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BUDGET ACT TAX CREDITS WILL BENEFIT BIOTECH COMPANIES, BIO ASSN. SAYS; LARGE DRUG FIRMS ARE BRACING FOR HIGHER TAX LIABILITIES IN 1994 DUE TO SEC. 936 CHANGES

Executive Summary

Biotechnology companies will benefit from the tax credits enacted as part of the 1994 budget reconciliation act, the Biotechnology Industry Organization said in an Aug. 9 statement on the legislation. The tax credits contained in the budget reconciliation measure (HR 2264) indicate "that President Clinton and Congress recognize the value of emerging, high-tech businesses that invest heavily in the future," BIO President Carl Feldbaum asserted. The legislation, which was passed by the House Aug. 5 and the Senate Aug. 6 ("The Pink Sheet" Aug. 9, p. 5), was signed into law by President Clinton Aug. 10. BIO supported the capital gains credit to exclude from taxes half of earnings on the sale of stock held at least five years in a small business, which the legislation defines as a business having gross assets of no more than $50 mil. The association suggested that it will push for an amendment next year to extend the tax benefit to apply to gains from investments held in companies with up to $100 mil. in assets. "We may see an amendment next year to restore the $100 mil. threshold" initially proposed by Sen. Bumpers (D-Ark.) and Rep. Matsui (D-Calif.), Feldbaum said. Noting that the act extends the R&D tax credit from July 1, 1992, when it expired, through June 1995, BIO maintained that the extension "will help companies that had counted on receiving [the credit] in their business planning processes." Feldbaum also praised the orphan drug tax credit as "an important symbol of the federal government's commitment to biomedical research." The credit for orphan drug research was extended from July 1992 through 1994. Larger, more established pharmaceutical companies are expected to experience a significant reduction in tax benefits from the amendment of Section 936 of the tax code, the benefit for companies with Puerto Rican subsidiaries. Abbott estimated that the legislation will increase its tax payment in 1994 by "approximately $50 mil." The company said the R&D tax credit "will offset a portion of" the effects of the increase in the corporate tax rate and the "significant reductions" in the 936 benefit. Chairman and CEO Duane Burnham said Aug. 9 that Abbott expects "there will be no significant impact on the company's 1993 tax expense." Schering-Plough has estimated that its 1994 tax liability will increase by $15 mil. due to the legislation. The company said the "unfortunate" changes to Section 936 will have a "dramatic" adverse impact on the island economy as investments "shrink substantially." Schering-Plough added that it will "not consider any future expansion in Puerto Rico" and will reassess its existing presence on the island. Pfizer announced Aug. 9 that the reduction of the 936 credit and the 34%-35% rise in the top marginal corporate tax rate "will increase the company's effective tax rate by approximately four percentage points in 1994" from its expected rate of 26% in 1993 to 30% in 1994. Allergan said Aug. 11 that its effective tax rate in 1994 will jump five percentage points to 31% from 26%, "primarily due to" changes to the Sec. 936 credit. Johnson & Johnson predicts that its corporate tax rate will rise two-and-one-half percentage points, from 26.5% to 29%, in 1994. Merck anticipates that its 1994 corporate tax rate will be less than two percentage points higher than its 1993 rate.

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