$1B in cash grants available soon for small biotech

by John Chase and Evan Ng, partners at Dorsey Whitney LLP

The recently enacted healthcare reform legislation provides up to $1 billion in tax credits and cash grants for life sciences companies with 250 or fewer employees that have made or will make “qualified investments” in “qualifying therapeutic discovery projects” during 2009 and 2010. Credits and grants will be awarded through a competitive application process which is expected to commence on or before May 21, 2010.

A “qualifying therapeutic discovery project” is a project which is designed to develop a product, process or therapy to diagnose, treat or prevent diseases and afflictions by (1) conducting pre-clinical activities, clinical trials, clinical studies and research protocols, or (2) developing technology or products designed to diagnose diseases and conditions, including molecular and companion drugs and diagnostics, or to further the delivery or administration of therapeutics.

A “qualified investment” is the aggregate amount of the costs paid or incurred in 2009 or 2010 for expenses necessary for and directly related to the conduct of a qualifying therapeutic discovery project, subject to certain limitations and exclusions. The tax credits are equal to 50 percent of the qualified investment, and taxpayers may elect to receive the credits in the form of a cash grant. Any such grant is not includable in the taxpayer’s gross income. The availability of a cash grant significantly increases the appeal of the program to companies in a loss position who may not otherwise be able to immediately utilize the credits. Furthermore, unlike the grants available under the Small Business Innovation Research (SBIR) program, corporations that are majority owned by venture capital funds should be eligible for cash grants based on their qualified investments.

Companies must apply to the Secretary of the Treasury in order to obtain certification for qualified investments.