an opponent of hESC research. As a result, critics of SB 1565, including CIRM’s narrow objection, argue it would torpedo California’s top-tier stem-cell effort by restricting future ICOC funding approvals to research based on adult stem cells, even if the federal prohibition on hESC funding is lifted by a new President in January [BRN, July 21].
Schwarzenegger has until the end of this month to sign or veto SB 1565, and all other legislation passed during the session. “The governor does not have a position on that bill,” his spokeswoman Lisa Paige told BRN last week.
State Sen. Sheila Kuehl (D-Santa Monica), the author of SB 1565, told BRN she too had no idea how Schwarzenegger will act. “There is no attention being paid to any individual bill, no messages being given about what he’ll do.”
The bill enjoyed such strong support as it traveled through the Legislature that it garnered only eight ‘no’ votes: one when the state Senate approved amendments made since the bill had been introduced there in February, and the other seven when it cleared the full Assembly.
Before that, SB 1565 passed unanimously through two state Senate committees, the full state Senate, then two Assembly committees.
Don C. Reed, co-chair of Californians for Cures, and director of policy outreach for Americans for Cures Foundation, said his groups have urged Schwarzenegger to veto the measure.
“Think of the message this will send: If even in the stem-cell center of the world, we are seen to be turning away from embryonic stem-cell research? This would be like saying, well, uh President Bush was right to be against this stuff: Look, they don't even want it in California! This cannot go unchallenged,” Reed wrote in an Aug. 26 e-mail message posted on a Web site of Parkinson’s disease advocates, the Parkinson’s Information Exchange Network Online, and available here.
A veto by Schwarzenegger could not be overridden, Kuehl said, because the Legislature wrapped up its special session with the 81-day-late passage of the state budget. The Legislature is not set to meet again until Dec. 1, and then only to swear in new officers for the 2009 legislative session.
“Frankly, our job is simply to try and continue to convince [Schwarzenegger] … that [SB 1565] is a good thing, which we will continue to do,” Kuehl said.
In addition to the simple-majority provision, Reed and other patient advocates take issue with another section of SB 1565 that commits the state Legislature to request a study of CIRM by a state-created government watchdog agency. The Milton Marks, or “Little Hoover,” Commission on California State Government Organization and Economy would examine CIRM’s governance and its susceptibility to conflicts of interest.
Reed has told BRN a new study of CIRM could produce legislation that would hinder the agency, delaying cures for diseases, and lessening the agency’s value in helping research institutions leverage private donations.

Reed is a retired schoolteacher who spearheaded the passage of a law directing the state to spend $1.5 million annually on research to fight paralysis. The law is named for Reed’s son Roman, who was paralyzed following a 1994 football injury.

The governance issue arose late last year after John Reed (no relation to Don Reed), president of the Burnham Institute in La Jolla, Calif., and, at the time, an ICOC board member, asked a CIRM administrator to reverse a decision rejecting a $638,000 grant request by Burnham — an apparent conflict of interest. The issue sparked an audit by state Controller John Chiang that largely gave the stem-cell agency a clean bill of health [BRN, May 19].
In a voicemail message to BRN last week, Kuehl said that if Schwarzenegger were to veto SB 1565, “frankly down the line they’ll probably get exactly what they deserve by doing such a thing, which is they’ll suddenly find that they won’t be able to afford the very therapies that they advocated for.

“I always say, ‘Be careful what you wish for. You just might get it.’ And think that in this case, they could not be any wronger,” Kuehl added.

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