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Playing Catch-up with the World (8 June 2009)

The Edge, June 8, 2009

A Greek philosopher once said, Wise men learn many things from their enemies." Biotechnology industries of different countries would probably not regard each other as enemies. However, Malaysia’s nascent biotech industry really needs to start looking at those who have had at least a 20 year head start on it if it hopes to be seen as a formidable competitor on the world stage.

In 2008, Malaysia’s 92 BioNexus companies reported a 187% year-on-year increase in revenue to RM378.6 million. Two initial public offerings (IPOs) were done in 2008, bringing the number of the country’s public listed biotech companies to 13. While these numbers and statistics show growth, what does it really mean in comparison to the rest of the world?

The perfect place to start would have been one of the year’s biggest biotech conventions BlO 2009 in Atlanta, Georgia, last month - where industry players from all over the world converged to study the state of the global industry.

In his annual address, Steven Burrill touted as one of the leaders of the industry delivered his speech on a very sombre note. While last year’s address indicated an optimistic outlook for the industry- complete with hopes of an AIDS vaccine this year’s speech had gloomy overtones, a reflection of the impact the prolonged bear markets worldwide have had on the industry.

Industry leaders falter just like US President Barack Ohama’s call for change, Burrill announced that the time had come for change in the biotech industry too, especially its funding landscape. "If you tried to recreate Genentech today like 30 years ago, you would fail,” Burrill said.

The reason for this, according to him, is that companies have had easy access to cheap capital for the last 30 years but all that has changed now. With hedge funds in limbo and financial markets in disarray, companies funding options are very limited. In addition, Venture capitalist (VCs) and private investors are now much more cautions than ever, making it even harder for companies looking to raise money. Biotech companies in the US and Europe have to deal with the fact that need to get creative or face extinction.

According to Burrill’s state of the industry report, 2008 saw only one IPO, which raised a meagre US$6 million (RM20 million). It was very disappointing especially when 2007 saw 28 IPOs, which raised almost US$2 billion. The top five pharmaceutical companies in the world have lost an average of 20% of their market capitalization since last year. Meanwhile, of the 342 companies plying their trade in various US markets, 40% don’t even have enough cash for one year’s operating expenses.

Strapped for funds, mergers and acquisitions (M&A) seem to be high on everyone’s list. Genentech, founded in 1976 and considered to be the world’s first successful biotechnology company, was acquired by Roche in a deal worth US$46 billion. The total value of M&A this year thus far is estimated to be about US$120 billion, almost equal to the US$140 billion for the whole of last year

Malaysia’s BiotechCorp reports that the global biotechnology industry was worth US$917 billion in 2008, with Europe and the US accounting for some 79%.

Burrill believes another big change that’s coming is the emergence of new market leaden from Asia, particularly China and India. With the changing business models, he believes that a tri-polar world comprising the US, China and India will exist by 2035. He believes that by 2035, Asia will grab a bigger piece of the pie by taking on a lot of the R&D work usually undertaken by Western countries. In fact, the transition has already begun a number of R&D jobs have been outsourced to China and India.

If Malaysia hopes to capitalise on the global industry slowdown, then surely the answer lies in looking at how our neighbors like China and India have grown their respective biotech industries.

Emphasis on brain power a biotech company is not built on the traditional model of trade, where products and services are bought and sold. At the heart of the biotech business are the scientists and researchers who toil away at their jobs to discover the next breakthrough for a drug, enzyme, bioenergy and how to run a more efficient process to get them produced.

The first mistake Malaysia can make is by not making R&D its highest priority. This clearly is understood by the leaders of countries like China, India and Singapore, who have seen their results make waves around the world.

China recently announced that it would be spending US$9.2 billion between this year and the next on new technologies, with biotech, bioenergv and genetically modified (GM) products among them. Even at a time when the world economy is in turmoil, China treats innovation as a necessity, not as a luxury it can do without.

China has also announced a DS$1O billion "Mega New Drug Development Programme", with the aim of growing its drug development industry over the next 13 years.

