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Biotech Industry Overview


"This document is not an official pronouncement of the law or the position of the Service and cannot be used, or cited, or relied upon as such."

Table of Contents:

  1. Introduction
    A. Purpose of Industry Overview
    B. Use of the Intranet and Internet
    C. General History of Industry Specialization Program (ISP)
    D. History of Biotech Industry Study ISP
    E. Industry Specialist Staffing (Technical Advisors in LB&I)
    F. LB&I Industry Staffing
  2. Government Regulatory Requirements
    A. Federal Requirements
  3. Significant Law and Important Issues
    A. Coordinated Issues
    B. Emerging or Other Significant Issues
    C. Recent or Pending Legislation
    D. Specific Industry Related Tax Law
    E. Important Revenue Rulings or Revenue Procedures
    F.   Important Court Cases
    G.  Technical Advice Memorandums – Field Service Advices
  4. Industry Resources
    A.  Websites
    B.  Trade Associations
    C.  IRS and Other Training Courses/Videotapes
    D.  Trade Magazines and Newsletters
    E.  Industry Books
    F.   Internal Revenue Manual Citations
    G.  AICPA Auditing Standards and Publications
    H.  Market Segment Specialization Program (MSSP)
  5. Appendix
    A.  Complete Listing of Industry Overviews Available

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1.  Introduction

A. Purpose of Industry Overview

This overview is designed to provide industry related information at a high level and is the first step in the effort of the new Large Business and International (LB&I) to develop a greater level of expertise in the industry or industries to which you will be assigned.

B. Use of the Intranet and Internet

It is anticipated that an industry web page will be established on the LB&I Intranet that will contain detailed information involving each industry. The topics included in this overview will be expanded upon and others will be included.  For example, an up-to-date economic analysis of the industry, current and future trends, and links to many other industry related web sites that can assist you in gaining the needed level of understanding of your industry will be included.

C. General History of Industry Specialization Program (ISP) 

Date:    1-1-80

Date:  1-2-90

D. History of Biotechnology Industry Study

Date:  12-31-01 
Event:  Biotech Industry Study established

E. Industry Specialist Staffing (Technical Advisors in LB&I)

Name of Specialist:  Louis Milano, T/A Pharmaceutical Industry  
Telephone #:  908-301-2106
FAX #:  908-301-2305
Email Address:  Louis Milano

Name of Specialist:  Lena C. Lee, T/A Biotech Industry  
Telephone #:  415-522-6381
FAX #:  415-522-6123
Email Address:  Lena C. Lee

F.     LB&I Industry Staffing

The Industry Specialist is assigned to the Pre-Filing and Technical Guidance Division that is a part of LB&I Headquarters.  Each industry is assigned to one of the five Industry Functional Divisions.  Industry Specialists will be known as technical advisors in LB&I and will be supervised by a Manager, Technical Advisors.  Information relative to the management in the Industry Division that this industry is assigned as well as the Manager of the Technical Advisor(s) of this industry is as follows:

Name:  Sergio Arellano, Industry Director
Location:  Downers Grove, IL

Name:  Lori L. Nichols, Director, Field Operations
Location:   Louisville, KY

Name:  Jim Roosey, Director, Field Operations
Location:   Downers Grove, IL

Name:  Gregory Zielinski, Manager, Technical Advisors
Location: Chesterfield, MO


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2. History of Industry

The history of biotechnology begins when primitive humans became domesticated enough to breed plants and animals; gather and process herbs for medicine; make bread and wine and beer; create many fermented food products including yogurt, cheese, and various soy products; create septic systems to deal with their digestive and excretory waste products, and to create vaccines to immunize themselves against diseases. Archeologists keep discovering earlier examples of each of the uses of organisms by humans, but examples of most of these processes go back to between 5,000 and 10,000 BC.

It is evident that biotechnology in the past concentrated on the production of food and medicine and solving environmental problems.

Modern biotechnology, based on recombinant DNA technology, finds a similar distribution in the use of recombinant organisms to serve in the production of food, and medicines and solving environmental problems. Introducing genes into organisms, breeding organisms to form new variants, or treating organisms with specific compounds may accomplish this. Biomedicine is medicine based upon the principles of biology and biochemistry.

Biotechnology-derived products have the potential to positively change our society, from improving health care and increasing agricultural products to producing a cleaner environment.

Though a quarter of a century old, the industry remains relatively small compared to the traditional pharmaceutical industry, which bases its approach to drug development more on chemistry than on genetics.  Most biotechnology companies are still in the start-up mode, which means they are not yet profitable and instead are consuming investors' capital on research and development in order to develop new products, such as human therapeutics.

Time line of Biotechnology –

B.C. 8000 - Humans domesticate crops and livestock.  Potatoes first cultivated for food.

4000-2000 - Biotechnology first used to leaven bread and ferment beer, using yeast (Egypt).  Production of cheese and fermentation of wine (Samar, China and Egypt).
Babylonians control date palm breeding by selectively pollinating female trees with pollen from certain male trees.

500 - First antibiotic:  moldy soybean curds used to treat boils (China).

A.D. 100 - First insecticide:  powdered chrysanthemums (China).

1322 - An Arab chieftain first uses artificial insemination to produce superior horses.

1590 - Janssen invents the microscope.

1663 - Hooke discovers existence of the cell.

1675 - Leeuwenhoek discovers bacteria.

1761 - Koelreuter reports successful crossbreeding of crop plants in different species.

1797 - Jenner inoculates a child with a viral vaccine to protect him from smallpox.


1830 – Proteins discovered.

1833 – First enzyme discovered and isolated.

1835-1855 - Schleiden and Schwann propose that all organisms are composed of cells, and Virchow declares, "Every cell arises from a cell."

1857 - Pasteur proposes microbes cause fermentation.

1859 - Charles Darwin publishes the theory of evolution by natural selection. The concept of carefully selecting parents and culling the variable progeny greatly influences plant and animal breeders in the late 1800s despite their ignorance of genetics.

1865 - Science of genetics begins: Austrian monk Gregor Mendel studies garden peas and discovers that genetic traits are passed from parents to offspring in a predictable way-the laws of heredity.

1870-1890 - Using Darwin's theory, plant breeders crossbreed cotton, developing hundreds of varieties with superior qualities.

