Tax incentives encourages biotech growth
Imagine if every DKK spent on R&D in biotech provided you with DKK 1,6 back in taxes. This is reality in Canada. Here the tax-system is so beneficial to biotech firms that many small, research-intensive firms are attracted. MVA has just returned from a stimulating visit to the Canadian biotech industry, which from 2001-2005 has experienced an average annual 24 % increase in the number of biotech companies.
Politics is about willing, said Olof Palme. Canada is working to place its biotech industry among the world leaders. With this stated objective a multitude of business policies have been initiated. For instance, in many provinces of Canada, biotech companies are allowed to deduct R&D investments, and get the payment immediately instead of waiting for the tax allowance. This tax rule remains in force until the biotech companies becomes profitable. For a biotech company that generates low earnings in the early stages of it’s development these tax credits reduce the company risk significantly. Moreover the tax savings in R&D investments are so high that for every DKK spent on R&D you have approximately DKK 1,6 at your disposal.
In Quebec they go even further to strengthen the biotech industry. In this province the provincial income tax of high level scientists and business people is heavily reduced for five years – we call it ‘tax holiday’. The first two years there is no provincial income tax, whereas the provincial income tax is reduced 75, 50 and 25 percent respectively in the last three years. The tax rule aims towards attracting international talents (brain gain) as well as regaining brain drain from the neighbouring USA. The result is remarkable. After several years of loss of skilled labour to USA, high level scientists and business people are attracted to Quebec and the biotech research is thriving.
To encourage research the provincial government of Quebec also grants financial aid to biotech companies based on research intensity. The grant is given according to equipment usage. For instance, if the equipment is used twice the company receives a certain financial support. If the equipment is used four times, the company receives twice the amount. The more research a company conducts the larger the grant they receive.
Favourable tax system encourages growth
MVA has just returned from a business trip to Canada which included visits to bioregions in Montreal (Quebec), Toronto (Ontario) and Vancouver (British Columbia). Vækstfonden, Novo A/S and the Danish and Swedish science parks, namely Scion-DTU, Symbion, Ideon and Medeon participated in the trip. All were impressed by the commitment and action, taken by both public and private players in Canada in order to create a world-class biotech industry. In a KPMG analysis from 2006 Quebec is rated as the world’s most attractive location to locate a biotech company. The Canadian biotech industry is thriving, thanks in no small part to a favourable tax system. The tax system facilitates a strong regional development, promotes R&D and creates incentives for venture capital. The Canadians claim that the public investments will have financed themselves within a five years period from now. The numbers show that they might be right. As mentioned above the number of biotech firms has increased by an average of 24 % each year from 2001-2005, and R&D has grown by 13 % annually over this same period.
This is a success – wire more money!
In 2006 Denmark was the European country that received the highest rate of private investments in the biotech industry – the vast amount of investments reflects a strong biotech environment with mature companies. However, we cannot compete with countries like Canada, if we do not take the steps necessary to ensure that our companies can afford massive R&D.
In Denmark and Sweden a biotech company may not be able to use its R&D allowance until it is profitable. That is a problem for our biotech companies, as they typically are not profitable in the early stages which can sometimes last for 5 to 7 years. Therefore we run the risk of companies dying out before the tax allowance is realized. In contrast, the favourable tax system in Canada reduces the risk of R&D investments and increases the growth potential. The Canadians have not been afraid to take risks, and it has already paid off.
Denmark and Sweden can choose to do the same! Even if it takes 25 years to get a payoff in terms of growth, it may be a valuable and necessary investment.
Best regards,
Stig Jørgensen, Managing Director