Cover Story: Taiwan's Biotech Clock is Ticking...

With the IT industry increasingly moving to China, biotech has been cited as a potential driver for the next stage of Taiwan's economic evolution. Yet while its credentials are strong, no one should be expectin the R&D-heavy industry to start lighting up in GDP accounts anytime soon.

 

By Jim Boyce

Chaos - the word sprang to mind as I wandered about BioTaipei, Taiwan's premier biotechnology show, last November. On display was a range of products running the gamut from cutting-edge science to Harry Potteresque magic.

It was the kind of diversity you might expect from Taiwanese entrepreneurs. At one booth, a microarrayer whirred away, creating a "biochip" for use in diagnosing diseases. At another, health food bars replete with "magical seaweed extract VNP001" were stacked in a pyramid. Nearby, a woman handed out photocopied articles from an academic journal that supported the legitimacy of her company's male hormone stimulator. Further down the aisle, a stack of colorful leaflets proclaimed that an "aura-improving" drink was "The Word's [sic] #1 Business Opportunity."

It was all a bit overwhelming and confusing. But then so is biotech in general. Even if one can grasp what is meant by the term (see sidebar), understanding the biotech industry seems to require being part biologist, electronic engineer, entrepreneur, financial analyst, venture capitalist, and government bureaucrat.

What is clear, however, is the industry's potential for society. Whether it is at the macro level, in the development of cheaper medicines or food sources that benefit continents, or at the micro level, by helping to create a more vigorous, perhaps even more intelligent you, biotech could outstrip even IT in changing the way the world works. After all, if forced to choose, what would a consumer prefer: the newest wireless PDA, or a life-saving blood pressure medicine?

Biotech also holds interest for more than simply the altruistic-minded, as it is an industry that has demonstrated a potential to make people rich. Just consider the US, where the period between 1993 and 2001 saw biotech revenues leap from US$8.1 billion to US$25 billion, according to the Biotechnology Industry Association. And there is little reason to think that this trend will slow any time soon.

Little wonder, then, that biotech has lately attracted so much attention in Taiwan. With the early drivers of Taiwan's "second economic miracle" in the IT industry rapidly relocating to low-cost China, the search for a high value-added replacement has been intense. Given the numbers, biotech is a very attractive choice.

Admittedly, Taiwan is no giant in the field just yet: according to Industrial Development Bureau figures, "emerging biotech industry" exports measured just NT$14 billion (US$400 million) in 2000. The projections for 2006 are 4.5 times higher at NT$64 billion (US$1.83 billion), but this too is miniscule compared to IT exports of NT$1.869 trillion (US$53.4 billion) during 2000. Even adding together biotech with medical device and pharmaceutical export projections for 2006 brings the total to NT$141.3 billion (US$4.04 billion), far behind IT.

But people should not dismiss Taiwan's biotech potential based on the current situation, as it is clear that the real rewards will appear only in a decade or a two. As Chang Tse-Wen, president of the Development Center for Biotechnology, points out: "The U.S. has done biotech for 20 years [without profit]. The value is the potential for revenue, not the revenue per se."

Understanding Taiwan's potential at the present time is a bit like putting together a jigsaw puzzle. Many key pieces are already on the board. Taiwanese companies, research institutes and government agencies, for example, have a proven track record of partnering successfully with foreign firms, an essential prerequisite in an industry as global as biotech. Then there is the adequate supply in Taiwan of skilled scientific workers, increasingly strong government backing, mounds of private investment capital, and geographic and cultural proximity to the massive China market. Finally, there is that most intangible of factors: a legendary entrepreneurial - some might say gambling - spirit among Taiwan's citizens.

For the puzzle to take shape, however, all these pieces need to fit together. Which is never as easy as it looks on the box.

Trading In Last Year's Model

Anyone who thinks that Taiwan's best bet in biotech is to follow the same model that gave it a world-class IT industry should think again. It's an alluring idea once favored by many industry strategists: Instead of making notebooks on an OEM contract for Compaq, for example, a Taiwanese biotech company could do outsourcing for foreign drug companies.

It's a model, though, that falls short of Taiwan's present needs. For a start, Taiwan no longer has such cheap land and labor, and its domestic market is small. Even when it comes to manufacturing medical devices, China or Southeast Asia will soon enough eclipse Taiwan's competitive advantage in low production costs. Taiwan's lengthy product validation process, meanwhile, makes OEM production unfeasible for industries like pharmaceuticals.

