NCBIO Emerging Companies Survey and Focus Group Information Forum Meeting February 8, 2007

1. NCBIO Emerging CompaniesSurvey and Focus Group InformationForum Meeting February 8, 2007

2. ECF Survey Overview • Conducted in fall 2006 • Online survey sent to 190 companies members of NCBIO and identified from NC Biotechnology Center database • A number returned because emails were no longer valid • 47 companies completed the survey

3. Emerging Company Activities

4. Phase of Clinical DevelopmentAmong Companies with FDA-Approvable Products

5. Emerging Company Employment

6. Emerging Company Funding Sources by Amount (2005-2006)

7. Emerging Company Funding Sources by Frequency(2005-2006)

8. Business Climate Factors • Quality of Workforce • Venture Capital • Debt Financing • Alternative Financing • Government Incentives • Pro-Business Government Attitudes • Cost of Doing Business • Corporate Tax Rates • Technology Transfer

9. Importance vs. Satisfaction with Business Climate Factors

10. Importance of Current NCBIO Policy Initiatives

11. Analysis • Venture Capital • Remains an Important Issue • QBV, Capital Gains Initiatives address venture availability by promoting deal flow • Incentives • Tax and incentive responses indicate strong interest among companies • Incentives will leverage venture financing and further improve climate for venture companies • Key issue will be finding appropriate vehicles for delivering incentive benefits

12. Analysis, cont. • Debt Financing & Credit Enhancement • Dissatisfaction with debt and alternative financing indicate continued need for programs to support manufacturing investments • Other Priorities • NCBC Funding • Medical Device Company Support

13. Focus Groups • Held in December to follow-up up areas of concern from survey and from group who attended October meeting • Capital Formation • Tax and Incentives

14. Capital Formation Focus Group Report • Capital formation acute problem for early-stage companies • Fatigue among angel investors limits access to start-up capital • Movement by venture funds to larger, later stage investment • Later-stage companies also have continuing capital needs • Not adequately addressed by existing capital formation policies, which focus on early-stage companies

15. Existing Capital Formation Programs • SBIR Matching Grant Program • NCBC Grant and Loan Programs • Qualified Business Venture Tax Credit • State Treasurers Venture Fund Investment Authority

16. SBIR Matching Grant Program • Matches 100% of Phase I SBIR Grants • $3000 Stipends for SBIR Grant Applications • 2006: $5 Million Non-Recurring Appropriation • Completely utilized in FY 2006-07 • Action Item: • Seek recurring funding of $5-6 million per year in 2007-09

17. NCBC Business Loan Programs • Business Development Non-scientific, business-related activities critical to the commercialization --$15,000 - $25,000 • SBIR Bridge (RBL) Phase I/Phase II SBIR/STTR gap funding -- Up to $75,000 • Small Business Research (SRL)Product development for technologies with clear commercial potential -- Up to $150,000 • Strategic Growth (SGL)Matching loans for angel or venture investments -- Up to $250,000

18. NCBC Business Loan Programs (cont’d.) • 2005: $434,000 Business Development, SBIR Bridge & Small Business Research Loans Loans • 2006: Launched Strategic Growth Loan Program (Angel & venture matching up to $250,000) • Action Item: • Seek continued increases in appropriations to NCBC and continued increases in amount and volume of business development loans

19. Qualified Business Venture Tax Credit • 25% Tax Credit for Investments in Emerging Manufacturing, Research and Other Companies • $50,000 per Investor per Year Cap; $7,000,000 per Year Statewide Cap • Expires December 31, 2007 • Action Item: • Seek reauthorization of QBV Tax Credit to 2010 with increase in statewide cap to $10,000,000; seek increase in credit rate in 2008

20. NC VentureInvestments • Treasurer May Invest Up to 10% of Pension and Escheat funds in Alternative Investments • 2005: $1.1 Billion in Pension Assets; 1.7% of Total Assets • Action Items • Encourage Treasurer to use more venture investment authority • Encourage Treasurer to leverage investments to attract venture fund offices and investments to North Carolina • Obtain and Publish Data on NC Investments in Venture Funds

21. Proposals for New Capital Formation Programs • Expand Deal Flow • Venture Fund Investment & Recruitment Incentives • Implement Capital-Extending Policies • Credit Enhancement for Debt Financing

22. Expand Deal Flow • Capital Gains Tax Exclusion for Founders Stock & Angel Investments • Exclusion from Personal Income Tax for Gains Derived from Sale of Stock Purchased from Qualified Business Ventures • Advantages: • Places More Capital in Hands of Experienced Investors and Entrepreneurs • Provides Recruitment Incentive for Key Employees • Action Item: • Seek enactment of exclusion in 2007-08 General Assembly

