S. HRG.

11275

DRIVING INNOVATION AND JOB GROWTH

THROUGH THE LIFE SCIENCES INDUSTRY

HEARING
BEFORE THE

JOINT ECONOMIC COMMITTEE

CONGRESS OF THE UNITED STATES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION

MAY 25, 2011

Printed for the use of the Joint Economic Committee

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WASHINGTON

67182

2011

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JOINT ECONOMIC COMMITTEE

[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
SENATE
ROBERT P. CASEY, JR., Pennsylvania,
Chairman
JEFF BINGAMAN, New Mexico
AMY KLOBUCHAR, Minnesota
JIM WEBB, Virginia
MARK R. WARNER, Virginia,
BERNARD SANDERS, Vermont
JIM DEMINT, South Carolina
DANIEL COATS, Indiana
MIKE LEE, Utah
PAT TOOMEY, Pennsylvania

HOUSE OF REPRESENTATIVES
KEVIN BRADY, Texas, Vice Chairman
MICHAEL C. BURGESS, M.D., Texas
JOHN CAMPBELL, California
SEAN P. DUFFY, Wisconsin
JUSTIN AMASH, Michigan
MICK MULVANEY, South Carolina
MAURICE D. HINCHEY, New York
CAROLYN B. MALONEY, New York
LORETTA SANCHEZ, California
ELIJAH E. CUMMINGS, Maryland

WILLIAM E. HANSEN, Executive Director

ROBERT P. OQUINN, Republican Staff Director

(II)

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CONTENTS
OPENING STATEMENT
Hon.
Hon.
Hon.
Hon.

OF

MEMBERS

Robert P. Casey, Jr., Chairman, a U.S. Senator from Pennsylvania .........

Kevin Brady, Vice Chairman, a. U.S. Representative from Texas .............
Amy Klobuchar, a U.S. Senator from Minnesota .........................................
Mike Lee, a U.S. Senator from Utah ............................................................

1
3
5
7

WITNESSES
Dr. Stephen S. Tang, President and CEO, University City Science Center,
Philadelphia, PA ..................................................................................................
Mr. Thomas Kowalski, President, Texas Healthcare and Bioscience Institute,
Austin, TX .............................................................................................................
Dr. Arthur T. Sands, President/CEO/Director, Lexicon Pharmaceuticals, Inc.,
Woodlands, TX ......................................................................................................
Mr. Mark G. Heesen, President, National Venture Capital Association, Arlington, VA ..................................................................................................................
SUBMISSIONS

FOR THE

8
11
13
16

RECORD

Prepared statement of Representative Kevin Brady ............................................

Prepared statement of Dr. Stephen S. Tang .........................................................
Prepared statement of Mr. Thomas Kowalski .......................................................
Prepared statement of Dr. Arthur T. Sands ..........................................................
Prepared statement of Mr. Mark G. Heesen .........................................................
Prepared statement of the California Healthcare Institute, submitted by Representative John Campbell ..................................................................................

34
35
36
38
42
48

(III)

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DRIVING INNOVATION AND JOB GROWTH

THROUGH THE LIFE SCIENCES INDUSTRY
WEDNESDAY, MAY 25, 2011

CONGRESS OF THE UNITED STATES,

JOINT ECONOMIC COMMITTEE,
Washington, DC.
The committee met, persuant to call, at 9:31 a.m. in Room 216
of the Hart Senate Office Building, the Honorable Robert P. Casey,
Jr., Chairman, presiding.
Senators present: Casey, Klobuchar, and Lee.
Representatives present: Brady, Mulvaney, Maloney, Cummings.
Staff present: Will Hansen, Colleen Healy, Andrew Wilson,
Jesse Hervitz, Jessica Knowles, Jayne McCullough, and Robert
OQuinn.
OPENING STATEMENT OF HON. ROBERT P. CASEY, JR.,
CHAIRMAN, A U.S. SENATOR FROM PENNSYLVANIA

Chairman Casey. Well thanks, everyone, for being here. We are

still starting early, but we are grateful you are here. I am proud
to be joined by Vice Chairman Brady and our witnesses.
I will give an opening statement, and then I will turn the microphone to Congressman Brady, and then what we will have is, for
Members who are here, maybe brief opening statements and then
of course we want to get to our witnesses.
I am pleased to be joined by Vice Chairman Brady at this hearing. We are going to examine today the key roles that are played
by the life sciences, and life sciences companies in driving innovation and job creation throughout our country.
We hope to shine light on the opportunities created by this vibrant sector and explore new policy actions that can incentivize additional research and development in the life sciences industry, and
have a broader conversation about the role the Federal Government plays in supporting R&D.
As we consider that role, it is useful to remember the inspirational leadership of President Kennedy. Today is the 50th anniversary of the day when he challenged the country to put a man on
the moon in his historic speech to a joint session of Congress.
That speech drove new breakthroughs in science explorationor
space exploration, I should say, and major advances in technology.
On July 20th, 1969, eight years and two months after President
Kennedy addressed the Nation, Neil Armstrong became the first
person to walk on the moon.
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2
Today, 50 years after President Kennedy laid out that bold vision
of the successful Apollo 11 Mission, that is a reminder of what our
country can achieve when we set ambitious goals and commit ourselves to reaching them.
The anniversary is also a fitting backdrop to todays hearing on
R&D and the life sciences industry R&D that will lead to next-generation drugs and devices that can dramatically improve quality of
life and will enable us to address challenges that seem beyond our
grasp even today.
Life sciences include, as you know, fields such as biotechnology,
microbiology, and genetics. Among the very different types of life
sciences companies are firms that research and produce pharmaceutical drugs, medical devices, and of course surgical equipment.
These firms play a critical role in our economy, employ approximately 1.2 million workers across America, and provide innovationfueled economic growth, and job creation. The life sciences industry
is particularly R&D intensive and is home to high rates of innovation.
Pharmaceutical companies alone, just one piece of this industry,
account for 16 percent of the firm-powered R&D in the country employing just about 115,000 workers.
While employment in the health care sector is generally viewed
as recession proof, life sciences employment actually declined by
28,000 from its high from October of 2008 to February of 2011.
That is something we should note and discuss.
The role of the Federal Government of course is to spur innovation through policies and encourage or enable innovation, creating
investment and research that would not otherwise occur in the private sector. This can be done through the government stepping in
to fund research directly through grants to universities, for example, or by using the tax code to incentivize the private sector to
carry out the investment.
These different tools can help to address when there is market
failure in the private sector when, if it is left to its own devices,
may underinvest in research and development.
In the past three decades, total R&D spending, both public and
private, has remained relatively flat between 2.5 and 2.8 percent
of GDP. Recently, the U.S. has lagged behind the rest of the world
in the growth and the growth of R&D spending.
From 1996 to 2006 U.S. spending on R&D as a share of GDP
grew by just .1 percent. China, on the other hand, grew by .9 percent during the same time period. A continuation of this trend can
have significant negative effects on our long-term competitive position.
We know that in the post-World War II period there has also
been a change in how R&D is funded. Federally funded R&D has
been declining during this period, while industry-funded R&D has
been increasing.
In 1980, industry-funded R&D surpassed federal R&D funding
and, by 2008, the most recent comparative data available, the gap
had grown substantially, with industry spending a little more than
$267 billion on R&D, compared to the Federal Governments R&D
spending of just $103 billion.

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3
However, the Federal Government continues to play a significant
role in funding basic research. That research increases our general
base of knowledge and creates the building blocks for future products. Indeed, the Federal Government funds over half, 57 percent,
of the basic research in the United States, the majority of which
is conducted in universities.
In addition to the government funding of basic research, there
are other federal policies that promote innovation. Tax credits that
reduce the cost to the private sector of conducting R&D in the U.S.
is one such policy. The Research and Experimentation Tax Credit,
first introduced in 1981, and recently extended through 2011 as
part of the bipartisan agreement on taxes in late 2010, is yet another prime example.
Businesses have long argued that the lack of a permanent credit
leads to uncertainty from one year to the next about whether or not
the credit will exist, and has limited the credits effectiveness. A
permanent credit would give business the certainty that they need
to make R&D investments, thereby boosting R&D spending, innovation, and job creation.
The Presidents 2012 budget proposed making the R&D credit
permanent, and expanding it by about 20 percent. So policymakers
can also provide targeted incentives to encourage R&D in specific
industries, amongst certain-sized businesses.
The Small Business Innovation Research Program, for example,
provides grants to small businesses, helping them in the early
stages of their research to navigate the so-called Valley of Death
where their concept is too high risk for private-sector support.
The Life Sciences Jobs and Investment Act, which I am proud to
be co-sponsoring with Vice Chairman Brady, will double the R&E
credit from 20 percent to 40 percent on the first $150 million of
R&D in life sciences, providing a new incentive for small and medium-sized businesses to invest in R&D funding.
We want to ensure that the United States is preparing our students in science, engineering, and other skills they need to compete
in this new economy. That is not the focus of today, but we know
this is a priority for other hearings and other discussions.
We are fortunate today to have a distinguished panel of experts
who bring with them vast experience as inventors, innovators, job
creators, and experts on the important role that tax incentives can
play in spurring new research, new innovation, and new jobs.
With that, I will turn to our Vice Chairman, Congressman
Brady.
OPENING STATEMENT OF HON. KEVIN BRADY, VICE
CHAIRMAN, A U.S. REPRESENTATIVE FROM TEXAS

Vice Chairman Brady. First, Mr. Chairman, I would like to

thank you for holding todays hearing on the life sciences industry.
I would also like to welcome all of todays witnesses, especially my
fellow Texans, Dr. Arthur Sands and Thomas Kowalskiboth highly respected in their fieldsand thank you for taking time out of
your busy lives to testify.
Americas life sciences industry leads the world with innovations
in biomedical science, biotechnology, agriculture, and medical devices. This industrys products help Americans live longer and

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4
healthier lives. It employs 1.4 million Americans and accounts for
one-third of all research and development expenditures by private
U.S. firms.
The Joint Economic Committee is holding this hearing today to
discover what steps the U.S. Government may take to help the life
sciences industry prosper and strengthen its competitiveness both
here and abroad.
Investment in research and development in life sciences creates
good, high-paying jobs; keeps the United States on the cutting edge
of global competitiveness; and enhances the quality of life not only
for Americans but for people everywhere.
Yet the up-front cost of investment in this industry is extremely
high. Companies spend years researching and testing, pouring millions and at times billions of dollars into the research, testing, and
trials of medical ideas that may never make it to market. Yes, the
return can be high, but the investment is highly risky as well.
In this vital area of the economy, America is falling behind.
Other countries are increasing their incentives for R&D in an aggressive effort to attract investment and the high-paying jobs that
go with it. Americas share of the worlds research and development
pie is shrinking as our global competitors are taking a page from
our playbook and beating us at it. In 1981, America led the world
as the first to create an R&D tax credit. By 2009, we ranked 24th
out of 28 countries in the strength of our R&D incentives.
We need to rethink our approach to incentives. It is time we
modernize the R&D tax credit; strengthen it to encourage companies to make even more substantial investments in research and
hiring; and make it permanent so businesses and investors have
the confidence to make long-term decisions.
At the same time, we should reform the way our overall tax
structure operates by lowering the rate and simplifying the code.
At 35 percent, the United States has one of the highest corporate
tax rates in the world. Our complicated tax structure puts Americans at a disadvantage when competing at home and abroad. More
than $1 trillion in capital earned by American companies and
workers is stranded overseas because our tax code strangely penalizes companies for bringing profits home.
As an interim step, we have an opportunity to temporarily lower
tax barriers to incentivize companies to bring these profits back
home for investment. The right form of repatriation measure would
lower the tax gate and allow private capital to flow back to the
United States to be used to create jobs, to expand businesses, and
to invest in research.
Additionally, we should examine ways we can help boost incentives even more for the life sciences industry, given its unique
structure and the benefits it adds to our health and way of life.
This could include further strengthening the R&D tax credit, and
allowing life sciences companies to claim research expenses paid to
universities.
However, we should not limit our considerations of tax provisions
only to those benefiting the life sciences industry. The competitive
challenges which federal policies pose to life sciences firms merely
reflect the tax, trade, and regulatory impediments that all American companies face when competing in global markets.

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5
To begin, we must look at fundamental reform of business taxation:
We must lower the federal corporate income tax rate to a competitive level so that both American and foreign firms will make
new investments in the United States, creating more and better
paying jobs for American workers.
We must also lower the after-tax cost of making new business investments by moving toward expensing new investments in equipment and software and significantly shortening the tax depreciation schedules for buildings and other structures.
Finally, we must enact a permanent and generous tax credit for
research and development.
Beyond business tax reform, we must continue to open new markets to American exports of goods and services. I continue to call
on President Obama to submit the pending free trade agreements
with Colombia, Panama, and South Korea to Congress for approval.
And we must ensure that intellectual property rights, such as those
developed by firms before us today, are fully respected by all countries.
Finally, we must reform our regulatory structure to assure that
the goals we all share for product safety and a clean environment
are achieved in a cost-effective way that does not place undue burdens on American companies or their workers.
With that said, Mr. Chairman, I look forward to hearing todays
testimony.
[The prepared statement of Representative Kevin Brady appears
in the Submissions for the Record on page 34.]
Chairman Casey. Thank you, Vice Chairman Brady.
Next, by order of appearance, which is the way we do things
here, Senator Klobuchar.
OPENING STATEMENT OF HON. AMY KLOBUCHAR, A U.S.
SENATOR FROM MINNESOTA

Senator Klobuchar. Well thank you very much, Mr. Chairman,

and thank you for holding this hearing. I think it is very important.
I first wanted to mention, my in-laws are here today, Bill and
Marilyn Hassler, from Mankato, Minnesota. My father-in-law
taught science biology for most of his life, and I am happy to have
them here.
I told Senator Casey it was Bring Your In-Laws To Work Day,
but
[Laughter.]
But he did not really believe me. I am very excited about this
hearing because my State has really built its reputation on innovation. Our unemployment rate is at 6.5 percent, one of the lower in
the country, and that is because of innovation.
We brought the world everything from the Pacemaker to the
Post-It Note. 3M started as a little sandpaper company up in Two
Harbors, Minnesota, and now employs 75,000 people. Medtronics
started as a garagein a garage. Target started as a little dry
goods store in Nicollet Mall. So we have always believed in moving
ahead.

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6
I think this country needs to move ahead, and that the heart of
our progress should be an innovation agenda. It is what Tom Friedman, who writes for The New York Times, who is a Minnesota native called, Nation building in our own Nation.
This innovation agenda, weve got part of it in a bill that I introduced with Senator Scott Brown, that is co-sponsored by Lamar
Alexander and Mark Warner, called Innovate America, and I think
first of all we start with education, doubling our number of STEM
high schools and making sure that we are training students to go
into the jobs that are actually available in the marketplace today,
including technical schools, and making sure that we have students
trained to run the high-tech assembly lines of the day.
The second thing, which has been mentioned by my colleagues
and certainly applies in the life sciences, is this idea of making
sure the R&D tax credit is good, and stable, and that we are not
playing a game of red light/green light with that tax credit, like we
have been; that we do things to close loopholes and lower rates.
I think the Deficit Commission had some good ideas there in
terms of lowering the overall corporate rate, but closing some of the
loopholes and looking at our revenues, as well. Certainly doing
something about our debt will be helpful for market investment in
every new kind of product.
Third, immigration reform: looking at the H1B Visas; realizing
that we are basically having to contract with people in other countries because weve made it so hard for them to come over here.
When students graduate that study at our great universities, that
we give them that time to get a job so that they start the next
Google in the United States and not in India or some other place.
The idea of making sure that we do something about red tape.
Minnesota is the mecca for the medical device industry, and I was
just reading a statistic from a study that came out today out of
Chicago that showed, because of problems with the FDA approval
process, two-thirds of small medical device companies engaged in
developing new products are obtaining approvals in Europe first.
Only 8 percent of the 300-some companies surveyed felt that the
U.S. approval pathway was the most predictable in the world; 72
percent found that information requested by the FDA reviewers
was beyond necessary requirements. That is a big problem. We are
working to address it every single day, but it is basically we are
putting up a sign that says: Go put your money elsewhere. And I
think that has to change.
Last, exports is the key to this in terms of getting out of our
slump. The President has called for a doubling of our exports in the
next five years. I think that is doable. And I think a lot of the way
it is doable is the research that you will be talking about, the work
in the life sciences, as well as medical device and other areas.
But this has to be an around-the-world effort. Our embassies
have to be focused on assisting companies in getting contracts in
other countries, because certainly the embassies in other countries
is what theyre devoted to all the time, and we have to make sure
that our small- and medium-sized companies have an opportunity
through the foreign commercial service to find out about those customers and potential markets. Because there is this growing group

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7
of customers across the world that we have not appropriately
accessed with our small- and medium-sized companies.
So in sum, Mr. Chairman, I truly believe that we are not going
to grow as a Nation in the life sciences, or in any of our innovative
industries if we are simply a country that focuses on churning
money on Wall Street, and importing our way, and building debt.
We have to be a country that thinks again, that makes things,
that invents, that exports to the world. So I thank you for holding
this important hearing.
Chairman Casey. Thank you, Senator Klobuchar.
Senator Lee.
OPENING STATEMENT OF HON. MIKE LEE, A U.S. SENATOR
FROM UTAH

