Most Small Firms Ranking Among the World’s Top R&D Investors Are US Biopharma Start-Ups; New Report Urges Targeted Tax Reforms to Sustain US Biopharma Leadership

WASHINGTON—Among the world’s top 2,500 investors in research and development (R&D), there were only 260 small, pre-profit firms in 2021—and an astounding 193 of them (85 percent) were biotech and biopharmaceutical start-ups from the United States, according to a new analysis by the Information Technology and Innovation Foundation (ITIF), the leading think tank for science and technology policy.

ITIF’s new report calls on Congress to sustain U.S. biopharmaceutical leadership by making targeted tax reforms to optimize incentives for these risk-takers given the role they play in the country’s biopharma sector and the high-risk investments they make pursuing innovations that accrue to the benefit of the U.S. economy and global society.

“The United States is unique in having a vibrant and research-intensive biopharmaceutical start-up system,” said Trelysa Long, a policy analyst at ITIF and author of the report. “But small, pre-profit firms must travel an especially daunting path from the research phase to winning market approval for their innovations. Most burn through invested equity for years while conducting research, making tax incentives critical.”

Drawing from data encompassing the world’s top 2,500 R&D investors in 2021, the report identifies 260 small firms operating at a net loss due to their start-up status and finds that 193 are U.S. biotech or biopharma start-ups. These 193 small, pre-profit U.S. biopharma firms represent 85 percent of all small biopharma firms ranking among the world’s top R&D investors. Across all sectors, America had 211 small, pre-profit firms ranking among the world’s top R&D investors, meaning the biopharma sector accounted for 91 percent of them, underscoring the sector’s contribution to the vibrancy and dynamism of the U.S. economy.

The report also examines the R&D investments made by these small biopharma firms. In 2021, firms invested an average of $712,258 in R&D per employee, compared to $373,997 for the rest of the world’s small, research-intensive firms. This level of investment equates to a substantial 18 percent of the entire R&D investments made within the broader U.S. biopharma sector.

The report presents several policy recommendations to sustain innovation within the biopharmaceutical industry:

It calls on Congress to pass the American Innovation and Jobs Act, comprehensive legislation designed to bolster innovation among small firms. This includes doubling the credit limits for small firms’ payroll tax offset, expanding gross receipts for companies utilizing R&D tax credits, and extending the payroll tax offset period to eight years.

Furthermore, the report advocates for repealing the Tax Cuts and Jobs Act provision that currently requires firms to amortize, rather than expense, R&D expenditures.

The report also proposes amendments to Sections 469 and 382 of the code to enable passive investors to harness their net operating losses and research tax credits, even during periods of ownership changes.

“Small, research-intensive biotechnology and pharmaceutical firms are key contributors to the R&D of novel drugs and U.S. global competitiveness in the sector, meaning that U.S. biopharma leadership and competitiveness depend on the development and survival of these firms,” said ITIF Vice President Stephen Ezell. “Policymakers need to take steps to incentivize these firms. Failing to do so would diminish the new drugs available in the future and weaken the U.S. biopharma sector’s competitiveness.”

Read the report.