Meanwhile, India is providing R&D incentives, such as a 130% weighted tax exemption on R&D expenditure and a three-year excise duty waiver on patented products. Coupled with its massive talent pool, it’s quite easy to see why India remains a top choice for out-sourced R&D work.

Today, China and India have emerged as top destinations for outsourced R&D. If you think that outsourcing is about unloading labour-intensive jobs, think again. Western companies are increasingly collaborating with those in China and India because of their innovative capabilities.

Both China and India have a strong base of CROs (contract research organisations) and CMOs (contract manufacturing organisations) to support the changing business models of Western biotech companies, whose R&D costs continue to escalate.

Even latecomer Singapore understands the need for proper R&D. The Economic Development Board report that since 2000, the government has invested more than S$5 billion (RM 12 billion) to build up its biotech industry and human capital. In 2007 alone, Singapore spent S$l.I billion in R&D expenditure lot biomedical sciences.

In comparison, Malaysia’s first five-year budget for biotech, from 2001 to 2005, was a modest RM574.4 million, according to the Economic Planning Unit. Of this amount, RM190 million was allocated for R&D. It’s a real wonder then that so little was allocated when failed mega projects in Malaysia run into the billions. The recent PKFZ (Port Klang Free Zone) saga is one example, where costs could balloon to as RM 12.5 billion, according to some estimates, and with no clear results. Instead of wasting money on mega projects, why not invest in cutting-edge biotech R&D work, which could make a significant impact on the nation’s GDP.

Under the Ninth Malaysia Plan, the allocation for biotech was increased to RM2 billion. Upon closer inspection however, about 50% was allocated for building physical infrastructure, while only 20% was for R&D. Malaysia’s capacity-building phase is nearing its end, making way for the commercialization phase, which will start in 2011.

Logically, any success in commercialization requires good R&D as well as talent to get it off the ground. While buildings, laboratories and manufacturing facilities may be nice physical assets to look at, it is only a means to an end, which is innovation.

Human capital if it were as simple as throwing money and incentives around, then many countries would be making progress in this industry. Human capital plays a big role in making the industry a success.

According to Ernst and Young’s 2009 global biotechnology report, China produces six million graduates a year. The number of researches in China has increased to almost a million, making it second behind the US. China is also hoping to capitalise on its "sea turtles a term used to describe Chinese nationals who have worked overseas and would he be able to bring back valuable expertise experience.

India’s International Market Assessment (IMA) estimates that the country produces more than half a million graduates in biotech and life sciences a year. India also benefits from a large pool of patient candidates, making it a perfect place to do clinical trials.

Singapore and Malaysia may not be able to compete in terms of those numbers, but Singapore has played the game well and taken advantage of its world class infrastructure and standard of living. The Singapore government has managed to attract world class researchers to set up shop in the city state, which are currently home 2,000 researches.

Singapore’s Agency for Science, Research and Technology (A*STAR), the agency responsible for building human capital, reports that the top 11 pharmaceutical and biotech companies, like GlaxoSmithKline, Pfizer and Wyeth, have invested in more than 25 commercial-scale manufacturing facilities. There is also a national scholarship programme offered by A*STAR, with a target of 1,000 local PhD graduates by 2015.

While Malaysia has an advantage over Singapore in terms of human resources, it will amount to nothing if there is no focus to build on it. There are 19 public universities, and not all of them offer courses in biotech or life sciences.

The already apparent brain drain in the country, which has seen qualified Malaysian researchers and entrepreneurs leaving the country for better prospects abroad, is a blow to Malaysia’s efforts at building its human capital.

Private-public partnerships it is a well-known fact in Malaysia that research in universities and institutions never make it to market. The country may have a commercialization fund, but the reality is that there needs to be a strategic partnership between the public and private sectors.

BiotechCorp got it right with its BioNexus Partners Programme (BNP) launched last year.BNP allows BioNexus companies to use the resources and facilities of seven public universities and a research institute, while sharing their own industry standards and business acumen with the universities. But this is just the beginning; there is still much to be done.