Senator Lee. Thank you, Mr. Chairman. Utah is also a state

with a strong interest in the life sciences. We have got 600 different life sciences companies in Utah, employing over 25,000 people. We have got two institutions in the State of Utah that have
helped to facilitate this, along with our universities.
One is an organization known as the Bio-Innovations Gateway.
Another is known as USTR, the Utah Science Technology Research
Initiative. And so these are both programs that work with our institutions of higher learning to help recruit top-level talent to the
State of Utah and to its universities so that we can patent and develop and produce more life sciences technology.
And I wish I could claim that the Post-It Note was invented in
my state, but alas Minnesota beat us to the punch.
[Laughter.]
But we are out there looking for the next life sciences iteration
of the Post-It Note. Maybe we will find some medical device delivery system that is a removable adhesive strip like the Post-It.
Senator Klobuchar. Dream on. Dream on.
Senator Lee. Yes. Exactly. I have to dream. So I welcome the
witnesses and look forward to your testimony.
Chairman Casey. Thank you, Senator Lee.
We will now move to our witnesses. I will provide a biographical
sketch, brief though it will be, of each witness. And then of course
we will start with Dr. Tang for his testimony.
Let me start with Dr. Stephen Tang. He is the President and
CEO of the Science Center in Philadelphia. Before coming to the
Science Center, Dr. Tang served as Group Vice President and General Manager with Olympus America, where he led U.S. operations
for the companys Global Life Sciences business. Dr. Tang earned
a Doctorate in Chemical Engineering from Lehigh University.
Were happy about that. An MBA from the Wharton School of Business in the University of Pennsylvania, also a Pennsylvania institution, and a B.S. in Chemistry from the College of William and
Mary. So, Dr. Tang, welcome, and we look forward to your testimony.
Tom Kowalski is the President and CEO of Texas Healthcare and
Bioscience Institute, a statewide public policy research organization
promoting medical research, development, and manufacturing in
the State of Texas. Prior to his appointment as President of THBI,
Mr. Kowalski served as Executive Director of the National Associa-

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8
tion for the Support of Long-Term Care, as well as a senior staff
member to Governor Bill Clements of Texas; and Senator John
Tower of Texas. Mr. Kowalski, welcome to you.
Dr. Arthur Sands is the President and CEO of Lexicon Pharmaceuticals, a company he co-founded. Dr. Sands pioneered the development of large-scale gene-knockout technology for use in drug discovery. Prior to founding Lexicon, Dr. Sands served as the American Cancer Societys Post-Doctoral Fellow at Baylor College of
Medicine. He received his BA in Economics and Political Science
from Yale University and his M.D. and Ph.D. from Baylor College
of Medicine. Dr. Sands, thank you very much for being here, as
well.
Mark Heesen is the President of National Venture Capital Association, which is engaged in public policy issues surrounding information technology, life science, and clean technology investing.
Prior to his work in the NVCA, Mr. HeesenHe-sin? Hee-sen, Im
sorry. Im pronouncing that wrong. He was an aid to former Governor Thornburgh in Pennsylvania. He received a Law Degree with
emphasis in taxation from Dickinson School of Law. Thank you
very much for being here, as well. So we will start with Dr. Tang.
And I should mention for the record, your full testimony, each of
your testimonies, will be included in the record in full. We will try
to keep each of you to five minutes, if you can do that, in your
opening.
Thank you.
STATEMENT OF DR. STEPHEN S. TANG, PRESIDENT AND CEO,
UNIVERSITY CITY SCIENCE CENTER, PHILADELPHIA, PA

Dr. Tang. Thank you, Chairman Casey, and Vice Chairman

Brady, and Members of the Committee:
I am Steve Tang. I am President and CEO of the University City
Science Center in Philadelphia. It is an honor and a privilege to
speak to this distinguished Committee today. And may I say, I
have had the honor of living in both Pennsylvania and Texas, and
doing business in each of your States, during my career.
Science and innovation are in my blood and are part of my heritage. I am the son of two Chinese-born scientists. I was born with
high expectations from parents who sought, and largely achieved,
the American Dream.
My background is in both science and entrepreneurship. As Senator Casey mentioned, I have an undergraduate degree in Chemistry from the College of William and Mary and a Ph.D. in Chemical Engineering from Lehigh University; as well as an MBA from
the University of Pennsylvanias Wharton School. So with my overeducation in full view of the Committee, I want to wish everyone
Happy Nerds Pride Day.
[Laughter.]
Senator Lee, as a graduate student, I founded and ran my own
technology assessment consulting firm, while at the same time pursuing my doctorate and managing Lehigh Universitys Biotechnology Research Center.
After I obtained my MBA, I served as a management consultant
to two international firms, focusing on projects in the chemical, environmental, health care, and pharmaceutical industries.

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9
I then served as CEO of a hydrogen fuel cell company, guiding
its growth as it moved beyond its start-up phase, completed a successful initial public offering, and attracted subsequent investment
and financing.
Next, as Senator Casey mentioned, I ran Olympus Americas Life
Science Division, overseeing operations, finance, strategy, and
product and business development.
Since 2008, I have had the privilege of leading the University
City Science Center. I was motivated to take this position by my
passion for science and technology, and their ability and potential
to make the world a better place. As a newly appointed member
of the U.S. Commerce Departments Innovation Advisory Board, I
welcome the opportunity to contribute to the national discussion on
innovation and economic competitiveness, particularly as it relates
to life sciences.
The Science Center is a private, nonprofit research park and
business incubator in Philadelphia. Located in the citys heart of
the citys meds and eds community, we have existed at the intersection of innovation and economic development for close to 50
years. We are the Nations oldest and largest urban research park,
with 15 buildings on 17 acres containing over 2.0 million square
feet of lab and office space. More than 8,000 people come to work
each day on our campus.
We are home to innovative programs such as the QED Proof-ofConcept Funding Program, which pulls technologies out of the labs
and into the marketplace by pairing scientific researchers with experienced business advisors.
At the Science Center we firmly believe that our multi-institutional QED program is a unique and model public-private partnership that can be replicated across the Nation to help promising
ventures cross the Valley of Death in funding.
I am proud to report that QED achieved a funding milestone on
its own last month when we received a two-year, $1 million grant
from the U.S. Economic Development Administration. This federal
funding is currently being leveraged with funding previously
awarded to QED by the Commonwealth of Pennsylvania and the
William Penn Foundation of Philadelphia, plus additional funding
from the Science Center and the 19 institutions participating in
this program.
The Science Center is owned by 32 of the leading colleges, universities, hospitals, and nonprofit institutions throughout Pennsylvania, New Jersey, and Delaware, including the University of
Pennsylvania, Drexel University, the Childrens Hospital of Philadelphia, the University of Delaware, and Rutgers University.
More than 350 companies have passed through our doors since
we were founded in 1963. The 93 that remain in the Greater Philadelphia Region account for over $9 billion of annual sales and
15,000 current direct jobs. These jobs pay an average of $89,000
per year, a remarkable figure considering todays economy.
Our campus features two business incubators, collectively known
as the Port, that are home to more than 30 start-up companies
in life sciences, cleantech/greentech and information technology.
These companies are at the cutting edge of scientific innovation.
To give you an example, one of our start-up residentsInvisible

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Sentinelis working on a fast, efficient way to detect food contamination. AnotherBioNanomatrixis using nanotechnology to decode the human genome. And a thirdEnzybel Internationala
Belgian company, is dedicated to the production and commercialization of sustainable compounds derived from nature.
In our 48 years of operations, we have helped to create the model
for the modern research park and high tech business incubator.
Our graduates include Centocor, the maker of Remicade, to treat
rheumatoid arthritis; global software giant Bentley Systems; and
financial services powerhouse SEI Investments.
One of our latest incubator success storiesAvid Radiopharmaceuticalsexemplifies Americas potential for innovation and entrepreneurship in the life sciences. Avid was founded by Dr. Dan
Skovronsky, a neuropathologist at the University of Pennsylvania
who had an idea for a technology that would revolutionize the ability to diagnose Alzheimers and other diseases at an early stage.
In 2005, Dan moved his brand-new company into the Science
Centers incubator with one employeehimself. Over the next 4
years, Avid refined its technology and added jobs. By 2009, the
payroll had grown to 37 people. The company outgrew its space in
our incubator and moved into custom-fitted, full-price office and lab
space on our campus. Since then, the company has grown to more
than 50 employees.
Last fall, Avid was acquired by one of our Nations leading pharmaceutical companies, Eli Lilly, for $300 million in cash up front,
plus another $500 million in additional payments over the next few
years based on the achievement of certain milestones.
We were thrilled to learn that Avid currently plans to remain at
the Science Center, continuing to bring new jobs and economic
growth to Philadelphia and our region.
Avid represents a classic example of how research and development in the life sciences are essential to our Nations economic recovery.
Lets take a step back and look at the economic impact of the life
sciences in the Science Centers home State of Pennsylvania.
As noted in the State Bioscience Initiative 2010 Report from
Battelle and BIO, the biosciences sector in Pennsylvania employs
81,000 workers in the state at an average salary of $82,000for a
total of $6.7 billion in wages. With a multiplier effect of 4.38, the
industry has a total employment impact of 354,000 people.
On a national level, according to the same report, total employment in the U.S. bioscience sector reached 1.42 million in 2008.
When you figure in a multiplier effect of 5.8, the total employment
impact of the bioscience sector is 8 million jobs nationwide.
These are tough numbers to ignore. Yet the life sciences industry
does more than create well-paying jobs. Scientists and researchers
are dramatically improving treatments, therapeutics, and ultimately patient care and the quality of life.
Think back to our Port business incubator tenant, Invisible Sentinel. Their work in detecting food contamination may also have
applications in the detection of pathogens associated with hospitalacquired infections, as well as in cancer detection, and homeland
security.

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At the Science Center we look forward to helping our residents
advance science and technology and invent new products that will
change the world, while creating jobs and economic growth along
the way.
I invite you to visit Philadelphia and learn more about us, our
track record of success in nurturing entrepreneurs and their ventures, and our unique self-sustaining business model.
In closing, I would like to express my strong support, along with
the Chairman and Vice Chairman, for the proposed Life Sciences
Jobs and Investment Act. This legislation will help strengthen the
biosectors culture of innovation, discovery, education, and job creation across the Nation.
The Life Sciences Jobs and Investment Act will offer tax incentives for small and medium-sized businesses to invest in life
sciences research and development on a targeted basis. It will also
ensure the availability of an educated, skilled workforce that will
sustain our pipeline of bioscience innovations, companies, and jobs
over the long term.
One out of every six jobs in the Greater Philadelphia region can
be traced back to life sciences. The Life Sciences Jobs and Investment Act is key to the long-term success of this crucial industry
sector. This is the kind of proactive legislation that we need to
maintain our competitive edge as we ensure that biotech in the regionand the entire countrycontinues to grow and thrive.
Thank you for your kind attention, and I welcome your comments and questions.
[The prepared statement of Dr. Tang appears in the Submissions
for the Record on page 35.]
Chairman Casey. Thank you, Dr. Tang. Dr. Kowalski.
STATEMENT OF MR. THOMAS R. KOWALSKI, PRESIDENT,
TEXAS HEALTHCARE AND BIOSCIENCE INSTITUTE, AUSTIN, TX

Mr. Kowalski. Thank you, Chairman Casey, Vice Chairman

Brady, and the entire Joint Economic Committee, for inviting me
here today.
I am Tom Kowalski, President of the Texas Healthcare and Bioscience Institute. The Institute was created in 1996. We are located
in Austin, Texas. Our national partners we consider are Pharma,
BIO, and Agrameds, so it covers a whole spectrum of the life
science industry.
Our organizations mission is to research, develop, and advocate
policies and legislation that promote biomedical science, biotechnology, agricultural and medical device innovation in Texas.
We have been at this a long time.
The issues you are considering here todayhow targeted tax incentives can be used to enhance medical innovation, life sciences
education, and job creation here in the United Statesis of great
interest to me and of vital concern to our industry.
The impact of the life sciences industry on the U.S. economy is
significant. It advances medical knowledge, develops products that
keep our country at the cutting edge of global competitiveness, and
supports millions of high-quality paying jobs.

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As important as the direct benefits to our Nations economy, the
innovations produced by these companies are also helping Americans live longer, healthier lives.
I would like to share with you the positive impact the life
sciences industry has had in Texas, both in improving the health
of Texans as well as creating a robust job sector. And much of this
development has occurred because of the very vital investments
that Texas has been willing to make into the life science sector.
We have a dynamic biotechnology marketplace with an estimated
economic impact of $75 billion. The State has many national top10 rankings in biotechnology and is home to over 4,100 biotechnology, biomedical research, business, and government consortia, medical manufacturing companies, and world-class universities. We employ over 104,000 people at an average annual salary
of over $67,000.
A significant number of top global biotechnology and pharmaceutical companies have Texas locations, underscoring the States
vitality.
There are significant factors pointing to the robust growth, and
I would like to point out two:
First, University research is the lifeblood of our States innovation, medical treatments, and job creation. The Texas Life Science
Centers in the State, they are the crown jewels by which all of this
activity centers around.
Secondly, there has been a significant investment from the State
into the life science industry which has enabled research technology transfer and commercialization to successfully occur. Much
of the states investments require academic and private sector collaborations, and that has been key. And the Life Sciences Investment Act will complement these efforts by the potential infusion of
industry research dollars and future collaborations which extend to
increase workforce, which goes into the entire R&D process.
The State is ready to be able to work with these companies because of these two programsbecause of the problems I am about
to talk to you about, and focusing on the collaborative efforts.
The Texas Emerging Technology Fund is one of these programs.
It is known as the ETF. It has allocated more than $193 million
in funds to 131 early stage companies, and nearly $173 million in
grant, matching, and research superiority funds to Texas universities. And by research superiority, we are going out and actually
recruiting talent to the State of Texas with the ETF dollars.
Investments by the TETF attract additional investment capital
to emerging technology companies. Since the funds inception, more
than $407 million in private capital has been invested in ETF companiesin ETF-funded businesses, which is more than double the
states contribution.
Another key program in Texas has been the creation of the Cancer Prevention and Research Institute of Texas. It is known as
CPRIT. The Texas Legislature and the Governor authorized the
program in 2007. It has funded 256 grants totaling more than $382
million for cancer research, commercialization and prevention in 46
academic centers. More than $500 million including matching
funds have been invested in Texas extraordinary efforts to lead the
Nation in cancer research.

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CPRIT has become one of the largest cancer research grant-making organizations in the Nation. Our focus in Texas has been to
create a strong environment. How do we grow our own? How do we
keep the companies we are creating? How do we attract additional
companies into the State? And, more importantly, how do we put
our grads that we are graduating to work into these companies?
The industry has enjoyed a strong growth rate of 14 percent from
2003 to 2008. These programs have added stability during the last
two years to enable our companies to continue to raise capital and
invest that capital into the R&D process. This is what has been
helpful for us during this economic recession.
While individual states can do much to support the growth of the
life science industry, continued and increased support at the federal level is paramount.
The biotech industry directly provides hundreds of thousands of
good-paying jobs for American working families. However, over the
last decade, Americas leadership in the life sciences industry has
begun to erode.
To retain those jobs and to create new ones, the success and
growth of the industrys basic research efforts, as well as innovations in effective treatments and associated technological advancements, must remain in the U.S. where they will contribute to our
Nations future economic growth and international competitiveness.
Unfortunately, as the cost of developing new biotech products in
the U.S. continues to rise, companies are under great pressure to
find lower-cost locations to conduct their research and development.
We can adjust our tax policies and remain the international leader in biotech research, development, and manufacturing, or we can
watch the industry move overseas like so many before it.
Narrowly tailored tax incentives aimed at ensuring investment in
domestic biomedical research and development will create a demand for highly skilled workers, promote higher education in the
life sciences, encourage greater scientific collaboration, and improve
our Nations overall economic well-being and health.
Thank you for the opportunity to be here today.
[The prepared statement of Mr. Kowalski appears in the Submissions for the Record on page 36.]
Chairman Casey. Thank you, Mr. Kowalski. Dr. Sands?
STATEMENT OF DR. ARTHUR T. SANDS, M.D., PRESIDENT/CEO/
DIRECTOR, LEXICON PHARMACEUTICALS, INC., WOODLANDS, TX

Dr. Sands. Thank you. Good morning, Chairman Casey, Vice

Chairman Brady, Members of the Committee, ladies and gentlemen:
I am President and Chief Executive Officer of Lexicon Pharmaceuticals, and I am honored to be appearing before the Committee
today on behalf of the Biotechnology Industry Organization, BIO.
BIO represents more than 1,200 companies, academic institutions, state biotechnology centers, and related organizations in all
50 states.
When I founded Lexicon in 1995, we were a small, privately
funded research-stage company. We now employ 290 individuals,

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and we have 7 drugs in development. Currently there are thousands of similar companies throughout the United Stateseach
one with molecules and drug candidates that could change the face
of modern medicine.
Biotechnology may hold the answer to medical problems that face
America from the devastation of cancer and AIDS, to the personal
losses of Alzheimers and Parkinsons Disease, and to the spiraling
costs of health care associated with diseases that are reaching epidemic proportions such as Type II diabetes.
Additionally, the biotech industry is a thriving yet Id say constantly struggling industry. It is a growth engine directly employing 1.4 million Americans in high-quality jobs, and indirectly supporting an additional 6.6 million workers.
Despite these windows of opportunity that face us in biotechnology, the research and development effort is truly a difficult,
arduous, and very long process. It takes an estimated 8 to 12 years
for one of these breakthrough companies to bring a new therapy
from discovery to market, costing between $800 million and $1.2
billion.
These are estimates that of course there have been many studies
on, which we have all read. I have to say, we are actually living
these numbers, and we are having to raise the capital associated
with all these figures. Through this time, Lexicon has raised up to
about $1.2 billion. We have done that through private investment.
We are very fortunate to have strong investors, but it is a very difficult thing, to consistently raise capital like that over 15 years
with the hope of bringing forward the medicine that weve created.
So those are very real numbers.
Due to this capital-intensive process, biotechnology has turned to
the private-sector investors, and we are publicly traded, as well,
and collaborative agreements to finance the early stages of therapeutic development. We have done over $450 million worth of collaborations. Weve reached out to bigger companies, such as
Genentech and Bristol-Myers Squibb to help fund our discovery
process, but now we are trying to develop innovative therapies on
our own.
However, I would say the current economic environment has
made private investment dollars extremely elusive, especially during the recent financial crisis. It has been a very difficult time, resulting in life-saving therapies for patients being delayed or
shelved. Weve actually seen some of this happen at our company.
Early and midstage companies have been hit the worst; last year,
Series A initial funding deals brought in half of what they did in
2009.
As U.S. biotech companies face financial uncertainty, other countries are moving ahead, including China and India, and we have
seen business moving to these countries. This lag puts us at risk
to lose our competitive edge.
There are certain steps Congress has taken to maintain the
American leadership in biotechnology. Last March Congress enacted the Therapeutic Discovery Project, an important $1 billion
tax credit program designed to stimulate investment in biotechnology research and development.

