Biotechnology in a Global Economy

Biotechnology in a Global Economy

October 1991

OTA-BA-494NTIS order #PB92-115823

Recommended Citation:

U.S. Congress, Office of Technology Assessment, Biotechnology in a Global Economy,OTA-BA-494 (Washington, DC: U.S. Government Printing Office, October 1991).

For sale by the U.S. Government Printing OfficeSuperintendent of Documents, Mail Stop: SSOP, Washington, DC 20402-9328

ISBN 0-16 -035541-9

Foreword

Since the discovery of recombinant DNA technology in the early 1970s, biotechnologyhas become an essential tool for many researchers and the underpinning of new industrialfirms. Biotechnology-which has the potential to improve the Nation’s health, food supply,and the quality of the environment—is viewed by several countries as a key to the marketplaceof the 21st century. In order to understand the potential of biotechnology in a global economy,it is first necessary to identify current and potential applications of biotechnology, and to learnhow various Nations support and regulate the uses of biotechnology in commerce.

This report examines the impact of biotechnology in several industries, includingpharmaceuticals, chemicals, agriculture, and hazardous waste clean-up; the efforts of 16Nations to develop commercial uses of biotechnology; and the actions, both direct andindirect, taken by various governments that influence innovation in biotechnology.

The report was requested by the House Committee on Science, Space, and Technology;the Senate Committee on Agriculture, Nutrition, and Forestry; the Senate Committee on theBudget; and the Senate Committee on Governmental Affairs. OTA was assisted in preparingthis study by a panel of advisers, experts from 16 countries who participated in an internationalconference, two workshop groups, and more than 140 reviewers selected for their expertiseand diverse points of view on the issues covered in the report. OTA gratefully acknowledgesthe contributions of each of these individuals. As with all OTA reports, responsibility for thecontent of the final report is OTA’s alone. The report does not necessarily constitute theconsensus or endorsement of the advisory panel, the workshop groups, or the TechnologyAssessment Board.

JOHN H.-GIBBONSDirector

,.,Ill

Biotechnology in a Global Economy Advisory Panel

Alberto AdamVice PresidentInternational Agricultural DivisionAmerican Cyanamid Co.Wayne, NJ

Robert Reich, ChairJohn F. Kennedy School of Government

Harvard UniversityCambridge, MA

Brian AgerDirector, Senior Advisory Group on BiotechnologyBrussels, Belgium

Robert H. BensonSenior Patent AttorneyGenentech, Inc.South San Francisco, CA

Stephen A. Bent, PartnerFoley & LardnerAlexandria, VA

Jerry Caulder.Chairman, President, and Chief Executive OfficerMycogen Corp.San Diego, CA

Peter F. DrakeExecutive Vice President and

Director of Equity ResearchVector Securities International, Inc.Deerfield, IL

Anne K. HollanderWashington, DC

Michael HsuPresidentAsia/Pacific Bioventures Co.New York, NY

Dennis N. LongstreetPresidentOrtho BiotechRaritan, NJ

Lita L. NelsenAssociate DirectorTechnology Licensing OfficeMassachusetts Institute of TechnologyCambridge, MA

Richard K. QuisenberryVice President, Central Research

and DevelopmentDuPont Experimental StationWilmington, DE

Sarah Sheaf CabotBiotechnology Licensing ConsultantMalvern, PA

James 3?. Sherblom.Chairman and Chief Executive OfficerTSI Corp.Worcester, MA

Donna M. Tanguay,Willian, Brinks, Olds, Hofer, Gilson, & LioneWashington, DC

William J. WalshExecutive Vice President and ChairmanCurrents International, Inc.Oakton, VA

Thomas C. Wiegele*Directorprogram for Biosocial ResearchNorthern Illinois UniversityDeKalb, IL

W. Wayne Withers,Senior Vice President, Secretary and

General CounselEmerson Electric Co.St. Louis, MO

Kenneth J. MacekPresidentTMS Management ConsultingFramingham, MA

* Deceased.

NOTE:

iv

OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the advisory panel members.The panel does not, however, necessarily approve, disapprove, or endorse this report. OTA assumes full responsibility for thereport and the accuracy of its contents.

OTA Project Staff-Biotechnology in a Global Economy

Roger C. Herdman, Assistant Director, OTAHealth and Life Sciences Division

Michael Gough, Biological Applications Program Manager

Gretchen S. Kolsrud, Biological Applications Program Manager1

Kevin W. O’Connor, Project Director

Kathi E. Hanna, Senior Analyst

Margaret McLaughlin, Analyst

Randolph R. Snell, Analyst 2

Suzie Rubin, Research Analyst

Editor

Bart Brown, Washington, DC

Support Staff

Cecile Parker, Office AdministratorLinda Rayford-Journiette, Administrative Secretary

Jene Lewis, Secretary

ContractorsEvan Berman, Arlington, VA

Sue Markland Day, University of TennesseeGenesis Technology Group, Cambridge, MA

Kathi E. Hanna, Churchton, MDGregory J. Mertz, Washington, DC

Michael K. Hsu, Asia/Pacific Bioventures Co.Tai Sire, Washington, DCPaul J. Tauber, Ithaca, NY

William J. Walsh, Oakton, VAHal Wegner, Washington, DC

Aki Yoshikawa, University of California, Berkeley

PageChapter 1: Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 2: Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Part I: Commercial Activity

Chapter 3: Introduction: Commercial Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . .

Chapter 4: Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 5: The Pharmaceutical Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 6: Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 7: The Chemical Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 8: Environmental Applications . . . . . . . . . . . . . . . ...*...* . . . . . . . . . . . . . . . . . . . . . . . . . .

Part II: Industrial Policy

Chapter 9: Introduction: Industrial Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . .

Chapter 10: Science and Technology Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 11: Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 12: Intellectual Property Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Appendix A: A Global Perspective: Biotechnology in 14 Countries . . . . . . . . . . . . . . . . . . . . . .

Appendix B: Comparative Analysis: Japan . . . . . . . . . . . . . . . . . . . . . . . ● *...... . . . . . . . . . . . . . .

Appendix C: Federal Funding of Biotechnology, FY 1990/1991 . . . . . . . . . . . . . . . . . . . . . . . . . .

Appendix D: List of Workshops and Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Appendix E: Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Appendix F: Acronyms and Glossary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .275

vi

Chapter 1

Summary

“As we move through the next millennium, biotechnology will be as important as thecomputer. ‘‘

John Naisbitt & Patricia AburdeneMegatrends 2000

“Biotechnology-the very word was invented on Wall Street-is a set of techniques, ortools, not a pure science like much of academic biology.”

Robert TeitelmanGene Dreams

CONTENTSPage

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .COMMERCIAL ACTIVITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Financing of Biotechnology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .The Pharmaceutical Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .The Chemical Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Environmental Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

INDUSTRIAL POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Science and Technology Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Intellectual Property Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

INTERNATIONAL COMPETITIVENESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Japan ● . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

OPTIONS FOR ACTION BY CONGRESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Federal Funding for Biotechnology Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Targeting Biotechnology Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Developing Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Coordinating Federal Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Protecting Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ● . . . .Improving Industry-University Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Structuring Coherent Tax Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

33378

101213131416191919212121222223232424

Boxl-A. Defining Biotechnology . . . .l-B.l-C.

Sixteen Countries . . . . . . . . . .Biotech’s 1991 Stock Boom

BoxesPage

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .l-D. Arrangements Between Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .l-E. Measuring International Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5578

20

FigureFigurel-1. States Where Releases of Genetically Engineered Organisms

Been Approved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PageHave. . . . . . . . . . . . . . . . . . . . 17

TablesTable Pagel-1. Major Events in the Commercialization of Biotechnology . . . . . . . . . . . . . . . . . . . . . . . 2l-2. Approved Biotechnology Drugs/Vaccines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9l-3. Characteristics, Pharmaceutical Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10l-4. Proposed Pending or Performed Field Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11l-5. U.S. Federal Funding for Biotechnology, Fiscal Year 1990 . . . . . . . . . . . . . . . . . . . . . . 20

Chapter 1

Summary

INTRODUCTIONBiotechnology-both as a scientific art and com-

mercial entity—is less than 20 years old (see tablel-l). In that short period of time, however, it hasrevolutionized the way scientists view living matterand has resulted in research and development (R&D)that may lead to commercialization of products thatcan dramatically improve human and animal health,the food supply, and the quality of the environment(see box l-A). Developed Primarily in U.S. laborato-ries, many applications of biotechnology are nowviewed by companies and governments throughoutthe world as essential for economic growth in severaldifferent, seemingly disparate industries.

To what degree is biotechnology being used as atool in basic research, product development, andmanufacturing? In what industries is biotechnologybeing used, and how are various national govern-ments promoting and regulating its uses? Will theUnited States retain its preeminence in biotechnol-ogy, or will the products and services created bybiotechnology be more successfully commercial-ized in other nations? What is the role played bymultinational corporations, and how is internationalbiotechnology R&D funded? Because of its impor-tance to U.S. competitiveness in an increasinglyglobal economy, biotechnology is viewed as one ofthe keys to U.S. competitiveness during the yearsahead. This report describes the increasing interna-tional use of commercial biotechnology in industri-alized and newly industrializing countries (NICs)(see box l-B) and the ways governments promoteand regulate the uses of biotechnology.

COMMERCIAL ACTIVITYBiotechnology is not an industry. It is, instead,

a set of biological techniques, developed throughdecades of basic research, that are now beingapplied to research and product development inseveral existing industrial sectors. Biotechnologyprovides the potential to produce new, improved,safer, and less expensive products and processes.Pharmaceuticals and diagnostics for humanS andanimals, seeds, entire plants, animals, fertilizers,food additives, industrial enzymes, and oil-eatingand other pollution degrading microbes are just a

few of the things that can be created or enhancedthrough the use of biotechnology.

Many early claims about biotechnology, seen inretrospect, were premature. Products have not beendeveloped and marketed as quickly as previouslythought possible, and many scientific and publicpolicy issues remain to be settled. However, biotech-nology has arrived as an important tool for bothscientific research and economic development. Itseffect on the world’s economy will certainly grow inthe years ahead, as research leads to new products,processes, and services.

Financing of Biotechnology

The competitiveness of U.S.-developed bio-technology products and processes may ultimatelydepend on broad issues, e.g., fair trade practices,protection of intellectual property, regulatoryclimate, and tax policies. The competitiveness ofU.S. innovation, however, could very well rely onthe ability of biotechnology companies to stay inbusiness. Because biotechnology is capital-intensive, staying in business means raising substan-tial sums of cash. Start-up companies’ fundamentalneed for cash, coupled with the desire of venturecapitalists in the United States to profit from thecreation of high-value-added products (based’ oncutting-edge technology) have led to the financialcommunity’s substantial involvement in the forma-tion of biotechnology-based firms.

Venture Capital and the DedicatedBiotechnology Company

The United States has led the world in thecommercial development of biotechnology becauseof its strong research base-most notably in bio-medical sciences--and the ability of entrepreneursto finance their ideas. During the early 1980s, acombination of large-scale Federal funding for basicbiomedical research, hype surrounding commercialpotential, and readily available venture capitalfunding led to the creation of hundreds of dedicatedbiotechnology companies (DBCs).

Dedicated biotechnology companies are almostexclusively a U.S. phenomenon; no other countryhas a remotely comparable number. Biotechnol-ogy companies are created specifically to exploit the

- 3 -

4 ● Biotechnology in a Global Economy

Table l-l—Major Events in the Commercialization of Biotechnology

1973 First cloning of a gene.

1974 Recombinant DNA (rDNA) experiments first discussed in a public forum (Gordon Conference).

1975 U.S. guidelines for rDNA research outlined (Asilomar Conference).First hybridoma created.

1976 First firm to exploit rDNA technology founded in the United States (Genentech).Genetic Manipulation Advisory Group started in the United Kingdom.

1980 Diamond v. Chakrabarty--U.S. Supreme Court rules that micro-organisms can be patented.Cohen/Boyer patent issued on the technique for the construction of rDNA.United Kingdom targets biotechnology for research and development (Spinks’ report).Federal Republic of Germany targets biotechnology for R&D (Leistungsplan).initial public offering by Genentech sets Wall Street record for fastest price per share increase ($35 to $89 in 20 minutes).

1981 First monoclonal antibody diagnostic kits approved for use in the United States.First automated gene synthesizer marketed.Japan targets biotechnology (Ministry of international Trade and Technology declares 1981, “The Year of Biotechnology”).initial public offering by Cetus sets WallStreet record for the largest amount of money raked in an initial public offering ($1 15

million).Over 80 new biotechnology firms formed by the end of the year.

1982 First rDNA animal vaccine (for colibacillosis) approved for use in Europe.First rDNA pharmaceutical product (human insulin) approved for use in the United States and the United Kingdom.

1983 First expression of a plant gene in a plant of a different species.New biotechnology firms raise $500 million in U.S. public markets.

1984 California Assembly passes resolution establishing the creation of a task force on biotechnology. Two years later, a guideclarifying the regulatory procedures for biotechnology is published.

1985 Advanced Genetic Sciences, inc. receives first experimental use permit issued by EPA for small-scale environmental releaseof a genetically altered organism (strains P. syringae and P. fluorescens from which the gene for ice-nucleation protein hadbeen deleted.

1986 Coordinated Framework for the Regulation of Biotechnology published by Office of Science and Technology Policy.Technology Transfer Act of 1986 provides expanded rights for companies to commercialize government-sponsored

research.

1987 U.S. Patent and Trademark Office announces that nonhuman animals are patentable subject matter.October 19th-Dow Jones Industrial Average plunged a record 508 points. initial public offerings in biotechnology-based

companies virtually cease for 2 years.

1988 NIH establishes program to map the human genome.First U.S. patent on an animal--transgenic mouse engineered to contain cancer genes.

1989 Bioremediation gains attention, as microbe-enhanced fertilizers are used to battle Exxon Valdezoil spill.Court in Federal Republic of Germany stops construction of a test plant for producing genetically engineered human insulin.Gen-Probe is first U.S. biotechnology company to be purchased by a Japanese company (Chugai Pharmaceuticals).

1990 FDA approves recombinant renin, an enzyme used to produce cheese; first bioengineered food additive to be approved inthe United States.

Federal Republic of Germany enacts Gene Law to govern use of biotechnology.Hoffman-LaRoche (Basel, Switzerland) announces intent to purchase a majority interest in Genentech.Mycogen becomes first company to begin large-scale testing of genetically engineered biopesticide, following EPA approval.First approval of human gene therapy clinical trial.

1991 Biotechnology companies sell $17.7 billion in new stock, the highest 5-month total in history.Chiron Corp. acquires Cetus Corp. for $660 million in the largest merger yet between two biotechnology companies.EPA approves the first genetically engineered biopesticide for sale in the United States.

SOURCE: Office of Technology Assessment, 1991.

Chapter 1--Summary ● 5

Box 1-A—Defining Biotechnology

The first challenge in describing the effect ofbiotechnology on a global economy is to definewhat biotechnology is. The term “biotechnology”means different things to different people. Someview biotechnology as all forms of biologicalresearch, be it cheesemaking and brewing orrecombinant DNA (rDNA) technology. Others,only view biotechnology as including modernbiological techniques (e.g., rDNA, hybridoma tech-nology, and monoclonal antibodies). Some peoplehave analogized biotechnology to a set of new toolsin the biologist’s toolbox by referring to “biotech-nologies.’ To Wall Street financiers and venturecapitalists who invested in the creation of compa-nies in this area, biotechnology represents a hot newsource of financial risk and opportunity. Congress,increasingly invoked in public policy questions raised by biotechnology, in one statute referred toproducts “primarily manufactured using recombi-nant DNA recombinant RNA, hybridoma technol-ogy, or other processes involving site specificgenetic manipulation techniques” (35 U.S.C.156(2)(B)).

In 1984, OTA arrived at two definitions ofbiotechnology. The first definition--broad inscope--described biotechnology as any techniquethat uses living organisms (or Parts of organisms) tomake or mod@ products, to improve plants oranimals, or to develop micro-organisms for specificuses. This definition encompassed both new biolog-ical tools as well as ancient uses of selectingorganisms fur improving agriculture, animal hus-bandry, or brewing. A second, more narrowdefinition refers only to “new” biotechnology:the industrial use of rDNA, cell fusion, and novelbioprocessing techniques. It is the developmentand uses of the new biotechnology that hascaptured the imagination of scientists, finan-ciers, policymakersy journalists, and the public.As in earlier OTA reports, the term biotechnol-ogy, unless otherwise specified, is wed in refer-ence to new biotechnology.SCX,JFNX: Office of ‘Bcbnology Assmsm4 1991,

commercial potential of biotechnology. These com-panies generally start as research organizations withscience and technology but without products. Theydo not undertake R&Don nearly so broad a scale asestablished companies. Instead, they focus on spe-cific technologies, particular products, and nichemarkets. The companies must fund the initial costsof infrastructure development—including buildings,

Box 1-B--Sixteen Countries

In compiling this report, OTA focused on bio-technology-related developments in the followingcountries:

AustraliaBrazilCanadaDenmarkFederal Republic of GermanyFranceIrelandJapanThe NetherlandsSingaporeSouth KoreaSwedenSwitzerlandTaiwan (Republic of China)United Kingdomunited states

In addition, the biotechnology-related activitiesof the European Community (EC) as a whole areconsidered. The countries chosen are representativeof a range of commercial and governmental activ-ity. This roster is not exhaustive; biotechnologyplays an important role in many other nations. Asthis report was compiled, major political changesoccurred including the merging of the FederalRepublic of Germany and the German DemocraticRepublic. The merger of both countries raises manyquestions regarding industrial competitiveness thatare beyond the scope of this report.

SOURCE: CMice of ‘IWmlogy Assessmon$ 1991.

plants, equipment, and people-without the benefitof internally generated revenues. They depend onventure capital, stock offerings, and relationshipswith established companies for their financingneeds.

The boom era for founding DBCs occurredbetween 1980 and 1984, when approximately 60percent of existing companies were founded. In1988, the Office of Technology Assessment (OTA)verified that there were 403 DBCs in existenceand over 70 major corporations with significantinvestments in biotechnology. The majority ofthese companies have a strong focus on humanhealth care products, largely because capitalavailability has been greater for pharmaceuticalsthan for food or agricultural products, due to theprospect of greater and faster market reward.


In the early 1980s, companies had little troubleraising cash, often obtained by licensing away keyfirst-generation products and vital market segments.As time passed, the term “biotechnology” lost itsability to turn promises of future products intoinstant cash. Several factors have been cited fortightened availability of venture capital financing:

Basic gene-splicing technology became readilyavailable to an increasing number of compa-nies, both in the United States and abroad.Product development was slower than expected(e.g., unforeseen technical problems, slow reg-ulatory approval and patent issuance, anddifficulties in scale-up and in obtaining mean-ingful clinical results).The 1987 stock market crash slammed shutopportunities for initial public offerings, andfor 18 months biotechnology companies had toget by with little new public financing.Expected returns on investments have notmaterialized as expected.

To date, most U.S. biotechnology companieshave no sales and have been losing money sincetheir inceptions. Capital and market value areconcentrated in only a few of the hundreds of firmsinvolved in biotechnology. Only one-fifth of bio-technology companies surveyed in 1990 were profit-able. Most companies are still several years awayfrom profitability and positive cash flow, but the top20 firms could last more than 3 years on current cashlevels without needing to raise additional money.

Despite the slower-than-expected commercial-ization of biotechnology, start-up firms have beenable to raise cash in the initial stages of operation.Second and third rounds of needed financing, thatare necessary to bridge the gap between basicresearch and a marketable product, are more difficultto come by. While the venture capital communityhas become more conservative in where theychoose to invest, viable opportunities appear toremain for entrepreneurs with good ideas. How-ever, a bottleneck is developing as start-upcompanies attempt to move forward towarddevelopment, testing, and marketing—the expen-sive part of the process. As much as $5 to $10billion may be needed just to develop the 100biotechnology products currently in human clini-cal trials.

Companies fortunate enough to have gone publicbefore 1987 are generally able to obtain needed cash

through limited partnerships, secondary public of-ferings, and strategic alliances. The stock marketcrash in October 1987 virtually stopped all initialpublic offerings in biotechnology-based companies.By 1991, however, stock offerings were again invogue, both for new and established firms (see boxl-C). The top DBCs will most likely remain stable,surrounded by an ever-changing backdrop of start-up companies. Those DBCs that do survive will relyon corporate relationships of every form and combi-nation of forms imaginable (see box l-D).

Consolidation

Start-up companies will continue to appear, butthese new DBCs will likely face the reality of mergeror acquisition. Only a dramatic surge in the publicmarkets or the creation of breakthrough products orprocesses will save some of these companies fromthis fate. Consolidation of DBCs is inevitable, mostlikely necessary, and desirable for some companies.What concerns some observers is the role thatforeign acquisition and investment will play in thefate of many of these vulnerable fins. Although itis true that joint activity between firms has been onthe rise (involving both U.S. companies with foreignfirms and between U.S.-based firms themselves),much of this activity is necessary to conductbusiness in a global market, i.e., licensing, market-ing, and co-marketing agreements. Currently, thereis insufficient evidence to state that U.S. commer-cial interests in biotechnology are threatened byforeign acquisition. To date, most corporationshave avoided this mechanism. As U.S. DBCs movecloser to product reality, however, foreign corpora-tions with large pools of cash may be more willingto pursue acquisition in order to ensure manufactur-ing rights. Executives of DBCs tend to feel thatmanufacturing rights will be crucial for the viabilityof their companies.

The recent merger of the United States’ largestbiotechnology company, Genentech, with Swiss-owned Hoffmann-LaRoche, has increased publicinterest and concern in foreign acquisition of U.S.biotechnology concerns. While some foreign firms(usually large, multinational corporations) areactively investing in U.S. DBCs, approximatelythree-quarters of all mergers and acquisitionsinvolving biotechnology companies are betweenU.S.-based firms (e.g., the 1991 merger betweenChiron and Cetus). However, U.S. corporations aredisadvantaged when it comes to acquisition because

Chapter l---Summary . 7

Box 1-C—Biotech’s 1991 Stock Boom

On October 19, 1987, the Dow Jones Industrial Biotech’s Surprising Stock Market Boom

Average plunged a record 508 points. Following thestock market crash, there was little interest on Wall 1600 ~ü -1Street in stock offerings for biotechnology-related ,Aoo {companies. By early 1991, however, the U.S. marketfor new stock offerings had heated up to a record pace, lzoo ~ I

despite the fact that the U.S. economy was in arecession and stock sales in general were sluggish. 1000 ~

\Between January and May 1991, companies sold 800 :

almost $18 billion in new stock the highest 5-month/ \

/600 ;

total in history. Various reasons were cited by analystsfor the hot market: the approval by FDA of new 400 “ / \

products, the durability of health-related stocks during ‘ p)/ ‘./’p \ I \

economic hard times, and pent-up demand following 200 “ 1slow stock activity over a 3-year period. O ‘- “ - ~ ‘- “T” ‘-—~ “~ ‘1-–— ~--

1980 81 82 83 84 85 86 87 88 89 90 911Unlike earlier bull markets for biotechnology ,~~,OU~~ ~aY *4 ,991stocks, however, analysts generally view the 1991boom as short term in nature. By the end of May, therewere signs that the stock demand was cooling. For SOURCE: IDD Information Services, Inc., New York.

example, Regeneron Pharmaceuticals (Tarrytown,NY), a start-up company that had set a record for biotechnology companies by raising $99 million in its initial publicoffering in April (4.5 million shares sold at $22 per share), saw its stock value drop to $12 per share by the end ofMay after reporting first-quarter losses of $1.1 million.SOURCE: Ofi%ce of lkchnology Assessmen4 1991, adapted from IDD Information Services; R. Rhe& “Bioteeh Stocks: M the Good Times

Roll,” Journal of NZZi Research, July 1991, pp. 54-55; Biotechnology, ‘‘Regeneron Gets Rich, Offerings Abound,” vol. 9, May1991, p. 404.