Farmers first inoculate fields with nitrogen-fixing bacteria to improve yields.

William James Beal produces first experimental corn hybrid in the laboratory.

1877 – A technique for staining and identifying bacteria is developed by Koch.

1878 – The first centrifuge is developed by Laval.

1879 – Fleming discovers chromatin, the rod-like structures inside the cell nucleus that later came to be called chromosomes.

1900 - Drosophila (fruit flies) used in early studies of genes.

1902 - The term immunology first appears.

1906 - The term genetics is introduced.

1911 - The first cancer-causing virus is discovered by Rous.

1914 - Bacteria are used to treat sewage for the first time in Manchester, England.

1915 - Phages, or bacterial viruses, are discovered.

1919 - First use of the word biotechnology in print.

1920 - Evans and Long discover the human growth hormone.

1928 - Penicillin discovered as an antibiotic: Alexander Fleming.
A small-scale test of formulated Bacillus thuringiensis (Bt) for corn borer control begins in Europe. Commercial production of this biopesticide begins in France in 1938.
Karpechenko crosses radishes and cabbages, creating fertile offspring between plants in different genera.
Laibach first uses embryo rescue to obtain hybrids from wide crosses in crop plants-known today as hybridization.

1930 - U.S. Congress passes the Plant Patent Act, enabling the products of plant breeding to be patented.

1933 - Hybrid corn, developed by Henry Wallace in the 1920s, is commercialized. Growing hybrid corn eliminates the option of saving seeds. The remarkable yields outweigh the increased costs of annual seed purchases, and by 1945, hybrid corn accounts for 78 percent of U.S.-grown corn.

1938 - The term molecular biology is coined.

1941 - The term genetic engineering is first used by Danish microbiologist A. Jost in a lecture on reproduction in yeast at the technical institute in Lwow, Poland.

1942 - The electron microscope is used to identify and characterize a bacteriophage-a virus that infects bacteria.
Penicillin mass-produced in microbes.

1944 - DNA is proven to carry genetic information – Avery et al.
Waksman isolates streptomycin, an effective antibiotic for tuberculosis.

1946 - Discovery that genetic material from different viruses can be combined to form a new type of virus, an example of genetic recombination.
Recognizing the threat posed by loss of genetic diversity, the U.S. Congress provides funds for systematic and extensive plant collection, preservation and introduction.

1947 - McClintock discovers transposable elements, or "jumping genes," in corn.

1949 - Pauling shows that sickle cell anemia is a "molecular disease" resulting from a mutation in the protein molecule hemoglobin.

1951 - Artificial insemination of livestock using frozen semen is successfully accomplished.

1953 - The scientific journal Nature publishes James Watson and Francis Crick's manuscript describing the double helical structure of DNA, which marks the beginning of the modern era of genetics.

1955 - An enzyme involved in the synthesis of a nucleic acid is isolated for the first time.

1956 - Kornberg discovers the enzyme DNA polymerase I, leading to an understanding of how DNA is replicated.

1958 - Sickle cell anemia is shown to occur due to a change of a single amino acid.
DNA is made in a test tube for the first time.

1959 - Systemic fungicides are developed. The steps in protein biosynthesis are delineated.

Also in the 1950s - Discovery of interferons.
First synthetic antibiotic.

1960 - Exploiting base pairing, hybrid DNA-RNA molecules are created.
Messenger RNA is discovered.

1961 - USDA registers first biopesticide: Bacillus thuringiensis, or Bt.

1963 -New wheat varieties developed by Norman Borlaug increase yields by 70 percent.

1964 - The International Rice Research Institute in the Philippines starts the Green Revolution with new strains of rice that double the yield of previous strains if given sufficient fertilizer.

1965 - Harris and Watkins successfully fuse mouse and human cells.

1966 - The genetic code is cracked, demonstrating that a sequence of three nucleotide bases (a codon) determines each of 20 amino acids.

1967 - The first automatic protein sequencer is perfected.

1969 - An enzyme is synthesized in vitro for the first time.

1970 - Norman Borlaug receives the Nobel Peace Prize (see 1963).
Discovery of restriction enzymes that cut and splice genetic material, opening the way for gene cloning.

1971 - First complete synthesis of a gene.

1972 - The DNA composition of humans is discovered to be 99 percent similar to that of chimpanzees and gorillas.
Initial work with embryo transfer.

1973 - Stanley Cohen and Herbert Boyer perfect techniques to cut and paste DNA (using restriction enzymes and ligases) and reproduce the new DNA in bacteria.

1974 - The National Institutes of Health forms a Recombinant DNA Advisory Committee to oversee recombinant genetic research.

1975 - Government first urged to develop guidelines for regulating experiments in recombinant DNA:  Asilomar Conference, California.
The first monoclonal antibodies are produced.

1976 - The tools of recombinant DNA are first applied to a human inherited disorder.
Molecular hybridization is used for the prenatal diagnosis of alpha thalassemia.
Yeast genes are expressed in E. coli bacteria.
First time the sequence of base pairs for a specific gene is determined (A, C, T, G).
First guidelines for recombinant DNA experiments released: National Institutes of Health-Recombinant DNA Advisory Committee.

1977 - First expression of human gene in bacteria.
Procedures developed for rapidly sequencing long sections of DNA using electrophoresis.

1978 - High-level structure of virus first identified.
Recombinant human insulin first produced. 
North Carolina scientists show it is possible to introduce specific mutations at specific sites in a DNA molecule.

1979 - Human growth hormone first synthesized.

Also in the 1970s - First commercial company founded to develop genetically engineered products.
Discovery of polymerases.
Techniques for rapid sequencing of nucleotides perfected.
Gene targeting.
RNA splicing.

1980 - The U.S. Supreme Court, in the landmark case Diamond v. Chakrabarty, approves the principle of patenting recombinant life forms, which allows the Exxon oil company to patent an oil-eating microorganism.
The U.S. patent for gene cloning is awarded to Cohen and Boyer.
The first gene-synthesizing machines are developed.
Researchers successfully introduce a human gene-one that codes for the protein interferon-into a bacterium.
Nobel Prize in Chemistry awarded for creation of the first recombinant molecule: Berg, Gilbert, Sanger.

1981 - Scientists at Ohio University produce the first transgenic animals by transferring genes from other animals into mice.
Chinese scientist becomes the first to clone a fish-a golden carp.

