Korea Inc. going bio-centric at full tilt
Conglomerates shifting gears to future-oriented growth engines
By Kim Yoo-chul
Korea is well-known and trusted for hardware- and scale-centric businesses that range from shipbuilding, televisions, displays, cars, semiconductors, chemicals and steel.
Such cash- and labor-intensive businesses have significantly helped the Northeast Asian nations realize rapid industrial and economic growth in the past few decades.
Korea, which has top-tier firms including Samsung Electronics, Hyundai Heavy Industries, Hyundai-Kia Motors, POSCO and LG Chem, is preparing for another leap forward with bio-related businesses.
One of the main reasons why Korea’s leading industrial firms are spending heavily on biotechnologies is quite evident — the country’s ageing population.
The healthcare market here is expected to grow significantly over the next five years as the nation becomes an aged society, with spending rising an average 18 percent annually to reach $131 billion in 2014 from $59 billion in 2009, data from Business Monitor International (BMI) said.
BMI insisted that major pharmaceutical firms are forecasting sales growth of more than 10 percent this year.
“The point is that Korea has a long history in manufacturing biologics, making it a hub in biosimilar research and development (R&D),” said Lee Seung-won, a senior executive from LG Life Sciences.
Biopharmaceuticals differ from conventional drugs as they are produced by using biotechnology instead of chemical mixes. They are known to have fewer side-effects due to their closer similarities to normal human-organ functions.
Biosimilars are versions of biopharmaceuticals whose patents have expired. They are also copies of expensive drugs made from living organisms.
In July 2009, just shortly after the regulatory pathway for biosimilars was established, Korea claimed a milestone in completing clinical trials of TuNEX — a biosimilar version of Amgen and Wyeth’s rheumatoid arthritis and psoriasis drug Enbrel.
A series of strategic partnerships between Korean and overseas biologics companies for such projects and generic studies are further confirmation that local firms in the biosimilar sector have made considerable strides in R&D, manufacturing and distribution, according to market analysts.
“Biotechnology is the industry that carries a higher risk and needs a long time to develop, however, big local firms are looking at it from a quite long-term perspective,” said David Kwon, an analyst at Daewoo Securities, a local brokerage.
The government backs this up.
The nation’s economic ministry said earlier that it had signed a letter of intent (LOI) with several local companies, including Samsung and LG Life Science, on investment in a government biosimilar industry development initiative, with the Korea Development Bank (KDB) and a state-led fund already committed to giving financial support.
“The government has the intention to offer more financial packages for companies that operate biosimilars or develop bio-related technologies because the industry is a market that Korea should not lose,” said an official from the ministry.
Samsung spending cash
Attention is being focused on whether Korea can become the “manufacturing hub” for biosimilars.
“The one noticeable thing is that conglomerates are spending on bio-driven projects in a consistent way because they believe bio-related projects could create revenue amid ageing global societies and increased awareness on healthcare,” said HMC Securities, another local brokerage, in a recent report to clients.
As the brokerage pointed out, the chaebol are being urged to diversify their business portfolios and to boost efficiency in their existing business.
Samsung, which plans to invest 3.3 trillion won in biopharmaceuticals and healthcare-related equipment by 2020, has been developing a biosimilar product — SAIT101 — to treat non-Hodgkin’s lymphoma with production starting in 2016.
Officials said the project was coming from its joint venture with Quintiles in a biopharmaceutical production facility in the Incheon Free Economic Zone of Song-do.
Samsung identified biosimilars as one of its next earnings streams and officials say the outlook for success is more than promising.
“We have cash, ownership and proven manufacturing techniques. Just time will be needed,” said an executive.
Samsung runs semiconductor, display, handset, shipbuilding and home appliances businesses and applies the latest technologies for memory chips and flat-screens, giving it a secure bottom line in cyclical downturns.
“The consumer electronics market has already become a ‘red-ocean.’ Margin pressures are very high due to more rivals on the market and that means Samsung cannot guarantee its corporate sustainability by only running electronic businesses,” said HMC. The joint venture will go on-line from 2013 with 30,000 liters of mammalian cell culture bioreactors, capable of producing 600 kilograms of biosimilar active ingredients a year, focusing mainly on products to treat cancer and arthritis.
