BIOTECH IN TAIWAN: THE ECONOMY'S NEXT GROWTH

UNCLAS SECTION 01 OF 04 TAIPEI 002551 SIPDIS SENSITIVE SIPDIS DEPT FOR EAP/TC, STATE PASS USTR FOR STRATFORD/KATZ, TREASURY FOR OASIA/TTYANG, COMMERCE FOR 4431/ITA/MAC/AP/OPB/TAIWAN E.O. 12958: N/A TAGS: TBIO ETRD ECON EINV TW SUBJECT: BIOTECH IN TAIWAN: THE ECONOMY'S NEXT GROWTH ENGINE? REF: TAIPEI 2545 ¶1. (SBU) SUMMARY. In the 1970s and 80s, official funding and support fostered a Taiwan high technology IT sector that now ranks among the world's most competitive. With the mainland and other low-cost producers offering increased competition, Taiwan authorities have identified biotechnology as a priority field for future economic development. Although Taiwan hopes to develop a biotech industry as quickly as possible, the sector does not yet play a major economic role. On the positive side, Taiwan has the human and technical resources to become a significant player, particularly given a large pool of scientists and researchers both in Taiwan and abroad. Challenges remain, however, in such areas as marketing, intellectual property protection (IPR),corporate culture, and wages that are not always competitive with international standards. In order for Taiwan to exploit its biotech potential, therefore, it needs to ensure that a new crop of IPR, legal, and international management experts are in place and ready to develop the industry. If Taiwan is to nurture a successful biotech sector, new management and production techniques will be required in order to succeed in the rigorously competitive global arena of drug manufacturing and marketing. END SUMMARY. BACKGROUND -------------- ¶2. (SBU) Biotechnology, or biotech, refers to the use of technology based on biology to develop agriculture, food science and medicines. Biotech accounts for up to U.S. $800 billion in product value worldwide, of which Taiwan contributes only 0.6 percent, or about $4.7 billion, compared with $200 billion for Japan, $15.9 billion for Singapore, and $7.5 billion for South Korea. Taiwan is trying hard to catch up with its regional competitors. Although venture capital is arguably the main ingredient in the successful U.S. biotechnology sector, Asian economies have often pursued official policies designed to nurture biotech development. Taiwan's new incentive program, for example, gives biotech start-ups a five-year tax holiday on 35 percent of their profits, a benefit not enjoyed by any other industry. Other incentives include low-cost housing for returning expatriate Taiwan scientists, to help counter the high cost of living in cities such as Taipei. Overall, Taiwan's National Development Fund (NDF) plans to pump NT $30 billion (about U.S. $907 million) into the biotech sector over the coming year. In addition, certain underlying conditions favor biotech development in Taiwan. Taiwan's research and development (R&D) costs are 30 percent of those in the U.S., for example. Compared with Hong Kong and Singapore, Taiwan has a larger population base and potential research talent pool from which to draw. TAPPING THE TALENT POOL -------------- ¶3. (SBU) DDIR and Econoffs recently visited Academia Sinica (AS),a research institution funded primarily by the Taiwan authorities. Academia Sinica has 24 research institutes covering physical and life sciences and humanities, and is headed by Wong Chi-huey, an MIT graduate and genomics expert who worked at Scripps Research Institute before returning to Taiwan. Wong's interest is in chemical biology and new drugs, and he is the prime mover behind Taiwan's efforts to attract biotech talent back from the U.S. and other foreign countries. Wong noted that although Taiwan excels in the numbers of patents issued, at third in the world, most of its innovative ideas sit idle and un-marketed. To encourage biotech investment, Wong has been instrumental in helping push Taiwan's biotechnology incentive program through the legislature. In addition to financial incentives, he observed, researchers employed at official agencies can also transfer their knowledge to private companies to help develop new drugs. Unlike the IT sector, said Wong, business partners can be added at different stages of drug development. To help compensate for Taiwan's comparatively TAIPEI 00002551 002 OF 004 low wage levels when compared with the U.S. and other more developed economies, Wong said AS pays researchers returning from abroad 17.5 months of salary a year, and also provides low-cost housing. MOEA-FUNDED R&D AND INVESTMENT -------------- ¶4. (SBU) Taiwan's biotech effort is being directly financed by the Ministry of Economic Affairs (MOEA). The Development Center for Biotechnology (DCB) is an example of MOEA-funded research. DCB is a non-profit agency with a staff of 400, including 