Scandal Widens for Taiwan Pharma Firm OBI

Academia Sinica President Wong Chi-huey has been under fire because of the OBI Pharma case. (Photo: CNA)
This is Part 3 of the cover story on Pharmaceuticals: Links to Part 1, Part 2

The controversy over the biotech company has ensnared the president of Academia Sinica, as well as the company chairman.

The Taiwanese biotech firm OBI Pharma has struggled since revealing in late February that Phase III clinical trials for its new breast cancer vaccine OBI-822 were not statistically significant. When drugs fail to pass Phase III trials, the product development process is typically aborted.

Investors, spooked by the bad news, rushed to divest themselves of OBI Pharma shares. The ensuing selloff has shaved over a billion U.S. dollars off of OBI Pharma’s market capitalization since late February.

Worse yet, with OBI Pharma’s shares in freefall, allegations arose that company executives and others had tapped “non-public information” as they sold off part of their holdings ahead of the announcement about the Phase III trial results. Among those ensnared in the allegations – which include insider trading and market manipulation – are OBI chairman Michael Chang and Academia Sinica President Wong Chi-huey. An eminent biochemist, Wong created the platform that eventually made possible the development of OBI-822.

In April, judicial investigators searched OBI company headquarters and its laboratories to collect evidence. Following the search, investigators summoned Chang and four other OBI Pharma executives for questioning at the Shilin District Prosecutors’ Office in Taipei. When prosecutors listed Chang as a defendant on insider trading charges, he had to post bail of NT$1 million (US$30,914).

Wong, meanwhile, has been accused of a conflict of interest. Until now, he has had difficulty explaining how his daughter was able to afford the purchase of 3 million OBI Pharma shares, priced at NT$31 per unit at the time. According to a March report by local media, Ruentex chairman Samuel Yin said he sold the OBI shares legally to Wong’s daughter, Wong Yu-shioh, in 2012, prior to OBI Pharma’s listing on the Taipei Exchange (then known as the GreTai Securities Market).

In an April 7 statement, Wong said that he sold 10,000 of his daughter’s OBI shares on Feb. 18, acting on her behalf. He said he made that decision based on advice from financial advisers that the stock “had reached a favorable price.” In mid-April, he told reporters he was not involved in insider trading and did not intend to manipulate OBI Pharma shares. Wong also met with President Ma Ying-jeou last month and told the president he “had no intention of acting unlawfully.”

The Shihlin Prosecutors Office, after reviewing data provided by the Financial Supervisory Commission (FSC), said Wong Yu-shioh was not among the 50 largest traders of OBI Pharma shares prior to the Feb. 21 announcement of the failed clinical trials.

Some observers say the conflict-of-interest allegations Wong faces are legitimate. They argue that Wong’s endorsement of OBI Pharma’s breast cancer vaccine after it failed the Phase III portion of combined Phase II/III clinical trials was not befitting his role as head of Academia Sinica, even if it was understandable that he would want to stand behind a product he had helped develop.

Yet media reports have also noted that some of the shares in question were sold well before the Phase III clinical trial’s results were known. Selling off the shares at that time was reasonable, some analysts say, noting the volatility of Taiwan’s biotech stocks and the fact that OBI’s market capitalization had reached roughly US$4 billion.

From bad to worse

As the case unfolds, the situation is looking increasingly unfavorable for OBI Pharma. In April, the Chinese-language Next Magazine reported that prosecutors are investigating institutions and active traders who borrowed OBI shares totaling NT$2.2 billion (US$68 million) for short sales. The report noted many of the shares were loaned at unusually low interest rates of 0.01%, which suggests big stakeholders in the company may have planned the short sales.

The interest rates mentioned in the Next Magazine report are considerably lower than what the FSC has verified. In April, Kuomintang legislator Lai Shyh-bao said the commission acknowledged that more than 4 million OBI Pharma shares were “loaned to investors and institutions for short sales with interest fees averaging between 7% and 12%.”

OBI Pharma issued a statement in mid-April rebutting allegations of wrongdoing and requesting that judicial investigators clear the company of those charges. The statement criticized the investigators for confiscating “private documents and material containing proprietary business information, some of which relates to the company’s core technology development.” If that information is leaked, the results would be detrimental for the company’s shareholders and Taiwan’s pharmaceutical, healthcare, and bioscience industries, OBI Pharma said.

Wong has also been criticized for his handling of the accusations. On April 26, the day before he was scheduled to report to the legislature, Wong asked President Ma for a 28-day leave of absence. He told local media that he made the request “in deference to judicial authorities” investigating his alleged insider trading.

“It is extremely inappropriate to ask for a long period of leave at this point in time,” Ma’s spokesman told journalists, adding that approving the request would give rise to “suspicions of trying to evade legislative oversight.”

When Wong reported to the legislature, he told lawmakers that he and Michael Chang had a joint investment fund “that was used to invest in two companies that later bought OBI Pharma shares,” according to The Taipei Times. Wong said Chang “was in charge of the investment” and that he (Wong) only “realized later…during the prosecutors’ investigation” that those two firms had invested in OBI Pharma.

On April 27, the Legislative Yuan passed a motion calling for Wong to resign. Having sullied the name of Academia Sinica and hurt Taiwan’s biotechnology industry, Wong is no longer fit to lead the nation’s top research institute, the lawmakers said.

Lesson to be learned

In response to the fallout from the OBI Pharma scandal, the FSC has said it will revise the regulatory framework governing biotechnology stocks. One proposed revision would tighten stock-trading restrictions on company insiders. Regulators say they aim to call investors’ attention to the riskiness of biotech investment, as many firms in the sector do not earn sufficient revenue to ensure successful drug commercialization.

To be sure, investors in Taiwan need to better understand the nature of the biopharma sector, says Danny Chou, president of the Los Angeles-based biotech consultancy Compassion BioSolution. “This kind of failure is the norm – not the exception,” he says.

Regarding the allegations of wrongdoing in the scandal, “this a classic case of smart people doing stupid things,” he says. “How can one unload a stock a week ahead of an announcement of a failed clinical trial and expect people to believe there was no knowledge of the information ahead of the announcement?”

Says Chou: “Holding people accountable is critical to investor confidence in the long term, so this is a good lesson for everyone.”

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