Biotech Essential To Economic Recovery, Canada

Main Category: Pharma Industry / Biotech Industry
Article Date: 22 Dec 2008 - 1:00 PDT

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Canada's biotechnology CEOs are calling for an economic stimulus package that includes targeted measures designed to protect $1.7 billion of annual spending and preserve high-value "21st century" jobs in Canada in the face of a severe economic times. These measures include a one-time cash refund on tax losses, an exemption from capital gains tax on the next two years' of investment, and changes to the Scientific Research and Experimental Development (SR&ED) credit program to support the sector during the economic downturn.

"We are asking for immediate targeted measures in order to protect Canadian world class technologies from competitors in the US, the UK and other countries, where governments are making significant commitments to protect their biotechnology industries in recognition of their social and economic value," said Rainer Engelhardt, Chair of the Board of Directors of BIOTECanada and CEO of Eulytica Biologics Inc., Ottawa. "Ultimately, our goal is to get through this downturn and have the high value jobs inherent to this industry stay in Canada."

BIOTECanada's proposed economic stimulus package includes three key measures. A one-time redemption for unused tax losses would be available to SMEs with revenues less than R&D expenses and be limited to the lesser of $20 million or twice a company's annual R&D expenditure. An exemption from capital gains tax is proposed for investors making new direct investments in 2009 and 2010. Both measures require companies to reinvest in Canada. Changes to the SR&ED program to process refunds quarterly rather yearly and an expansion of program eligibility to all firms engaged in research and development in Canada will create a competitive stimulus to support more domestic jobs and investment.

"With limited sources of financing available for the industry, many Canadian biotech companies are wondering where their next six months of operating cash are going to come from and need the Canadian government to take immediate action," said Andy Sheldon, President and CEO of Medicago Inc., Québec City. "For the industry to survive, we need a commitment from our government to facilitate investment and provide short term relief."

Without an immediate cash infusion and tax support, $1.7 billion in annual R and D spending, thousands of Canadian jobs and even Canada's long term economic prosperity are at risk according to Canada's national biotechnology trade association, BIOTECanada.

"Canadian governments have done the right thing in supporting major investments in post-secondary education and basic research because that research ultimately saves lives. As Canadians and as entrepreneurs we want to see that investment bear fruit," said Gordon McCauley, President and CEO of Allon Therapeutics Inc., Vancouver. "Our recommendations are targeted measures aimed at protecting these investments, in order to spur Canada's economic recovery, and get these advances in the hands of physicians and patients."

"This sector also looks to US capital to raise financing, but those sources are completely closed right now," said Yves Rosconi, President and CEO of Theratechnologies Inc., Montreal. "A capital gains exemption would allow companies to raise new money here, and to keep our scientists and research expertise in Canada."

"Research and development is at the core of the biotech business," said Peter Matthewman, President of Performance Plants, Saskatoon. "A tax loss credit and more timely SR&ED refunds will make an immense difference for firms working to commercialize and bring Canadian products to the global marketplace."

Canada's biotechnology industry is vital to the immediate and future well-being of Canada's economy. Over 550 companies from an array of sectors including health, agriculture, industrial manufacturing and resources make up the sector. The products and processes of biotechnology companies are the building blocks of a broader bio-based economy worth $ 78.3 billion (6.4 per cent of Canada's GDP). This is similar in size to the automotive and other primary Canadian industries. One million Canadian jobs are the result of biotechnology research, development and commercialization. To keep research jobs and innovation in Canada, we must create incentives for new investment into Canada's science and technology companies.

ABOUT BIOTECanada

BIOTECanada is dedicated to the sustainable commercial development of biotechnology innovation in Canada. It is the national industry-funded association with over 230 member companies representing the broad spectrum of biotech constituents including emerging and established firms in the health, industrial, and agricultural sectors, as well as academic and research institutions and other related organizations.