American accounting practices prevent them from are in the final stages of testing. Of the more thandeducting the full expense of acquisition in the yearthat it occurs. Some analysts believe that thisdifference in accounting practices allows foreigncorporations to move more rapidly toward acquisi-tion. In addition, the cost of capital in the UnitedStates makes it harder for U.S. corporations to savethe sums needed for acquisition and more difficultfor DBCs to raise the cash needed to take biotechnol-ogy products to market.

The Pharmaceutical Industry

Although the arrival of products has beenslower than expected, the development of bio-technology-based pharmaceutical products isflourishing. To date, 15 biotechnology-based drugsand vaccines are on the market (see table 1-2). BothDBCs and established multinational pharmaceuticalcompanies are utilizing the tools and techniques ofbiotechnology in their drug development efforts.Revenues in the United States from biotechnology-derived products were estimated to be approxi-mately $1.5 billion in 1989, and $2 billion in 1990.Many new products are in the pipeline, and several

100 biotechnology drugs and vaccines undergoinghuman testing for a variety of conditions, 18 haveessentially completed clinical trials and are awaitingFood and Drug Administration (FDA) approval.Biotechnology is particularly important for researchinvolving drug discovery as it allows for a molecularand cellular level approach to understanding disease,drug-disease interaction, and drug design. Biotech-nology is likely to be the principal scientificdriving force for the discovery of new drugs andtherapeutic chemical entities as the industryenters the 21st century.

The modern pharmaceutical industry is a global,competitive, high-risk, high-return industry thatdevelops and sells innovative high-value-addedproducts in a tightly regulated process (see table1-3). Because of the strong barriers to entry whichcharacterize the global pharmaceutical industry,many DBCs are focusing on niche markets anddeveloping biotechnology-based pharmaceuticalproducts. Established pharmaceutical companieshave been increasingly developing in-house capabil-ities to complement their conventional research with

8 . Biotechnology in a Global Economy

Box 1-D--Arrangements BetweenCompanies

Acquisition. One company taking over control-ling interest in another company. Investors arealways looking for companies that are likely to beacquired, because those who want to acquire suchcompanies are often willing to pay more than themarket price for the shares they need to completethe acquisition.

Merger. Combination of two or more compa-nies, either through a pooling of interests, where theaccounts are combined; a purchase, where theamount paid over and above the acquired com-pany’s book value is carried on the books of thepurchaser as goodwill; or a consolidation, where anew company is formed to acquire the net assets ofthe combining companies.

Strategic alliances. Associations between sepa-rate business entities that fall short of a formalmerger but that unite certain agreed on resources ofeach entity for a limited purpose. Examples areequity purchase, licensing and marketing agree-ments, research contracts, and joint ventures.SOURCE: mm Qf lkclmoktgy Assewmen$ 1991.

biotechnological techniques for use as researchtools. Strategic alliances and mergers between majormultinational pharmaceutical companies and DBCsallow both to compete in the industry and combinetheir strengths: the innovative technologies andproducts of those DBCs with financial and market-ing power blended with the development andregulatory experience of the major companies.

The original intent of many of the early DBCs wasto become fully integrated, competitive pharmaceu-tical companies, but the economic realities of thepharmaceutical business will likely deny this oppor-tunity to most DBCs. Biotechnology, while notlikely to fundamentally change the structure ofthe pharmaceutical industry, has provided amuch needed source of innovation for bothresearch and product development. Currently,much of the success or failure with the commerciali-zation of biotechnology in the pharmaceutical indus-try rests on economic, market, scientific, and techni-cal considerations. Government policies that affectthese conditions contribute to, but are not likely toindependently determine, success or failure.

Agriculture

Biotechnology has the potential to be the latest ina series of technologies that have led to astonishingincreases in the productivity of world agriculture inrecent decades. Biotechnology can increase foodproduction by contributing to further gains inyield, by lowering the cost of agricultural inputs;and by contributing to the development of newhigh-value-added products to meet the needs ofconsumers and food processors. These potentialproducts include agricultural input (e.g., seeds andpesticides), veterinary diagnostics and therapeutics,food additives and food processing enzymes, morenutritious foods, and crops with improved foodprocessing qualities. Thus far, R&D has focused oncrops and traits that are easiest to manipulate,particularly single-gene traits in certain vegetablecrops. As technical roadblocks are lifted, research islikely to increase and spread to other crops and othertraits.

In the United States, DBCs are applying biotech-nology to agriculture, and well-established firms areadapting biotechnology to their existing researchprograms. The ability to profit from new productsdepends on a variety of factors, such as the potentialsize of the market for these products, the existenceof substitutes, the rate at which new products andtechnologies are adopted, the potential for repeatsales using patent or technical protection, theexistence of regulatory hurdles, and the prospect forconsumer acceptance of these new foods. Becausethese factors vary considerably from country-to-

Photo credit: Calgene

Tomatoes, 25 days postharvest. The transgenic tomatoes,left, have not deteriorated, contrasted to the

nonengineered tomatoes, right.

Chapter 1--Summary . 9

Table 1-2—Approved Biotechnology Drugs/Vaccines

Revenues* Revenues*Product name Company Indication U.S. approval 1989 1990

Epogen (tin)**Epoetin Alfa

Neupogen**Granulocyte colonystimulating factorG-CSF

Humatrope (R)**SomatotropinrDNA origin forinjection

Humulln(R)Human insulinrDNA origin

Actimmune**Interferon gamma 1-b

Activase (R)Alteplase, rDNA origin

Protropln (R)**Somatrem for injection

AmgenThousand Oaks, CA

Dialysis anemia June 1989

February 1891

March 1987

October 1982

December 1990

November 1987

October 1985

June 1986

November 1988

March 1991

95

NA

300


Chemotherapyeffects

NA

40 50Eli LillyIndianapolis, IN

Human growthhormone deficiencyin children

Eli LillyIndianapolis, IN

Diabetes 200

NA

175

100

40

250

GenentechSan Francisco, CA

Infection/chronicgranulomatous disease

NA

200

120


Acute myocardialinfarction



Roferon (R)-A**Interferon alfa-2a(recombinant/Roche)

Hoffmann-La RocheNutley, NJ

Hairy cellleukemiaAlDS-relatedKaposi’s sarcoma

60

NALeukine**Granulocyte microphagecolony stimulatingfactor GM-CSF

Recombivax HB (R)Hepatitis B vaccine(recombinant MSD)

Orthoclone OKT(R)3Muromonab CD3

Procrit**Erythropoietin

ImmunexSeattle, WA

Infection related tobone marrow transplant

NA

MerckRahway, NJ

Hepatitis Bprevention

July 1986 100 110

Ortho BiotechRaritan, NJ


Kidney transplantrejection

June 1986

December 1990

30

NA

35

NAAIDS-relatedanemiaPre-dialysis anemia

HibTiter (tin)Haemophilus Bconjugate vaccine

Intron (R) A**lnterferon-alpha2b

Praxis BiologicsRochester, NY

Haemophilusinfluenza type B

December 1988 10 30

Schering-PloughMadison, NJ

June 1986

June 1988November 1988

February 1991

September 1989

60 80Hairy cellleukemia

Genital wartsAIDS-relatedKaposi’s sarcoma

Hepatitis C NA NA

20 30Energix-B SmithKline Beecham Hepatitis BHepatitis B vaccine Philadelphia PA(recombinant)● Estimated U.S. revenues in millions of dollars● *Orphan DrugNA = not applicableSOURCE: Office of Technology Assessment, 1991; adapted from Pharmaceutical Manufacturers Association-Biotechnology Medicines in Development,

1990 Annual Survey.


Table 1-3-Characteristics, Pharmaceutical Industry

●

●

●

●

●

●

●

●

●

●

●

Top firms are huge, multinational firms primarily based in theUnited States and Europe.Significant entry barriers; very expensive to develop, test, andmarket new products.Not particularly concentrated.Tightly regulated.Development of high-value-added products.Consolidation of companies occurring.Size of global market in 1989: $150 billion.United States the largest market; combined EC is second;Japan is second largest single country.Major companies are financially strong and vertically integratedfirms, controlling all aspects of business (R&D, manufacturing,and marketing).Main competitors for the world pharmaceutical market: huge,multinational companies based in the United States, Switzer-land, the United Kingdom, Germany, and increasingly, Japan.Japanese market historically difficult to enter; U.S. and Euro-pean companies, to ensure market presence, have collabo-rated with those Japanese companies that dominate theirdomestic market. Japanese companies are now beginning toglobalize their operations.

SOURCE: Office of Technology Aesesement, 1991.

country, the climate for application of biotechnologyto agriculture also varies. These applications arebeing explored throughout the world, mainly indeveloped countries that are major food exporters(e.g., Australia, Canada, France, and the UnitedStates).

Because most biotechnology products for agri-cultural use are still being developed, comparisonof numbers of products actually manufactured indifferent countries is not yet meaningful. How-ever, since field tests of many potential plantproducts are regulated by national agriculturalor environmental authorities, comparison ofsome test numbers is possible. As of 1990, over60 percent of all field tests worldwide (mostinvolving transgenic plants) have occurred in theUnited States (see table 1-4).

Although there is much active European agricul-tural biotechnology research in northern Europe,particularly Germany and Denmark, public concernabout possible environmental risks and ethicalissues associated with biotechnology has translatedinto regulations that discourage field testing ofgenetically engineered organisms. The lack of patentprotection for transgenic organisms also tends toinhibit investment in transgenic plants in Europe. InJapan and other Asian countries, public perceptionof biotechnology appears to be mixed. Biotechnol-ogical methods used to produce pharmaceuticals andindustrial and food processing enzymes are ac-

cepted, however, agricultural applications are lessso. Consequently, relatively little attention has beenpaid to transgenic plants and animals in Asia. Oneexception is work on plants, especially rice, derivedfrom plant cell cultures. The application of biotech-nology to food processing has received a great dealof interest in Japan, where the country’s expertise infermentation is likely to be applied to food produc-tion.

The Chemical Industry

The chemical industry is one of the largestmanufacturing industries in the United States andEurope. Currently, over 50,000 chemicals and for-mulations are produced in the United States. Theconsumption of chemical products by industry givesthese products a degree of anonymity as they usuallyreach consumers in altered forms or as parts of othergoods.

Biotechnology has a limited, though varied,role in chemical production. The production ofsome chemicals now produced by fermentation,such as amino acids and industrial enzymes, may beimproved using biotechnology. Similarly, biotech-nology can be used to produce enzymes with alteredcharacteristics (e.g., greater” stability in harsh sol-vents or greater heat resistance). In many instances,biotechnology products will probably be developedand introduced by major firms without the fanfarethat has accompanied other biotechnology develop-ments and, like much of chemical production, willremain unknown to those outside the industry. The

/%oto credit: Kevin O’Connor

Transgenic pigs born with a bovine growth hormone geneinserted in the embryo.


Table 1-4-Proposed Pending or Performed Field Tests

1986 1987 1988 1989 1990 Undated Total

Australia . . . . . . . . . . . . . . . . . . . . . . . . . . —Belgium . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . —Denmark . . . . . . . . . . . . . . . . . . . . . . . . . . —Finland . . . . . . . . . . . . . . . . . . . . . . . . . . . —France . . . . . . . . . . . . . . . . . . . . . . . . . . . .Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . . —tidy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —The Netherlands . . . . . . . . . . . . . . . . . . . —New Zealand . . . . . . . . . . . . . . . . . . . . . . —Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —Sweden . . . . . . . . . . . . . . . . . . . . . . . . . .United Kingdom . . . . . . . . . . . . . . . . . . . . 1United States . . . . . . . . . . . . . . . . . . . . . . 4

12

2

415

64

4

514—

3—

2

4

3—

1

1124—

23

5142121

10124631

10132

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 24 54 86 2 39 212 1990.

The abilityto produce high-value-added products is one reason the pharmaceutical industry is attractiveto venture capitalists.Genentech’s tissue plasminogen activator (left) costs $2,200 per dose. In contrast, Solmar Corp’s. Bio Cultures, used in waste

cleanup (right) sells for approximately $400 per 25-pound container.

chemical industry’s greatest use of biotechnology the worldwide industry response to oil shocks,may be the result of the industry’s expanding recessions, and increasing competition.investment in pharmaceuticals and agriculture.This reflects the industry’s shift away from the The use of biochemistry or fermentation toproduction of bulk chemicals and toward investment produce chemicals has historically received a greatin research-intensive, high-value-added products; deal of attention in Japan, and the Ministry of


International Trade and Industry (MITI) targetedimprovements in these processes through biotech-nology in 1980. Another application that has re-ceived particular attention in Japan is the biosensor(a device that uses immobilized biomolecules tointeract with specific environmental chemicals andthen detects and quantifies either the interactionitself or the product of the interaction, e.g., a changein color, fluorescence, temperature, current, orvoltage).

In the very long run, biotechnology may have amajor impact in shifting the production of fuel andbulk chemicals away from reliance on nonrenewableresources (e.g., oil) and toward renewable resources(e.g., biomass). However, current work in this fieldappears to be limited, in part, because the interna-tional price of oil has remained too low to encourageinvestment in alternatives, and, in part, because thechemical industry throughout the world has restruc-tured during the last 10 years, moving away frombulk chemical production and toward the productionof specialty chemicals, pharmaceuticals, and agri-cultural products.

Environmental Applications

Although biotechnology has several potentialenvironmental applications-including pollutioncontrol, crop enhancement, pest control, mining,and microbial enhanced oil recovery (MEOR)—commercial activity to date is minuscule com-pared to other industrial sectors. Bioremediation,efforts to use biotechnology for waste cleanup, hasreceived public attention recently because of the useof naturally occurring micro-organisms in oil-spillcleanups. The U.S. bioremediation industry includesmore than 130 firms, but it is the focus of few DBCs.Nevertheless, though small, the size of the commer-cial bioremediation sector in the United States farexceeds activity in other nations.

Although bioremediation offers several advan-tages over more conventional waste treatment tech-nologies, several factors hinder its widespread use.Relatively little is known about the effects ofmicro-organisms in various ecosystems. Researchdata are not disseminated as well as research in otherindustrial sectors because of limited Federal fundingof basic research and the proprietary nature ofbusiness relationships under which bioremediationis most often used. Regulations provide a market forbioremediation by dictating what must be cleaned

up, how clean it must be, and which cleanupmethods may be used; but regulations also hindercommercial development, due to their sheer volumeand lack of standards governing biological wastetreatment.

Bioremediation, unlike the pharmaceutical indus-try, does not result in the production of high-value-added products. Thus, venture capital has been slowto invest in the technology, and little incentive existsfor product development. The majority of thebioremediation firms are small and lack sufficientcapital to finance sophisticated research and productdevelopment programs. Bioremediation primarilydepends on trade secrets, not patents, for intellectualproperty protection.

Although some research is being conducted ongenetically engineered organisms for use in bio-remediation, today's bioremediation sector relieson naturally occurring micro-organisms. Scien-tific, economic, regulatory, and public perceptionlimitations that were viewed as barriers to thedevelopment of bioremediation a decade ago stillexist. Thus, the commercial use of bioengineeredmicro-organisms for environmental cleanup is notlikely for the near future.

INDUSTRIAL POLICYIndustrial policy is the deliberate attempt by a

government to influence the level and composi-tion of a nation’s industrial output. Industrialpolicies can be implemented through measures suchas allocation of R&D funds, subsidies, tax incen-tives, industry regulation, protection of intellectualproperty, and trade actions.

Industrial policies in the United States are com-plex, fragmented, continually evolving, and rarelytargeted comprehensively at a specific industry.There is no industrial policy pertaining to biotech-nology per se, but rather, a series of policies for-mulated by various agencies to encourage growth,innovation, and capital formation in various high-technology industries. And, just as there is nobiotechnology policy in the United States, biotech-

nology companies tend to behave not as an industrybut rather, as agrichemical firms, diagnostic firms,or human therapeutic firms. Biotechnology compa-nies have been built on a unique system offinancing, but they largely confront the sameregulatory, intellectual property, and trade poli-cies faced by other U.S. high-technology firms.There may be a need for the Federal bureaucracy tofine-tune its policies as biotechnology movesthrough the system, but, to date, Federal agencieshave not seen the need to revolutionize theirpractices for biotechnology.

Science and Technology Policy

National policies promoting biotechnology R&Dcan be categorized as targeted or diffuse. In general,countries that have targeted biotechnology (e.g.,Japan, Korea, Singapore, and Taiwan) share an


emphasis on export-driven growth, and they viewcomprehensive government policies strongly pro-moting biotechnology and other critical technolo-gies as key to future development. In the UnitedStates and much of Europe, in contrast, growthpromotion is less prominent and is one of manycompeting social concerns. In these countries, fun-damental goals are more diffuse.

A challenge to the adoption of a national biotech-nology policy is the increasing internationalizationof research, development, and product commerciali-zation. The advent of EC 1992 has led to the creationof unique regional biotechnology research programsthat offer yet another approach to strategic planning.These programs are currently modest in size, andtheir eventual success will likely hinge on politicaland economic integration of the European Commu-nity (EC).

Government targeting of biotechnology for spe-cial support is one of the least significant factorsaffecting competitiveness in the technology. Manycomponents of targeting strategies such as theemphasis on technology transfer, the developmentof incubator facilities and venture capital for start-upfins, and the establishment of interdisciplinarycenters for research are certainly helpful for focusingattention. However, in a sense, they operate at themargins.

There are two prerequisites for a nation to fullycompete in biotechnology: 1) a strong researchbase and 2) the industrial capacity to convert thebasic research into products. A strong researchbase is the first priority, allowing small companiesand venture capitalists the opportunity to take risks.Without this, industry-oriented programs will not bevery successful. Targeted national biotechnologystrategies have been generally unsuccessful, in largepart because of the way biotechnology arose out ofbasic biomedical research only to become fullyintegrated into the various fields of life sciences. Theterm ‘biotechnology’ retains coherence only to theextent that regulation, public perception, and intel-lectual property law deal with specific biotechnol-ogy techniques as something unique.

A major challenge for national governments is tosort out national from private interests, a task thatwill become more difficult as competitiveness isused as a justification for particular expenditures.Economic nationalism may be particularly difficultto define and pursue, given the pluralistic, incre-

mental, and increasingly global nature of the world’sR&D system. In the emerging global research andcommercial environment, aggressive companies,whether large multinationals or savvy newcomers,seek the best ideas regardless of nationality. Like-wise, they produce goods and services to effectivelycompete in international markets regardless ofnationality. It is no longer always clear whatconstitutes an American firm in a global economy.

Regulations

Governments impose regulations to avert thecosts associated with mitigating adverse effectsexpected to result from the use of the technology.But, developing regulations is difficult when atechnology is new and the risks associated with it areuncertain or poorly understood. Because there havebeen no examples of adverse effects caused bybiotechnology, projecting potential hazards rests onextrapolations from problems that have arisen usingnaturally occurring organisms. The consensusamong scientists is that risks associated withgenetically engineered organisms are similar tothose associated with nonengineered organismsor organisms genetically modified by traditionalmethods, and that they may be assessed in thesame way. Where similar technologies have beenused extensively, past experience can be animportant guide for risk assessment.

Many countries, in addition to the United States,have adapted existing laws and institutions toaccommodate advances in biotechnology. However,it is no simple matter to base scientifically soundbiotechnology regulation on legislation written forother purposes. The differences in approach fromnation to nation, particularly through their effects oninvestment and innovation, will influence the abilityof the United States to remain competitive inbiotechnology on the international scene.

Worldwide, there have been three basic ap-proaches to the regulation of biotechnology:

No regulations. A number of countries withactive investment in biotechnology have noregulations specific to biotechnology. In mostof the growth-oriented countries of the PacificRim, such as Taiwan, South Korea, and Sin-gapore, biotechnology has been targeted as astrategic industry. Some industrialized Euro-pean nations, including Italy and Spain, whichhave no regulations specifically dealing with

Photo credit: Advanced Genetic

Two applications of “ice-minus” bacteria at Advanced Genetic Sciences in 1987 reflect varying requirements of regulation.At left, worker in protective clothing applies bacteria on strawberry test plot in April 1987; at right, worker in

minimal protective gear applies bacteria on strawberry test plot in December 1987.

biotechnology, expect to develop them toharmonize with EC directives on biotechnol-ogy.Stringent biotechnology-specific regula-tions. Some northern European countries haveresponded to public pressure to impose strin-gent regulations specific to biotechnology byenacting new legislation. Under a 1986 law,Denmark prohibits the deliberate release ofgenetically engineered organisms without theexpress permission of the Minister of theEnvironment. Germany enacted new legisla-tion imposing tight restrictions, in 1990. TheEC’s 1990 directives on contained use anddeliberate release of modified organisms, whilenot as restrictive as the Danish or German laws,follow a similar approach in regulating prod-ucts based on the means by which they wereproduced, rather than based on their intendeduse.Limited restrictions. Australia, Brazil, France,Japan, The Netherlands, the United Kingdom,and the United States allow the use of biotech-nology with some restrictions and oversight. Inthese countries, regulations based on existing

or amended legislation governing drugs,worker health and safety, agriculture, andenvironmental protection are being applied tothe use of biotechnology. Stringency varies, asdo the enforcement mechanisms.

In 1986, the Office of Science and TechnologyPolicy (OSTP) of the White House described theregulatory policy of the Federal agencies in theCoordinated Framework for Regulation of Biotech-nology. Recognizing that biotechnology is basicallya set of techniques for producing new biochemicaland altered organisms, and that chemicals andorganisms are usually regulated according to theirintended use and not their method of production;Federal policy fit the products of biotechnology intothe existing web of Federal legislation and regula-tion. The framework also outlined the approach tointeragency coordination, identifying the leadagency in several areas of overlapping jurisdiction.

Under the existing Framework for Regulationof Biotechnology, FDA has approved hundreds ofdiagnostic kits, 15 drugs and biologics, and 1 foodadditive; the Department of Agriculture (USDA)and the Environmental Protection Agency (EPA)


have established procedures for reviewing fieldtests of modified plants and micro-organisms,and have approved 236 field tests as of May 1991(see figure l-l). Although farm activists are con-cerned about the potential economic effects ofbovine somatotropin (bST), public concern aboutthe contained uses of modified organisms and theirtesting in the field has dissipated in the UnitedStates. However, some problems remain:

Mechanisms established to provide Federalcoordination of activities related to biotechnol-ogy have instead become the center of inter-agency ideological disputes over the scope ofproposed regulations.

The time required for clinical trials necessaryfor FDA approval of new drugs and biologicshurts young firms attempting to commercializetheir first products.

EPA has yet to publish proposed rules for theregulation of micro-organisms under the ToxicSubstances Control Act of 1976 (TSCA) andFederal Insecticide, Fungicide, and Rodenti-cide Act (FIFRA).

EPA considers micro-organisms to be chemicalsubstances subject to TSCA, an interpretationthat could be legally challenged.

There is little funding for research that wouldsupport risk assessment of planned introduc-tions.

