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Here's hoping the feds become better biotech investors with tax payer money

May 27, 2011 9:12 PM ETNVAX
M. E. Garza profile picture
M. E. Garza's Blog
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Seeking Alpha Analyst Since 2009

M.E. Garza is one of the founders of the biotech and healthcare sector news portal BioMedReports.com. He believes in getting the news from credible sources on the street and often reaches out to CEOs and newsmakers directly for interviews and discussions about their companies. Since he has been publishing, during the past year and a half, Garza has built a reputation as a writer and reporter who can move markets. His track record for accurately reporting rumors and alerting readers about developments in the biotech sector is unmatched during that time.

Last November biotech investors started to see a slew of news releases issued by firms who got  $1 billion into biotech research and development in grants under the Therapeutic Discovery Tax Credit program which was enacted under President Obama's Patient Protection and Affordable Care Act. Now, two lawmakers are proposing to revive the "one-time grant program" announced last year.

We were quite critical of the fund initiative, which saw many biotechs (almost as many as are publicly traded) apply and given funds from. We weren't the only ones who thougth that these grants were spread too thin.  Given the news that this might be in play again, we continue to hope that these tax credits and grants are available to a more select group of companies when the feds start to hand out chunks of cash.

Some have pointed to the fact that Novavax (Nasdaq:NVAX), for example, got just a small portion of the funds more than Sequoia Pharmaceuticals got. The problem, you see, is that Sequoia's offices are vacant and their employees were all laid off not long after they got the funds. Some wonder where the $733,437 in federal grants and discovery funds went.  Just three years ago, Sequoia was had plenty of cash from venture funds from big-name investors, a pipeline of promising HIV drugs and was a hot IPO candidate, but few would argue now that the money might have been better spent on any number of other cach-starved early-stage biotechs... Or would it?

Biotech is an industry in which most products never make it from the lab to the pharmacy shelves. It's not uncommon to see many of these firms fall off the map. Meanwhile others are like cats who live their nine lives showing uncommonly good skills when it comes to raising capital.

The Biotechnology Industry Organization (BIO) released the following statement regarding the extension of the act which was introduced by Representatives Susan A. Davis (D-CA) and Allyson Y. Schwartz (D-PA) and would would extend the Therapeutic Discovery Project for each fiscal year 2011 through 2017 and allows the program's qualified investments from 2009 through 2015.

“The legislation introduced today by Representatives Davis and Schwartz extends the Therapeutic Discovery Project to support continued American innovation and accelerate the development of life-saving cures for numerous prominent diseases, such as cancers, mental illnesses, heart disease and Parkinson’s disease. The bill provides much-needed support for biotechnology companies working on breakthrough therapies that could ultimately lower overall health care costs and cure these debilitating diseases within the next 30 years... As evidence of the project’s popularity suggests, Congress should consider extending the project for its second year and beyond in order to support American innovation and speed the development of life-saving cures."

Theoretically, at least, the proposed extension is supposed to help companies "sustain or create high-quality jobs by providing capital assistance that supports their work and their work force," but given the small parcels we saw given out and announced in press release after press release we wonder just how many jobs and innovations were really created versus how many Sequoia scenarios took place instead.

One thing is certain, many of the biotech leaders we've spoken to were less than satisfied with the way the original therapeutic discovery grants were distributed.

“That wasn’t what we considered ideal,” Biotechnology Industry Organization CEO Jim Greenwood said in an interview this week. “Our preference would have been if the government, particularly the folks at [the National Institutes of Health], had done more of a qualitative analysis of the projects and rewarded those that they thought most promising in perhaps fewer, larger grants.”

Here's hoping they get it right next time... If there is a next time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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