For the American Chamber of Commerce in Taipei
Key in “Shengyi Road, Hsinchu” on Google maps and all that is visible is scrub and grass. But go there and you’ll find a brand-new biomedical plant – the headquarters of JHL Biotech, a start-up founded in California in 2012 – that is top-notch even by U.S. and European standards. After key figures in Taiwn’s biotech community were shown around the facility at its inauguration in early December, they were lavish with their praise. “It’s as spacious as if it were in the States,” says one of the VIP guests, who asked not to be named. “Taiwan’s biotech laboratories are usually cramped, which has been an issue with the U.S. Food and Drug Administration when local companies apply for regulatory approval.”
The domestic biotech industry is still far from being a key factor in Taiwan’s overall economic performance. But recent months have produced three developments suggesting that talk of biotech at some point offsetting the decline in the island’s IT sector can no longer be dismissed as a mere pipedream.
First was JHL’s sudden emergence, getting its pilot plant in operation in record time for manufacturing monoclonal antibodies for use as active pharmaceutical ingredients (APIs) in biologics, which are drugs derived from a living cell. Second, Taiwan’s government-initiated Development Center for Biotechnology (DCB) spun off a company called EirGenix Inc., which has taken over DCB’s pilot plant to engage in the commercial manufacturing of antibodies. And third, ASLAN Pharmaceuticals, a Singaporean drug developer focused on both biologics and “small molecules” (the industry’s term for traditional, chemically engineered drugs), set up a subsidiary in Taiwan in what was viewed as a major breakthrough.
While the three firms are following very different business models, their stories have one important aspect in common – securing sufficient investment funds was not a problem. “We raised more money than Genentech’s IPO 40 years ago and we built the Hsinchu plant in just nine months, which are both quite some achievements,” says Racho Jordanov, JHL’s co-founder, president, and CEO. Genentech, where Jordanov’s career and those of other key JHL personnel took off, was the first biotech firm in the United States, and its IPO in 1980 famously set off an investor frenzy.
JHL’s website lists high-tech venture capital firms (VCs) such as Kleiner Perkins Caufield & Byers, as well as Taiwan’s China Development Industrial Bank, as the company’s main sources for financing. The company entered Taiwan with an initial approved investment of US$20 million. “European banks are playing a role, too, extending generous loans under the condition that we purchase European equipment to go with the U.S. equipment to be imported into China for use in our plant there,” notes Jordanov. Additional capital is coming from the Chinese government, also due to strategic considerations.
Companies involved in biologics and biosimilars (the term for biologics’ successors after patent expiration) are currently investors’ darlings, partly because the technological and regulatory threshold to develop and manufacture them is extremely high. While Indian and Chinese manufacturers are unbeatable in terms of price when it comes to producing small molecules, the steep biotech threshold is expected to provide Taiwan with a continuing competitive edge for a number of years.
Another difference between biopharma and traditional drugs is the nature of their applications. Biotech drugs typically target diseases for which treatment with chemical drugs alone is not an ideal option. One of the earliest examples was the use of biologics in producing insulin, and one of the latest is their use in anti-cancer immune therapy, which transforms patients’ blood cells into “soldiers” that go on “seek-and-destroy missions” against cancer cells.
JHL’s Hsinchu pilot plant will be operational in early 2014, producing small quantities of antibodies for use mainly in early-stage clinical trials. Simultaneously, JHL is building a commercial manufacturing facility in Wuhan, China, scheduled to begin production of APIs for commercialized drugs in mid-2015. JHL says it will be the world’s largest single-use biopharmaceutical plant.
Typically, the customers for the firm’s APIs will be either small biotech research companies, which generally wish to avoid having to invest in building their own plant during drug development, or “Big Pharma,” the leading multinational drug companies, which might prefer outsourcing for strategic reasons (JHL says it is currently in discussion with Pfizer and Novartis). Either type of customer might later partner with JHL for drug development and manufacturing in exchange for royalties in the Asia market. Jordanov also cites the development of biosimilars as a third pillar in the company’s business model, “as many mega-sale drugs are coming off patents.”
The choice of Taiwan
After the idea for establishing JHL was conceived in San Francisco, there were ample reasons to choose Taiwan as the location for the headquarters, says Jodanov. “We wanted to position in Asia because the Asia market is the fastest growing,” he notes.
“The main draws for Taiwan were the availability of talent, a strict but clear regulatory environment, government support, as well as respect for IP, which makes us more comfortable here than in China.”
