Here’s how government funding for biotechs is immensely helpful for companies and their investors

Government funding for biotechs boosts the entire sector and the players in it – including ASX-listed companies. Many investors in listed biotechs may only see capital raisings as meaningful sources of funding. Even though the money allows for companies’ endeavours to become possible, capital raisings have the negative connotation of diluting shareholders and may even cause investors to question the company if it has raised substantial capital in the past and lacks the progress to show for it.

However, government support plays a vital role in helping companies bring innovations to the market, even if the impact isn’t seen by investors focussed on listed companies. Let’s take a look at how governments can aid biotech companies.

Government funding for biotechs: The early days

State support for biotech companies begins with public funding often provided to universities. Most biotechs on the ASX are commercialising or developing products that began as part of university or institute research. Scientists are always researching to discover new treatments for diseases ranging from cancer to sepsis. It is in the government’s best interest to fund such research programs due to the significant impact these health issues have on the healthcare system, individuals, and the economy.

How governments support later stage biotech companies

Any assets (drugs or medical devices) that show enough potential end up being spun out into companies, because the technology will need a dedicated management team and funding to turn their idea into a commercial reality. However, governments also provide support to independent companies, in the form of Research and Development (R&D) tax credits.

The R&D tax credit regime differs from country to country, but let’s just focus on Australia. Companies with an aggregated turnover of less than $20m can receive a tax offset that is 18.5 percentage points above the company’s rate. If the tax offset exceeds the entity’s tax liability, the balance is paid to the company in cash.

Australia’s Research & Development Tax Incentive

In the cases of smaller companies, the Australian government’s R&D program is sometimes called the ‘43.5%’ Research & Development Tax Incentive – calculated from the 18.5% percentage point figure above, as well as the 25% corporate tax rate for small companies. In essence, 43.5% of a company’s R&D activities are captured for activities undertaken both domestically and in some instances, overseas.

For companies with a turnover of $20m or over, the incentive will be the company’s tax rate plus a certain number of percentage points, subject to the proportion of the company’s expenses dedicated to R&D. For companies spending 2% or more of their total expenditure on R&D, it is 16.5 percentage points, but for those that spend less than 2%, it is only 8.5 points.

There may be other sources of funding (potentially the government coming onboard as an investor). There are also companies that provide advance R&D funding – in other words, provide the funding that companies anticipate receiving in the future, and requiring repayment when this money comes through. One such company is Endpoints Capital.

Recce Pharmaceuticals is one company that has benefited from R&D, among others

Recce Pharmaceuticals is a company that has been a beneficiary of the R&D tax incentive over its history. Most notably, in December 2023, Recce was awarded an Advanced Overseas Finding totalling A$54.9m for its R&D work to be undertaken between FY23 and FY25.

This was one of the largest-ever awards from an R&D Tax Incentive Program administered by the Australian government. Although this did not constitute a grant, or upfront payment, it was a binding, underwritten guarantee provided by the Australian government. Yet when drawn, it will be caveat-free and non-dilutive. Of this money, Recce received nearly $5m for its work done in FY23. It received $2.3m for its work in Australia, and $2.62m for its work conducted overseas.

Tapping Canadian funds as well

Australia is not the only jurisdiction to provide R&D funding to Recce. Canada has provided funds to the company as part of its Scientific Research & Experimental Development Tax Incentive Program (SR&ED). However, it is Australian government funding that will be most important to the company in the near-term.

Larger companies benefit too, CSL claimed US$74m (A$110m) in R&D tax incentives during its most recent fiscal year. Although this may seem like penny change for a company that makes over US$13bn, this plays a key role in providing returns to shareholders, by reducing the company’s tax bill and thus increasing the return to investors.

How it helps investors

The biotech sector is heavily reliant on government funding, more so than most investors may think. Companies of all sizes, from small caps such as Recce Pharmaceuticals to large caps like CSL, can be major beneficiaries of government support, providing an additional leg up to develop tomorrow’s innovations.

This is a sponsored article.

What are the Best ASX Biotech Stocks to invest in right now?

Check our buy/sell tips