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Under this program, small biotech companies received an infusion of capital to advance their innovative projects and create and
sustain American jobs. Congress should expand and extend this
program.
There was a cutoff there of 250 employees to be included in the
program. At 290 employees actually couldnt be included, just because we were 40 employees over the limit.
Additionally, Vice Chairman Brady recently introduced the
American Research and Competitiveness Act which would support
and foster the creation of high-wage jobs associated with R&D in
the biotech industry by strengthening and making permanent R&D
tax credits.
Chairman Casey has introduced a bill, the Life Sciences Jobs and
Investment Act, which would allow biotech companies to elect an
increased R&D credit for their life sciences research, or to repatriate up to 150 million in foreign earnings to invest in job creation.
I definitely believe those should be passed.
Given the long R&D timelines and the truly arduous road to
bring a therapy from bench to bedside, emerging biotech companies, which are not currently profitable, and that is most companies, are unable to immediately benefit from many of the current
tax incentives, given the way that they are structured.
In the reduced capital gains rate for sale of qualified small business stock, IRC Section 1202, there is greater theoretical and practical impact on companies like ours, and throughout the biotech
sector. This is due to the complexity of the rules, its limited scope,
subsequent changes in tax rates and alternative minimum tax.
Among other challenges, the section employs a test in which the
corporations gross assets must be less than $50 million in order to
be eligible for the preferential capital gains treatment. When intellectual property is incorporated as an asset, small biotech companies are almost always over the $50 million limit, and we dont
start in garages. We start in very expensive garages, okay, with
our intellectual property.
So while modifications to Section 1202 would represent key improvements in the biotech environment, Congress has the opportunity to enact new tax incentives which would further encourage
private investment in our industry.
Historically, Congress has provided tax incentives to high-risk industries as a means of encouraging investment in these new endeavors, which it deems important. Research and development in
the biotech industry is an extremely high-risk undertaking. Small
oil and gas exploration companies face similar challenges to
biotech, and Congress responded by including provisions in the
code allowing investors to take advantage of tax benefits accumulated by these high-risk companies.
If applied to biotechnology, these partnership tax incentives
would encourage biotech investment.
In 2000, Lexicon completed one of the most successful IPOs in
the biotech industry, raising $220 million. Companies today with
science just as groundbreaking as ours are unable to access the
capital markets, given the state of the public markets.
The U.S. biotech industry is a thriving and, as I said, continually
struggling growth engine for the American economy, creating high-

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quality jobs in every state, and improving Americas health and
well being.
Congress has the opportunity to encourage investment in this industry by both improving our current programs and incentives, and
by creating new ones that will recognize the vital part the biotech
industry plays in Americas future.
Thank you very much.
[The prepared statement of Dr. Sands appears in the Submissions for the Record on page 38.]
Chairman Casey. Dr. Sands, thank you very much. Mr. Heesen.
STATEMENT OF MR. MARK G. HEESEN, PRESIDENT, NATIONAL
VENTURE CAPITAL ASSOCIATION, ARLINGTON, VIRGINIA

Mr. Heesen. Thank you.

For the last four decades the venture capital community has
served as a founder and builder of companies, a creator of jobs, and
a catalyst for innovation in the United States.
According to a recent study conducted by Global Insight, companies that were started with venture capital since 1970 now account
for 12 million American jobs and $3.1 trillion in revenue in the
United States in 2010.
Nowhere has the power of venture-backed innovation been felt
more strongly than in the life sciences sector. Approximately onethird of all venture investment is directed into biotechnology and
medical device startups each year.
After funding companies such as Genentech, AmGen, and
Medtronic, the venture capital industry has helped bring countless
lifesaving medical innovations to market. In 2010 alone, venture
capitalists invested nearly $6 billion in biotechnology and medical
device startups.
Today I want to cover some important ways that you as policymakers can help ensure that our life sciences startup ecosystem
can continue to prosper.
To begin, Congress must continue to encourage long-termand
I emphasize long terminvestment through tax policy. Returns
earned by venture capitalists and entrepreneurs as a result of successfully building companies should be taxed at a capital gains rate
that is globally competitive and preserves a meaningful differential
between ordinary income and capital gains.
This maintains proper incentives for investors who are dedicating more than a decade of capital and time to their companies.
We appreciate the support of many Members of Congress, including
Chairman Casey and Vice Chairman Brady, in recognizing this dynamic.
While the R&D tax credit is important to many midsized and
large corporations, it is not a critical component for startup biotechnology and medical device companies. Our companies are typically losing money and thus cannot use a credit that is structured
for companies that are profitable.
As lawmakers consider tax reform, we urge you to build a system
that supports both emerging companies and multinational corporations. Certainly we believe that recent reports of possible proposals
to force certain partnerships to pay corporate tax rates is a move
in the opposite direction of such a system.

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We are also beginning to look towards protecting future sources
of venture capital within our industry. Private and public pension
funds currently represent 40 percent of all the institutional venture
capital that we receive. At the same time, we are beginning to see
a movement from defined benefit to defined contribution pension
plans, particularly at the state and local level.
If this shift continues, the venture industry will risk losing a critical source of capital as there are currently no viable means by
which a defined contribution plan can invest in the venture capital
asset class. We hope to work together to develop viable solutions
to this looming concern over the next several years.
We also must address problems at the end of the venture capital
cycle. Studies show that more than 90 percent of job creation occurs after a venture-backed company goes public. In the last decade, however, the market for venture-backed IPOs has suffered due
to unfavorable market conditions and ramifications of regulations
that attempt to fit everyone into the same criteria.
The NVCA is actively engaging with Congress, the Administration, and regulators on ways to make the path to an IPO once
again smoother, particularly for small-cap companies.
Regulatory barriers are also impacting medical innovation. In recent years, when evaluating new drugs and medical technologies,
the FDA has become increasingly reticent to balance the benefits
against the risks of new therapies and technologies for seriously ill
patients, resulting in less and later access to life-saving products
when compared to other countries.
We are calling for FDA reform that returns a balance to the review and approval process and reflects the importance that patients and health care providers place on access to new products in
the United States.
The NVCA understands that these reform measures require an
FDA that is adequately funded. While all agencies should root out
waste, untempered resource reduction at the FDA will result in a
reduction in innovation being delivered to the American people. We
ask that Congress be mindful of the tradeoff here.
Maintaining Americas global innovation advantage also requires
continued federal funding of basic research and development. We
understand the need for fiscal responsibility, but drastically reducing this research funding will be devastating long term to our global economic leadership.
Further, we remain extremely disappointed regarding the onceagain stalled SBIR reauthorization bill. The ongoing lack of clarification regarding whether venture-backed companies can apply for
SBIR grants has unquestionably hurt the innovation pipeline. We
hope that another year does not go by in which the most promising,
innovative venture-backed projects are not eligible to receive SBIR
grants and subsequently die on the vine.
The venture capital industry remains committed to the long-term
investment in our countrys future. We look forward to working
with Congress to ensure that our companies continue to grow and
create significant economic value for years to come.
Thank you very much.
[The prepared statement of Mr. Heesen appears in the Submissions for the Record on page 42.]

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Chairman Casey. Mr. Heesen, thank you very much. I appreciate all of our witnesses testimony. We will do a round of questions, and I will start.
I first of all wanted to askand this is not necessarily directed
to any one of our witnesses; each and every one of you could provide perspective on itit is the basic question about not just the
divide between private sector investment in R&D versus public sector, but in particular if we can state, as I did for the record, about
the investment of government dollars in basic research, which is
still I guess around 57 percent. Moving away from that question,
I would ask the panel: What are the most efficient uses of government resources in R&D? We know it is more predominant in basic
research, but beyond that question, what is the best and most efficient use of federal dollars? We can start with Dr. Tang and go
down the panel.
Dr. Tang. Certainly, Senator Casey.
I think you are absolutely right. There needs to be increased
spending on basic research. That is, research that is pre-competitive. In other words, it is not yet to the point of commercialization.
I think we have become more enlightened about the innovation
process, though, over the years. And I have to say that
translational research is now known to be separate and distinct
from basic research.
Chairman Casey. Can you define and distinguish the two?
Dr. Tang. Certainly. So in the life science area, translational research is what is known as the work that needs to be done to move
it from bench, the laboratory bench, to the bedside.
That is a very different set of challenges. It involves a clinical approval from the FDA. It involves reimbursement definition from
CMA. So there are several factors that go beyond what the government is funding.
This area of translational research, I think, has not been highlighted from a policy perspective as an area that needs more funding, and it certainly does. But it is also an area, I think, where
there could be better public/private partnerships. In other words,
the use of not only federal funds, but state funds, and regional economic development funds to help them along the way.
Chairman Casey. Anyone else on this? Doctor.
Dr. Sands. Yes. I think it would be interesting if the Federal
Government could help fund clinical trials. For example, with our
diabetes drug alone our Phase III clinical trial alone is $200 million. And this is given the rising hurdle that we face in diabetes
to prove both safety and efficacy.
I know that the Federal Government does conduct a large number of its own trials, but I think it would be very interesting if companies could also be eligible for that kind of funding so that its not
necessarily conducted through the federal, you know, NIH and
other investigational organizations, but actually if companies could
apply for such grants.
Chairman Casey. Could you just walk through that for a second? Today, in terms of funding for clinical trials, how does that
work? If you can just describe the process?
Dr. Sands. Yes. It is privately funded. We have to raise capital
from investors, and then invest that moneyspend the money on

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clinical trials. We send the money to all of the research organizations to sponsor those trials. The money goes to numerous centers
for each patient on a per-patient basis.
And I dont know of any methodology where companies can apply
for grants to actually fund those trials. You can collaborate with
NIH, but then the NIH is running the trial and that is a challenge.
We are actually trying to get one of those going in schizophrenia
with the NIH right now. They are very interested in funding that
trial. It has taken a long time to get that established.
But I personally believe that more investment dollars by the government in translational research outside the walls of the government would be very important, in my view.
Chairman Casey. I am almost out of time. Mr. Heesen.
Mr. Heesen. Well from a business perspective, a venture capitalist is not going to put money into basic R&D. Thats not the job
of the venture capitalist. The job of the venture capitalist is to take
data and research thats been done from the basic research and
apply it, and help companies to grow in that regard.
However, theres also a point where government needs to be
more effective. And I think the real highlight there is the SBIR
program right now. The fact that a venture-backed company cannot
take part largely in that program because it is getting venture dollars, these are companies that actually were vetted by venture capitalists who think that these companies actually have potential,
and the government is saying, okay, well that means that you dont
need any more money. So instead, we will invest in those companies that did not pass venture capital muster.
And that, to me, demonstrates that you need to be looking at
companies that have a true potential for success at the end of the
day. Many of our companies fail but at least give us a leg up because weve looked at these companies and we see what companies
have real expertise, and a potential to move cancer, Alzheimers, et
cetera.
Chairman Casey. Thank you. Mr. Kowalski, and then Ill turn
it over to Vice Chairman Brady.
Mr. Kowalski. A decade ago we were losing companies in Texas.
And by the implementation of the two funds that I spoke about, the
ETF, what those dollars did is it allowed the companies to leverage
those state dollars, and to be able to take those state dollars and
then bring in matching dollars and be able to invest those companies.
Let me just give you two figures. In the biolife sciences side,
there were awards of $83 million given. They leveraged those dollars to $138 million. So there was a return on investment. On the
research superiority where they were going out and attracting researchthe best of the best, and the George Steinbrenner model,
and recruiting them into Texas, there was $85 million in grants
given. They leveraged that to $484 million.
So it was the way and the approach that these funds were set
up that allowed that leveragability and, believe it or not, 10 years
now were keeping our companies in the state. And that is the best
news.
Chairman Casey. Vice Chairman Brady.

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Vice Chairman Brady. The George Steinbrenner model? In
Texas we dont really talk about New York models.
[Laughter.]
Tom, you should know that.
Mr. Kowalski. Sorry, Congressman.
Vice Chairman Brady. I would first like to ask permission to
submit for the record from Congressman John Campbell, a member
of the Committee, the statement by the California Health Care Institute related to innovation and job growth, if I may.
Chairman Casey. It will be submitted for the record.
[The statement by the California Health Care Institute, submitted by Representative John Campbell, appears in the Submissions for the Record on page 48.]
Vice Chairman Brady. Several of you have made the point that
America is at risk of losing its leadership position in this very important industry.
Dr. Sands, in your written testimony you said many countries in
Western Europe are implementing biotech-friendly tax incentives,
including lowering the corporate tax rate for innovative industries
as a means to grow their 21st Century economies.
Tom Kowalski said, over the last decade, Americas leadership
eroded. We can adjust our tax policies and remain the leader, or
watch industry move overseas.
As we explore and move toward a lower tax rate with fewer exceptions, deductions, and complexity, knowing that is ultimately
the goal, what tax changes can we make? What are the highest priorities in tax law to make today to ensure that private capital flows
to the United States, so that this is the best tax climate in order
to make these investments, and that encourages the life sciences
innovation to both grow here and remain here as well?
Dr. Sands, and Mr. Kowalski, I will start with yaall.
Dr. Sands. Go ahead. You can start.
Mr. Kowalski. Well we can take a look at state models. I think
the tax credits that are allowed a company in the life science structure, particularly in the biotech arena, because many of these companies are so small, it goes to the bottom line. And you can see
what the states are currently doing.
Right nowand this is according to the Battelle Report that has
been produced by BIO38 states are offering R&D tax credits.
Twenty states are offering tax credits to angel investors who invest
in technology companies. Twelve states are reported providing tax
credits to individuals who invest in early stage venture funds.
One of the things that we have been advocating in Texasand
by the way, we do not have an R&D tax credit in the State of
Texas; were one of 12and what we are advocating right now is
a sales tax exemption on the purchase of equipment that would
also be utilized in the R&D process, as well as the manufacturing
process.
And to many of our companies, this is bottom line. It goes beyond
that, as well. It is an economic development driver. So our chambers, our economic development corporations, are also advocating
for this as well because the money that is saved is then reinvested
back into the R&D process and utilized in the manufacturing process.

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Vice Chairman Brady. Is that a higher priority than making,
expanding, simplifying, and making the R&D tax credit permanent
at the federal level?
Mr. Kowalski. I think making it permanent isshould be a priority, because it leaves the industry guessing. And so, yes, I would
say it should be a priority.
Vice Chairman Brady. Well it seems like today we are buying
the R&D car on installment payments, but we are not allowed to
drive it as far and as fast as it can go by not making it permanent.
Dr. Sands.
Dr. Sands. Well I would echo what Tom just mentioned. But I
would say conceptually anything that would reinforce long-term
thinking and long-term investment.
I think one of the problems we have that I see in this country,
and even from the investor side, is very short-term thinking. And
the R&D process in our industry is extremely long, probably one
of the longest.
The repatriation of capital for the large corporation. I know we
are focused a lot on the small companies, but we do deals with big
companies. And if their capital is locked overseas, theres less to
doless for us to do deals with. And we have actually seen that.
I find that whole concept just bizarre to me. I am not a tax expert, but if that capital could come back to the major American corporations, I believe they would be another source of funding for
R&D for the small companies.
Vice Chairman Brady. Right. Thank you, Doctor. Mr. Heesen.
Mr. Heesen. I think a venture capitalist looks at things from the
eyes of the entrepreneur. If the entrepreneur is happy, the venture
capitalist is going to be happy. You have to look at and talk about
the long-term dedication that entrepreneur has.
Is that entrepreneur going to leave AmGen or Medtronic and go
up and create his or her own company? Theyre going to do that
if they see a long-term tax potential. And that means a capital
gains differential that gets that person up every day and says, not
only am I going to try to help cure cancer, but I am also going to
see an economic benefit at the end of the day.
And so making sure that there continues to be a distinction between ordinary income and capital gains is critically important.
And then also making sure that capital gains, we believe after
seven years, you should not be paying capital gain, even. If you are
going to lock up your money and your time that long in trying to
create a drug, or a device that is going to benefit millions of Americans, that is something that should beif you are risking your
time and your money and venture capitalist money, at seven-plus
years you should be looking at that very differently than a hedge
fund person doing day trading.
Vice Chairman Brady. I should have warned you. In Washington you are really not supposed to talk about the profit motive,
really. Its a nervous thing around here.
Dr. Tang.
Dr. Tang. Right. I certainly agree with the comments made by
the fellow witnesses. I go back to what Mark just mentioned. I
think risk taking has to be rewarded for the long term. That is
very, very key.