FDA has given little indication of its intentionsfor the development of regulations and proce-dures for evaluating the food safety of geneti-cally modified plants and animals.

Field-testing requirements have been criticizedas too burdensome, especially for the academiccommunity, and disproportionate to the smallrisk associated with these organisms, particu-larly transgenic crops with no nearby wild,weedy relatives.

The problems associated with developing regu-lations add to the costs borne by firms, and isespecially burdensome for small biotechnology-based firms. Despite these difficulties, however,there is anecdotal evidence that some Europeanfirms have decided to open research and productionfacilities in Japan and the United States, in partbecause of the more favorable regulatory climate.

Intellectual Property Protection

Intellectual-property law, which provides a per-sonal property interest in the work of the mind, is ofincreasing importance to people using biotechnol-ogy to create new inventions. Intellectual propertyinvolves several areas of the law: patent, copyright,trademark, trade secret, and plant variety protection.All affect emerging high-technology industries be-cause they provide incentives for individuals andorganizations to invest in and carry out R&D. Manysee protection of intellectual property as a para-mount consideration when discussing a nation’scompetitiveness in industries fostered by the newbiology.

Broad patent protection exists for all types ofbiotechnology-related inventions in the UnitedStates. The Supreme Court decision in Diamond v.Chakrabarty, that a living organism was patentable,along with action by Congress and the executivebranch changing Federal policy to increase opportu-nities for patenting products and processes resultingfrom federally funded research have spurred bio-technology-related patent activity. Internationally,several agreements (e.g., the Paris Union Conven-tion, the Patent Cooperation Treaty, the BudapestTreaty, the Union for the Protection of New Varie-ties of Plants, and the European Patent Convention)provide substantive and procedural protection forinventions created through the use of biotechnology.

Despite a generally favorable international cli-mate, a number of elements affect U.S. competitive-ness in protecting intellectual property. The patentapplication backlog at the Patent and TrademarkOffice (PTO), domestic and international uncertain-ties regarding what constitutes patentable subjectmatter, procedural distinctions in U.S. law (e.g.,first-to-invent versus frost-to-file, priority dates,grace periods, secrecy of patent applications, anddeposit considerations), uncertainties in interpretingprocess patent protection, and the spate of patentinfringement litigation, all constitute unsettled areasthat could affect incentives for developing newinventions.

The backlog of patent applications at PTO isfrequently cited as the primary impediment tocommercialization of biotechnology-relatedprocesses and products. Recent studies reveal thatthe pendency period for biotechnology patent appli-cations is longer than that of any other technology.


Figure 1-1--States Where Releases of Genetically Engineered Organisms Have Been Approved

The number in each state equals the number of tests approvedby USDA and EPA in that state as of May 15, 1991.

Total tests ■ 2 3 6

“’”-lU1

~a

Hawaii -

6

cl

6

to Rico 3

‘d

SOURCE: National Wildlife Federation, 1991, adapted from data provided by U.S. Department of Agriculture and U.S. Environmental Protection Agency.

IWO, in an effort to reduce the backlog, created aspecial biotechnology examining group and insti-tuted an action plan to reduce the average pendancy.The PTO plan, while showing some promise, standslittle chance of significantly reducing the backlogfor two reasons: the number of filed biotechnologypatent applications grows at a significantly higheraverage rate than that for all other types of patentapplications, and PTO is unable to train and keepqualified patent examiners. The backlog createsuncertainty for business planning and a disincen-tive for proceeding with some R&D projects;however, there is no evidence to suggest that itsignificantly affects international competitive-ness in biotechnology. Accelerated examination, aprocedural option open to those needing expeditedexamination of a patent application, is rarely usedfor biotechnology applications. When compared to

other countries, biotechnology patents are grantedfaster in the United States than in any majorexamining office in the world. And, for products thathave a long regulatory approval time, the delay inobtaining a patent can result in an extended length ofprotection, since the 17-year term does not beginuntil the patent is actually issued.

Subject matter protection—what can and can-not be patented—is an issue that has receivedmuch attention because of the types of inventionscreated through biotechnology. U.S. law is thebroadest and most inventor-generous statute in theworld; in addition to processes, patents have nowissued for microbes, plants, and, in one instance, atransgenic animal. The subject of patenting plant andanimal varieties (permitted in the United States butnot in most other countries) and products (pharma-


Photo credit: Claudia

ceuticals, for example, are patentable in some law. The ability of inventors to understand andcountries but not in others) is of concern to those easily meet the procedural requirements of vari-who seek consistent worldwide protection for their ous patent offices may, in the long term, be theinventions. issue of most importance to inventors of biotech-

nology products and processes. Procedural issuesProcedural distinctions between the laws of vari- currently under debate in international forums in-

ous nations are receiving increased attention in elude: determining how a priority date is set,forums convened to harmonize international patent establishing a consistent grace period, determining


requirements for publication of patent applications,and standardizing translation requirements of appli-cations.

A major concern of U.S. biotechnology compa-nies is the adequacy of U.S. laws to protect againstpatent piracy. Process patents constitute the major-ity of patents issued in the biotechnology area. Suchpatents can be vital, especially if they cover a newprocess for making a known product. Congressenacted legislation in 1988 to address concernsregarding process patent protection. Debate, how-ever, continues as to whether additional protection isneeded. The large number of patents in the emergingbiotechnology field has resulted in a surge oflitigation as companies seek to enforce their rightsagainst infringement and defend the patent grant inopposition or revocation proceedings. Such litiga-tion is not surprising given the web of partiallyoverlapping patent claims, the high-value products,the problem of prior publication, and the fact thatmany companies are interested in the same products.Litigation, while important to those staking theirproperty claims, is extremely expensive and a majordrain on finances that could otherwise be directedtoward R&D.

INTERNATIONALCOMPETITIVENESS

Industrial competitiveness is viewed by some asthe ability of companies in one country to develop,produce, and market equivalent goods or services atlower costs than firms in other countries. Theincreasingly global economy, however, makes itmore difficult to view industrial competitivenessthis way. Many companies actively investing inbiotechnology are multinational, conducting re-search, manufacturing, and marketing throughoutthe world. These companies contribute to theeconomies of nations other than the one in whichthey are headquartered. Despite these complications,it is still possible to broadly discuss strengths andweaknesses in various countries with respect tobiotechnology.

A number of nations have targeted biotechnologyas being critical for future economic growth. Nation-ally based R&D programs have arisen in severalcountries, and biotechnology has been singled out inmany public policy debates as having economic,social, ethical, and legal consequences. Using anumber of measures (see box l-E), in 1984 OTA

found that the United States was at the forefront inthe commercialization of biotechnology, that Japanwas likely to be the leading competitor of the UnitedStates, and that European countries were not movingas rapidly toward commercialization of biotechnol-ogy as either the United States or Japan.

United States

In retrospect, the diffusion of biotechnology intoseveral industrial sectors in many nations makes itdifficult to define what constitutes a strong nationalprogram in biotechnology and to rank the countriesin competitive order. By many measures, theUnited States remains preeminent in biotechnol-ogy, based on strong research programs andwell-established foundations in pharmaceuticalsand agriculture. Broad-based, federally fundedbasic research-especially in biomedicine-is ahallmark of U.S. capability in biotechnology. Infiscal year 1990 alone, the Federal Governmentspent more than $3.4 billion to support R&D inbiotechnology-related areas (see table 1-5).

Dedicated biotechnology companies, a uniquelyAmerican phenomenon, aided by the vast resourcesof venture capital and public markets have providedinnovation to a number of preexisting industries.U.S. patent law provides generous protection for allkinds of biotechnology-derived inventions, and lawsand regulations are largely in place to protect thepublic health and the environment. Public concernregarding the uses of biotechnology is minimalwhen compared to many other nations.

Japan

In 1981, Japan’s MITI announced that biotech-nology, along with microelectronics and new ma-terials, was a key technology for future industries.The announcement attracted interest and concernabroad, largely because of the key role MITI playedin guiding Japan’s economic growth in the postwarperiod. While government policies encouraged bio-technology investment by a large variety of compa-nies, Japanese investment in biotechnology predatesMITI’s 1981 action. Regardless of earlier actions,MITI’s naming of biotechnology as an area ofinterest probably gave it the legitimacy it previouslylacked and eased financing for private investment—as it had done earlier for other industries andtechnologies. As in the United States and elsewhere,however, the broad range of potential biotechnologyapplications has led to a wide variety of frequently


overlapping initiatives by various Japanese agen-cies.

Today, MITI is continuing to support R&D effortsin areas such as: marine biotechnology and biode-gradable plastics, addressing relevant industrialpolicy (e.g., tax incentives, Japan DevelopmentBank, and Small Business Finance Corp. loans, andpromotion of industry standards), improving safetymeasures (new contained-use regulations and devel-oping lists of industrially exploitable organisms),and internationalization (regulatory harmonization,international R&D cooperation, and funding devel-

Table 1-5--U.S. Federal Funding for Biotechnology,Fiscal Year 1990 (millions of dollars)

Agency Amount

National Institutes of Health. . . . . . . . . . . . . . . . . . .National Science Foundation . . . . . . . . . . . . . . . . .Department of Agriculture . . . . . . . . . . . . . . . . . . . . .Department of Defense. . . . . . . . . . . . . . . . . . . . . . .Department of Energy. . . . . . . . . . . . . . . . . . . . . . . .Agency for International Development . . . . . . . . . .Food and Drug Administration. . . . . . . . . . . . . . . . .Environmental Protection Agency. . . . . . . . . . . . . .Veterans Administration . . . . . . . . . . . . . . . . . . . . . .National Institute of Standards and Technology. . .National Aeronautics and Space Administration . .National Oceanic and Atmospheric Administration.

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .SOURCE: Office of Technology )ksessment, 1991.

$2,900.0167.9116.098.082.228.719.48.37.54.84.52.0

$3,439.3

oping country research). However, in contrast tothe United States, Japan suffers from the lack ofa strong research base, which has led firms toseek access to research and training abroad,especially in the United States.

Japan also suffers some weaknesses in the indus-trial sectors to which biotechnology is most applica-ble. Japan’s pharmaceutical industry, for example,was sheltered from international competition untilrecently and is only now beginning to developinternational skills in drug development, testing, andmarketing. In agriculture, research is limited tospecialized areas (e.g., rice), as Japan is not a foodexporting country. Additionally, concern regardingfield testing of genetically modified organisms ispervasive; governmental approval for the first envi-ronmental release of a genetically engineered orga-nism-a transgenic tomato---did not occur untilJanuary 1991.

Japan is, however, effectively combining bio-technology with its traditional strength in fer-mentation, especially in the production of aminoacids and industrial enzymes. There is also activeresearch with biosensors, based on Japan’s strengthin micro-electronics. The efforts of MITI to promotebiotechnology as a key technology, intergrate bio-technology into existing industrial sectors, while atthe same time bearing some fruit, clearly has beenless successful than many anticipated. As in theUnited States and Europe, commercialization hastaken longer, been more technically difficult, andbeen more dependent on factors unique to eachindustrial sector than expected. Biotechnology hasnot yet achieved the spectacular success for Japanese

Chapter l-Summary ● 21

industry that other fields have in the past. For theforeseeable future, corporate strategies, rather thanMITI initiatives, will likely determine Japan’s in-vestment in biotechnology.

Europe

A number of European countries have technologypolicies that resemble those of the United StatesNational policies, however, are becoming less dis-tinctive as Europe moves closer to economic inte-gration.

Unlike Japan, Europe’s strengths in pharma-ceuticals and agriculture lend themselves to theadoption of biotechnology. Germany, Switzerland,and the United Kingdom are home to major multina-tional pharmaceutical companies. These companiesare investing heavily in both in-house and collabora-tive research in biotechnology, with much of thelatter conducted with U.S. DBCs. Promising re-search in agricultural biotechnology is under way inseveral countries, especially Belgium, France, Ger-many, and the United Kingdom. The picture isclouded, however, by several factors: the frag-mentation of research efforts, adverse publicopinion, and uncertain effects of recently enactedEuropean Community directives on field testingof genetically modified organisms.

While many countries are targeting biotechnol-ogy, those that have not developed a research baseand the industrial capacity to convert basic researchinto products are not likely to be serious commercialcompetitors in the near future.

OPTIONS FOR ACTIONBY CONGRESS

There is no way to directly measure a nation’scompetitiveness in biotechnology. Modern biologyis being used in many nations, by many multina-tional corporations, and in many industrial sectors.In addition, there is no consensus as to whatconstitutes the so-called “national interest” inpromoting a technology. Some view competitive-ness in terms of who ultimately owns a company(i.e., where do the profits eventually go), whileothers view competitiveness as where jobs and skillsare located.

U.S. competitiveness in the global commerciali-zation of biotechnology has come to the attention ofCongress for three reasons. First, the U.S. Govern-

ment indirectly supports industrial applications ofbiotechnology by funding basic research in a widerange of relevant disciplines. Second, Federal agen-cies have the authority to regulate the commercialdevelopment of biotechnology. Third, internationaleconomic competitiveness in various technologies,including biotechnology, has emerged as a keybipartisan concern.

In all three areas, Congress plays a direct role.Through its annual appropriations to Federal agen-cies, it increases or decreases the level of researchand regulatory oversight. Through its authorizationpowers, Congress can create programs and setpriorities for Federal agencies. Through oversight ofagencies’ conduct of research and regulatory pro-grams, Congress can express its enthusiasm andconcern.

Seven policy issues relevant to U.S. competitive-ness in biotechnology were identified during thecourse of this study:

Federal funding for biotechnology research,targeting biotechnology development,developing regulations,coordinating Federal agencies,protecting intellectual property,improving industry-university relationships,andstructuring coherent tax policies.

Options for congressional action discussed herebuild on the discussion in chapters 3 through 12 ofthis report. Some options are oriented toward theactions of the executive branch but involve congres-sional oversight or direction. The order in which theoptions are presented does not imply their priority.Moreover, the options are not mutually exclusive.

Federal Funding for Biotechnology Research

An issue central to the competitive position ofU.S. efforts in biotechnology is a sufficient andstable level of funding for areas of science crucial tothe field. In relative and absolute terms, the UnitedStates supports more research relevant to biotech-nology than any other country. Clearly, intensiveand sustained Federal investment in applications ofbiotechnology to the life sciences has been trans-formed into commercial products in some industriesfaster than others. Commercial applications con-tinue to be more advanced in areas such as humantherapeutics and diagnostics, largely due to the high


levels of funding of basic biological research by theNational Institutes of Health (NIH). Other areas,such as agriculture, chemicals, and waste degrada-tion, have not come close to approaching the samelevels of funding enjoyed by the biomedical sci-ences. In some cases, such as agriculture and wastedegradation, slow progress in commercial activitycould be due in part to insufficient funds for basicresearch; in other cases, such as chemicals, potentialproducts are simply not being developed becauseindustry does not consider the biotechnology prod-ucts or processes sufficiently better (either function-ally or economically) than those that already exist.

Congress could determine that Federal levels ofinvestment in R&D over recent years have ade-quately supported the forward integration of bio-technology into many sectors and have contributedto the commercial successes of U.S. biotechnologycompanies. Proceeding with the current fundingpatterns would ensure a stable level of researchrelevant to biotechnology and its applications. Suchan approach, however, would perpetuate currentdisparities in research emphases, with biomedicinecontinuing to fare better than agriculture and wastemanagement.

Congress could conclude that because of social,economic, and strategic importance, biotechnologyresearch relevant to agriculture, chemicals, andwaste management deserves additional support. Orit could direct Federal agencies to dedicate more oftheir budgets to applied and multidisciplinary re-search in biotechnology critical to those industries ata competitive disadvantage. This option would notnecessarily require new money but would directagencies to identify areas of applied research inbiotechnology where awards could be made. Ap-plied areas deserving increased funding could beidentified by committees of peers comprised ofgovernment, academic, and industrial scientists. Inaddition, areas of research that require multidiscipli-nary involvement could receive higher levels ofsupport. However, any effort to increase emphaseson applied research carries the risk of harming thesupport base for basic research. Each agency needsto consider the balance of support between basic andapplied work within its mission.

Targeting Biotechnology Development

Because it encompasses several processes thathave applications to many sectors of the U.S.

economy, some argue that biotechnology should betargeted by the Federal Government for aggressivegovernment support and promotion. Currently, U.S.industrial growth depends on private sector entrepre-neurship, Federal funding of research, and regula-tory oversight of various research applications andcommercial development.

Congress could target biotechnology throughlegislation that broadly singles it out for favorabletreatment, or through measures that address specificproblems faced by researchers and companies seek-ing to commercialize products developed throughbiotechnology. Legislative attempts to target bio-technology have focused on the establishment ofnational biotechnology policy boards and advisorypanels for specific areas of research interest (e.g.,agriculture, human genome, and biomedical ethics)and development of a national center for biotechnol-ogy information. Those who argue against targetingbiotechnology say that it is not the role of the FederalGovernment to pick winners and losers in the worldof commerce, that such efforts have more oftenfailed than succeeded, and that attempts to targetbiotechnology cannot succeed due to the number ofindustries involved, all of which face differentscientific, regulatory, patent, and commercial prob-lems. Targeting biotechnology alone cannot assureincreased competitiveness; fostering a research base(funding, training, and personnel) and maintainingan industrial capacity to convert basic research intoproducts also is required.

Developing Regulations

Six years after the Coordinated Framework forRegulation of Biotechnology was first proposed and4 years after it became final, regulations for geneti-cally modified pesticides and for certain micro-organisms have yet to be issued. This is due todisagreements among some Federal agencies aboutthe need for and appropriate scope of regulations.The failure to promulgate final regulations has led tocomplaints by industry representatives that theregulatory approval process is unclear and inhibitsinvestment. Manufacturers have also complained ofa lack of guidance on food biotechnology and a lackof information on FDA’s regulatory intentions. TheBiotechnology Science Coordinating Committee(BSCC), in one of its last acts before disbanding,issued a policy statement giving guidance on thescope of organisms to be regulated. But still noproposed rules are in sight. Congress could decide to

Chapter 1--Summary .23

use its oversight authority to encourage the agenciesto give informal guidance to manufacturers and toencourage the rapid development of rules.

TSCA includes a regulatory scheme to screen newchemicals for their potential to cause unreasonablerisk to human health and the environment. Manufac-turers and importers must notify EPA 90 days beforemanufacturing or importing a new chemical orbefore a chemical is put to a‘ ‘significant new use.’If EPA determines that the chemical poses anunreasonable risk of injury to health or the environ-ment, EPA can prohibit or limit its manufacture,import, or use. As a matter of policy, EPA considersmicro-organisms to be chemical substances subjectto TSCA. EPA’s interpretation has not been chal-lenged in court, and it is not clear how the courtswould rule if it were challenged. Congress coulddecide to amend TSCA to specifically includemicro-organisms within its scope. This would assureEPA review of micro-organisms not fitting under thejurisdiction of other statutes prior to field testing.

Coordinating Federal Agencies

There will be a continuing need for interagencyconsideration of scientific advances, research needs,and regulatory jurisdiction. OSTP founded theBiotechnology Science Coordinating Committee(BSCC) to provide a formal mechanism for discus-sion of these issues. BSCC became embroiled inquestions of agency policy, specifically in thecontent of EPA’s proposed rules, which caused it toneglect its role as a forum for discussion of broadscientific issues and as a mechanism for interagencycooperation. BSCC was also criticized for conduct-ing many of its activities away from public view.OSTP disbanded the BSCC and replaced it with theBiotechnology Research Subcommittee (BRS).BRS has been asked to focus on scientific issues, butthe subcommittee will continue to be involved inregulatory matters as well. However, BRS has nostatutory authority nor was its formation or purposepublished in the Federal Register. It is not clear whatmeasures are being taken to ensure that BRS avoidsthe difficulties that stymied its predecessor, nor is itclear that steps are being taken to open its activitiesto public scrutiny.

Congress could decides that interagency coordi-nation is adequate or that problems of coordinationare best resolved through Congress’ oversight au-thority.

Protecting Intellectual Property

Many researchers and companies cite protectionof intellectual property as being of utmost impor-tance to preserving competitiveness in biotechnol-ogy. This is less a domestic issue than an interna-tional one as U.S. law provides broad protection forthose who invent new and useful processes andproducts. However, as markets in biotechnologybecome increasingly global, issues arise regardingsubject matter protection, harmonization of patentprocedure, and the context of intellectual property ininternational trade.

U.S. law permits patents to issue for any new,useful and unobvious process, machine, manufac-ture, composition of matter, or new and usefulimprovement of these items. As a result, U.S. lawhas permitted the patenting of micro-organisms,plants, and nonhuman animals. The patenting ofnonhuman animals has led to legislative debateregarding subject matter protection. Options forcongressional action-which included discussionon issues such as deposit considerations and exemp-tions from infringement for certain classes ofusers—were presented in an earlier OTA report(New Developments in Biotechnology: PatentingLife) and are incorporated here by reference. Interms of patentable subject matter, U.S. patent lawis the most inventor-friendly statute in the world; itis unique in that it makes no exceptions to patenta-bility, which are often found in the statutes of othercountries (e.g., animal and plant varieties, publicorder or morality, and products such as pharmaceuti-cals and foods). If Congress takes no action regard-ing patentable subject matter, broad protection forinventions created by biotechnology will continue.Laws created by Congress to regulate interstatecommerce would be relied on to govern the develop-ment, approval, sale, and use of such inventions.Congress could, either through moratorium or prohi-bition, specifically bar patents from issuing fornonhuman animals or human beings. Such actionwould clarify congressional intent regarding thelimits of subject matter protection, but it would alsocreate the precedent of using patent law, rather thanlaws regulating commerce, to limit the creation ofcertain types of inventions.

Harmonization of U.S. patent law with the laws ofother nations is likely to come to Congress’ attentionas a result of several ongoing efforts: the GeneralAgreement on Tariffs and Trade, the World Intellec-


tual Property Organization, amendments to theUnion for the Protection of New Varieties of Plants,and other bilateral and multilateral trade discus-sions. It is too early to predict specific optionsarising from each of these forums. In all cases, thegoal of harmonization should be the creation ofconsistent laws addressing substantive and proce-dural issues in patent practice.

Process patent protection is also of increasingimportance to industry. Legislation was introducedin the 101st and 102d Congresses to grant theInternational Trade Commission the right to barentry into the United States products made using anycomponent manufactured in violation of a U.S.patent and to allow process patent protection onbiotechnology production processes as long as thestarting material is novel. Issues related to the scopeof process patents, obviousness, and import into theUnited States of products containing patented partswill continue to arise. Consensus among companiesis unlikely in many of these policy disputes as manyof these problems involve competing biotechnologycompanies that are staking out corporate competi-tive positions.

Improving Industry-University Relationships

Through a series of actions, both Congress and theexecutive branch have encouraged the transfer ofresearch findings into commercial applications.Industrial sponsorship of university-based biotech-nology research has become a widespread andgenerally accepted phenomenon over the past 10years. The resulting links between academic-basedbiotechnology research and industry have severalbeneficial effects (e.g., additional resources forR&D and training, more focus on applied research,and the development and use of patented inven-tions). Questions have been recently raised aboutpossible negative affects of some of these relation-ships, particularly the conflicts that could arise whena researcher is involved in trials or testing of newdrugs developed by companies in which they have apersonal financial or fiduciary interest. Some indus-trialists have expressed concern that guidelines orregulations requiring disclosure of potential con-flicts of interest for federally funded scientists willhave a negative impact on the ability of U.S.biotechnology firms to transfer the results of feder-ally funded research into commercial application.

