54.3 F
San Diego
Tuesday, Mar 19, 2024
-Advertisement-

SEC Ruling Could Aid R & D; for Local Biotech Firms

SEC Ruling Could Aid R & D; for Local Biotech Firms

Biotech: Plan Could Give Smaller Companies More More Flexibility in Structuring Collaborations

BY MARION WEBB

Senior Staff Writer

The Securities and Exchange Commission has proposed regulations enabling biotechnology companies to raise their income from investments by not having to register as investment companies and comply with mutual fund rules.

The Washington, D.C.-based industry trade group Biotechnology Industry Organization, known as BIO, asked the SEC in May to exempt biotech firms from the Investment Company Act of 1940.

The five-member SEC panel voted unanimously Nov. 26 in favor of the proposal and set Jan. 15 as the deadline for public comment.

“This proposed rule will help biotech companies that often need to raise a large amount of capital to invest those proceeds and use the principal to fund their research and development activities during what is typically a lengthy product development process,” said Peter Norman, manager of federal government relations at BIO.

Rich Mejia, a partner with Ernst & Young in San Diego, sees no short-term benefit for the maturing local biotech industry.

“I don’t think it’ll have an immediate significant impact on San Diego,” Mejia said.

“Historically companies have been more concerned about conserving cash for internal development and haven’t had access cash to invest.”

Still, there is the potential for large investment gains down the road, he said.

Joe Lesko, special council for the law offices of Heller Ehrman White & McAuliffe LLP in San Diego, said, “The new rule gives the smaller biotechnology firms more flexibility in structuring R & D; collaborations.”

Under the proposed rule, biotechs could earn twice as much from certain investments as they spend on R & D; without having to register as an investment company, Lesko said. Now firms are only exempt if they spend more on research than they earn on investments.

Having more flexibility may entice pharmaceutical firms to enter partnership deals with biotech startups.

Traditionally, drug firms have made large upfront cash payments to biotechs to get their costly research off the ground, Lesko said.

Under the proposal, drug firms may trade higher equity for less upfront cash, thus lowering their financial risk earlier in case the biotech doesn’t deliver on its promise.

If the collaboration succeeds, the biotech then benefits from the upside of the larger organization, he said.

Under the proposal, biotechs would also be eligible for the exemption if their R & D; spending was “a substantial percentage of its total expenses for its last four fiscal quarters combined and that equal at least half of its investment revenues for that period,” the SEC said in a statement.

Biotechs increasingly rely on partnership deals to fund their costly drug development, Lesko said. Even minority investments can add up.

“Pretty soon a well-financed biotech company that enters into several R & D; collaborations may end up owning stock in various companies and then it begins to look like an investment company,” he explained.

Many biotechs also “have few tangible assets and often hold large amounts of capital in liquid instruments so that funds are readily accessible for research and development,” the SEC said.

This too can make a biotech firm look like an investment company, Lesko said.

Finally, the proposed rule removes some uncertainty for biotechs thinking about going public, Lesko said. That is because the IPO prospectus indicates the investment company act may apply to biotech firms.

This means biotechs may be exposed to certain legal issues the underwriters would prefer avoiding, Lesko said.

Still, Doug Obenshain, who also is a partner with Ernst & Young in San Diego, said he’s never seen a local biotech that went public become a subject of the investment act.

“To the best of my knowledge none of them have been subject to that rule,” he said.

Lesko stressed that biotechs would only be eligible for exemptions if they met all the guidelines of the ruling.

-Advertisement-

Featured Articles

-Advertisement-
-Advertisement-

Related Articles

-Advertisement-
-Advertisement-
-Advertisement-