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Continental Traffic

by D. Larraine

In November 2001, Alberta Venture writer Larraine Andrews spent a week in Hong Kong as a winner of the Dateline Hong Kong Fellowship sponsored by the Canadian Association of Journalists and the Hong Kong Economic and Trade Office. During her visit, she talked with officials at Kinetana Hong Kong Herbal Pharmaceuticals Ltd., a subsidiary of Edmonton biotech company Kinetana Group Inc., to find out why the company will soon become the first tenant in the biotechnology cluster at Hong Kong's new high-tech Science Park.

When you hover over the site of the new Hong Kong science Park (HKSP) in a government helicopter, its hard to argue with the bureaucrats. The Park is impressive. Located north of Hong Kong Island in Tai Po, at the centre of the New Territories, the government-funded project is being built in three phases that will eventually cover 22 hectares of reclaimed land fronting Tolo Harbour. With easy access to downtown Hong Kong and Mainland China, the Park will feature campus-like surroundings including on-site apartments, retail and commercial outlets, and services such as legal and financial support, fitness and conference facilities all geared to operate, in typical Hong Kong style, on a 24-hour basis. It is tangible evidence of the vision set forth in 1999 by Tung Chee Hwa, chief executive of the Government of the Hong Kong Special Administrative Region (HKSAR), "to make Hong Kong the innovation and technology hub of Asia."

In the months leading up to the handover of Hong Kong back to China on July 1, 1997, the predictions about the future of the colony were dire. Hong Kong’s new constitution, The Basic Law, promised a high degree of autonomy and little if any interference from the Mainland. But many were skeptical that its promise of "One Country, Two Systems" would actually materialize. (Under The Basic Law, Hong Kong will be allowed to operate independently of the Mainland using a capitalist system for the next 50 years.)

In the end, the actual event was almost an anti-climax. Soldiers didn't fill the streets and the capital markets didn't collapse. In fact, for the eighth consecutive year, Hong Kong has maintained its rating as the "freest economy in the world" according to the 2001 Index of Economic Freedom recently released by The Heritage Foundation and the Wall Street Journal.

While the threat to Hong Kong’s immediate stability has subsided, what has emerged is a very real threat to Hong Kong’s status as the economic hub of Asia. As China slowly opens its borders to the world, cities like Shanghai and Guangzhou are hungry for a piece of the Asian wealth that has traditionally been centred in Hong Kong. These competitors are forcing Hong Kong to adapt and reinvent itself. The Science Park project makes it clear the HKSAR is serious about meeting the challenge. To date, the government of the HKSAR has committed $7.3 billion HK ($1.46 billion Cdn) to the construction of the first two phases.

Dr. Yun K. Tam, president and CEO of Edmonton-based Kinetana Group Inc. (Kinetana), believes it was "fate" that brought him to Hong Kong at a time when the HKSAR was moving to establish a high-tech community aimed at nurturing world-class clusters committed to applied research and development. Tam, who was born in Hong Kong, is currently an Adjunct Professor of Pharmacokinetics at the University of Alberta, where he has worked since 1981. (Pharmacokinetics focuses on the absorption, distribution and metabolism of drugs by the body over time.)

Tam founded Kinetana as a consulting company in 1987, and in 1998 the company opened a research facility at the Advanced Technology Centre in Edmonton’s Research Park where 15 employees occupy about 2,700 square feet of space. It is Kinetanas research in Edmonton that is currently opening the doors to exciting new prospects in Hong Kong. Kinetana is developing an "artificial gut" technology called SimBioDAS™ The technology is complex, but the concept is relatively easy to understand. Drugs administered orally must first be absorbed from the intestine into the blood and then sent to the site of action. The artificial gut is designed to speed up the testing of the absorption process, which has traditionally relied on animal testing - an extremely expensive and time-consuming procedure. Currently, new drugs can require 11 to 15 years and up to $500 million US to develop. Kinetana hopes to dramatically reduce the time and cost of drug development for large pharmaceutical companies with its artificial gut technology. Tarn predicts that within four years, there will be a market worth $1 billion US for the type of screening services supplied by technologies like SimBioDAS™

Kinetana also develops popular herbs such as gingko and echinacea. Plans are to launch a gingko product early in 2002. This product will be the first real revenue generator for the company, which has pumped almost $2 million into testing and development over the past three years. The stakes are high. According to Tam, the world market for gingko is projected to grow to $4 billion US in five years.