“Our biosimilar products will seek an international market, however, the timing will be sometime in late 2015,” said the executive, asking not to be identified. Samsung, which bought stakes in electronic healthcare equipment maker Medison, previously, invested $266 million into the venture and is planning to establish another biosimilar joint venture later this year.
“Talks are still under way, though technical issues still remain,” said a spokesman.
Samsung is not the only one.
Hanwha Chemical, a domestic chemical maker, has inked a $720 million deal with Merck of the United States to commercialize a biosimilar of Enbrel — a drug to treat moderate to severe plaque psoriasis, psoriatic arthritis, and moderate to severe rheumatoid arthritis.
Enbrel is one of the top-selling prescription drugs overall and also is one of the top-selling biologic-based drugs.
The contract will be effective from 2015 to 2024 and the biosimilar “HD203” developed by Hanwha will undergo clinical trials soon, according to Hanwha officials.
“We are expecting to receive a sizable amount of royalties dependent upon the technology advancement and market situations,” said a spokesman.
Clinical trials have yet to be initiated in the United States.
Lee Hee-cheol, an analyst at Hi Investment, said the deal has raised the possibility for the success of HD203, and added Hanwha’s bio businesses will receive a re-valuation.
LG Life Sciences was also testing a biosimilar form of “LBEC0101” and other similar drugs. However, officials said it was too premature to talk about detailed global strategies.
Leading biopharmaceutical firm Celltrion is set to complete its global clinical trials of CT-P06 (a Herceptin biosimilar for breast cancer treatment) and CT-P13 (a Remicade biosimilar for arthritis treatment) within the latter half of this year, raising its share prices on higher expectations of business growth.
“Considering the massive investment into biosimilars and the phase of technology developments, chances are high for Celltrion to rise as a top-tier biosimilar maker,” said Kim Hye-lim, an analyst at Hyundai Securities.
Celltrion will begin selling biosimilars from early next year in the United States, and India, South America and other emerging countries — sales will be expanded to the EU zone in 2014, according to officials and stock analysts.
“Price is the key for the success of biosimilars. Samsung’s plan to boost its biosimilar capacities to better compete with Celltrion from 2015 is noticeable because of this reason,” said Shin Ji-won, an analyst at Mirae Asset Securities.
“R&D is important but facilities are more than significant in the market for biosimilars. That’s why Samsung was getting attention over its plan for biosimilar businesses,” said a company executive, asking not to be identified.
Eased regulation
Biopharmaceutical experts said the government will speed up its plans to further ease regulations to back up private firms that have been shifting their eyes on the new sector.
It said it will open the details of some biopharmaceuticals that have stronger possibilities to be developed as biosimilars amid rising calls for safety and effectiveness.
“The government needs to create proper guidelines to help biosimilar developers reach out to the mass-market,” said an official from Celltrion.
The EU has been out ahead of the United States in preparing guidelines and a regulatory pathway for biosimilars for the market, according to data from the government.
It has have guidelines in place to cover at least 36 separately marketed biopharmaceutical products and officials say 14 products have already been approved.
Korea Food and Drug Administration (KFDA) officials said the government agency will increase transparency in management and try to keep policy consistencies for the growth of the sector.
“I can say the regulation for biosimilars is kind of a ‘double-edged sword.’ It means tougher regulation will help players get more modern technology, but that also means small companies and laboratories would face difficulties in technology innovation,” said the Celltrion official.
When asked about any negative impact on the free trade deals with the EU and the United States, experts said the impact will be limited.
They said the trade agreements between South Korea, the EU and the United States are expected to have some negative impact on smaller Korean generic firms.
“In order to compete, Korean companies are investing profits from their generic sales into ‘super-generics’ — generics that are brought to market at the same time as patent expiry. But this requires capital and R&D pipelines that many Korean firms don’t possess.”