Tax On, Tax Off: What new changes mean for biotech

Good morning Armchair Army,

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

So, yesterday, the Labour government announced the proposed carve-outs to the tax reform.

My LinkedIn feed was a flurry of “hot takes”.

The good, the bad and the ugly. 

My initial take was… what?

I had to squint and read the press release about six times to work out exactly what was being proposed.

My take is that these carve-outs = complexity.

Bandaiding over the real issue... 

People don’t like the tax changes in the first place.

… well, maybe the accountants and lawyers.

(Who will be cleaning up on all the extra fees)

My favourite take from yesterday’s doomscroll was:

I’d like to think the government is starting to listen, but we have now gone from a budget that gives us the highest capital gains in the world on entrepreneurs and innovation, to a proposal that modestly walks back the changes, but still leaves Australia with the highest capital gains tax AND the most complicated capital gains tax system in the world. 

Here is the exact media release from the government, so that you can read the proposed changes unfiltered.

Let’s break it down.

(Specifically, what affects the biotech sector, not touching property, small business changes or death taxes)

The 50% CGT discount will apply to investors, founders and employees in “innovative start-up businesses”.

From the text: Releasing a consultation paper on the design of a new Innovative Business CGT Concession that would provide a 50 per cent CGT discount to early-stage investors, including founders and employee share scheme participants of innovative start-up businesses.

Eligible investments must have:

The government will release a “consultation paper” outlining exactly what this will look like, with submissions due on July 10th.

(Biotech industry, get your submissions ready!)

Biotechs and medtechs are called out specifically, which means that they ARE paying attention.

There is a “Mega Bull Case” scenario for the industry in which the only carve-outs for investors are Biotechs and Medtechs.

There is a finite pool of capital on the ASX.

This tax incentive could draw investment away from mining speculation and towards healthcare speculation.

… although you still need to hold the shares for 5-years.

This may be okay for the patient, institutional investors, or fund managers, but less palatable for the retail investor seeking liquidity and trading on shorter timeframes.

Companies need to be 10 years old, or 15 years in the case of biotech and medetch.

In biotech land… 15 years is still a Spring Chicken.

I was doing some digging into Australia’s largest biotech companies and how long it actually took them to go from benchtop to commercialisation:

… this stuff takes a LONG time.

Do investments include publicly traded shares?

This is a big one (and one where I hope the ASX itself makes a submission to the government)...

IF the carve-outs don’t include publicly listed shares, it would be a disaster for ASX-listed biotech companies.

We’ll see more companies stay private for longer. 

Deductible gifts and donations made to charities will still be eligible for the CGT discount.

From the text: “Ensure deductible gifts and donations reduce capital gains that are subject to the minimum tax, to maintain tax incentives in relation to charitable giving.”

The fact that charities were targeted in the initial budget proposal is insane to me.

Many early-stage research organisations and organisations that support diseases rely on charitable donations to operate.

I know from working at LifeChanger, a youth mental health charity, that the “tax-deductible gift” incentive around June 30 is a big driver of revenue.

Just last week, we had the Big Freeze event, which has raised over $157 million in lifetime donations to fund research and support for Motor Neuron Disease.

Charities also operate to support the families of people who suffer from terrible diseases (Cancer Council, Starlight Foundation, Peter Mac Foundation… the list goes on)

Keeping donations to these organisations as tax-deductible is a good thing.

(Honestly, pretty sad that charities were targeted by the government… but at least they’ve walked it back)

The consultation is open until 10 July and will inform the final design, to be implemented in a later tranche of tax reform legislation.

I’m not a political expert, but my read is that the Labour Government will seek to pass the Tax Changes ‘as is’, with the carve-out and amendments to come later.

This scares me too.

Because if the changes are passed without us knowing what the final carve-outs will look like, then we are at the whim of the old “take what you can get” adage.

But let’s see.

The outcry for the initial changes was loud, and the backtrack was necessary.

Obfuscation and complexity IS the political strategy here.

… but honestly, it’s just so much simpler to scrap the tax altogether and start from scratch.

(and maybe, like, can the government waste less money?)

Let’s dive in…

Cynata Therapeutics (ASX: CYP) announces the Phase 3 trial results for CYP-004 in knee osteoarthritis, showing no significant differences from placebo. (CYP)

🪑 Double duster for CYP.

A takeaway for me is that “the pain reduction in the control group was better than expected”.

The placebo effect in clinical trials for pain is real. If you look through the history of Avecho, the placebo effect is what tripped them up in their opioid trials back in the 2000s. 

Something to be aware of when evaluating pain trials (two underway right now: Paradigm and Mesoblast).

A good question to ask: What have you done to alleviate the placebo effect?

The silver lining for CYP shareholders is that they published the results before June 30, and it can be written off as a tax loss.

Careful trading this one; they only had a pro forma cash balance of $3 million… and that was at March 31st. 

I’d estimate a cash balance of $1M (based on last month’s burn)... 

With 243 million shares on issue, cash backing is $0.004 (0.4 cents).

AVITA Medical (ASX: AVH) launched in the UK, performing 17 successful surgeries using its RECELL GO product for burns. (AVH)

Opthea (ASX: OPT) announces that Regal has ceased to be a substantial holder. (OPT)

🪑 Regal’s out. Now let’s see where the chips lie… 

See you all next week,

The Armchair Analyst