1982 - Applied Biosystems, Inc., introduces the first commercial gas phase protein sequencer, dramatically reducing the amount of protein sample needed for sequencing.
First recombinant DNA vaccine for livestock developed.
First biotech drug approved by FDA: human insulin produced in genetically modified bacteria.
First genetic transformation of a plant cell:  petunia.

1983 - The polymerase chain reaction (PCR) technique is conceived. PCR, which uses heat and enzymes to make unlimited copies of genes and gene fragments, later becomes a major tool in biotech research and product development worldwide.
The first genetic transformation of plant cells by TI plasmids is performed.
The first artificial chromosome is synthesized.
The first genetic markers for specific inherited diseases are found.
First whole plant grown from biotechnology: petunia.
First proof that modified plants pass their new traits to offspring: petunia.

1984 - The DNA fingerprinting technique is developed.
The entire genome of the human immunodeficiency virus is cloned and sequenced.

1985 - Genetic markers found for kidney disease and cystic fibrosis.
Genetic fingerprinting entered as evidence in a courtroom.
Transgenic plants resistant to insects, viruses and bacteria are field-tested for the first time.
The NIH approves guidelines for performing gene-therapy experiments in humans.

1986 - First recombinant vaccine for humans: hepatitis B.
First anti-cancer drug produced through biotech: interferon.
The U.S. government publishes the Coordinated Framework for Regulation of Biotechnology, establishing more stringent regulations for rDNA organisms than for those produced with traditional genetic modification techniques.
A University of California-Berkeley chemist describes how to combine antibodies and enzymes (abzymes) to create pharmaceuticals.
The first field tests of transgenic plants (tobacco) are conducted.
The Environmental Protection Agency approves the release of the first transgenic crop-gene-altered tobacco plants.
The OECD Group of National Experts on Safety in Biotechnology states: "Genetic changes from rDNA techniques will often have inherently greater predictability compared to traditional techniques" and "risks associated with rDNA organisms may be assessed in generally the same way as those associated with non-rDNA organisms."

1987 - First approval for field test of modified food plants: virus-resistant tomatoes.
Frostban, a genetically altered bacterium that inhibits frost formation on crop plants, is field-tested on strawberry and potato plants in California, the first authorized outdoor tests of a recombinant bacterium.

1988 - Harvard molecular geneticists are awarded the first U.S. patent for a genetically altered animal-a transgenic mouse.
A patent for a process to make bleach-resistant protease enzymes to use in detergents is awarded.
Congress funds the Human Genome Project, a massive effort to map and sequence the human genetic code as well as the genomes of other species.

1989 - First approval for field test of modified cotton: insect-protected (Bt) cotton.
Plant Genome Project begins.

Also in the 1980s - Studies of DNA used to determine evolutionary history.
Recombinant DNA animal vaccine approved for use in Europe.
Use of microbes in oil spill cleanup: bioremediation technology.
Ribozymes and retinoblastomas identified.

1990 - Chy-Max™, an artificially produced form of the chymosin enzyme for cheese-making, is introduced.  It is the first product of recombinant DNA technology in the U.S. food supply.
The Human Genome Project – an international effort to map all the genes in the human body-is launched.
The first experimental gene therapy treatment is performed successfully on a 4-year-old girl suffering from an immune disorder.
The first transgenic dairy cow-used to produce human milk proteins for infant formula-is created.
First insect-protected corn:  Bt corn.
First food product of biotechnology approved in U.K.:  modified yeast.
First field test of a genetically modified vertebrate:  trout.

1992 - American and British scientists unveil a technique for testing embryos in vitro for genetic abnormalities such as cystic fibrosis and hemophilia.
The FDA declares that transgenic foods are "not inherently dangerous" and do not require special regulation.

1993 - Merging two smaller trade associations creates the Biotechnology Industry Organization (BIO).
FDA approves bovine somatotropin (BST) for increased milk production in dairy cows.

1994 - First FDA approval for a whole food produced through biotechnology: FLAVRSAVR™ tomato.
The first breast cancer gene is discovered.
Approval of recombinant version of human DNase, which breaks down protein accumulation in the lungs of CF patients.
BST commercialized as POSILAC bovine somatotropin.

1995 - The first baboon-to-human bone marrow transplant is performed on an AIDS patient.
The first full gene sequence of a living organism other than a virus is completed, for the bacterium Hemophilus influenzae.
Gene therapy, immune system modulation and recombinantly produced antibodies enter the clinic in the war against cancer.

1996 - The discovery of a gene associated with Parkinson's disease provides an important new avenue of research into the cause and potential treatment of the debilitating neurological ailment.

1997 - First animal cloned from an adult cell: a sheep named Dolly in Scotland.
First weed- and insect-resistant biotech crops commercialized: Roundup Ready® soybeans and Bollgard® insect-protected cotton.
Biotech crops grown commercially on nearly 5 million acres worldwide:  Argentina, Australia, Canada, China, Mexico and the United States.
A group of Oregon researchers claims to have cloned two Rhesus monkeys.
A new DNA technique combines PCR, DNA chips and a computer program to create a new tool in the search for disease-causing genes.

1998 -  University of Hawaii scientists clone three generations of mice from nuclei of adult ovarian cumulus cells.
Human embryonic stem cell lines are established.
Scientists at Japan's Kinki University clone eight identical calves using cells taken from a single adult cow.
The first complete animal genome, for the C. elegans worm, is sequenced.
A rough draft of the human genome map is produced, showing the locations of more than 30,000 genes.
Five Southeast Asian countries form a consortium to develop disease-resistant papayas.

Also in the 1990s - First conviction using genetic fingerprinting in the U.K.
Isolation of gene that clearly participates in the normal process of regulating weight.
Discovery that hereditary colon cancer is caused by defective DNA repair gene.
Recombinant rabies vaccine tested in raccoons.
Biotechnology based biopesticide approved for sale in the United States.
Patents issued for mice with specific transplanted genes.
First European patent on a transgenic animal issued for transgenic mouse sensitive to carcinogens.
Breast cancer susceptibility genes cloned.

