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Biotechnology needs a shot in the arm - R&D Tax

Biotechnology needs shot in the arm

BIOTECHNOLOGY is akin to white-water rafting. It's not for the fainthearted and players are known to have a great appetite for risk and the unexpected. These attributes have served the sector well to date.

Biotechnology has proved to be resilient, particularly so during the tough economic conditions of the past year.

That's why the turbulence and unexpected twists in the federal government's proposed research and development tax incentive scheme -- in perpetual consultation since last October -- probably unsettle biotechs less than others.

Having said that, each review announced -- and there've been at least three since last December--compounds the concern that the final bill won't be as beneficial as originally hoped. In fact, some big business in other innovation industries, are calling for the draft bill to be scrapped.

Biotechnology usually has a plan B, but we're counting on this plan A getting through.

It has been great to see research organisations receive a welcome shot in the arm of $901 million for research infrastructure in the last budget. The government's healthy investment in our discovery sector yields many candidate drugs and products that advance into the biotechnology sector.

Biotechs are typically small companies focused on a specific disease area or technology. Projects are guided through rigorous, expensive clinical trials, typically taking 15 years and hundreds of millions of dollars.

It's common for projects to fail along this pathway. In fact, fast failure is preferred as each step is more expensive than the last.

Insufficient funding is the critical barrier, preventing many discoveries from getting off the starting blocks in the long race to commercialisation. Not every discovery gets a fair go. That's especially so for those on the drawing boards of small and medium-sized firms that lack long-term funding.

Still, despite the dire economic conditions that squeezed out many small innovators in other industries, biotechnology held on as a sector.

Up to the end of February, for instance, it raised more than $580m on capital markets. Expenditure on R & D in Victoria alone is estimated to be more than $550m.

Nonetheless, cash will always be the hot topic of conversation in biotech circles. These days it's coupled with the R & D tax credit incentive scheme. The federal government proposes to reward companies undertaking R & D with a 45 per cent tax credit or refund of their R & D spending for those with annual turnover of less than $20m. That's equivalent to a 150 per cent tax concession.

For companies in a tax loss position, this means they can receive up to 45 per cent of their R & D expenditure back as a cash payment from the government, with no cap on a company's R & D expenditure. About 5500 small firms stand to benefit.

Business groups with a turnover above $20m will also benefit with access to a 40 per cent non-refundable credit, equivalent to a tax concession of 133 per cent.

Moreover, companies that are foreign-owned and have intellectual property held offshore but undertake R & D in Australia, will also benefit. This measure is good for multinational pharmaceutical companies active in Australia which maintain close connections with local biotechs.

In a nutshell, the proposed scheme is a return to the good old days of more than a decade ago.

I've been reassured during the consultation process that the biotechnology sector is recognised by the architects of the scheme and that their intentions are to ensure the sector benefits, along with other R & D-based industries. The rate of incentive is cited as an example of the new support on offer.

Another relates to R & D activities conducted overseas. Many R & D projects conducted by biotechs can't be done in Australia as the expertise and facilities simply aren't available. So it's great news that the strict 10 per cent cap on overseas expenditure has been removed.

This will allow biotechs to present their case for consideration of costs associated with R & D activities relating to, for instance, overseas clinical trials, a genuinely high-value outcome.

Still, the industry is nervously waiting as final details regarding activity, cost eligibility and compliance are thrashed out. What's absolutely critical to this industry is an assurance that clinical and preclinical trials will be included as eligible core or supporting R & D activities.

Clinical trials are the most expensive aspect of the R & D process, yet it's uncertain that such activities will qualify for support due to a revision to the list of activities excluded from eligibility.

Assuming the outcomes in relation to the above and other eligibility related matters are consistent with the government's stated support for the biotechnology sector, I congratulate Canberra on behalf of the industry.

Regardless, I must return to the central theme of the biotech industry conversation: cash. What more could be done to ease the cashflow burden?

For starters, if small and medium-sized firms could claim their R & D credit online on a quarterly or six-monthly basis, that would be a great boost to their cash management. If this option were available I'm sure they'd be keen to obtain pre-approval of their activities.

After all, it would be terrific if the little guys who are generating returns and creating value were paid some well deserved attention just as they're coming to maturity.

Michelle Gallaher is chief executive of the BioMelbourne Network.