Currently, NIH and the Alcohol, Drug Abuse, and

NIH must approve any outside financial arrange-ments for its employees that could pose potentialconflicts of interest. To date, the Public HealthService (PHS) has only proposed that investigatorswho design, conduct, or report research disclosefinancial interests to institutions. Comments on theproposal were received at a November 1990 publicmeeting.

Congress could take no action if it concludes thatthe number of cases of alleged conflict of interestand misconduct have been too few to warrantlegislative action, or that oversight of conflict ofinterest is best managed at the university level. IfCongress decides that action is needed, it coulddirect the Department of Health and Human Services(DHHS) to promulgate PHS regulations that clearlyspell out or restrict financial ties for researchers whoconduct evaluations of a product or treatment inwhich they have a vested interest. In the absence ofaction by DHHS, Congress could also enact legisla-tion to achieve the same goal.

Legislation that restricts the ability of publiclyfunded researchers to collaborate with industrycould discourage the entrepreneurial initiative ofscientists and possibly limit the value of govern-ment-sponsored research. However, a lack of actionby either Congress or executive agencies to clarifythe limits of such collaboration could result in casesof actual or perceived conflict of interest withresulting public concern about the safety of somebiotechnology-derived products.

Structuring Coherent Tax Policies

The Tax Reform Act of 1986 (Public Law 99-514)contained numerous provisions, including extensionand reduction from 25 to 20 percent of the R&D taxcredit, repeal of the investment tax credit forequipment investment, and abolition of the preferen-tial treatment for capital gains. Five options forcongressional action were presented in an earlierOTA report (New Developments in Biotechnology:U.S. Investment in Biotechnology). One of theoptions—restoration of preferential treatment ofcapital gains—was addressed by the 101st Congress.

Other options discussed the R&D tax credit,which is designed to provide an incentive tocompanies to increase their commitment to indus-

Chapter l-Summary .25

trial R&D. Firms that annually increase R&Dspending can apply for an R&D tax credit againstFederal income taxes. The credit has been availablesince 1981 but is not a permanent part of the taxcode, rather it has been extended several timesthrough various legislation. Most recently it wasextended through December 31, 1991, by theOmnibus Budget Reconciliation Act of 1990. Con-gress could grant the R&D tax credit permanentstatus when it expires at the end of 1991. Apermanent credit would reduce the uncertainty thatexists for industrial R&D planners concerning thecredit’s future existence.

The statutory rate of the credit is 20 percent, andthe credit is calculated based on the excess ofqualified research over abase amount linked to R&Dspending in a specific historical period. The baseamount is figured by multiplying a “fixed-basepercentage” by a firm’s average gross receipts overthe preceding 4 years. As currently structured,companies that do not have positive gross receiptsfor the preceding 4 years are not eligible to receivethe R&D credit in the same year as the researchexpenses are made. The credit is not refundable inthe current year, so only firms with positive taxliabilities can use it immediately. Those companieswithout current tax liabilities, which include manyDBCs, can carry forward tax credits to offset taxesup to 15 years in the future. For a DBC, thiscarried-forward credit is less valuable than a refund-able credit, that would provide immediate returns. Inaddition, when considering the time-value ofmoney, carried-forward tax benefits are less valu-able than tax benefits rendered in the current year.Despite these facts, some successful biotechnologycompanies have expressed the opinion that the R&Dtax credit is beneficial and that it does factor intotheir decisionmaking practices in terms of R&Dexpenditures. Congress may wish to consider chang-ing the structure of the R&D credit to provide more

immediate benefits to biotechnology and other smallhigh-technology companies that are not yet profit-able, by making the credit refundable in the year ofresearch expenditures.

One particular accounting standard that has re-ceived recent attention is the inability of U.S. firmsto amortize goodwill for tax purposes as quickly asforeign firms. Amortization refers to an accountingprocedure that gradually reduces the cost-value of alimited-life or intangible asset through periodiccharges to income. Goodwill is a term used inacquisition accounting to refer to the going-concernvalue (defined as the value of a company as anoperating business to another company or individ-ual) in excess of asset value and is considered anintangible asset. Goodwill represents things such asthe value of a well-respected business name, goodcustomer relations, and other intangible factors thatlead to greater than normal earning power. Goodwillhas no independent market or liquidation value andmust be written off over time, or amortized. Ac-counting standards are set by the Financial Account-ing Standards Board (FASB), an independent pro-fessional board over which Congress has no author-ity. Foreign companies are not held to FASB rulesand are not required to amortize goodwill, ratherthey can write it off immediately as an expense andin some cases receive a tax deduction. This givesforeign companies an advantage over U.S. compa-nies with respect to acquisitions because the formerdo not have to carry a balance sheet of goodwill overtime. Since Congress has no legislative authorityover the FASB, there is no specific legislative actionthat can be taken to change FASB’s rules. Congresscould, however, change the tax code to offer a taxdeduction on goodwill that is amortized. Such actionwould recognize the disadvantage that U.S. compa-nies are facing in acquiring U.S. assets, but it couldalso fuel further controversial corporate acquisitionsin a number of industries.

Chapter 2

Introduction

“The United States is the world leader in biotechnology. This $2 billion domestic industry isexpected to increase to $50 billion by the year 2000.”

Vice President Dan QuayleThe President’s Council on Competitiveness

Report on National Biotechnology Policy

“It is industries, not nations, that compete globally.”Gail D. Fosler

Chief Economist, The Conference Board

CONTENTSPage

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29WHAT IS BIOTECHNOLOGY? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29COMMERCIALIZATION OF BIOTECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29ORGANIZATION OF THE REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33CHAPTER 2 REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........................ 33

BoxBox Page2-A. Three Kinds of Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . .. . .. .. ... +.. . . . . . . . . 31

FigureFigure Page2-1. The Structure of DNA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

TablesTable Page2-1. Major Events in the Commercialization of Biotechnology . . . . . . . . . . . . . . . . . . . . . . 302-2. Some Factors That Can Affect Commercialization of Biotechnology . . . . . . . . . . . . 322-3. Requesters of OTA Assessment, Biotechnology in a Global Economy . . . . . . . . . . . 33

Chapter 2

Introduction

INTRODUCTIONThis report examines international trends in

biotechnology-related commercial activity and gov-ernmental approaches to promotion and regulationof biotechnology. This introductory chapter pro-vides a context for the report’s more technicalchapters by explaining and defining what biotech-nology is, by outlining some factors that influencecompetitiveness in biotechnology, and by describ-ing the congressional request for this report and theorganization of the Office of Technology Assess-ment’s (OTA’s) assessment of issues raised by therequesters of this report.

WHAT IS BIOTECHNOLOGY?The first challenge in describing the effect of

biotechnology on a global economy is to definebiotechnology. The term “biotechnology” meansdifferent things to different people. Some viewbiotechnology as all forms of biological research. Toothers, biotechnology includes the use of classicalbreeding techniques that have been used for years tocreate new plants, animals (e.g., improved live-stock), and foods (e.g., baking and brewing). Othersview biotechnology as comprising modern biologi-cal techniques (e.g., rDNA, hybridoma technology,or monoclinal antibodies) that have resulted ingreatly increased understanding of the genetic andmolecular basis of life (see figure 2-l). Some peoplehave analogized biotechnology to a set of new toolsin the biologist’s toolbox, by referring to “biotech-nologies. To Wall Street financiers and venturecapitalists who invested in the creation of companiesin this area, biotechnology represents a hot, newsource of financial risk and opportunity. Congress,increasingly involved in public policy questionsraised by biotechnology, in one statute referred toproducts “primarily manufactured using recombi-nant DNA, recombinant RNA, hybridoma technol-ogy, or other processes involving site-specific ge-netic manipulation techniques’ (35 U.S.C.156(2)(B)).

In a 1984 report, after extensive canvassing ofacademicians, industrialists, and government offi-cials involved in biotechnology, OTA arrived at twodefinitions of biotechnology (3). The first defini-

tion—broad in scope-described biotechnology asany technique that uses living organisms (or parts oforganisms) to make or modify products, to improveplants or animals, or to develop micro-organisms forspecific uses. This definition encompasses both newbiological tools as well as traditional uses ofselecting organisms for improving agriculture, ani-mal husbandry, or brewing. A second, more narrowdefinition refers only to “new” biotechnology:the industrial use of rDNA, cell fusion, and novelbioprocessing techniques. It is the developmentand uses of this new biotechnology that hascaptured the imagination of scientists, financiers,policymakers, journalists, and the public. As inearlier OTA reports, the term “biotechnology,”unless otherwise specified, is used in reference tonew biotechnology.

COMMERCIALIZATION OFBIOTECHNOLOGY

Biotechnology-both as a scientific art and com-mercial entity—is less than 20 years old (see table2-l). Science, however, can find roots in the

Figure 2-l—The Structure of DNA


–29-


Table 2-l—Major Events in the Commercialization of Biotechnology

1973 First cloning of a gene.

1974 Recombinant DNA (rDNA) experiments first discussed in a public forum (Gordon Conference).

1975 U.S. guidelines for rDNA research outlined (Asilomar Conference).First hybridoma created.

1976 First firm to exploit rDNA technology founded in the United States (Genentech).Genetic Manipulation Advisory Group started in the United Kingdom.

1980 Diamond v. Chakrabarty--U.S. Supreme Court rules that micro-organisms can be patented.Cohen/Boyer patent issued on the technique for the construction of rDNA.United Kingdom targets biotechnology for research and development (Spinks’ report).Federal Republic of Germany targets biotechnology for R&D (Leistungsplan).Initial public offering by Genentech sets Wall Street record for fastest price per share increase ($35 to $89 in 20 minutes).

1981 First monoclinal antibody diagnostic kits approved for use in the United States.First automated gene synthesizer marketed.Japan targets biotechnology (Ministry of International Trade and Technology declares 1981, ‘The Year of Biotechnology”).Initial public offering by Cetus sets Wall Street record for the largest amount of money raised in an initial public offering ($1 15

million).Over 80 new biotechnology firms formed by the end of the year.

1982 First rDNA animal vaccine (for colibacillosis) approved for use in Europe.First rDNA pharmaceutioal product (human insulin) approved for use in the United States and the United Kingdom.

1983 First expression of a plant gene in a plant of a different species.New biotechnology firms raise $500 million in U.S. public markets.

1984 California Assembly passes resolution establishing the creation of a task force on biotechnology. Two years later, a guideclarifying the regulatory procedures for biotechnology is published.

1985 Advanced Genetic Sciences, Inc. receives first experimental use permit issued by EPA for small-scale environmental releaseof a genetically altered organism (strains P. syringae and P. fluorescens from which the gene for ice-nucleation protein hadbeen deleted.

1986 Coordinated Framework for the Regulation of Biotechnology published by Office of Science and Technology Policy.Technology Transfer Act of 1986 provides expanded rights for companies to commercialize government-sponsored

research.

1987 U.S. Patent and Trademark Office announces that nonhuman animals are patentable subject matter.October 19th-Dow Jones Industrial Average plunged a record 508 points. Initial public offerings in biotechnology-based

companies virtually cease for 2 years.

1988 NIH establishes program to map the human genome.First U.S. patent on an animal-transgenic mouse engineered to contain cancer genes.

1989 Bioremediation gains attention, as microbe-enhanced fertilizers are used to battle Exxon Valdez oil spill.Court in Federal Republic of Germany stops construction of a test plant for producing genetically engineered human insulin.Gen-Probe is first U.S. biotechnology company to be purchased by a Japanese company (Chugai Pharmaceuticals).

1990 FDA approves recombinant renin, an enzyme used to produce cheese; first bioengineered food additive to be approved inthe United States

Federal Republic of Germany enacts Gene Law to govern use of biotechnology.Hoffman-LaRoche (Basel, Switzerland) announces intent to purchase a majority interest in Genentech.Mycogen becomes first company to begin Iarge-scale testing of genetically engineered biopesticide, following EPA approval.First approval of human gene therapy clinical trial.

1991 Biotechnology companies sell $17.7 billion in new stock, the highest 5-month total in history.Chiron Corp. acquires Cetus Corp. for $660 million in the largest merger yet between two biotechnology companies.EPA approves the first genetically engineered biopesticide for sale in the United States.

SOURCE: Office of Technology Aseeesment, 1991.

Chapter 2--introduction . 31

discovery of the replication process of deoxyribonu-cleic acid (DNA)--first proposed nearly 40 yearsago by Francis H.C. Crick and James D. Watson(1,10,1 1)—and commerce in standard fermentationtechniques, which is centuries old.

The commercialization of biotechnology, both interms of research and the development of productsand services, has received increased attention duringthe 1980s. The promotion of high-technology is ofincreasing concern—both in terms of alleviatingsocial problems such as hunger, disease, and pollu-tion—and in terms of creating new sources of wealthfor national economies. In a short period of time,biotechnology has joined a menu of other high-technology fields, viewed as being important to thefuture development of the U.S. economy.

Three main areas of research relevant to biotech-nology can be described (see box 2-A). Biotechnol-ogy provides the potential to produce new, im-proved, safer, and less expensive products andprocesses. Pharmaceuticals and diagnostics for hu-mans and animals, seeds, whole plants, fertilizers,food additives, industrial enzymes, and oil-eatingmicrobes are just a few of the things that can becreated or enhanced through biotechnology.

It is convenient to refer to biotechnology asthough it were a singular, coherent entity, and insome respects, commercial activity in biotechnologyis unique. Federal spending for biotechnology-related research can be estimated, and the linking ofsuch activities under the term “biotechnology’ isseen by many as useful for obtaining adequateresearch and development (R&D) funding. At least33 States are actively engaged in some form ofpromotion of biotechnology R&D. Such efforts areseen as a means to achieve academic excellence intheir colleges and universities, as a path to economicdevelopment, or both. In U.S. industry, OTA hasidentified more than 400 dedicated biotechnologycompanies (DBCs) and 70 established corporationswith significant investments in biotechnology (8).Many of these companies, especially the DBCs,share common political concerns (as represented bythe formation of various biotechnology organiza-tions) and business traits (e.g., methods of financingor means of product development). On Wall Street,biotechnology is recognized in some business re-ports as a portfolio of stocks—in much the samemanner as other technologies and industrial sectorsare so recognized.

Box 2-A—Three Kinds of Research

Basic research involves biotechnology by usingits component tools (e.g., recombinant DNA andhybridomas) to study the different ways in whichbiological systems work and to identify the mecha-nisms that govern how they work. Included in thiscategory are studies that address such questions as:how viruses infect cells, how immunity to patho-gens is acquired, and how fertilized egg cellsdevelop into highly complex and specialized orga-nisms? Biotechnology is used in a broad range ofscientific disciplines, ranging from microbiology(the study of micro-organisms, such as viruses andbacteria) to biophysics (the use of physical andchemical theories to study biological processes atthe molecular level). A greater understanding of themechanisms of evolution and the resilience ofecosystems will also come from biotechnology.

Generic applied research is a useful term fordescribing research that bridges the gap betweenbasic science, done mostly in universities, andapplied, proprietary science, done in industry forthe development of specific products. Variousgroups have coined alternative phrases, such as“bridge” research, “technical” research, and“strategic” research. Examples of generic appliedbiotechnology research include----the developmentof general methods for protein engineering andlarge-scale mammali‘an or plant cdl-culturing.

Applied research is directed toward a veryspecific goal. The use of rDNA to develop vaccinesfor specific antigens, such as malaria or the humanimmunodeficiency virus (HIV) responsible foracquired immunodeficiency syndrome (AIDS); thetransfer of herbicide or pesticide resistance to aparticular plant species; and the use of monoclonalantibodies as purification tools in bioprocessing areall examples of biotechnology use in appliedresearch.SOURCE: (Mice of Toctilogy A ssossrnm~ 1991.

Because biotechnology has become an essentialtool for many existing industries, there is no suchentity as the biotechnology industry. Rather,biotechnology is employed by several industrialsectors, each with its own advantages and obsta-cles in the race to market (see table 2-2). As DBCsdevelop products and services, these companies arefacing many of the opportunities and obstacles facedby the industrial sector in which they seek tocompete.


Table 2-2-Some Factors That Can AffectCommercialization of Biotechnology

Antitrust lawApplied researchBasic researchCollaborative venturesCongressional interestCoordination between agenciesCost of capitalEnvironmental controlEquipmentExport controlsGaps in knowledgeGovernment targeting policiesIndustrial capabilityIntellectual property protectionJoint venturesLegislationMarketing agreementsMergersPersonnel availabilityPublic and private fundingPublic opinionRegulationsStatutesTax incentivesTechnology licensingTechnology transferTradeUndergraduate and graduate educationUniversity/industry relationshipsSOURCE: Office of Technology Assessment, 1991.

As commercial biotechnology expands in size andscope, its effect on the international economy islikely to increase. Biotechnology is likely to be seenas a national asset by more nations—both as a wayto develop a high-technology base and to increasemarket share in several international industrialsectors. As the use of biotechnology expands,various factors and barriers come into play. Some ofthese factors are business-specific, some industry-wide-specific, and some recognizable across therange of industries affected by biotechnology.

ORGANIZATION OF THE REPORTThe report, which was requested by several

congressional committees (see table 2-3), has twoparts. The first part, Commercial Activity, examinessome of the ways biotechnology has influenced thefollowing sectors: financing, health, agriculture andfood, chemicals, and environmental applications.The second part, Industrial Policy, examines the roleof government in forming policies concerning sci-ence and technology, regulations, and intellectualproperty. Appendixes focus on a summary of

Table 2-3-Requesters of OTA Assessment,Biotechnology in a Global Economy

SenateCommittee on Agriculture, Nutrition, and ForestryCommittee on the BudgetCommittee on Governmental Affairs

HouseCommittee on Science, Space, and TechnologySOURCE: Office of Technology Asessment, 1991.

biotechnology in 14 countries, U.S. Federal Govern-ment funding of biotechnology R&D, and a compar-ison of biotechnology in the United States andJapan.

Because biotechnology is so ubiquitous and itsapplications so far-reaching, it is impossible to studyin depth all the ways it may be used and all the waysit may affect the economies of various nations.Instead, this report focuses on general trends in eacharea and uses case studies, as appropriate, tohighlight relevant economic and policy considera-tions.

This report is the latest in a series of OTA reportson the subject of biotechnology. Earlier reportsaddressed: Impacts of Applied Genetics (2), Com-mercial Biotechnology (3), New Developments inBiotechnology (4,5,7,8,9), and Mapping of theHuman Genome (6). This report does not focus onspecific issues addressed in earlier OTA reports, butrather, draws on them to examine some of theemerging issues related to the globalization ofbiotechnology. Its primary focus is on the descrip-tion and analysis of commercial activity in biotech-nology-related services and products—in both in-dustrialized and newly industrializing nations. Is-sues solely related to biotechnology development inThird World nations is beyond the scope of thisreport.

Three public meetings were conducted by OTA inorder to develop information for this report. Aworkshop of Federal agency representatives washeld in May 1989. A 2-day international conferencewas held in July 1989 that brought together repre-sentatives from 16 nations. A workshop on financingissues was held in September 1990 (see app. D forthe participants of these meetings). The proceedingsof the international conference as well as otherselected contract documents are available throughthe National Technical Information Service (seeapp. F).

Chapter 2-Introduction ● 33

SUMMARYBiotechnology, broadly defined, includes any

technique that uses living organisms (or parts oforganisms) to make or modify products, to improveplants or animals, or to develop micro-organisms forspecific purposes. Although traditional uses ofbiotechnology are centuries old (e.g., baking andbrewing), it is the so-called new biotechnologyinvolving the uses of modern scientific techniques,such as rDNA technology, hybridoma technology,and bioprocess technology, that leads to issuesaffecting international commercialization of re-search and products and is the focus of this report.

Biotechnology is not an industry. It is, instead, aset of biological techniques developed throughdecades of basic research that is now being appliedto research and product development in severalexisting industrial sectors. The arrival of biotechnol-ogy has resulted in the development of products andprocesses that have the potential to alleviate many ofmankind’s problems, e.g., malnutrition, disease, andpollution. This report examines international trendsin biotechnology-related commercial activity andindustrial policy.

1.

2.

3.

CHAPTER 2 REFERENCESCrick F.H., and Watson, J.D., “The ComplementaryStructure of Deoxyribonucleic Acid,” Proceedingsof the Royal Society (A), vol. 223, 1954, pp. 80-96.U.S. Congress, Office of Technology Assessment,Impacts of Applied Genetics: Micro-Organisms,Plants, and Animals (Springfield, VA: NationalTechnical Information Service, April 1981).U.S. Congress, Office of Technology Assessment,Commercial Biotechnology: An International Analy-

4.

5.

6.

7.

8.

9.

10.

11.

sis @lmsford, NY: Pergamon Press, Inc., January1984).

U.S. Congress, Office of Technology Assessment,New Developments in Biotechnology: Ownership ofHuman Tissues and CellApecial Report, UIA-BA-337 (Washington, DC: U.S. Government Print-ing Office, March 1987).

U.S. Congress, Office of Technology Assessment,Background Paper: New Developments in Biotech-nology: Public Perceptions of Biotechnology, OTA-BA-BP-BA45 (Washington, DC: U.S. GovernmentPrinting Office, May 1987).

U.S. Congress, Office of Technology Assessment,Mapping Our Genes+The Genome Projects: HowBig? How Fast? OTA-BA-373 (Washington, DC:U.S. Government Printing Office, April 1988).

U.S. Congress, Office of Technology Assessment,New Developments in Biotechnolo@ield-TestingEngineered Organisms: Genetic and EcologicalIssues, OTA-BA-350 (Lancaster, PA: TechnomicPublishing Co., hlC., my 1988).

U.S. Congress, Office of Technology Assessment,New Developments in Biotechnology: U.S. Invest-ment<pecial Report, OTA-BA-360 (Springfield,VA: National Technical Information Service, July1988).

U.S. Congress, Office of Technology Assessment,New Developments in Biotechnology: PatentingLif@pecial Report, OTA-BA-370 (Washington,DC: U.S. Government Printing Office, April 1989).

Watson, J.D., and Crick, F.H., “Genetic Implicationsof the Structure of Deoxyribose Nucleic Acid,”Nature, vol. 171, 1953, pp. 964-967.

Watson, J.D., and Crick, F.H., “Molecular Structureof Nucleic Acids: A Structure for DeoxyriboseNucleic Acid” Nature, vol. 171,1953, pp. 737-738.

Part I: Commercial Activity

Chapter 3

Introduction: Commercial Activity

‘‘Ifentrepreneurs and arbitrageurs were our heroes of the ‘80s, we hope scientists and engineers willbe the stars of the ‘90s.”

Mary Ann LiebertGenetic Engineering News, January 1990

CONTENTSPage

BIOTECHNOLOGY AND COMPETITIVENESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39CHAPTER 3 REFERENCES

. . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Chapter 3

Introduction: Commercial Activity

BIOTECHNOLOGY ANDCOMPETITIVENESS

Biotechnology is a new set of techniques that canbe used in basic research, product development, andmanufacturing in several different industries. Al-though it was primarily developed in the UnitedStates, funded mainly through government supportfor basic biomedical research, there are growingconcerns that, like some other native technologies,biotechnology will be rapidly adopted and commer-cially applied elsewhere, leading to a loss of U.S.preeminence in this area.