What resulted was a win-win situation for both the company and the host country. JHL’s staff in Taiwan – which has started with a headcount of 40 people and is expected to double in two years – includes only a few expats. In addition, Jodanov estimates that the Taiwan plant will eventually generate about US$80 million a year in pre-tax profits, while JHL’s research projects carried out in cooperation with Academia Sinica and local universities will benefit the Taiwan biotech industry as a whole.
He further notes that as the Hsinchu and Wuhan plants will use the same computer controls, JHL will be bringing in three Chinese staff members per month for training. This arrangement means that from day one, the Wuhan operators will be familiar with the entire system, which in turn is an assuring notion for investors. “What counts for the VCs is the business plan, the management team, and the track record,” says Jordanov. “We have delivered on every milestone agreed on with the VCs in the 15 months since we’ve been established.”
Meanwhile, EirGenix, the new operator of what was the DCB’s biologics pilot plant, lists Formosa Laboratories, Taiwan’s National Development Fund, CTBC Capital (part of what was formerly called the Chinatrust group), and Waterland Venture Capital, among others, as its shareholders. It has an asset value of NT$540 million (US$18 million). Like JHL, EirGenix can be labeled a contract development and manufacturing organization (CDMO), and according to DCB Chairman Johnsee Lee, much of the money that has been raised will be used for technological upgrades.
“Not many companies in Asia can do what EirGenix and JHL do,” Lee says. “And the quantities of APIs needed for clinical trials alone are sufficient for good business already.” Lee further stresses the importance of the Good Manufacturing Practice (GMP) certifications possessed by both the DCB and JHL plants, as regulators in the United States, Europe, Taiwan, and elsewhere will only clear drug candidates for trial use in humans if they have been manufactured under that standard. Lee predicts that after successful clinical trials and regulatory approvals, many clients will return to EirGenix and JHL for commercial manufacturing.
Lee sees the emergence of the two CDMOs as a highly significant step for Taiwan’s biotech development. “Both JHL and EirGenix were set up over the last six months and take Taiwan to a new stage. Before this, Taiwanese drug companies have mostly done small molecules, which exposes them to more cut-throat competition,” he notes.
Also auguring well for Taiwan’s biotech industry is the ongoing regulatory harmonization with China. Lee, who is one of Taiwan’s top cross-Strait negotiators in pharmaceutical affairs, points to a new cooperative drug development program with China to be launched later this year. Under the program, the two sides will nominate a total of about 30 drug candidates, and from that pool several will be chosen for joint clinical trials on the basis of their commercial prospects or medical urgency.
“This cooperation will greatly accelerate drug development because clinical trials will no longer have to be repeated on the other side for regulatory approval there,” Lee explains. Presumably the lion’s share of the drugs selected under the program will focus on diseases that disproportionally plague ethnic Chinese populations, such as liver cancers and diabetes. As the prevalence of these diseases is lower in the West, Big Pharma is regarded as less likely to compete with Chinese and Taiwanese developers and makers of treatments aimed at the rapidly growing China market.
Lee also notes that DCB has recently been certified by China to test Taiwanese biotech-based cosmetics for marketing in China. The arrangement should facilitate sales of these products across the Strait, since DCB can complete the testing faster than the Chinese laboratories now doing the job. As cosmetics are a major source of revenue for many biotech research companies, and since Chinese consumers have proven very receptive to Taiwanese cosmetics brands, this regulatory relaxation is seen as an additional shot in the arm for the Taiwan biotech industry.
Looking beyond Singapore
ASLAN, the Singaporean virtual drug developer whose investment last year in Taiwan was said to be even larger than JHL’s, is considered a potential client for Taiwan’s biotech CDMOs JHL and EirGenix, according to industry observers. ASLAN’s business model is to in-license drugs that typically have six to seven years of toxicity studies and animal testing behind them and have either just started or are about to start clinical trials. ASLAN typically in-licenses global rights to drugs and then designs and executes clinical trial programs, starting with phase 1 clinical trials, which usually involve 20-100 healthy volunteers, followed by phase 2, which typically look at results from 100-500 patients. At some stage, the company will seek to find partners for global phase 3 clinical trials, which may involve several thousand patients, and for eventual commercialization.
“We are focusing on the four years during which a drug that works in a mouse is proven to work in a human,” says Carl Firth, ASLAN’s CEO. “We acquire a drug that has made it through animal testing, that has a competitive profile, and where the partner is unable to progress it themselves, which might be for strategic reasons.” He adds that the out-licenser’s motivation could also be a desire to have a partner with a different or innovative approach to develop the compound.
