Australian Biotechs Lose Out with New R&D Incentives

Naysayers have warned that biotech companies are going under—but if the Australian government alters the R&D tax incentive program, they won’t be going down under. That’s what the biotech sector is threatening in response to newly proposed changes, which would cap an R&D rebate at two million dollars for smaller companies and increase it to $200 million for larger ones.
To date, some 13,000 companies have claimed a rebate for R&D work completed in Australia. Under the current program, smaller businesses can get as much as ten million back. When you’re talking about a phase II clinical trial, which runs close to 30 million, those are significant savings.
Now, critics fear, international companies will have less reason to set up shop down under. The rebate, which previously made Australia an attractive option for outsourced clinical testing, just isn’t worth it anymore—at least not for smaller companies.
Big businesses may actually benefit if the changes are approved. After all, their potential savings will double should the review board’s recommendations be put into effect (although companies must spend one or two percent of their turnover on research to be eligible for the rebate).

The recommendations come from Bill Ferris, chairman of the Innovation and Science Australia board, as well as from Alan Finkel and John Fraser—the country’s Chief Scientist and Treasury Secretary, respectively. They were charged with ensuring the incentive program, which has been in place for 30 years, will be sustainable going forward.
Ferris has also spoken about the need for Australia to compete as an attractive clinical trials location. In a speech delivered at the Medical Technology Association Australia’s national conference, he noted that the country is no longer “a preferred clinical trials destination.”
The situation isn’t all bad: “We are … one of the three biotech leaders when it comes to number of publicly-traded companies, company revenue and company market capitalization,” Ferris reminded the audience.
But industry experts say that might not be the case much longer—not if these new recommendations go through. Speaking to The Australian, Chris Nave of Brandon Capital Partners and Paul Anderson of Orthocell (ASX:OCC) warned against revising the program as suggested.
“It will stop overseas companies doing their clinical development here because two million isn’t worth the cost of setting up an Australian company,” said Nave. Anderson echoed the concerns: “These changes don’t help with certainty or sentiment, particularly when you’re talking about a government that is promoting innovation as the next cornerstone piece of the economy.”
Indeed, Australian biotechs are reexamining their plans for the future. “We … are now carefully considering its [the review board’s] recommendations and the potential implications for our business,” Jemimah Pentland, a spokesperson for Australian biotech CSL (ASX:CSL), told Life Science Investing News.
“CSL undertakes  significant  R&D in Australia and while the R&D tax incentive is not a key driver of our decision making around individual projects, it is a very important aspect of our longer term planning around where to locate and build our R&D infrastructure.”
Meanwhile BDO Australia, a tax advisory organization, has spoken out against certain aspects of the proposal. They declared that those industries which are expensive to get started in—specifically biotech—would be negatively impacted by the changes.
These concerns will not go unnoted. The Australian government is actively seeking feedback on the review board’s recommendations, and will do so until October 28, 2016.
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Securities Disclosure: I, Chelsea Pratt, hold no direct investment interest in any company mentioned in this article.