Obtaining a quick overview of life sciences and life sciences investing in Asia is a bit like scooping up a handful of water. The region is so vast, the status of the efforts in different countries so varied, that any conclusions you draw are out of date as soon as they are written down. Still, given that biotech essentially had its start in the San Francisco Bay Area, a poll of investors and researchers sheds light on industries a 10-hour plane ride away.
One place to start is with Cynthia Robbins-Roth. A researcher at Genentech 25 years ago, Robbins-Roth, became the editor of one of the first newsletters on biotech in the late 1980s before founding BioVenture Consultants, a Palo Alto, Calif.-based biotechnology consulting firm that has done considerable work in the Asia Pacific region with startups, governments and corporations.
Robbins-Roth says that Asia is the most recent region of the world to attempt to enter biotech-after America and Europe-and that the governments in the region are trying hard to develop a strategy that will allow them to create a biotech industry because biotech is seen around the globe as an important method of economic development.
It’s generally accepted that to be successful, biotech startups need great science, smart money and a pool of management that knows the industry. “You can find the science part in many places,” says Robbins Roth, “but management and money that knows it takes take 10 years to develop a drug is harder to come by.”
Frank Kung, co-founder and managing member of Vivo Ventures in Palo Alto, Calif., which oversees four funds in biotech and health care, is in agreement. “The Asian capital market is nowhere as sophisticated as that of the United States,” he says. Kung adds that it’s difficult to stretch investors’ interests in Asia over the five to 15 years that it takes to develop a drug, whether they’re institutions, private investors or even governments.
Vivo, which has around 60 bio-startups in its portfolio, took 10 to 15 CEOs of U.S. biotech firms to Asia to meet with government representatives in 1997 and 1998 to encourage the development of companies there. “But it didn’t work,” Kung says, because Asian investors and industries are used to making products in an OEM/ODM model based on their long success in the IT industry.
The Margin Factor
Kung says that potential Asian partners for U.S. companies would look at them and say, “Give me a product to manufacture,” but unfortunately, says Kung, “in biotech, manufacturing is not the gating’ [or controlling] factor. In IT you have a 10% margin; making things cheaper is important. In making drugs, you have a margin of 80%. Manufacturing can’t provide a big cost savings.”
As a result, while there has been great interest in building a biotech industry in Asia and an initial enthusiasm for creating companies, when local investors get down to business, they’re thinking of setting up plants and making products-not starting down the years-long road of lab bench research it takes to create a drug. “Asia isn’t like Europe, where there are 100-year old firms like Roche,” says Kung, who adds that there is no industrial infrastructure for pharmaceuticals outside of Japan to sustain the drug discovery and development process.
WI Harper’s Peter Liu, one of the longest standing bridge venture investors-those firms who use U.S. technology, people and funds to help Asian startups-took the approach of building what may be the first truly trans-Pacific biotechnology practices. Liu hired Jonathan Wang, who left Walden International as that firm was exiting biotech, to build a biotech practice. As a result Harper’s has senior investment professionals on the ground in Beijing, Taipei and in San Francisco. Apart from its portfolio investments Wang now has Harper involved in an effort alongside SRI of Menlo Park, Calif., in the creation of Bridge Pharmaceuticals Inc., whose goal is to transfer U.S. drug discovery and development technology to Asia.
Despite an obvious enthusiasm for biotech in Asia, Wang also sees problems there, one of the most important being “genotype” issues-the reality that different races and ethnicities respond differently to drugs. For example, drugs developed in China may not have the same efficacy in the U.S. A second issue, mentioned by everyone we talked with, is intellectual property (IP) protection. Like all industries, those setting up operations in China or Asia run a risk of having their products or processes stolen by their partners in business. China alarmed the entire biotech industry when its government declared that Pfizer’s patent on Viagra was invalid in that country. It’s one thing to have your drugs copied, another when a government decides it can invalidate international patents. The third major set of issues is Asia’s lack of adherence to GLP (good laboratory practices) and GMP (good manufacturing practices).
Scanning the Region
For all of these reasons Asian countries have been unable to simply borrow the U.S. biotech development model and instead have had to develop their own biotech development roadmap, producing few successes. The government of Singapore, for example, puts up money to match funds that firms will invest in Singapore to set up an R&D lab or to set up manufacturing.
