Neil McInnes: Tax credits hold key to stimulating life sciences sector

For many years, Scotland's life science sector has been heralded as one of the nation's rising stars. We have a tremendous opportunity to leverage our resources, including the NHS, our universities, our exceptional heritage for medical innovation, talent and infrastructure to encourage and attract big business.

Why then does it feel that most of our young life science companies are struggling to get out of the starting blocks?

The challenge of converting ideas into commercial reality and companies of scale still seems to elude all but a few and needs to be urgently addressed.

The life science industry is truly global and Scotland, as others, has identified it as a key sector to drive future wealth and prosperity. But aspiration isn't enough and we need to act now to exploit the opportunity before we get left behind.

Lack of funding is a vociferous lament by those in the sector. Scotland has a vibrant business angel community and the Scottish Investment Bank's Co-investment and Venture Funds play an important role. However, there is a growing sense of foreboding that this money could be redirected to renewables.

Coupled with our lack of a strong active venture capital community specialising in life sciences in Scotland, growth is inevitably slow. That said, life science is fundamentally a long-term, high-risk business. It is expensive, for instance, to take drugs through clinical trials and into the market with no guarantee of a return.

But if Scotland is serious about its life science sector, we need to find ways to get businesses to a point where venture capital money is forthcoming.

Tax incentives are seen as a very positive tool. The system for research and development (R&D) tax credits has been in place for ten years and is valued by companies. In a CBI survey in November 2008, 76 per cent of respondents making an R&D claim said the relief had helped to maintain their level of R&D spending. A further 37 per cent had increased R&D as a result of receiving the relief.

When Grant Thornton canvassed the opinion of its clients who could take advantage of the R&D tax credit system, it was apparent that enhancing this would be very welcome. They were specifically looking for it to be increased and for the claim process to be simplified. For Scottish SMEs and start-ups, the benefits are important as they allow them to maintain a sustained R&D programme. However, the perceived complexities of claiming can be enough to put them off.

These incentives are also vitally important to ensure the UK remains competitive in the global arena.More than half of the G20 countries offer some form of tax relief and, according to Sir James Dyson's report, The Dyson effect and the future: Tax incentives for research and development in the UK, the UK ranks 19th in terms of attractiveness of tax credits.

While Scotland's life science sector remains made up of many diverse small companies, there may also be an argument for consolidation. Pooling resources and collaboration to create critical mass with other indigenous companies or partnering with organisations overseas is one route and may well prevent some companies from failure in these particularly hard times.

Consolidation of organisations with complementary products or services could be particularly beneficial for Scotland as it potentially makes the most of scarce resources. It is easier to assemble one management team and get one company funded rather than two. Getting investor ready is another course of action, especially with major foreign organisations looking on.

According to Grant Thornton's private equity barometer, the price of healthcare assets appears to remain remarkably steady. Over the past quarter, private equity groups have lowered their views on valuations for 2011 in all sectors with the exception of high technology and healthcare, suggesting there is a strong appetite for quality healthcare assets.

Medical research is one of Scotland's strengths. We have an exceptional pool of talent and ideas. But in today's global competitive economy, that is not enough without the right incentives and the business infrastructure to support them. As our politicians prepare for May's elections, it will be interesting to see how they might truly wake the sleeping giant that is Scotland's life science industry.

• Neil McInnes is associate director for accountancy firm Grant Thornton in Scotland