2000 - First complete map of a plant genome developed:  Arabidopsis thaliana.
108.9 million acres of biotech crops grown in 13 countries.
"Golden Rice" announcement allows the technology to be available to developing countries in hopes of improving the health of undernourished people and preventing some forms of blindness.
First biotech crop field-tested in Kenya:  virus-resistant sweet potato.
Rough draft of the human genome sequence is announced.

2001 - First complete map of the genome of a food plant completed:  rice.
Scientific journals publish complete human genome sequence.
Researchers in Australia report developing a technique using "hairpin RNA" that vaccinates crop plants against viruses like Barley Yellow Dwarf Virus.
Chinese National Hybrid researchers report developing a "super rice" that could produce double the yield of normal rice.
The European Commission issues rules requiring the labeling of all foods and animal feed derived from GMOs.
Complete DNA sequencing of the agriculturally important bacterium Sinorhizobium meliloti.
A single gene from Arabidopsis inserted into tomato plants to create the first crop able to grow in salty water and soil.
Genome sequence for Agrobacterium tumefaciens, important in agriculture, released.
Researchers grow thale cress that lights up when it is damaged or stressed-a step toward developing hardier, stress-resistant crops.
First comprehensive molecular map completed of the peanut.

Source for the above Timeline:  The Biotech Industry Organizations website


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3. Trends

The Biotech Industry within the last 5 years has seen a significant influx of capital into their firms due to their cutting edge technologies, the mapping of the human genome and a wave of new biologic drug product approvals by the FDA. This influx of capital, which has come from venture capitalists, private investors, off balance sheet financial arrangements, convertible debt instruments, alliance revenue and product sales, has changed the Biotech business model. The large and mid sized biotech firms, have gone from reliance on large pharmaceutical partners for up front fees, milestone payments, and moderate royalties in funding their R&E endeavors (Platform Based of Tool Based Model), to a model whereby they can independently fund their own R&E activities and directly market their products, or enter into more lucrative co development and co promotion agreements with their large pharmaceutical partners (Composite Business Model).  This new model has enabled a number of large and mid sized biotech firms to significantly retain more of the fruits of their labor (i.e. profits and earnings).  This is evidenced by the fact that in 1999, 55% of publicly traded biotech companies had less than two years worth of cash, and 35% had less than one year.  As of 2001, 54% of biotechs had at least three years of cash and 42% had more than five years for funding their research activities.  This financial strength presents an enormous challenge.  Biotech firms now need to put the money to work by continuing to effectively get products into the marketplace and get shareholders a return on investment. It also means they must advance existing projects in clinical trials, expand their R&E infrastructures, negotiate collaborations which retain maximum downstream value and possibly acquire other technologies or companies.  Examples of biotech companies already making strides in these areas over the past couple of years are, Amgen in its acquisition of Immunex for $16 billion dollars, Millennium’s acquisition of COR Therapeutics for $1.5 billion dollars, Medimmune’s acquisition of Aviron,  Elan’s acquisition of Dura for $1.8 billion dollars, collaborations such as Imclone and Bristol Myers for $2 billion dollars, Cura Gen and Bayer for $1.5 billion dollars, Vertex and Novartis for $800 million dollars, Millennium and Bayer for $465 million dollars, Millennium and Aventis for $450 million dollars, and Millennium and Abbott Labs for $250 million dollars.  This activity has allowed the large and mid size biotech companies to begin achieving their goal of becoming vertically integrated stand alone drug companies.  Conversely, smaller biotechs with products still in early stages of development and who have not reached profitability must still rely on outside sources for capital (i.e. Platform or Tool Based Business Model), such sources being large pharmaceutical or biotech companies.  This has raised speculation that over the next few years you will see increased M&A activity, not Pharma and Bio but Bio and Bio as biotech companies strive to acquire critical mass for achieving drug development independence.  From a financial standpoint, Standard and Poors expects industry wide revenue for public firms to increase from 25 billion in 2001 to 31 billion in 2002 with aggregate earnings to grow at approximately 24% a year.  These revenues are currently fairly concentrated; estimates are that the six largest biotech drug developers in terms of sales (Amgen, Biogen, Chiron, Genentech, Genzyme and Immunex) will account for approximately two fifths of industry revenue.   This revenue base will become more diversified as additional smaller firms grow their product portfolios (60 biotech companies report a profit for 2001 according to Ernst and Young’s annual published revue of the Biotech industry "Focus on Fundamentals").  With this expected growth, comes important income tax considerations.  Some biotechs are deferring the reporting of their alliance revenues, other biotechs are using off balance sheet R&E financing vehicles to attract investment into their firms, while still other biotechs are looking to place their intangibles offshore.  These activities will need to be monitored for compliance in the future.


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4.  Industry Terms

Agonist: A drug that promotes certain kinds of cellular activity by binding to a cells receptor.

Amino Acids:  Building blocks of proteins.

Antagonist:  A drug that prevents certain types of cellular reactions by blocking other substances from binding to a cells receptor.

Antibody:  A protein produced by certain types of white blood cells to deactivate foreign proteins.

Antigen:  Any substance that induces a body's immune response.

Antisense:  A drug that is the complimentary image of a small segment of messenger RNA (mRNA), the substance that carries instructions from cells genes to its protein-making machinery.

Assay:  A test that measures a biological response.

Autoimmune disease:  A condition such as multiple sclerosis where the body produces antibodies against its own tissues.

Bioavailability:  The percentage of a drugs active ingredient that reaches patients bloodstream and body tissues.

Bioinformatics:  A system whereby biological information is collected, stored, and accessed via computers and similar other electronic media.

Biologicals:  Also known as biological drugs, they are medicinal preparations made from living organisms or their byproducts.  Vaccines, antigens, serums, and plasmas are examples of biologicals.

Biologics license application (BLA):  The formal filings that drug makers submit to the FDA for approval to market new biologic-based drugs.  The application must contain clinical evidence of the compounds safety and efficacy.

Bioremediation:  The use of microorganisms to remedy environmental problems, rendering hazardous waste nonhazardous.

Biosynthesis:  Production of a chemical by a living organism.

Biotransformation:  The use of enzymes in chemical synthesis to produce chemical compounds of a desired stereochemistry.

Breakthrough Drug:  A compound whose mode of action is significantly different from that of existing drugs, representing a major therapeutic advance.

Chemotherapy drugs:  Drugs used to treat cancers.

Chromosomes:  Microscopic, threadlike components in the nucleus of a cell that carry hereditary information in the form of genes.

