January 1, 2009 (Vol. 29, No. 1)
Robert Yuan, Ph.D.
With Gov’t Funding, R&D Clusters, and VC Growth, There Is a Chance for a Viable Presence
In a series of recent articles, the restructuring of the global pharmaceutical and biotechnology industry was examined; more specifically, the effect of multinational corporations and Western research institutions, which have invested heavily in major facilities and established key ventures in the major Asian countries, was reviewed.
Singapore, for example, has focused on multinational companies and alliances with major research universities (see GEN, April 15, 2005), while Taiwan has promoted technological innovation by its small and medium enterprises with the support of government-financed research organizations (see GEN, April 1, 2006) and acquisition of foreign technology. China is a major destination for multinationals that have combined manufacturing facilities and R&D laboratories in an effort to gain a market niche in the expanding Chinese economy (see GEN, April 15, 2007).
South Korea, which has become a significant force in steel production, consumer electronics, and computer chips, is now engaged in a serious effort to be a major competitor in the biotechnology industry.
In the late 1980s, the Korean government decided that biotechnology was one of the key industrial technologies for the future. In 1994, it established a plan—Biotech 2000—a major initiative to promote R&D, build up the scientific infrastructure, and promote commercial applications.
The initiative lasted from 1994–2001 with a budget that increased from $110 million in 1998 to $189 million in 2001. Major partners in this effort were the large industrial conglomerates (known as chaebols) who saw this as an opportunity to diversify into the biomedical and agro/food sectors.
A series of events, however, affected the implementation of Biotech 2000. First, the chaebols became disenchanted with the lack of profits from biotechnology, while a new administration withdrew its support from the chaebols when the technology bubble burst in 2001–2002. Finally, the excitement of revolutionary new therapies based on stem cells waned when it was reported that the cloning of embryonic stem cells by Professor Hwang Woo-Suk of Seoul National University was fraudulent.
Then, in 2006, the government launched Bio-Vision 2016. The plan’s objectives were to establish a biotechnology-based economy in ten years, putting Korea in seventh place in biotechnology worldwide, from its current position of 14. This would increase its share of that market from $2.9 billion in 2005 to $65 billion in 2016.
The Bio-Vision initiative has four components. A restructuring of government biotechnology programs; a strengthening of the scientific infrastructure with an emphasis on bioinformatics, nanobiotechnology, and synthetic biology; and globalization of the biotechnology industry including start-up companies, the recruitment of multinationals, and the creation of bioclusters are key aspects of the initiative. In addition, there is a strengthening of the regulatory and legal systems along with increased public information efforts.
Additionally, the program has two novel features. One, is an emphasis on interdisciplinary research and its industrial applications as indicated by the term bioconvergence (the integration of biology, bioinformatics, and nanotechnology). The second, is an effort to bring together research, company creation, and regional economic development through bioclusters. Several government ministries are charged with this effort, including the Ministry of Knowledge and Economy, and the Ministry of Education, Science, and Technology.
The Bio-Vision initiative started out with a budget of $720 million for R&D and $230 million for infrastructure in 2007, with a projected rise to $1.67 billion for R&D and $690 million for infrastructure by 2016. The total budget for nine years is projected at $15.56 billion.
Building Research Capacity
The two largest segments of the Korean biotechnology industry are pharmaceuticals and food. The pharmaceutical industry is mainly involved in the manufacturing of generics, and the R&D budgets of the major companies at 5–6% of sales are significantly lower than that of 15–20% for the multinationals. It is, therefore, a high priority for the Korean government to support the basic research necessary for novel drug development.
Another element of the government’s strategy is the creation of research institutes. The Korea Advanced Institute of Science and Technology (KAIST) was a graduate institution modeled after U.S. research universities such as MIT. While its primary objective is graduate training, this is linked to basic research in areas such as the biological sciences.
The Genetic Engineering Center was established in 1985 and was later restructured and renamed the Korea Research Institute of Biosciences and Biotechnology (KRIBB).
The Center fulfills multiple functions that include basic research, infrastructure building, policy formulation, and coordination of international collaboration. With a staff of 295 and an annual budget of $87.5 million, its research divisions are directed toward leading-edge areas such as stem cells, nanotechnology, biointegration research, molecular therapeutics, and biomaterials science.
KRIBB runs major national facilities in informatics and primate investigations. It provides a venue for important international initiatives, such as a joint venture with the Fred Hutchison Cancer Research Center, and information and material exchange in natural resources and diversity with countries such as China, India, and Thailand. KRIBB is also a participant in the biocluster program.
BioMax is part of Seoul National University (SNU) and was established to promote interdisciplinary research in leading areas. It partnered with KAIST in the establishment of the Bioinformation Research Complex at the Incheon Free Economic Zone. This complex, to be ready by 2012, will lead projects for the convergence of biotechnology and information technology. BioMax also has a Bio-CEO program to train leaders for the biotechnology industry.