But one source says that the Singaporean government has learned that just throwing money at an industry doesn’t work. Thus, they’re developing new strategies to pursue lower tech and lower risk approaches to biotech. Unfortunately, such approaches have a lower return as well. Recently Singapore has announced that major pharmaceutical companies are setting up manufacturing plants in the city-state, which will provide employment. But that’s a far cry from developing an indigenous industry or research capabilities.
Japan, which began investing in biotech 20 years ago, and which experienced a downturn over a 10-year period, has seen a resurgence in biotech and more recently an appetite for biotech IPOs. Vivo’s Kung says that firms are considering opening up a business in Japan just in order to take advantage of the favorable IPO climate.
Japan, more than any other nation in the region, has benefited from the pattern of graduate and post-doctoral students returning to their home country with the desire to work as entrepreneurs, says Robbins-Roth. Dr. James Healy, a managing director at Sofinnova Ventures in San Francisco, is also enthusiastic about Japan, saying that there is a lot of activity there on the part of Japanese companies who are actively seeking to partner with U.S. biotech startups in order to sell their future products in Japan.
Taiwan, which began developing its biotech industry 15 years ago with strong government support, has benefited from its understanding of the role of entrepreneurs in startups. And while the country hasn’t lived up to its high expectations due to perceptions of poor quality control and concerns over intellectual property theft, today Taiwan has a thriving biotech community.
Australia and New Zealand are arguably the most advanced biotech market in the Asia Pacific region, in part because the wave of Asia Pacific drug development work first started in Australia. But market pros caution that Australia has its own set of inhibitory issues, most importantly the short term outlook of venture capital in the country. Robbins-Roth, who has consulted widely in Australia for the biotech industry, says that the lack of follow-on funding in the country has created a chronic condition in which biotech companies have to IPO at an immature stage to raise money to continue development. The likely result for these immature companies is that they get stuck in a cycle of chronic under-funding.
Korea has probably done the best job of partnering with U.S. drug companies, she says, and has benefited from the pattern of U.S. startups looking overseas for licensing revenues. As a result Korea is benefiting from learning about biotech through its partnerships, if not from the development of its own drugs.
Meanwhile the picture in India revolves around the expansion of India’s thriving outsourcing industry to biotech, according to Sanjiv Kapur, the head of Asian Private Equity at Henderson Private Capital, a global fund of funds with $1.2 billion of its $12.5 billion in assets in private equity.
Kapur says there are three areas where India can provide biotech outsourcing: clinical trials; contract manufacturing of ingredients, chemicals and generic drugs; and data services. Kapur says that recruitment for trials is both faster and cheaper than in the rest of the world, but he admits that there are quality problems in India. Villou Patell, the founder of Mumbai-based Avesthagen, one of India’s only indigenous biotech companies, says that India could become a hub for biotech development but cites a host of issues that must be resolved, one of which is that “Biotech is a non-existent industry for VC firms in India.”
It All Comes Back To China
In the end, everyone wants to talk about biotech in China. China is different, the landscape is fast changing and that country is developing its own plan for developing biotech. The U.S., for example, with the most stringent development and approval process in the world, has no approved gene therapies, while China already has gene therapies in the market. And nearly 1,000 companies in its biotech industry spread across major cities such as Beijing, Shanghai, Shenzhen, Wuhai, Chongquing and Sizhuan. Despite its size, however, China’s biotech companies are very thinly capitalized and many people are predicting a major consolidation in the industry.
Harper’s Wang is the most hopeful about China, saying that it is the future for biotech in Asia because of the cost issues that others say are not so important to biotech. Despite all of the factors that may inhibit the growth of biotech in Asia, Wang says that the protracted drug research and development process will insure that China has a role in the field, especially in the pre-clinical non-human testing of drugs because costs of such testing and research are only one-fifth of U.S. costs and because testing is labor-intensive and not subject to IP theft fears. Wang also points to chemistry services, especially around Shanghai where a specialty chemicals industry is well developed.
Robbins-Roth concurs that cost is important, pointing out that all of Big Pharma, including Roche, Novartis and even Pfizer are setting up research facilities in China, despite their concerns of IP protection. “A Ph.D. researcher in the United States earns $85,000 and up, whereas a Ph.D. researcher in China makes around $25,000,” she says.
That said, the salient conclusion one draws after talking with experts is that Asia is a distant third in the world of biotech. It’s not an important part of the economy and hardly appears on the map of the private equity industry. Given the long time frames needed in biotech, our expectation is that unlike IT or manufacturing, this is one area-given some important exceptions-where Asia is not likely to compete with the United States or even Europe for the foreseeable future.