Biotechnology was first applied commercially inproducing diagnostics and therapeutics. These appli-cations were the most obvious because most of thedevelopers of the new techniques were conductingbasic biomedical research. Most recently, geneti-cally engineered biopesticides have won regulatoryapproval in the United States. Further agriculturalapplications are expected within the next 10 years.

In the United States, the earliest firms to exploitthese new techniques were the dedicated biotechnol-ogy companies (DBCs). Financed with venturecapital, they were founded in the late 1970s and early1980s to apply the new techniques to the develop-ment of diagnostics, pharmaceuticals, pesticides,plants, and other products. Although these firmsare often referred to collectively as the “biotechindustry,” the dedicated biotechnology firms are,in fact, developing products and competing withfirms in existing industries. DBCs, regardless ofthe products they make, share some characteristicsand certainly compete with each other for capital.But industries are defined primarily by the productsthey produce and the markets in which they com-pete. As DBCs develop and become engaged incommercializing products, the problems they faceare characteristic of the existing industries to whichthey belong. Thus, their problems become moreunderstandable if DBCs are regarded not as “bio-tech companies’ but as young firms in, for example,the pharmaceutical, agricultural, or waste treatmentindustries.

Although DBCs have actively applied biotechnol-ogy to existing industries, more and more, estab-

lished multinational firms in these industries areinvesting in biotechnology, either through invest-ment in in-house research programs or throughlinkages with small firms. Over the last 10 years, asit has become clearer which applications are poten-tially useful and which are not, the research anddevelopment (R&D) conducted by small firms hasbecome more narrowly focused, and investments oflarger firms have become more aligned with theirlong-term strategies.

Increasingly, biotechnology is becoming partof the mainstream of R&D in several industries.In assessing its ultimate impact on industry andproductivity, it is less useful to ask, “Is the UnitedStates competitive in biotechnology?” and moreuseful to ask, “HOW can biotechnology contributeto the competitiveness of the industrial sectors inwhich it can be used?” and, “What factorsinfluence the adoption of biotechnology in theseindustries?” To understand the adoption of bio-technology by these industries requires some under-standing of the organization of the industries and therole of innovation and R&D.

Like other new technologies that have the poten-tial for major effects on a number of industries, theultimate impact of biotechnology is impossible topredict. But, as with other new technologies, itsincorporation into research, product development,and manufacturing is likely to be gradual (1,2). Anumber of factors influence investment in biotech-nology and its diffusion into new industries, includ-ing:

. Technical feasibility. The earliest researchprojects in every industry have been chosenmainly for ease of accomplishment becausenew companies or new research teams need todemonstrate their competence and achievecommercial success in a relatively short time.Beyond initial projects, technical limits con-strain the projects that may be done. Work inagriculture, for example, has been limitedbecause of difficulties in transferring deoxyri-bonucleic acid (DNA) into the cells of majorcereal crops and the relative lack of basicknowledge of plant genetics and biochemistry

–39-


●

●

●

●

compared to knowledge of common micro-organisms and mammals.Ability to recoup investment in R&D andcapture profits. In some industries, biotech-nology can provide an alternative productionprocess for a marketable product (e.g., insulinor growth hormone), the development of im-proved versions of current products (e.g., toma-toes or cotton), or the development of novelproducts (e.g., tissue plasminogen activator(tPA) or biopesticides). But in some cases thenew production processes are not competitivewith current technology. For other productsthat are technically feasible, the potential sizeof the market is too small to justify theinvestment in R&D needed to bring the productto market. The cost of research can be offset bymarketing products more widely, especiallythrough exports. The ability to protect technol-ogy investments by patenting also influences afirm’s ability to capture markets and thereforeprofits.Availability of a research base and laborpool. In the United States, federally fundedbasic research in biomedical sciences hasprovided a wealth of information that can beexploited by industrial research teams. Muchless basic research has been conducted in plantbiology and microbial ecology. Federal fund-ing of research has also resulted in the trainingof scientists with skills useful to some indus-tries. The European research base is not asextensive as that in the United States, and inJapan and other Asian countries there is rela-tively little public funding of basic research inbiology. Scientists in these countries mustoften go abroad to obtain training.Availability of capital. The development ofbiotechnology in the United States coincidedwith the availability of a high level of fundingfor new firms from venture capitalists andpublic equity markets. In Europe and Japan,venture capital and public equity have played amuch smaller role. Outside the United States,industrial biotechnology is largely confined tothe research laboratories of major corporations.Fit with industry or company strategy. Thechemical industry inmost industrial nations hasundergone a restructuring in the last 10 to 20years. Many major corporations have beenreducing their operations in commodity chemi-cals while investing in specialtv chemicals and

●

●

●

life sciences, including pharmaceuticals. In-vestment has followed this corporate strategy.Investment in biotechnology by pharmaceuti-cal firms is also made to complement existingproduct lines and research needs. Seed firmsuse biotechnology to complement their effortsin plant breeding.

Public acceptance. In the United States, farmerresistance to the use of bovine somatotropin(bST), a protein hormone that increases milkproduction, has delayed its introduction andmay deter investment in the development ofsimilar products. In some parts of Europe,particularly Germany, public concerns aboutthe use of biotechnology has slowed commer-cial development. On the other hand, consum-ers have favored the development of new drugs,diagnostic products, and environmentally be-nign biopesticides.

Regulations. Regulations can delay the intro-duction of new products and thus delay returnson investment. For example, the lengthy proc-ess for obtaining drug approval in the UnitedStates has been widely criticized. The time it istaking the Environmental Protection Agency(EPA) to develop regulations for field-testinggenetically modified micro-organisms isthought to have had a negative impact oninvestment in this area. The development ofbiotechnology regulations in Europe and Japanhas also been slow and, especially in Denmarkand Germany, has been thought to inhibitinvestment.

Effects of other government programs. Agri-cultural programs that affect acreage planted orthat protect farmers can influence investment inagricultural biotechnology. Laws on environ-mental protection affect the use of bioremedia-tion. The Orphan Drug Act and the PlantVariety Protection Act (PVPA) are intended toencourage investment in new drug and newplant development, respectively. Other exam-ples of government policies that influence .investment in biotechnology include tax poli-cies and laws on intellectual property protec-tion.

The ensuing five chapters are not intended to beexhaustive descriptions of the industries or theapplications of biotechnology. The intention is togive a fuller explanation of forces that affect

Chapter 3--Introduction: Commercial Activity .41

adoption of biotechnology. In each sector, marketforces beyond the scope of government authoritylargely determine the use of biotechnology.Gov- ernments can influence the climate for technology “development and adoption as they influence theclimate for all business activity. Congress caninfluence technology adoption through its activi-ties concerning basic scientific research andtraining, regulations, patents, and in legislation that specifically affects the industries in which “biotechnology will be used.

CHAPTER 3 REFERENCES

David, P.A., “Technology Diffusion, Public Policy,and Industrial Competitiveness,” The Positive-SumStrategy: Harnessing Technology for EconomicGrowth, R. Landau and N. Rosenberg (eds.) (Wash-ington, DC: National Academy Press, 1986).

Rosenberg, N., Perspectives on Technology (Armor&NY: M.E. Sharpe, kC., 1985).

Chapter 4

Financing

“In this entrepreneurial world, the venture capitalist occupies an ambivalent position. Like a gigolo,he’s involved, but not involved. He’s part entrepreneur, part accountant. He’s Santa Claus andEbenezer Scrooge.”

Robert TeitelmanGene Dreams

“Interferon is a substance you rub on stockbrokers.’A scientist quoted in Forbes, September 1980

CONTENTSPage

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45U.S. COMMERCIAL BIOTECHNOLOGY: AN OVERVIEW .. . . . . . . . . . . . . . . . . . . . . 45FINANCIAL STATUS OF U.S. BIOTECHNOLOGY COMPANIES . . . . . . . . . . . . . . . . . 48

Capital and Market Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48Cash Flow, Product Revenues, and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

RAISING CAPITAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...... 50Venture Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50Research and Development Limited Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

CONSOLIDATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53Foreign Participation in Mergers and Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

STRATEGIC ALLIANCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. ... ... ......+ 57Equity Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. ... ... .....60Joint Ventures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61Licensing and Marketing Deals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63Co-Marketing Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

TAX POLICY AND ITS EFFECTS ON FINANCING R&D . . . . . . . . . . . . . . . . . . . . . . . . . 64Capital Gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64R&D and Investment Tax Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64Tax Credits and the Orphan Drug Act...... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66Amortization of Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67CHAPTER PREFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...... 68

BoxesBox Page4-A. A Glossary of Finance and Investment Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 464-B. The Genentech/Hoffmann-LaRoche Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 564-C. Country-by-Country Analysis of Strategic Alliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . 604-D. R&D Tax Incentives of Selected Foreign Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

FiguresFigure Page4-1. Market Capitalization of 42 Publicly Traded US. Firms . . . . . . . . . . . . . . . . . . . . . . . 494-2. Reasons for Geographic Strategic Alliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

TablesTable Page4-l. Areas of Primary R&D Focus by Biotechnology Companies (1988) . . . . . . . . . . . . 454-2. Profile of Market Segmentation (1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 464-3. Financial Profile of Leading Public Firms in 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 494-4. Cost of Capital for R&D Projects With 10-Year Payoff Lag in Four Countries . . . 514-5. Venture Investments in Biotechnology ($ in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . 524-6. Acquisitions of U.S. Biotechnology Companies, 1989-90 . . . . . . . . . . . . . . . . . . . . . . . 554-7. Breakdown of the Number of Alliances With 46 Publicly Held U.S.

Biotechnology Companies With European or Asian Partners . . . . . . . . . . . . . . . . . . . 594-8. Number of Agreements With European and Asian Partners for 46 Publicly

Held U.S. Biotechnology Companies As of 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 594-9. Equity Participations in 46 Publicly Held U.S. Biotechnology

Companies by European and Asian Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Chapter 4

Financing

INTRODUCTIONUntil recently, genetic engineering was largely

commercialized in the United States, mainly intop-notch academic departments and an exponen-tially expanding troupe of biotechnology entrepre-neurial firms. In the last few years, large, establishedU.S. corporations have increasingly invested inthese technologies, both in-house and through avariety of arrangements with dedicated biotechnol-ogy companies (DBCs). The markets for newbiotechnology-derived medical and agriculturalproducts are worldwide, and now the innovationsthemselves are starting to be developed throughoutall parts of the globe.

Although biotechnology per se is not a singleindustry but a tool of industry, the financial commu-nity has had considerable interest in and effect on theformation and survival of firms commercializingbiotechnology. While major corporations, both do-mestic and foreign, are spending considerable sumsto exploit the new techniques, much of the innova-tion in research continues to come from the smallerfirms dedicated to biotechnology. Large, establishedcorporations can rely on revenues from existingoperations to fund innovation, but DBCs do not haveas wide a comfort zone and, in the absence ofproduct revenues, must rely on equity investors forsurvival (see box 4-A for a glossary of financialterms). The competitiveness of U.S.-developedbiotechnology products and processes may ulti-mately depend on broader issues, such as fairtrade practices, protection of intellectual prop-erty, and the regulatory climate. The competi-tiveness of U.S. innovation, however, could verywell rely on the ability of DBCs to stay inbusiness. Because biotechnology is capital-intensive, staying in business means raising sub-stantial sums of cash.

This chapter focuses on the current financialstatus of the leading U.S. DBCs and addresses theability of new firms to enter the market and raisecash. The status and importance of strategic alli-ances, both domestic and foreign, and direct foreigninvestment in U.S. biotechnology also are discussed.Finally, the effects of specific tax policies on theability of firms worldwide to raise cash are reviewed.

U.S. COMMERCIALBIOTECHNOLOGY: AN

OVERVIEW

The boom for founding DBCs in the United Statesoccurred between 1980 and 1984. During theseyears, approximately 60 percent of existing compa-nies were founded (54). In a 1988 report, the Officeof Technology Assessment (OTA) verified that therewere 403 DBCs in existence and over 70 majorcorporations with significant investments in bio-technology (54). Although these numbers have mostlikely grown since that time, the areas of primaryresearch and development (R&D) focus of thesefirms have not changed radically. In 1988, OTAfound that human health care was the focus ofresearch for most companies, whether large or small.Agriculture and chemicals were the focus of farfewer firms, and environmental applications ofbiotechnology were even less well represented (seetable 4-l). A 1990 survey by Ernst & Young drawnfrom a large sample of firms (based on a broaderdefinition of biotechnology) revealed similar seg-mentation of primary markets (see table 4-2) (19).Companies continue to have a strong focus onhuman health care products, largely becausecapital availability has been greater for pharma-ceuticals than for food or agriculture, due to theprospect of greater market reward (54,57). Thus,

Table 4-l—Areas of Primary R&D Focus byBiotechnology Companies (1988)

Dedicatedbiotechnology

companiesResearch area Number (percent)

Human therapeutics . . . . .Diagnostics . . . . . . . . . . . .Chemicals . . . . . . . . . . . . .Plant agriculture. . . . . . . . .Animal agriculture . . . . . . .Reagents . . . . . . . . . . . . . .Waste disposal/treatment.Equipment . . . . . . . . . . . . .Cell culture . . . . . . . . . . . .Diversified . . . . . . . . . . . . .Other . . . . . . . . . . . . . . . . . .

63 (21)52 (18)20 ( 7)24 ( 8)19( 6)34 (12)3 ( 1)

12 ( 4)5 ( 2)

13 ( 4)51 (18)

Largediversifiedcompanies

Number (percent)

14 (26)6(1 1)

11 (21)7 (13)4 ( 8)2 ( 4)1 ( 2)1 ( 2)2 ( 2)6(1 1)o ( o)

Total . . . . . . . . . . . . . . . . 296 (100) 53 (loo)SOURCE: Office of Technology Assessment, New Developments in

Biotechnology: U.S. Investment in Biotechnology, 1988.

4 5 –


Box 4-A—A Glossary of Finance and Investment Terms

Acquisition. One company taking over controlling interest in another company. Investors are always lookingfor companies that are likely to be acquired, because those who want to acquire such companies are often willingto pay more than the market price for the shares they need to complete the acquisition.

Amortization. Accounting procedure that gradually reduces the cost-value of a limited life or intangible assetthrough periodic charges to income.

Assets. Anything having commercial or exchange value that is owned by a business, institution, or individual.Black Monday. October 19, 1987, when the Dow Jones Industrial Average plunged a record 508 points

following sharp drops the previous week—reflecting investor anxiety about inflated stock price levels, Federalbudget arid trade deficits, and foreign market activity.

Book value. Net asset value of a company’s securities, calculated as total assets minus intangible assets(goodwill, patents, etc.), minus current liabilities, minus any long-term liabilities and equity issues that have priorclaim. The total net asset figure, divided by the number of bonds, shares of preferred stock, or shares of commonstock, gives the net asset value, or book value, per bond or per share of preferred or common stock. Book value canbe a guide in selecting stocks and is an indication of the ultimate value of securities in liquidation.

Capital gain. The difference between an asset’s purchase price and selling price, when the difference ispositive.

Cash burn rate. The rate at which a company uses cash, i.e., cash flow. Biotechnology companies aregenerally cash users, not generators. Cash burn rates are very high in the years before the first profits are made.

Common stock. Units of ownership of a public corporation. Owners typically are entitled to vote on theselection of directors and other important matters as well as to receive dividends on their holdings. In the event thata corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stocktake precedence over the claims of those who own common stock. For the most part, however, common stock hasmore potential for appreciation.

Convertible debt. Debt that is exchangeable in another form for a prestated price. Convertible debt isappropriate for investors who want higher income than is available from common stock, Most commonly, corporatesecurities (usually preferred shares or bonds) are purchased and later traded for common shares.

Cost of’ capital. The rate of return that a business could earn if it chose another investment with equivalentrisk-in other words, the opportunity cost of the funds employed as the result of an investment decision or actualdebt costs as part of the capital structure of the company.

Equity. Ownership interest possessed by shareholders in a corporation stock as opposed to bonds. Shares canbe common or preferred.

(Gontinwdon next fmge)

Table 4-2—Profile of Market Segmentation (1990) human health have had a more difficult time andhave had to follow different routes at different times.

Percent ofResearch area respondents

Human therapeutics . . . . . . . . . . . . . . . . . . . . . . 35%Diagnostics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28%Agriculture (plant and animal). . . . . . . . . . . . . . . 8%Supplier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18%Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11%

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 00%SOURCE: Adapted from Ernst & Young, Biofech 97: A Changing Environ-

ment (San Francisco, CA: 1990).

most discussions about the financing of biotechnol-ogy tend to be skewed toward companies working inhuman therapeutics and diagnostics because that iswhere most of the activity has been (23). And whilethe methods used by various DBCs to raise cashgenerally have been similar, DBCs not working in

While more companies may have been formed inthe early 1980s than the late 1980s, the amount ofmoney invested per company (and dedicated tobiotechnology in general) increased significantly.As a result, and despite the lack of private late-stagecapital resulting from the market crash in 1987,many of the companies formed late in the 1980s havehad somewhat greater staying power than theirearlier competitors. In addition, due to having largeramounts of capital at an earlier stage, some of thesecompanies may generate products more quickly (5).

In the early 1980s, fledgling genetic engineeringfirms would do almost anything to raise cash, oftenlicensing away key first-generation products and

Chapter 4-Financing ● 47

Exit opportunities. A term commonly used by venture capitalists to describe opportunities for investors torealize their investment or pull out of a deal. Examples are the public markets, mergers, and acquisitions.

Liquidity. Ability of an individual or company to convert assets into cash or cash equivalents withoutsignificant loss. Having a good amount of liquidity means being able to meet maturing obligations promptly, earntrade discounts, benefit from a good credit rating, and take advantage of market opportunities.

Market capitalization. Valueof a corporation as determinedly the market price of its issued and outstandingcommon stock. It is calcuated by multiplying the number of outstanding shares by the current market price of ashare. institutional investors often use market capitalization as one investment criterion. Analysts look at marketcapitalization in relation to book or accounting value for an indication of how investors value a company’s futureprospects.

Merger. Combination of two or more companies, either through a pooling of interests, where the accounts arecombined; a purchase, where the amount paid over and above the acquired company’s book value is carried on thebooks of the purchaser as goodwill; or a consolidation, where a new company is formed to acquire the net assetsof the combining companies.

Operating profit (or loss). The difference between the revenues of a business and the related costs andexpenses, excluding income derived from sources other than its regular activities and before income deductions.

Preferred stock. A class of stock that pays dividends at a specific rate and that has preference over commonstock in the payment of dividends and the liquidation of assets. Preferred stock does not ordinarily carry votingrights.

Royalty. Payment to the holder for the right to use property such as a patent, copyrighted material, or naturalresources, Royalties are set in advance as a percentage of income arising from the commercialization of the owner’srights or property.

Strategic alliances. Associations between separate business entities that fall short of a formal merger but thatunite certain agreed on resources of each entity for a limited purpose. Examples are equity purchase, licensing andmarketing agreements, research contracts, and joint ventures.

Venture capital, An important source of financing for start-up companies that entails some investment riskbut offers the potential for above-average future profits.SOURCl% ~lce of Technology hsossmm~ 1991, adapted from Barren’s Dictionary of Finance andhwe.stment Terms, 2d ed. (New York

NY: Barren’s, 198’7).

vital market segments in order to obtain the neces- expression, in scale-up, and in obtaining meaningfulsary cash to survive. Some call this mortgaging thefuture-more enthusiastic chief executives describeit as leveraging the technology. In any case, front-running companies, like Genentech, Genex, andBiogen, lined up numerous corporate partners withrelative ease, only to find later that a deal with amajor international corporation did not necessarilyprove adequate for survival. Many pharmaceuticalfirms learned the hard way that biotechnologyproducts represented no magic bullet, and that someof their products would succeed while many otherswere destined to fail.

As time passed, the term biotechnology lost itsability to turn promises-for-tomorrow into instantcash today. Several changes occurred at the sametime. Basic gene-splicing technology became read-ily available to scientists at large pharmaceuticalcompanies in the United States and overseas.However, unforeseen technical problems in gene

clinical results created a slowing of developmentsand expectations. Despite technical problems andslower-than-expected product development, the in-novative U.S. financial markets supplied the grow-ing number of genetic engineering firms with theincreased funding needed to survive. Research anddevelopment limited partnerships (RDLPs), bothlarge and small, provided funds between lucrativepublic offerings, and the venture capital communitycontinued to invest money in new start-up opera-tions.

The 1980s may prove to have been the high watermark for formation of DBCs. A critical eventaffecting the financial strategies of DBCs came onOctober 17, 1987, or “Black Monday,” when thestock market crashed. Biotechnology companiesfaced a severe problem: the fabled window forpublic offerings-particularly initial public offer-i n g s - w a s slammed firmly shut. Although that


Photo credit: Newsweek, Nov. 2, 1987

Media coverage of the 1987 stock market crash.

window seemed to have slightly opened again by thesummer of 1989 (especially for convertible debtissues for the more established companies in theUnited States and Europe), biotechnology compa-nies had to weather a full 18 months without publicfinancing. Some firms retrenched and focused ontheir most promising or near-term projects. Others,notably Genentech, had product revenues. Stillothers, e.g., Cetus, Genetics Institute, and Mycogen,maintained hefty bank accounts accumulated in theearly 1980s to carry them through all but the mostprotracted public equity droughts. But all biotech-nology firms reexamined the possibility of allianceswith major corporations. As time passed, deals weresigned increasingly between DBCs and domesticand foreign pharmaceutical and chemical companies(19). Top-tier DBCs, however, often find themselveson more equal footing with their partners than in thepast. These DBCs, having a greater understanding ofthe powers and limitations of biotechnology haveused this knowledge combined with their financialresources to demand clauses securing manufacturing

rights or rights to key geographic areas or marketsegments (31).

FINANCIAL STATUS OF U.S.BIOTECHNOLOGY COMPANIESTo date, most U.S. biotechnology companies

have no sales and have been losing money sincetheir inceptions. According to a 1989 survey of 93biotechnology companies, about one-fourth re-ported net profits (18). An updated survey in 1990found that only 21 percent of all companies areprofitable, even though overall sales increased by 13percent (19). Therefore, standard accounting tools,which measure expenses and assets as a function ofsales and earnings, are not useful in determining thevalue or stability of a DBC (46). However, theleading public biotechnology companies have highliquidity and can generate cash once product reve-nues begin to flow. While most companies are stillseveral years away from profitability and positivecash flow, the top 20 firms could last more than 3years on current cash levels without raising anymoremoney (46).

Capital and Market Value

Capital and market value are concentrated in fewof the over 400 firms involved in biotechnology.Individual companies that top the list in marketvalues are generally the same ones that lead theindustry in total assets, book value, R&D spending,and total employment (see table 4-3). As of early1990, public market values ranged from less than$5 million to $1.9 billion (only two companies—Genentech and Amgen--had market values of $1billion or more, while the rest were valued signifi-cantly less). In a survey of 42 publicly tradedcompanies, total market capitalization totaled$6.9 billion, and two companies—Genentech andAmgen—together accounted for 42 percent of thetotal market capitalization (46) (see figure 4-l).The top seven companies have market valuesranging from $500 million to $2.5 billion (47).

