Guest article
By Andrew Stewart, CEO; Charlie Veeneklaas, Business Analyst; and Tom Baldry, Credit Analyst, Endpoints Capital.
This article was originally published in the Australiasian BioTechnology April 2025 magazine, page 26-28.
The impact of Research and Development Tax Incentive finance on cost of capital and shareholder value is an important consideration.
Australia has a world-class life sciences ecosystem of researchers, scientists and service providers delivering cutting-edge innovation. Despite its strong research and development (R&D) capabilities and best-in-class clinical practices, life sciences companies have faced significant funding challenges in recent years.
For early-stage and clinical research companies, equity can be expensive and extremely dilutive. These funding challenges ultimately affect enterprise value and long-term sustainability for many companies. This article has stemmed from the many hundreds of conversations we've had with business leaders, founders and investors in biotechs, medtechs and other life sciences companies about these challenges.
R&D finance has been shown to reduce equity dilution by more than 30% through the clinical development lifecycle, preserving more value for shareholders and founders. For institutional investors, it improves return on equity and enhances the overall attractiveness of this asset class.
This article explores key financial concepts and valuation methods in the life sciences context. It demonstrates how R&D finance strengthens a company's financial position, enhances investment appeal and supports sustainable growth.
Most life sciences companies depend heavily on the Australian Government's R&D Tax Incentive scheme, which provides cash refunds of up to 43.5% on eligible R&D expenditures. While these incentives are invaluable, companies often have long delays in receiving the rebate after they incur these costs - sometimes up to 18 months.
R&D finance bridges this gap, enabling firms to unlock funds in advance, mitigating cashflow constraints and reducing reliance on dilutive equity rounds. So, how much of your R&D refund could you access today? Before you answer that, let us ask you this:
Is your R&D tax asset on your company's balance sheet?
Many companies are not acutely aware of the R&D tax asset that is accruing monthly on their company's balance sheet. For eligible R&D companies, as these R&D costs are incurred, the R&D tax asset is actually increasing every month!
The universal law of accounting is that assets equal liabilities plus equity. Put a different way, assets are funded by debt and equity. Expanded again, assets are a combination of fixed assets (land, buildings and intellectual property) and working capital (cash, receivables and inventory).
In summary, a company's balance sheet is: fixed assets plus working capital funded by equity and debt. Congratulations, by reading this far you are now certified to practice as an accountant (almost).
All investments should yield a return relative to the risk an investor is taking (compare government bonds and the roulette wheel in the casino). The pricing of this risk-adjusted return on each investment is calculated by understanding its cost of doing so. This cost of capital is the return a company must achieve to justify the investment. It consists of two primary components:
These two inputs yield a company's Weighted Average Cost of Capital (WACC), which reflects a company's overall financing cost. Lower WACC improves company valuations when using a discounted cash flow model, as future cash flows are discounted at a lower rate, increasing their present value (Frank & Shen, 2016). Additionally, a lower WACC allows biotech firms to allocate more resources to R&D, rather than diverting funds to expensive capital costs.
Biotechs face higher cost of equity compared to other asset classes due to several factors, including:
Given these challenges, biotech firms must optimise their capital structure to minimise financing costs and reduce dilution to enhance valuation. High equity costs often push companies toward issuing more shares, resulting in dilution that erodes long-term shareholder value. In contrast, R&D finance provides a non-dilutive and significantly cheaper cost of capital.
Endpoints Capital specialises in R&D finance for biotech, providing clients with a structured alternative to conventional equity funding. This financing model offers several advantages:
In addition, R&D finance provides flexibility in financial planning. Unlike traditional bank loans, which impose rigid repayment schedules and stringent covenants, this form of financing improves and accelerates a company's cash inflows. This allows biotech firms to allocate capital efficiently to research, trial costs and regulatory approvals without immediate financial strain.
For companies pursuing partnerships, investment, or acquisitions, a healthier financial profile-reinforced by R&D financing-strengthens their balance sheet and negotiating position. Investors favour firms with a lower WACC and a well-structured balance sheet, which signals sound financial sustainability and stewardship.
R&D finance is a transformative funding solution for biotech firms, offering an alternative to traditional financing methods, such as dilutionary equity rounds. By leveraging the government-backed R&D rebates, R&D finance enables biotechs to secure necessary funding while avoiding dilution, ensuring ongoing innovation and therapeutic breakthroughs without disruptive funding gaps.
Please visit www.endpointscapital.com.au to download the full white paper.
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