Boosting Taiwan’s Biopharma Sector

This is Part 1 of the cover story on Pharmaceuticals: Links to Part 2Part 3

Several Taiwan biopharma companies have developed promising new drugs, and the new government taking office this month is expected to place even more emphasis on this sector. For the industry to become a major driver of economic growth, however, Taiwan will likely need to create a more favorable environment to encourage investment, including regulatory changes and better pricing for innovative drugs.

Taiwan is at an economic crossroads. In 2015, years of inertia finally caught up with the once ascendant Asian technology hub as export orders collapsed, dragging GDP growth down to just 0.75%. Policymakers were quick to blame the moribund performance on China’s economic slowdown – it is Taiwan’s largest export market – and falling oil prices.

Yet Taiwan’s neighbors, which all of which count China as a major trading partner, fared better. South Korea’s economy expanded at a 2.6% clip, while Singapore’s grew at 2.1%, beating analyst forecasts. Even Hong Kong, whose fortunes are the most tethered to China of any economy, managed a growth rate of 2.4%.

The difference between those three former “Asian tigers” (the first East Asian societies after Japan to grow rich) and Taiwan (the fourth “tiger”) is that the island has stalled on its way up the value chain. South Korea has built global technology brands; Singapore and Hong Kong are global financial centers. By contrast, Taiwan remains reliant on price-sensitive contract electronics manufacturing even as the global consumer electronics market is stagnating. Worse yet, China is set to eclipse Taiwan in most of the electronics market segments where it has been a leader.

Fortunately, Taiwan looks ready to chart a new economic course under President-elect Tsai Ing-wen, who has named biotech as one of five industries her administration will focus on developing as future growth engines. Taiwan, Tsai says, should become a biotech research hub in the Asia-Pacific region. Investors, expecting Tsai will increase incentives for the local biotech sector, cheered her victory in the January presidential election, pushing biotech shares to their highest levels in three years.

“I think that the new president is committed to supporting the biopharma industry,” says Grace Yeh, chief executive officer of PharmaEngine, a Taipei-based drug manufacturer.

Market insiders say Tsai has a deeper understanding of the biotech industry than her predecessors. She is the co-founder and former chairwoman of HIV drug developer TaiMed Biologics Inc., a company that has raised more than US$200 million in funding on the strength of its drug pipeline. TaiMed’s HIV drug ibalizumab is on the Breakthrough Therapy Designation and Fast Track list of the U.S. Food and Drug Administration (FDA), qualifying it for expedited approval.

In addition, Tsai has named Chen Chien-jen, an eminent epidemiologist and former health minister, as her vice president. Chen was hailed as a hero in Taiwan for his efforts in containing the 2003 outbreak of severe acute respiratory syndrome (SARS).

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As the Tsai administration prepares to take office, key biopharma infrastructure is already in place. That includes strong clinical research capabilities, an abundance of talented scientists, and cost-competitive R&D and manufacturing. “As a country of origin for clinical studies, Taiwan is always a reference,” says Carol Cheng, chief operating officer of the Taiwan Research-based Biopharmaceutical Manufacturers Association (TRPMA), noting that the number of clinical trials conducted in Taiwan has risen steadily over the past decade.

For pharmaceutical giant Merck Sharp & Dohme (MSD), “Taiwan is a prime location for clinical studies – it’s fast, high quality and thorough,” says Joseph Romanelli, MSD’s Taiwan managing director and zone leader of Taiwan and Hong Kong. “Taiwan has good scientists and physicians who have developed local capabilities and brought back best practices from their time abroad.”

Taiwan’s own biopharma companies have grown steadily in recent years, performing consistently well in the local equities market. A total of 94 biopharma companies are listed on the Taiwan Stock Exchange and the smaller, over-the-counter Taipei Exchange. Market capitalization in the sector soared from about US$6 billion in 2009 to US$22 billion in late 2015. “When the tech sector started to stall after the global financial crisis, hot money was redirected to biotech,” says David Silver, president of the life-sciences consultancy BiotechEast. “Retail investors saw biotech as new and exciting.”

Silver notes that local regulations permit companies to list before they are profitable – in contrast to the Hong Kong and Singapore exchanges. Being able to go public before registering profits has encouraged nascent companies to list early for access to easy financing, he says, which has given Taiwan a reputation “as a particularly favorable location for biotech IPOs.”

Success overseas

Because of the small domestic market, Taiwanese biopharma companies often ally with contract research organizations and pharma multinationals to develop high-end drugs and expand overseas. Expansion typically occurs through distribution partnerships and strategic relationships.

