QIC Inside Investor Relations Volume 35：Why Investors Should Re-focus on Taiwan’s Biotech Sector

In 2020, Oneness Biotech licensed out its atopic dermatitis new drug FB-825 to Denmark dermatology giant Leo Pharma for US$ 530mn. The unprecedented licensing deal got the show started. Foresee Pharma completed the global licensing of its late-stage prostate cancer drug CAMCEVI™ for US$ 420mn, followed by the US FDA approval of PharmaEssentia’s polycythemia vera new drug BESREMi®. So after a few years of “silence”, is Taiwan’s biotech sector still a castle in the air or is it a sustainable industry that investors should participate in?

We included 33 Taiwan biotech companies in our research universe and analyzed it by overall Index performance, trading volume, FINI shareholding trends, and composition. The following are our findings:

TPEx Bio-Med Index Sustainably Outperform HSHK Bio Index and Nasdaq Bio Index

HSHK Bio Index is a China-centric, Hong Kong-based Bio-Index. After HKSE allowed for the IPO of biotech companies prior to generating revenues, the HSHK Bio Index grew rapidly driven largely by the IPO of several Chinese innovative drug companies. On the other hand, Nasdaq Bio Index (NBI) is the most active Bio cluster in the world and clocked in a particularly strong performance following the series of new product offerings of vaccines, anti-viral drugs, and diagnostics following the COVID outbreak.

However, if we compare TPEx Bio-Med with HSHK Bio Index and Nasdaq Bio Index for the past 24 months, the HSHK Bio Index underperformed TPEx Bio-Med Index for 16 months, and NBI underperformed for 23 months. In this period, the return of HSHK Bio Index was 4%, NBI was 23%, while TPEx Bio-Med Index booked a 53% return.

Average Trading Volume Is Still Low - The Sector Remains Unloved

The above chart is an index of Taiwan’s biotech companies’ average daily trading volume relative to that of the overall market. A high index level indicates a high level of speculative buying for Taiwan’s biotech stocks. The chart clearly demonstrates three stages in the past ten years:

(1) High growth stage: from 2011 to 2014, the average trading volume kept increasing. By 2014, the trading volume was 3.3 times of 2011. Investors were chasing “Price to Dream”, and heated up the sentiment in biotech sector.

(2) Recession stage: From 2014, Medigen Biotechnology failed to deliver positive results on its liver cancer new drug sending the sector index lower. After OBI’s failure on its breast cancer new drug, the market continued to fall for another four years - the average trading volume fell to levels even lower than 2011.

(3) Recovery stage: as described earlier, Oneness’ successful out-licensing lifted the curtain on the recovery stage. Following the success of Oneness, the shares of Microbio, SynCoreBio and Sinphar were closely watched by investors as well.

Even more noteworthy is the fact that despite a whole three months of recovery, the average trading volume of the biotech in 2020 was still under the level of 2016. A drop in 2021 was due to the surge of shipping and semiconductor names plus the fact that PharmaEssentia’s new drug BESREMi® wasn’t approved until year-end, not to mention the full-delivery trading penalty imposed by the authorities due to disclosure irregularities. This trading index chart thus suggests the strong potential in this sector is not yet reflected in share prices.

More Frequent and Larger Scale Fund Raising Expands Drug Pipeline

The key difference between the biotechnology sector and other sectors is the massive investment in early-stage R&D and the extraordinary long development periods involved. Therefore, innovative drug developers need to continuously raise funds to fuel pipeline projects. Aside from the 2016-2019 period, we can easily see the upward trend of the total fundraising value in the past 10 years. In those years, investors lost faith in the sector while stricter regulatory review further discouraged fundraising activities. In our view, the increased funding should support even stronger future revenue growth and demonstrate the growing investable clinical pipeline that is emerging from the Taiwan Biotech sector.

While starting from a very low base, foreign shareholding is rising quickly. A big jump happened in 2015 as the IPO of OBI attracted Vanguard Group, BlackRock and Templeton to become significant shareholders of the company. After that, passive funds increased significantly. It made the passive indices based on ESG metrics, market cap and liquidity much more important than before. Although the proportion of active funds gradually decreased versus passive funds, but the total amount of active fund holdings was still quite stable. With more positive developments in the future, we believe active funds will play a more important role in the biotech sector.

Defying the good news of the US approval of the AIDS new drug developed by TaiMed and the EU approval of the PV new drug developed by PharmaEssentia, the only year of decreased foreign investment was in 2019. In 2021, we have seen a transformation in this sector with the index level rising strongly after PharmaEssentia and Foresee obtained their US FDA approvals. We believe these positive developments are not one-off events, but rather the beginning of a longer-term trend of growing new drug development and revenue growth.

Summary

The capital market road for Taiwan biotech sector was a bit bumpy along the way. However, we have seen more positive results and innovative products approved to improve patients’ quality of life. Biotech stocks still account for a relatively low proportion of foreign investment in Taiwan, as well as valuation and trading volume, thus we believe that as long as Taiwan biotech companies can come up with strong R&D achievements, and with growing awareness of this trend, foreign ownership should still have considerable room for growth.

QIC Healthcare Forum

QIC is hosting a Healthcare Forum from the 14th to 18th of Feb, 2022. You are welcome to contact us should you be interested in participating in meetings with the leadership of the best biotech companies in Taiwan.

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Contact: Yvonne Huang yvonnehuang@qtumic.com