Industry experts say expired tax credits have hindered local biotech. Can the sector get well again?

The state-versus-state competition to grow local economies can be intense. Local legislators often waive recruitment incentives to lure blue-chip companies, their educated workforce, and high-paying jobs. But when those incentives aren’t offered, business leaders might ask if their elected officials are committed to growing their economies.

That scenario is playing out now in Olympia with Puget Sound biotech industry leaders. Recently, the state Legislature, looking to close deficits in other areas of the budget, has let expire a handful of tax laws aimed to grow the biotech economy, and biotech leaders are complaining.

The incentivized laws include:

• High-Tech Credit and the High-Tech Deferral. The former allowed biotech companies to counterbalance the state’s B&O tax by claiming up to $2 million in credits annually. Between 2011 and 2014, biotech companies in the life sciences field took advantage of this benefit to the tune of approximately $9.5 million. The latter law allowed a tax break for biotech companies building new facilities or purchasing machinery and equipment. Both benefits expired on Jan. 1, 2015.

Biotechnology & Medical Device Manufacturing Sales & Use Tax Deferral/Waiver, which expired Jan. 1.

Life Sciences Discovery Fund, a grant-funding resource launched in 2005 with aspirations of spending $350 million over a 10-year period, never kept pace with that funding goal. Notably, $11 million from the Life Sciences Discovery Fund was moved to the general fund in 2015, and $51 million it was supposed to receive in 2016 and 2017 was also redirected. The Fund was essentially eliminated in 2015.

The loss of these tax incentives hit companies close to home, particularly so in Bothell, home to many of the Puget Sound region’s pharmaceutical and medical device companies.

Bothell-based Seattle Genetics employs nearly 1,000 people, and scores of its openings fill online job boards. The company’s leading drug, Adcetris, is used to treat patients with lymphoma, and the company generates annual revenues of roughly $330 million. Other big Bothell biopharma players include Alder Pharmaceuticals, BioLife Solutions, and OncoGenex Pharmaceuticals.

On the medical device front, Phillips is the biggest in Bothell, with approximately 1,800 employees. Other key Bothell medical device companies include Ekos and RJC Enterprises.

In February, the Washington Life Science and Global Health Advisory Council — a committee of industry professionals appointed in 2015 by Governor Jay Inslee and tasked with exploring how the state could be more competitive in the biotech industry — went on the offensive and released a report that argued for reinstating many of these tax breaks.

“We’ve tried to make the case pretty clearly with folks that, while we don’t need the most robust incentives, we do need a baseline of incentives that will allow Washington to be competitive when life science companies are thinking about where their next facility or their next engineering team is going to be located,” said Marc Cummings, vice president of public policy and external affairs at Life Science Washington.

Cummings and Life Science Washington president and CEO Leslie Alexandre point to data compiled by Life Science Washington and the Global Health Advisory Council that show some of the benefits the biotech industry brings to Washington, such as:

• An average annual wage of $82,000 (in 2014). The state’s average private-sector wage in 2014, by comparison, was $55,000.

• Every Washington state biotech job creates another 3.8 jobs statewide.

• Between 2001 and 2011, the number of industry employees grew by 17 percent in Washington state. During that same period, national biotech employment growth was 7 percent, and private-sector job growth in Washington state expanded by 5 percent.

The same data show industry stagnation:

• Washington state’s biotech industry lost 900 jobs, or 3 percent of its job base, between 2011 and 2014. The industry saw 2.7 percent job growth nationally during the same period.

• Between 2012 and 2015, Washington has seen a decline in patent activity, while the industry has seen a 15 percent increase in activity nationwide.

• Between 2012 and 2015, Washington biotech companies increased their Research and Development spending by 11 percent, while biotech companies nationally increased their Research and Development spending by 19 percent.

Cummings and Alexandre argue states with a baseline of strategic biotech incentive programs like those that recently expired in Washington are the ones seeing consistent industry job growth.

The Life Sciences Discovery Fund was launched in 2005 with one ambitious goal: Use money collected in 1998 by Washington state from settlements with tobacco companies and fund life science research grants to the tune of $35 million per year over a 10-year period. The Legislature approved the fund in 2005, and awards were granted beginning in 2008. But budget shortfalls meant money originally destined for life sciences research was moved elsewhere.

For example, data compiled by the Washington State Department of Commerce show North Carolina had seven different incentive programs between 2003 and 2013 and saw employment grow by 19.7 percent; California had six programs and experienced 18.3 percent job growth; Massachusetts had seven programs and experienced 15.2 percent job growth; Texas had six programs and experienced 15.61 percent job growth; and Florida had seven programs and experienced 8.42 percent job growth.

“When Washington had in place supportive policies, our state did extremely well in life science job creation,” said Alexandre. “With the phasing out of those policies and diminishing support for life science economic development in general, it’s been difficult to keep up the growth momentum in terms of our jobs.”

Stewart Lyman — a molecular biologist who worked for 14 years at Immunex, holds more than two dozen patents and still keeps close tabs on the biotech industry as a consultant — agrees. “It makes it very difficult for Washington state to compete with other states that offer those credits, and many states do.”

This year, Olympia legislators considered two bills, one in the House and one in the Senate, that biotech leaders said would begin to level the playing field. The bills essentially would reinstate the High-Tech Credit and High-Tech Deferral incentives, but with smaller dollar incentives: A $500,000 cap on Research and Development tax deferrals, and a $1 million cap for facilities deferrals. The House bill was amended to allow companies to take either a $750,000 tax credit or a $750,000 deferral, but not both.

“Washington is now an outlier among states with a viable life science industry in that we are really the only place that both taxes gross receipts (versus income/profits) and does not have Research and Development tax incentive,” said Cummings. “So, reinstating a Research and Development tax incentive is more about making Washington a viable place to grow a life science company versus leveling the playing field because most competitors don’t have a B&O tax, do have a Research and Development tax incentive, and do have a mix of other supportive programs. We currently have none of those in place.”

Lyman is aware of the efforts underway to reinstate those tax incentives, and notes it has the obvious support from biotech industry leaders, as well as Gov. Inslee and other local government leaders whose municipalities benefit from biotech job creation. But he isn’t counting on its passage.

“I’m told people are not terribly optimistic that’s going to happen because it’s seen as a giveaway to industry, even though (biotech) is something that our state actually excels in,” said Lyman. “I mean, what the state gave Boeing, essentially, to stay here dwarfs the Research and Development tax credit available to any individual company by a tremendous margin.” State tax breaks to Boeing totaled $216.9 million in 2014 and $304.8 million in 2015, according to Washington State Department of Revenue data.

Still, both proposals were working their way through the Legislature. “Reinstating the Research and Development tax incentives to help grow the life science industry in Washington state is Life Science Washington’s top legislative priority,” said Cummings, who has traveled to Olympia to comment during several related hearings.

Whatever the outcome in Olympia this year, it won’t entirely restore the biotech incentive programs that were in place a few years ago. But industry leaders hope it will be a start toward making Washington state competitive again in drawing those lucrative biotech jobs to the region.