During a trip to Hong Kong in 1999, Tam was intrigued by information he saw on the Hong Kong Science Park, where biotechnology was one of four world-class clusters being established. (The other clusters include Information Technology, Precision Engineering and Electronics.) He had noticed a renewed interest in the study of Traditional Chinese Medicine (TCM), which was being aggressively promoted by the HKSAR to develop Hong Kong as a TCM research and development centre. Tam recalls, "I thought the artificial gut technology could be useful in the study of TCM but it wasn't my area. I was starting at a knowledge base of zero." Through connections he made with the State Drug Administration in China, Tam talked to experts who agreed the technology, which could help pinpoint active ingredients in traditional treatments and measure their efficacy, had good potential in the study of TCM.

At this point in time, no one knows for sure the size of the market for TCM but most agree that the potential is huge. Dr. Hugh Semple, director of Scientific and Regulatory Affairs with Kinetana in Edmonton, points to the growing demand for TCM treatments as the Mainland Chinese become more prosperous. He notes, "The Mainland government also wants to tap into the market for alternative medicines that is growing in North America." But to do this, sellers must be able to meet rigorous regulatory and quality standards. It means TCM must be "modernized." Early in 2000, Kinetana decided to establish a subsidiary, Kinetana Hong Kong Herbal Pharmaceuticals Ltd. (KinHK), in facilities at the Hong Kong Institute of Biotechnology. The Institute is next door to the Science Park where KinHK will be an anchor tenant in the biotechnology cluster when Phase 1 of the Park is ready for occupancy later in 2002. The new space will allow KinHK to triple the size of its present facilities from 4,000 to over 15,000 square feet and to more than double the number of employees from 13 to 30.

Tam works closely with his wife, Dr. Nuzhat Tam-Zaman, who is in charge of quality assurance and international affairs in addition to research work she is currently doing on a drug used to treat endotoxemia. Both of them were impressed with the support they received from the HKSP during the negotiations. Tam notes, 'They were really promoting [the Park]. They even came to Edmonton to look at our facilities there. They were very supportive."

Although the final rental contract is still being negotiated, Tam confirms that the HKSAR has not asked for any special concessions such as sharing a portion of licensing fees from commercialized products. He explains, "I don't think the Science Park will demand these kinds of things because rental and leasing are becoming more and more affordable outside the Park as real estate prices come down."

KinHK is currently in the R & D stage and doesn't plan on any major product launches any time soon. Tam explains, "We have transferred the artificial gut technology and are [working on] analyzing and quantifying the active ingredients in herbs." The aim is to produce uniform quality formulations that will meet the high standards set for certification under the U.S. FDA guidelines. Once certified, it will be possible to make therapeutic claims about the products for prescription purposes - something that has not been possible up to now because of the difficulties in isolating and identifying the active ingredients. The company is working on the development of TCM products to treat liver cancer, hepatitis and other ailments and recently won the title of Best Biochemistry Technology Company in Hong Kong for 2001 during a competition sponsored by OMEGA and Capital Marine.

Hong Kong is a long way from Edmonton, but as Tam explains, "We needed to be closer to the TCM experts [in China] and to be able to get samples and products. We realized if we just focus on Canada without an Asian presence, it would be difficult to do business and be taken seriously. We needed to establish a local presence."

