Staff Writer

PERTH, Australia – Another battle is brewing over Australia's Research and Development Tax Incentive in the lead up to the annual Federal Budget that is released in early May.

AusBiotech CEO Glenn Cross told BioWorld MedTech that Australia's life sciences sector would be severely damaged if the Treasury pushes ahead with its plans to cap the R&D Tax Incentive (RDTI).

Treasurer Scott Morrison indicated that the coming May budget includes an overhaul of the RDTI that imposes a A$4 million (US$3.09 million) annual cap and a lifetime cap of A$40 million. He said the changes sought to restore the "integrity of the program" after accusations of "mining of tax incentives" and "arbitrary use."

Cross took issue with Morrison's statements because they suggest that "companies were cheating the system," he said. "But if that were his only concern, he's got 100 people in the Australian Tax Office and 100 people in the Industry Department who are supposed to be policing this. They could easily put an end to by stopping the rot and not decimating such an important sector.

"We've said that this is counterintuitive. The government has said it wants to boost innovation, and it's put in all this money to innovation schemes, but then it wants to cut back on the R&D tax incentive, which is the driver for R&D development," Cross said.

"This is really more about budget repair and Treasury running the country. They just want the savings, and it's just a short-term benefit," he said.

"If the government is concerned about misuse of the program, then why not clamp down on misuse and preserve the policy intent? How is capping the program a rational solution?" he asked. "This cap is going to wind back the 5 percent annual growth Australia is achieving in clinical trials and the related jobs that we have seen in Australia since the scheme began."

Under the current R&D tax incentive plan, there is no cap for small-to-medium enterprises (SMEs). The R&D tax benefit currently provides a refundable 43.5 percent tax offset for companies with turnover less than A$20 million, and a nonrefundable 38.5 percent tax offset for other companies.

Additional tax breaks are offered for profitable companies with a tax liability to induce greater R&D investment.

"The RDTI has been critical to Australia's success in attracting more investment for the commercialization of medical research because it stretches our medical research dollars further. By fostering a strong Australian medical technology, pharmaceutical [MTP] and life sciences R&D sector, we are encouraging the long-term investment in Australia that creates highly skilled jobs, attracts clinical trials and grows the economy we need," Cross said.

Currently about $1 billion is spent on clinical trials in Australia, and the RDTI translates into additional dollars to keep trials running longer.

Cross noted that 17 percent of ASX-listed MTP companies would be affected immediately, with potential flow-on limitations to their R&D programs, and another 9 percent would be in the danger zone.

MTP sector needs protection

If the federal government imposes a A$4 million annual cap, the MTP sector should be carved out for protection, as measures to limit the R&D Tax Incentive will inequitably harm MTP-based research and development, which makes up only about 8 percent of claims under the RDTI, the association said.

Ironically, the government has recognized the MTP industry as one of Australia's strongest and most competitive sectors. Cross said a big concern is that if companies lose out on the benefit, they could well look to take their programs offshore.

Roughly 75 percent of CEOs said the proposed cap would undermine their ability to compete globally.

Clinical Genomics Pty Ltd. CEO Larry Lapointe told BioWorld MedTech that the R&D tax incentive was important to the company when it was starting out.

"We knew the U.S. was the main game, but Australia is a great place to start, and then if you can make the jump, you can get the best of both worlds," he said, noting that the RDTI allowed the company to "almost double its clinical trial dollars."

Budget re-dux

Cross said AusBiotech has been fighting this battle for more than 18 months. "During that time, we've had four industry ministers and two health ministers, so as soon as we spend time talking to someone, and get our CEOs to go speak with them, they change.

"That's one of the issues – the ministers keep changing and the landscape keeps changing, and we're not getting good consistent public policy."

Last May, the biopharma and medical device industry breathed a collective sigh of relief that the 2017 budget left R&D tax incentive untouched. But they are now holding their breath to see if it will survive another year.

Opal Biosciences Ltd. CEO Julie Phillips said that Australia's life sciences sector has taken a beating in recent years.

"It took such a long time to recover from the global financial crisis and then we had Tony Abbott as prime minister, who deleted innovation.

"The biggest hole that I've fallen into with small companies is funding, and you can lose a lot of time if government policy changes. You can't do your five-year funding pathway if government policy is up in the air. I hope I live long enough to see all the stars align," she said.

"We'll continue to fight," Cross said. "This has been a long battle that is very important to our sector. We will continue to talk to the politicians and, if it doesn't go well, we have a plan.

"If they do come in with these caps, we can go to the Labor party at the crossbench [minority party] and see if we can get it defeated in the Senate," he said. "We've already spoken to the Labor Party, we've spoken to a number of the crossbenchers, we've spoken to the Greens.

"For now, it's a waiting game, and we'll mount a campaign if we have to."

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