In any case, the OEM model runs counter to the kind of high value-added, knowledge-based industries Taiwan is seeking to develop. As the DCB's Chang puts it, "With OEM, at most [Taiwan] can have some jobs... but they can never have an intellectual base."

Instead, people like Chang and others at research institutes, investment firms, and government offices insist that Taiwan must shift away from its traditional focus on manufacturing, which represents very little of a biotech product's value. "R&D is where the money is," he says.

Research and development may be where the money is, but getting there involves something for which Taiwan is not famed: control and protection of intellectual property rights. Yet if necessity is the mother of invention, then it's clear that the need to develop strong IP rights has probably never before been as widely appreciated as it is now in Taiwan. Chang points to his institution's 13-year struggle after its 1985 founding, when attempts to link academia and business were undermined by a lack of incentives to conduct biotech research that could yield commercial results. This is changing, he says, as professors are freer to pursue business ideas, while universities and research institutes are piling up patents. IP is it, says Chang, and it is here to stay.

Skeptics of Taiwan's R&D potential should also consider Chang's point that gaining control of intellectual property need not necessarily involve creating it. There is a fast track to R&D and, surprise, surprise, it runs along the backbone of Taiwan's economy: small and medium-sized enterprises (SMEs).

"Taiwan's biotech future will not depend on big pharmaceuticals," says Chang, but on small firms in specialized parts of the global industry: "Chinese are very good at finding niches."

A crucial advantage of SMEs is their bargaining power with foreign - primarily U.S. - counterparts of similar size. Most large companies have Asian offices set up and are bound to protect their territory, but small US firms are far less likely to be concerned about Asian distribution and marketing rights for their products. They are interested in "getting off the ground", says Chang, and Taiwan firms have the capital and technological support to make it happen. In return, the Taiwan firms get Asian keys to the cashbox - the intellectual property rights.

Financiers agree with Chang's assessment. Howard Lee, vice president of China Development Industrial Bank's (CDIB) Technology Department, says Taiwanese firms need to find overseas partners of their own size. "They need Asian partners, they need money, they need a global image," he says. Such links are especially crucial, says Chang, since the United States is home to most of the important inventions in biotech.

Naturally, bigger corporations still have a role to play in Taiwan's biotech industry. Chang says that as the IT industry matures, its leaders will be looking for new opportunities with greater potential. "They have to diversify into biotech in order to grow," he says. Taiwan's IT industry captains will also bring to biotech other strengths, such as technological know-how and marketing skills.

Even state-owned firms are expected to get in on the act: one goal of the Executive Yuan's "Action Plan for the Biotechnology Industry" is to encourage state-run giants such as Taiwan Sugar and Chinese Petroleum to invest in biotech.

And don't forget the foreigners. Philippe Auvaro, managing director of Aventis Pharma, makes the case for big foreign companies' involvement in Taiwan's biotech development, saying Aventis has links to many American and European companies, including start-ups, and hopes that Taiwan will expand its horizons. "I dream of signing a contract with a bright scientist of a Taiwanese university," he says.

So far, Taiwan's biotech horizons are expanding, though perhaps not always with the intended consequences, as most venture capital money is going abroad. According to IPO.COM, CDIB was the fifth biggest institution investing in biotech globally last year, with nine deals totaling US$26.2 million. Lee says that going back four years, CDIB has made 68 biotech deals worth US$180 million, but three-fourths of this was committed to companies abroad.

This might not be as bad as it sounds. Such deals can still benefit Taiwan through technology transfers. But at the end of the day, the money is going where the better value is perceived to reside.

So where does this leave smaller, R&D-focused companies based in Taiwan? Unfortunately, it would seem, caught up in a vicious cycle. According to Elizabeth Green Sah, managing director of Primasia Bio-Ventures Limited, a lack of financial support has forced many small companies to neglect their long-term research for short-term projects that bring in quick, survival cash. This is where Taiwan's challenges really start to loom larger.

Evaluating Biotech Thingamajigs

It's not surprising that average citizens don't know much about biotech, but when the same is said of investors in the field, it's a bit more worrying. And right now, there is an obvious shortage of people who know where capital would be best used in Taiwan's biotech industry.