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For start-up companies, in terms of policy, net operating losses
have to be monetized. And the states compete on that level, but foreign municipalities put some very attractive offers on the table. So
I think we need to acknowledge that entities outside the U.S. are
making it very attractive for U.S. companies to do business there.
How are we going to catch up? And the Life Science Investment
Job Act I think accounts for that. Repatriating foreign profits back
into the U.S. But the piece that is the most helpful about that potential legislation is that it will enable investment in research infrastructure and the startup companies that Mark and his members fund, as well as all of the organizations that we have represented today.
So you essentially renew the ecosystem in the U.S. for innovation
by repatriating these profits.
Vice Chairman Brady. Thank you very much. I appreciate it.
Chairman Casey. Congressman Cummings.
Representative Cummings. Thank you very much, Mr. Chairman.
You know, when I participate in these hearings I am always
wondering how it plays back home. In other words, if my constituents are looking at this, I am trying to figure out what they are
thinking. Okay?
And, you know, Dr. Kowalski and Dr. Tang, you are both deeply
familiar with the significant role thatand I guess all of you are
that university research and public investments play in scientific
breakthroughs and discoveries. Yet, given how longand just to
pick up where we left offand complex the scientific process is, I
believe a lot of peopleyou know, my constituents and people looking at thisregular citizens are unaware of the connection between
the life sciences industry and the average citizens daily life.
Therefore, they wonder why we need to invest federal dollars in
what can be an abstract and elusive field. They just, sometimes
people do not see it.
And so can you both cite real-world examples of the value of university research and federal R&D investment in peoples everyday
lives and whether it be past discoveries, or discoveries that may be
right on the horizon? And be brief, because I have some other
things I want to get to.
Dr. Tang. Certainly. It is a great question. And I will go back.
The Mayor of the City of Philadelphia, Michael Nutter, says the life
science industry has to reach not only Ph.D.s but GEDs. So we
need to do a better job of making this industry more approachable
for the average citizen. Granted.
Now, to your question of how has it impacted daily life? I could
go on for hours. New therapeutics, new devices, new diagnostics,
better ways to treat diseases early are all part of the basic research
that has been funded at the federal level and then translated by
venture capital and by state funding and other means into products.
So from the perspective of the Science Center, companies like
Centocor with their product Remicade, which was a treatment for
rheumatoid arthritis and was initially funded by federal dollars.
Now it is the top-selling product in Johnson & Johnson to treat
rheumatoid arthritis.

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So just about every malady that is being treated today with advanced technology started with federally funded research.
Representative Cummings. Wonderful.
Mr. Kowalski. M.D. Anderson Cancer Center in Houston, Texas.
It is a global destination for the treatment of cancer, but the
amount of research that is going on at M.D. Anderson today. And
it is the full package. It is not only the research, but there is also
a commercialization center attached to it to where they are grabbing the latest ideas on the treatment of cancer and commercializing those ideas.
And just in a closing note, the university structure right now,
particularly our health science centers, they are being hammered
all across the state with this Recession. And the funding mechanism now is so important, particularly with the repatriation and
the ability to be able to invest in those university components.
Representative Cummings. You know, I was listening to Arnie
Duncan on CNN about how weve got 2 million jobs that we cannot
evenwe do not have the folks trained to do these jobs because
they are highly technical. And I would guess that this is the stuff
we are talking abouthe is saying that basically there are vacancies. Two million jobs in America.
And I worry about our pipeline and the STEM program and making sure we are preparing our children to take these opportunities.
I believe that you can have all the options you want, but if you are
not prepared to take them you might as well not have them.
So I just want you to talk about that whole idea of STEM programs and things to prepare our people right here in America to
take some of these jobs.
Mr. Kowalski. You know, one of our crown jewels that we do
not mention often is the role that our community colleges play. Our
community college in the life science field, it not only takes the
Ph.D., it not only takes the CEO or the COO, but it also takes a
front-line lab worker that knows the mechanisms and knows the
equipment and how to utilize that equipment. And those are hourly
jobs, high-paying hourly jobs, $18 to $22 an hour.
Our community colleges today I think are able to step into the
challenge to be able to develop training curriculum. And they are
already in place to be able to train those hourly workers that would
be highly skilled and place them in well-paying jobs.
And so it works hand in hand, as we are going through this paradigm of the Recession and our academic components are getting
hit, do not forget the role that this curriculum plays in our community colleges.
Representative Cummings. Well I am speaking at a community college graduation on Saturday morning and I am going to
quote you on that.
Mr. Kowalski. I would be happy to send you some information.
Representative Cummings. Please do.
Mr. Kowalski. Yes, sir.
Representative Cummings. I see my time has run out, Mr.
Chairman. Thank you.
Chairman Casey. Thank you, Congressman. Good questions on
the jobs issue.
Next, by order of appearance, Congressman Mulvaney.

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Representative Mulvaney. Thank you, Mr. Chairman, and
gentlemen, for your time today.
Id like to talk about an issue that I think is relevant in sort of
a different way. This is Small Business Week in Washington, D.C.
And, Mr. Heesen, I especially appreciated your thoughts on the
SBIR program, something we have been working on, and I wish we
could get some permanent resolution to.
I had always assumed before I came up here that this was an
industry that was driven by some of the names that I heard earlier, the Genentechs, the Medtronics, the Eli Lillys. I am getting
the impression that is not necessarily the case. And I am wondering, Mr. Heesen, if you could at least maybe help educate me
a little bit, or perhaps all of you, on the role that small business
plays in this particular industry.
Mr. Heesen. Well what happens very often today is that your
larger pharmaceuticals, your larger medical device companies, are
not doing R&D in-house. The way they grow today is by buying
smaller venture-backed companies.
It is part of the DNA of many of these large corporations to basically look at what is happening at these smaller companies and
cherry-pick and say, you know, we think that this company has potential and we will bring it in-house.
So the small businesses play an absolutely central role today, as
more and more large corporations forego doing in-house R&D and
go, frankly, shopping around and look at acquisitions of venturebacked companies and/or licensing agreements, which is becoming
more and more prevalent as well.
So without these smaller companies, your larger companies are
not going to be successful over the long term.
Representative Mulvaney. Let me press you on that. I do not
mean to cut you off, but you mentioned before something that
caught my attention. Which is, that an R&D tax credit really does
not have immediate value to a small company that does not have
any tax obligation.
Mr. Heesen. If you do not have a tax obligation, you are not
yes.
Representative Mulvaney. So if the small companies are doing
all of the R&D, then how is a tax credit for R&D helping spur research and development?
Mr. Heesen. That is a good question. I think that the smaller
companies that try to go publicand there are certainly those who
will forego an acquisition because they really want to become a
public company, which is a very important public policy goal
those companies eventually are going to get, if they continue to
grow and go public, they are eventually going to get to the point
where they are tax paying entities and are going to be able to take
advantage of that R&D tax credit.
But that is a long time after the venture capitalist has gotten out
of line.
Representative Mulvaney. Dr. Sands.
Dr. Sands. Yes.
Representative Mulvaney. You all are, what, seven years into
it? Is that what you said before?
Dr. Sands. Fifteen.

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Representative Mulvaney. Fifteen.
Mr. Heesen. Which is typical.
Dr. Sands. Seven drugs in development.
Representative Mulvaney. There it is, right.
Dr. Sands. But I do think the tax credit benefitting large companies is also important for small companies. You mentioned
Genentech. We did a deal with Genentech. If they have more R&D
dollars, they do deals with small companies. They do not just acquire them.
We studied 500 genes with Genentech. We knocked down and
studied the functions of 500 novel genes. It was a core part of their
research program and ours. In total, weve studied 5,000 genes.
And this is all a product of the Human Genome Project, which was
started of course and led by the United States.
But now all that information is out there in the rest of the world,
and they are using it. But I do believe benefitting large companies
is important, too, and will be important indirectly to us, because
we seek deals with the large companies.
Representative Mulvaney. Yes, sir.
Mr. Kowalski. We had also built in, in Texas, at the time we
did have an R&D tax credit, because the companies would take
such a long time, we had built in a very healthy carry-forward. It
was a 25-year carry-forward. So in the event, when they were profitable, there was an opportunity to begin to use those credits.
Representative Mulvaney. Got cha. Let me ask you a different
question, because we have heard some discussion here today about
the issues about repatriation and so forth. I guess I am trying to
get a fairly simple question here, because I have only got 50 seconds left, which is:
What is preferable? I mean, in the overall scheme of things, what
would you gentlemen rather see? A world where you have to come
here every couple of years and ask for an R&D tax credit extension? Or a simplified tax system where the corporate tax rate is 25
percent; we have a territorial income tax system across the board?
Mr. Heesen. Simplification. And, more important, stability is
most important, I think, to a long range planning of an entrepreneur.
Representative Mulvaney. Does anybody disagree with that?
Dr. Tang.
Dr. Tang. I only disagree to the extent that the rest of the world
has a different motive and a different method. If simplify does
not make us globally competitive, then we cannot simplify for the
sake of simplifying.
And to an earlier point, I think the R&D tax credit is important
but it needs to catch up with the model of how R&D is being done
in the life science industry. It needs to recognize that more R&D
is being done off balance sheet from the large corporations, and
that needs to be accounted for and encouraged.
Because the smaller companies unequivocally are the ones that
are generating the jobs today. The larger companies are all consolidating and cutting jobs. So we have got to catch up with the model
that actually exists in the world today.
Representative Mulvaney. Thank you, gentlemen. Thank you,
Mr. Chairman.

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Chairman Casey. Thank you very much. Senator Lee.
Senator Lee. Thank you, Mr. Chairman.
I would like to follow up on the point made by Congressman
Mulvaney. We have talked a lot about R&D tax credits today, and
I understand the allure that those credits hold for this industry.
And there is no one who wants more to incentivize and encourage
research and development, particularly in this area, than I do.
And at the same time, I share many of the concerns that I think
were underlying Congressman Mulvaneys questions in that I wonder whether we could not benefit from an effort to simplify our tax
system. Even if, as Dr. Tang points out, it is not the way the rest
of the world does it, it seems to me to be one way in which we
could offer some value-added to would-be investors to invest in the
United States.
So, Dr. Sands, I was noticing you pointed out that investment in
this area really requires foresight not just of a few years but of several decades.
Dr. Sands. Yes.
Senator Lee. With an R&D tax credit, with a tax credit of any
sort, even if you build into the law the ability to carry forward the
benefit of that 25 years or so, that further complicates an already
extraordinarily complicated tax code; one which, when considered
together with all of its implementing regulations, occupies tens of
thousands of pages.
Nobody has ever read the whole thing. If they did, they would
promptly die.
[Laughter.]
Just like, as I am told, the guy who ran the first marathon collapsed and died right after. Very sad. I ran a marathon once; I did
not die, but I felt like I was going to.
[Laughter.]
So, anyway, Dr. Sands, my question is: In light of your comment
about how this requires foresight of many decades, dont you think
we could benefit from moving toward a simpler tax code? One that
tries to flatten out rate structures? It seems to me that regulatory
and tax simplification could perhaps give the greatest degree of assurance of certainty that you would need in your industry.
Dr. Sands. Yes. I mean, unquestionably. The simpler, the better.
But I have no idea how to accomplish that. I have never seen that
done before. But if you guys can do it, I think you should.
[Laughter.]
Now I can say from the industry perspective, whatever can help
not only the small companies but also the large companies, view research as a long-term investment worth doing, those incentives, if
it is worth having something special, I think this industry is
unique in that the basic unit of time is the decade. And that is a
different way of thinking than most industries.
And given that it is at the core of health costs and other things,
it may be worth some special attention. But, you know, I cannot
tell you how that could be done.
Senator Lee. Okay. Thank you. Another area that I am always
looking into, I always try to look at areas within government where
we could simplify and roll back things that government does that
make things more complicated, I like government solutions that do

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not cost us money in order to implement but that will yield the
benefit to you.
In this industry, and this question is open to any of you who
have an opinion on it, is the current patent structure that we have
in place for pharmaceutical products sufficiently long to enable you
to recover what you need to recover for the products that you are
now developing?
Dr. Sands. No, it is not.
Senator Lee. What would, in your opinion, be a better solution?
One that would still take into account the goal of not holding drug
patents open perpetually, but would be more suitable toward allowing you to recover your investment?
Dr. Sands. Well I understand the difficulties in extending patent
life from a statutory standpoint, but I think data exclusivity time
periods, regulatory exclusivity, perhaps would be more manageable.
And I know people have tackled that with regard to biologics.
I think it should apply to small molecules, because the extended
regulatory hurdles that we have to overcomefor example, in diabetes trialseats into the patent life, eats into our time frame to
actually get a return on the investment. And as I said earlier,
these numbers are very real.
Our Phase III trial alone is $200 to $300 million in Type II diabetes. And if
Senator Lee. And the entire time the clock is ticking.
Dr. Sands. You are burning, yes, not only the dollars, but you
are talking about a three- to four-year just Phase III period. And
we file patents seven years previous to starting that. So you have
burned up 10 years of your patent life before you even get on the
market, at least.
So this concept of a 20-year patent is pure fiction. It really does
not help you during the vast majority of your time there.
The other thing you mentioned about saving money and simplification. If you can cure diabetes, you will save the Federal Government billions and billions of dollars in terms of health care. You
are talking about 35 million Americans with diabetes right now,
going up to 50.
Senator Lee. Are you talking about Type I or Type II?
Dr. Sands. I am talking about Type II, adult onset diabetes. And
the drug we are working on, by the way, should work in both.
Senator Lee. Great. Happy to hear that. I see my time has expired, so thank you.
Chairman Casey. Thanks, Senator. Congresswoman Maloney.
Representative Maloney. Thank you, Mr. Chairman. We in
Congress get an opportunity to take all these ideas and translate
it into legislation, and we do have a bill that one of you, several
of you referenced during the hearing. But I would like you to comment on how it would help incentivize your numbers, and also to
follow up on Dr. Tangs statement, catch up with models that exist
already internationally.
Specifically, I talk about the billI would ask you to comment
on the bill designed to provide companies with a choice between an
increased R&D tax credit for the first 150 million of research in the
life sciences, or the ability to return up to 150 million in foreign

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earnings to the U.S. free of tax, provided the earnings are used in
life sciences.
The legislation also provided that 100 percent of qualified life
sciences research done through nonprofit research areas or centers,
or schools, would be eligible for the credit. And I must note that
many of our universities have spoken to others about the support
for research that is done in the United States. So I would like all
of you to comment, or give us your insight on this legislation. Or
if you think it should be changed in any way, or modified, or adjusted to what is happening internationally. Your comments, and
just go down the line.
Dr. Tang.
Dr. Tang. Thank you, Congresswoman.
If I may begin, I believe it is a very well-crafted bill. I think it
accounts for two things. The first is that R&D has become more expensive, more risky, and takes much more time, and is more expensive than we have ever imagined. And so the increase in encouraging more R&D on the one hand is important.
The other phenomenon is recognizing that countries outside the
U.S. are making it very attractive for U.S. life science companies
to do business in their countries. The only way we are going to gain
from that is if we can repatriate some of the profits that are earned
in those countries.
And so in effect what you have in this bill is a way of replenishing the ecosystem of life science ventures. Because the funds are
directed towards improving and increasing the likelihood that
small companies will thrive and exist who will probably be acquired at some point by these larger companies. And so it is sustainability, if you will, applied to the venture ecosystem in the life
science industry.
Mr. Kowalski. Congresswoman Maloney, if you will think about
this without repatriation, that money stays with our foreign competitors. And it is invested in their communities, in their university
systems, training their researchers. I would rather have it here.
It is a great bill. We like it, and we support it. I particularly like
the university component and allowing those universities to participate within it.
Thank you.
Dr. Sands. I think also it is an excellent bill. I think $150 million is not enough. I do not know why that number is what it is.
It should be significantly more. And I think that then we would see
our companies spending more on research.
Pfizer, for example, has been shutting down their research program. They are cutting, I think it is about 2- or 3,000 jobs. And
that does not just hurt Pfizer; again, it hurts the little companies
that seek to do business with the Pfizers of the world.
Mr. Heesen. Well most venture-backed companies will not be
able to take part in this. It is still, as Dr. Sands says, very important that we have larger corporations out there who will have the
ability to acquire us, or to enter into licensing agreements and
other types of activities.
Most biotechnology companies will not have the ability to go public. And so they have to have another exit. And that exit is working
with larger corporations. If they are healthy, we will be able to

