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Appropriate legislation can help innovative biotech firms working on the treatments of the future to build capital, according to congressional testimony from Bill Newell, a Board Member of the Biotechnology Innovation Organization (BIO).
The March 25 House Committee on Financial Services hearing entitled “Beyond Silicon Valley: Expanding Access to Capital Across America,” was informed of the challenges facing small biotechs by Newell, the Senior Business Advisor and former CEO at Sutro Biopharma.
“Ensuring a robust domestic biotechnology industry is rightfully recognized as a critical national security issue. In addition, it is also an economic juggernaut,” Newell’s written testimony explained. “Drug discovery is expensive. Scientists are expensive. Clinical trials are expensive. That’s why access to capital is so crucial.”
Newell shared his own company’s highly relevant experience: Like the majority of biotech startups, Sutro, a “public biotech focused on clinical stage development of cancer therapeutics using protein engineering,” has required funding to cover research and development before its innovations can produce income.
“Most biotechs remain pre-revenue through their entire time in the lab and the clinic,” Newell testified. “A recent survey by Deloitte reported that for 2022-23, the average R&D cost to progress a new pharmaceutical from discovery to launch is $2.3 billion.”
Raising the capital to go from an idea to an approved drug usually involves a combination of private funding and public funding. Newell told the committee that legislation to facilitate this funding is vital.
“Small tweaks can mean a big difference for emerging biotechnology entrepreneurs who continue to face a tidal wave of challenges,” he testified.
Encouraging private investment
Startups usually begin with private investments from a small group of investors. To increase access to such investment from venture capitalists and others, Newell promoted the Equal Opportunity for All Investors Act, sponsored by Rep. Mike Flood (R-NE).
While accredited investors are legally allowed to make more of the types of early investments startups need, current legislation prevents anyone from becoming an accredited investor unless they pass a certain threshold of wealth. Newell argued that what investors really need is adequate information.
“Wealth should not be the sole determinant of investment knowledge, so this bill directs the SEC (Securities and Exchange Commission) to create a thorough accredited investor exam that allows more people who understand investing to participate in the marketplace,” Newell said.
Encouraging public investment
Sutro’s own ability to go public was made possible by the 13-year-old Jumpstart Our Business Startups (JOBS) Act, according to Newell. The Act allows publicly traded firms below a certain income and market cap to receive Emerging Growth Company (EGC) designation. Companies receiving EGC designation can forgo certain regulatory requirements that have a compliance cost of $1 million or more.
Newell said the EGC status can be a game changer, but it only lasts for five years.
“Most biotechnology companies that make the transition into public markets do not generate revenue for years beyond the current five-year EGC exemption limitation,” he testified. “Sutro is a prime example. The five-year timeline is simply too short for small biotechs.”
Newell encouraged passage of legislation sponsored by Rep. Bryan Steil (R-WI), the Helping Startups Continue to Grow Act, which would allow for a five-year extension of EGC status.
Similar legislation designed to reduce SEC reporting requirements include the Small Entity Update Act, sponsored by Rep. Ann Wagner (R-MO).
“This legislation directs the SEC to assess regulatory costs of compliance for small and growing businesses, ensuring that regulations placed on these businesses are not overly burdensome,” said Newell. He noted the bipartisan support for the legislation, which passed the House by 367-8 in the last Congress.
SEC requirements also become more onerous when a firm’s public float—essentially the value of shares held by people outside the company—exceeds a certain threshold. Newell supported a provision in the Empowering Main Street in America Act, sponsored by Senate Banking Committee Chairman Tim Scott (R-SC), which would prevent a “temporary blip in their stock price,” from forcing companies to incur large new reporting costs.
Congress members concur
Representatives from both parties spoke in favor of legislation to increase access to capital by allowing more people to invest and reducing unneeded reporting requirements. After receiving testimony from Newell and others, the Financial Services Committee discussed roughly 40 relevant pieces of proposed legislation.
Committee Chairman French Hill (R-AR) laid out the challenge in his opening statement.
“Our capital markets should work for everyone. That means reducing barriers for startups to access funding, incentivizing investment in regional businesses, and reforming outdated regulations that improve access to growth capital to ensure a public offering is a more viable option again,” Chair Hill said.
Rep. Bryan Steil (R-WI) discussed his legislation, which Newell supported, the Helping Startups Continue to Grow Act. That act passed the House of Representatives with support from both sides of the aisle last year. The legislation, which would allow early stage companies to retain their EGC status and regulatory relief for a longer period, is especially important for emerging biotech innovators that often remain in the lab and clinic for longer than a decade before they can market their first approved product.
Democrats were also supportive of legislation to promote capital formation for small businesses, with Rep. Bill Forster (D-IL) and others asking about ways to spread the wealth beyond major urban clusters like Silicon Valley.
Rep. Nikema Williams (D-GA) spoke of the challenges small businesses have in working with the SEC. Newell agreed these challenges are specifically difficult for firms with small staffs.
“Disclosures and reporting obligations should be scaled as a company matures and generates revenues,” said Newell in concluding remarks. “Congress should build off the successful implementation of the JOBS Act and pass legislation that will enhance capital formation.”