Consider this: CDIB's Lee says only eight of Taiwan's 200 venture capital firms are involved in biotech. Hsieh Dar-jen, president of Acrobio Investment Consulting, says his is the only Taiwan firm specializing in the field.

Eddy Hsieh, president of DigitalGene Biosciences, has felt the effects firsthand. Venture capitalists with a scientific background are almost always schooled in biology, he says, whereas electronic engineering and optical electronics also play big roles in biotech. The inability of the VCs to properly evaluate the technology on offer means they look for "star" companies that look good on the surface, he says: "If you are a ÔTom Cruise' you can make it to superstardom; if not, you can't get venture capital." Moreover, the company's management and marketing skills are often overlooked: "They just look at how many researchers are from Harvard or Cambridge, at how many Ph.Ds you have."

The result? Small companies are forced to rely on guanxi (connections) for support. "People like [Eddy] Hsieh use their own personal experience. People back him not because they know the technology, but because they know the person," says Acrobio's Hsieh Dar-jen.

For its part, the government is making available NT$100 billion for venture capital funds that invest in knowledge-based industries such as biotech. But, says Eddy Hsieh, this means the government still fully trusts that VC funds are in fact capable of evaluating suitable projects.

To be fair, the lack of biotech expertise is not a Taiwan-specific problem. Terry Cooke, American Institute in Taiwan's commercial section chief, uses the car industry for perspective on the global situation. "With cars, you have half a dozen companies and thousands of analysts," he says. "It's the reverse in biotech: thousands of companies and few analysts."

Given the increasingly lucrative nature of biotech, it seems sensible to assume that more experts will eventually appear among the VC ranks. The DCB's Chang says some of his staff members were recently recruited as financial analysts. The government, meanwhile, is not going to hand over money to just anyone, says Kuo Jin-der, a division director with the MOEA's Industrial Development Bureau.

People Power

Greater than the concern over a dearth of biotech analysts in Taiwan is the fear that there are not enough good scientists to be found. Yet this is a global problem, and Taiwan seems to be better off than many.

Liu Chien-An, a scientist at the Asian Vegetable Research and Development Center (AVRDC), is unperturbed. "There are plenty of devoted, high-quality scientists as well as advanced equipment and facilities [here]," he says. The DCB's Chang, meanwhile, highlights Taiwan's wealth of mid-level technicians. "They are not good enough to lead and formulate products," he says, "but they can implement."

The country also has its fair share of world-class U.S.-trained Taiwanese returnees, including Nobel laureate and Academia Sinica head Lee Yuen-Tseh, and Sunney Chan, his deputy. But Chan is the first to stress that Taiwan's biotech future must be secured by channeling more resources into training for young scientists. He frankly describes the current crop as "not well trained or motivated."

Again, though, even with many well-educated, bright young scientists and piles of cash, biotech is not going to happen without commercial leaders. And according to people like CDIB's Lee, the real human resource problem facing Taiwan lies in management. "Companies say there is not a problem finding scientists, but they need CEOs, businesspeople," he says.

If only it were a task of finding the right people. As happened in IT, the right links must also be established between academic organizations, government offices, and private companies. Academia has been especially anemic in this regard. "Efforts are not very focused and very few of the research results have been developed into real products," says the AVRDC's Liu. Chang agrees, pointing to the DCB's early years: "Companies were waiting for all this research to come from Academia Sinica, and it never came."

This said, change is underway. Getting professors involved in companies as managers, researchers, and investors, and encouraging schools and research institutes to spin off businesses is important, as such measures will naturally lead to greater cooperation among the industry's key players. Citing the success of school technology transfer offices, Kuo says, "The main vision is to sell the technology to industry, so professors need to talk to industry." More such initiatives are needed like that between the Industrial Technology Research Institute (ITRI) and NTU Hospital in biomedical technology R&D, or Taipei City's efforts to help universities establish biotech incubators.

As these links are strengthened, what is also needed is to balance the drive for improved coordination with the need for regulation.

Regulating Biotech to Death

The frustration companies feel when dealing with Taiwan's bureaucracy can be overwhelming. "It is absolutely entrenched," says Elizabeth Green Sah. "It is the only thing keeping Taiwan from being a world-class biotech center."