23. Venture Fund Investment & Recruitment Incentives • Research Programs in Other States • Considerations: • 2006: NC: 65 Deals, $471 Million in venture investments; 1.8% of US total • 2006: MA: 368 Deals, $2.8 Billion in venture investments; 11.1% of US total • Action Item: • Propose venture incentive legislation in 2008 General Assembly

24. Capital-Extension Strategies • Make Existing Tax Credits and Incentives More Accessible to Emerging Companies • Reduce Sales Tax Rates on R&D Equipment and Supplies • Make R&D Tax Credit Rebatable or Transferable • Further Discussion in Tax and Incentives Focus Group

25. Credit Enhancement for Debt Financing • North Carolina Life Science Development Corporation • Loans for new plant and equipment for life science manufacturing facilities • State income, franchise or premium tax credit for loss on guarantees of loans by NCLSDC • Action Item: • Seek support of banks and insurance companies for enactment of legislation in 2007-08

26. Tax and Incentive Programs Focus Group Report • Emerging companies generally cannot access tax credits and other financial incentives offered by the state • Economic disadvantage for small companies versus large firms • Allowing the companies to benefit from the credits could make them more attractive for other investments

27. Existing Business Investment Tax Incentive Programs • Jobs Development Investment Grants Program (JDIG) • William S. Lee Quality Jobs and Business Expansion Act (Lee Act Credits) • R&D Tax Credit

28. Jobs Development Investment Grants Program • State Authorizes Targeted Company to Retain as Grant a Share of Employee Income Tax Withholding • Reserved for Large Projects; Requires Approval of Economic Investment Committee • Early-Stage Companies Unlikely to Achieve Threshold Scale

29. Lee Act Credits • Credits Against Income and Franchise Tax for Job Creation and Capital Investments • Available to Companies in Manufacturing, R&D in Physical or Life Sciences • Must meet Minimum Requirements, Including Investment or Job Creation Thresholds • 5-15 New Jobs • As Much as $2 Million Minimum Investment • Most Emerging Companies Lack Tax Liability Against Which Credit Can be Taken

30. R&D Tax Credits • Credit for Increases in Federally Qualifying R&D – 5% • Flat-Rate Credit for R&D in North Carolina • Small Business - 3% • Low-Tier - 3% • University R&D – 15% • Most Emerging Companies Lack Tax Liability Against Which Credit Can be Taken • 15-Year Carry-Forward Not Attractive to Most Emerging Companies

31. Tax Credit Rebates and Monetization • Consider Proposing Tax Credits Be Rebatable to Emerging Life Science Companies • Revenue Department Makes Cash Payment for Credits in Excess of Tax Liability • Consider Proposing Tax Credits Be Transferable to Other Taxpayers • Emerging Companies Sell Tax Credits to Companies with Sufficient Tax Liability to Recover Entire Credit Amount

32. Tax Credit Rebates and Monetization (cont’d.) • Considerations: • Rebates Have Been Previously Proposed but Not Enacted • Unrestricted Transferability of Credits Creates Secondary Market • Proposal: • Rebates Transferable to Emerging Companies Providing Goods or Services to Credit Holder

33. Recommended Short Term Action Items • Full Recurring Funding for SBIR Matching Grants • Expanded Funding for NCBC Emerging Company Loan Programs • Reauthorization and Expansion of QBV Tax Credit • Capital Gains Tax Exclusion for Founders Stock • Credit Enhancement Program for Debt Financing of Life Science Manufacturing • Encourage Treasurer to Increase Venture Investments • Obtain and Publish Information on State Treasurers Investments in Venture Funds

34. Recommended Longer Term Action Items • Encourage NCBC development of new financing programs for later-stage life science companies, • Encourage Treasurers Office to leverage venture investments to attract venture fund offices and investments to North Carolina • Develop and propose venture fund incentive programs, based on strategies used by other states • Develop and propose programs to improve emerging companies’ access to state tax credits for job creation, business investment and research and development.

35. Questions & Discussion

36. Future ECF Programs • Schedule • April 3, 2007: Legislative Meet & Greet Breakfast, Legislative Building, Raleigh • September 2007: CEO Networking & Best Practices Forum Best Practice Forum Content Suggestions?

37. Your Help! • ECF Forum Sponsorships • Sponsorship Flyer • Marketing to Service Providers • Legislative Grassroots Support • Fact Sheets • Member Action Alerts • Triangle Area Legislators

38. Questions?Comments?Sam TaylorPresident, NCBIOstaylor@ncbioscience.orgBrenda SummersProject Coordinatorbsummers@ncbioscience.org(919) 281-8960