Thursday, April 16, 2009

FDI in biotech industry in U.S.: Make Decision under the New Regulatory Environment

A few days ago, NeoStem, Inc. (AMEX: NBS) received a total $11 million investment from three Asian companies, including a Shanghai based investment company. NeoStem, Inc. is a biotech company which “manages a network of adult stem cell collection centers in major metropolitan areas in the United States, enabling people to donate and store their own (autologous) stem cells when they are young and healthy for their personal use in times of future medical need. The Company also has entered into research and development through the acquisition of a worldwide exclusive license of technology to identify and isolate VSEL(very small embryonic-like) stem cells, which have been shown to have several physical characteristics that are generally found in embryonic stem cells.”

This investment coincides with the dramatic change in the big picture: President Obama lifted the ban on federal funding for embryonic stem cell research on March 9, 2009. This new order gave a big boost on biotech research communities, in addition to more commitments on government funding for general biotech research.

Previously, the U.S. only allowed the federal funding for adult stem cell research. It was reported that the U.S. has already initiated a clinical phase II study of adult stem cell-derived drugs that could treat chronic heart disease and, for the first time in the world, authorized a clinical trial of embryonic stem cell drugs that could treat spinal injuries. (

The traditional business model for big pharmaceutical companies has already been broken. Currently, the average R&D period of a new drug is about 12 years and the successful rate of new drugs development is about 2-3%. On the other hand, the revenue from new drugs is reduced because the generic drug producers can undercut the prices and markets just a few years later. Thus, the cost per patient under this business model is prohibitively high, which is impossible under the current U.S. healthcare system. Many of these challenges facing the drug industry compelled the industry to find ways to cut cost, i.e. outsourcing clinic trials to China and India.

The same problems also appear in biotech field. In long term, stem cell research is called the one of the most promising areas that is expected to generate numerous marketable new drugs and new therapies. One application is for treatment of neurogenerative diseases, such as spinal muscular atrophy, Lou Gehrig's disease and Parkinson's. However, in short term, the stem cell research very much relies on government funding and venture capital.

To reverse the outsourcing trend in pharmaceutical industry in U.S., foreign investors considering investing in U.S. biotech field usually have a few reasons: techniques and patents; closed to U.S. market (especially crucial for FDA applications); and closer to a capital market (dysfunctional now but could be helpful in the future).

There are only a few places in U.S. that are suitable for such goals, such as California, New Jersey, New York, Massachusetts, and Wisconsin. All these states have strong legal supports on stem cell research. While other states might support general biotech research, many banned public funding for stem cell research particularly. More importantly, these states have a large pool of talents, top universities and research facilities that are devoted to life science research. As a result, pharmaceutical industry and medical communities have strong presence in these places. Setting up an office or acquiring a biotech company there is a necessary step if one wants to get in the game.

The stem cell research and application industry is still a much fractured segment. Because the stem cell research currently is still in the lab stage, marketable commercialized products are much farther away on the horizon. Major revenue sources for this industry include government funding and private venture capital. However, there is still room for private companies to make profits. As the investment mentioned at the beginning of the article, NBS is an adult stem cell supplier and bank, which could be commercially viable because demand for its products is likely to rise due to increasing funding for research. Likewise, there are other investment opportunities in this market. It all depends on your advantages and position in the industry.

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