Taiwan biologics companies have tended to focus heavily on cancer therapeutics. In October 2015, Taipei-based PharmaEngine and its licensing partner, U.S.-based Merrimack Pharmaceuticals, introduced a pancreatic cancer drug called Onivyde to the U.S. market. It is the first cancer drug to begin its clinical development in Taiwan and receive regulatory approval from the U.S. FDA.

Onivyde is a proprietary irinotecan liposome injection used together with the chemotherapy drugs fluorouracil and leucovorin. It is used to treat patients whose cancer has spread beyond the pancreas and who have completed first-line therapy with the chemotherapy drug gemcitabine.

In the battle against pancreatic cancer, Onivyde is significant as the first drug to increase survival in patients who relapsed after being treated with gemcitabine, says Grace Yeh. “It gives patients hope,” she says, noting that one-fourth of the patients in the global Phase III clinical trial survived for more than a year. “If you can survive, there is the possibility you will be able to receive new therapies later on,” she notes, adding that “this is all the more relevant given pancreatic cancer may become the second leading cause of cancer-related death after 2020.”

Onivyde is competing with chemotherapy treatments from some of the world’s biggest pharma firms: Eli Lilly’s Gemzar, Roche’s Tarceva, and Celgene’s Abraxane. Patents for the three competing drugs expired in 2014.

Taishin Securities estimates that Onivyde could boost PharmaEngine earnings this year to NT$1.52 billion (US$47 million) or NT$14.93 per share, with sales likely to grow 25% to NT$2.11 billion from 2015.

Another of Taiwan’s niches is drug reformulation. TWi Pharmaceuticals, Inc. (TWi) focuses on the development and commercialization of “high-barrier generic” drugs for the U.S. market. In March 2015, TWi became the first Taiwanese pharmaceutical company to directly sell generic pharmaceutical products under its own label in the United States.

David Silver notes that local expertise also exists in treating infectious viral diseases. One of the major success stories in that area is TaiMed, which President-elect Tsai formerly chaired. TaiMed’s monoclonal antibody ibalizumab – an HIV entry inhibitor – is in Phase III trials in the United States and Taiwan, the last step before submitting the product for regulatory approval to the U.S. FDA.

The U.S. FDA designated ibalizumab a “breakthrough therapy” based on preliminary clinical evidence indicating that it may represent a substantial improvement over existing therapies “on one or more clinically significant endpoints.” In a Phase IIb clinical trial conducted on 113 patients, the product “significantly reduced viral load in multi-drug resistant HIV-infected patients,” according to TaiMed.

The U.S. FDA has also granted ibalizumab “orphan drug” designation. The Orphan Drug Act allows the FDA, upon request of a sponsor, to grant special status to a drug or biological product to treat a rare disease or condition. Orphan designation qualifies the drug sponsor for incentives that include tax credits for qualified clinical testing.

In April, TaiMed signed a 12-year agreement with Montreal-based pharma firm Theratechnologies Inc. to market ibalizumab in the United States and Canada. Terms comprised a mix of cash, stock and 52% of the drug’s future net sales, notes BiotechEast’s Silver.

“It is a niche, breakthrough treatment for multi-drug resistant HIV patients,” said Luc Tanguay, president and chief executive officer of Theratechnologies, in a company statement. “These are the types of products we want to add to our portfolio as they hold the potential to generate additional revenues while keeping us focused on our core business.”

Cross-Strait opportunities

In addition to the United States, China is a major market of interest to Taiwanese biopharma firms. Given Taiwan’s  strength in clinical trials, more multinationals may choose to do the clinical research on the island if China recognizes the trial data in the future. That development could substantially boost clinical investment in Taiwan.

In September 2014, the Mainland Affairs Council (MAC) announced that Taipei and Beijing had reached a “consensus” on cooperation in clinical tests of drugs, mutual recognition of clinical data, and data use for reference in drug inspection and registration. To date, however, no concrete policy changes have followed that announcement. For now, mutual clinical trial data recognition remains elusive.

Under an ideal scenario for Taiwan, companies would conduct Phase I and Phase II trials in Taiwan, where IPR legal protection is stronger and the approval process expeditious – taking two to three months in Taiwan, compared to one to two years in China. Phase III trials would be held in both Taiwan and China, with the objective of simultaneous new-drug application if the results are favorable.