Clinical Trials:  Test in which experimental drugs are administered to humans to determine their safety and efficacy.

Clone:  A term that is applied to genes, cells, or entire organisms that are derived from and are genetically identical to a single common ancestor gene, cell or organism respectively.

Clotting factors:  Proteins involved in the normal clotting of blood.

Colony-stimulating factors:  Proteins responsible for the controlling production of white blood cells.

Combination therapy:  The use of two or more drugs that together has greater therapeutic power in treating illnesses and diseases than either used alone.

Deoxyribonucleic acid (DNA):  The basic molecule that contains genetic information for most living systems.

DNA chip:  A micro array used to analyze DNA sequences, ascertain gene expression or detect single nucleotide polymorphisms (SNPs).

Drug Delivery:  The process by which a formulated drug is administered to the patient.  Traditional routes have been oral or intravenous perfusion.  New methods deliver through the skin with a transdermal patch or across the nasal membrane with an aerosol spray.

Enzyme:  Protein that controls chemical reactions in the body.

Fermentation:  The process of growing microorganisms for the production of various chemical or pharmaceutical compounds.

Fusion:  Joining the membrane of two cells, thus creating a daughter cell that contains some of the same properties from each parent cells.

Gene:  The basic determinant of heredity, genes are chromosomal segments that direct the syntheses of proteins and conduct other molecular regulatory functions.

Gene sequencing:  Decoding DNA strands into the specific order of its four nucleotides.

Gene therapy:  The introduction of genes into a patient's body to replace the defective ones or to suppress the action of a harmful one.

Genetic screening:  The use of specific biological tests to screen for inherited diseases or medical conditions.

Genetic testing:  The analysis of an individual’s genetic material. Can be used to gather information on an individual’s genetic predisposition to a particular health condition or to confirm a diagnosis of genetic disease.

Genome:  The total complement of genetic material in a cell, comprising the entire chromosomal set found in each nucleus of a given species.

Genomics:  The study of genes and their function, including mapping genes within the genome, identifying their nucleic acid structures, and investigating their functions.

Growth Factors:  Proteins responsible for regulating cell proliferation, function, and differentiation.

Human growth hormone:  Pituitary hormone that stimulates the growth of long bones in prepubertal children.

Immunomodulator:  A drug that attempts to modify the immune system.

Interferon:  A glycoprotein, produced naturally by cells, which interferes with a virus's ability to reproduce after it invades the body.

Interleukin:  An endogenous substance that stimulates the production of different types of white blood cells or leukocytes.

Investigational new drug (IND):  Regulatory classification of an experimental new compound that has successfully completed animal studies and has been approved by the FDA to proceed to human trials.

In vitro:  Literally "in glass" performed in a test tube or lab apparatus.

In vivo:  In the living organism.

Macrophage:  A type of white blood cell that is involved in the production of interleukin 1.  These substances are being studied as potential anticancer therapies.

Monoclonal Antibodies:  Large protein molecules produced by white blood cells, which seek out and destroy harmful foreign substances.

New drug application (NDA):  The formal filing that drug makers submit to the FDA for approval to market new chemical based drugs.

Orphan drug:  A drug designed to treat rare diseases afflicting relatively small patient populations (currently less than 200,000 cases).

Polymerase:  General term for enzymes that carry out the synthesis of nucleic acids.

Preclinical studies:  Studies that test a drug on animals and in other non human test systems.

Priority review:  An investigational drug that receives this status from the FDA will be reviewed within 6 months of its BLA or NDA submission.

Prodrug:  An inactive compound that converts to an active agent through contact with a specific enzyme.

Proteome:  The set of all proteins expressed by a genome.

Proteomics:  The study of encoded proteins and their function, with emphasis on the role proteins play in the disease process.

Recombinant DNA technology:  The process of creating new DNA by combining components of DNA from different organisms. Usually the new DNA is then incorporated into therapeutic substances.

Regeneration:  Laboratory technique for forming new plant from a clump of plant cells.

Scale Up:  Transition from small-scale production to large industrial quantities.

Single nucleotide polymorphism (SNP):  A variation in the sequence of a gene due to a change in a single nucleotide.

Tissue plasminogen activator (TPA):  A substance produced in small amounts by the inner lining of blood vessels, it prevents abnormal blood clotting.

Treatment IND:  An FDA program that allows experimental drugs treating life threatening illnesses to be made available to very sick patients before the drugs obtain FDA approval.

Tumor necrosis factors (TNF):  Rare proteins of the immune system that appear to destroy some types of tumor cells without affecting healthy cells.

Vaccine:  A preparation that contains an antigen consisting of whole disease-causing organisms (killed or weakened) or parts of such organisms, used to confer immunity against the disease that the organisms cause.

Vector:   The agent (plasmid or virus) used to carry new DNA into a cell.

Virus:  A submicroscopic organism that contains genetic information but cannot reproduce itself.

Xenotransplantation:  The process of transplanting organs, cells or tissues from animals into humans.


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5. Accounting Principles

The industry uses standard U.S. accounting GAAP.  Foreign Controlled Companies may use Organization of Economic Community Development guidelines for their transfer pricing policies.  They may also follow International Accounting Standards (IAS), which is becoming more popular.

6. Information Systems

There is no information at this time.


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7.  Industry Operating Procedures

Companies in the Biotech Industry draw heavily upon research in genetic engineering or recombinant DNA technology to produce biological compounds (such as human insulin or vaccines) in large quantities for commercial use.  These biotech companies range in size from small start-ups to multi billion dollar firms. One of the most important requirements facing these firms in order to bring a product to market is access to capital to fund their research activities.  Patents are critical in this endeavor.  For the young biotech just starting up, capital is acquired through seed money from venture capitalists and private investors. Once a firm has a promising new product candidate it may team up with a major pharmaceutical or biotechnology company.  The large company will provide capital in the form of up front fees, R&E funding, milestone payments after each phase of clinical trial, and royalties in return for receiving the marketing rights to the product once it’s commercialized.  The larger partner often provides needed production facilities and sales organizations as well for new product launches in return for the marketing rights under various licensing agreements.  Many of the approved biotech products in the marketplace today have been developed through this process.  In recent years however, some well-capitalized biotechs have leveraged their resources to develop and commercialize drugs on their own or through more lucrative 50/50 co-promotion agreements.  This trend is continuing currently; it allows the biotech to realize significantly higher percentages of earnings from product sales compared to smaller firms who continue to be satisfied with only royalties or small co-promotion percentages.


