September 1, 2009 (Vol. 29, No. 15)
Experience and Infrastructure Also Seen as Key Drivers in Region’s Ascent
The conversation about outsourcing to Asia has changed from cost reduction to opportunity. The recent BIOCOM “CalAsia Conference” in San Diego focused on strategies biotech companies can use to leverage the strengths of Asian biotech opportunities. Presenters agreed that Asia is becoming increasingly innovative as it gains experience and an infrastructure to support the biotech industry. Consequently, the work performed in Asia is moving up the value chain.
Steven Burrill, CEO of Burrill & Company, suggested that Asian nation’s strengths in information technology—specifically silicon chips and semiconductors—will catapult them to the fore of healthcare innovation. “In the Asia-Pacific region, they’re building tomorrow’s healthcare system today,” Burrill said. He characterized the future of biotech as “Silicon Valley meets physics,” leading to greater opportunities.
Joe Panetta, president and CEO of BIOCOM, recommended taking advantage of Asia’s strengths to conduct innovative research and development in that region. Although China, India, and Singapore are the trendiest Asian destinations, they’re hardly the only players. “Japan and Australia have mature pharmaceutical industries and markets; and Korea, Taiwan, Malaysia, and Thailand are seeing momentum. Indonesia and the Philippines are good as cost-reduction strategies,” but need to adapt global standards, according to Peter J. Claude, advisory partner, PriceWaterhouseCoopers.
Peter Beattie, former premier of Queensland, Australia, referenced a recent McKinsey Report that listed Korea as a hot spot for stem cell work “ahead of, or on par with, the rest of the world.” Korean representatives, in a separate session, cited the beginnings of ventures between local and international firms.
Asia is not homogeneous and, Claude stressed, “the choice of location is crucial.” For example, Cambodia is low-cost, but is very risky. Taiwan has a strong IT and medical-device culture, and the government is now offering incentives to biotech, in a bid to become a hub for CRO action, Claus said. India holds the promise of a vast future market, but that market currently is smaller than that of Japan, Korea, or China. “India and China will spearhead the growth in the Asian pharmaceutical and biotech markets,” he added, “and Singapore will maintain its position as a center for research and innovation.”
To compare multiple locations, he suggested a formula that balances costs (including compensation, infrastructure, taxes, and regulatory considerations) against the risks (geopolitical, human capital, legal, economic, and infrastructure) and market opportunities (healthcare needs, pharmaceutical market size, and the market growth rate).
“There’s no one-size-fits-all strategy. Different companies—and even different activity centers in the same company— may have different results in going to Asia,” Claude continued. Choose locations based upon your own company’s strategy, and the strengths and weaknesses of its own programs and those of potential locations.
Deals with Asian partners offer several strategic benefits. Most obviously, they open vast potential markets. Beyond that, they also offer specific expertise, a market for mature Western therapies and, even in today’s constrained economy, sources of financing.
“The IPO window is absolutely closed,” stated Lisa Walters-Hoffert, managing director, Roth Capital Partners. That limits both the number and size of deals as venture firms work to ensure they can honor existing commitments. Zhu Shen, Ph.D., founder and CEO of BioForesight, suggested that the IPO window may open in China late this year or in early 2010 for companies listing on local stock exchanges.
“In China and India, CROs are looking for alliances and acquisitions to expand,” Dr. Shen commented. “They’re not alone.” To fill the void left by the dearth of IPOs, “we’re seeing a wave of companies looking for strategic deals,” added Vivian Lee, partner at Aqua Partners. “Companies are looking at ways to move up the food chain from their traditional businesses,” and that often means collaborations, mergers, and acquisitions. Importantly, that interest is flowing both ways across the Pacific. WuXi, for example, acquired the U.S. based Apptech Laboratory Services last year.
Currently, Chinese CROs and firms focused on plasma, biologics, preclinical services, and clinical trials services will see opportunities to consolidate and participate in some cross-Pacific acquisitions. “The blood-supply industry is growing tremendously and is exporting products outside of China,” Nancy Chang, chairman and senior managing director, Asia, Orbimed Healthcare Fund Management, explained. In a move to ensure quality, “the government is forcing consolidation in the plasma industry,” by mandating that blood collection centers be closely affiliated with major plasma companies.
