Featured Health Business Daily Story, Dec. 7, 2010

Biotech Gets $1B Under Reform, But Firms Sought Bigger Shares

Reprinted from AIS's HEALTH REFORM WEEK, the nation’s leading publication on the business implications of the massive changes for the health industry mandated by reform.

November 22, 2010Volume 1Issue 22

While biotechnology firms welcome the $1 billion available under the federal health reform law to spur research and development of new therapies, numerous firms report receiving sums totaling far less than expected. That is because funding was divided among several thousand applicants — and capped in an unanticipated way, company executives tell HRW.

A total of 5,600 companies applied for money under the Qualifying Therapeutic Discovery Project (QTDP) program by the July 21 deadline. The program was designed to provide tax credits and grants for 2009 and 2010 to small firms showing significant potential to produce new and cost-saving therapies, support U.S. jobs and increase U.S. competitiveness.

The IRS, along with NIH, reviewed and approved applications that met criteria by Oct. 29, as congressionally mandated. It also determined the tax credit or grant amount for each approved project. Initially, the federal government broadly stated it would provide up to $5 million to each eligible applicant, but in early November the IRS announced awards on an individual-project basis. Roughly 4,600 individual projects that were submitted by about 2,900 companies received pool funding — with a cap of $244,479.25 per project.

Some biotech companies, including Merrimack Pharmaceuticals, Inc., in Cambridge, Mass., submitted applications for more than one project, and therefore got more funds: a total of $2.44 million for 10 cancer therapy projects in its case.

Merrimack spokesperson Kathleen Petrozzelli says company executives decided that every project in the biopharmaceutical firm’s pipeline met the QTDP program’s criteria, and thus applied for grants for all 10 of its clinical, pre-clinical, and early-stage research projects. Federal officials said grants were awarded to those projects showing a “reasonable potential” to produce new therapies to treat areas of unmet medical need, reduce the long-term growth of health care costs in the U.S., and significantly advance the goal of curing cancer within 30 years.

Merrimack, a privately held, freestanding firm, had not sought the maximum $5 million in total, according to Petrozzelli, but had applied for more than $2.44 million across its 10 projects. She says she doesn’t know the exact amount sought.

Petrozzelli explains that Merrimack has a team leader for each of its initiatives, making the application process easier. Moreover, she says Merrimack’s finance executives attended seminars on how to apply for the QTDP program sponsored by the Massachusetts Biotech Council, a similar national organization and accounting firms. Yet “none of us knew there was a cap on each program,” she adds.

Given the numerous biotech companies in the cancer-treatment field, she says, “We didn’t think we’d get a huge sum on any one program, so our strategy was to go across all the [Merrimack] programs rather than focus on just one.” Merrimack has about 180 workers; the federal program was open to firms with 250 or fewer employees. Petrozzelli won’t disclose any financial information, noting only that Merrimack is in the development phase and not marketing its products yet.

‘A Drop in the Bucket’

Other biotech firms, including Errant Gene Therapeutics LLC, tell HRW they focused on a single application for the QTDP program. Errant got a grant of $244,479.25 for its work on Thalagen, a novel gene therapy for the treatment of beta-thalassemia major, a rare inherited blood disorder similar to sickle cell anemia.

“It was a phenomenal thing they offered, but so oversubscribed,” Jason Feldman, director of business operations for Chicago-based Errant, said of the numerous biotech firms applying for a share of the pool. “We would’ve filed for more projects if we’d known it was capped [at about $244,000 per project], but we wanted to put in a ‘rock star’ application for the one, and try to secure a sizable grant.”

Feldman describes Errant’s share of the new grants as “a drop in the bucket” given the significant costs associated with developing an orphan drug. “We spent close to $30 million to get us to where we are now,” using a combination of equity investment and federal funding for early-stage research, he says. While appreciative of any funding in a down economy, Feldman says he hears that “people were grumbling” about securing less than $250,000 “for all this work.” He estimates his firm’s application took more than 100 man-hours to complete.

But Errant deemed it worthwhile to apply because the firm thought it qualified for about $1.3 million under the QTDP program, explains CEO Pat Girondi. He began working to find treatments for thalessemia in 1992 in an effort to help his son, who was diagnosed with the disorder. About a decade later, he founded Errant.

Girondi says he heard that the QTDP program had six times more applications than expected. IRS officials did not provide any information by press time to HRW in response to a request for comment on this and other questions about the program.

Girondi says he appreciates getting new federal money, telling HRW that Errant has an annual operating budget of about $850,000. “Now we’re going into clinical trials, and the budget will be much higher,” he adds.

But Girondi cites huge costs for biotech firms such as his. The most common approach to gene therapy uses viruses as vehicles, or vectors, in transporting a beneficial gene into cells. It cost Errant about $1.2 million for a vector to treat only 10 people with its gene-therapy product, he says. “A nonprofit hospital helped us, but wouldn’t release the vector until we paid every penny,” he says. “The economy is what it is, and they keep raising the bar” on how far along firms must be in order to secure federal research and development dollars.

Contact Petrozzelli at (617) 441-1043 and Feldman and Girondi at (312) 441-1800. Visit http://grants.nih.gov/grants/funding/QTDP_PIM/index.htm.

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