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8. Government Regulatory Requirements

A. Federal Requirements

The Food & Drug Administration (FDA) regulates the introduction of new drugs. It is also responsible for approving the safety of all foods with new food ingredients.  It requires that manufacturers perform extensive testing to prove that products are safe and effective before it will sanction commercial sale.  The U.S. Department of Agriculture (USDA) and the Environmental Protection Agency (EPA) impose safety and/or performance standards on the development of pesticides, herbicides, and genetically altered crops.  Biotechnology companies must comply with the standards of all three agencies as they develop their biopharmaceutical, agricultural and hazardous waste type treatments.  The U.S. rigorous approval process is respected around the world.  In many foreign countries, approval by FDA is enough to guarantee approval.

The biopharmaceutical approval process (which accounts for approximately 90% of industry revenue) is both lengthy and costly (12 to 15 years to get from preclinical to market at a cost of between $300 to $600 million dollars).  The effort to discover and develop new therapeutics generally consists of several distinct steps.

Step 1 – Early discovery and preclinical development (including target identification, target validation, assay development, primary screening, lead optimization, and preclinical studies).  This first step allows the researchers to identify a potential therapeutic or vaccine candidate.  It takes several years to study how a protein works and whether it is a candidate for development as a biopharmaceutical.  The researchers must create these proteins, which the body produces in minute amounts, in larger quantities, which large-scale production involves genetic engineering.  Scientists isolate the genetic sequences or genes that instruct cells how to make specific proteins.  The isolated gene is spliced into the genetic information of the microorganism or cell. Once this information is inserted, providing simple nutrients (i.e. sugar) causes the cell or bacterium to produce the desired protein in larger quantities.  The added genetic information results in the production of human insulin or a new interferon.  The manufacturing process is then carefully controlled so that these new biopharmaceuticals are not contaminated.

Before testing the protein in humans (pre clinical trials), laboratory and animal studies are carried out to determine safety (in terms of carcinogenicity and other toxic consequences) and biological activity.  After these studies are complete, the company files an investigational new drug application (IND) with the FDA for approval to test the product in humans.  The IND will contain all the data collected during discovery and preclinical trials.

Step 2 – Clinical Trials designed to show safety and efficacy in humans.  While the FDA does not mandate a particular methodology, the scientific community has established a four Phase methodology:

Phase I – Drug given to a relatively small number of healthy people to test its safety.

Phase II – Drug administered to patients suffering from the disease or condition the drug is intended to treat.  These trials usually involve a few hundred patients and are designed to evaluate the biopharmaceuticals effectiveness and safety in treating the targeted disease or medical condition at the dosage level.

Phase III – Large-scale trials are conducted involving thousands of patients to prove the product is effective against a targeted disease.  Human trial subjects must provide consent to be part of the experimental group.  The results must be statistically valid and include the determination of side effects that may exist in the general population.  

When clinical testing and research on a biopharmaceutical have been completed, the manufacturer analyzes all the data and, if the data successfully demonstrates safety and efficacy, submits a Biologics License Application (BLA) or a New Drug Application (NDA) to the FDA for product marketing approval.  The BLA or NDA must contain all the data (formula, production, labeling, and intended use) the company has collected on the drug.

Most biopharmaceuticals, blood products, and all vaccines derived from biotechnology are reviewed by the FDA's Center for Biologics Evaluation and Research (CBER).  Some biotech drugs are reviewed by the Center for Drug Evaluation and Research (CDER).

Once a BLA or an NDA is approved, the FDA continues to monitor the biopharmaceutical product.  Sometimes, side effects or other unexpected developments come to light after the drug is widely used. If so, the FDA may require additional studies (Phase IV) to evaluate long-term effects.

Phase IV – Post approval marketing testing.  These types of trials are conducted to generate marketing data that will be used in the competitive market.  The trials usually involve one or more competitor products.


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9. Significant Law and Important Issues

A. Coordinator Issues - There are no coordinated issues at this time.

B.  Emerging and Other Significant Issues and Brief  Summary of Issues

Capital Loss – Special Purpose Entity  -  TAM 200601029:  Taxpayer may not claim a loss deduction under 165 of the Internal Revenue Code upon the expiration of a "purchase option agreement" to acquire X if Taxpayer instead acquires X by other means.

Cost Segregation:  The crux of cost segregation is determining whether an asset is I.R.C. §1245 property (shorter cost recovery period property) or §1250 property (longer cost recovery period property).  The most common example of §1245 property is depreciable personal property, such as equipment.  The most common examples of §1250 property are buildings and building components, which generally are not §1245 property. 1

The difference in recovery periods has placed the Internal Revenue Service and taxpayers in adversarial positions in determining whether an asset is §1245 or §1250 property. The Biotech/Pharmaceutical industry matrix recommends the categorization and general depreciation system recovery period of various assets utilized within the industry (refer to the cost segregation industry guide attachment A).

Deferred Revenue:  IRC sections 61, 446, 451. Biotech companies for promising research enter into alliance agreements with large pharmaceutical or biotech companies. The agreements call for up front fees, milestone payments and royalties upon commercialization. Biotech companies are deferring the reporting of the up front fee and including it into income ratably over the term of the agreement. The up front fee is for research already performed, taxpayer has unfettered use of the funds, deferral is not warranted.

Government Settlements: The issue in question is whether or not a False Claims Act (FCA) settlement with the DOJ is deductible in its entirety as a Sec 162 (a) deduction, or is some portion a non-deductible penalty under Sec 162 (f).

Experience has shown that almost every defendant/taxpayer deducts the entire amount of a (FCA) settlement as a business expense.  In most cases, a portion of the civil fraud settlement payment represents a penalty that is not deductible for tax purposes. 