BACKGROUNDER: ECONOMIC STIMULUS TOOLS TO KEEP CANADA'S RESEARCH-INTENSIVE EMERGING COMPANIES VIABLE

"Canada must translate knowledge into commercial applications that generate wealth for Canadians and support the quality of life we all want…"

- Mobilizing Science and Technology to Canada's Advantage, Government of Canada

Canada has invested billions of dollars in establishing the infrastructure for a globally competitive biotechnology industry. The federal government's Mobilizing Science and Technology to Canada's Advantage lays out a course to ensure continued prosperity. Canada's science and technology companies are the means to generate this wealth. But the majority of these companies are now struggling to raise the necessary operational funding to survive the recent economic crisis. If economic conditions do not improve in the very near future, many of these promising companies are likely to disappear within a year.

More emerging technology firms then ever are operating with less than 6 months of cash and the majority of small, emerging companies have less than 1 year of cash. Under normal circumstances, most of these companies would have secured private and public sector financing to move them to their next stage of commercial evolution. In Canada, there are now almost no financing sources available to provide short term access to the cash needed to keep our companies operating through these times. Companies are forced to close product development programs and, in effect, cease operations putting at risk thousands of direct and indirect jobs and ensuring that anticipated future growth in employment in this sector will not occur. Hundreds of promising new treatments and technologies are being shelved. Moreover, this short-term financing drought puts all of Canada's historical investment at risk.

BIOTECanada urges the government to introduce economic stimulus measures that will provide immediate short term cash relief for science and technology companies and create a new incentive for investment in the upcoming Federal Budget. Specifically, the tools to implement in this three point action plan are:

1. Sustain Research and Development: Allow a One-time Refund of Unused Tax Losses

In order to save the high‐paying, research intensive jobs of Canada's innovation economy, the government should allow companies to accelerate the use of their tax assets.

Description: Allow companies to apply for a one-time advance on accumulated non-capital tax losses in lieu of claiming other qualified research expenses. The proposal would have the following features:

* Election by a company to receive refund of accrued non-capital tax losses at current corporate tax rate.

* Refunds must be reinvested in research & development expenses as defined by Canada Revenue Agency over the next two years.

* Company would permanently forgo the opportunity to claim those non-capital tax losses involved in the refund.

* Company would forgo claiming any SR&ED tax credits if funded by the refund.

* Limited to small and medium enterprises with revenues less than R&D expenses in 2008.

* The advance will be capped at the lesser of $20 million or twice a company's annual R&D expenditure.

2. Stimulate Financing: Exempt New Investments in R&D Companies from Future Capital Gains

To stimulate new investment into companies allowing them to continue commercialization of innovative research, the federal government should create a one-time incentive for new direct investments.

Description: Implement a capital gains exemption on all new direct investments in the next two years to all companies with Canadian headquarters investing in science & technology research here. The proposal would have the following features:

* No immediate cost to the government.

* Exemption from future capital gains would be limited to investments made in 2009 and 2010.

* Limited to new direct investments into Canadian headquartered companies conducting research and development in Canada.

* Creates an incentive for investment that waits for returns during the long development time of R&D companies.

The business of science and technology companies is research. Most companies invest 7 to 10 years in commercializing research and development. To stimulate continued patient investment over this time and keep research jobs and innovation in Canada, we must immediately create the incentive for new investment in Canada's science and technology companies.

3. Support Domestic Jobs: Make simple changes to the SR&ED Tax Credit Program

The refundable credits under the Scientific Research & Experimental Development (SR&ED) tax credit program offer value to companies investing in research in Canada. But, the timing for companies to receive credits is too slow and the program is too limited to support Canadian jobs today.

Description: Change the processing of refundable credits to occur quarterly rather than on an annual, basis, and allow all engaged in research and development in Canada to equally benefit under the program. The proposal would have the following features:

* Simple change in processing to quarterly processing instead of annual.

* Eligibility thresholds for the credit remain unchanged.

* All companies spending in Canada would now be eligible for refundable credits (instead of continuing to use the 1985 criteria which limited eligibility to only Canadian Controlled Private Companies).

The increased quarterly review provides companies with the same refund they would normally be entitled to but on a more timely basis. Some administrative changes would be needed however. Changing the eligibility to allow all companies doing research in Canada to benefit creates a competitive stimulus to support more domestic jobs and investment. According to Finance Canada the SR&ED credits generate more value for government than the program costs. Therefore, the marginal increase in costs to allow all companies to benefit from the credit would be offset by the return.

Source:
Kasia Majewski
BIOTECanada