VANCOUVER — The company behind the biggest-ever IPO by a Canadian biotech firm wants the B.C. and federal governments to implement new rules it says will help keep scale-ups with valuable intellectual property from relocating to more tax-friendly jurisdictions.

Vancouver-based AbCellera uses proprietary technology to discover antibodies that its partners develop into therapeutic drugs. It had 155 antibody-discovery programs under contract with 35 partners, including Novartis, Gilead, Pfizer and Merck, as of its third quarter this year, and has enjoyed some early commercial success with a COVID-19 treatment co-developed alongside U.S. pharmaceutical giant Eli Lilly.

“Our success depends in large part on our ability to obtain and maintain adequate protection of the intellectual property” that AbCellera owns, its financial documents read. It owned or exclusively licensed 69 issued or allowed patents, with another 69 applications pending around the world, including Canada, as of Sept. 30. 

The company raised hundreds of millions of dollars through an initial public offering on the Nasdaq last December, and planned to use that money in part to fund its ambitious expansion plans. It has committed to adding hundreds of thousands of square feet to its Vancouver headquarters, and hiring hundreds of people in B.C. and elsewhere. Along with access to customers, talent and facilities, one factor that will determine where it expands will be whether the area has a “patent-box” regime. “It is part of the overall equation,” said Andrew Booth, AbCellera’s chief financial officer, in an interview with The Logic. 

Under a patent-box system, a company pays lower taxes for revenue earned from its intellectual property. AbCellera “argues this will reduce the number of corporations leaving Canada to scale their businesses,” according to a briefing note prepared for the deputy minister for the Western Economic Diversification regional-development agency ahead of a meeting with Booth in March. The Logic obtained the document through an access-to-information request.

Booth told The Logic he has met with representatives from both the federal and provincial governments to advocate for the patent-box system. He believes Canada struggles to help companies scale. Other places around the world build anchor firms “quite well,” he said, often using patent-box regimes as “quite effective” mechanisms. He cited some European countries—the U.K., Belgium, France, Switzerland and Ireland—as well as Australia, where AbCellera also operates, out of Sydney. That country has focused its policy specifically on the biotech and medtech sectors, deciding to tax income from related patents at 17 per cent instead of the typical 25 to 30 per cent. 

Patent-box regimes encourage homegrown companies to reinvest in expanding their operations locally, Booth said. In Canada, a patent typically lasts 20 years. Companies tend to spend the first decade raising money and trying to find a commercial application for it, he said. The following decade “is when they have the ability to make investments to scale up the people, the team, the factories, the commercial forces in order to make those inventions actual, commercial, viable business.” When revenue associated with those patents is taxed at a lower rate, it gives companies more after-tax cash to invest in that growth, he said. 

AbCellera’s push for the tax incentive echoes those of others in the innovation community. The Canadian Council for Innovators (CCI) recommended the federal government adopt the patent box as one part of the lobby group’s broader request for an expanded national intellectual property strategy. It would reduce “the tax incentive for high-growth Canadian firms to take their intellectual property outside of Canada for the realization of significant commercial benefits elsewhere,” its submission reads.

In this year’s federal election campaign, the Conservative Party promised to introduce a version of a patent-box regime as part of its IP-focused innovation platform.

Companies will offshore their intellectual property to jurisdictions with more favourable tax terms, said Jim Hinton, an IP lawyer and founder of Kitchener, Ont.-based Own Innovation, which provides IP-filing, strategy-consulting and portfolio-building services. To do so, a firm sets up a company in the other jurisdiction and assigns its patents or intellectual property to it, he said. The new entity licenses those back, paying less tax than it otherwise would. The home country then not only loses the tax revenue, but also, “the company has less and less ties to the domestic ecosystem and it becomes easier and easier for them to provide less economic benefit to the country.”

Companies must be a certain size to take advantage of this, Hinton said. Typically, the firm is globally minded already, has held an initial public offering and is honing in on how to play an effective tax game to remain competitive with its peers. A “certain group of the CCI memberships are sort of on the cusp of being the size,” said Hinton, who has advised some of CCI’s members, but not AbCellera.

Dana O’Born, the council’s director of strategic initiatives, said she doesn’t think “it’s a significant trend.” But as Canada focuses on developing more intellectual property, it’s going to be faced with those kinds of conversations and questions, she said. “There are companies that have said they’re looking to offshore their IP so they can realize lower tax rates on some of those profits.”

According to the briefing note, Western Economic Diversification—which has since been split into two more focused regional development agencies—acknowledged “innovative companies leaving Canada to commercialize technologies is a complex challenge,” with factors including a lack of venture capital and smaller available markets. “A broad and integrated approach to fostering innovation and trade is likely required” to address the challenges AbCellera has raised, the note reads.

It pointed out that patent-box regimes have been criticized for negatively impacting competition for foreign investment and creating a so-called race to the bottom as countries compete to lower tax rates to bring in foreign corporations. 

“Further economic analysis is needed to fully understand the impact of this proposal,” reads the note.

WD’s conversations with Booth “have been helpful in understanding AbCellera’s perspective on the issues and concerns of innovative companies growing in B.C.,” wrote Ben Letts, manager of communications for Pacific Economic Development Canada, in an email to The Logic. He deferred questions on patent regimes to the federal Industry, Science and Economic Development department.

ISED Minister François-Philippe Champagne said in a statement that the “government has created a favourable environment for businesses’ growth and development,” highlighting its 2018 IP strategy and commitments in the 2021 budget. He did not answer whether the government was considering implementing a patent-box regime, among other questions. 

There are some hints AbCellera is thinking about its options if B.C. or Canada choose not to deploy the tax break. It has established a corporate entity in Quebec, Canada’s first province to implement a patent-box strategy. (Saskatchewan has since also created one.) So far in Quebec, AbCellera has hired one employee and registered a lobbyist, whose objective includes seeking funding, including tax credits, for the company’s work and to expand its Quebec operations through hiring staff, purchasing equipment and establishing an office. The company declined to share more details about its plans for the province, saying in a statement only that it is “exploring opportunities in Quebec” and will share more information when it is available.

The province has a plethora of talent in machine learning, artificial intelligence and translational sciences, as well as a friendly business environment, Booth said in a follow-up email to The Logic, highlighting Quebec’s life-sciences strategy. Its patent-box regime is “part of the overall picture, but not the only factor,” said Booth, noting talent is most likely “the lead driver.”

He did not directly answer whether AbCellera would consider expanding operations outside of Vancouver to more tax-friendly environments in future. “AbCellera is building an anchor company that is headquartered in Vancouver,” he said. “As a global company, we also have locations in Boston and Sydney.”