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Older biotech companies in line for tax credits

ANNAPOLIS — Last year’s top beneficiary of biotechnology investment tax credits — a Rockville company in danger of aging out of the subsidy program — would be among those spared by legislation close to being approved by the General Assembly.

According to records kept by the Department of Business and Economic Development, 20/20 GeneSystems Inc. received a state-subsidized $3.4 million investment in 2012, the last year the company was eligible to benefit from the program and the highest dollar amount among the 22 companies that received subsidized investments last year.

House Bill 328 would let biotechnology companies continue to receive the credit regardless of their age, a change to the program that would have an immediate impact on a handful of Maryland firms. Companies are only eligible if they are 10 years old or younger under current law, but DBED, at its discretion, is able to expand eligibility by an extra two years, a courtesy it has already extended 20/20 GeneSystems.

Eighteen companies, including 20/20 GeneSystems, signed on in support of the legislation. But younger companies — such as Gaithersburg-based NexImmune Inc., founded in 2011 — aren’t sold on the potential changes.

Kenneth C. Carter, president and CEO of NexImmune, said he was “generally very supportive” of the biotechnology investment tax credit. But he struggled to understand why a decades-old company — in theory — would be able to receive the credit under this new legislation.

“It’s an excellent program for early-stage biotech companies,” Carter said. “If I understand the legislation correctly, it would provide an opportunity to take advantage of the program regardless of the age of the company, which I don’t see a strong justification for.”

H.B. 328 has already passed the House of Delegates, and could receive final approval from the Senate as early as Wednesday. A companion bill, Senate Bill 779, has already been passed by the Senate, making HB 328’s passage likely. SB 779 is awaiting action by the House Ways and Means Committee.

Del. Brian J. Feldman, HB 328’s sponsor, said the biotechnology investment tax credit program fails to take into account the “normal lifecycle” of a biotechnology company, putting older companies at a disadvantage.

“Companies that are hitting their stride are about to time out,” Feldman said. “It gives some companies an unfair competitive advantage.”

Jonathan Cohen, president and CEO of 20/20 GeneSystems, did not respond to an interview request. Instead, he deferred comment to Darryl Sampey, the president and CEO of 10-year-old BioFacturia Inc., which would be too old to benefit from the tax credit program next year unless DBED provided a two-year exception, as it did with 20/20 GeneSystems.

BioFactura, based in Rockville, received no funding through the program last year, according to DBED records. But Sampey said the nature of biotechnology companies made 10 years a very narrow window.

“For biotech, it’s taking a lot longer from getting the companies to getting that first round of professional funding. I think that’s why we had talks and interest in modifying” the program, he said. “It makes sense to me. It better aligns the program with reality.”

The legislation is steaming toward approval even as the House and Senate have agreed to include language in the state operating budget that would require a study of how biotechnology credits are distributed, following an analysis that showed an “inequity” in the distribution of the credits.

The House Appropriations Committee and Senate Budget and Taxation Committee agreed to mandate that DBED study the program after the analysis showed investors in five companies received 60 percent of the credits available.

Feldman said his bill will likely pass, but that the biotechnology investment tax credit should also continue to be studied to determine its fairness.

“That’s a legitimate issue to look at,” Feldman said.

The tax credit program, launched in 2006, lets investors in startup and early-stage biotechnology companies receive a credit of 50 percent of their investment if the investment is at least $25,000. The maximum credit an investor can receive is $250,000, on an investment of $500,000. That means the state subsidized about $1.7 million of 20/20 GeneSystems’ $3.4 million total investment.

After starting as a $6 million annual tax giveaway, the biotechnology investment credit grew to $8 million last year and could increase to $10 million once a conference committee of lawmakers makes its final adjustments to Gov. Martin O’Malley’s proposed operating budget for fiscal 2014.

In a letter supporting the legislation, the 18 companies argued that the program as currently administered is unfair to most established companies.

“The product development timeline for biotech companies, particularly those developing novel drugs, can easily span beyond a 10 year time horizon,” the letter states. “With the current interpretation of the statute, by the time these companies are able to tap private investors they may be ready to age out of the tax credit program.”