Sah is not alone in holding this view. Executives from multinational companies in medical devices and pharmaceuticals, two industries expected to drive biotech, have long-standing gripes with Taiwan's regulators. Just two of their pet peeves: requirements that they provide information on drugs asked for nowhere else in the world, and a drug reimbursement fee system that they claim takes away incentives for innovation.

Smaller fry also feel the pain. DigitalGene's Hsieh wanted to locate his small company in the Neihu technology park, but regulations stating how it should be categorized were too vague and carried too many restrictions. "The government has always talked more than it has done [to help us]," he says.

This kind of criticism hurts officials, especially after a flurry of announcements over the past year, topped by the central government's decision to commit NT$52.4 billion toward developing the biotech industry. About NT$40 billion will go to R&D and the rest to construction projects.

President Chen Shui-bian, for one, recognizes that Taiwan's biotech clock is ticking, judging by his remarks last month: "If we don't do this today, we will regret it tomorrow." He has been a high-profile publicist for biotech, helping to launch the Taiwan Biotechnology Promotion Association and handing out prizes at the 2001 National Biotechnology and Medical Care awards. It's a good fit, as biotech is the kind of low-pollution, high-value industry that promotes the government's ambitions for a "Green Silicon Island."

Local governments are not about to be outdone, especially Taipei City, which has a Biotech Development Commission closely monitored by Mayor Ma Ying-jeou. Wu Hueih-Meei, executive director of the city's Committee on Economic Development, says biotech is the city's "first choice" for future industrial development.

Still, not everyone is convinced. Talk persists among industry players of a "disconnect" between government aspirations and actions. Eddy Hsieh says the government only understands biotech as an abstract concept. "They want to promote biotech, but have no solid idea of where they should go," he says.

Not anymore, counters Ho Mei-Yueh, vice chairperson of the Council for Economic Planning and Development. "You can't imagine the change from August until now," she says, citing "hundreds of laws and regulations" that have been passed, including those promoting biotech's development.

She has a point, because at the practical level, government support goes far beyond R&D funding. It is seen in efforts to establish biotech parks, provide financial aid for venture capital companies, entice overseas Chinese scientists to return to Taiwan, ease requirements for biotech firms to list on the Taiwan Stock Exchange, and grant permission for universities and allow more professors to get into the biotech businesses. There are also basic tax incentives for companies, from deductions on equipment and training to exemptions on royalty payments.

Then there is the "one-stop-service" window for foreign investors. Ho says the Biotechnology and Pharmaceutical Industries Program Office, under the Ministry of Economic Affairs, will "do everything." But no one should be expecting Singapore-style service just yet. Despite the "one-stop" label, applicants must still deal with a dozen or more agencies in setting up an operation in Taiwan. They can take their specific complaints, however, to the office. "It is designed to coordinate, but not to do the applications," says the IDB's Kuo.

Forgive old Taiwan hands for seeing this as the application of yet another layer of bureaucracy. Says Elizabeth Green Sah: "The sounds from the [government] are the right kinds of sounds... but they have dealt with bureaucracy their whole life through. They don't see how it's inefficient to need 28 chops on a document."

Even so, it does seem that a fire has been lit under the powers that be. Acrobio's Hsieh praises recent official efforts, adding, "If 9-11 or the economic slowdown had not happened this year [2001], it could have been very fruitful for biotech." Aventis head Auvaro agrees, calling the government's commitment "the best illustration of the effort for this society to move toward a new industrial age."

Indeed, there are some very bright spots to look at. In January, SG Securities ranked Taiwan tops in biotech in Asia, ahead of Singapore, China-Hong Kong, South Korea, and India (in that order). This was no one-hit wonder, as Taiwan has been ranked in other surveys ahead of Singapore for its potential, with its technical experts and proximity to the China market, both culturally and geographically, being cited. And in contrast to Singapore and China, where public money drives biotech development, private capital is a major force in Taiwan, which should make it more dynamic over the longer run.

Of course, there is a long way to go. At present, only four biotech companies are listed on the TSE, and Taiwan has no large
pharmaceutical companies of its own to work with small R&D firms. But amid all the apparent chaos at BioTaipei, a glimmer of future prosperity was evident. Taiwan is on the right track. Ultimately, a thriving biotech future seems to be more for it to lose than to win.