300 researchers. DCB President Wu Ming-chi told us that the agency has two major facilities which provide protein drug research and toxicology analysis to the private sector, generating funds for its own research. Unlike its sibling, the Industrial and Technical Research Institute, DCB does not focus on medical device development. Instead, its major focus is drug development, including small molecular drugs and Chinese herbal medicine. While DCB does research, its other arm, the Biotechnology and Pharmaceutical Industries Program Office (BPIPO),promotes investment by both local and foreign industry. In order to avoid conflict of interest perceptions, MOEA does not get directly involved in the biotech industry. MOEA-funded biotech companies include Taimed, PharmEssentia, and about a dozen others. TAIMED LEADING THE WAY INTO THE NEW BIOTECH -------------- ¶5. (SBU) Taimed is a newly-formed company specializing in anti-virus drug development. It has a staff of experienced researchers from overseas, and former Vice Premier Tsai Ying-wen is its president. Tsai, a graduate of Cornell and the London School of Economics, exemplifies the new blood that Taiwan is relying on to remain competitive in the world market. In a recent meeting with DDIR and econoffs, Tsai was optimistic about Taiwan's ability to excel in biotech. She cited the vast pool of middle-aged Taiwan scientists in the U.S., including world-renowned HIV/AIDS drug researcher David Ho who is on Taimed's board. With their expertise and experience, they could provide the impetus for Taiwan to develop a sector with as much potential as high technology. Taimed recently concluded an agreement with U.S. drug giant Genentech to develop the anti-AIDS drug TNX355, which blocks the entry of the HIV virus into human cells. The drug is now undergoing phase two of clinical trials. Once the drug passes clinical trials in the U.S., and is reviewed and approved, it will be marketed in Japan, Europe and the U.S. In Taimed's case, MOEA provided 40 percent of initial costs to help the company begin recruiting and set up an office. Tsai said Taimed's first priority is new drug development, SIPDIS followed by medical devices and next-generation manufacturing. Although the government share of the company now stands at 40 percent, Tsai said the level will eventually be reduced to 20 percent or less. Tsai believes at least 20 years is needed for Taiwan's biotech sector to mature. PHARMAESSENTIA AND INNOVATIVE NEW DRUGS -------------- ¶6. (SBU) Econoff visited two companies in the Nankang area to get their insights on biotech developments. PharmaEssentia, a company with 45 staff founded by a group of Taiwan-Americans, is marketing CoQ10, an energy pill claimed to have rejuvenating properties. PharmaEssentia recently marketed its CoQ10 in Japan, and is the largest manufacturer of CoQ10 outside Japan. PharmaEssentia's Jack Hwang and Jason Lin, both with extensive experience in the U.S., said they are developing a drug to combat hepatitis, which afflicts thirteen percent of the population of Taiwan. The drug has already undergone successful clinical trials with monkeys. They said their former U.S. academic mentors encouraged them to return and get in on the ground floor of an innovative new industry, although their salaries here are only 20 percent of what they earned in the U.S. Pharmaessentia is 32 percent funded by the National TAIPEI 00002551 003 OF 004 Development Fund, and the rest is from private sources. TLC AND DRUG DELIVERY SYSTEMS -------------- ¶7. (SBU) Taiwan Liposome Corporation (TLC),like Pharmaessentia, is a newly established company which has benefited from official help in getting started. TLC was founded in 1997 and currently has a staff of 50, 90 percent of whom are from Taiwan, with the remainder US citizens. TLC's manager, George Yeh, a UC Berkeley graduate, said the company has cooperated on drug research with the National Cancer Institute in the U.S., and is now negotiating with a Japanese drug company to develop a drug to cure diabetes. Yeh said Taiwan has the technical expertise to develop drug delivery systems that will maximize effectiveness while reducing inconvenience. Taiwan's small drug production units also can custom-manufacture small batches of particular drugs without having to shut down an entire production line, allowing them to tailor production to the requirements of its clients, mostly small, R&D-heavy companies with innovative ideas and patents, but without the market access or assets to compete with the drug majors. Yeh emphasized that the entry bar for the global drug market is high--a minimum of $500 million USD in product value, which among East Asian companies Japanese firms are best positioned to attain, since they have the