HECS for Biotechs

In today's Age, Mike Vitalie argues for a HECS scheme for biotechs ...

A "HECS for Biotechs" program, that is loans for fledgling companies, to be repaid if and when a company's earnings reach a certain level - should be implemented. More should be done to encourage overseas biotechs to establish operations in Australia. In biotechnology as in education, our neighbours are steadily becoming our competitors - Singapore used the occasion of BIO to announce $US8 billion ($A11 billion) in biotechnology funding over the next five years, and Malaysia announced it was creating a biotech hub. The Australian tax system is not friendly to overseas companies or executives. Global biotechs certainly need to be in the Asia Pacific region, but they do not need to be in Australia, and for the most part they aren't.

The scheme would be the equivalent of a loan provided by the government. It would only be repaid if the biotechnology was successful.

Of course, that is pretty much what venture capitalists do now except that they do this by taking equity in the biotech start-up. For there to be a government provided substitute for this, it would have to be that venture capital is suffering from some sort of market failure. Certainly, as Vitalie points out, less VC funding goes to Australian biotechs than those in other countries but that does not mean there is a market failure in terms of capital market constraints.

The constraint could be on the demand for capital side. Not enough funding is going to Australian biotechs because their potential to earn profits may be lower than elsewhere. Indeed, this appears to be the constraint on start-ups even in the US. A few years ago, Scott Stern (Kellogg) and I studied whether the demand or supply side of the capital market constrained start-up funding. By comparing privately funded start-ups with those seeded by government we could distill this. Our conclusion: that it was the demand-side that constrained funding. The implication: it is better to improve the prospects for start-ups to appropriate more of the returns from their intellectual property than to provide them with more capital per se.

All this means that biotechs in Australia likely don't need a HECS-type scheme. Instead, they need assistance in accessing commercialisation resources and overseas networks. This suggests that core infrastructure might be a better way to spend Victorian government dollars.

[By the way, Scott Stern was lurking around and presenting at the Chicago biotech gathering this week. I heard he made off with a boomerang from the Australian exhibits.]