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work with them a lot longer and it will be a much healthier relationship at the end of the day.
Representative Maloney. Thank you. Some of you, or many of
you have also mentioned the fact that we are now in a world economy, and we have to compete in a world economy. So could any of
you, starting with you, Dr. Tang, talk about how the U.S. R&D tax
credit fares when compared to other countries?
We used to lead the world. I understand that is not the case now,
but where do we stand?
Dr. Tang. I think the statistic you mentioned before is we are
now 24th. So we are clearly behind. Other countries with new
sources of capital, the BRIC companies, Brazil, Russia, India,
China, in particular, are out-maneuvering us. They are making it
more attractive to do business and create innovation on their
shores, not our shores. And I think it is a desperate situation, and
it is one that I think threatens our economic development.
Mr. Kowalski. Our global competitors are reducing their costs
that makes it attractive for our companies to go over there. I think
the most exciting thing this week and this year has been hearing
your comments, and your knowledge level in terms now of what it
takes to build a successful American life science company.
Mr. Heesen. What you are seeing is an increasing amount of interest by U.S. venture capitalists in looking at companies that are
not domiciled in the United States.
We follow the entrepreneur, not the other way around. And if the
entrepreneur has a good idea and they can be funded in another
country, that entrepreneur is going to get funded with U.S. venture
capital.
If it is in Bangalore or in Birmingham, Alabama, we are going
to make the decision based more on that entrepreneur and his idea
than anything else. And so if they are located somewhere else, unfortunately we have to look at those opportunities overseas.
Representative Maloney. My time has expired. Thank you
very much, Mr. Chairman.
Chairman Casey. Congresswoman, thank you very much. And
I want to thank the other Members who are with us today.
I have just one question, and then both the Vice Chairman and
I will wrap up.
First of all, Mr. Heesen, you mentioned the SBIR. You say in
your testimony on page 11, The ongoing lack of clarification regarding whether venture backed companies can apply for government grants (such as SBIR grants) to conduct early stage research
has unquestionably hurt the innovation pipeline. And others have
referred to it.
It has been stalled in the Senate. It has been a source of frustration for lots of us. Can you just speak to that again?
Mr. Heesen. Absolutely. I mean, the National Institutes of
Health has stated that they are seeing the quality of their applications deteriorate because venture-backed companies, which are 50
percent or more owned by venture capitalists, those venture-backed
medical device companies and biotechnology companies are precluded from taking part in the SBIR program.
And that simply means that the companies that have either voluntarily said that they dont want venture capital, or who have

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gone through the venture capital process and frankly been rejected
by venture capitalists, are the ones who have the ability to get
these SBIR grants.
Our view is that you want the best companies to be able to get
those grants at the end of the day, particularly in these budget-conscious days that we are in, and that means that we should be able
to participateour kinds of companies should be able to participate, just like any other biotechnology or medical device company.
It is an equal footing. It is not like we want preference. We just
want to be viewed as the same. In many of these companies, there
are five people working in a lab. If they are venture-backed, there
are five people working in a lab. If they are not venture-backed
there are still the same five people working in the lab. There is not
a lot of difference there.
Chairman Casey. Thank you. And I know I have other questions and I will submit them for the record.
Chairman Casey. But I want everyone to know that Vice Chairman Brady and I did a scientific split here, the exact number of
minutes, equivalent amounts for Texas and Pennsylvania were provided at this hearing.
[Laughter.]
We had a timer that was right up to the minute. So we are grateful for your testimony.
Vice Chairman Brady.
Vice Chairman Brady. Again, thank you, Mr. Chairman, for
holding this hearing on this important issue. Senator Lee and I
were noting the irony of the panels response to his earlier line of
questioning. Mapping the human genome? No problem. Simplifying
the tax code? Hmmm, not so sure.
[Laughter.]
I appreciate, too, at this point being considered in Congress as
we strive toward a lower, more competitive, simpler tax code, what
can be done in the interim. Repatriation is an ability to lower that
tax gate and allow that private capital to flow back, a no-cost stimulus at a critical time. This is one of the issues we are weighing
very strongly.
But I wanted to finish with this, real quickly, to put all this in
perspective. What is the latest data on the cost to bring a new drug
to market in the U.S.? What range today are we looking at?
Dr. Sands. It is $1 billion to $2 billion. It is up, depending on
the numbers. The common study, the Tufts study, is $800 million
to $1.2 billion. That is about an eight-year-old study, or a ten-yearold study. So it is enormous.
And each trial period is expanding in time and cost. And this
gets to the FDA regulatory burdens being lifted.
Vice Chairman Brady. Is there an average time, Doctor?
Dr. Sands. I would say eight years to bring a drug forward. And
that does not count the discovery phase. That is just the clinical
development phase, not the laboratory phase.
Vice Chairman Brady. Once you have made the breakthrough,
that is the process to bring it to market?
Dr. Sands. Yes. Yes. And there are programs that are called
Fast Track programs. Those can actually take longer, depending
on

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[Laughter.]
The disease.
Vice Chairman Brady. Welcome to Washington.
[Laughter.]
Mr. Kowalski. Ten years ago, that cost was $800 million. So we
have bumped it up over a decade a billion plus, and the time has
lengthened as well, to bring a drug to the marketplace.
Mr. Heesen. And the important thing here is, once you bring it
to market, you also have to get a price for that drug that makes
that 15 years worth of work and effort worthwhile. And that is
where CMS comes in, and the ability of the Federal Government
to price a drug that is available to the public but at the same right
rewards 15 years of long toil and investment on the other side.
And there are going to be investors who, at the end of the day,
if that price is not set properly, are going to walk away and instead
be doing frankly, unfortunately, work in the life science area that
is not FDA regulated, or not CMS mandated. And so you are going
to be looking at cosmetology types of deals. And is that really what
you want this country to be looking at, as opposed to looking at
these very important drugs and devices at the end of the day?
Vice Chairman Brady. Dr. Tang, any comment?
Dr. Tang. It is more expensive and more risky. I think that is
the bottom line. And that needs to be rewarded in the overall process. And while I certainly appreciate the work that the FDA does,
I do not think any business person in the life science industry will
say that they are particularly easy to work with.
Vice Chairman Brady. We have got some work to do, especially
if America is to continue its lead in this innovative area. So again,
Mr. Chairman, thanks for holding this hearing.
Chairman Casey. Vice Chairman Brady, thank you.
Mr. Heesen, Dr. Sands, Mr. Kowalski, Dr. Tang, we want to
thank you and your staff for making yourselves available for this
remarkably good testimony, one of the best panels I have ever been
a part of, or witnessed, I should say, at a hearing in the Senate.
You have provided us a lot of perspective and a lot to think about.
We will submit more questions for the record.
We should note for the record that the record will remain open
for five business days for Members to submit both statements and
questions for the record. And with that, we are all grateful for your
testimony and the healing, the hope and the jobs that come from
the investments that we want to incentivize in the life sciences. So
thank you very much for your testimony. We are adjourned.
[Whereupon, at 11:16 a.m., Wednesday, May 25, 2011, the hearing was adjourned.]

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(33)

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PREPARED STATEMENT

OF

REPRESENTATIVE KEVIN BRADY

Mr. Chairman, I would like to thank you for holding todays hearing on the life
sciences industry. I would also like to welcome all of todays witnesses, especially
my fellow Texans, Dr. Arthur Sands and Thomas Kowalskiboth highly respected
in their fieldsand thank them for taking time out of their busy lives to testify
today.
Americas life sciences industry leads the world with innovations in biomedical
science, biotechnology, agriculture, and medical devices. This industrys products
help Americans live longer and healthier lives. It employs 1.4 million Americans
and accounts for 1/3 of all research and development expenditures by private U.S.
firms.
The Joint Economic Committee is holding this hearing today to discover what
steps the U.S. government may take to help the life sciences industry prosper and
strengthen its competitiveness both here and abroad.
Investment in research and development in life sciences creates good, high-paying
jobs; keeps the United States on the cutting edge of global competitiveness; and enhances the quality of life not only for Americans, but for people everywhere.
Yet the upfront cost of investment in this industry is extremely highcompanies
spend years researching and testing, pouring millions and at times billions of dollars into the research, testing and trials of medical ideas that may never make it
to market. Yes, the return can be highbut the investment is highly risky as well.
In this vital area of the economy, America is falling behind. Other countries are
increasing their incentives for R&D in an aggressive effort to attract investment and
the high-paying jobs that go with it. Americas share of the worlds research and
development pie is shrinking as our global competitors are taking a page from our
playbook and beating us at it. In 1981 America led the world as the first to create
an R&D tax credit. By 2009 we ranked 24th out of 28 countries in the strength of
our R&D incentives.
We need to rethink our approach to incentives. Its time we modernize the R&D
tax credit; strengthen it to encourage companies to make even more substantial investments in research and hiring; and make it permanent so businesses and investors have the confidence to make long-term decisions.
At the same time, we should reform the way our overall tax structure operates
by lowering the rate and simplifying the code. At 35 percent, the United States has
one of the highest corporate tax rates in the world. Our complicated tax structure
puts Americans at a disadvantage when competing at home and abroad. More than
$1 trillion in capital earned by American companies and workers is stranded overseas because our tax code strangely penalizes companies for bringing profits home.
As an interim step, we have an opportunity today to temporarily lower tax barriers to incentivize companies to bring those profits back home for investment. The
right form of repatriation measure would lower the tax gate and allow private capital to flow back to the United States to be used to create jobs, to expand businesses,
and to invest in research.
Additionally, we should examine ways we can help boost incentives even more for
the life sciences industry given its unique structure and the benefits it adds to our
health and way of life. This could include further strengthening the R&D tax credit,
and allowing life sciences companies to claim research expenses paid to universities.
However, we should not limit our considerations of tax provisions only to those
benefiting the life sciences industry. The competitive challenges which federal policies pose to life sciences firms merely reflect the tax, trade, and regulatory impediments that all American companies face when competing in global markets.
To begin, we must look at fundamental reform of business taxation:
We must lower the federal corporate income tax rate to a competitive level, so
that both American and foreign firms will make new investments in the United
States, creating more and better-paying jobs for American workers.
We must also lower the after-tax cost of making new business investments by
moving toward expensing new investments in equipment and software and significantly shortening the tax depreciation schedules for buildings and other
structures.
Finally, we must enact a permanent and generous tax credit for research and
development.
Beyond business tax reform, we must continue to open new markets to American
exports of goods and services. I call on President Obama to submit the pending free
trade agreements with Colombia, Panama, and South Korea to Congress for approval. And we must ensure that intellectual property rights are fully respected by
all countries.

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Finally, we must reform our regulatory structure to assure that the goals we all
share for product safety and a clean environment are achieved in a cost-effective
way that does not place undue burdens on American companies or their workers.
I look forward to hearing todays testimony.
PREPARED STATEMENT

OF

DR. STEPHEN S. TANG

Thank you, Senator Casey. Im Steve Tang, President & CEO of the University
City Science Center. It is an honor and a privilege to speak to this distinguished
committee today.
Science and innovation are in my bloodand a part of my heritage. Im the son
of two Chinese-born scientists. I was born with high expectations from parents who
soughtand largely achievedthe American dream.
My background is in both science and entrepreneurship. I have an undergraduate
degree in chemistry from the College of William and Mary and a Ph.D in chemical
engineering from Lehigh Universityas well as an MBA from the University of
Pennsylvanias Wharton School.
As a graduate student, I founded and ran my own technology assessment consulting firm, while at the same time pursuing my doctorate and managing Lehighs
biotechnology research center. After obtaining my MBA, I served as a management
consultant at two international firms, focusing on projects in the chemical, environmental, health care and pharmaceutical industries. I then served as the CEO of a
hydrogen and fuel cell company, guiding its growth as it moved beyond its startup phase, completed a successful IPO, and attracted subsequent investment and financing. Next, I ran Olympus Americas Life Science division, overseeing operations,
finance, strategy, and product and business development.
Since 2008, Ive had the privilege of leading the University City Science Center.
I was motivated to take the position by my passion for science and technologyand
their ability and potential to make the world a better place. And as a newly appointed member of the U.S. Commerce Departments Innovation Advisory Board, I
welcome the opportunity to contribute to the national discussion on innovation and
economic competitiveness, particularly as it relates to the life sciences.
The Science Center is a private, nonprofit research park and business incubator
in Philadelphia. Located in the heart of the citys meds and eds community, we
have existed at the intersection of innovation and economic development for close
to 50 years. We are the nations oldest and largest urban research park, with 15
buildings on 17 acres containing over 2.0 million square feet of lab and office space.
More than 8,000 people come to work on our campus each day.
We are also home to innovative programs, such as the QED Proof-of-Concept
Funding Program, which pulls technologies out of the lab and into the marketplace
by pairing scientific researchers with experienced business advisors. At the Science
Center, we firmly believe that our multi-institutional QED program is a unique and
model public-private partnership that can be replicated across the nation to help
promising ventures cross the Valley of Death in funding. Im proud to report that
QED achieved a funding milestone of its own last month when it received a twoyear, $1 million grant from the U.S. Economic Development Administration. This
federal funding is currently being leveraged with funding previously awarded to
QED by the Commonwealth of Pennsylvania and the William Penn Foundation of
Philadelphia, plus additional funding from the Science Center and the 19 institutions participating in the program.
The Science Center is owned by 32 of the leading colleges, universities, hospitals
and nonprofit institutions throughout Pennsylvania, New Jersey, and Delaware, including the University of Pennsylvania, Drexel University, and The Childrens Hospital of Philadelphia.
More than 350 companies have passed through our doors since we were founded
in 1963. The 93 that remain in the Greater Philadelphia region account for over $9
billion of sales and 15,000 current direct jobs. These jobs pay an average of $89,000
per yeara remarkable figure, especially in todays economy.
Our campus features two business incubatorscollectively known as the Port
that are home to more than 30 start-up companies in life sciences, cleantech/
greentech, and information technology.
These companies are at the cutting edge of scientific innovation. To give you an
example, one of our start-up residentsInvisible Sentinelis working on a fast, efficient way to detect food contamination. Another, BioNanomatrix, is using nanotechnology to decode the human genome. And a third, Enzybel International, a Belgian
company, is dedicated to the production and commercialization of sustainable compounds derived from nature.

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In our 48 years of operation, we have helped to create the model for the modern
research park and high-tech business incubator. Our graduates include Centocor,
the maker of Remicade, global software giant Bentley Systems, and financial services powerhouse SEI Investments.
One of our latest incubator success stories, Avid Radiopharmaceuticals, exemplifies Americas potential for innovation and entrepreneurship in the life sciences.
Avid was founded by Dr. Dan Skovronsky, a neuropathologist at the University of
Pennsylvania who had an idea for a technology that would revolutionize the ability
to diagnose Alzheimers and other diseases at an early stage.
In 2005, Dan moved his brand new company into the Science Centers incubator
with one employeehimself. Over the next four years Avid refined its technology
and added jobs. By 2009, the payroll had grown to 37 people. The company outgrew
its space in our incubator and moved into custom-fitted, full-price office and lab
space on our campus. Since then the company has grown to more than 50 employees.
Last fall, Avid was acquired by one of our nations leading pharmaceutical companies, Eli Lilly, for $300 million in cash up front, plus another $500 million of additional payments over the next few years, based on the achievement of certain milestones. We were thrilled to learn that Avid currently plans to remain at the Science
Center, continuing to bring new jobs and economic growth to Philadelphia and the
region.
Avid represents a classic example of how research and development in the life
sciences are essential to our nations economic recovery.
Lets take a step back and look at the economic impact of the life sciences in the
Science Centers home state of Pennsylvania.
As noted in the State Bioscience Initiative 2010 Report from Battelle and BIO,
the biosciences sector in Pennsylvania employs 81,000 workers in the state at an
average salary of $82,000for a total of $6.7 billion in wages. With a multiplier effect of 4.38, the industry has a total employment impact of 354,000.
On a national level, according to the same report, total employment in the U.S.
bioscience sector reached 1.42 million in 2008. When you figure in a multiplier effect
of 5.8, the total employment impact of the bioscience sector is 8 million jobs nationwide.
Those are tough numbers to ignore. Yet, the life sciences industry does more than
create well-paying jobs. Scientists and researchers are dramatically improving treatments, therapeutics, and ultimately patient care and quality of life.
Think back to our Port business incubator resident Invisible Sentinel. Their work
in detecting food contamination may also have applications in the detection of
pathogens associated with hospital-acquired infections, as well as in cancer detection and homeland security.
At the Science Center, we look forward to helping our residents advance science
and technology and invent new products that will change the worldwhile creating
new jobs and economic growth along the way.
I also would like to express my strong support for the proposed Life Sciences Jobs
and Investment Act. This legislation will help strengthen the biotech sectors culture
of innovation, discovery, education, and job creation across the nation.
The Life Sciences Jobs and Investment Act will offer tax incentives for small and
midsized businesses to invest in life sciences research and development on a targeted basis. It will also ensure the availability of an educated, skilled workforce that
will sustain our pipeline of bioscience innovations, companies, and jobs over the long
term.
One out of every six jobs in the Greater Philadelphia region can be traced back
to the life sciences. The Life Sciences Jobs and Investment Act is key to the longterm success of this crucial industry sector. This is the kind of proactive legislation
that we need to maintain our competitive edge as we ensure that biotech in the regionand the entire countrycontinues to grow and thrive.
Thank you for your kind attention! I welcome your comments and questions.

PREPARED STATEMENT

OF

MR. THOMAS R. KOWALSKI

Thank you, Chairman Casey, Vice-Chairman Brady and the entire Joint Economic
Committee for inviting me here today.
Im Tom Kowalski, President of the Texas Healthcare and Bioscience Institute.
Our organizations mission is to research, develop, and advocate policies and legislation that promote biomedical science, biotechnology, agriculture, and medical device innovation in Texas.