Off-Balance Sheet Financing Vehicles:  IRC section 174.  Biotech companies utilize patents from their promising research to raise additional capital to fund their R&E activities.  The biotech will transfer the rights to the research to a newly formed entity.  The new entity at the time of the transfer will simultaneously enter back into a series of agreements with the biotech (i.e. R&E agreement, exclusive license agreement, manufacturing agreement and an option to purchase agreement).  The new entity typically has no employees, no R&E expertise, no assets other than the transferred technology, and no realistic prospect of exploiting the R&E and passive income (interest and royalties).  The issue therefore, is the new entity entitled to an I.R.C. 174 expense for research paid by it to the biotech?  Is the research in connection with the new entities trade or business?

Cost Sharing and Buy-In:  IRC section 482 and Treas. Reg. 1.482-7.  Biotech companies when deciding to globalize their business are electing cost sharing with their foreign affiliates and contributing pre-existing intangibles (in process R&E) to the agreement.  Taxpayer is entitled to a buy-in payment from the foreign affiliate for intangibles made available to the CSA.  Valuation questions and expected benefits questions need to be addressed.

Legally Mandated Research and Experimental Expenses:  IRC sections 861-864 and Treas. Reg. 1.861-8(e)(3) and 1.861-17(a)(4).  Biotech companies when allocating and apportioning R&E for foreign tax credit purposes are excluding from the total R&E pool before such allocation and apportionment an amount for legally mandated research.  Before such exclusion can take place, taxpayers must demonstrate they are in compliance with the requirements of the regulations.

License Fees & Milestone Payments:  In the pharmaceutical and biotech industries it is common for companies to license promising research candidates at various stages of discovery/development from related and unrelated parties. Fees are paid in order to acquire the rights to use or exploit such promising research or know how which may lead to the development of a bio-pharmaceutical product. Each year billions of dollars are paid in licensing fees and other commitments. Preliminary analysis indicates the inconsistent treatment of these fees by taxpayers. (see  Licensing Fees Emerging Issue Alert[7/7/2005] [doc]

Expansion vs. New Business Expenses:  IRC sections 162, 195, and 482.  Biotech companies are incurring expenses for the investigation of new business markets and start up costs of entry into those markets.  A determination of whether the costs are ordinary and necessary or capitalizable needs to be decided.

Section 936 – Exit Strategy :  Notice 2005-21 provides guidance to U.S. corporations allowed a credit under section 936 or 30A of the Internal Revenue Code (section 936 corporations) with regard to the termination of sections 936 and 30A for tax years after 12/31/2005. Specifically, this notice discusses certain issues that are likely to arise depending on the manner in which the business of a section 936 corporation continues to be conducted after this termination. Certain issues include : the offshore migration of intangibles under section 367 and the transfer pricing of U.S.-owned intangibles under section 482 that result from the restructuring of section 936 corporations.

C.  Recent Pending Legislation - There is no recent or pending legislation at this time.

D.  Specific Industry Related Tax Law

Code section:  45C
Summary and Impact of Law:  Clinical Testing Expenses for Certain Drugs for Rare Diseases or Conditions (Orphan Drug Credit)

Code section:  41
Summary and Impact of Law:  Credit for Increasing Research Activities

Code section:  61 & 451 (Rev. Proc. 2004-34)
Summary and Impact of Law:  Gross Income Defined; Deferred Revenue

Code section:  174
Summary and Impact of Law:  Research and Experimental Expenses

Code section:  195
Summary and Impact of Law:  Start up Expenditures

Code section:  167
Summary and Impact of Law:  Amortization of certain intangibles

Code section:  482
Summary and Impact of Law:  Allocation of Income and Deductions among taxpayers

Code sections:  861,862,863, 864
Summary and Impact of Law:  Income from Sources within and without the United States


Code sections:  901,902,904
Summary and Impact of Law:  Foreign Tax Credit

Code section:  936
Summary and Impact of Law:  Puerto Rico and Possession Tax Credit

E.  Important Revenue Rulings and Revenue Procedures:  There are no important Rev. Ruls. or Rev. Procs.  At this time.

F.   Important Court Cases

Date Opinion Issued:  2001
Name of Court Case and Citation:  Westpac Pacific Foods v. Commissioner, T.C. Memo 2001-175
Summary of Importance of Court Case:  Taxable Advance Payments vs. Deposits and Deferrals of Income.

Date Opinion Issued:  1957
Name of Court Case and Citation:  Automobile Club of Michigan v. Comm., 353 U.S. 150
Summary of Importance of Court Case:  Prepayment for goods and services. (Deferred Income Issue)

Date Opinion Issued:  1961
Name of Court Case and Citation:  Automobile Association v. U.S. , 367 U.S. 687

Summary of Importance of Court Case:  Prepayment for goods and services (Deferred Revenue Issue)
Date Opinion Issued:  1963
Name of Court Case and Citation:  Schlude v. Comm., 372 U.S. 128

Summary of Importance of Court Case:  Prepayment for goods and services (Deferred Revenue Issue)
Date Opinion Issued:  1979
Name of Court Case and Citation:  Thor Power Tool v. Comm., 439 U.S. 522

Summary of Importance of Court Case:  Disparity between tax and financial reporting (Deferred Revenue Issue)
Date Opinion Issued:  1974
Name of Court Case and Citation:  Snow v. Comm., 416 U.S. 500
Summary of Importance of Court Case:  Interpretation of in connection with a trade or business standard (Off-book financing and section 174 Issue)

Date Opinion Issued:  1984
Name of Court Case and Citation:  Green v. Comm., 83 T.C. 667
Summary of Importance of Court Case:  Trade or business standard (Off-book financing and section 174 Issue)

Date Opinion Issued:  1993
Name of Court Case and Citation:  Kantor v. Comm., 998 F.2d 1514
Summary of Importance of Court Case:  Trade or business standard (Off-book financing and section 174 Issue)

Date Opinion Issued1988
of Court Case and Citation:  Ben-Avi v. Comm., T.C. Memo 1988-74
Summary of Importance of Court Case:  Trade or business standard (Off-book financing and section 174 Issue)

Date Opinion Issued:  2002
Name of Court Case and Citation:  Impact Research Corp. v. Comm., T.C. Memo 2002-107
Summary of Importance of Court Case:  Trade or business standard (Off-book financing and section 174 Issue)

Date Opinion Issued:  2001
Name of Court Case and Citation:  Lychuk v. Commissioner, 116 T.C. 374
Summary of Importance of Court Case:  Expansion vs. New Business deductibility of expenses.