ASLAN’s method is to try to identify drugs that work in a particular kind of patient, possibly in combination with other drugs, rather than seeking cures that are effective for the entire population. Taking lung cancers as an example, Firth explains that the term covers what are actually hundreds of different diseases, and that the effectiveness of a treatment may vary according to a patient’s genome, ethnicity, and the stage of the disease, among other factors. ASLAN focuses only on the 10% to 20% of patients that will have a positive response to the drug, he says.
Because the company is targeting tumors prevalent in Asia, in addition, ASLAN says it chose to locate in Taiwan because of its good medical and research infrastructures and ample clinical trial experience. “Taiwan has come quite a long way in becoming an attractive biotech location,” notes Firth. “Three or four years ago, a strong Singapore biotech firm would not even have considered Taiwan in the first place.”
Firth points out that ASLAN’s in-licensing deals typically do not involve initial payments. That approach saves money that can be used for the clinical trials, which can be very expensive. Backend profits can be shared with the partner later. Firth notes that Big Pharma, on the other hand, might make an upfront payment in the neighborhood of US$80 million for oncology drugs ready to enter global phase-3 clinical trials, with the subsequent milestone payment for commercialization reaching as high as US$700 million.
“But it is obviously a very risky and expensive process to get there,” he says. “The reason we run clinical trials is that we don’t know what the answer will be,” adding that as a rule of thumb, only one in three candidates will make it from phase 1 to phase 3. Firth cautions that if a drug developer has only one or two drugs in the pipeline, as is the case with many Taiwanese developers, it is accordingly quite precarious from an investor’s perspective.
In contrast, ASLAN looks like a safer bet for the four VCs that are backing it (BioVeda Capital, Cenova Ventures, Morningside, and XinChen Ventures) as it currently has three compounds in the pipeline – two for solid tumors and one for rheumatoid arthritis, with a few more compounds being targeted over the course of the year. “We have no lab, no plant, and we only have 11 people,” says Firth. “But if you look at our portfolio, you’ll see that no biotech company in [East Asia excluding Japan] has more innovative drugs in the pipeline than us.”
In its strategic quest to in-license more compounds, ASLAN is likely to benefit from the world-class research facilities in Taiwan, most prominent of which are DCB, Academia Sinica, and the government’s Industrial Technology Research Institute (ITRI) in Hsinchu, including its Biomedical Technology and Device Research Laboratories. Traditionally the ITRI labs have primarily researched botanical and chemical drugs, but in recent years have turned more to biologics. ITRI also runs GMP-certified manufacturing plants, which Taiwanese biotech research companies can turn to for favorable production conditions.
According to Richard Shau, the division’s General Director and VP, the current focus of ITRI’s biotech research is a novel “scaffolding” made of biotech-engineered collagen, which enables the linking of chemical and botanical compounds and antibodies. “The key advantage of the scaffolding will be targeted drug delivery,” he explains. “A drug only cures when delivered to the targeted part of the body, whereas elsewhere it may be a poison.”
Although a chemical drug may be good at killing a cancer cell, he continues, it can cause drug resistance, as well as other side effects, if it doesn’t hit the right target. The scaffolding now allows the chemical drug to sniff out the cancer cell at a lower dosage, with the antibody taking over the job from there. “This is the state of the art in cancer drugs currently,” he notes. Firth adds that a botanical drug can also be linked to the scaffolding, as such drugs are good at suppressing certain side effects, such as appetite loss or drowsiness.
Biochips for a better diagnosis
The availability of the best treatment for a disease means nothing without the right diagnosis, and Taiwan is making impressive strides in the development of so-called diagnostic biochips. These chips, as produced by Hsinchu-based Phalanx Biotech under the brand name CytoOneArray, are 1×3-inch glass slides hosting 26,000 probes. When the probes hook up with genes or gene parts in a DNA sample, a staggering 305 genetic diseases for developmental delay or intellectual disability can be detected in prenatal and postnatal tests. All of the diseases and disorders are relatively rare, but doing the math, it becomes clear that the product is destined to pay off. About 1% of people suffer from autism and 1% from schizophrenia, and when all diseases on the CytoOneArray target list are added together, they affect 6% to 8% of a given population. A prenatal diagnosis of autism, for example, is important, as it facilitates treatment of children before the unrecognized disease turns them into an outsider in the social environment.