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The issue you are considering todayhow targeted tax incentives can be used to
enhance medical innovation, life sciences education, and job creation here in the
United Statesis of great interest to me and of vital concern to our industry.
The impact of the life sciences industry on the US economy is significant. It advances medical knowledge, develops products that keep our country at the cutting
edge of global competitiveness, and supports millions of high-quality jobs.
As important as the direct benefits to our nations economy, the innovations produced by these companies are also helping Americans live longer, healthier lives.
I would like to share with you the positive impact the life sciences industry has
had in Texas both in improving the health of Texans, as well as in creating a robust
job sector. Much of this development has occurred because of the very vital investment Texas has been willing to make into the life sciences.
Texas has a dynamic biotechnology marketplace with an estimated economic impact of 75 billion dollars. The state has many national top 10 rankings in biotechnology and is home to over 4,100 biotechnology, biomedical research, business
and government consortia, medical manufacturing companies, and world-class universities and research facilities, employing over 104,400 at an average annual salary
of over 67,300 dollars. A significant number of top global biotechnology and pharmaceutical companies have Texas locations, underscoring the states vitality. Government support; a highly trained workforce, excellent educational, medical, and research institutions; a first-rate transportation and logistics infrastructure; and a
top-ranked business climate all strengthen the states status as a biotechnology
leader.
There are significant factors pointing to the robust growth of the Texas Life
Science Industry.
FirstUniversity research is the lifeblood of our states innovation, medical treatments, and job creation. The Texas Health Science Centers are the crown jewels of
our industry.
SecondlyThere has been a significant investment from the State into the life
science industry which has enabled research technology transfer and commercialization to successfully occur. Much of the states investments require academic/private
sector collaboration, and the Life Sciences Investment Act will compliment these efforts by the potential infusion of industry research dollars and future collaborations
which extend to increase workforce and added clinical trials.
The Texas Emerging Technology Fund is one of those programs. The ETF, as it
is known, has allocated more than 193.7 million dollars in funds to 131 early stage
companies and nearly 173 million dollars in grant matching and research superiority funds to Texas Universities.
Investments by the TETF attract additional investment capital to emerging technology companies. Since the funds inception, more than 407 million dollars in private capital has been invested in ETF-funded businessesmore than double the
states contribution.
Another key program in Texas has been the creation of the Cancer Prevention
and Research Institute of Texas. It is known as CPRIT. The Texas Legislature and
the Governor authorized the program, which the voters approved in 2007. The program has funded 256 grants totaling more than 382 million dollars for cancer research, commercialization, and prevention in 46 academic institutions, nonprofits,
and private companies. More than 500 million dollars, including matching funds,
have been invested in Texas extraordinary efforts to lead the nation in cancer research. CPRIT has become one of the largest cancer research grant-making organization in the nation. Our focus in Texas has been to create such a strong life science
environment that we keep our companies in our state and attract additional companies to Texas. By these investments, we continue to fine tune our workforce and
more importantly put our graduates to work in Texas companies.
The industry has enjoyed a strong growth rate of 14% from 2003 to 2008. These
programs have added stability during the last two years to enable our companies
to continue to raise capital and invest that capital into the R&D process.
While individual states can do much to support the growth of the life sciences industry, continued and increased support at the federal level is paramount.
The biotechnology industry directly provides hundreds of thousands of good-paying jobs for Americas working families. However, over the last decade, Americas
leadership in the life sciences industry has begun to erode. To retain those jobs and
to create new ones, the success and growth of the industrys basic research efforts,
as well as innovations in effective treatments and associated technology advancements, must remain in the U.S., where they will contribute to our nations future
economic growth and international competitiveness.

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Unfortunately, as the costs of developing new biotechnology products in the U.S.
continue to rise, companies are under great pressure to find lower-cost locations to
conduct their research and development.
We can adjust our tax policies and remain the international leader in biotechnology research, development, and manufacturing, or we can watch the industry
move overseas, like so many before it.
Narrowly tailored tax incentives aimed at ensuring investment in domestic biomedical research and development will create a demand for highly skilled workers,
promote higher education in the life sciences, encourage greater scientific collaboration, and improve our nations overall economic well-being and health.
Thank you.

PREPARED STATEMENT

OF

DR. ARTHUR T. SANDS

Good morning Chairman Casey, Vice Chairman Brady, Ranking Member DeMint,
Ranking Member Hinchey, Members of the Committee, ladies, and gentlemen. I am
President and Chief Executive Officer of Lexicon Pharmaceuticals, Inc. I am appearing before this Committee on behalf of the Biotechnology Industry Organization
(BIO). BIO represents more than 1,200 companies, academic institutions, state biotechnology centers, and related organizations in all 50 states.
I have been a part of the biomedical industry since the early 1990s, beginning
with my work as an American Cancer Society postdoctoral fellow at the Baylor College of Medicines Department of Human and Molecular Genetics. It was an extremely exciting time, as Baylor was one of the major genome sequencing centers
of The Human Genome Project. In 1995, I co-founded Lexicon Pharmaceuticals and
helped pioneer the development of large-scale gene knockout technology for use in
drug discovery. Gene knockout technology allows us to turn off and/or modify any
gene in order to study human disease. Since most drugs act by inhibiting the function of the products of genes, this technology enables us to genetically model what
a drug would do in an animal before embarking on the arduous task of inventing
such a drug. With the DNA sequence of all genes now available, Lexicon has focused
on knocking out those gene products that are druggableapproximately 5,000
genes, or almost a quarter of the entire genome. In particular, Lexicon targets those
genes that, when blocked, confer a favorable effect that could be used to create a
new medicine to fight disease. This powerful approach to drug discovery has been
the source of our drug pipeline now in development, including drug candidates with
breakthrough potential in diabetes, cancer, rheumatoid arthritis, and gastrointestinal disease.
When I founded Lexicon, it was just a small, privately funded research stage company. Currently, there are thousands of similar companies throughout the United
States, each one with molecules and drug candidates that could change the face of
modern medicine. Biotechnology may hold the answers to the medical problems that
America faces, from the devastation of cancer and HIV/AIDS to the personal losses
of Alzheimers and Parkinsons to the spiraling costs of health care associated with
diseases of epic proportions, such as Type 2 diabetes. Of the 118 scientifically novel
drugs approved from 1998 to 2007, 48% were discovered and/or developed by biotech
companies. These revolutionary cures and treatments save lives and reduce
healthcare spending. As Congress continues to look for ways to reduce our nations
deficit, it is important that we remember the impact that innovative therapies can
have on increasing overall health, especially by combating costly chronic diseases.
These advances will save taxpayers money by decreasing the outlays necessary to
care for our aging population.
Additionally, the biotech industry is a thriving economic growth engine, directly
employing 1.42 million Americans in high-quality jobs and indirectly supporting an
additional 6.6 million workers. The average biotechnology employee makes $77,595
annually, far above the national average salary. President Obama has called for the
United States to lead in the 21st century innovation economy, and biotechnology can
be a key facet of our nations economic growth.
Despite these windows of opportunity, biotechnology research and development is
often a difficult process. Bringing groundbreaking therapeutics from bench to bedside is a long and arduous road, and small biotechnology companies are at the forefront of the effort. It takes an estimated 8 to 12 years for one of these breakthrough
companies to bring a new therapy from discovery through Phase I, Phase II, and
Phase III clinical trials and on to FDA approval of a product. The entire endeavor
costs between $800 million and $1.2 billion. Due to this capital-intensive process,
biotechnology companies lacking research and development funds turn to private-

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sector investors and collaborative agreements to finance the early stages of therapeutic development.
However, the current economic climate has made private investment dollars extremely elusive. In 2010, venture capital fundraising endured its fourth straight
year of decline and its worst since 2003. Biotechnology received just $2 billion in
venture funds, a 27 percent drop from its share in 2009. Even worse, the biggest
fall was seen in initial venture rounds, which are the most critical for early stage
companies. Series A deals last year brought in just over half of what they did in
2009. Decreasing upfront investment could mean cures and therapies being shelved
in labs across the nation and ultimately not reaching patients.
In 2000, Lexicon completed one of the most successful initial public offerings (IPO)
in biotech history, raising $220 million from a range of investors. By putting our
company on the public market, we were able to provide our initial backers with a
return on their original investment as well as open ourselves to myriad other
sources of funding. IPOs like ours used to be the standard for the industryafter
we showed proof of concept in our gene knockout technology, we knew a successful
public offering was in the cards. However, companies today with science just as
groundbreaking do not have the same support on the public market. From 2004 to
2007, the United States had an average of 34 IPOs in biotechnology per year. From
2008 to the first quarter of 2010, we had a total of 8. While the numbers have ticked
up slightly this year, the weak demand for these offerings is restricting access to
capital. This then hampers critical research and depresses valuations of later-stage
venture rounds.
As U.S. biotech companies face financial uncertainty, other countries are increasing their investments and enacting intellectual property protections to encourage domestic biotech growth. We still hold our place as the leader in global biotechnology
patents thanks to our large head start, but China and India rank first and second
in biotech patent growth. These emerging powers are heavily investing in science,
and particularly in biotechnology. Meanwhile, the U.S. has fallen to twentieth out
of twenty-three countries in new biotech patent applications. Additionally, many
countries in Western Europe are implementing biotech-friendly tax incentives, including lower corporate tax rates for innovative industries, as a means to grow their
21st century economies. This lag has put us at risk of losing our place at the forefront of this important and innovative economic driver.
THERAPEUTIC DISCOVERY PROJECT

There are certain steps that Congress has taken to maintain American leadership
in the biotechnology space. Last March, Congress enacted the Therapeutic Discovery
Project (TDP), an important tax credit program designed to stimulate investment
in biotechnology research and development. Under this program, small biotech companies received a much-needed infusion of capital to advance their innovative therapeutic projects while creating and sustaining high-paying, high-quality American
jobs.
In total, the Therapeutic Discovery Project awarded $1 billion in grants and tax
credits to nearly 3,000 companies with fewer than 250 employees each. These small
companies were eligible to be reimbursed for up to 50% of their qualified investment
in activities like hiring researchers and conducting clinical trials. The impact of this
funding was felt across the American biotech industry, as companies in 47 states
received awards. The average company received just over $200,000, an important
shot in the arm in these rough economic times. While Lexicon was not eligible for
the program because we have 290 employees, my colleagues at other emerging companies in Texas greatly benefitted from this important investment. In fact, Texas
was among the top ten states in total TDP funds awarded.
The infusion of capital for small biotech companies provided by the Therapeutic
Discovery Project is an essential incentive for companies to keep their research and
development, manufacturing, and operations here in the U.S. The critical funding
will also accelerate the movement of cures to patients who need them. This program
was a step in the right direction by Congress to invest in growing the U.S. biotech
industry to keep pace with our global competitors. Given the imbalance between the
extraordinarily high demand by small biotech companies and the limited pool of
funds, I hope that Congress will extend and expand this oversubscribed program
and assist more American companies in pursuing breakthrough medical discoveries
and supporting American jobs.
R&D TAX CREDIT

As you know, Congress has also striven to aid the life sciences industry through
the research and development (R&D) tax credit. Most biotechnology companies

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working toward new cures and therapies are small, research-intensive companies
that are not profitable because they do not yet have an FDA-approved product on
the market. As companies like mine struggle to raise capital to finance their cutting-edge research, we rely on a stable and predictable R&D credit as part of our
investment decisions.
Vice Chairman Brady recently introduced the American Research and Competitiveness Act, which would support and foster the creation of the high-wage jobs associated with R&D in the biotechnology industry by strengthening and making permanent the R&D tax credit. A permanent R&D credit would provide greater certainty and assist American biotechnology companies as they plan future research investments in the U.S. The legislation would also increase the Alternative Simplified
Credit (ASC) rate to 20 percent, making U.S.-based R&D more attractive relative
to the research incentives offered by many foreign governments seeking to foster
their own biotechnology industries. I strongly believe that enacting this legislation
would be a boon to our industry.
LIFE SCIENCES JOBS AND INVESTMENT ACT

I also believe that Chairman Caseys efforts to support job creation in the life
sciences industry will be beneficial to biotech companies like mine. The Life Sciences
Jobs and Investment Act, introduced by Chairman Casey, would incentivize research and investment in the life sciences industry on a very targeted basis. Under
the bill, a taxpayer engaged in the life sciences could elect an increased R&D tax
credit for their first $150 million spent on life sciences research. The taxpayer would
also have the option to return up to $150 million of foreign earnings to the United
States free of taxation in lieu of the increased R&D credit. The repatriated funds
would be earmarked specifically for investment in new jobs, and would have to be
kept in a special account or trust, to be disbursed only for permitted activities.
Through this legislation, biotechnology companies would have the resources necessary to hire additional scientists and researchers, increase partnering with American universities, and invest in new research facilities, so I support its enactment.
MODIFICATIONS TO CURRENT TAX INCENTIVES IMPACTING INNOVATIVE BIOTECHS

Given the long R&D timeline and arduous road necessary to bring a therapy from
bench to bedside, emerging biotechnology companieswhich are not currently profitableare unable to immediately benefit from various tax incentives in the current
tax code. These incentives do not provide much-needed capital to small research-intensive companies because their lack of profits makes tax benefits unredeemable.
There are two specific areas of the Internal Revenue Code which provide opportunities for Congress to invest in Americas future through biotechnology: with modifications, Section 1202, which covers reduced capital gains tax for the sale of qualified small business stock, and Section 382, which imposes limitations on the use of
net operating losses, could encourage private investments into biotech.
Reduced Capital Gains Rate for Sale of Qualified Small Business Stock (IRC Section
1202)
Congresss original intent in enacting Section 1202 was to stimulate investment
in small businesses. President Obama and the 111th Congress further emphasized
the importance of small business investment by enacting a law temporarily allowing
100% of gains from the sale of qualified small business stock to be excluded from
capital gains taxation. Thus, investors in qualified small businesses are eligible for
a zero percent capital gains rate on their sale of certain stock through the end of
2011. However, despite Congresss support for stimulating investment in small and
start-up businesses, Section 1202, which defines the qualified small business stock
eligible for an exclusion from capital gains tax, is too limited and presents technical
challenges which investors in small innovative companies are unable to overcome.
Among other challenges, Section 1202 employs a test in which a corporations gross
assets must be less than $50 million immediately before and after the stock is
issued in order to be eligible for preferred capital gains treatment. When IP is incorporated as an asset, small biotech companies are almost always over the $50 million
limit. The high value of our IP belies the fact that our emerging companies are
small businesses that need support if they are going to continue to work toward important medical breakthroughs. Given the emphasis placed on small business job
growth through innovation by Congress and the President, it is important that Congress take a look at modifying the small business stock rules in Section 1202 to
more accurately represent the state of innovative small businesses in America.

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Limitations on the Net Operating Losses (IRC Section 382)
As I have mentioned, many of these tax incentives are necessary because of the
capital-intensive nature of the long development process in the biotechnology industry. During the early years of development, biotech companies are generally not
profitable. As such, they may accumulate net operating losses (NOLs) for years before they ever have a product on the market. NOLs may be carried back two years
and carried forward twenty years to offset positive income. Unfortunately, many
biotech startups are not able to utilize their NOLs within this time period, and
these tax assets expire unused. Additionally, Section 382 operates to further limit
the utilization of NOLs by many biotech companies. Section 382 was designed to
combat the very real problem of NOL trafficking, wherein profitable companies buy
companies with losses in order to acquire their NOLs. The Section describes the
many circumstances that can be classified as an ownership change and prohibits
NOLs from flowing to the new controlling entity if an ownership change occurs. Unfortunately, the law as written captures the frequent biotech practice of raising equity in successive financing rounds, a practice essential to successfully negotiating
the long product development and FDA approval process. Thus, these limitations
have the effect of discouraging investment in biotechnology research, leaving the
companies that would otherwise conduct that research in dire financial straits. Vice
Chairman Brady proposed a bill in 2007 to ease Section 382 restrictions, and I believe that the passage of similar legislation by Congress would represent an important step forward in research financing in the biotechnology industry.
NEW TAX PROPOSALS ENCOURAGING PRIVATE BIOTECH INVESTMENT

While modifications to Sections 1202 and 382 would represent key improvements
to the biotechnology investment environment, Congress has the opportunity to enact
new tax incentives which would further encourage private investment in our industry. There are a number of new proposals, including partnership structures to support high-risk industries, incentives for industry collaborations, and angel investor
tax credits, which could open up new sources of capital for biotech.
Partnership Structures
Congress support for biotechnology is critical in this uncertain economic climate.
Historically, Congress has provided tax incentives to high-risk industries as a
means of encouraging investment in new endeavors which it deems important. For
example, the oil and gas industry often invests significant amounts of capital to determine whether a particular well will be successful. When Congress wanted to spur
oil and gas exploration, it included provisions in the Code allowing investors to take
advantage of tax benefits accumulated by high-risk drilling and exploration companies. This encouraged investment despite the uncertain nature of the oil and gas
business.
Similarly, research and development in the biotechnology industry is a high-risk
undertaking with substantial start-up costs, a lengthy R&D period, and the possibility that the technology will not be commercially viable. The challenges that smaller oil and gas corporations face in finding and developing new resources and diversifying risk are analogous to the hurdles that small biotech companies must overcome.
These companies expend substantial financial resources on research and development before successful FDA approval.
As Congress looks to continue Americas leadership in the 21st century innovation
economy, it should look to tax incentives available to the oil and gas industry that
would be equally beneficial to the biotechnology industry. These incentives, when
combined with the research and development tax partnership structure, would encourage investment in the biotechnology sector. For example, allowing biotech companies to drop their R&D projects into joint ventures with investors to provide tax
benefits to those investors would create a powerful incentive structure for private
investment in this high-risk industry.
Incentives for Collaborations, Liquidity, and Initial Public Offerings
While most investment in the biotechnology industry comes from private sources,
companies within the industry often collaborate with one another to pursue their
research and development objectives. Collaborative arrangements provide an opportunity for specializationsmall companies can focus on innovation while larger companies utilize their greater expertise in downstream clinical trial management. Each
company uses its strength in order to bring cures to patients faster. These agreements involve upfront, milestone, and reimbursement payments for research and development undertaken by the small biotech. Given that these agreements have been
pervasive throughout the industry and are critical to its success, I would suggest
encouraging this important financing mechanism through tax incentives. A greater

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proliferation of these types of collaborations would provide substantial capital for
small biotechs and would leverage the know how found in the larger companies
in the industry to speed medical breakthroughs to patients.
Separately, as I have mentioned, there has been a dearth of initial public offerings
for biotech companies. This is problematic for two key reasons: first, it means that
the early investors, generally angels or venture investors, cannot sell their shares.
That means that they cannot return their initial capital or any return to their limited partners, who are primarily large institutions such as public pension funds or
endowments. Second, it means that companies are unable to access the considerable
resources available in the public markets.
Accordingly, Congress should consider a set of incentive structures, perhaps
through capital gains rate advantages or otherwise, that increase opportunities for
liquidity for investors and expand public appetite for public offerings.
Angel Investor Tax Credits
Congress can also look to the states for examples of how to spur biotech innovation. Over 20 states have implemented angel investor tax credit programs, in which
high-net-worth individuals are incentivized to invest in small innovative businesses
like mine. Angel investors play a valuable role during the seed stage of therapeutic
development. They are the main source of capital for about 50,000 companies each
year, but that number could decrease significantly unless action is taken to promote
investment and minimize risk. The states have recognized the importance of angel
investors and implemented tax credit programs reimbursing angels for 25% to 50%
of their qualified investments in biotechnology and other small businesses. This investment by the states makes clear the important impact that innovation can have
on the national level. It is imperative that Congress look at measures the federal
government could take that would spur seed investing vital to the beginning of the
research and development process.
CLOSING REMARKS

The U.S. biotechnology industry is a thriving growth engine for the American
economy, creating high-quality jobs in every state. Additionally, the medical breakthroughs happening in labs across the country could unlock the secrets to curing
the devastating diseases that affect all of our families. Congress has taken admirable steps toward supporting this valuable industry. However, if the United States
is to hold its place at the forefront of the 21st century innovation economy, further
investment is needed. Congress has the opportunity to make that investment, both
by improving current programs and incentives and by creating new ones which recognize the vital part that biotechnology will play in Americas future.

