Since most biotech companies who manage to get a drug successfully to market are bought, almost none of them actually end up being profitable. And that’s just for the 10% of firms that are a success. The other 90% simply fail. Either way, the federal treasury doesn’t get as much money back with this proposal as some might think. This can be fixed by altering the discount rate, but it will have to be much steeper than the 33% BIO seems to be suggesting.BIO advises this program only be available for 1 year. This reflects the fact that almost everyone I know assumes this current biotech funding crisis -- and it is a crisis -- won’t last much past next summer. I think this is shortsighted and misses an opportunity to mimic what some states and other countries do for their biotech companies.

I don’t disagree with this idea. In fact, I think it is probably a good one given some common-sense restrictions on executive salaries, a cap on sales, uses of cash, and an intelligent discount ratio for the debt-to-cash exchange. I also agree that if we do it, the first year should be done in the manner BIO suggests, with the transaction happening between the federal government and the development-stage company.

The first year should be thought of as transitional. In subsequent years, the program should be funded by profitable companies who can buy down their tax debts -- via cash payments to qualifying unprofitable companies -- in order to reduce their tax burden.

The government sets up the exchange rates, but the money doesn’t come directly from government coffers. It does reduce income, so there is a budget impact, but it’s not the double-outflow situation seen in BIO’s proposal.

Cash is undoubtedly scarce for biotech companies. This is not a credit crunch problem, as it is in other industries, but a crunch resulting from redemptions, leverage withdrawal, and fear on the part of funds who normally invest in these companies. This is a fundamentally different situation than we saw in 2001-2002 - a time that most in the biotech field remember as a funding crunch.

Absent an improvement in the financial climate or a bailout, bankruptcies of small biotech companies will increase. BIO notes about a third of all publicly-traded biotech/biomedical companies will run out of cash in 2009.

I’ve believed partnerships or acquisitions by cash-rich pharma might help. In fact, that’s been a central thesis of my investment outlook for a number of years. Instead of getting more tightly focused in front of billions in lost revenue from patent expirations, big pharma is instead looking more like a beheaded chicken. That’s not something I expected – at least not to the degree I’m hearing about now.