“Our product line focuses on two markets, the first being R&D with our CytoOneArray chip and the second prenatal screening with CytoOneArray,” says Gordon Ho, Phalanx’s CEO. “As CytoOneArray is classified as a medical device, it will require regulatory approval, which we are preparing for.” Ho says he expects the regulatory nod to come sometime in 2015 because detection is much better with CytoOneArray than with current technology.
Until CytoOneArray can be sold to prenatal screening clinics, hospitals, or doctors, Phalanx’s revenue-creation is based on two pillars. First, there is the service model, where clients – typically researchers – send in cell samples for analysis. Second, Phalanx supplies other service laboratories with consumables and disposables (that is, the biochips) and provides technical support, so that they can execute the analysis services in their local regions.
A particular illustrious example among Phalanx’s clients is the U.S. National Aeronautics and Space Administration (NASA), whose researchers are using the Taiwanese biochips to profile the gene expression of mice that have gone on space missions versus those that remained on the ground.
The opportunities and risks of the drug-development business are exemplified by Anti-CD3, the first drug that ITRI successfully embedded in its scaffolding. After years of development work, the compound had failed phase 3 clinical trials in the United States a decade ago because of too many complications and side effects. In 2010, ITRI took on Anti-CD3 to use in its collagen platform and succeeded in markedly reducing side effects through better drugreformulation technology. Following autoimmune system trials in chimpanzees, ITRI out-licensed the drug to a Taiwanese drug developer in early 2013. Shau predicts that the product may gain approval from the U.S. FDA for a phase 1 clinical trial sometime in 2014.
Asked about the ITRI biotech division’s strategic direction, Shau said the stunning successes reported in the United States in recent months in relation to gene therapy technology opens even more opportunities for targeted delivery based on ITRI’s collagen scaffolding. The challenge for Taiwan now is how to bring all the research done on the island together. “The DCB has the antibodies, we have the scaffolding. Together we can create spin-offs for multimillion and billion-dollar projects,” he says.
There is still some way to go until then, however, and what the Taiwanese biotech industry has been achieving is still humble in concrete macroeconomic terms. As the common definition of “biotech” on the island differs from Western parlance in that that it also covers pharmaceuticals, medical devices, and even traditional Chinese medicine, the industry’s total revenue statistics can only serve as a broad indicator. DCB puts the figures at NT$240.3 billion (US$8 billion) for 2011, NT$263 billion in 2012, and an estimated NT$281 billion in 2013. In comparison, TSMC, Taiwan’s world-leading semiconductor foundry, alone accounts for nearly double that amount per year.
But despite this relatively low level of revenue so far, the capital market has been very supportive in investing in the local biotech sector for the last several years. As a result, capitalization in the industry has grown 6.6-fold, from US$2.5 billion to US$16 billion, from 2009 to 2013.
While that rate of growth exceeds that of the United States, Singapore, or Korea, the focus of investment activity has been concentrated largely on a few “poster child” firms, especially drug discoverer and developer TaiGen Biotechnology, as opposed to the kind of agile start-ups credited with providing the U.S. biotech industry with is dynamism.
“The Taiwanese government has traditionally been very protective of the mom-and-pop investors that make up some 30% of stock investments here, and has therefore made listing difficult for biotech start-ups, as they do not yet really create revenue,” says Clark Su, Secretary General of the Taiwan Venture Capital Association. “And for VCs, which typically work on a timeframe of only 7 to 10 years, the 15 years needed for the drug development cycle was too long.”
But the rules of the game changed abruptly on January 7, 2013 for the benefit of startups, says Su. On that day the GRETAI Securities Market (GTSM), which operates the local over-the-counter market, implemented a reform that makes it easier for individual investors to buy startup shares through their stockbrokers. In addition, GTSM last month launched a special incubation board – similar to Hong Kong’s Growth Enterprise Market, Singapore’s Catalist board, and London’s AIM board –to help small-cap startups raise funds.
These innovations are expected to have far-reaching consequences for the modus operandi of VCs. Su notes that they can now identify a biotech company that has just received a patent or readied a compound for clinical trials, invest in it until it has listed on GTSM, and then exit as individual investors move in.
Besides the markedly rising share prices the new rules have brought, Su sees other signs of growing interest – and perhaps even a bubble – in the biotech sector. He has long organized matchmaking events between local biotech firms and VCs, but notes that before the GRETAI reform a given presentation was usually attended by just three or four VCs. “But since then, it has always been close to 30,” he says.
