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COO's Assessment that Exam Cheating + Pre-Revenue Biotech = Fraud Concerns

One of the biggest potential challenges for investors in pre-revenue biotech companies preparing to IPO in Hong Kong may be linked to the region’s problem with exam cheating.

The value of pre-revenue biotech companies is directly linked to the quality of their science, and progress through clinical trials to full regulatory approval for human use. But determining the quality of a biotech company’s scientific research is extremely difficult, even for specialists.

Fraud is a big problem for the industry globally. One fundamental building block for a good biotech company is the quality of its research. But there is a global problem with fake peer review, where lies are told by people trusted to offer an independent assessment of a company’s science. Biotech values also skyrocket when a drug progresses through government clinical trials. Unfortunately, these can also be faked, with investors paying the price.

There is no evidence that Asia’s Ivory Tower has better academic integrity, or that science in Asia is immune to fraud and falsification of scientific results. Instead, Asia appears to be ground zero for massive cheating scandals. I-OnAsia has specialized in the investigation of exam cheating syndicates since 2001. Highly sophisticated fraudsters sell exam results for nearly every exam or certificate imaginable, including health related certifications. Networked student groups reverse engineer entire exams by collecting individual answers, and trade cheating tips on chat rooms and the Dark Web. And the problem appears pervasive within the culture. One 2016 report suggested that academic cheating by international students, particularly Chinese students, was fifty times (50X) worse than cheating by U.S. students.

The problem of exam cheating in the region could be particularly pronounced for Asia’s pre-revenue biotechs, given the importance of academic research to determining corporate value. Old habits are hard to break, and common (un)ethical practices are likely to threaten the industry. Fraud allegations have touched high profile western biotech companies such as Theranos, Aveo Pharmaceuticals, AnC Bio, Turing Pharmaceuticals, PixarBio, Innate Immunotherapeutics, and Sterling Biotech. Asian companies are likely to follow.

Screening for fake degrees and false statements of academic achievement is already a common due diligence practice. For Asia’s pre-revenue biotech companies is more valuable.

Likewise, pre-investment due diligence typically examines relationships between a company and politicians for compliance purposes. More of the same activities are now essential to uncovering any untoward relationships with regulators overseeing clinical trials.

It is common for the quality of executives’ historic business relationships with third parties to be tested as part of any due diligence process. The quality and background of any peers that reviewed early scientific research should be reviewed.

Finally, regulators frequently examine corporate culture when considering whether any firm is fit to sell stock to public investors. Whether or not a company’s employees tolerate cheating is likely to be an important metric for measuring the quality of pre-revenue biotech leadership teams.

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