Biotech Industry Seeks Congressional Greenlight for NOL Sales
A new approach to financing could become available to pre-revenue biotech companies if Congress signs off on it.
The San Francisco Business Times reported that industry lobbyists are urging Congress to approve a plan that will allow companies that are not yet generating revenue from the sales of their assets to be allowed to sell net operating loss carryforwards to larger companies. In other words, the biotech companies are looking to sell their losses to larger companies to provide them with a tax credit that would allow them to lower their tax burden.
Currently, net operating loss (NOL) carryforwards allow businesses that have suffered financial losses within a fiscal year to deduct them from profits in future years. This will enable businesses to be taxed on average profitability. The plan floated by biotech leaders would certainly be appealing to some of the larger companies.
As the Business Times explained, NOL carryforwards are attractive to merger and acquisition specialists because of their practical applications in decreasing tax burdens. But, those are NOLs that are gained through an acquisition. The current plan seeks to give small companies the ability to sell those losses on the open market without going through the M&A process.
If a company gains a commercial revenue stream, it can take up to a decade and hundreds of millions of dollars in revenue that can offset those net operating losses.
While the sale of NOLs is not an option across the country as a whole, there are places where the practice is already in place. For years, the state of New Jersey has allowed tech and life sciences companies to sell up to $20 million in state net operating losses or R&D tax credits to buyers, which the purchasers can use to reduce taxable income.
California has also reinstated the sale of NOLs as the state faced a budget deficit of $34 billion. It appears to have been successful as the state is now projected to have a surplus.
But, at the federal level, the idea of NOL sales has not seen much movement.
This plan would allow early-stage companies with a new source of capital, mainly if they have been unsuccessful at finding significant funding from venture capitalists. The Business Times report comes the same day that Third Rock Ventures announced a new $1.1 billion fund aimed at supporting startup companies.
The approach would provide a new source of funding for these early-stage companies. The supporters of the plan also noted that larger companies would benefit through a new tax-reduction tool.
The Business Times speculated that these NOLs are worth hundreds of millions of dollars. If the carryforward sale is allowed, the biotech industry hopes this could also serve as a catalyst for investors to return to supporting these early-stage companies to drive the development of new therapies, diagnostics and medical devices.
Investors have largely backed away from biotech and pharma over the past year due to market uncertainty caused by inflation, supply chain disruptions, the ongoing war in Ukraine and continuing talks about drug price controls. Since the start of the year, the Nasdaq Biotechnology Index has been down nearly 30%.