PREPARED STATEMENT

OF

MR. MARK G. HEESEN

INTRODUCTION

Chairman Casey, Vice Chairman Brady, and members of the Committee, my

name is Mark Heesen, and I am president of the National Venture Capital Association (NVCA) based in Arlington, VA. The NVCA is the only national trade group
representing venture capitalists. Our 400+ member firms invest in start-up companies across the country as well as globally in high-tech industries such as life
sciences, information technology, and the clean technology sectors. We estimate that
our membership comprises more than 90 percent of the venture capital under management in the U.S.
It is my privilege to be here today to share with you the role of venture capital
investment in start-up companiesand how that role contributes to economic
growth and innovation in the United States, particularly in the areas of life
sciences. We appreciate the opportunity to offer a transparent view into our world
and answer any questions the Committee might have.
THE FUNDAMENTALS OF VENTURE CAPITAL INVESTING

Venture capital funds typically are organized as private partnerships with a significant percentage of capital provided by qualified institutional investors such as
public and private pension funds, universities and endowments, private foundations,
and to a lesser extent, high-net-worth individuals. These investors, referred to as
the limited partners (LPs), have benefited greatly from the high-risk/high-reward
exposure afforded by venture capital as a relatively small component of their diversified investment portfolio. The venture capitalists that seek out start-ups for in-

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vestment are the general partners (GPs), and they also supply capital for the fund
from their own personal assets.
A venture fund is typically structured with a fixed term of at least 10 years, sometimes extending to 12 or more years. At the outset, a limited partner commits a
fixed dollar amount to the fund. As the GPs identify a new idea or company for investment, they make capital calls from their LPs, essentially collecting a portion
of the capital commitments to make the investment. Further capital calls are made
as each portfolio company becomes ready for a new tranche of investment by meeting milestones or growth trajectories. When a portfolio company has reached either
stand-alone stability and sustainability, or when it needs to access the deeper resources of the public capital markets, the GPs exit, through an initial public offering (an IPO) or an acquisition by a larger company, and the liquidity from these
exits is distributed back to the limited partners. Limited partners may not otherwise withdraw capital during the life of the venture fund.
After the venture fund is formed, the GPs job is to find the most promising, innovative ideas, entrepreneurs, and companies that have the potential to grow exponentially with the application of the venture capital expertise and investment. Often
these companies are formed from research that spins out of university and government laboratories. Because the venture industry has historically focused on hightechnology areas such as information technology, life sciences, and clean technology,
we rely a great deal on these labs to feed our pipeline.
Once a promising opportunity has been identified, venture capitalists vet the entrepreneur and his or her management team and conduct due diligence research on
the market, the financial projections, and other areas. For those opportunities that
clear this investigation, VCs make an investment in exchange for equity ownership
in the business. Venture capitalists also generally take a seat on the companys
board of directors and work side by side with the company founders to grow the
business. In many cases, particularly in the area of life sciences, the company founders are scientists with limited business experience. Therefore, the venture capitalists can play a crucial and complimentary role by helping to recruit talent, secure
customers, implement budgets, and develop long-term strategic plans. In other
words, venture capitalists are not passive investors. In fact, many are scientists and
technologists by trade and are therefore able to apply their technical and business
experiences directly to the growth of the company.
Venture capitalists expect to hold a typical investment for 510 years, often longer
in the area of life sciences, and rarely much less. During that time, VCs continue
to invest additional capital into those companies that are performing well and cease
follow-on investments into companies that do not reach their agreed-upon milestones.
The ultimate goal is described abovean exitwhich is when the company is
strong enough to either go public on a stock market exchange or become acquired
by a strategic buyer at a price that ideally exceeds the investment. At that juncture,
the venture capitalist exits the investment, though the business continues to grow.
In recent years, the venture-backed acquisitions market has far exceeded the IPO
market in terms of volume. This is especially true in the life sciences industry
where larger corporate pharmaceutical companies have come to rely on the purchase
of smaller venture-backed companies to support their R& D efforts.
Because at least one-third of venture-backed companies ultimately fail, and those
that succeed usually take 515 years to do so, there have historically been no other
asset classes that have the long-term patience and fortitude to withstand the highrisk nature of providing capital to these businesses. Commercial banks lack the appetite to invest in companies that have little or no collateral and such a high failure
rate. Hedge funds and buyout shops typically balk at the long-term nature of our
investments and the required level of engagement in the companys operations.
Friends and family and angel groups have become more active in recent years
mostly in the technology sector, less in life sciencesbut they do not have the capital necessary to take their companies all the way to a public offering or acquisition.
Because of these dynamics, the venture industry has been the only source of capital
for many of these companies as they move through their life cycles.
It is important to recognize that, despite the growing value created by venture
capital, we remain a small industry that is actually shrinking still. In 2010, the venture industry invested just $22 billionrepresenting less than 0.15 percent of GDP.
We currently have approximately $177 billion under management as an industry,
compared to the buyout or private equity industry which manages approximately
$800 billion and the hedge fund industry which manages an estimated $2 trillion.
We estimate that there are about 790 venture capital firms in the U.S. of which
58 percent are actively making new investments. Our small investment goes a long,
long way.

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CONTRIBUTION OF VENTURE CAPITAL TO THE U.S. ECONOMY

For the last four decades, the venture capital community has served as a founder
and builder of companies, a creator of jobs, and a catalyst for innovation in the
United States. This contribution has been achieved through high-risk, long-term investment of considerable time and dollars into small, emerging growth companies
across the country and across industry sectors. According to a 2011 study conducted
by econometrics firm Global Insight, companies that were started with venture capital since 1970 accounted for 12 million jobs and $3.1 trillion in revenues in the
United States in 2010. In doing so, our industry has collectively earned above average returns for our countrys pre-eminent institutional investors and their beneficiaries, including public pension funds, university scholarship endowments, and
charitable foundations.
Venture capital has been behind such technology innovations as computer chips
(Intel), search engines (Google), operating systems and routers (Microsoft and
Cisco), hardware (Apple), online social media (Facebook and Twitter), and online retail and auctions (Amazon and eBay). We have also supported business model innovations such as superstores (Home Depot and Staples), quality food chains (Whole
Foods), and coffee houses (Starbucks).
Within the last five years, the venture capital industry has committed itself to investing in the clean technology space, specifically renewable energy, sustainable materials, and environmental innovations. Since 2006, the industry has invested nearly
$14 billion dollars in companies innovating in the areas of solar and wind power,
electric cars, advanced battery technology, efficient energy grids, and water purification. I can say with confidence that the clean tech economy of the future will be
powered by venture capital.
Nowhere has the power of venture-backed innovation been felt more than in the
life sciences sector. Approximately one-third of all venture investment is directed
into biotechnology and medical device start-up companies each year. After funding
companies such as Genentech, Amgen, and Medtronic, the venture capital industry
has helped bring life-saving medical innovations to market over the last four decades. The results have been astounding. In 2010 alone, venture capitalists invested
nearly $6 billion into biotechnology and medical device start-ups. We estimate that
more than 100 million Americans have been positively impacted by a venturebacked medical innovation. Without venture capital, companies that have brought
to patients medical devices such as the pacemaker, ultrasound, MRI, angioplasty,
and blood glucose monitoring and drugs such as Integrillin, ENBREL, and Epogen
would likely have never come into existence. At one time, these lifesaving innovations were simply ideas put forth by scientists who had little experience in growing
a business. The infusion of venture capital dollars and expertise moved their products to market and, in doing so, these companies created new markets that have
made our lives healthier and more productive.
Despite popular belief that our industry only resides in Silicon Valley, venture
capital is a national phenomenon with investment going to all 50 states. While certain regions of the countrysuch as Northern California and New Englandhave
successfully established thriving venture-backed communities, other areas such as
Pennsylvania, New York, Colorado, Virginia and Minnesota continue to successfully
support their own start-up ecosystems.
Political leaders in these states and others are seeking to do for their states what
venture-backed companies such as Dell have done for Austin or Medtronic for Minneapolis. The positive economic impact of a successful venture-backed company
headquartered in a region can be measured not only in jobs and revenues of that
particular company but also by the spinouts of companies that inevitably emerge.
A culture of entrepreneurship feeds on itself and can organically grow if the environment is properly nurtured.
Despite the value and economic strength created by venture capital investment,
we are still a small and fragile industry. Our investing dynamics are highly susceptible to changes in our ecosystem. The one commonality for innovation and entrepreneurship to succeed is a consistent alignment of critical investment drivers including robust capital markets, access to talent, and a regulatory and tax environment
that supports risk-taking and long-term investment. Over the last several years, we
have faced challengesboth market and policy drivenbut with these challenges
comes opportunity to mitigate the uncertainty and continue to encourage long-term
investment in Americas start-up companies.
PROTECTING THE AMERICAN START-UP ECONOMY AND INNOVATION

Public policy plays a significant role in the health of the venture capital industry
and in the companies in which the industry invests. Given the dynamic and evolu-

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tionary nature of our ecosystem, we need policies and programs that promote certainty, supporting and encouraging the formation and growth of companies that are
innovating in a meaningful way. The following represents some of the most important ways that policymakers can help ensure our start-up ecosystem continues to
prosper.
Encouraging Long-Term Investment Through Tax PolicyNVCA has long advocated for a tax structure that fosters capital formation and rewards long-term,
measured risk taking. We believe that the returns earned by venture capitalists and
entrepreneurs as a result of building successful companies that are out-innovating
others over the long term should be taxed at the capital gains rate. In recent years,
this tax rate has been threatened by those who do not understand the importance
of encouraging venture investment. It is critical that the capital gains tax rate is
globally competitive and preserves a meaningful differential from the ordinary income rate so that proper incentives remain for investors who are often dedicating
more than a decade of capital and time to each of their companies. We appreciate
the support of many members of Congress, including Chairman Casey and Vice
Chairman Brady, in recognizing this dynamic.
To encourage truly long-term investment, serious discussion regarding the holding
period required to qualify for a long-term capital gain should be made part of any
upcoming debate on tax reform. The NVCA has been supportive of increasing the
holding period generally for capital gains and also developing a tiered capital gains
rate so that the longer an investment is held, the lower the tax rate on the ultimate
gain. One area where a longer holding period would be helpful is in the capital markets where many investors are buying and selling shares of our venture-backed companies quickly. Offering capital gains tax incentives for investors to buy and hold
public stock of small cap companies for longer periods of time will help encourage
investment in our companies once they go public, increasing the appeal of an IPO.
Ironically, although the R&D tax credit is important to many midsize and large
corporationsmany of whom are venture graduatesit is not a critical component
of tax policy for start-ups that are still in the venture fold. Companies receiving current venture support generally are losing moneywhich is why banks and other
traditional sources of finance find them too riskyand thus cannot use a tax credit
that is structured for companies that are profitable. As lawmakers consider broadscale tax reform to create a simpler, fairer tax code, the NVCA urges both Congress
and the Administration to build a system that supports small companies and their
investors as well as those that address the concerns of large, multinational corporations.
Protecting Sources of Future CapitalAs previously stated, venture capitalists receive more than 90 percent of their money from institutional investors who commit
a small percentage of their portfolio to alternative assets of which VC is but one.
These investors typically enjoy above-average returns in exchange for the risk factors associated with venture investing. We estimate that public and private pension
funds represent approximately 40 percent of the institutional investor base for venture capital, making this investor group the largest overall for the venture industry.
The share is significant to the future of our industry as we are beginning to see
a movement from defined benefit to defined contribution pension plans, particularly
at the state and local level. If this shift continues in a meaningful way, the venture
industry will be at risk for losing a critical source of capital as there is currently
no viable means by which a defined contribution plan can invest in our asset class.
In 1978 Congress and the Department of Labor worked with the then fledging
venture community to develop rules which permitted defined benefit pension plans
to take part in venture capital. The result was the beginning of the American venture capital process we know today. Not since that time has the issue of institutional investor pools been more important to the future of the venture industry, and
we hope to work together to develop some viable solutions to this looming concern
over the next several years.
Encouraging More Small Cap IPOsStudies show that more than 90 percent of
job creation occurs after a venture-backed company goes public. In the last decade,
however, the market for venture-backed initial public offerings (IPOs) has suffered
due to unfavorable market conditions and ramifications from one-size-fits-all regulations. From Sarbanes Oxley (SOX) to the Global Settlement to Reg FD, regulations
intended for larger multinational corporations have raised burdensome obstacles
and compliance costs for start-ups trying to enter the public markets. From 2008
2010, only 62 venture-backed companies have gone public compared to the same
time period one decade ago when 583 companies had IPOs. At the same time, venture-backed acquisitions have been taking place in record numbers. While venture
capitalists can return money from an acquisition, the IPO is the exit which translates into job creation for the U.S. Imagine if, instead of going public, Genentech

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was acquired by Johnson & Johnson. While one would hope that the innovation
would prevail, the job creation that would have inevitably been quashed in the consolidation is almost unimaginable. The IPO dearth must be addressed or we face
serious economic risks for our country.
The NVCA is actively engaging with Congress, the Administration, and regulators
on ways in which we can make the path to an IPO once again smoother, particularly
for small cap companies. We feel there is an appetite for regulatory right-sizing so
that our capital markets can once again be a viableand preferredexit for venture-backed companies.
Implementing Health Reform that Promotes InnovationImproving the quality of
care and fostering the advancement of innovation that improves the efficiency and
cost-effectiveness of healthcare delivery are critical pieces to venture capital investment and our health care system. While not the focus of todays hearing, we do have
concerns regarding the medical device excise tax as well as the Medicare capital
gains tax and the potential impact of those measures on our portfolio companies and
our industry. As the law is implemented, we hope that all Members of Congress will
remain open to hearing from our industry on those issues.
Other elements of the health care reform law, such as the increased emphasis on
comparative effectiveness (CER), have the potential to improve patient outcomes
and increase the efficiency with which our system delivers them. However, it is essential that CER be undertaken with the proper focus and context, to ensure that
CER does not create undue hurdles for innovative new drugs and technologies.
Similarly, we are concerned that the Independent Payment Advisory Board
(IPAB) has the potential to be an unbalanced regulatory authority that could stifle
advances in medical innovation and hobble free market competition. NVCA believes
that, to be effective, entities such as the IPAB and the CER must include persons
with deep expertise in medical technology innovation. These members would serve
as needed advocates for innovation, ensuring that attempts to cut costs are balanced
by an understanding of both the benefits of innovation and the potential impact that
certain reforms may have on the future of medical innovation in our country. This
will ensure a proper balance between saving money, continuing to invent life-saving
treatments for the future, and continuing to allow patient access to innovative technologies and therapies.
Supporting Broad-Based FDA ReformJust as one-size-fits-all regulation has impacted the public stock markets, so too has it impacted medical innovation. The
Food and Drug Administration (FDA) is one of the most influential government
agencies in the United States, regulating 25% of the products in the domestic economy and impacting millions of patients each year. In recent years, when evaluating
new drugs and medical technologies, the FDA has become increasingly reticent to
balance the benefits against the risks of new therapies and technologies for seriously ill patients. In many cases, the evidence demanded to support approval has
become unnecessarily extensive and cumbersome, deterring investment in innovative therapies and technologies for serious diseases. This is particularly troubling
in areas where there are unmet medical needs and is resulting in less and later access to life-saving products when compared to other countries. Moreover, the regulatory burden is having a negative impact on job creation and is threatening our
countrys leadership in life sciences innovation.
Within the last year, our organization has formed the Medical Innovation and
Competitiveness Coalition (MedIC) which comprises both venture capital firms and
companies operating in the life sciences arena. The mission of the coalition is to advocate for policies that improve certainty and transparency within the FDA approval
process which will, in turn, encourage investment in life sciences companies. Specifically, we are calling for FDA reform that returns the balance to the review and approval process, ensuring seriously ill patients access to breakthrough therapies and
technologies in a timely fashion. The regulatory assessment of benefit and risk
should reflect the importance that patients and healthcare providers place on access
to new products in the United States.
NVCA MedIC will be asking Congress to enact a set of focused and targeted policies that would restore the balance of patient benefits and risks in FDA decisionmaking, reform the regulation of innovative technologies, hold the Agency more accountable to patients, healthcare providers, and sponsors, and strengthen the FDAs
role in the innovation economy to restore U.S. competitiveness. A copy of our priorities in this regard is attached as addendum A.
Also, it should be stated for the record that the NVCA understands that these reform measures require an FDA that is adequately funded. While the 2011 fiscal
budget largely spared the FDA from significant cuts, we have concerns regarding
future cuts in the 2012 budget. While all agencies should root out waste and duplication, untempered resource reduction at the FDA will result in a reduction in inno-

