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OMB Sees NIH Sequester Cuts Deeper than Expected

NEW YORK (GenomeWeb News) – If the US Congress is unable to reach an agreement that gains the approval of President Barack Obama to avoid deep and wide federal budget cuts that are scheduled to take effect in January 2013, the National Institutes of Health will face an 8.2 percent budget reduction, according to the most recent analysis from the White House.

A new report from the Office of Management and Budget has raised the projected size of the cut from NIH's previous projection of a 7.8 percent funding cut. Overall, the sequestration plan must reduce federal discretionary spending by $984 billion over nine years.

According to OMB's new projections, which it released on Friday, the reduction of 8.2 percent from this year's $30.7 billion budget at NIH would result in a $2.52 billion decline in funding at the agency.

Such a cut — at either of the two estimated levels — would have a sharp and immediate effect at NIH, as NIH Director Francis Collins testified to a Senate subcommittee earlier this year.

Collins told the subcommittee in March that a 7.8 percent cut would result in a reduction of $2.4 billion from the budget, and it would mean that the agency would award 2,300 fewer grants in the next fiscal year.

"That represents almost a quarter of our new and competing grants," he told the subcommittee. "That would result in success rates of our applicants who come in with new applications or competing ones falling to historically low levels. It would be devastating to investigators seeking to continue programs that they have had funded in the past and are back for their competing renewal, or who are starting things that are entirely new."

"A cut of 8.2 percent to the NIH budget, as presented in today's OMB sequestration report, would jeopardize the entire medical research ecosystem, from research labs to private industry jobs to patients' health," the group United for Medical Research, which advocates for federal biomedical science funding, stated in response to the OMB's report on Friday.

UMR has calculated previously that a 7.8 percent-level cut at NIH would result in 33,000 fewer jobs in the US and a $4.5 billion decrease in economic activity.

The sequester plan is required under the Budget Control Act that was agreed to last year by Congress and was triggered when the Joint Select Committee on Deficit Reduction failed to reach a long-term compromise to reduce the federal deficit. It will take effect automatically if a deal is not reached between the House and Senate that will meet with approval of the White House to reduce spending another way.

However, the executive and legislative branches also could postpone the cuts. In addition, the outcome of the fall elections could impact the possibility of an agreement being reached between Congress and the president.

Goldman Sachs Investment Research analyst Isaac Ro said in a research note that it is likely that a short-term fix to avoid the sequester will be agreed upon that will last until at least the second quarter of 2013.

Analyzing the potential impacts of the fall elections, Ro said that the "best case" scenario for NIH funding would be a sweep by Democrats — based on the assumption that they would keep NIH funding flat and replace the sequestration cuts with a mix of spending cuts and tax increases — and that the "worst case" for NIH would be a GOP sweep, because it could result in the shifting of cuts from defense activities to other discretionary spending areas, including NIH funding.

Oppenheimer Life Sciences Tools and Diagnostics Senior Analyst David Ferreiro this weekend wrote that large players in the life sciences industries that are the most levered to the NIH budget, such as Life Technologies and Illumina, will see an impact if the sequestration cuts are enacted.

According to Ferreiro, an 8.2 percent budget cut at NIH would result in a 2.5 percent headwind to revenue growth next year for Life Tech, and a roughly 5 percent headwind for Illumina, which could impact the companies' earnings-per-share for the year by $0.11 and $0.08, respectively.