Most of the companies in a Shearson LehmanHutton survey showed strong cash positions, with 10having cash balances above $50 million by the endof 1989 (47). Again, only three companies—Genentech, Amgen, and Chiron--produced profitsin 1990, leading the industry in revenues as well asR&D spending (5,47). With just two products itmarkets plus two products from which it receives

Chapter 4--Financing ● 49

Table 4-3-Financial Profile of Leading Public Firms in 1990

Percent Netprice change Market Years of R&D expense income

in stock capitalization Book value cash left (calendar (calendarperformance ($ million) ($ million) at net year 1989) year 1989)

6/30/89-6/29/90 6/29/90 12/31/89 burn rate ($ million) ($ million)

Figure 4-1—Market Capitalization of 42 PubliclyTraded U.S. Firms

Dollars in billions$8$7$6$5$4

$3$2$1

$0

$6.9

Premerger

$0.4

$2.7

- T o t a l - G e n e n t e c h ~ A m g e n m C h i r o n

~~ Cetus ~ B i o g e n = Ali others combined

SOURCE: ShearsonLehman Hutton, 1990.

substantial royalties, Genentech accounted for morethan half of 1989 product sales for the 20 companiesreporting sales (50).

What remains remarkable has been the health ofbiotechnology stocks. While the Standard and Poors500 advanced 12.6 percent between June 1989 andJune 1990, health care biotechnology stocks rose anaverage of 77 percent and agricultural biotechnologystocks rose 38 percent. The medical biotechnologysector grew by 36.7 percent in 1990 and was thenumber one stock performer (20,36).

Cash Flow, Product Revenues, and Expenses

Although biotechnology companies have highliquidity (on average, companies have 50 percent oftheir assets as cash), in their early years they tend toburn more cash than they generate. In 1989, onlyGenentech and Amgen generated meaningful levelsof cash from operations (40,46). One reason thatbiotechnology companies use their cash reserves sorapidly is the intensity of R&D investment; prior toproduct commercialization some companies dedi-cate nearly 65 percent of all expenses to R&D. In1989, Genentech’s R&D expenditures, at 42 percentof sales, were almost as much as those of the nextthree companies combined (see table 4-3).

Estimates by Wall Street analysts predict that theleading public firms have a mean of just over 3 yearsand a median of 2.3 years of cash left, at eithercurrent or average burn rate (46). Past experienceshows that the leading biotechnology companieshave been extraordinarily successful at financingvirtually all of their cash-flow needs. It is not clearhow much longer this success will last, and there isevidence that a two-tiered structure has evolvedamong DBCs, where leading firms are able to raisecash and the have-nets find sources increasinglyunavailable (57). Some analysts believe that only afew biotechnology firms will generate significantannual revenues and thus be able to survive over thelonger term (17). This is reflected in a recent trendtoward steady financial backing for a few larger


firms and lesser amounts of capital available forsmaller, less successful fins.

As would be expected, companies focusing onhuman health care products have larger cash re-serves than those focused on other industries. Theaverage, or mean, cash balance of 34 publicly tradedhealth-based biotechnology companies was $38million in early 1990; the median was $18 million.The figures were $13 million and $10 millionrespectively for agricultural companies (46).

Limited product sales hurt cash flows. In 1989,only eight companies had product sales over $10million (46). A 1989 survey showed that 5-yearsales-growth projections had dropped. Yet salesoverall are still expected to more than double overthe next 2 years (19). Companies continue to surviveon cash obtained from R&D contracts, corporatealliances, interest income, and occasionally a com-mon or preferred stock issue. Total industry reve-nues in 64 public companies reached $1 billion in1989, up 67 percent since 1987. According to Ernst& Young, which casts a wider net in its survey,product sales in 1990 were $2.9 billion. Genentechand Amgen comprised the bulk of those sales (46).

RAISING CAPITALBiotechnology companies in the United States

have relied heavily on the investment community fortheir survival. Despite the relatively high cost ofcapital in the United States compared to othercountries (see table 4-4), U.S. firms have beenremarkably successful in attracting investors in thestart-up phase. The high cost of capital, however,may put U.S. firms at a disadvantage in the longterm. The cost of capital is less important for shorterprojects but becomes increasingly important overtime. Japanese and German fins, with lower costs,may face fewer risks (22).1 And, although Japanesecorporations are finding it easier than U.S. firms toraise relatively cheap capital (48), U.S. biotechnol-ogy companies to date have been able to raise fundsthrough creative financing. This type of financing,however, is very costly in the long term due to thehigh royalty rates and significant capital required forthe companies to buy back the product rightsnormally transferred to R&D financing vehicles.

It is not clear how long DBCs can go to venturefunds and the public markets. According to a 1988survey, 62 percent of all companies needed majorfinancing of a few million dollars each by the end of1990, and 90 percent will need financing by the endof 1991 (18). In a 1989 survey, the average companyprojected a need for $3 million in financing during1991 and $32 million in total over the next 10 years(19). Some analysts estimate that it will take $5billion to $10 billion to develop the 100 productsnow inhuman clinical trials in the therapeutic sectorof biotechnology (16,33).

Biotechnology companies continue to be financedprimarily through equity (about 75 percent), usuallyin the form of common stock (46). Debt financing isstill relatively rare. In addition to being rare, debtfinancing has been relatively unsuccessful whenused. The convertible debt instruments that wereemployed counted on appreciation in equity. If thisdid not occur, the company was forced to service thedebt while still operating on a negative cash-flowbasis (32). Forty percent of the companies surveyedby Shearson Lehman Hutton had no debt at all.

As biotechnology moves through the 1990s,strategic alliances will be the most reliable, andperhaps sensible, source of needed capital. Strategicalliances may be the only way for some firms toprevent takeover, bankruptcy, or liquidation as theyreach the most expensive stages of development.

The following sections cover the current state ofprivate and public equity funds available for bio-technology as well as recent developments instrategic alliances between U.S. firms and betweenU.S. and foreign fins.

Venture Capital

Venture capital has been the prime source of earlystage financing for new and young companiesseeking to grow rapidly. It has been a significantsource of capital for biotechnology start-ups in the1980s. The importance of venture capital to U.S.commercial biotechnology reflects the growth, ingeneral, of the venture capital industry. Biotechnol-ogy, conveniently, arrived at the right time.

l~e ~o~t~ of debt ad ~~~ ~ Ge-ny ~d J~p~ me g~~~~ lower ~ tit iII tie Ufited s~t~. mS combined with cheaper corporate fhdhlg

result in a lower cost of funds and a lower cost of capital.


Table 4-4-Cost of Capital for R&D Projects With 10-Year Payoff Lag in Four Countries

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

United States . . . . . . 12.5 12.9 11.9 12.4 8.3 18.4 15.2 20.3 20.2 16.8 18.2 20.3

Germany . . . . . . . . . 13.4 13.8 13.3 15.6 15.7 14.7 13.9 14.6 13.9 13.2 14.4 14.8United Kingdom . . . 18.2 28.4 21.1 33.4 24.2 29.5 28.2 24.4 25.4 18.9 20.6 23.7SOURCE: Federal Reserve Bank of New York staff estimates, 19S9. The rankinas reflect the reauired real pre-tax rate of return on an investment in plant or

equipment.

United States

Despite fluctuations through the 1980s, due,according to some analysts, to excesses andovervaluations in the mid-1980s, the venturecapital community is operating in a stable, if notmore conservative, environment (57). The pool offunds in the United States managed by organizedventure capital exceeds $31 billion (28). Venturefunds are still available for biotechnology but havebecome increasingly concentrated and more readilyavailable to firms or individuals with a proven trackrecord (57,14). Of the over 800 U.S. and Canadianventure capital companies listed in a comprehensivedirectory of such firms, nearly half indicated apreference for genetic engineering for possibleinvestment (35). A 1989 trade journal listing ofventure capital funds with interests in biotechnologyshowed 86 entries (24). Between 1985 and 1989,about $1.1 billion in venture capital was invested inbiotechnology (see table 4-5). Some regions of theUnited States are particularly well endowed withventure funds for biotechnology. For example,biotechnology companies remained the principalrecipients of venture funds in the San Diego area inthe last half of 1989, during which time 13 SanDiego biotechnology companies raised $113 million(44).

But growth companies, such as biotechnology,require continuing financing, sometimes requiringalmost twice as much equity financing between the3rd and 6th years as required during the frost 3 years(34). Venture capital has been available for biotech-nology companies at the founding stage, but it isincreasingly difficult to come by during the develop-ment stage, which is more expensive than thediscovery stage (23). The new conservatism inventure markets has resulted from lower rates ofreturn (30) and lowered likelihood that venturecapitalists will support a firm where exit might bedifficult. Small companies have been hardest hit byconstriction in the venture markets (19).

Opportunities for venture capitalists to realizetheir return through sale of equity via the publicmarket have been limited since the stock marketcrash of 1987. Until 1987, the public was willing toplay the role of late-stage venture capitalists bybuying stocks in companies far from profitable (23).Today, initial public offerings are harder to come by,and many companies are stuck pre-public. Onebiotechnology executive testified in May 1989 thatafter the 1987 crash, equity capital was no longeravailable to small companies, and his company wasforced to form limited partnerships with Japanesecompanies (9). United States firms were not the onlyones to suffer the consequences of the October 1987crash. Foreign firms have also been affected. Ac-quiring risk capital in Sweden was not difficult priorto that time; Swedish biotechnology firms, com-prised largely of small- to medium-sized firms, arenow having trouble raising cash (55).

One analyst estimates that public equity becamea less favorable strategy for financing for as many as75 percent of DBCs, whereas strategic alliancesgained in favor by as much as 60 percent (l). Thisdoes not mean that all biotechnology companiesalready traded publicly are being hurt. In fact,overall, biotechnology stocks performed well in thelast years of the 1980s. Still, the largest source offunding for biotechnology companies is establishedcorporations (20).

Despite positive stock activity, the valuations forthe public companies may have peaked as they havefinally reached the product stage. For smaller privatecompanies wanting to enter the public market,leveling off of valuation has brought increasingdemands for greater maturity before public fundscan be raised. One analyst reported that before somefirms are willing to underwrite an initial publicoffering for a health biotechnology company, thecompany should have positive Food and DrugAdministration (FDA) Phase II clinical trial data (4)indicating the product is close to the marketingphase.


Table 4-5-Venture Investments in Biotechnology ($ in millions)

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989. . . . . . . . .venture capital Industry

Total dollars raised . . . . . .Total capital invested . . . .Total number of

companies . . . . . . . . . .

Biotechnology industry

Dollars investedNew companies . . . . . .Total companies . . . . . .

Percent of total capitalinvestedNew companies . . . . . .Total companies . . . . . .

Number of companies . . .Total companies . . . . . . . .

Percent of total numberof companiesNew companies . . . . . .Total companies . . . . . .

Dollars investedPer companyNew companies . . . . . .Total Companies . . . . .

$3,300$2,670

1,377

$4,500$3,230

1,504

$4,900$3,940

1,729

$2,100$3,650

1,472

$2,200$3,260

1,355

$13.60$100.59

$40.15$186.18

$54.17$255.19

$41.28$311.21

$57.83$250.85

0.51%3.77%

2165

1.24%5.76%

2583

1.37%6.48%

44118

1.1 3%8.53%

40110

1 .77%7.69%

2297

1.53%4.7P/0

1.66%5.52%

2.54%6.82%

2.72%7.47%

1.62%7.16%

$0.65 $1.61 $1.23 $1.03 $2.631.55 2.24 2.16 2.83 2.59

NA = not availableSOURCE: S.P. Galante, Venture Capita/ JourrM, August 1990.

Internationally venture use. In general, pension funds are not asource of venture capital in other countries. In theUnited States, independent private venture capitalfirms (typically organized as limited partnerships)provide about 83 percent of the total venture capitalpool (28). Banks tend to be the main sources ofventure capital in the United Kingdom (about25 percent), Denmark (50 percent), and Germany(56 percent). The government provides as much as73 percent of venture capital in countries such asBelgium and Luxembourg and nearly 40 percent ofthe funds in The Netherlands. In France, insurancecompanies provide 23 percent of venture capital(37). In other European countries, venture capitalcompanies are relatively new. Nearly all of the40 companies in Germany, for example, are less than7 years old and have yet to fully realize theirinvestments. Most venture capital investments byEuropean Community (EC) countries have gone tocomputer-related firms or industrial products. Bio-technology has historically received about 3 percentof the disbursements (37).

The EC has recognized the shortage of start-upand early stage financing across Europe and hasrecently launched two initiatives: Seed Capital andEurotech Capital. The Seed Capital project supports24 new seed capital funds across the EC, seeking tostimulate cross-border investment. Eurotech Capital

Investment in biotechnology in other countrieshas been very different from that in the UnitedStates. There are few DBCs. Most of the invest-ment has come from large pharmaceutical, chem-ical, and agricultural corporations spendingmoney on in-house research and strategic alli-ances with DBCs. It is not clear whether moreventure capital availability would result in theformation of DBCs because the culture for innova-tion and entrepreneurialism is different. The venturephenomenon has been uniquely American, but thepast decade has seen an increase in venture activityoverseas. In 1988, venture capitalists in the UnitedKingdom (U.K.) invested over £1 billion, a 27-percent increase over 1987 and more than twice asmuch as in 1986. United Kingdom investors tend toplace their money within the United Kingdom (89percent), but nearly 10 percent has been invested inthe United States. Still, less than 10 percent ofventure funds have been invested in biotechnology(2).

The sources of venture funds vary betweencountries. In the United States, pension funds are asignificant source of funds for venture capital.Deregulation of types of investments allowed bypension funds released a large pool of cash for


attempts to encourage financial institutions to in-crease their investment in cross-border, high-technology projects by means of investment subsi-dies ranging from 4 to 50 percent (2).

Some countries’ efforts are so new it is impossibleto predict how successful they will be. In Taiwan, forexample, a venture capital funding system wasrecently developed to help finance new start-upcompanies. Government banks led the investmenteffort, and special income tax exemptions werelaunched. Thirteen venture capital firms have beenestablished since 1986 under this program (51). InAustralia, in an effort to encourage a more healthyventure industry, the government provides tax bene-fits for those who invest in licensed venture capitalcompanies. This scheme, however, has not beenhelpful in raising biotechnology venture capital. Ofthe 44 investment firms listed in a 1988 directory,only 4 stated a preference for biotechnology invest-ment. The average investment of 5 percent is lowwhen compared with a 15-percent investment in theinformation industries (27).

In Japan, where most of the capital is heavilyconcentrated in the banking system, venture capitalhas played a limited role in high-technology financ-ing. Because large companies develop biotechnol-ogy, financing traditionally has taken place withdebt finance. In the early 1970s, about eight venturecapital companies were established, but they func-tioned more as loan agents than as investors. In the1980s, venture capital companies were organized inlimited partnerships, which provided better exits forinvestors and changed the tax rate in a favorable way(37).

In general, venture capital sources in Japan arevery different from those in the United States. MostJapanese venture capital fund managers lack entre-preneurial management skills and usually operateout of their parent headquarters (which tend to bebanks, security houses, or giant corporations such asKirin or Mitsubishi) and invest conservatively. MostAmerican venture capitalists would claim that Japa-nese venture capital really isn’t venture capital at all.For example, Japanese venture capitalists are willingto accept returns two-fifths of the level that U.S.venture capitalists typically expect. Several otherreasons exist for the conservative nature of Japaneseventure capitalists-such as the stigma of failure andan emphasis on personal relationships rather thandepersonalized sales of equity, which result in sales

of equity primarily between cooperating firms. And,although the Nakasone government exempted taxeson capital gains of individual investors, corporationsare taxed at a rate as high as 42 percent (37). Whilethe Japanese may be moving rapidly into biotechnol-ogy through the efforts of academia, government-supported laboratories, and their major corporations,they have been unable (and perhaps unwilling) toimitate the unique relationships that exist in theUnited States between DBCs and venture capitalists.

Research and Development LimitedPartnerships

Until recent changes in U.S. tax law, research anddevelopment limited partnerships (RDLPs) allowedindividuals or companies to invest in a fro’s R&Dand write-off the investment as an expense. Inves-tors became limited partners and were entitled toroyalty payments from future sales. But current taxlaws effectively prohibit individuals from writing-off the investment as an expense. Investors do notbecome limited partners until royalty payments arereceived but technically become owners of thetechnology to either exploit or sell back to thecompany for a fixed payment plus royalties. Accord-ing to some industry executives, the current tax rulesgoverning these partnerships are unclear and furthercomplicate successful transactions (26). This meansthat RDLPs have to stand on their own merits, andall deals must include equity incentives (32).

Although the dollar amount that can be raisedfrom RDLPs is potentially high, participants at aSeptember 1990 OTA workshop agreed that thesepartnerships remain a valuable funding vehicle onlyfor established firms with a proven track record andare not widely available (57). In 1989, Genentechraised $72 million in an RDLP to research anddevelop its CD4-based acquired immunodeficiencysyndrome (AIDS) treatment. Even so, executives ofGenentech reported difficulties in raising thisamount (6), and most biotechnology companieswould be fortunate to raise a sum that large (11).RDLPs are not currently a good money raisingmethod--even for established companies (5).

CONSOLIDATIONConsolidation within industries occurs when

competition between companies becomes extreme,when marketing of existing products becomes moreimportant than the development of new products,


when the costs for R&D of new products increasefaster than the level of sales, or when it is difficult toraise cash. Such consolidations can take the form ofbuyouts or mergers. Typically, larger companiestake over or merge with smaller companies that donot have the marketing power of the larger firms orthat have not met the challenges posed by the levelof competition. In the 1980s, several industriesexperienced consolidations, including high-technol-ogy areas, such as mainframe computer software,cellular telephones, and semiconductors.

A general trend in high-technology-includingbiotechnology-is that the basic technology isrelatively inexpensive for firms to develop. Severalfactors may contribute to this phenomenon. First,the Federal Government supports basic researchthrough grants to universities-the results of whichbecome public knowledge. Second, there are fewregulations affecting basic research. Small compa-nies with innovative ideas can compete successfullyby exploiting their narrow specialty. However, asideas approach the market, the capital required tomake improvements and start production increasesdramatically. Undoubtedly, the cost of developingbiotechnology products is rising rapidly; enough toconcern the largest DBC. Although start-up compa-nies will continue to play a crucial role in thedevelopment of biotechnology, mergers and take-overs will become more common as the marketlimits capital availability and the costs of developingand marketing new products increases while cashsupplies become limited.

Mergers will allow large corporations to lead inthe effort to develop commercial biotechnologyproducts immediately, without having to engage inbasic research that is often not applicable to acommercial product. Because of the relatively lowcost at which technology can be acquired, largeforeign- and domestic-based pharmaceutical andpesticide firms will likely be active in takeovers andmergers of biotechnology firms in the United States.Moreover, foreign multinationals view U.S. firms asparticularly attractive, given the size, affluence, andopenness of the U.S. market, as well as the founda-tion of basic research techniques and knowledge thatmany companies possess. To date, there have beenno hostile takeovers in biotechnology, largely be-cause the assets (people) have no obligation to stayand many takeover opportunities exist elsewhere(40).

The recent $660 million merger of Chiron andCetus is symptomatic of the consolidation beginningto occur among companies involved in biotechnol-ogy. One of the frost takeovers of a biotechnologycompany occurred in 1982 when Schering-PloughCorp. acquired DNAX (Palo Alto, CA) for $29million (3). In 1986, two important buyouts ofbiotechnology companies took place. Hybritech(San Diego, CA) was bought by Eli Lilly for $500million, and Genetic Systems was acquired byBristol-Myers for nearly $300 million (3). A fewbuyouts have occurred between foreign and U.S.fins. For example, in 1988, Denmark’s Novo-Nordisk purchased a Seattle-based biotechnologyfirm, Zymogenetics. In 1989, Gen-Probe, Inc. (SanDiego, CA) was sold to Japan’s Chugai Pharmaceu-tical for $110 million (39), and Seradyn, Inc. wasbought by Mitsubishi Kasei. In 1990, Schering AGpurchased Codon Corp. and Triton Biosciences. Asampling of acquisitions can be found in table 4-6.Further consolidation is inevitable.

Foreign Participation in Mergers andAcquisitions

Relationships between U.S. biotechnology com-panies and foreign corporations have taken virtuallyevery form and combination of forms imaginable,including: acquisition, merger, equity investment,joint venture, co-marketing, technology licensing,product licensing, and research sponsorship. Obvi-ously, mergers and acquisitions are the most extremeinteractions that can take place between two compa-nies. The case of Genentech and Hoffmann-LaRoche is the most notable (see box 4-B). Otherconsolidation occurring today within the pharma-ceutical industry is illustrated by Eastman Kodak’spurchase of Sterling Drug, the trans-Atlantic mergerbetween SmithKline Beckman and the BeechamGroup, the union of Squibb Corp. and Bristol-Myers, the Marion Laboratories merger with Mer-rell-Dow, and the Rhone-Poulenc acquisition ofRorer. But these are big companies merging withother big companies. While drug companies areteaming-up for potential synergies and improvedcompetitiveness in an increasingly global market-place, traditional reasoning has long proposed thatfinancial pressure would eventually force biotech-nology companies to sell out in order to survive.Financing has been particularly tight ever since thestock market crash of 1987, and the majority ofbiotechnology concerns have nervously watched


Table 4-6-Acquisitions of U.S. Biotechnology Companies, 1989-90

TransactionAcquirer Target company form Date

Abbott Laboratories. . . . . . . . . . . . . . . . .American Cyanamid Co. . . . . . . . . . . . . .American Vaccine Corp. . . . . . . . . . . . . .Applied Bioscience International, Inc. . .Baxter International, Inc. . . . . . . . . . . . . .Biomedical Technologies, Inc.. . . . . . . . .Biopool International, Inc.. . . . . . . . . . . .Cambridge Bioscience Corp. . . . . . . . . .Cambridge Bioscience Corp. . . . . . . . . .Carter-Wallace, Inc. . . . . . . . . . . . . . . . . .Chugai Pharmaceuticals, Inc.. . . . . . . . .Collagen Corp. . . . . . . . . . . . . . . . . . . . . .Eastman Kodak Co./Cultor Ltd.. . . . . . . .Eli Lilly & Co...... . . . . . . . . . . . . . . . . . .Hoffman-LaRoche, Inc. . . . . . . . . . . . . . .Genentech, Inc. . . . . . . . . . . . . . . . . . . . .Genzyme Corp. . . . . . . . . . . . . . . . . . . . .Immucor, Inc. . . . . . . . . . . . . . . . . . . . . . .Immunotech Pharmaceuticals . . . . . . . .Institut Merieux. . . . . . . . . . . . . . . . . . . . .Life Sciences International, Inc. . . . . . . .Life Technologies Inc. . . . . . . . . . . . . . . .Microgenics Corp. . . . . . . . . . . . . . . . . . .Mitsubishi Kasei . . . . . . . . . . . . . . . . . . . .Moleculon, Inc. . . . . . . . . . . . . . . . . . . . . .Murex Clinical Technologies Corp. . . . . .Orion Pharmaceutical, Inc. . . . . . . . . . . .Porton International, inc. . . . . . . . . . . . . .Porton International, Inc. . . . . . . . . . . . . .Quidel Corp. . . . . . . . . . . . . . . . . . . . . . . .Sanofi Pharma SA...... . . . . . . . . . . . .Schering AG . . . . . . . . . . . . . . . . . . . . . . .Schering AG . . . . . . . . . . . . . . . . . . . . . . .Synbiotics Corp. . . . . . . . . . . . . . . . . . . . .Transgenic Science, Inc. . . . . . . . . . . . . .Institute Union Carbide Corp. . . . . . . . . .Ventrex Labs, Inc. . . . . . . . . . . . . . . . . . .