Some observers say Taiwan could serve as a springboard for new biologics that would be used to treat ethnic Chinese patients worldwide. “We have excellent human resources in clinical medicine and research to study diseases specific to ethnic Chinese,” said President-elect Tsai during an October 2015 speech at Democratic Progressive Party headquarters. With “a sufficient grasp of certain inherited genes specific to [East Asian people], their lifestyle habits and the geographic environments,” she said, Taiwan could “respond to local needs first before making the products available globally.”

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Vice President-elect Chen Chien-jen (center) at a recent AmCham Taipei event on opportunities for biotech in Taiwan.

In recent years, Beijing has begun highlighting the biotech industry in its five-year economic plans as many Chinese researchers who have worked in the West return home to build companies, notes Danny Chou, president of Compassion BioSolution, a Los Angeles-based biopharma consultancy. The Organization for Economic Co-operation and Development (OECD) forecasts that China could become the world’s overall top R&D spender by about 2019.

“China is serious about biotech even though it has a lot to do before its products can be approved and accepted by the global market,” says Chou. “There is opportunity for collaboration between the industry in China and Taiwan since they share one common goal – to become recognized as a source of innovative technology and high-quality products.”

Chou, who visits China regularly to hold workshops on biologic formulation development, says “China has many talented scientists who want to build the next Amgen [the world’s biggest independent biotech firm, based in California] with new drugs, while Taiwan has both experience and a reputation for high-quality manufacturing.”

The price is not right

As Taiwan’s own biopharma firms expand overseas, foreign drug makers say onerous regulations are hurting their businesses in the island’s domestic market. Since the introduction of Taiwan’s National Health Insurance system, pharmaceutical drugs have comprised roughly 25% of all medical costs in Taiwan, which is higher than the OECD average of 16%, according to a January 2015 PriceWaterhouseCooper (PWC) report on Taiwan’s pharmaceutical sector.

To control drug spending, the government conducts frequent price-volume surveys and price cuts. Patented drugs – largely imported from the United States, Europe, and Japan – account for about 70% of total prescription spending in Taiwan, but that share is projected to fall as patents expire and the government promotes the use of cheaper generic products.

Overuse of medical services exacerbates pricing pressures. According to the PWC report, Taiwanese on average visit a doctor 15.7 times a year, compared to the OECD average of 5.9, and usually seek treatment in hospitals. Given that most Taiwanese hospitals do not separate the prescribing and dispensing functions, it is relatively easy for doctors to over-prescribe drugs.

The pharmaceutical section of AmCham Taipei’s 2015 Taiwan White Paper noted that the average price of new drugs in Taiwan is just 51.8% that of the median for the benchmark A10 countries (a basket of 10 benchmarked developed markets). Every year or two in Taiwan, all drugs face a price adjustment. Under those conditions, it is imperative to obtain a reasonable price when applying for new-drug reimbursement. But from 2009 to mid-2015 (when the White Paper was published), just nine new drugs were granted “breakthrough” status, allowing them to be referenced with international prices. Other drugs were priced based on “low-priced comparators.”

The passage in 2013 of Article 46 of the second-generation National Health Insurance Act, which introduces immediate price cuts for products that go off patent, is particularly problematic, says Heather Lin, chief operating officer of the Taipei-based International Research-Based Pharmaceutical Manufacturers Association (IRPMA). Prior to that legislation, drug makers could still maintain a relatively long lifecycle for originator drugs even after their patents expired due to brand loyalty, allowing them to “hold a certain degree of market share,” Lin explains.

But since the legislation was enacted, the business environment for drug manufacturers has soured. “Drug prices here are already much lower than the global median,” says Lin. “No drug company wants to launch in a market if it will risk its product being benchmarked at a low price.” Further, she notes, it takes a long time [three to five years] for a drug to be listed in a Taiwanese hospital. By the time the drug is finally available to physicians and their patients, it may no longer be cutting edge.

Taiwan’s reimbursement system further complicates matters by allowing healthcare providers to be reimbursed in full for medicines sold to them at discount. The incentive for additional income encourages hospitals to demand large discounts from drugmakers. Generic drugmakers may offer discounts of up to 50%, while brand manufacturers usually offer a 5%-10% discount, according to the PWC report. That forces the R&D-based pharmaceutical industry into a role of “effectively subsidizing the operation of hospitals,” the report says.

