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The Tax Credit, Therapeutic Discovery Project

Tucked away on page 759 of the voluminous healthcare law signed by President Barack Obama in March is a provision to aid small companies doing research and development (R&D) in biotechnology. Starting on 6/21/10, many of those companies will be racing to take advantage of a tax credit worth up to $5M per company and totaling $1B.

Called the Therapeutic Discovery Project Program, the initiative aims to lift an industry that has struggled during the recent economic crisis. When anxious investors shifted money to low-risk investments, high-risk biopharmaceutical companies, particularly young firms with no products on the market, were left scrambling for cash.

The pressure has taken its toll. According to the Biotechnology Industry Organization (NYSE:BIO), there were at least 394 public US biotech firms in 1/08; by 1/10, 285 remained. Most of those lost were early-stage firms.

The tax credit is targeted at vulnerable young businesses; those with fewer than 250 employees are eligible and covers up to half of the R&D expense for qualifying projects. Because most biotech companies don’t earn a profit in their early years, and therefore owe no taxes; they wouldn’t benefit from a tax credit. The program allows those firms to convert the credits into grants. In fact, the program is largely a grants program disguised as a tax credit.

To be eligible, a project must demonstrate the potential to produce new therapies, reduce the cost of health care or contribute to the goal of curing cancer within 30 years. Under the program there is no limit to the number of projects that can be funded at a single company, and the $1B total will be distributed among all qualifying projects. This deluge of applications could lead to smaller awards per proposal.

The grants are clearly tiny compared with the billions often required to fully develop a new drug, but they are enough to stimulate early- stage research. The credit should help address concerns that US biotechnology is falling behind in the face of increasingly vigorous international competition

For now, the credit is only mandated to cover costs incurred in 2009 and 2010, but it’s a safe bet that the industry will lobby for the program’s renewal. Even so, the credit is unlikely to solve the real challenge facing the sector: how to sustain a high-risk industry that often takes a decade or longer to generate a viable product.