In Wednesday's New York Times, my friend Andy Pollack reported on the Biotech Industry Organization’s (or BIO's) effort to secure bailout dollars for the biotech community. It’s an interesting proposal, but one that will add to the federal budget deficit.

BIO proposes to allow development-stage companies (not just biotechs, though they’re the focus of this article) who generate significant losses to obtain federal cash for those losses in exchange for the future right to write those losses off against profits. Essentially, firms could sell to the government a future on taxes against forward profits.

This is an interesting proposal, insofar as the total dollar amount the federal government hands out today isn't equal to the long-term impact on the budget deficit, under the assumption that some of these companies would end up being profitable.

The way it works is pretty simple. It generally takes a biotech company about $250 million in cash to get a drug to market. A note on that $250 million figure: Though it's generally thought that $800 million to $1 billion is required to get a drug to market, I believe this is true only if you take into account all the money spent on drug-development failures and divide them by the total number of drugs reaching the market. If you look at the balance sheets of any single biotech who gets a drug to market, however, you’ll generally see a combined deficit around $250 million - which is the figure I chose for this example.

The BIO proposal apparently limits the amount any single company could receive to around $30 million. Further, recognizing that many companies won’t make it to profitability, it suggests some sort of ratio be used. For every $30 million in losses “sold” to the Treasury, for example, the biotech could only receive $20 million in cash.

So in this case, a company selling $30 million in losses to the Treasury would get $20 million in cash and a reduction to $220 million for their total losses - usable for tax purposes if they ever become profitable.

If the biotech company does become profitable, it normally can offset profits with past losses on its tax return. Under this proposal, that’s what the biotech company is selling to the government. This, in theory anyway, reduces the long-term impact to the government, since it would get some of the cash back in the form of increased tax revenue upon profitability.

The primary problem with the proposal is that almost none of these companies will ever see profitability. My rule of thumb: Only 1 out of every 10 publicly traded biotech companies will succeed. I define “success” not only as profitability, howeverl it also requires an exit event profitable for shareholders.