The POSTECH Biotechnology Center is part of the Pohang University of Science and Technology (POST). POST is an unusual technology university that was created by Pohang Iron and Steel. Established in 2000, POSTECH focuses on research in molecular medicine, plant biotechnology, and nanobiotechnology. The center has a staff of 450 including 30 professors, its reportedly generous compensation packages are said to attract some of the best researchers and students.
Mogam Biotechnology Institute was set up in 1984 by Green Cross as a nonprofit research institute. Its basic research areas include the study of angiogenic inhibitors, the use of immunotherapy against hepatitis C, T-cell targeted anti-rheumatic drugs, and diagnostics for infectious diseases. It collaborates with SNU and POSTECH and also functions as a WHO collaborating center.
The International Vaccine Institute (IVI) was established by the UN Development Program. Its principal missions are to carry out translation research in vaccines, improve and promote the manufacture of new or needed vaccines for the developing world, and provide training in vaccine development and clinical trials. Though funded from various sources such as the Gates Foundation, the Korean government donated its physical facilities and provides about 20% of its operating budget (about $4.53 million in 2007). It was expected that IVI’s presence in Seoul would have an energizing effect on the Korean pharmaceutical and biotechnology industries in the area of vaccine products and applications. To date, this impact appears to be limited.
Though the government has concentrated its monies on research institutes, it has also moved to expand such activities in its academic sector. Thirty university research institutes and 40 biotechnology related departments have been created in Korean universities.
Conglomerates to Start-Ups
The modernization of Korean industry had been grounded on a partnership between the government and the chaebols. This began to change with the reform government of Kim Dae Jung, which chose to stimulate small and medium enterprises.
An important new initiative is trying to bring together research institutions, companies, and regional economic development, beginning with the creation of Daedeok Science Town, which includes 80 government and private research institutes, and four universities (including KAIST and KRIBB).
Daedeok Science Town has now been expanded to four regional clusters: Seoul, Daejeon/Chungcheong, Jeonila/Jeju, and Kangwon/Gyoungsang, all of them coordinated through a Korea hub.
Each cluster emphasizes specific industrial sectors appropriate to the region, e.g., Daejeon/Chungcheong focuses on biomedicine, oriental medicines, and livestock.
The most ambitious project, so far, is the Osong Bio-Health Science Technolopolis. Essentially a new city with a population of 100,000, it will house the Korean FDA, NIH, CDC, a number of other government institutes and private companies.
Another major component of government policy is the promotion of venture capital. This type of investment was directed toward R&D and technological innovation as well as for new business models.
The government is the major source of funds for venture capital (about 31% of the total). The boom years at the end of the 1990s were marked by rapid VC growth, reaching a total of 147 in 2000, although it is estimated that there are only 30–40 active today. The total investment in 2004 was estimated at $2.24 billion with about 2.3% in biotechnology.
The combination of venture capital and the promotion of bioclusters has altered the demographics of the Korean biotech industry. The companies fall into three general categories: conglomerates (diversified groups), ~30; mid-size companies (pharmaceuticals, food), ~70, and; small new companies (R&D driven, often VC financed), more than 500. Many of the latter are associated with university laboratories.
The business environment for the industry is highly volatile, characterized by the tension between established business sectors (e.g., generic drugs, diagnostics, and fermented foods) and the introduction of new drugs and therapeutic approaches (e.g., personalized medicine and nanotechnology applications).
Two factors will put additional pressure on the industry in the coming years. The first revolves around the signing of a U.S.-Korea Fair Trade Treaty, which would phase out tariffs on pharmaceuticals and tighten up IP regulations. This would push a move from generics to prescription drugs.
The second will lead to changes in Korean venture capital. At present, the major exit strategy from VC investments is through an IPO. Aside from the high risks involved in starting a new biotechnology company, the average time for a start-up to go to an IPO is a long nine years. The Korean Venture Capital Association has expressed the need for partnerships among Korean biotechnology companies and between them and foreign firms. Such alliances, particularly with chaebols and multinational corporations, would open up new sources of financing (private equity financing) and exit routes, plus access to new technologies.
Finally, South Korea has made a concerted effort to increase its training of biotechnology specialists, and it estimates that its pool of such individuals is about 13,000. The majority of them (52%) are at universities, with another 13% at research institutes and 35% in industry.
A senior scientist has pointed out that the statistics do not fully address the real issue, which is the shortage of individuals able to act as principal investigators in either academic or industrial environments at a global standard.
A future article will examine how different kinds of Korean companies struggle with the competitive biotech environment worldwide, and the opportunities that this might provide for U.S. companies.
Robert Yuan, Ph.D. ([email protected]), is professor emeritus of cell biology and molecular genetics at the University of Maryland in College Park.