John Jackson of Celgene

NJEDA

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This article by Barbara Fox was published in U.S. 1 Newspaper on November 10, 1999. All rights reserved.

Tax Break for High Techs

More than 20 of Princeton’s young high tech businesses

will get "free money" next month, thanks to an tax scheme

cooked up by state lawmakers and biotech leaders. In spite of some

birth pangs — those who crafted this new plan have encountered

one difficulty after another — the plan may make tax history.

New Jersey has a nine percent corporate tax on profits, but young

biotechs typically don’t pay this tax. Because of their very long

product-to-market cycle, biotechs tend to hemorrhage cash for a longer

time than other start-ups and often run for years without profits.

"This pioneering legislation will make a very big difference to

biotech firms that are so R&D intensive. It is aimed at attracting

companies to build in New Jersey," says John Jackson, president

of the Biotechnology Council of New Jersey (BCNJ) and CEO of Celgene.

"When you need cash is before you become profitable."

In its original form, the tax break allowed a young biotech company

to "sell" its tax losses to a profitable firm for a minimum

of 70 cents on the dollar. The profit-making firm could use these

losses to offset its state corporate tax bill. "Biotech is a cottage

industry with a high burn rate," says Michael Batelli of Deloitte

& Touche in Parsippany. "But from the state’s perspective they

are looking to attract all high-tech business."

Governor Christie Whitman took the tax break proposed by State Senator

Robert W. Singer and broadened the act to include all high-tech companies.

On June 28 Whitman signed what is now known as the New Jersey Emerging

Technology and Biotechnology Financial Assistance Act.

"Biotech drove this whole process from start to finish," says

Jackson. "But the governor thought it should include all high

tech." That raised the price. The initial response to the revised

program was so overwhelming, and would have cost the state so much

money, that the state was caught by surprise, and it pulled back from

the initial proposal.

"When they realized all the applications they were getting and

how much it would cost they put the whole thing on hold and froze

it," says Robert Siegel, who served on the New Jersey State Taxation

Committee. Siegel, an alumnus of the University of Delaware, Class

of ’89, has a master’s in taxation from Fairleigh Dickinson. He is

with Richard A. Eisner & Co. in Florham Park.

"At first they were going to limit the amounts transferred to

$10 million," says Siegel. The final version put an overall cap

of $50 million for the first year and $40 million each year thereafter.

The first year’s pool of $50 million was divided up among the total

requests submitted and accepted. Those with small requests got a higher

percentage, some as high as 100 percent.

Nevertheless, most companies will get from 30 to 50 percent of what

they had applied for this year, and will get the remainder next year,

says Jackson. A Yale alumnus, Class of ’67, he has an MBA from Insead,

the noted business school at Fountainbleu, France. His firm, Celgene,

is based in Warren but is opening a branch at the New Jersey Technology

Center in North Brunswick. Speaking for the Biotechnology Council,

he says that "the largest number of our members will be able to

benefit from this effectively."

With the rewriting of the bill, the rules were tightened as well.

A firm must have fewer than 225 employees, and 75 percent must live

in New Jersey. It must be in existence for not more than 10 years,

have viable and innovative technology, and offer significant growth

in permanent full time New Jersey employment. But if the financial

thresholds are taken too literally, as Siegel points out, almost any

firm could be excluded. For instance, the applicant must not have

sufficient resources to operate in the short term — it cannot

be able to raise money from venture capital, by issuing stock, by

selling products, or with subsidy from a parent company. It’s a paradox:

"If you can’t get money from other sources, you may not have a

good idea to begin with," says Siegel.

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John Jackson of Celgene

"We felt the bill was a fair compromise given the difficulties

that the treasury was facing," insists Jackson. "As written

it enabled subsidiaries of Lucent Technology to benefit from the legislation.

It was never intended to allow firms like Lucent to take advantage

of it."

The exact tax loss amounts that each company may sell have not been

released. But here is an example: Of the $10 million that Celgene

asked for, it hoped to get $5 million in tax credits. The buying company

would pay $4 million for the credits but get $5 million off its state

tax bill. After it pays accounting costs and some federal tax obligations,

the buying company’s profit would be just under $1 million.

Under the revised proposal, 58 of 100 applicant companies were selected

to sell their losses and get cash back. Letters are scheduled to go

out this month to confirm dollar figures for each firm.

Among those who were declared ineligible are Biomira USA Inc. (formerly

OncoTherapeutics on Eastpark Boulevard) and Palatin Technologies Inc.

at the Carnegie Center. "At this time it is a pill we are still

digesting," says Jeff Koellner, Palatin’s controller.

Now comes the race to buy tax credits from eligible

applicants, and the field got very crowded very quickly. Early last

spring Bruce Deichl, president of the Tax Transfer Corporation of

New Jersey, set himself up to be a buying broker with a website at

http://www.taxtransfer.com. At least one registered broker-dealer

based in New York is writing to the high-tech companies, offering

to buy the tax losses at a reported 82 cents on the dollar, even though

the required minimum is 70 cents.

One mega-firm, quietly working with the Biotechnology Council, is

reportedly offering to buy the entire $50 million basket of tax losses

at 82.5 cents on the dollar. "I understand that BCNJ is offering

this service at no cost to its members, and my intention is to use

their services," says Burt Ensley, CEO of NuCycle Therapy Inc.

"BCNJ has brought a buyer to my attention."

BCNJ has not revealed the buying company’s name, but a spokesperson

for Public Service Electric & Gas confirms that the utility has been

in discussions with BCNJ. "PSE&G has an agreement with BCNJ to

voluntarily aggregate its members to sell the tax credits to us,"

says Paul Rosengren. "These are good customers, and it makes sense

for us to help them succeed in New Jersey."

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NJEDA

The state’s Economic Development Authority (NJEDA) is adjudicating

the application process, in conjunction with the Division of Taxation

in the Department of Treasury, which will issue tax benefit transfer

certificates. "The Division of Taxation has indicated that after

the certificate is issued, it is `as good as cash’ in the hands of

the purchaser," says David Shipley of Dechert Price & Rhoads.

"For some companies, this tax sale will be the difference between

surviving and not surviving," says Johnson (noting that this is

not the case with his own company, Celgene). "Remember that last

year the window was firmly shut for biotechs to get money from public

markets."

"Politics has played its course," says Jackson. "We were

able to bring together disparate interests to get an acceptable compromise

for almost all our members. We are very grateful to Senator Singer,

Governor Whitman, Caren Franzini, and the tax department."

"Now after all the negotiations we have a program that works,"

says Franzini, executive director of the NJEDA. "It is a tremendous

benefit for technology companies in New Jersey, to get $50 million

this year and $40 million every year thereafter — money that they

could not have received otherwise. And they don’t give up any equity.

No other state has a program of this size, and it makes the state

much more attractive to growing technology companies."

— Barbara Fox


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