Still, if a bubble is developing, Su believes it is not going to burst in the next three to five years. He considers that it will take that long for the first few Taiwanese-developed drugs to have entered the market, and for “people to find out that the margins are not as astronomical as they expected.” But that timeframe will be sufficient for good biotech companies to grow, he says, as well as for Taiwanese banks and other institutional investors to have educated themselves thoroughly on the subject.
As to whether the industry will face a hard or soft landing, Su holds that it will to some extent depend on the number of biotech firms listed by then. “The bubble will burst if there are only a handful of biotech companies in the stock markets. But if there are 50 or so, we can analyze which are good and which are bad, and then share prices will be reasonable rather than crash.”
Accordingly, Su has been urging the government to be less concerned about protecting individual investors and instead approve more biotech firms for stock exchange listings. He expresses confidence that the authorities have been persuaded to follow that course, and that significantly more biotech listings will take place this year.
Yet another obvious factor working against a bubble burst is the prospect of Chinese investment. Mainland-based pharmaceutical companies are “very rich” and are eager to invest in Taiwanese biotech firms, says Su, but the Taiwanese government has so far applied the brakes because of strategic considerations. As the permitted investment from China gradually expands, however, a large new source of investment funding is expected to be available for Taiwan biotech.
Making it through the pipelines
As a rule of thumb, it takes a compound 15 years from discovery to commercialization as a drug. Typically, the candidate would have been in-licensed and out-licensed more than once on its way, with each research company involved adding value. But trials could go wrong at any given time. A compound that has been in-licensed for millions of U.S. dollars could be worthless overnight and likewise the business that owns it.
Three milestones are coming up for Taiwan biotech, and the stories behind them are indicative of the nature of the business:
In a first for a Taiwanese drug developer, TaiGen Biotechnology Co will soon have brought a drug through to marketing. Taigexyn, an antibiotic to treat pneumonia and skin infections in-licensed by TaiGen in phase 1 clinical trials, is about to pass phase 3 clinical trials and is projected to gain regulatory approval in Taiwan and China at the same time. It will be the first drug jointly approved by the two sides, showcasing great strides in cross-Strait regulatory harmonization. “That will probably be announced in the first half of 2014 and will be a very big milestone for the industry,” says David Silver, president of BiotechEast, a Taipei-based consultancy for the biotech industry.
As the first Taiwanese drug to have been developed from scratch – from discovery through to clinical development and market approval – AOP2014/P1101, a biologic developed by PharmaEssentia Corp., is well on its way to hit the market. The drug, originally meant for hepatitis B and C, has had a real rollercoaster ride behind it, as during the development years a more promising drug type appeared, albeit a very expensive one. Luckily, Silver says, PharmaEssentia identified a totally new application, a rare blood disease. The company is now partnering with Austria’s AOP Orphan Pharmaceuticals to help it run phase 3 clinical trials for AOP2014/P1101 in Europe. The drug is classified as an “orphan drug,” meaning there are very few patients and thus lower regulatory hurdles. “So far it sounds all good,” Silver notes. “PharmaEssentia has built a new plant to supply the clinical trials in Austria, and once the compound has gained regulatory approval, it will do the manufacturing of AOP2014/P1101 for the market.”
Liver cancer drug PI-88from Medigen Biotechnology is in phase 3 clinical trials, which are being run in Taiwan, mainland China, Hong Kong, and South Korea, making them very expensive. According to Silver, PI-88 could be highly significant for two reasons. “First, Medigen is running the phase 3 trials alone, which is remarkable for a local biotech company because of the costs. Second, it is not clear yet, but there is the expectation that China will flatly approve the ongoing phase 3 clinical trials for PI-88’s commercialization in the Chinese market, so that Medigen won’t have to do additional trials in China to back up its phase 3 data.”
If this scenario pans out, it would mean that Taiwan biotech companies do early-stage clinical trials in Taiwan and then follow up with the rest in China, facilitating speedier commercialization of Taiwanese-developed drugs in the rapidly growing Chinese market. But Silver says the real jackpot would be if this approach could enable Taiwan to be a “drug approval portal into China” not just for drugs from Taiwan but from other countries as well.
At this stage, no one is sure if or how this approach would work, adds Silver, as his understanding is that the cross-Strait Economic Cooperation Framework Agreement (ECFA) applies to Taiwanese companies only. “However, if a licensing agreement is formed early enough between the overseas company and their Taiwan partner company to share the benefit of future China market access, then it might work out well for the overseas company when the drug from the Taiwan company gets approved,” he notes.