Experts say the government’s drive for cost containment is ultimately acting as a disincentive for R&D-based pharma activity, threatening Taiwan’s viability as a future biopharma hub. “The regulatory environment has hurt Taiwan’s attractiveness as an environment for investment in new-drug launches,” Lin says. “People are happy with the low prices, but it comes at the expense of a lot of infrastructure.”

No overnight cure

Taiwan’s biopharma sector faces many challenges ahead. One of the foremost tasks will be narrowing the gap between sector performance and investor expectations. Indeed, despite surging market valuations, the scale of Taiwan’s biotech industry remains small. Government data includes about 500 companies categorized loosely as “biotechnology,” but with combined revenues of just US$2.5 billion. Speaking at an AmCham Taipei luncheon meeting on April 19, Chi Wei-kuang, director of the bioengineering group at the government-backed Development Center for Biotechnology (DCB), estimated the current number of biologic drug companies in Taiwan at 40.

Worryingly, there has been little consolidation in the sector, raising questions about the true value of the companies. Calvin Chen, president of TWi Pharmaceuticals and a former venture capitalist, warned about the lack of M&A activity in an interview with PharmaBoardRoom, a publication that tracks pharmaceutical industry trends, published in November 2013. Noting that the valuations of some Taiwanese firms that had out-licensed their drug compounds to U.S. companies had reached parity with or exceeded that of their U.S. partners, he said: “That seems very strange to me. In my experience, unless a U.S. biotech can sell its own product, they cannot become very profitable. The reason U.S. investors recognize the value of smaller biotechs is because the typical expectation for these companies is that a larger player will acquire them.”

“But I wonder about the biotechs in Taiwan,” Chen added. “What is the ultimate exit for their investors?”

BiotechEast’s Silver says Taiwan’s clinical trial environment and the prevalence of SMEs make the island well suited to the “acquire, develop, transfer” biotech business model, whereby companies in-license assets at the preclinical or early clinical phase, develop them locally in the clinic, and ultimately out-license them later to larger partners for marketing. PharmaEngine and TaiMed, two of Taiwan’s more successful biopharma firms, use that model, he notes.

“There is dubious risk return for small companies taking on Phase III clinical trials themselves,” he says. “A failure could cost hundreds of millions. A huge multinational pharma could absorb the loss, but it could be devastating for a small company.”

He cites the case of Taiwanese biopharma firm Medigen as an example. In July 2014, Medigen announced disappointing preliminary results for the multinational Phase III trial of its new liver cancer drug, PI-88. Over a stretch of three weeks, the company’s shares cratered, erasing more than NT$45 billion (US$1.39 billion) in market capitalization.

Compassion BioSolution’s Chou urges Taiwanese investors to better understand the dynamics of the sector. “Investors in biotech companies need to be willing to tolerate a great deal of volatility,” he says. “It’s the nature of the business.”

Manufacturing capacity is also an issue for Taiwanese drug manufacturers, says Silver. He explains that Taiwan currently has just three contract manufacturers that can provide batch quantities of drugs sufficient for clinical studies: Eirgenix Inc., Mycenax Biotech Inc., and JHL Biotech Inc. In an April report for BioWorld, he notes that TaiMed in 2012 entered into a supply agreement with Chinese contract manufacturer Wuxi PharmaTech to manufacture ibalizumab as no Taiwanese firm could meet its demand for batches of 1,000 to 2,000 liters.

PharmaEngine’s Yeh urges the incoming government to focus on establishing “a friendlier innovative environment” to boost Taiwan’s research and development capabilities, adopt regulations to “encourage more talented individuals to come and work in Taiwan,” and allocate resources to promising companies via an open peer-reviewed process.

To build a more robust biotech industry, Chou suggests that Taiwan build up expertise in pharmaceutical product development – the science of turning a molecule into a usable medicine. He advises the Taiwanese government to encourage scientists with such expertise to start new business ventures in Taiwan. That would provide local industry with “the know-how to bridge drug discovery with cutting-edge product development and manufacturing.” Government-led efforts could include offering funding to entrepreneurs who possess practical knowledge and experience in guiding the development of biopharmaceuticals from discovery to commercialization, he says.

The government could also sponsor activities to educate the existing industry on how to integrate all aspects of biopharmaceutical development, including rational drug-candidate selection, formulation optimization, the manufacturing of active pharmaceutical ingredients, and the final dosage form, Chou adds.

For the Taiwan biopharma sector, “the vision has been identified,” says MSD’s Romanelli, referring to President-elect Tsai’s focus on making Taiwan a regional biotech hub. “Now there needs to be articulation of a strategy to get there.”

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