Public Markets Biotechs on the ASX are about to get smoked

Good morning, Armchair Army,

Welcome to today's edition of The Armchair Analyst, a 5-minute daily update on the ASX life-sciences sector.

Not to be dramatic…

But this might be the most existential threat the Australian small-cap healthcare industry has ever faced.

(Alright, maybe a little dramatic. But this is really bad)

Late Friday, two key pieces of draft legislation dropped.

FIRST, the proposed changes to the R&D Tax Incentive.

SECOND, the proposed carve-outs for the Capital Gains Tax 50% discount.

Both affect the healthcare industry.

Both changes are woefully inadequate.

So while the government's media release says, “These reforms will support the continued growth of Australia’s start‑up and venture capital ecosystem”.

… my bet is that it will do the complete opposite.

Particularly for our healthcare sector and the public markets.

The legislation is still in draft.

So there is time for public consultation.

(and for our industry to lobby a defence)

We have 17 days to submit comments and try to get things turned around.

So here is my deep dive:

But first…

Telix Pharmaceuticals Limited (ASX: TLX) receives FDA approval for Pixclara, the first PET imaging drug for gliomas. (TLX)

🪑 Huge milestone. Well done.

Noxopharm Limited (ASX: NOX) has an early efficacy trial of SOF-SKN for lupus is scheduled to begin early next year. (NOX)

🪑 I like this strategy.

Do the trial that you can afford (rather than the big Phase 2 trial) and still get some early efficacy data.

Dimerix (ASX: DXB) has been granted a composition-of-matter patent in Mexico for DMX-652. (DXB)

🪑 Viva la DXB 🇲🇽

Entropy Neurodynamics (ASX: ENP) announces 12-week data in its Phase 2 trial of TRP-8803 for IV-infused psilocybin for Binge Eating Disorder. 50% remission and 73% reduction in binge episodes. (ENP)

🪑 Treatment showing durable effects. Nice.

Imagion Biosystems (ASX: IBX) resumes MagSense® nanoparticle manufacturing in anticipation of a Phase 2 clinical trial. (IBX)

🪑 It’s always scary when the company uses the word “update” in the title.

But this one was not so bad. Milestone ticked. 

Proteomics International Laboratories (ASX: PIQ) announces the controlled release of Promarker®D and Promarker®Eso in WA and NT. (PIQ)

🪑 Off to the races.

REPORT: 5 Takeaways from the Oura IPO filing. (Medtech Dive)

REPORT: 4 questions about the FDA’s approach to generative AI. (Medtech Dive)

Right now, the government is putting the kibosh on risk assets.

… and no asset is riskier than early-stage biotech and medtech companies.

High risk, high reward.

The Australian government will remove the 50% Capital Gains Tax discount from 1 July next year.

Shares and investments included.

But there are carve-outs.

Because the entire startup industry kicked up a fuss and basically said: “we’ll all move overseas if this happens”.

So the government has recognised that, to encourage innovation and investment, it can’t drop the Hammer of Damocles on the ENTIRE startup industry.

Only parts of it…

And unfortunately, the collateral damage hits the parts I like most.

Public market companies.

Late-stage drug developers and medtech companies.

They will get smoked.

I spent the better part of this weekend reading through two key pieces of draft legislation:

Initial take?

Public market companies will resemble the Tax Man’s Taxidermy.

Lifeless and sitting on the shelf.

… IF the draft legislation goes ahead as planned.

But the devil is in the details.

So, let’s take a look.

For the last 25 years, there has been a 50% Capital Gains Tax discount on assets held for 12-months or more.

This was introduced to encourage investment in Australian companies.

The May Budget proposed scrapping it entirely, replacing the discount with cost-base indexation and a 30% minimum tax on gains from 1 July 2027.

The Australian startup community kicked up a big fuss.

Nearly 2,000 submissions landed with the Senate and Treasury.

… and a major media campaign to fight the changes.

The argument?

Pulling the concession out from under venture investing would stifle risk-taking and send founders looking to build businesses elsewhere.

Last Friday, the Labor Government announced the draft carve-outs and gave 17 days to submit responses.

You can find the release here: Innovative Business CGT Concession – exposure draft legislation

So... here are the details.

An IBCC is eligible for the old 50% discount.

IBCC = Innovative Business CGT Concession.

To get the concession, a company needs to tick a few boxes.

On top of that, the shares must be new equity issued after 30 June 2027.

So this isn't retrospective relief for stock you already hold.

There are also other qualifiers, like the company needing to be Australian.

ALSO.