Date Opinion Issued:  1972
Name of Court Case and Citation:  Briarcliff Candy Corp. v. Commissioner, T.C. Memo 1972- 43
Summary of Importance of Court Case:  Expansion vs. New Business deductibility of expenses.

G. Technical Advice Memorandums - Field Service Advices

Date:  2001
Number:  FSA 2001 - 45011
Description:  Off balance sheet financing and deductibility of R&E under IRC section 174.

Date:  1997
Number:  PLR 9707003
Description:  Off balance sheet financing and deductibility of R&E under IRC section 174.

Date:  1996
Number:  PLR 9604004
Description:  Off balance sheet financing and deductibility of R&E under IRC section 174.

Date:  1988
Number:  PLR 8802007
Description:  Off balance sheet financing and deductibility of R&E under IRC section 174.
Date:  1987
Number:  PLR 8749006

Description:  Off balance sheet financing and deductibility of R&E under IRC section 174.
Date:  1988
Number:  PLR 8806002
Description:  Expansion vs. New Business deductibility of expenses.

Date:  1996
Number:  PLR 9645002
Description:  Expansion vs. New Business deductibility of expenses.

Date:  2001
Number:  FSA 2001 - 09001
Description:  Expansion vs. New Business deductibility of expenses.

Date:  2000
Number:  FSA 2000 - 01018
Description:  Cost Sharing and Buy In.

Date:  2000
Number:  FSA 2000 - 23014
Description:  Cost Sharing and Buy In.

Date:  2000
Number:  FSA 2000 - 09022
Description:  Cost Sharing and Buy In

Date:  2000
Number:  FSA 2000 - 03010
Description:  Cost Sharing and Buy In

Date:  2002
Number:  FSA 2002 - 25009
Description:  Cost Sharing and Buy In.a


[1] I.R.C. §1245 can apply to certain qualified recovery nonresidential real estate placed in service after 1980 and before 1987.  See I.R.C. §1245(a)(5).

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10. Alternative Issue Resolution Considerations

None at this time.

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11. Industry Resources

A. Websites

Name of Site:
Summary and Available Information:  Broad internet resource for biotechnology news, analysis and web casts.

Name of Site:
Summary and Available Information:  Provides up to the minute biotechnology and pharmaceutical developments, as well as links to other sources of biotech information.

Name of Site:  Signals: The Online Magazine of Biotechnology Industry Analysis
Summary and Available Information:  A searchable database on alliances between drug and biotech companies, development of biotech products, and company specific information.

Name of Site:  FDA Home Page
Summary and Available Information:  Info on Biotech, Pharmaceutical and Medical Device Industries, Regulations, Issues etc.

Name of Site:  Bio
Summary and Available Information:  Information on the Biotechnology Industry Organization, Members, Events, Issues and Initiatives, and News releases.

B.  Trade Associations
Name:  BIO
Address:  Washington, DC   
Purpose, Goals, Objectives, Etc.
:  Umbrella organization for Bio Technology research companies.

Name:  PhRMA
Address:   Washington, DC
Purpose, Goals, Objectives, Etc.:  Umbrella organization for branded pharmaceutical manufacturing companies, goal is to lobby for health care legislation.

Name:  GPIA
Address:   Washington, DC
Purpose, Goals, Objectives, Etc.:  Association of Generic Manufacturing companies.

C.  IRS and Other Training Courses/Videotapes

Name of Course:  Biotech and Pharmaceutical Emerging Issues
Course Number:  4829(a)
Delivery Method:  IVT and CENTRA
Developer of Course and Procedures to Secure Material:  PFTG Technical Advisors and Industry Counsel for Biotech and Pharmaceutical in conjunction with RFPH Industry Headquarters Training Coordinator.

D.  Trade Magazines and Newsletters

Title:  BioCentury
Frequency of Publishing:  Weekly
Summary of Purpose/Information Included/Availability:  Analysis, interpretation, and commentary on biotech news and developments.

Title:  BioWorld Today
Frequency of Publishing:  Weekly
Summary of Purpose/Information Included/Availability:  Current biotech events.

Title:  Genetic Engineering News
Frequency of Publishing:  Semi-Monthly
Summary of Purpose/Information Included/Availability:  Broad coverage of biotech news and analysis of industry trends.

Title:  Med/Ad/News
Frequency of Publishing:  Monthly
Summary of Purpose/Information Included/Availability:  Covers news and events affecting the medical, pharmaceutical, and biotech marketing industries.

Title:  Scrip
Frequency of Publishing:  Twice Weekly
Summary of Purpose/Information Included/Availability:  International Focus, Legislation, Approvals.

Title:  Pink Sheets
Frequency of Publishing:  Weekly
Summary of Purpose/Information Included/Availability:   U.S. Focus, Legislation, Approvals, Research.

Title:  PharmaBusiness
Frequency of Publishing:  Monthly
Summary of Purpose/Information Included/Availability:  Overview of news, drugs, and pipelines regarding biotech and pharmaceutical companies.

Date of Latest Edition:  January 2000

Title:  Physicians Desk Reference
Summary of Contents:  Contains all approved drugs, indications, ownership and manufacturing facilities.
Date of Latest Edition:  January 2000

Title: Orange Book
Summary of Contents:  Reference guide for marketed products, used principally by Generic Companies.
Date of Latest Edition:  January 2000

Title:  Biopharmaceuticals:  Biochemistry and Biotechnology
Summary of Contents:  Broad overview of biopharmaceutical processes and therapies.

Date of Latest Edition:  April 1999
Title:  Merck Manual
Summary of Contents:  Detailed information on various diseases and medical conditions as well as therapeutics used to treat them.

F.   Internal Revenue Manual Citations - No Information at this time.  Refer to the website for an overview of the biotech industry and related issues.

G.  AICPA Auditing Standards and Publications 

Date of Issuance:  1999
Title:  Staff Accounting Bulletin No. 101 - Revenue Recognition in Financial Statements
Summary of Information Included:  When should revenue be recognized for financial reporting purposes?

Date of Issuance:  1999
Title:  Statement of Financial Accounting Concepts No. 5 - Recognition and Measurement in Financial Statements of Business Enterprises
Summary of Information Included:  Provides revenue recognition guidance.

H.  Market Segment Specialization Program (MSSP) - No information at this time.

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Page Last Reviewed or Updated: 03-Aug-2015