New Report Demonstrates High Costs and Low Benefits of Sarbanes-Oxley 404(b) Compliance for Emerging Biotechs

BusinessWire

WASHINGTON–()–Today, to recognize National Inventors’ Day, the Biotechnology Innovation Organization (BIO) released a new report, Science or Compliance: Will Section 404(b) Compliance Impede Innovation by Emerging Growth Companies in the Biotech Industry? The report shows the detrimental impact of Sarbanes-Oxley 404(b) on biopharmaceutical emerging growth companies (Bio-EGCs) and demonstrates how this regulatory requirement harms innovation and capital formation without any corresponding investor benefit.

“It’s an exciting time for the life sciences sector,” BIO’s President and CEO Jim Greenwood noted, “but we must do more to protect small business innovators from regulatory burdens that are counterproductive to their mission. As this study proves, failing to exempt pre-revenue biotech companies from costly and unnecessary regulations is harming innovation, capital formation, and the ability of companies to develop breakthrough medicines and cures.”

In the report, renowned economists Craig Lewis and Joshua T. White of Vanderbilt University point to mounting evidence that links Section 404(b) compliance to reduced market capitalization, higher audit fees, exiting of public markets, and a direct reduction in innovation such as R&D that results in fewer patents.

Under the JOBS Act, enacted in 2012, small companies like Bio-EGCs were granted a five-year exemption from the costly Section 404(b). Since the law’s passage, more than 300 Bio-EGCs have gone public representing a 270 percent increase compared to the same period prior to JOBS Act. However, because drug development is an exceptionally time-consuming endeavor and often requires a decade or more of research and development, many life science startups are still pre-revenue when this 5-year exemption expires.

“The reality is that almost 90 percent of Bio-EGCs go public as early-stage startups and given their potential to create breakthrough medicines and cures, they often achieve large market capitalizations despite generating little to no revenue,” Lewis said. “The costs of Section 404(b) compliance are high and the benefits for small companies, like Bio-EGCs, and their investors are low, which is why it’s so important for policymakers to consider extending this important exemption.”

“It’s important to recognize the significant impact the JOBS Act has had on accelerating the pace of biotech IPOs since its passage. By providing a critical on-ramp for small business innovators and targeted regulatory relief measures, we have seen a dramatic uptick in IPO activity,” White added. “To that end, wasting valuable resources on unnecessary compliance undermines the intent of the JOBS Act which has helped hundreds of companies facilitate capital formation, bolster employment, and produce next generation medicines and cures for patients who need them.”

Failing to extend the exemption from Section 404(b) compliance for Bio-EGCs would have a negative impact on America’s economy and society for generations to come. Regulators and lawmakers should act swiftly to ensure unnecessary regulations are not preventing innovative companies from carrying out their lifesaving work.

This report is available for download here.

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