Public Comments

07/18/2012

FasterCures Comments on the IRS's proposed rule for examples of program-related investments

Department of the Treasury

Internal Revenue Service

[REG-144267-11]

RIN 1545-BK76

Public Comment: Examples of Program-Related Investments

ACTION: Notice of proposed rulemaking.

 

Thank you for the opportunity to comment on the proposed rule for “Examples of Program-Related Investments.” FasterCures is a nonprofit, nonpartisan center of the Milken Institute dedicated to accelerating the process of discovering and developing new medical solutions for deadly and debilitating diseases. Through our programmatic activities, including our TRAIN (The Research Acceleration and Innovation Network) initiative, we work with dozens of patient advocacy and medical research organizations across the disease spectrum.

FasterCures applauds the Treasury Department and the IRS for taking the important step of updating the examples of appropriate program-related investments (PRIs), to provide guidance to private foundations considering applying these tools as part of their operations. However, while “scientific research” is one of the goals cited in the guidelines, presently only Example 11 focuses specifically on medical research, and it highlights the use of PRIs for medical research in a global health context. While global health organizations have been the clear leaders in creating and deploying novel financing mechanisms to advance their nonprofit missions, they are not the only medical research foundations employing such tools. FasterCures strongly recommends that at least one non-global health example of the use of PRIs to support medical research be included as instructive examples for foundation managers.

Within what might be called the domain of “developed world diseases,” there are many for which market incentives for research and development of new treatments is sorely lacking. Most often cited are rare diseases such as cystic fibrosis, which have relatively small patient populations and are therefore typically of little interest to pharmaceutical companies. However, diseases with large patient populations, such as Alzheimer’s, also face significant challenges in the R&D marketplace; the risks in neuroscience are particularly high, and funders such as government and industry are becoming increasingly risk-averse as resources shrink. In this context, strategic funding by nonprofit foundations is playing an increasingly important role in “de-risking” R&D and ensuring promising ideas move through the early and under-funded stages of development and ultimately to patients. (FasterCures has extensively analyzed the challenges in the U.S. medical research system and the important role of patient-driven foundations in addressing them in publications such as Entrepreneurs for Cures and Crossing Over the Valley of Death.)

PRIs are already being used by some of these foundations for financing mission-related medical research, and the deployment of these tools is likely to increase in the future. Options include deploying PRIs through request-for-proposal grant applications, making straight equity investments in for-profit companies for the main purpose of advancing science, or providing loans or credit enhancement mechanisms to for-profit entities that engage in operations that meet the foundation’s mission.

The inclusion of additional detailed examples of non-global health foundations utilizing PRIs to further a mission of advancing science or developing treatments for a specific disease could make significant strides in encouraging the application of PRIs for domestic medical research. We believe if these organizations see themselves reflected in the IRS’s guidelines it will increase their comfort level with making such investments and provide clarity around issues such as whether a seemingly high potential rate of return on an investment precludes it from qualifying as a PRI.

We are providing the following draft example of a PRI in this context for your consideration: Company X is a small startup biotech company that has discovered a compound that it believes can have a disease-modifying effect on an autoimmune disease, but it lacks the funds to support early-stage clinical trials to achieve “proof of concept,” which potential venture backers want to see before investing. Foundation Y, a private foundation, enters into an investment agreement with X in order to induce X to spur its efforts to develop the drug. Foundation Y makes an equity infusion of $1,000,000 in Company X. Y's primary purpose in making the investment is to advance science. No significant purpose of the investment involves the production of income or the appreciation of property. The investment significantly furthers the accomplishment of Y's exempt activities and would not have been made but for such relationship between the investment and Y's exempt activities.

Thank you for your time and consideration. We are confident that by including additional examples of non-global health medical research investments in its guidelines, the IRS will add immense value to and encourage much innovation in the growing field of PRIs in developed-world medical research.

 

Sincerely,

Margaret Anderson

Executive Director, FasterCures

1101 New York Ave., NW, Suite 620

Washington, DC 20005

www.fastercures.org

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