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vation being delivered to the American people. We ask that Congress be mindful of
the trade-off here.
Filling the R&D PipelineMaintaining Americas global innovation advantage requires continued federal funding for basic research and development. Discoveries in
federal labs and universities remain the germination points for the breakthrough
ideas that can be commercialized by entrepreneurs and venture investors and transformed into the promising new companies that will drive job creation and economic
growth. This unique public-private partnership has delivered countless innovations
to the American public and a decisive competitive advantage to the U.S. economy
for decades. Yet, recently, fiscal realties have threatened the funding levels for basic
research grants in such areas as life sciences and energy. We understand the need
for fiscal responsibility, but drastically reducing the funding those types of companies that can participate will be devastating long term to our global economic leadership. As Congress reviews ways to cut spending and balance the budget, we urge
lawmakers to take a longer-term approach and protect those areas that are innovating for the future.
Further, we remain extremely disappointed regarding the once again stalled SBIR
Reauthorization bill. The ongoing lack of clarification regarding whether venturebacked companies can apply for government grants (such as SBIR grants) to conduct
early stage research has unquestionably hurt the innovation pipeline. We hope that
another year does not go by in which the most promising, innovative projects are
not eligible to receive SBIR grants and subsequently die on the vine.
Embarking Upon Legal Immigration ReformThe U.S. must continue to attract
and retain the worlds best and brightest minds if it wants to maintain its global
economic leadership. However, a number of factors have hindered our ability to keep
foreign-born entrepreneurs here in the U.S. The first is that developing countries
such as India and China have been hard at work over the last decade growing their
own start-up ecosystems that today rival the U.S. market. In many cases, they are
offering tax and other incentives for entrepreneurs to form their companies on their
shores. Foreign-born entrepreneurs now have a number of good choices in terms of
where they start their businesses. Second, and more importantly, it has been increasingly difficult for these foreign-born entrepreneurs to come to the U.S. and
build their companies here due to our immigration policies. Even students who have
studied at the best American universities are finding it difficult to remain and innovate here. We estimate that 25 percent of the largest venture-backed companies that
today are thriving public entities were founded by one or more foreign-born nationals. Unless our government is able to reform our legal immigration policies, we remain at high risk for losing these innovators to other countries.
For this reason, NVCA supports policies that allow foreign-born entrepreneurs to
come to America to build their companies and create U.S. jobs. Proposals such as
the Start-Up Visa Act will allow enterprising professionals to come here to develop
their ideas and then remain here to build their companies, as opposed to innovating
and creating economic value overseas. Further, the NVCA supports a streamlining
of the pathway to green cards for foreign-born graduate students who wish to remain in the United States upon completion of their studies.
Protecting Small Innovators and Inventers with Patent ReformWe continue to
have significant concerns regarding the patent reform legislation that has passed
the Senate and which is currently being taken up in the House. While we strongly
support the provisions that would end the diversion of fees from the patent office,
giving examiners critical resources, we remain concerned that other sections of the
bill may not adequately protect small innovators. Small venture-backed companies
use every dollar for research, product development, and scaling their enterprise.
They do not have the deep reserves necessary to protect themselves from large companies that infringe on their patents or that may use some of the new procedures
in the legislation, such as postgrant review, as a harassment tool. We will continue
to work with Congress to amend the current bill to help these small companies as
the implications for investment in this sector are significant.
CONCLUSION

In many ways, America is at a cross roads when it comes to enacting policies that
support start-ups job growth and innovation across all industry sectors, including
the life sciences industry. Market forces have challenged the U.S. venture capital
industry over the last several years while foreign countries have grown their own
ecosystems at a rapid pace. At the same time, the regulatory restrictions placed
upon those companies that are innovating in meaningful ways have weighed down
the growth trajectory these start-ups once enjoyed. Our global leadership in innova-

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tion can no longer be taken for granted; in fact we are at risk for losing it in certain
areas if we do not address the challenges that we face.
The opportunity remains to encourage long-term investment in start-up companies through smart and fiscally sound tax policy. The regulatory environment can
be right-sized and adjusted to ensure that the best companies are able to bring their
most innovative products to market and thrive in our countrys capital markets system. And policies can be enacted so that the best and brightest minds can build
their businesses in the U.S., and the best and brightest breakthroughs can be funded in their earliest stages. If we take the proper paths here, there is no doubt that
innovation will prevail. We appreciate your willingness to better understand our industry and its key drivers so the path towards growth and protecting innovation
will indeed be taken.
The venture capital industry remains committed to long-term investment in our
countrys future. We look forward to working with Congress to ensure that our companies continue to grow and create significant economic value for years to come.

PREPARED STATEMENT

THE CALIFORNIA HEALTHCARE INSTITUTE, SUBMITTED

REPRESENTATIVE JOHN CAMPBELL

OF

BY

INTRODUCTION

CHI is the statewide public policy organization representing Californias innovative biomedical sector, including the states premier research universities and institutes, venture capital firms, and medical device, diagnostics, and biotechnology companies. Our mission is to identify and advocate for policies that encourage life
sciences research, investment, and innovation. We are grateful for the opportunity
to provide comment on innovation and job growth within the life sciences sector and
to address the importance of certain federal policies to the continued vibrancy of the
sector, especially given broader macroeconomic factors and conditions as the financial markets crisis and increased global competition.
BACKGROUND

Californias biomedical industry is responsible for breakthrough treatments,

therapies, and technologies that are improving and extending the lives of millions
in the United States and around the world. It is also a key component of our state
and national economy. As reported in our CHI/PricewaterhouseCoopers/BayBio 2011
California Biomedical Industry Report, California is home to over 2,200 biomedical
companies, employing 268,000 people, making it one of the top high-tech employers
in the state. The sector is responsible for over $114 billion in annual revenues, $15.4
billion in exports, and $19.4 billion in wages and salaries. Last year, Californias
biomedical innovators also attracted $3.2 billion in National Institutes of Health
(NIH) research funding and $2.6 billion in venture capital (VC) investment.
Over the past generation, California has developed a remarkably rich and diverse
ecosystem that has fostered the growth of vibrant biopharmaceutical and medical
technology industries. This ecosystem is shaped and influenced by many factors that
can bolster or weaken it. At the federal level, these factors include policies set by
Congress and government agencies in areas such as science funding, tax policy, and
regulation by the U.S. Food and Drug Administration (FDA). It is also shaped by
other external economic factors. Below is an overview of each of these themes.
Federal Biomedical Research Funding has historically served as the fuel
priming the pump of biomedical innovation. In fact, the biotechnology industry was
born in California with the founding of companies like Amgen and Genentech based
upon biomedical research at institutes such as Stanford and the University of California. Today, one-third of our states biotechnology firms were founded by University of California scientists.
California has averaged 15 percent of NIH-awarded funding over the past decade.
In 2009, NIH grants, excluding R&D contracts as well as stimulus bill-funded
projects, totaled $21.483 billion. That year, 7,082 California applicants were selected
for funding that totaled $3.2 billion. As NIH funding helped make California and
the United States the global leader in biopharmaceutical innovation, the future of
the industry will likewise be tied to the commitment of Congress to continue its support for such funding, even in such fiscally challenging times as today. Moving forward, CHI is hopeful that Congress will better recognize the value of NIH funding
as an investment into the innovations, jobs, and medicines of the future and commit
to a more thoughtful approach to strengthen and sustain support for the nations
biomedical research infrastructure.

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Numerous Federal Tax Policies exist to encourage increased investment into
the research that enables companies to develop new treatments, technologies, and
therapies for patients here at home and around the world, while also creating quality jobs that fuel economic growth in California and across the nation. This includes,
of course, the federal Research and Development (R&D) tax credit. As important as
this policy is, the requirement of annual extensions instead of long-term or permanent extension results in uncertainty and makes long-term investment planning difficult. R&D uncertainty drives capital away as companies seek out other markets
or apply the credit less when making assessments about whether to invest in new,
costly projects. According to the Information Technology and Innovation Foundation,
the United States ranks No. 17 in R&D tax incentives out of the top 30 Organizations for Economic Co-Operation and Development (OECD) countries. The United
States ranked No. 1 as recently as the 1990s.
Two more recent tax policies enacted as part of the new healthcare reform law
demonstrate seemingly contradictory goals. In the case of the Therapeutic Discovery
Project Credit, Congress created grants and credits, limited to companies with less
than 250 employees, to purposely encourage investment into new therapies. Specifically, the program allotted $1 billion over FY2009 and FY2010 for investments that
demonstrated potential to result in new therapies to treat areas of unmet medical
needs or to prevent, detect, or treat acute conditions, reduce long-term health costs
in the United States, or significantly advance the goal of curing cancer within 30
years, and advance U.S. competitiveness and create and sustain high-quality, highpaying jobs in the country. The provision was hugely successful. California-based
firms alone were awarded with over $280 million in grants and credits for projects
targeting conditions and diseases such as cancer, spinal cord injury, tuberculosis,
Parkinsons, hepatitis, diabetes, and heart disease.
Unfortunately, the same law enacted a $20 billion excise tax on the medical device
industry, which will, without a doubt, negatively impact R&D and job creation to
some, likely considerable, extent. There are over 8,000 medical device firms throughout the nation employing over 400,000 people. California is home to over 1,200 of
these firmsmore than any other state in the nationand the more than 107,000
medical device jobs in California represent roughly one-quarter of the total U.S.
medical technology workforce. Given our still uncertain economy, it is especially important that we do everything we can to encourage, not hamper, investment, entrepreneurship, and innovation. Again, for most companies, the device tax would
threaten payroll reductions and slash R&D investmentsanything but foster innovation. This is especially the case for small firms, which make up the bulk of the
sector in California and across the country. It is difficult to quantify the precise
number of jobs or lost R&D the tax would pose to California companies, however,
it is reasonable to worry that as home to the largest segment of the nations medical
technology industry, our state will be disproportionately impacted by the device tax.
FDA Regulatory Consistency, Predictability, Transparency, and Efficiency helped the United States become the global leader in life sciences innovation. Indeed, history shows that a strong, science-based FDA and well-articulated,
predictable, and consistent regulatory process are essential to biopharmaceutical
and medical technology investment, innovation, and patient care. And, until recently, FDA policies and organizational structure have served as models for regulators around the globe.
Beginning in approximately 2007, however, evidence clearly confirms that FDA
biopharmaceutical and medical device regulation has become increasingly slow and
unpredictable.
As documented by the FDAs own data in our recent CHI report, Competitiveness
and Regulation: The FDA and the Future of Americas Biomedical Industry, comparing the latest data with the 20032007 period:
Drug and biologics review times have increased by 28 percent
510(k) device clearances have slowed by 43 percent
PMA device approval times have lengthened by 75 percent
No single factor explains this decline. Clearly, part of the problem lies beyond the
direct control of the FDA and its leadership. In recent years, for example, Congress
has enlarged the Agencys scope into new fields (e.g., tobacco) and added to its responsibilities and authority. Yet federal appropriations have largely failed to keep
up with new mandates, forcing greater reliance on industry-funded user fees. Similarly, expanded and tightened responsibilities under the FDA Amendments Act of
2007 (FDAAA), such as intensified conflict of interest rules on advisory committees,
have constrained the Agencys capacity.
Perhaps the most important factor in the Agencys recent history, though, has
been a change in its culture. Faced with accusations from the press, consumer

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groups, and some in Congress that its reviews were too lax and failed to protect the
public from safety problems with drugs and devices, the FDA has shifted emphasis
in product reviews from the benefits of new products to an increasing weight on
their possible risks. When broken down, industry anecdotes about Agency uncertainty, unpredictability, moving goalposts, and the like all seemingly revolve
around ever-increasing demands that are not justified by science or by any increased risk profile of the medicines or devices to which those demands are associated. From the perspective of an FDA device reviewer, this is understandable. After
all, an individual reviewer has nothing to gain by approving a product but much
to lose by approving a product that has a problem in the future.
In a larger sense, a serious problem for device and drug innovation alike is that
there is no shared understanding of the benefit-risk calculus. Most medical advances
carry some risks. And a basic principle of medicine is that the risk of any interventiona procedure, a drug, a deviceshould be commensurate with the seriousness
of the patients disorder. Accordingly, for example, patients with advanced coronary
artery disease are typically willing to accept risks for new minimally invasive procedures and technologies that have a chance to not only treat the condition but result
in faster recovery times and shorter hospital stays. What has happened within the
FDA, though, is that more and more attention has been focused on the potential
direct risks of new medicines and technologies without sufficient appreciation of potential benefits.
But just as important to consider are indirect risksdistortions in the regulatory
process, for example. How do we calculate and consider the public health loss to patients if investors and companies avoid entire diseases and conditions because the
FDAs demands for clinical data are so extensive and its standards for approving
new products so uncertain?
With this in mind, CHI believes that it is critical that Congress, the FDA, industry, patient groups, and other stakeholders come together with the will and ideas
to restore Agency performanceto rejuvenate, support and sustain a strong,
science-based FDA and efficient, consistent, and predictable review processes to ensure safe and innovative therapies, treatments, and technologies for patients in
need.
In addition to these federal policies, a number of important External Macroeconomic Factors have combined to worsen the environment for the life sciences
industry.
Beginning in 2008, the Great Recession devastated investment portfolios, including the pension funds and institutional endowments that historically have been the
main source of life sciences venture capital. Meanwhile, VC firms themselves also
sought to reduce risk, trending away from early stage investmentsones that combine the greatest innovation with the greatest risk. To make matters worse, the initial public offering (IPO) market for biotechnology and medical device companies all
but vanished. After the collapse of iconic firms such as Lehman Brothers, Wall
Street had little interest in offerings from young companies with no operating revenues that would need continuing infusions of capital over many years.
Smaller companies were forced to adapt by redesigning the biomedical business
modelreceive regulatory approval, demonstrate adoption by physicians and patients, and present to potential acquirers as a lower-risk investment. From the perspective of company and investor alike, winning approval sooner in any market became far more valuable than gaining FDA approval later.
Levels of regulatory uncertaintydelays, missed timelines, doubts about eventual
approvalthat had been uncomfortable in good economic times became intolerable
after the economic downturn. Especially, as investors and executives came to realize, there are practical, more efficient routes to market outside the U.S.
Overseas regulators have recognized that regulatory efficiency can bolster biomedical innovation, investment, and job creation without undermining patient safety. The European Medicines Agency (EMA) has been especially forthcoming about
its ambitions to encourage and facilitate biomedical investment and innovation in
the EU. For example, in its strategic document, Road Map to 2010: Preparing the
Ground for the Future, the EMA stated that its role in enabling the pharmaceutical industry to achieve the objective of industrial competitiveness is crucial.
They have begun to succeed. Today, complex medical devices approved via the PMA
process in the United States are approved in Europe on average nearly four years
ahead of the United States, up from just over a year earlier this decade. And where
new medicines were approved first in the U.S. by an average on nearly seven
months between 2004 and 2006, recent years show products approved on average
two-and-a-half months earlier in the EU, a shift of nine months. Of course, in either
case, the result is that European patients benefit from U.S. innovations before

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Americans do. And no evidence exists to suggest that these faster approval times
in Europe have led to systemic patient safety-related problems.
These elementsmacroeconomic factors and increased global competitionemphasize the important consideration that must be given, including through constructive congressional hearings such as today, to the costs of regulation. As this Committee and the Congress seek paths to create new jobs and promote innovation, the
costs of the regulatory system should be carefully weighed. As the global economy
grows ever more connected, American leadership in the life sciences sector faces intense competition: for capital, for markets, for talent and for jobs. As these competitive forces gather momentum, investors, managers, and policymakers ignore them
at their peril. If FDA regulation, for example, is just one factor among several, it
nonetheless can be pivotal.
CONCLUSION

Californias life science sector is a critically important element of our state and
nations continued vitality in the increasingly competitive 21st century global economy. It is also, just as important, critical to improving patient care and public
health here in the United States and around the world. However, the biomedical
innovation ecosystem in California and nationwide is under tremendous stress. And
in todays still uncertain economic environment, it is especially important that policymakers thoughtfully weigh the full consequence of decisions and trends in areas
such as NIH funding, tax policy, and the FDA in the context of broader macroeconomic factors and the global economic competitiveness framework in order to
help foster and stimulate the environment to encourage job creation, attract investment, and promote continued life sciences innovation.
Again, we thank you for the opportunity to have our remarks be a part of the
record.

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