Eligibility only applies to “newly issued shares”.

So if you’re buying stock off someone else, that’s not included.

The eligibility isn't a one-off test either.

A company's shares can become "disqualified" later if it stops meeting the innovation test, or if its registration gets suspended or cancelled, including for something as administrative as missing an annual reporting requirement.

A few changes from the eligibility requirements floated in June.

The biggest issue, in my opinion, is that public market stocks are not included.

I read through the ASX’s submission on the Capital Gains Tax reform in June, and they forecast what could happen if this was the case.

… it “risks creating a tax distortion between private and public sources of growth capital”.

That’s the polite way of saying it.

My take is that it basically BBQs any incentive for sophisticated or institutional investors to invest in public companies over private ones.

Public market healthcare companies (particularly the later-stage ones) already struggle to access institutional-grade capital in Australia.

The mandates for some of the largest healthcare funds in Australia One Ventures, Brandon Capital, Tenmile are to avoid making investments in public companies.

This legislation makes that a whole lot worse.

It essentially creates two classes of investments.

Private companies WITH tax concessions.

And…

Public companies WITHOUT tax concessions.

… and do you know the types of investments that the mum and dad investors can make?

Well…

It’s not the private companies.

So the next Cochlear.

The next Neuren…

The next Telix… CLS… Pro Medicus.

These guys just stay private.

And the massive wealth generated for Australian mum-and-dad investors backing these companies disappears.

It’s all for the private institutional investors.

Fair system?

Not really.

My prediction if this goes ahead as written (on the public/private thing):

Companies will still want to get listed…

But will look to NASDAQ or TSX… hell, even AIM might get a shot in the arm.

(and if you’ve ever seen what the small-cap stock industry is like in London, that is a pretty grim reality)

Where can an 18, 25 or 30-year-old with $5,000 or $10,000 readily invest in emerging Australian businesses?

The ASX.

Well… good luck with that if staying private gives companies a HUGE advantage.

Great for institutional investors.

Terrible for the retail investor.

… alright, rant over.

This is how I would change the legislation:

Now this one affects biotech and medtech companies, PRIVATE OR PUBLIC.

Unlike the CGT changes, it doesn’t matter whether you are listed on the ASX or backed by private capital.

This legislation caps access to the refundable R&D Tax Incentive at 15 years, after which it becomes non-refundable.

Up from the 10 years previously floated.

The R&D needs to be for the dominant purpose of generating new knowledge about therapeutic goods, or how therapeutic goods are used.

The biggest concession is extending the refundable R&D Tax Incentive from 10 years to 15 years for eligible biotech and medtech companies.

An improvement…

One that recognises that biotech companies operate on a different clock than software start-ups.

BUT…

A biotech company at year 15 might be just about to start its Phase 3 clinical trial.

In fact, the ASX-listed companies that are at the Phase 3 stage are largely older than 15 years:

Drug development takes time.

Clinical trials take time.

Regulatory approvals take time.

Commercialisation takes time.

15 years gets the company to the pivotal inflection point, where if the R&D Tax Incentive becomes non-refundable… well, that’s when they will look overseas.

No point being in Australia anymore.

So this is great legislation IF you want to drive out our best biotech companies right at the inflection point, when they have the highest potential to generate value.

I suspect the industry will push back on this hard.

The 15-year clock starts on the earlier of two dates:

The clock also includes connected entities and affiliates.

So putting new science into an old listed shell doesn’t restart the clock.

Neither does a new name, a new board or a completely different drug.

Many ASX-listed companies (and other biotech companies) have been around so long because they've pivoted the science.

PYC Therapeutics is a great example.

For 13 years as Phylogica, the company was trying to commercialise its cell-penetrating peptide technology through licensing and collaboration deals.

It only accelerated when it pivoted from drug discovery to developing its own drugs.

Under the proposed legislation, PYC would already be outside the 15-year window for the refundable R&D Tax Incentive.

It could still claim the non-refundable offset.

But for a pre-revenue biotech, that means carrying forward a tax benefit rather than receiving cash today.

So say goodbye to RTOs, recycled companies, good tech that should be given a second chance.

… Acrux.

… Avecho.

… Starpharma.

… Alterity.

… PYC.

A bunch of listed companies could get smoked by these R&D changes.

As I said, this is existential for our industry.

FIRST, remove the 15-year cap for therapeutic-goods companies.

SECOND, if the government wants an integrity test, tie eligibility to the age of the actual therapeutic program, NOT the age of the company.

We’ve got 17 days to lobby.

See you all tomorrow,

The Armchair Analyst

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