Pedestrians walk past an electronic stock indicator outside a securities firm in Tokyo. Many biotech companies, both domestic and foreign, have successfully listed their shares on the Japanese stock exchange with good results. [Photo/AFP]

Innovation can help biotech companies cut costs, boost profits

The bull run that has defined the global biotechnology space is not showing any signs of slowing down, but if countries in Asia plan to take advantage of the growth of the space in the long run they might have to develop better funding and innovation strategies.

Since 2009, biopharma companies that were once the smaller cousins of giant global pharmaceu tical companies have seen their value, by market capitalization, escalate.

Not only are they selling many more drugs and acquiring more companies around the world, but the largest in the world are now big enough to stand shoulder to shoulder with the pharmaceutical majors.

Gilead Science Inc, for example, was worth $47 billion by market capitalization in 2009 and is now worth $122 billion. Celgene Corp, another US company, was worth $25 billion and now has a market valuation of around $60 billion. Going forward, their growth is likely to be driven by acquisitions and many of those will be in Asia.

The bull run has not gone unnoticed in Asia, which led the number of new healthcare initial public offerings last year with 92, up from 56 in 2012. Those IPOs raised a combined $10.9 billion.

This year "could be a bumper year for Asian exchanges", said accountancy firm Ernst&Young in its Global IPO Update earlier this year.

In China, for example, biopharma companies feature prominently on the list of proposed IPOs since the China Securities Regulatory Commission lifted a ban on new offerings at the end of 2013. Since May, as many as 23 different biotech companies have announced plans to issue new shares. Five of these are biopharma companies.

Du Zuoyuan, a healthcare analyst at Guosen Securities in Shenzhen, says the size and scope of biotech IPOs is likely to get bigger because of what he called an "industry uptrend".

The growth of the sector is also visible in Japan, where the Tokyo Stock Exchange has attracted both domestic and foreign companies. Among them is Acucela Inc, which specializes in eye diseases and raised $162 million in Tokyo in February.

Through the first half of last year, biotech stocks in Japan overshot average market performances by wide margins. Some stocks rose by multiples, not percentages, in the first few months of last year thanks to a combination of investor interest, a series of healthcare reforms in the country and a large drop in the value of the Japanese yen against the dollar.

Shin Nippon Biomedical Laboratories rose 669 percent in the six months to March 2013. Another company, Chiome Bioscience Inc, saw its shares rise 619 percent in the same period. The Topix Pharmaceutical Index, which tracks 17 pharmaceutical companies in Japan, rose by about 50 percent in the first half of last year.

The amazing growth in early 2013 in Japan was driven by a combination of pro-growth policies and the prospects for the sector.

Once the general bullish sentiment surrounding the wider market faded, most of the gains in the stock market were reversed. The Topix index, for example, was back down to around 420 in early June, down from a high of 570, a year ago. The same thing happened with Shin Nippon, whose share price on June 12 was 909 yen ($8.90), down from a 52-week high of 2,039 yen.

But the structural changes in the space in Japan, including easier pathways to funding and faster approvals for new drugs, have made it possible for companies to secure more sustainable approaches to growth. In other parts of Asia, biopharma companies are going public, raising money and finding investors.

Taipei-based TaiGen Biotechnology Co raised $36 million from a January IPO on the Gre Tai Securities Market in Taiwan, where the company benefits from its links to the Chinese mainland.

"The strategy of developing a biotech company in Taiwan is to fully utilize the regional advantages and give it to the mainland market," said Hsu Ming-Chu, TaiGen's chairman and CEO in Tokyo in April.

There is little doubt that new and effective drugs will sell, but the challenge that countries in Asia have to tackle is a shortage of innovation. Executives generally agree with the broad generalization that true innovation in terms of drug development is in short supply in the region.

Some countries like South Korea and Japan are leading the global way with programs to develop biosimilars, for example, but these programs typically make existing drugs more widely available rather than lead to the development of new drugs.

"Where innovation has been in healthcare in the last 15 or 20 years really has been in catering to a market that prioritizes disruptions to prize equations and brings costs down," says Charles Chon, managing director of the Ally Bridge Group, a private equity firm.

"What is really needed is truly (domestic) innovation. Really off-the-map thinking," he says. "That's where I think there is a significant gap." Chon is referring to South Korea but similar opinions can be regularly heard across Asia.

Around the world, many biologic drugs not developed by the big multinational companies are developed by companies driven by single scientists or small groups of colleagues that secure funding to chase an innovative idea.

The money often comes from venture capital funds or angel investors who see a future in the particular product and are willing to back the development.