marketing structure and financial wherewithal. CONTRACT MANUFACTURING -- NOT FOR BIOTECH -------------- ¶8. (SBU) Taiwan's IT sector has been able to keep ahead of the competition due to its innovation, contract production and outsourcing. Today, as labor markets become increasingly competitive, biotech entrepreneurs are considering duplicating the strategies that proved successful in the IT sector. According to Academia Sinica's Wong, however, when it comes to drug production, finding cheaper labor is not the answer. He also asserted that given the long developmental phase of drugs, tax policy needs be relaxed on capital gains until biotech innovations have been marketed. Our interlocutors in the biotech sector agreed that contracting out to the lowest-cost manufacturer will not work in the biotech sector, where long R&D times, stringent requirements at every phase of development, and the high cost of drug testing require a different approach. Next Generation Manufacturing (NGM),a new manufacturing strategy designed to quickly reconfigure factories for changing production demands, must be operated by highly-skilled workers which can quickly respond to customer needs. Taiwan's biotech industry will need NGM to fully exploit smaller-scale production, as well as closely monitor and fine-tune manufacturing processes in order to meet the high requirements of drug production. According to TLC's Yeh, mainland drug testing facilities suffer from lax data collection and analysis practices. As a result, biotech firms in Taiwan are reluctant to use them for drug testing and evaluation. However, even after all the tests are done and the drug is ready to be marketed overseas, obtaining foreign regulatory approval is an art that Taiwan has not yet fully mastered, given the lack of IPR and legal experts. EDUCATING BIOTECH LEADERS -A CHALLENGE -------------- ¶9. (SBU) Taiwan's educational system is another potential impediment to biotech development because it has not fully adapted to the rapidly changing business environment and cannot always staff even the needs of its IT sector. Taiwan's students and academics focused mostly on the sciences and engineering when they went overseas to study in large numbers from the late 1960s through the 1980s. However, in their zeal to pursue the sciences, they typically did not focus on business and legal studies, resulting in a shortage of managerial and legal experts. As a result, many of Taiwan's good inventions and patents do not make it into the island's economy, much less onto the world market. Both TAIPEI 00002551 004 OF 004 Academia Sinica's Wong and Taimed's Tsai acknowledge that Taiwan needs IPR experts and marketing strategies, and its researchers and businessmen need to develop a world view and think beyond their local market. In negotiating with foreign entities, Taiwan's lack of expertise with global business culture often comes to the fore. George Yeh of TLC told econoff that he underwent excruciating negotiations with a Japanese drug company over a diabetes drug his company had developed, mainly due to lack of understanding of Japanese business practices. After considerable effort, he was finally able to conclude an agreement allowing the drug to be marketed in Japan. CONCLUSION -------------- ¶10. (SBU) Biotech may be touted as Taiwan's future, but as our interlocutors in the biotech industry asserted, it will neither supplant the information technology (IT) sector nor dominate Taiwan's future industrial development. As biotech expands, Taiwan could combine its IT strength with biotech in such areas as bioinformatics or computational biology. Serious deficiencies remain in Taiwan's biotech aspirations, however, including the inability to bridge the divide between patents and marketing, and the lack of legal experts to help certify products for use overseas. This problem goes to the fundamental issue of Taiwan's corporate structure, which has traditionally been composed of small family-run businesses. In order to see their product reach global markets, the small, highly-specialized firms which dominate Taiwan's biotech sector have to seek partners with the drug majors. This strategy recently led Swiss drug giant Novartis to sign an agreement with Taiwan authorities to develop biotech through cooperative efforts on clinical trials, drug research, and training. Taiwan needs to attract biotech talent, provide sufficient incentives to retain that talent, convince researchers of the sector's potential and, most importantly, develop and train legal and IPR experts to complement and support research talent by ensuring innovations are protected and marketed. As Taimed's Tsai indicated, it may take at least 20 years for Taiwan's biotech industry to reach maturity. YOUNG