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Proposed Budget Cuts Could Hurt Cash-Strapped Biotechs

Ed Silverman | June 14, 2010

Finding enough cash to conduct their operations is job No. 1 for New Jersey's numerous biotechs.

Debbie Hart could hardly be mistaken for Chicken Little.

The New Jersey native understands the value of being cool, calm and collected, and puts those attributes to good use in Trenton, where she has spent the past 15 years advocating on behalf of the numerous biotechnology companies that are sprinkled around New Jersey.

As president of BioNJ, Hart is used to being overshadowed by the much larger multinational drug makers whose headquarters and laboratories continue to dominate the headlines and have helped New Jersey become known as "the nation’s medicine chest." But in her own quiet way, she has succeeded in winning useful tax incentives from successive administrations. Recently, though, Hart has been clucking rather loudly over the outlook facing local biotechs. Unlike the behemoths in the pharmaceutical industry, which are undergoing a massive consolidation that can be traced to empty pipelines and generic competition, small biotechs face a different set of problems. Leading the list is finding enough cash to conduct their operations.

Nuts-and-Bolts Activities

The great recession has made this a difficult proposition, especially since venture capitalists have largely closed their wallets. Some biotechs with hot a prospect in the lab can line up a deal with a big drugmaker, but many of the smallest companies in the earliest stages of drug development are happy to rely on whatever funding sources are available, including government programs, for such nuts-and-bolts activities as hiring a few needed people or pursuing a clinical trial.

But in New Jersey, where such initiatives have for years attracted and nurtured biotechs, the recession is threatening to sever those lifelines, as well. Governor Chris Christie, who hopes to shrink a projected $10.7 billion budget deficit, plans to drastically cut funding for two cherished programs of the biotech industry. For one thing, Christie wants to halve the funding for the Technology Business Tax Certificate Transfer Program. For another, the governor is looking to completely eliminate funding for the New Jersey Commission on Science and Technology.

The total savings would amount to $40 million.

The Sky is Falling

That may seem like chicken feed compared with a multi-billion budget deficit, but to Hart, the governor’s plan comes pretty close to the sky falling. As she sees it, these cutbacks would not only deflate the hopes of many biotechs already located here, but also impede New Jersey’s ability to remain competitive with other states, such as Massachusetts and Pennsylvania, that are doing a good job of vying for biotech employers.

Credit: BioNJ
BioNJ's Debbie Hart advocates on behalf of NJ's numerous biotech firms.

"The governor’s efforts to make New Jersey a more business-friendly state are unprecedented and we’re thrilled about his outreach to companies that are considering coming here," Hart says in her patented diplomatic tone."But the bottom line is that cutting a total of $40 million from the state budget will result in missed opportunities and missed revenues for the state in an amount greater than the savings."

Specifically, Christie would cut in half the funding for the Technology Business Tax Certificate Transfer Program, which enables unprofitable, but promising biotechs to turn net operating losses and R&D tax credits into capital. Basically, the TBTC program , which is run by the New Jersey Economic Development Authority, allows biotech companies to "sell” their operating losses to pre-approved profitable businesses, which can then take the losses as tax credits.

The other proposal would do away with all funding for the New Jersey Commission on Science and Technology, which runs a popular incubator.

To illustrate her case, Hart says that $34 million of the $60 million in TBTCT funding last year was allotted to biotechs and that money helped leverage an additional $510 million in new capital funding. At the same time, the Commission on Science and Technology returned $31 for each dollar invested. Overall, for each job created in a New Jersey biotech, another 2.8 jobs were created here.

That’s the good news. The bad news is that a report specially commissioned by BioNJ shows no increase in the number of NJ biotechs between 2002 and 2007, and a declining number of employees here compared with other states during the same period. And this occurred while the programs were intact. Her point—imagine the outcome if the programs shrivel or disappear entirely.

For its part, the Christie administration maintains the cuts are unavoidable and that a compromise that might allow some funding to be restored—and permit the New Jersey Commission on Science and Technology to keep its doors open – is simply not in the cards. The only glimmer that a spokesman offered was the possibility that, perhaps, funding could be restored next year.

"This is an extraordinary year and I think most people recognize that," says Christie spokesman Michael Drewniak. "The reduction in funding was purely budget driven. There are too many things to fund and not enough revenue. We catch a lot of anger from a lot of groups for all manner of cuts and, frankly, this is part of the sacrifice we have to spread around. This is one of the areas that we’re hopeful funding can be restored. These are not decisions we want to make, these are decisions we are forced to make."

An Independent Assessment

One former gubernatorial candidate, however, agrees with Hart that the cuts may be overdone. Chris Daggett, who ran against Christie last year as an independent, demurred when asked about the specific proposal, but did argue that any moves that diminish the standing of the biotech industry in the state won’t bode well for the long run.

“Biotech is the wave of the future. That’s where the creativity is based and it’s critical to the growth of the economy,” says Daggett, who is now chief executive officer of the Geraldine A. Dodge Foundation in Morristown. “If we’re going to do things to remain competitive and drive the economy, we need to revive New Jersey in the world of research. Look at all the large pharmaceutical companies that opened facilities in Boston, because that’s where so many first-rate teaching hospitals are located. All of this is linked to higher education and high-income employees.”

James Sapirstein heartily agrees. The chief executive of Tobira Therapeutics last year tapped the TBTCT program for the first time and received a tax credit close to $700,000, which was used to pay for a clinical study of its HIV medication. "We’re small and doing some good thing, but struggling to stay afloat, and so we’re dependent upon some of these programs. We hope to apply again."

The Princeton biotech, which doesn’t yet have any drugs on the market, employs just seven people and retained several consultants to help with its project. Sapirstein, who moved Tobira here from San Diego three years ago, would like to expand his payroll and believes the state programs offer the best hope.

"These programs create jobs, "he says. "The biotech business isn’t employing people making $20,000 to $30,000 a year. Our employees all make six figures. And so we’re major contributors to the tax base. We’re the upper middle-class part of the state. I understand what he has to do—he has to find money. We’re not angry with him, but we hope the money gets restored once the economy gets better. These tax credits aren’t the end-all, but they are catalysts to help us keep going as we look to find monies elsewhere."

Ed Silverman is the founder and editor of the Pharmalot blog that tracks the pharmaceutical industry.

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