Damon Biotech, inc. . . . . . . . . . AcquisitionPraxis, Inc. . . . . . . . . . . . . . . . . . AcquisitionIAF BioChem . . . . . . . . . . . . . . . MergerEnviron Corp. . . . . . . . . . . . . . . . MergerBio-Response, Inc. . . . . . . . . . . AcquisitionFlow Labs . . . . . . . . . . . . . . . . . Acquisitioninter-Haemaol, Inc. . . . . . . . . . . AcquisitionAngenics, Inc. . . . . . . . . . . . . . . AcquisitionBiotech Research Labs, . . . . . . MergerHygenia Sciences . . . . . . . . . . . AcquisitionGen-Probe r Inc. . . . . . . . . . . . . . AcquisitionSummaCare, Inc. . . . . . . . . . . . . AcquisitionGenecor, Inc. . . . . . . . . . . . . . . . AcquisitionPacific Biotech, Inc. . . . . . . . . . . AcquisitionGenetech, Inc. . . . . . . . . . . . . . . AcquisitionGenentech Canada . . . . . . . . . . AcquisitionIntegrated Genetics. . . . . . . . . . AcquisitionImmucor, GmbH. . . . . . . . . . . . . AcquisitionDura Pharmaceuticals . . . . . . . . AcquisitionConnaught Biosciences, . . . . . . AcquisitionInternational Equipment . . . . . . AcquisitionWaitaki International, Inc. . . . . . AcquisitionBioautomated Systems, inc.. . . AcquisitionSeradyn, Inc. . . . . . . . . . . . . . . . AcquisitionKalipharma, Inc. . . . . . . . . . . . . . AcquisitionDominion Biological . . . . . . . . . . AcquisitionKSV Lipids . . . . . . . . . . . . . . . . . AcquisitionHazelton Biologics, Inc. . . . . . . . AcquisitionSera-Lab, Ltd. . . . . . . . . . . . . . . AcquisitionMonoclonal Antibodies, inc. . . . MergerGenetic Systems, Inc. . . . . . . . . AcquisitionCodon Corp. . . . . . . . . . . . . . . . . AcquisitionTriton Biosciences . . . . . . . . . . . AcquisitionCryschem, Inc. . . . . . . . . . . . . . . AcquisitionMason Research . . . . . . . . . . . . AcquisitionVitaphore Corp. . . . . . . . . . . . . . AcquisitionCambridge Medical

Oct. ’89NOV. ’89Oct. ’89May ’90Jan. ’90NOV. ’89Mar. ’90Aug. ’89Apr. ’90May ’90NOV. ’89Apr. ’90Jan. ’90Apr. ’90Jan. ’90Jan. ’90Aug. ’89May ’90Jan. ’90Dec. ’89Apr. ’90July ’89Mar. ’90Oct. ’89NOV. ’89Jan. ’90Aug. ’89Dec. ’89Dec. ’89July ’90Apr. ’90May ’90June ’90Feb. ’90Dec. ’89May ’90

Aug. ’89NOV. ’89

Technology . . . . . . . . . . . . . . . AcquisitionIngene Corp . . . . . . . . . . . . . . . MergerXoma Corp. . . . . . . . . . . . . . . . . . . . . . . . . _ .

NOTE: The information displayed was gathered from publicly available sources (industry journals, newspapers, pressreleases, etc.) As such, it is not meant to be an all encompassing list but rather, a reasonable sample of theactivity during the past year. No confidential survey data was used for this list.

SOURCE: Ernst & Young, 1990.

their bank accounts dwindle since then. For manysuch start-up companies the choice has been one ofcutting R&D or turning to corporate sources forvarious types of financial assistance.

The North Carolina Biotechnology Center(NCBC) maintains a database that monitors publicliterature citations to take a much broader approachto biotechnology agreements. The center includes adeal if either one of the firms involved has somebiotechnology activities. As a result, more agree-ments are included within the NCBC database,which tracks more than 550 small and large firmsthat work with recombinant DNA (rDNA), mono-clonal antibodies, or new cell culture technologies.

For the years 1982 to 1988, a total of 33 biotechnol-ogy-related acquisitions involved a firm from theUnited States and a firm from Europe, while onlythree involved combinations of U.S. and Asiancompanies. Many of these deals consisted of multi-nationals on both sides of the Atlantic exchangingdivisions, with biotechnology often an unimportantpart of the buyouts. In the three Asian acquisitions,for example, biotechnology played virtually no rolewhatsoever (31).

The long-awaited biotechnology consolidationhas been less than dramatic so far, but worldwideacquisitions were on the rise in 1989 and 1990 (seetable 4-6). Of these deals, few involve a foreign

56 ● Biotechnology in a Global Economy——..——— . . .—— . .— .— —..- - ——-

Box 4-B—The Genentech/Hoffmann-LaRoche Merger

In February 1990, the biotechnology community was stunned when the Swiss pharmaceutical company RocheHoldings, Basel, announced that it was acquiring 60 percent of Genentech for $2.1 billion. Roche Holding Ltd. is the parentcompany of Hoffmann-LaRoche. In principal, the arrangement is a merger rather than a takeover and Roche’s investmentrepresents a much greater interest in biotechnology than it has previously taken. Hoffmann-La Roche has joint venturesto develop specific products with at least 13 other companies and owns 4 percent of Cetus. The announcement was metwith dismay by some because of rising concern about foreign investment in the U.S. economy; Japanese firms were activelypurchasing U.S. assets, including Sony’s highly publicized acquisition of Columbia Pictures 4 months prior to Roche’sannouncement.

The merger agreement was overwhelmingly approved by Genentech shareholders and passed Federal TradeCommission (FTC) review in September 1990. Under the terms of the agreement, Roche Holdings will exchange everytwo shams of Genentech stock for $36 cash plus one share of Genentech redeemable stock. Roche has the right to buy allof the redeemable stock at various dates between December 1990 and June 1995 at prices ranging from $38 to $60 per share.

Genentech was the largest and most successful independent U.S. biotechnology company and had become symbolicof American superiority in the field. The biotechnology-based pharmaceutical company was founded in 1976 using venturecapital. In October 1980, Genentech was able to capitalize on the biotechnology hype during the public offering of itsshares. During the first 20 minutes of trading, the stock rose from the initial offering price of $35 to $89. This was especiallysurprising given that investors’ decisions were based on expected profits from products that were not yet developed,approved, or marketed. Nevertheless, investors were lured to Robert A. Swanson’s dream to ‘‘build a fully integrated,independent pharmaceutical company. Swanson hoped that Genentech would achieve a billion dollars in annual sales by1990.

Genentech’s success is considered extraordinary because it pioneered four of the first six genetically engineeredpharmaceutical products available on the market. The first three commercial successes for Genentech were human growthhormone, human insulin, and alpha interferon. Genentech’s largest effort was in the development of tissue PlasminogenActivator (tPA). By 1989, Genentech’s product and licensing royalties revenues had grown to $400 million from itsproducts-the aforementioned human insulin, human growth hormone, alpha interferon, and tPA. While revenue increasedsteadily, costs of research, development, and litigation also rose. In 1989, Genentech spent 40 percent of its revenues onresearch and development, amounting to $155 million.

Genentech was the primary company to develop Activase (the brand name for tPA). Sales of Activase, Genentech’smain product, were much slower than expected because of delays in Food and Drug Administration (FDA) approval,scientific studies questioning its effectiveness, and the availability of an inexpensive, low-technology competing product.The inability of Activase to live up to original expectations combined with increased costs of bringing new products to themarket may have spurred Genentech’s efforts to find a partner.

Genentech executives report that they looked for a U.S. partner before approaching Roche Holdings. Roche wasdeemed suitable because, among other things, it took a long-term view on the merger, it needed to take a major step forwardwith its comparatively slow-moving internal biotechnology efforts, and was apparently less concerned with quarterlyperformance. In addition, Genentech wanted to expand the sale of its products overseas very quickly.

During the next few years, the daily management of Genentech is expected to change little. Roche Holdings has saidthat Genentech will continue to have a high degree of flexibility and independence; Roche will appoint only 2 of the 13members of Genentech’s board of directors. How long this relationship will last is unclear. The main benefit for Genentechappears to be an immediate infusion of $492 million. Genentech executives noted that the company simultaneously gainedthe capital to finance its long-term drug development plans and reduced its need to worry about volatility in quarterlyprofits. Kirk Raab, CEO and President of Genentech, implied that fluctuations in eamings were hurting Genentech’s abilityto conduct its programs and secure financing. In essence, Genentech is gaining a degree of security that will offset its lostindependence. In addition, Genentech will have access to Roche’s large international sales staff. Sales of Genentech’sproducts are likely to show strong growth, especially overseas; currently only 20 percent of Genentech’s revenues originatefrom sales outside the United States.

Nearly all of Genentech’s 1,850 employees hold stock options. The day the merger was completed, Genentech gaveits employees a cash windfall of approximately $120 million, or $60,000 each. Kirk Raab stands to gain $7.9 million instock options while Chairman and cofounder, Robert Swanson, would receive $4.2 million in cash on top of stock options.Herbert Boyer, cofounder and co-patentee on the most famous recombinant patent, will collect $36 million in cash forturning in his 2 million shams.SOURCES: Oftlce of Technology Assessment 1991, based on Associated Press wire story, Sept. 9, 1990; Business Week, “Roche’s Big Buy

May Set Offa Shopping Frenzy,” Feb. 19, 199Q M. Chase, “GenentechPlans To Sell 60 Percent Stake to Roche Holdings for$2.1Billion” Wall Street Journal, Feb. 5, IW, M. Ratner, “New Era for Genentecb and So It Goes,” Biotechnology, March 199QR.A. Swanso~ “Remarks Before the Vice President’s Council on Competitiveness,” February 1990.


acquisitor. In fact, in the case of Genzyme’sproposed takeover of Integrated Genetics, it was thesmall U.S. acquisitor outbidding the large Italianpharmaceutical concern, the Ares-Serono Group.Rather than demonstrating any international trend,1989 and 1990 proved to be the years of the teamupbetween U.S. biotechnology companies: the years’deals involve U.S. biotechnology companies on bothsides of the contracts. A 1990 survey of biotechnol-ogy companies revealed that within the next 5 yearsnearly half expect to acquire another company and39 percent expect to be acquired (19).

With such a small number of acquisitions byforeign firms it is difficult to identify temporaltrends. It seems certain, however, that overall buyoutactivity is heating up, with half the total number ofbiotechnology acquisitions being made (or beingproposed) within the past 2 years. Nevertheless, itwould seem that if an onslaught of biotechnology-hungry multinationals acquiring cash-strapped bio-technology companies was going to occur, the trendwould likely have become quite evident by now. Thekey is, if American biotechnology companies re-main willing to arrange deals for single products orproduct lines at reasonable prices, why should aforeign firm go through all the trouble and expenseof making a complete acquisition (25). In a 1990survey, three-quarters of the companies surveyedbelieve it does not matter whether an acquirer isforeign or domestic (19).

Analysts expect that many struggling, cash-shortAmerican biotechnology firms will command someof the richest takeover premiums in the years ahead(15). The Premiums paid for recent acquisitions havebeen high. Hoffmann-LaRoche acquired 60 percentof Genentech at a 40-percent premium over itsmarket valuation. Chugai paid a 92-percent pre-mium for Gen-Probe, and American Cyanamid paida 175-percent premium for Praxis Biologics (19).

Many industry observers disagree, however, onthe likelihood of a spate of foreign biotechnologytakeovers (57). One argument proposes that themajor assets of U.S. genetic engineering firms aretheir young, energetic scientists. These assets walkout of the building every night, and they wouldlikely move to another start-up company if theydidn’t like the corporate atmosphere following atakeover. That reasoning may carry somewhat lessweight today than previously, however, as a numberof biotechnology companies are beginning to show

product revenues and operating profits and thereforehave tangible worth in addition to their scientificexpertise. But, with companies spending 70 percentof their revenues on research, this argument is stillrelevant (40).

With any takeover, be it foreign or domestic, thenew parent is likely to put in place new managementand infrastructure. An action that could have nega-tive consequences on an entrepreneurial, research-based biotechnology fro-these problems are mul-tiplied if the parent company is headquarteredoverseas. This may be one reason why Japanesefirms prefer strategic alliances over total acquisition.In general, strategic alliances expose the parentcompany to less risk than acquisition.

STRATEGIC ALLIANCESAs venture funds become more conservative and

the public market more difficult to penetrate, U.S.companies increasingly rely on strategic allianceswith both domestic and foreign firms to raisemuch-needed cash. While policymakers may beconcerned about asymmetrical deals wherein theforeign firm gains more than the U.S. firm, U.S.companies enter into alliances that offer the mostcash with the greatest flexibility. A 1989 surveyexamined the reasons that biotechnology companiesturn to foreign partners for strategic alliances in thefirst place (19). United States firms cite marketingexpertise as the prime reason for foreign ties,followed by the availability of capital and theregulatory expertise necessary to market products inforeign countries (see figure 4-2).

It is surprisingly difficult to define exactly whatconstitutes an alliance between a U.S. biotechnologycompany and a European or Asian partner. Forexample, the research collaboration that Cetussigned with Hoffmann-La Roche in early 1990covering human diagnostics based on polymerasechain reaction (PCR) technology is really with theNew Jersey-based Hoffmann-La Roche, Inc. subsid-iary of the Swiss-based parent. Nevertheless, re-searchers at Roche’s world headquarters in Baselprobably have a much better handle on PCRtechnology than if Cetus’ deal was with a totallyunrelated company. Similarly, if Nova Pharmaceuti-cal’s major collaboration with SmithKline Beckmanwas an all-American deal when it was first signed,does anything change now that SmithKline hasmerged with England’s Beecham Group?


Figure 4-2—Reasons for Geographic Strategic Alliance

Market capability

Capital needs

Regulatory expertise

New products

Research capability

New science andtechnology

Manufacturing capability

18~ 27

I 48

18 ,71 2 2

’ 5 1 2J 20

7I I I I

o 20 4 0 60 8 0 100Percentage rating

m Us. = Europe ~ Japan

SOURCE: Ernst & Young, Biotech 91: A Changing Environment (San Francisco, CA: 1990).

Keeping track of new alliances is often a rela-tively straightforward procedure because of thepublicity surrounding such announcements. Moni-toring the termination of such deals, however, ismuch more difficult. For example, 46 publicly heldbiotechnology companies tracked by Shearson par-ticipated in 65 deals that terminated during 1988.European partners were involved in eight of thoseteruminations; Asian partners participated in four.Reasons for ending agreements include a change infocus on the part of one of the partners, unsatisfac-tory R&D progress, or the planned conclusion ofR&D contracts for better or worse. For example, inPharmacia’s termination of agreements with Bio-technology General and Chiron, analysts point tomajor corporate restructuring going on within theSwedish company (46).

A further difficulty with deal-counting is that oneagreement may cover just a single protein whileanother may involve a whole range of products. Forexample, Chiron Corp. ’s joint venture with Switzer-land’s Ciba-Geigy includes a variety of biotechnol-ogy-derived vaccines; by comparison, Amgen andKirin have actually made three separate agreements(plus one more between Amgen and the Kirin-Amgen joint venture) with each covering a specifictherapeutic product obtained using a DNA technol-ogy.

Despite these difficulties and limitations, it isinstructive to step back and examine the overall

numbers of agreements forged between U.S. bio-technology companies and European and Asianpartners. The investment bank Shearson LehmanHutton has kept track of the various domestic andforeign alliances currently in place for 46 publiclytraded U.S. biotechnology fins. It lists transactionsthat have taken place from the inception of thebiotechnology companies through February 1,1989.Biotechnology firms have an average of six corpo-rate partners each. The average number of foreignalliances for each U.S. biotechnology company is3.5, which includes an average of 2.1 Europeanalliances and 1.4 deals with Asian companies,almost always Japanese firms (see table 4-7). Thesefigures have been confirmed in a separate survey byErnst & Young (1990).

A half-dozen biotechnology companies haveforged an extraordinary number of foreign ties;Chiron, Biogen, and Genentech lead the way (seetable 4-8). The data reveal several different strate-gies for foreign strategic alliances: some U.S. firmshave emphasized European accords (e.g., Chironand Immunex), others have stressed Asian overEuropean alliances (e.g., Amgen, Bio-TechnologyGeneral Corp., and The Liposome Co.), and stillothers have opted for a balanced approach (e.g.,Biotech Research Labs, Genentech, Integrated Ge-netics, and Mycogen).

‘Timing the tables and examining the situationfrom the perspective of the foreign partners reveals


Table 4-7—Breakdown of the Number of AlliancesWith 46 Publicly Held U.S. Biotechnology

Companies With European or Asian Partners

Total number Number with Number withof alliances European firms Asian firms

12345678+

289400031

1811230100

SOURCE: Teena Lerner, Shearson Lehman Hutton, 1990.

that 62 percent of European firms that have madedeals with U.S. biotechnology companies havemade just one such accord, while 91 percent havemade three or fewer; the average number of deals perEuropean company is two. The European outliersare Switzerland’s Hoffmann-La Roche (13 deals),Ciba-Geigy (7 deals), Sandoz (7 deals), and Ger-many’s Hoechst (7 deals). Although these representa large number of alliances, the European corporatedealmakers have struck nowhere near the number ofbiotechnology accords as the most active of U.S.-based multinationals, such as Johnson & Johnson(23 deals) and Eastman Kodak (20 deals) (46). Acountry-by-country analysis of strategic alliancesappears in box 4-C.

As for Asian firms, the overall pattern is similar.Some 51 percent of those companies that do havestrategic alliances with biotechnology companieshave only one agreement, with all but one Asiancompany having four deals or fewer. The one Asianoutlier is Kirin Brewery, which has six agreements(four with Amgen and the remaining two with PlantGenetics, Inc.). Other major Japanese corporationsentering into alliances are Green Cross, MitsubishiChemical, and Yamanouchi Pharmaceutical, eachwith four agreements.

The Shearson data are useful as far as they go, butthey were constructed specifically to track andevaluate publicly held biotechnology companies,rather than monitoring the actual technologies in-volved. With over 400 U.S. companies dedicated tobiotechnology, the Shearson figures clearly leaveout small, public biotechnology companies as wellas privately held concerns. In addition, establishedU.S. pharmaceutical, chemical, and other companieswith significant in-house biotechnology expertiseare also ignored.

Table 4-8-Number of Agreements With European andAsian Partners for 46 Publicly Held U.S.Biotechnology Companies As of 1989

Number of Number of Total numberEuropean Asian foreign

U.S. company deals deals deals

Amgen . . . . . . . . . . . . . .Bio-Response . . . . . . . . .Biogen . . . . . . . . . . . . . . .Biotech Research

Labs . . . . . . . . . . . . . .BioTechnica

International . . . . . . . .Bio-Technology

General . . . . . . . . . . . .Calgene . . . . . . . . . . . . .California

Biotechnology . . . . . . .Cambridge

Bioscience . . . . . . . . .Centocor . . . . . . . . . . . . .Cetus . . . . . . . . . . . . . . . .Chiron . . . . . . . . . . . . . . .Collaborative

Research . . . . . . . . . . .Crop Genetics . . . . . . . .Cytogen . . . . . . . . . . . . .Damon Biotech . . . . . . . .DNA Plant Technology . .Ecogen . . . . . . . . . . . . . .Enzo Biochem . . . . . . . .Epitope . . . . . . . . . . . . . .Escagenetics. . . . . . . . . .Genentech . . . . . . . . . . . .Genetics Institute . . . . . .Genex . . . . . . . . . . . . . . .Genzyme . . . . . . . . . . . .Gen-Probe . . . . . . . . . . . .Immunex . . . . . . . . . . . . .Imre . . . . . . . . . . . . . . . . .Integrated Genetics . . . .Ingene . . . . . . . . . . . . . . .Invitron . . . . . . . . . . . . . .Lipsome Technology,

Inc. . . . . . . . . . . . . . . .Molecular Genetics . . . . .Monoclonal Antibodies..Mycogen . . . . . . . . . . . . .NeoRx . . . . . . . . . . . . . . .Nova Pharmaceutical . . .Oncogene Sciences . . . .Plant Genetics . . . . . . . .Repligen . . . . . . . . . . . . .Synergen . . . . . . . . . . . . .Syntro . . . . . . . . . . . . . . .T Cell Sciences . . . . . . . .The Liposome

co. . . . . . . . . . . . . . . . .Vestar . . . . . . . . . . . . . . .Xoma . . . . . . . . . . . . . . . .

;8

0

2

04

3

143

12

2011400217632450300

121000014110

033

407

0

0

41

2

1414

1000000116312102410

000100031013

500

50

15

0

2

45

5

284

16

301140032

13944552710

121100045123

533

SOURCE: Teena brner, Shearson Lehman Hutton, 19S9.

The NCBC data that were sorted under contractspecifically for this report show that from 1982 to1989 both European and Japanese firms have hadsignificant interactions with U.S. companies. Ap-

292-870 - 91 - 3 : Q1- 3

60 ● Biotechnology in a Global Economy---- . ——. . . .—.

Box 4-C-Country-by-Country Analysis of Strategic Alliances

Analysis of the countries involved in U.S.-Asian alliances shows Japan involved in 94 percent of the 195 dealsmade from 1982 through 1988. In 1988, there was a record 52 U.S.-Japanese deals struck; but some of the otherAsian countries also signed agreements with U.S. firms. The half-dozen non-Japanese deals signed last yearinvolved companies from China, Israel, Singapore, Korea, and Pakistan.

Alliances between biotechnology companies from Western countries and the Soviet Union are also becomingmore common of late. In one such arrangement, Monsanto agreed to contribute $500,000 toward joint research atthe U. S. S.R. 's Shenyakin Institute for Bio-Organic Chemistry involving neurobiological processes, human andanimal growth hormones, and plant genetic engineering. In another 1989 pact, Millipore and the Soviet Instituteof Genetics opened a joint R&D facility in Moscow that will initially develop separation processes foralpha-interferon and the amino acid L-threonine.

The leading players in U.S.-European alliances are the United Kingdom (74 deals), Switzerland (63), andGermany (45). Even though companies from each of these countries posted a record number of trans-Atlanticbiotechnology accords last year, the United Kingdom and Germany have clearly boosted their participation, whileSwitzerland’s presence has been more steady throughout the 7-year period. This may have something to do withfar-sighted Swiss pharmaceutical giants like Hoffmann-La Roche, Sandoz, and Ciba-Geigy having played suchactive partnership roles from the beginning.

The European countries that make up the second-tier in terms of U.S. alliance activity are Sweden (28 deals),France (28), Italy (25), and The Netherlands (24). French, Italian, and Dutch accords are clearly on the rise, whileSwedish participation has been more evenly spread over the analysis years.

Belgium and Denmark, with 10 agreements apiece, make up a third tier of countries when it comes toU.S.-European deals; Czechoslovakia, Finland, Ireland, Norway, and Spain represents the fourth tier, withcompanies from each country having signed between one and three pacts.

In Germany, industry invests heavily in R&D-58 percent of the national total-and the pattern extends tobiotechnology. The majority of biotechnology activities are being conducted by large firms including: Bayer,BASF, Boehringer Ingelheim, Hoechst, and Schering. Some of the firms, such as Bayer and Hoechst, are fundingbiotechnology R&D at the rate of $70 to $100 million a year—amounts equivalent to U.S. companies, such asDuPont and Monsanto. Licensing agreements, strategic alliances, and even acquisitions involving U.S. firms (e.g.,BASF’s $1 billion acquisition of Inmont) may help German firms gain access to cutting-edge technology. Inaddition, German firms are locating biotechnology facilities in the United States, such as BASF’s productionfacilities in Massachusetts. Wellcome has a joint venture manufacturing facility in the United States with GeneticsInstitute.

