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Schwarzenegger Flexes Muscle on Calif. Bioindustry Incentives: ‘Trust me on That’

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SAN DIEGO – On the world’s biggest life sciences stage last week, California Gov. Arnold Schwarzenegger vowed to terminate a threatened rollback of the state’s research and development tax credit, as well as to double the amount of time biotech companies can carry forward tax deductions on their net operating losses, despite the state’s $15.2 billion budget shortfall.
 
“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. I will fight for that in my budget negotiation,” Schwarzenegger said, delivering the keynote address at the 2008 Biotechnology Industry Organization International Convention, held last week at this city’s Convention Center.
 
Minutes later, Schwarzenegger punctuated his promise, Hollywood-style. Answering a BioRegion News question about the prospect of extending the net operating loss or NOL carry-forward this year, the governor replied “absolutely” before staring, smiling, pausing a half second, and drawing laughs adding: “Trust me on that.”
 
Schwarzenegger spoke during a tour of his state’s pavilion at BIO 2008, the life sciences industry’s largest annual conference. The four-day event drew 20,108 people to the city’s Convention Center, from top executives and researchers to vendors seeking to do business with them.
 
The governor’s promise thrilled a key industry advocate.
 
“We are overjoyed by the sentiment that the governor expressed, that he would be vocal and strong with the legislature on their push to suspend R&D tax credits and net operating losses,” Matt Gardner, executive director of BayBio, the life sciences group for the San Francisco Bay Area and northern California, told BRN in an interview.
 
He said Schwarzenegger’s BIO speech was a welcome first public expression of support for preserving the R&D tax credit and expanding NOL. BayBio pressed for that public support after a draft of the governor’s speech circulating two days earlier didn’t include assurances he would oppose cutting the incentives.
 
Notwithstanding that success, BayBio and California’s other two life sciences industry groups signaled at BIO that they would lobby harder in coming weeks for the incentives, as well as other issues of interest to the industry.
 
In a ceremony at the California pavilion, Gardner joined his counterparts at San Diego-based BIOCOM and the Southern California Biomedical Council or SoCalBio to sign a memorandum of understanding creating a united advocacy group capable of lobbying not only state but federal legislators.
 
“By working together as an alliance, we can make sure that our representatives in Sacramento and Washington, DC, as well as the public at large, understand that the life science industry is vital to California’s future,” Joseph Panetta, BIOCOM’s president and CEO, said in a statement.
 
The new California Life Science Alliance has issued a formal request for proposals from would-be lobbyists willing to advance the policy priorities of its three component regional groups. No additional staffers would be hired. While the groups will continue operating separately, they said they will also collaborate on life sciences industry events, joint purchases, and possibly some membership services through the new alliance.
 
One example of a possible future event collaboration: BayBio has discussed inviting BIOCOM to bring startup entrepreneurs to participate in its 6th Annual Life Sciences Investor & Entrepreneur Rountables, set for Oct. 14. Collaborations with Pacific Rim organizations are also possible, Gardner said.
 
“There are issues where the three organizations should collaborate – obviously, which issues should be an item for discussion — and some issues where we may need to get a lobbyist,” Ahmed Enany, SoCalBio’s president and CEO, told BRN.
 
Gardner said the alliance reflects the fruition of dialogue among the three groups dating back to the 2003 California Life Sciences Action Plan, a policy blueprint produced by the three life sciences industry groups and four other groups. He also said it reflects the increased amount of time the groups have spent lobbying in Sacramento in recent months: “We are almost to the point now where we’re working together almost every week. We want to give that discussion a little more of a framework.
 
Asked if that framework can be the basis of wedding the regional groups into a single statewide organization in a few years, he replied: “I wouldn’t want to speculate on that.”
 
Gardner said maintaining and enhancing incentives for the state’s life sciences industry will be among the alliance’s priorities. Till now, the regional industry groups have separately supported an NOL-extension bill now under review in California’s state Senate.
 
Assembly Bill 1370, available here, was approved in that chamber last year and is now before the Senate’s revenue and taxation committee which is set to hold a hearing on the measure June 25. The bill’s author is the Assembly’s second-most powerful leader, Speaker Pro Tempore Sally Lieber (D-Mountain View).
 
