Due diligence is the term business people use to describe the steps they take to evaluate a deal—do the pros and cons add up and make a positive outcome likely?

How the due diligence process plays out as companies consider expanding in or moving to Connecticut is what's holding back our state's economic development, perhaps most noticeably in the biopharma sector.

We make some helpful tactical moves, but when the due diligence is done, our long-term strategy is found lacking.

This state of affairs was all too apparent for biotech in the 2019 legislative session.

Growing Bioscience

SB 1026, An Act Establishing Certain Incentives to Grow the Bioscience Industry in the State, was passed by the General Assembly with great fanfare and much bipartisan self-congratulation.

As its title suggests, the bill's aim was to bolster Connecticut biotech. For a state hoping for a 21st Century makeover, biotech makes a lot of sense.

The sector's jobs are high paying, have robust benefits, and are difficult to send offshore.

Those salaries, with the sector's network of suppliers and high value-added products, give the bioscience industry about the highest economic multiplier—the ripple effect across the economic landscape—of any sector.

Existing law has been contorted to essentially say, "whatever credit you thought you had, you really only have 70% of it."

As unanimously approved by the legislature's Commerce Committee, the bill had two impressive provisions.  

In a nod to "mean what you say and say what you mean," one section would have restored R&D tax credits to 100% of their value.

Existing law has been contorted so that after a company calculates the stated tax credit, another, later provision essentially says, "whatever credit you thought you had, you really only have 70% of it."

Capital Base Tax

The bill would also phase out the capital base corporate income tax.

Connecticut has no fewer than three ways to calculate corporate tax liability. You determine your tax under each of the three formulas and, surprise, you pay the highest.

The capital base tax essentially taxes corporate savings accounts, disproportionately affecting biotech companies.

Given the colossal R&D expenses such companies incur as they bring a new medicine from concept to FDA approved drug—$2.7 billion—biotechs raise huge amounts of money from investors to sustain them over the 12 years it takes to complete their R&D.

Unique to the biopharma industry, this means that they typically hold millions of dollars in their corporate bank accounts.

They spend a lot of money, while not generating any revenue, in the hopes of one day having a successful and highly profitable product.

Let's just say they have few qualms about paying income tax once they become profitable.

Budget Pick-Up

What doesn't make sense is Connecticut's capital base tax, which taxes them all along the rough, long, road of R&D.

When push came to shove in the state Senate, SB 1026 was stripped of its meaningful provisions, including restoration of the full R&D tax credit and elimination of the capital base tax.

Seventy years of underfunding contractual obligations, overly optimistic assessments of future investment returns, and magical thinking that our quality of life would compensate for a dismal business climate, meant there was no money to incentivize Connecticut biotechs to expand here and out-of-state biotechs to move here.

Wiser minds prevailed and elimination of the capital base tax was included in the two-year budget.

Nevertheless, wiser minds eventually prevailed and elimination of the capital base tax was made part of the next biennial budget.

Similarly, while HB 5005, a bill extending and expanding the angel investor tax credit program, which provides investors in risky early-state tech companies a state income tax reduction, was not taken up by the General Assembly, the bill's language found its way into the budget.

Promises Made, Broken

The value of salvaging SB 1026's capital base tax provision and the angel investor tax credit is, of course, undercut by Connecticut's history of promising and then reneging on pro-business reforms.

Exhibit One is the temporary corporate tax surcharge, extended again in the recently adopted budget.

Do legislators really believe business people don't see this when they conduct due diligence?

The logic seemed to be: we don't need to fix anything or invest in anything, we just need some Mad Men to sell biotech to the world.

Tellingly, what was left in SB 1026? A marketing plan.

The logic seemed to be: we don't need to fix anything or invest in anything, we just need some Mad Men to sell Connecticut biotech to the world.

Note to economic developers: When you're in a hole, and those who got you there say the world just misperceives how great things are in the hole, and that all we need is a good marketing strategy, you know you're in deep trouble.

Public Option

Complicating any new Connecticut biotech marketing plan will be fallout from HB 7267, the public option bill.

While the bill's various iterations drew strong support from Democratic leadership, it was not taken up by the state Senate after earlier passing the House.

Apart from the uncertain wisdom at the core of the original bill—that the historic insurance capital of the world, Connecticut, should work to make private insurance obsolete—HB 7267 took direct aim at the bioscience industry.

The message implicit in the rollout of HB 7267 was all too apparent to the biopharma companies we claim to want to recruit: the love we have for you when you're young and struggling and unprofitable evaporates when you're successful with products to sell.

This, and the pledge on the part of the bill's advocates to redouble their efforts next legislative session, won't be missed as companies do their due diligence on Connecticut.

Drug Imports

The bill had provisions for new governmental oversight bodies with powers to collect reams of data, metrics, and other information, all to be used to haul companies into hearings for public shaming.

And HB 7267 attempted to breathe life into the intellectually bankrupt concept of Canadian drug importation.

The cold hard facts streaming from any company's due diligence cannot be overcome by a marketing plan.

The arithmetic does not work—a country of 37 million can't supply a country of 327 million—but even if it could, drug importation is a nonstarter because our own Federal Drug Administration does not have the manpower or legal authority to ensure the safety of every drug passing through Canada.

The cold hard facts streaming from any company's due diligence—that what's really ailing Connecticut is the skewed priorities memorialized in the budget—unfortunately cannot be overcome by a marketing plan, no matter how good.


For more information, contact CBIA's Paul Pescatello (860.244.1938) | @CTBio