Australia risks biotech R&D spend

Local clinical trials will move offshore if the government backs new recommendations, biotechs warn.

Australia’s smallest start-up companies would be hurt the most by mooted changes, Brandon Capital Partners said.

Australia’s biotech sector has warned that local clinical trials will go offshore if the government backs recommendations made in a review of the research tax incentive.

Chris Nave, managing director of Brandon Capital Partners, said a recommendation to cap at $2 million the cash refund smaller companies could claim for research and development would affect clinical trials in Australia.

“At $2m, it will stop overseas companies doing their clinical development here because $2m isn’t worth the cost of setting up an Australian company,” he said.

“I am really concerned for the Australian-based contract clinical research organisations that have benefited from an enormous amount of inbound commercial work as a result of the tax rebate, because that will disappear with that cap.”

Mr Nave said a phase two clinical study for a cancer drug could cost between $20m and $30m and under the current rebate small companies could claim up to $10m, which he said provided a huge incentive to keep those studies in Australia.

“Without the rebate, the advantage of remaining in Australia to do that work is diminished,” he said.

Bill Ferris, chairman of the government’s innovation ­advisory board, chief scientist Alan Finkel and Treasury secretary John Fraser made a series of recommendations to the Turnbull government after reviewing the $3 billion research and development tax incentive scheme.

One of the recommendations is to allow larger companies to claim up to $200m of R&D expenditure, double the present threshold. It also recommends that access to the tax break for larger companies should be restricted to those that are ­already spending 1 to 2 per cent of their turnover on research.

Mr Nave said while he recognised that changes needed to be made to the research and development tax incentive to make it sustainable, it was disappointing that the most pecuniary changes would hurt Australia’s smallest start-up companies the most.

“There seems to be a much greater advantage offered to the large multinational companies by doubling their eligibility expenditure rate,” he said.

Paul Anderson, managing director Australian-listed ­regenerative company Orthocell, said the proposed changes created investment uncertainty.

“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.”

KPMG R&D tax incentive partner David Gelb said the 13,000 companies that claimed a tax credit on research and development done in Australia, under a regime that had been in place for 30 years, would all be affected.

“At face value it is difficult to see there would be any winners come out of these recommendations,” he said.

“This is not a practice that has been adopted by any other country in the world ... it seems very radical and doesn’t make sense.”

Mr Gelb said it was clear that R&D incentives were a catalyst for investing in innovation and companies today adopted a more global approach to their evaluation of where to invest.

“In Australia, we are disadvantaged given our remote location and our high cost structure, therefore it’s critical that Australia offers a stable regime and one that encourages R&D investment rather than one that is restrictive,” he said.

AusBiotech chief executive Glenn Cross, who said he was surprised at the recommendations made, said the $2m cap on cash refunds would be “very bad” for small- to medium-sized businesses.

“It will have a significant impact on the investment community and internationally it sends a poor message. These companies are doing R&D and clinical trials over a long period of time and the uncertainty is not good.”