Japan is also seeing some acquisition activity. “The Japanese acquiring company allows a fair amount of independence,” according to George Montgomery, managing director at Montgomery, Marshall Healthcare Partners. “That’s indicative of a trend in M&A for more balanced risk sharing.” Typically, the acquiring firm provides a sufficient up-front payment to wrest control from the venture capital companies and then makes milestone payments.
Citing last year’s acquisition of Ranbaxy Laboratories by Daiichi Sankyo, Montgomery said that Japan is looking to India, China, and Europe, hedging bets regarding healthcare reform in the U.S. with potentially huge Asian markets. “They’re taking the long view. To be a global player, you have to serve India and China,” Montgomery reiterated.
Korea, historically, has served its domestic market and now wants to expand, according to Sang Chul Kim, general director of the Korean Trade Investment Promotion Agency. The country plans to boost government R&D investment in biotech from $836 million in 2006 to $3.3 billion in 2016, and to grow the market from $1.4 billion to $25 billion in that same time frame. It also plans to nearly double the number of graduates from master’s and doctoral programs to 17,300 and attain seventh place rankings for its quantity of scientific publications and patent filings by 2016.
“In 2009, for the first time, government spending on biotech was larger than IT spending,” Kim said. The government of Korea also has established a new, $100 million fund for biotech investment. “Ten to twenty percent of the seed money is from the government, and the rest is raised from the private sector,” Kim added. “International venture capital firms will manage the fund.”
In addition to trans-Pacific investment by individual companies, some foreign capital funds are seeking to develop international strategies by investing in North American and European companies. Takeda Research Investment, the corporate venture arm of Takeda Pharmaceutical, for example, initially wanted to expand its footprint into the U.S. and Asia, and now is expanding into other regions also.
According to Juan Harrison, vp, Takeda specializes in early investments. “We don’t put in much money,” he admitted, “but build collaborations among investment groups to provide undiluted funds.” As other venture-capital firms favor late-stage investment, “it’s more and more difficult to put these syndicates together.”
To attract foreign capital, the rule of thumb is to partner with a local company or to locate significant activities locally. That’s especially true in India. Anula Jayasuriya, managing director, Evolvence India Life Science Fund, said she raised a small $100 million fund in Europe and the Middle East to invest in India. “We will look at cross-border deals that have a significant presence in India,” she added.
Other funds with a similar approach, she pointed out, include Venture East for India, and for China, Fidelity Ventures and Orbimed Healthcare Fund Management. Hong Kong based Morningside Ventures is another. Rachel Gong, healthcare investment, said that she has invested Hong Kong capital in the U.S. and China for more than a decade.
When partnering abroad, it’s vital that the partnership is perceived as having strategic business importance, stressed Anand Govindaluri, CEO of Go-Vin Holdings. Forming an alliance in the hope of attracting capital is bad business strategy. Therefore, “don’t custom make a plan just become a company has money. It must make smart business sense in order to work in Asia.”
Cytori Therapeutics, for example, considered the Japanese market strategic. “For a deal to be accepted, the technology has to be relevant to the potential partner’s market,” Mark Saad, CFO, emphasized. “It’s a long time from ‘hello’ to signing a deal.” By patiently courting several Japanese firms, Cytori found a good match with Olympus that fit the strategic goals of both companies. The arrangement infused about $50 million into Cytori.
“This wasn’t a one-off deal, but a strategic decision,” Saad explains. “We found the scale we needed for a joint venture with Olympus for a product aimed at global scale. We encouraged them to go out of their usual risk profile. We were very early stage,” he said.
“It’s not easy to do business in a country like India. To begin with, it’s a 20-hour flight,” Govindaluri pointed out. Therefore, he advised having a business plan for the next five to ten years, with a structure to raise funds in Asia, match the legal structure to the environment, have your attorney with you, and consider how the new shareholders (or board members) will interact with the current set. Also, have an exit strategy that considers the positions of both sets of constituents.
Key Players and Strengths
- CROs in China and India are actively looking to expand globally.
- India holds the promise of a vast future market but needs to be built up.
- Japan has a mature pharmaceutical industry and market.
- Korea is considered, by some pundits, as a hot spot for stem cell work.
- Singapore has a strong position as a center for research and innovation.
- Taiwan and India both have a strong IT and medical-device culture.