Slow growth: the US biotech industry has suffered in the recession. Credit: T. Horowitz/Corbis

Tucked away on page 759 of the voluminous health-care law signed by President Barack Obama in March is a provision to aid small companies doing research and development (R&D) in biotechnology. Starting on 21 June, many of those companies will be racing to take advantage of a tax credit worth up to $5 million per company and totalling $1 billion.

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

The pressure has taken its toll. According to the Biotechnology Industry Organization (BIO), there were at least 394 public US biotech firms in January 2008. By January 2010, 285 remained. Most of those lost were early-stage firms. "We were seeing literally a generation of biotech companies being shelved," says Alan Eisenberg, BIO's vice-president for emerging companies and business development.

The tax credit is targeted at vulnerable young businesses — only those with fewer than 250 employees are eligible — and covers up to half of the R&D expense for qualifying projects. Because most biotech companies don't earn a profit in their early years, and therefore owe no taxes, they wouldn't benefit from a tax credit. So the programme allows those firms to convert the credits into grants. In fact, the programme is largely a grants programme disguised as a tax credit, says Barry Bozeman, a professor of public policy at the University of Georgia in Athens, who notes that tax credits tend to be more politically palatable.

Credit: Source: BIO

To be eligible, a project must demonstrate the potential to produce new therapies, reduce the cost of health care or contribute to the goal of curing cancer within 30 years. GlycoMimetics of Gaithersburg, Maryland, is one potential candidate for the credit. Rachel King, the company's chief executive, hopes the money could be used to expand clinical trials for its drug to treat sickle-cell anaemia. XOMA, a firm in Berkeley, California, will probably submit multiple applications, each for a different project, says its chief financial officer, Fred Kurland. One project XOMA is likely to put forward is its lead therapeutic — an antibody that reduces inflammation.

Syndax of Waltham, Massachusetts, a company that focuses on cancer, is still mapping out its strategy to maximize its chances of getting the credit, says its financial controller, John Pallies. "We could do one application per drug, or per type of cancer, or per patient population," he says. "There's not a good sense of how these projects are going to be evaluated."

Under the programme there is no limit to the number of projects that can be funded at a single company, and the $1 billion total will be distributed among all qualifying projects. Eisenberg estimates that about 600 of BIO's members will apply for funds, plus about 600 companies that are not part of the organization. This deluge of applications could lead to smaller awards per proposal. "In all likelihood, with so many applications, no project is going to get more than a million dollars," says Kurland. Eisenberg points out that 85% of BIO's members with fewer than 350 employees have R&D budgets of less than $30 million.

The grants are clearly tiny compared with the billions often required to fully develop a new drug, but they are enough to stimulate early-stage research, says Eisenberg. "Will it mean that you don't have to go out and do other fundraising?" says Kurland. "No. But maybe it gets you over the hump, or maybe it encourages others to invest in your company."

The credit should help address concerns that US biotechnology is falling behind in the face of increasingly vigorous international competition. "The United States was the first to have a tax credit for R&D back in 1981," says Gregory Tassey, a senior economist at the National Institute of Standards and Technology in Gaithersburg. "Since then, other countries have come up with their own. Now we're down around seventeenth in terms of actual financial impact of our R&D credit."

For now, the credit is only mandated to cover costs incurred in 2009 and 2010, but it's a safe bet that the industry will lobby for the programme's renewal. Even so, the credit is unlikely to solve the real challenge facing the sector: how to sustain a high-risk industry that often takes a decade or longer to generate a viable product. "This is not going to solve any long-term problem," says William Caldwell, chief executive of Advanced Cell Technology, headquartered in Santa Monica, California. "It's just going to be part of the funds that a company can access just to stay alive."