President Obama signs JOBS Act
Legislation holds good news for biopharma, biotech startups
And the timing couldn't be better. Coming on the heels ofthree consecutive years of U.S. unemployment rates above 8 percent, clearingthe paths for startups bodes well for the stalled economy as well as thepresident's re-election race.
The main thrust of the JOBS Act exempts companies from thefull reporting requirements of Sarbanes-Oxley Section 404(b) for the first fiveyears after going public, or until they reach $1 billion in revenue—a provisionnicknamed the "on-ramp" for initial public offerings (IPOs). That provisionalone should save biopharma firms up to $2 million a year—and allow biopharmastartups to spend more money on disease research, according to theBiotechnology Industry Organization (BIO), the lead group that lobbied forpassage of the JOBS bill.
"This legislation incentivizes and encourages capitalformation for small, emerging biotechnology companies, speeding the developmentof new cures and treatments for patients living with debilitating diseases suchas cancer, diabetes, Parkinson's and HIV/AIDS," BIO President and CEO James C.Greenwood said in a news release.
The JOBS Act also expands the eligibility requirements ofSEC Regulation A by raising the limit on how much companies conducting directpublic offerings can raise from the current $5 million to $50 million.Regulation A offerings would be exempt from state securities laws, providedthat the securities sold are offered or sold through a broker-dealer, offered orsold on a national securities exchange or sold to a qualified purchaser asdefined by the SEC.
Another component of the JOBS Act requires the SEC to reviseRule 506 of SEC Regulation D, by removing the current ban on generalsolicitation or advertisements, including the social media, provided that allpurchasers in the private placement are "accredited investors."
BIO spokesperson Tracy Cooley tells ddn that the JOBS law saves startup biotechs the expense ofcomplying with Sarbanes-Oxley Section 404(b), which requires an external auditof a company's internal controls.
To comply, companies "must hire and pay for an externalauditor to come in," Cooley says—"and that's not the only cost," she notes."Because this is the first time these companies have had external attestation,they have to get the audit team up to speed on how the company works, whichoften means hiring new staff or reassigning existing staff."
The entire process is "incredibly costly, and the end resultis an audit report that biotech investors don't even care about since they maketheir investment decisions based on clinical trial advancement or FDAprogress," she says. "So companies are forced to spend investor dollars(because they have no product revenue) on something that doesn't even reallyhelp their investors."
William D. Waddill, senior vice president and chieffinancial officer of OncoMed Pharmaceuticals in Redwood City, Calif., testifiedtwice on the Hill about how diverting money to costly regulations hurtscompanies' cash on hand and their investing potential. Waddill, who is also theco-chairman of BIO's Finance and Tax Committee, spoke to Congress "about theunique hurdles that innovative biotechnology companies face as they work towarddeveloping cures and breakthrough medicines to treat crippling illnesses thataffect families across the nation."
"It takes eight to 12 years for a breakthrough company tobring a new medicine from discovery through Phase I, Phase II and Phase IIIclinical trials and on to FDA approval," Waddill said. "The entire endeavorcosts between $800 million and $1.2 billion."
For the majority of biotechnology companies, the significantcapital requirements "necessitate fundraising through any source available,particularly venture capital firms," he said. "Later, we must turn to thepublic markets in the final stages of research to fund large-scale andexpensive clinical trials."
In 2011, Waddill's company saw only 98 first round venturedeals with biotechnology companies, a significant drop from the industry's peakof 141 in 2007. Last year was only the third time since 2000 that the number ofdeals dropped below 100, he said, adding that small startup companies "are theinnovative heart of our industry, but depressed financing means that potentialcures and treatments are often left on the laboratory shelf."
There was only $1 billion in public financing forbiotechnology last year, just a third of the total from 2007, Waddill said.
"Though funding totals are slowly climbing back towardpre-recession levels, this progress has been made almost entirely by larger,more mature companies which are getting better deals—while emerging companiesmaking their first forays onto the public market are getting squeezed out," hesaid.
Allowing emerging growth companies increased access tothe public markets would open the doors for much-needed innovation, heconcluded.