“That, among several initiatives, are in the discussion of what the final budget’s going to look like. [AB 1370] has been part of the discussion of an overall budget compromise,” Gardner said.
 

"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. I will fight for that in my budget negotiation."

Republican leaders in the Senate and Assembly have backed Schwarzenegger, a Republican who took office in 2003 following the recall of his Democratic predecessor, Gray Davis. Gardner expressed hope that the support could extend across party lines: “There are a number of folks in the Democratic leadership who are trying to figure out how tax changes can be made to make up the budget gap.”
 
One selling point about AB 1370 that the industry is advancing to lawmakers is its cost – projected at nothing until fiscal year 2019. That year, supporters say, California would lose a projected $300,000, based on the assumption that $6 million in net operating losses set to expire that year would instead be carried forward.
 
California Cures also calls for doubling – from the current 10 years to 20 years – the length of time life sciences and other tech startups have to write off losses. The 20-year rule would bring California in line with 28 states and the federal government – and is designed to reflect the roughly 15-year timeframe that biotech and pharma companies spend developing and obtaining approvals for drugs, then generating revenues from them.
 
R&D tax credits, Gardner said, have benefited the state as well as the life sciences companies awarded them. He cited a four-fold return on the state’s investment in state life sciences companies following a doubling of the credit in 1996, in the form of higher sales, property, and income taxes, the last because the jobs created by the industry typically pay above average wages.
 
At present, the state limits liability for life sciences and other tech companies to 15 percent for R&D activity funded by businesses, and 24 percent for activity undertaken by universities or charitable institutions.
 
But in February, with the economy sliding and the state’s budget gap expanding, the state Legislative Analyst’s Office headed by Elizabeth Hill recommended that California scale back the R&D tax incentive, by limiting to two-thirds of a taxpayer’s liability the amount that can be claimed in any one year. [BRN, March 3]. Hill’s office projected the cutback would raise $355 million in the fiscal year that starts July 1, and $290 million the following fiscal year.
 
“It has been discussed in the halls,” Gardner said. “The fact that they’ve drawn the R&D tax credit and NOL into question is a threat to the state’s life sciences success. When you have an economy that’s slowing down, you don’t want to put the brakes on an industry that’s investing in California the way that we do.”
 
That lawmakers would even consider an R&D tax credit cut reflects their apparent desperation to plug the state’s budget shortfall through June 30, 2009. Originally pegged at $14.5 billion, the projected shortfall has been estimated as high as $20 billion before dipping back to the current $15.2 billion.
 
The possibility of a cut in the R&D credit is one factor that has prompted industry advocates to shore up their lobbying effort. Another is the prospect next year of joining the industry’s fight against a national healthcare program if Sen. Barack Obama (D-Ill.) wins the presidency in November.  
 
Preserving the R&D tax credit – then converting it to a tax rebate program – as well as extending the NOL carry-forward were among 12 policy recommendations BayBio issued earlier this year in a wish list to state lawmakers [BRN, Jan. 14]. Last week, BayBio re-issued and amplified those recommendations in a 21-page report released at BIO 2008.
 
The most expensive of the 12 recommendations would cost California a total of $300 million over a decade. BayBio has asked the state to spend $150 million over 10 years to create new “greenhouses” or incubators to nurture early-stage life-sciences companies, linked to the University of California system; as well as another $150 million over 10 years for new “training centers of excellence” focused on training undergraduates for life science careers, and linked to the California State University system.
 
Other recommendations include creating a new California Science & Technology Trust to fund early-stage prototyping for small companies; a fellows program that would train students to advise all branches of state government on science issues; a full exemption from capital gains taxes for money invested in companies focused on information technology systems for healthcare and life sciences purposes; and creation of a new adjusted corporate income tax apportionment formula for companies making “major” investments in California.
 
Also, creation of new state incentives for local communities to establish new zones for life sciences research parks; new benchmarks toward aligning state environmental law with federal environmental law; new loans from the California Infrastructure and Economic Development Bank for pre-environmental report work and infrastructure preparation on “sites of high potential for life sciences expansion;” and new subsidies for the bioprocessing and biomanufacturing operations of life science businesses.
 