Collaboration between the public and private sectors is almost non-existent in Malaysia, whereas it is very common elsewhere. In fact, the growth of the US biotech industry is credited to the Bayh-DoIe Act, which allows universities, research Institutions and non-profit organizations to claim the rights to their own intellectual property through the use of federal funds. Through various partnerships between the public and private sectors in the US for the last 30 years, their R&D efforts have benefited the rest of the world.

China’s Beike Biotechnology, which specializes in adult stem cell treatments, came about through collaboration between researchers at Beijing University, Hong Kong University of Science and Technology, and Shenzhen City Hall.

In Singapore, top Swedish pharmaceutical company AstraZeneca is developing anti-cancer compounds with the National Cancer Centre of Singapore and the National University Hospital for Hepatocellular Carcinoma (HCC), a cancer common in Asia.

To put things in perspective, the biotech Industry is one that knows no borders. No one company can truly do everything on its own. Collaboration and partnerships are essential to the business, and Malaysian companies and researches need to realize this.

Need for focus China and India enjoy at least a 20-year head start over Malaysia. Singapore started about the same time as Malaysia, but has managed to capitalise on its strengths and overcome its weaknesses. Thus, it is critical that we play to our strengths; every country has its own.

India is famous for its generic drugs and biosimilars. This began when changes in its patent law in I 970s allowed for processes for pharmaceutical products to be patented. As a result, scientists could take a brand name drug and reverse-engineer it to create a similar drug with the same effects and hold the intellectual property to its process. India’s goal then was to make healthcare cheap and available for all.

But after joining the World Trade Organization as part of the TRIPS (Trade Related Aspect of Intellectual Properties) agreement, India’s patent law was amended in 2005 to include product protection in pharmaceuticals, which consequently closed the door to reverse-engineering patents that hadn’t expired. Today, India is gearing towards real innovation

China is strong in the healthcare sector, with an emphasis on modernizing traditional Chinese medicine (TCM). In fact, TCM accounts for 38% of the medical products produced in China in 2007. It is already working hard to come up with groundbreaking technologies, such as regenerative medicine and gene therapy.

For Malaysia, industry players and observers alike have stressed that its natural resources and biodiversity are its advantages. The 2001 Global Diversity Outlook identified Malaysia as one of the 12 "mega diversity" countries which house a high percentage of the world ’s species. The concept of mega diversity was first proposed at the Biodiversity Conference in 1988.

BiotechCorp fully understands this advantage and announced a few technology acquisitions during BlO 2009. One of them is technology for the supercritical fluid extraction of natural substances that occur In plants from Dutch company FeyeCon.

In the agri-bio sector, the participation of Sime Darby and Asiatic Centre for Genome Technology (ACGT) in trying to come up with a superior oil palm tree through genetic modification is indeed commendable.

However, there needs to be more participation from the public and private sectors to take on the challenges of biotech. BiotechCorp CEO Datuk Iskandar Mizal Mahmood stressed on the need for this to improve the funding environment In Malaysia. Currently, it is the government that contributes most of the funding for biotech projects and companies. Perhaps with the right policies, Malaysia can encourage more private investments in R&D.

As for the industrial side, recent inconvenient truths have made the quest for renewable and sustainable energy all the more important. Bioenergy is no longer just the industry’s concern but has become a global crusade. Obama’s administration has clearly singled out green technology as a priority.

With the recent creation of a new Malaysian ministry on green technology, it is very important that it takes advantage of Malaysia’s natural resources. Malaysia’s abundant oil palm and jatropha cultivation provide natural biomass for ethanol production. Even our tropical climate, with its abundant solar energy, can be put to good use if there is focus on R&D and its commercialization.

Indeed, this is the perfect time to accelerate Malaysia’s growth when the rest of the world is slowing down. But will the right measures be taken? That is another story.

As long as policymakers and the powers that be realize the importance of R&D, building human capital and strategic partnerships like China, India and Singapore have there will be a lot of progress. Otherwise, years from now, Malaysia could find that it has poured money down the drain and not equipped itself with the kind of knowledge that can truly change the world.