Biotechs lured overseas by incentives and specialists Two of Australia's largest biotechnology companies are looking at ways of tapping into the greater valuations accorded to the sector overseas, presenting policy makers with challenges in keeping some high technology areas. One of the largest of the locally grown biotech companies, Mesoblast, is believed to be considering a sharemarket listing in the US, in a bid to lift its sharemarket valuation. Similarly, one of the most valuable of the local unlisted biotech companies, Biosceptre, has asked shareholders to approve shifting its domicile to Britain, which could bring an immediate boost in valuation. Documentation sent to shareholders shows it could achieve an immediate valuation gain of close to $100 million from the move. The limited depth of local capital markets, combined with a small pool of analysts familiar with the sector, has been blamed for weighing on the valuations of some biotech stocks. Mesoblast, the largest of the locally listed pure biotech companies with a market capitalisation of $1.9 billion, has only a small number of institutional brokers following the company and as many private client brokers, but there is a much deeper level of analyst knowledge of the sector abroad. As a result, Mesoblast is believed to be looking into a listing on the New York Stock Exchange, which, along with lifting its visibility, would tap into a deeper pool of analyst expertise and could help give it a more accurate market valuation. In the US, analysts are specialists. As a result they are highly knowledgeable, with a much deeper understanding of the potential of emerging industries for companies such as Mesoblast, which is working on regenerative medicine, because there are any number of public companies active in the same field. For outfits such as Biosceptre, which are placed much earlier in the development phase, higher valuations also limit the number of shares to be issued in new funding rounds, which protects the position of existing shareholders. KPMG has valued Biosceptre at $340 million if its domicile remains in Australia. But if it moves to Britain, this could rise to $430 million. Also, research success could drive its valuation to $600 million upon completion of phase one clinical trials, the company estimates, and to $1.1 billion with the completion of phase two trials. Typically only about 10 per cent of agents make it from initial testing to commercial launch. In the past six months, there has been an increase in the flow of speculative investment funds into biotech companies, which is a reflection of the sustained downturn in resource explorers and the surge in US biotech stocks after several years of near-dormancy. However, there are still concerns about the limited valuations accorded local stocks. More important, though, is government policy, and this is the driver for Biosceptre's proposed shift. The reality of funding research locally means many research-driven outfits live hand to mouth. Biosceptre has found it easier to raise funds abroad, especially in Britain, in its recent funding rounds. Given that we were raising funding from offshore and with the incentives available abroad, should we move to a more supportive environment? Biosceptre chief executive Gavin Currie said. Some incentives work like film industry tax breaks in Australia, which at one stage allowed for 100 per cent deductibility. "The UK has a similar policy in place, where people can invest up to £1 million and get the full tax advantage," Currie said. For high net worth individuals willing to roll the dice ... that's a huge incentive. The other prospective tax incentive is a low tax regime for patents lodged there, which can reduce the tax liability to just 10 per cent. "That is, you can retain 90 per cent of the profit," Currie said. Also, if we IPO, support for IPOs in Australia is typically dismal. Therefore, we are talking to UK and US advisers who are pointing us to a US NASDAQ listing or the main UK market. The incentives, plus access to a skilled workforce, had prompted several outfits to go to Britain, he said.