Still, Tam has no plans to move everything to Hong Kong. He explains, "The whole idea is to keep Kinetana International. We have no intention of shrinking or moving the operation from Edmonton. In fact, the Edmonton operation will grow to the same size as that of Hong Kong except that the focus is different and the two operations are complementary to each other in terms of technology transfer and marketing of products from either side."

So why not go straight to Mainland China and the experts there? Tam responds, "Why would we want to go to [Mainland] China and try to understand the environment there? The government here (in Hong .Kong) has been very supportive. It’s not a hard process." There seems little doubt that Hong Kong means business with the world’s ninth largest banking centre, a low corporate tax rate (16%), and a government whose slogan is "maximum support, minimum intervention." But there are still challenges the company faces: "Its hard to find qualified scientists. We may have to bring in people from Canada. The salaries and operating costs are very high here. Salaries can be double those in Alberta."

One of the biggest incentives is the funding available to companies that locate in Hong Kong. Launched in November 1999, the Innovation and Technology Fund (ITF) was set up with an initial injection of $5 billion HK ($1 billion Cdn). Four different programs cater to the needs of various technology startups, universities, professional and industry support organizations. KinHK recently qualified for a matching grant of $6.13 million HK ($1.23 million Cdn) under the University-Industry Collaboration Programme. Contrast this with the $300,000 National Research Council grant awarded to Kinetana in Canada, and it’s clear the HKSAR is serious.

The Park is designed using a cluster concept, where a group of core enterprises and institutions collaborate in a particular business segment with a common goal of innovation. Customers, suppliers, manufacturers, financial and legal advisors, form a nucleus of contacts, which in turn interacts with institutions, government and other partners.

Daniel Lam, senior manager of marketing and promotions at the Park, believes the cluster concept is a world trend. "We looked at Silicon Valley and the semi-conductor industry in Taiwan where they have been very successful. Competition is between clusters instead of individual companies. World-class clusters become major drivers of the local economy and tend to concentrate in major centres with world-class facilities and support systems. The Park is designed to create the environment for nurturing these clusters for global competition."

Hong Kong's cluster concept is not unlike the "industry cluster" approach being promoted by Economic Development Edmonton (EDE) as part of the Greater Edmonton Competitiveness Strategy. In December 2001, Jim Edwards (at that time president and CEO of EDE) confirmed that analogy. "We survey world practices on a regular basis and Hong Kong would be part of that. We see Hong Kong as being totally complementary to what we are doing." Although the implementation stage of the strategy was only launched in 2001, a recent study by KPMG Consulting for EDE called Edmonton a leader in cluster economic development in Canada.

Tam comments, "The cluster concept wasn't kick started as fast [in Edmonton]. They are still talking and don't seem as sure how to proceed. In Hong Kong they brought in a team from around the world to advise on how to do it [and started doing it]." Nevertheless, the slow start hasn't affected Kinetana’s plans to stay in Edmonton.

Back in Hong Kong, the HKSP and its cluster approach is not without its skeptics. As China continues to open its markets and build its infrastructure, there is much uncertainty about Hong Kong's ability to maintain its position as the gateway to Asia. Can it become the Asian hub for innovation and technology? Tam believes the critical success factor depends on decisiveness. "If they have a clear cut approach to how to build a critical mass, the future is good. If they take too long, they will lose their competitive edge. There is a very narrow window of opportunity until China is able to catch up its infrastructure. They must act soon and aggressively."

Tam agrees KinHK has benefited from the government's plans. "We have positioned the company to keep doing what we do best. We are forming alliances with China. We will definitely benefit [from the potential cluster synergies] if Hong Kong maintains its edge. We want to be flexible and right now in Hong Kong we have that flexibility." Despite the doubters, he remains optimistic about Hong Kong's ability to become the biotechnology centre of the world. "The Hong Kong people are very hardworking and resilient. Their success in the past was not by chance." They've certainly known tough times before. And as Tam points out, "Heroes are made in tough times."

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