Hong Kong innovators

The CEO of cancer drug maker Athenex says Hong Kong needs to do more to draw innovative firms

PUBLISHED : Wednesday, 26 September, 2018, 10:04am
UPDATED : Wednesday, 26 September, 2018, 5:38pm

Hong Kong should consider lowering profit tax on innovative companies to attract more investment in the biotechnology sector, according to the chairman and CEO of a US-based cancer treatment developer.

Otherwise, the city – well placed as a hub for research and business – risks losing out to other jurisdictions that offer generous state grants and tax benefits, said Johnson Lau Yiu-nam whose Buffalo-based Athenex lobbied successfully for concessions from government officials in New York state and Chongqing.

“I have suggested to the Hong Kong government that it cut the profit tax for innovative biotech firms from 16.5 per cent to 5 per cent,” he told the Post in an interview. “The Netherlands and Belgium have become major biotech research and development centres and have been very proactive in offering incentives.”

Last year, the Netherlands lowered its effective tax rate to 5 per cent – compared to the normal 25 per cent – on profit derived from patents owned by companies through in-house innovation.

In Belgium, companies based in the northern Dutch-speaking Flanders region enjoy an effective tax rate of 5.1 per cent on earnings from patents-granted innovation.

Elsewhere, governments have offered subsidised land and building infrastructure to lure investment.

In May 2015, the New York state government agreed to spend US$225 million to build two facilities for Anthenex. These include offices in Buffalo that would become Anthenex’s North American headquarters, and a pharmaceutical factory in nearby Dunkirk in the western part of New York state. The factory has been leased by Anthenex at the bargain rate of US$1 a year for up to 20 years, while the offices have been leased rent free as long as operational costs are met.

The 315,000 square-foot plant will make “high potency oral and sterile injectable” cancer drugs upon approval by regulators, Anthenex said in a statement.

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The deal was part of the state government’s effort to revitalise and create jobs in the economically depressed upstate region by offering US$1 billion in state grants and tax breaks.

As part of the agreement, Athenex has committed to spend up to US$3.4 billion in Buffalo and Dunkirk should it lease the premises for the full agreement term of 20 years. About 700 jobs are expected to be created.

It is part of New York state Governor Andrew Cuomo’s Buffalo Billion initiative, announced in 2012, to spur economic development. A US$750 million state subsidy from the programme was used to build and equip a solar rooftop panel factory in Buffalo for SolarCity, which was later acquired by electric car giant Tesla.

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Lau said he clinched the Buffalo deal a few months after making a presentation to state economic development agency Empire State Development Corporation.

According to Athenex’s annual report, if it fails to attain or maintain certain levels of employment or spending for certain periods, the government could terminate the lease and Athenex’s liability would be capped at the amount spent by the state on the facility times the percentage of required spending not yet incurred.

Backed by pre-IPO private financing of US$250 million, Athenex was listed on Nasdaq in June 2017, raising US$64.2 million, followed by another US$68 million in a share sale in January of this year.

The company had a net loss of US$131.4 million last year, during which it used US$81.5 million of net cash to run its operations. Athenex had US$39.3 million of cash at the end of last year.

Five months after clinching the Buffalo deal, Lau said he won an agreement from Huang Qifan, then mayor of Chongqing, for the city government to fund the construction of two plants for Athenex to make active ingredients for its oncology drugs.

If Athenex fails to meet certain operational milestones it will lose access to the properties, according to company’s annual report.

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Athenex is in third phase clinical trials – the last phase before commercialisation – on a skin cancer ointment that may have better safety and efficacy than existing products. It is also testing a technology that could allow currently injected cancer drugs to be taken orally.

Chief Executive Carrie Lam Cheng Yuet-ngor announced in her policy address last October that she planned to give companies a 300 per cent tax deduction for their first HK$2 million research and development spending, and a 200 per cent deduction for expenditure above HK$2 million, compared to 100 per cent currently.

“The proposal, which is pending approval of the Legislative Council, has taken into account the views of different stakeholders and is welcomed,” a spokeswoman for the Innovation and Technology Bureau said. “We expect that the proposal would be applicable for qualifying expenditures incurred in the 2018-19 financial year.”