The report also acknowledges that BayBio’s policy priorities may require several years before becoming law. One example is the group’s proposal to convert the R&D tax credit into a tax rebate, since most startups have so little in assets to write off against that they cannot use the R&D tax credit. The extra time could allow lawmakers to set criteria for companies to qualify for the rebate, BayBio reasons.
 
That long-range approach is also a bow to political reality, as expressed to BRN earlier this year by the chair of the Assembly’s select committee on biotechnology. Gene Mullin (D-South San Francisco) said lawmakers were not inclined this year to approve new incentives that would add to the state’s red ink [BRN, Jan. 21].
 
One recommendation within California Cures calls for California to align its regulations with those of the federal government. At a press conference to discuss BayBio’s report, Gardner was joined by the president and CEO of XDx, who told reporters he was thinking of moving his molecular diagnostics company out California because of regulatory red tape.
 
Pierre Cassigneul, president and CEO of XDx, cited a state law requiring that technicians who work at his company’s molecular diagnostic lab be certified as clinical laboratory scientists – a mandate not required by the federal government.
 
“There are fewer graduates in that particular space, and the need is increasing every year. So you have this mandate from the state of California, which is inconsistent with what is produced by the universities. We’re competing against hospitals, which also need to have these CLSs, for fewer graduates every year. And that’s going to reach a point where it’s not going to be viable. That would actually lead us to go to a neighboring state, where you don’t have that requirement,” Cassigneul said.
 
XDx bases 132 of its 153 employees in California, where it maintains headquarters in Brisbane. The company’s ties to the state are many: Its founders live there, and first began their research at Stanford University before raising capital from Silicon Valley investors.
 
BayBio’s report also warned that absent changes in state law, California was unlikely to capture much of the potential $49.6 billion in investment to be generated by the production of 230 treatments set to complete clinical trials and begin production over the next five years.
 
“California’s elected officials have the opportunity right now to capture this massive investment and cement the life sciences industry as a cornerstone to the state’s future, ensuring high salaries, consistent investments and more opportunities for every facet of the state’s economy,” the report concluded.
 
California Cures also contended that the state also runs the risk of losing life sciences companies and their jobs to other states and nations absent a long-range plan to assist the industry — the same challenge the state faces on several other technology fronts, according to one of two 50-state studies released at BIO 2008.
 
The Milken Foundation’s State Technology and Science Index is an updated ranking of the nation’s 50 states for their hospitability to the life sciences and other technology industries; the previous edition was published in 2004, and the first one two years earlier.
 
Milken’s results were disappointing for California. Despite its number-one ranking among states in criteria related to risk capital and entrepreneurial infrastructure, the Golden State finished fourth overall behind top-ranked Massachusetts followed by Maryland, then Colorado.
 
“While it remains a national leader, the state is faltering,” the report concluded of California.
 
Milken expanded on its California findings with a separate 132-page report released along with its 50-state survey. California’s Position in Technology and Science: A Comparative Benchmarking Assessment found that while the state still leads the nation in venture capital investment, California’s competitiveness has eroded between 2004 and this year in several categories, notably workforce development, per-capita academic R&D, and academic achievement.
 
California fared better in State Bioscience Initiatives 2008 and a customized seven-page report focused on the state’s life sciences effort, both prepared for BIO by the Battelle Technology Partnership Practice with help from the nonprofit group SSTI.
 
That report noted California’s first-place status in the nation when measured by total academic R&D dollars, funding from the National Institutes of Health, higher education degrees in bioscience fields, employment in bioscience-related fields, bioscience VC activity, and the number of bioscience and related patents.
 
Yet the Battelle report also noted a decline between 2001 and 2006 in the number of California establishments in three life sciences specialties: agricultural feedstock and chemicals, drugs and pharmaceuticals, and medical devices and equipment. The med device sub-sector was also the only one to lose jobs during that timeframe, with the best performing segment being research, testing, and medical laboratories.
 
[See BRN’s report on the Milken studies in this issue].

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