Is growth in the Taiwanese biotech sector a bubble that is about to burst?


In Taiwan, biotech is finally booming, and more and more of the companies benefitting from this boom are listing on the Gre Tai Securities Market (GTSM), built with small to medium enterprises in mind, and tailored for companies that are part of emerging industries. But are these companies overvalued, and is there a danger that the growth of the sector is a bubble that is about to burst?

Taiwan’s Biotechnology & Pharmaceutical Industries Promotion Office (BPIPO) reports that total revenues for the industry have more than doubled between 2004 and 2012, to USD 8.88 billion. Johnsee Lee, chairman of Taiwan’s Development Center for Biotechnology (DCB) and the Taiwan Bio Industry Organization (TBIO), attributes much of the difference to the newcomers, founded amid a wave of investment that began in the early 1990s. After what Lee calls an “ungraceful” development period, these companies have now surpassed Taiwan’s “old guard”—large, established players that sold generics locally for decades—in terms of innovation and internationalization.

Meanwhile, the Economic Cooperation Framework Agreement (ECFA), a preferential trade pact between China and Taiwan signed in 2010, has lowered trade barriers and opened the door for broader collaboration with a country that IMS estimates will become the world’s second largest pharma market by 2015. “If Taiwanese companies develop a new molecule for a condition with high prevalence in Asia, why not benefit a larger population?” DCB’s Lee points out.

Investors smell an opportunity. “In the past,” Lee says, “we were missing a crucial element of our ecosystem: financing. Now, because of the health of our capital market, venture capitalists are quite willing to come on board because they see an exit: sell the shares when companies float their stock on the public market. If Initial Public Offerings (IPOs) weren’t so feasible in Taiwan at the moment, investors would be very reluctant to participate in the long-term play that is biotech.”

Are we looking at a bubble? Soushan Wu, Chairman of the GTSM, is frank: we are. “I think more than 30 percent of the biotech companies trading on the Gre Tai Securities Market (GTSM) are overvalued,” he says. “The GTSM has a higher average turnover ratio, and higher average P/E ratio, than the exchanges you will find in places like Shanghai, New York, Tokyo, or even Seoul. The ratios for biotech are higher still. Based on the numbers, no one can say this isn’t a bubble in the truest sense of the word.”

Dr. Soo, managing director of the Supra Integration and Incubation Center (Si2C), is equally candid: “The environment is starting to overheat. The problem is that this shooting star might have promoted a short-term investment strategy that is antithetical to the interests of the development of the industry. We need to address this danger.”

more than 30 percent of the biotech companies trading on the Gre Tai Securities Market (GTSM) are overvalued”

“And yet,” Wu continues, “we need that bubble to grow. Moreover, I would say the bubble is still under control. Why? First, we have more NT dollars circulating in Taiwan today than in years past—for better or worse, this is a result of the low interest rates we have today.

The second reason is this dream is a good one. Look at how many people there are in China that need safe drugs.”

Still, investors would do well to exercise caution. Tsu-Der Lee, chairman of Taipei Medical University, says of the state of the public market, “In a hurricane, even a turkey can fly!” For now, some companies are opting for a more traditional approach. TWi Pharmaceuticals, a US-focused generics company, presents itself to investors first and foremost as a business that cares about the bottom line.

Calvin Chen, the company’s president, reports, “We told our underwriters and analysts not to look at us as a pharma company, but rather as a profit-driven business, regardless of our sector. Better to compare us to the IT industry! In fact, IT companies’ profit margins typically approach 20-30 percent, while ours is closer to 60 or 70. We believe that revenues, rather than story, should drive up the valuation of a company.”

Chen has a few words of caution. “The market is quite hot right now,” he says, “and my background as a venture capitalist makes me look at the situation with a bit of concern. Certain Taiwanese drug development companies have out-licensed their compounds to US companies, and now their market cap is equal or greater than that of their US partners.

“That seems very strange to me. In my experience, unless a US biotech can sell its own product—unless they have the capabilities of a Celgene or an Amgen—they cannot become very profitable. The reason US investors recognize the value of smaller biotechs is because the typical expectation for these companies is that a larger player will acquire them. For the investor, it’s almost like buying an option. But I wonder about the biotechs in Taiwan. What is the ultimate exit for their investors? We haven’t seen any such acquisitions in this country yet.  Local investors may not be sophisticated enough today. I wonder, when reality hits, what their reaction will be.”

Local investors may not be sophisticated enough today. I wonder, when reality hits, what their reaction will be.”

Perhaps the market and its investors could use a bit more education, and a bit more experience. Indeed, implanting a new thought process is at the heart of Si2C’s strategy. “It is critical that the government, academic institutions and investors reaffirm a stable, long-term investment approach and do not panic and flee at the first sign of difficulty,” says Dr Soo. “Staying true to that approach will insert confidence and faith and stability in the system, and in the process, averting a psychologically driven run on the exchange.”

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