In Switzerland, where the pharmaceutical industry is very strong, industry accounts for 75 percent of all R&Dinvestment (approximately US $3.25 billion annually). Commercial investment in biotechnology goes toward basicresearch. Because of production costs and a small internal market, most Swiss companies prefer to produce productsabroad.SOURCE: Office of Technology Assessmen4 1991, adapted from data obtained from the North Carolina Biotechnology Centec Decision

Resources, Selected Company Liaisons in Biotechnology, First Quarter 1989 (San Franckco, CA: Arthur D. Little, 1989).——— . —

proximately 366 European-U.S. biotechnology ac- biotechnology firm by an overseas investor (tablecords and some 266 Japanese-U.S. biotechnologydeals were struck during the 7-year period.

Equity Arrangements

Biotechnology companies are always looking formoney; selling equity to major U.S. and foreigncorporations has always been an important part ofthis fundraising, often accompanying strategic mar-keting or distribution deals. Using data on 46publicly traded U.S. biotechnology companies showseven instances of equity participation in a U.S.

4-Y). This means that foreign firms accounted for 18percent of the total 38 equity investments listed. Aswith outright acquisitions, the small number of thesedeals indicates that this mute has not been animportant one for European and Asian companies asthey try to compete in biotechnology. A GeneralAccounting Office (GAO) report confirms the rela-tively minor part that foreign direct investment hasplayed in U,S. biotechnology (52).

The NCBC databases reveal 25 cases of U. S.-European equity arrangements and 12 cases of


Table 4-9-Equity Participations in 46 Publicly HeldU.S. Biotechnology Companies by European and

Asian Partners

U.S. firm Partner Description-. . . . . -. . --- --- -Cetus . . . . . . . . . . . . Hoffmann-

LaRoche

Chiron . . . . . . . . . . . Ciba-Geigy

DNA Plant Tech. . . Adron ABDNA Plant Tech. . . Hilleshog

ResearchAB

Imre . . . . . . . . . . . . . TakedaChemical

Nova Pharm. . . . . . Celanese

Plant Genetics . . . . KirinBrewery

Purchased 950,000 Cetusshares (3.6%) in Jan. 1989for $15 per share

Paid $20 million for 1 millionChiron shares in Dec. 1988

Owns 2.3% of DNAPOwns 6% of DNAP

Takeda increased its equityownership to 10% in Aug.1988

Celanese, which wasacquired by WestGermany’s Hoechst,purchased $10 millionNova shares in 1987

in 1986 Kirin purchased atotal of almost 95,000shares of various classes ofpreferred stock

SOURCE: Teena Lerner, Sheareon Lehman Hutton, 1990.

U.S.-Japanese deals. The European data show arecent increase in this activity, with 13 deals beingmade in the last 2 years; however, the U.S. firm wasacting as the equity purchaser in more than half ofthese 13 instances. Four deals involving equitybuy-ins into U.K. biotechnology companiesCelltech and British Biotechnology Ltd. clearlyillustrate the fact that recognized genetic engineer-ing expertise is no longer limited to U.S. shores.

Of 25 U.S.-European equity arrangements, fivecontain an explicitly mentioned marketing or distri-bution agreement. Interestingly, however, of the 15deals made in the last 3 years, only 1 involves sucha dual function, indicating, perhaps, U.S.-Europeanequity investments are now being made for their ownsake, rather than as part of a window on technologyor market access approach. On the Japanese side ofthings, 6 of 12 equity deals explicitly mentionmarketing or research funding with no trend awayfrom dual agreements in the last few years. Thisseems indicative of the fact that the Japanese marketis still inaccessible to most biotechnology compa-nies by any route other than teaming up with a largeJapanese corporation.

Joint Ventures

With the exception of complete acquisition, themost intimate relationship two companies can haveis a joint venture. In most cases, these arrangements

consist of both parties contributing a corporatestrength. In biotechnology, the genetic engineeringcompany invariably contributes the necessary tech-nology; and the partner contributes financing, per-haps some development skills, and marketing capac-ity down the line. For most biotechnology compa-nies, joint ventures are almost always preferred overlicensing arrangements as they give the start-up firmopportunity to finance internal infrastructure con-sistent with becoming vertically integrated and ashare in profits rather than receiving only a smallroyalty on eventual sales.

Joint ventures now account for most interna-tional alliance activity in terms of dollars, whilemarketing arrangements are still number one interms of overall numbers of deals made (58).Many of these agreements, especially in the earlyyears, involved major American companies, such asSquibb, Corning Glass, Abbott Laboratories, andDuPont; but as time passed, the biotechnologycompanies began to play a growing role, especiallythe larger, big-name companies like Genetics Insti-tute, Chiron, Amgen, and, of course, Genentech.Whether the U.S. biotechnology company isdealing with Europe or Japan, the more the firmcan bring to the partnership the better are itschances of negotiating a full-scale joint venture,as opposed to a limited and less valuable licensingor marketing arrangement. Although it wouldseem that U.S. biotechnology companies would bematuring over the last year or two to the point wheremore of them could pull their own weight in a jointventure involving an overseas partner, the evidencedoes not point to any large increase in such jointventures.

If one particular joint venture were to be singledout as a model for biotechnology companies toexamine, the Kirin-Amgen venture would be a goodplace to start. According to Amgen president HarryHixson, it took the two companies just 8 weeks in1984 to arrange the deal from beginning to end (29).Kirin put up $12 million and Amgen contributedpatent rights, technology, and (somewhat unusually)$4 million in its own funding. Research took placeon both sides of the Pacific, and the companies ‘divided up worldwide marketing rights as follows:Amgen kept U.S. rights, Kirin took Japanese rights,and the Kirin-Amgen joint venture itself held ontorights for the rest of the world. Johnson & Johnsonlater bargained for European marketing rights fromKirin-Amgen as well as rights to certain U.S.


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markets from Amgen. The key factor in making thearrangement a success was the potential success ofthe product, erythropoietin (EPO), a protein thatstimulates the production of red blood cells. Erythro-poietin is approved for use in close to a dozenEuropean countries. In June 1989, EPO receivedmarketing clearance from the U.S. FDA for treat-ment of renal dialysis patients who suffer anemiasdue to their inability to produce red blood cells.

Even this joint venture wasn’t perfect. For exam-ple, one of the reasons that Amgen was able tonegotiate such a favorable arrangement was thatKirin sells a lot more beer than it does drugs, so thiscompany would not immediately be considered thebest of marketing partners for a biotechnology-derived therapeutic. In fact, this marketing weaknessprobably played a role in the joint venture’s eventualdecision to license European rights to EPO.

Licensing and Marketing Deals

Licensing, whether it involves technology itselfor the marketing rights to eventual products thatresult from R&D, has been an important source offunds since the inception of commercialized molec-ular biology.

Despite their popularity in terms of numbers ofdeals, licensing agreements do not receive ravesfrom biotechnology executives. These arrange-ments, if made with a large pharmaceutical com-pany, provide the large pharmaceutical companyvery good downside protection with milestonepayments often eliminated if the research is notgoing well. The biotechnology companies, however,gain somewhat limited upside potential from thesedeals, because if the product is successful it will bethe pharmaceutical company that reaps the lion’sshare of the profits (41).

So why are there so many licensing deals? Theproblem, according to one executive, is that partner-ships and joint ventures cannot be completed until acompany has financed its own risk capital and hascome up with a product or service in which someonehas an interest. If the primary objective is to raisecash, a company is at a negotiating disadvantagefrom the beginning (9). Mycogen, an agriculturalbiotechnology company, was able to raise $18million in its initial public offering and has been ableto add about that much again in funding from threemajor international collaborations. These were withKuboto (covering bio-insecticides in Japan), Royal

Dutch Shell (for bioinsecticides in the rest of theworld, except North America), and Japan Tobacco(for bioherbicides worldwide) (8).

As for new trends, some companies are nowactually more willing to give up certain enablingtechnology as part of an agreement than in previousyears. In this scheme the technology per se is not sovaluable, but rather, the products; the technology isseen as something that will become availableanyway (42). The key, however, is when a companylicenses out the use of tools, such as specificpromoters and transformation systems, it does so forclearly restricted areas of research.

Another trend developing as biotechnology com-panies grow, have product sales, and develop theirown sales forces is some of the marketing agree-ments can switch direction. For example, in 1987 theJapanese pharmaceutical firm Mitsubishi Kaseiselected Genentech to develop and market some ofits products in the United States. However, Genen-tech was one of the few DBCs that had developed amajor marketing staff in the United States. Whilecompanies such as Amgen, Immunex, and Cetushave developed smaller sales forces, it is unlikelythat many similar agreements will be developed inthe near term (59).

Co-Marketing Agreements

In order for biotechnology companies to partici-pate in co-marketing agreements, they need two key,but relatively rare, components--a product and amarketing staff. Marketing is expensive and requiresa sales force, something most DBCs do not have.Not surprisingly, then, only a few such deals havebeen struck. Each deal is different, but all involve thelarger, more advanced biotechnology firms. BecauseGenentech and Amgen have the highest marketcapitalization and are widely considered bellweatherbiotechnology companies, their deals are worthy ofa closer look as they may predict future activity.

As an example, Amgen created Kirin Amgen as ajoint venture with Kirin Brewery in Japan to developEPO and subsequently elected to include granulo-cyte-colony stimulating factor (G-CSF). This time,Amgen held onto markets in the United States,Canada, Australia, New Zealand, and Europe, whileKirin took the marketing rights in Japan, Korea, andTaiwan; with the rights to the rest of the worldassigned to the joint venture. Later, Kirin forged aco-marketing arrangement with the Sankyo Co. for


Japanese distribution of G-CSF, and in 1989 Amgenand Hoffmann-La Roche agreed to a 10-year co-promotion deal in Europe under which the productwill be sold under Amgen’s name. After this 10-yearperiod, Amgen has the right to take over exclusiveEuropean sales and marketing.

As for Genentech, under a co-promotion agree-ment signed in February 1989 with BoehringerIngelheim Pharmaceuticals, Boehringer’s 475-person U.S. sales force joined Genentech’s salesforce in promoting Activase, tissue plasminogenactivator (tPA), to office-based physicians in theUnited States. Boehringer Ingelheim Pharmaceuti-cals is the Connecticut-based affiliate of Germany’sBoehringer Ingelheim International GmbH, which isGenentech’s tPA licensee for all countries except theUnited States, Canada, and Japan. The co-promotionagreement was to run through the end of 1991 butwas eventually bought out by Genentech.

TAX POLICY AND ITS EFFECTSON FINANCING R&D

Biotechnology companies require higher levels ofR&D investment than companies in other industrialsectors. Tax relief is one of the methods the FederalGovernment uses to reduce the financial burden onR&D-intensive industries. The justification for taxrelief programs is based on the premise that suchinvestment results in public benefits and in a greaterrate of industrial innovation than would have oc-curred otherwise. Taxes and effects on investment inbiotechnology were discussed in detail in a 1988OTA report (54). More general discussion of therelationships between tax policy and innovation canbe found in a 1990 OTA report (56). Tax issues thathave emerged since 1988 and are specific tobiotechnology are discussed in the following sec-tion. In addition, tax policies of other countries areexamined.

Capital Gains

Capital gains are profits obtained from the sale ofcapital assets, such as stocks and real estate. Capitalgains are taxed in most industrialized countries,albeit to differing extents. In fact, most WesternEuropean countries and Japan have systems ofcapital gains taxation that are more complicated anddifferentiated than that in the United States (38).

After the Tax Reform Act of 1986, these gains inthe United States were taxed at a maximum of 28

percent in 1987 and at ordinary income rates startingin 1988. Substantial capital gains are rare for mostpeople. In 1988, Americans filed 109.8 million taxreturns; only 7.8 million returns accounted for all$159 billion of capital gains, equivalent to 7 percentof the tax returns filed (43). Debate during the fiscalyear 1991 budget negotiations focused, in part, on aproposal to cut the top rate for capital gains taxes.While lowering the rate would likely stimulate stocktrading, past experience with lowering the rate hasshown that it does little to induce savings and thuscapital investment (43). One argument for cuttingthe tax rate has been to encourage venture capital.But venture capital accounts for only a small fractionof total capital gains. Most of the venture capitalcomes from investors not subject to taxes anyway,such as foreigners, pension funds, and collegeendowments (7).

The tax rate on capital gains is only one factordriving venture capital. The total amount of profes-sionally managed venture capital is an extremelysmall factor in the overall economic picture, even ifit is critically important to biotechnology start-ups.Nonetheless, should the capital gains rate be low-ered, the rise in investment in both RDLPs andventure funds will no doubt have a beneficial effecton biotechnology companies seeking capital.

R&D and Investment Tax Credits

The R&D tax credit lowers the cost of investmentin research activities by providing a 20-percent taxcredit on incremental R&D spending. The statutoryrate of 20 percent is calculated based on the excessof qualified research over a base amount which islinked to R&D spending in a specific historicalperiod. The base amount is figured by multiplying afreed-base percentage by a firm’s average grossreceipts over the preceding 4 years. The effectiverate of the credit is much lower than 20 percent as itis based only on incremental spending, and theamount of the credit is disallowed as a tax deduction.The effective rate of the credit is, therefore, approxi-mately 5 percent (26). The incremental nature of thecredit ties it to increasing research expendituresrather than total expenditures made in a year, thusencouraging companies to increase their R&Dcommitment. Several other countries have similartax incentives (see box 4-D).

To date, the R&D tax credit has been of littleuse to many U.S. biotechnology companies, be-

Chapter 4---Financing ● 65.— ———— --- —.-—. .— — — —-

Box 4-D—R&D Tax Incentives of Selected Foreign Countries

Australia. In Australia, biotechnology firms can avail themselves of the benefits of several industry-wideprograms, including an R&D taxation incentive (companies undertaking appropriate research can receive a taxbreak at 150 percent of the value of the research), grants, and a range of consulting services through the NationalIndustries Extension Service.

Canada. In Canada, immediate expensing of costs for both current and capital expenditures for R&D purposesis allowed. Canada provides for an indefinite carry-forward of excess R&D deductions. Canada also offers a20-percent flat rate tax credit for R&D activities based on a firm’s total R&D spending. Canada’s R&D credit isunique in reducing R&D deductions correspondingly on a dollar-for-dollar basis.

France. French tax law provides for the full deduction of current R&D expenses in the year in which they areincurred. Until recently, buildings used solely for scientific and technical research were eligible for a specialaccelerated depreciation allowance, under which 50 percent of the cost of the building was deductible over theremaining useful life of the asset. In 1983, the special depreciation allowance was replaced by a 25-percentincremental tax credit (very similar in structure to the U.S. R&D credit). France has adopted a generally applicablesystem of accelerated depreciation in the first year of service of the assets. Finally, France also maintains a systemof cash grants for R&D, under which companies creating or expanding scientific or technical research departmentsmay be entitled to a taxable cash grant of 15 to 20 percent of the value of such expenditures to a maximum of 25,000francs per-job created.

Japan. Japanese corporations undertaking R&D in Japan may deduct their current R&D expenses in full inthe year in which such expenses are incurred, with a carryover of unused deductions for up to 5 years. Since 1966,Japan has had an R&D tax credit for current R&D expenditures equal to 20 percent of the excess of current R&Dexpenditures over the largest amount of such expenditures incurred in any single prior tax year since 1966. Inaddition, Japan allows a special deduction of up to 40 percent of corporate income for firms that derive some portionor all of their income from “overseas transactions in technical services. ” Small firms which export products areallowed special reserves, deductible at rates ranging from 0.25 to 1.4 percent of income from exports, for thedevelopment of overseas markets.

Taiwan. In Taiwan, current expenditures on R&D are deductible in the year in which they are incurred. R&Dequipment is eligible for accelerated depreciation as well as an investment tax credit of 15 percent (in the case ofdomestically produced equipment) and 5 percent of the acquisition cost (in the case of imported equipment).Technology-intensive industries are eligible for a special reduced corporate income tax rate of 22 percent. A20-percent incremental credit is available over the highest credit of the past 5 years. If no R&D was conducted duringthe past 5 years, a tax credit for R&D in excess of 5 percent of current year revenues is available.

United Kingdom. In the United Kingdom, current expenditures on R&D are fully deductible in the year theyare incurred. In addition, capital expenditures incurred in R&D activities are fully allowable as a deduction in theyear such expenditures are incurred. Unused deductions may be carried forward for a period of up to 5 years.

Germany. The Federal Republic of Germany provides for the deduction of current R&D expenditures fromtaxable income in the year they are incurred. While capital expenditures on R&D, generally must be depreciatedover the economic life of the assets, accelerated depreciation of R&D assets at rates up to 40 percent over the first5 years are permitted with respect to personal property,SOURCE: E. Palmer, “AntitrusL Capital Gains, and Research and Development Tax Benefits in Several Industrialized Nations,” European Law

Divisiom Law Library of Congress, April 1990.

cause they are not profitable enough to generate because the government is, in effect, subsidizinga credit. The credit, however, can be carriedforward for 15 years and provides a strongincentive as it increases earnings over the longterm by reducing the tax burden. The tax reduc-tions come at a critical time, when a company startsearning money and selling products (26). The lowertax rate provides a company needed earnings. Still,smaller, newer companies are at a disadvantage,

R&D of larger companies but not of smaller ones(10). And, when considering the time-value ofmoney carried-forward tax benefits are less valua-ble than tax benefits rendered in the current year.

The investment tax credit was one of the firstspecific tax incentives that the Federal Governmentestablished to encourage investment in physicalplants and equipment, allowing the company to


deduct a 10-percent credit for the cost of qualifiedproperty that was either constructed or purchased.The credit was eliminated in 1986 in favor of anoverall reduction in the corporate tax rate, as it wasunclear how effective the tax credit was at stimulat-ing capital investment. In addition, the costs weredeemed greater than the benefits (56). Severalstudies have attempted to measure the benefits of theinvestment tax credit; estimates of the additionalinvestment range from $0.12 to $0.80 for each dollarnot collected in taxes (56). Estimates of the actualincrease in R&D spending from 1981 to 1985 as aresult of the tax credit, range from $500 million to$2.9 billion annually (53). The investment tax credit,therefore, resulted in lost revenue of between $13billion and $37 billion to the government over a5-year period (56).

One of the most controversial tax-related issueshas been whether or not R&D tax credits andinvestment tax credits induce more investment. And,if the tax credits encourage investment, does thisadditional investment activity have any measurableeffect on the U.S. economy? Following the introduc-tion of the R&D tax credit, private R&D spendingdoubled from 1980 to 1986, amounting to nearly $60billion (45).

The R&D tax credit remains controversial to aCongress constantly faced with a budget deficit. Thetotal amount of revenue lost as a result of the subsidywas approximately $700 million in 1985 (56) and ashigh as $1.8 billion in 1989 (53). The TreasuryDepartment projected that a permanent extension ofthe credit would reduce Federal revenues by $500million in fiscal year 1992,$1 billion in 1993, $1.3billion in 1991, $1.6 billion in 1995, and $1.8 billionin 1996 (21). Estimates on the effect of the creditindicate that between $0.35 and $0.99 of additionalR&D spending is generated for every dollar notcollected in taxes. The main obstacle to the enact-ment of a permanent R&D tax credit is that it is verydifficult to measure its effectiveness. And, althoughavailable since 1981, the R&D tax credit is not apermanent part of the tax code. Most recently it wasextended through December 31, 1991, by theOmnibus Budget Reconciliation Act of 1990. Thus,companies are unable to take full advantage of theprogram because of the uncertainties. Despite theobvious popularity of the R&D tax credit, Congresshas not yet made it a permanent part of the tax code.Many biotechnology companies feel that a perma-nent R&D tax credit would allow companies to plan,

rather than to guess, what their financial commit-ments will be when investing in long-term, high-riskendeavors (9). The President’s budget request forfiscal year 1992 included a provision to make thecredit permanent and expand it to cover 100 percentof applicable research expenses.

Tax Credits and the Orphan Drug Act

Prior to 1983, U.S. pharmaceutical companies hadlittle incentive to invest in developing drugs likelyto yield only limited financial profit. Small biotech-nology companies developing innovative new tech-niques were even less likely to invest any of theirlimited R&D budgets in any potentially unprofitablehuman therapeutic. Drugs available or to be madeavailable for such rare afflictions as Huntington’sdisease, that affect only a small population, arecommonly known as “orphan drugs” (see ch. 5 forfurther discussion of orphan drugs). In 1983, Con-gress amended the Federal Food, Drug, and Cosmet-ics Act with the Orphan Drug Act (Public Law97-414) to provide incentives for developing drugsfor rare diseases that would otherwise not bedeveloped. A 50-percent tax credit for the cost ofconducting clinical trials and 7-year market exclu-sivity were the key incentives provided in the act.The 7-year market exclusivity provision of the actwas designed to protect companies selling drugs thatwere ineligible for product or use patents, were offpatent, or had little patent term outstanding. The acthas been amended twice, and there is momentum inthe direction of another amendment.

A 1984 amendment (Public Law 98-551) definesa rare disease or condition as that which affectsfewer than 200,000 persons in the United States--ormore than 200,000 persons when it is clear that thecost of developing the drug will not be recovered bysales of the drug in the United States. A 1985amendment (Public Law 99-91) authorizes 7 yearsof exclusive marketing approval for all orphandrugs, regardless of their patentability, with theintention of encouraging private pharmaceuticalcompanies to invest more in orphan drug develop-ment.

In late 1990, Congress approved a measure thatwould tighten the requirements under which compa-nies will be eligible for this 7-year market exclusiv-ity-withdrawing orphan drug status for drugs whenthe patient population grows beyond 200,000. Thisprovision came amidst charges that some companies


were earning unexpectedly high profits from the saleof orphan drugs. The House-approved bill alsowould allow more than one company to marketdifferent versions of a drug granted orphan status ininstances where the companies developed the drugsimultaneously. A similar version of the bill passedthe Senate in fall 1990 but was vetoed by thePresident in December 1990.

Amortization of GoodwillIf company A has tangible assets valued at $2

million and company B is willing to pay $3 millionto acquire company A, the excess $1 millioncompany B is willing to pay is treated as anintangible asset, or goodwill, on company B’sbalance sheet. Goodwill is generally understood torepresent the reputation of the firm and the continu-ing loyalty of their customers. Because this intangi-ble asset has no independent market or liquidationvalue, generally accepted accounting principlespromulgated by the Financial Accounting StandardsBoard require that goodwill (the differential betweenthe purchase price of an acquired company and itsbook value) be amortized through their earningsstream over a period of time. Some analysts believethis requirement hurts the competitive status ofAmerican companies wanting to acquire firms (23).These analysts believe it penalizes companies bylowering their earnings enough to upset Wall Street.This is particularly true since there is no taxdeduction for the writeoff of goodwill. Thus, earn-ings are penalized for the total amount of thegoodwill writeoff rather than the tax-effectedamount of the writeoff (26). This contrasts with therules in England. A British firm, for example, canwrite-off goodwill immediately and get a tax deduc-tion. Participants at a September 1990 OTA work-shop on financing biotechnology, raised the concernthat the current requirement, that goodwill beamortized, could lead to the sale of major assetsoverseas.

SUMMARYCommercial activity in biotechnology in the

United States has led the world because of excellentscience and the ability of entrepreneurs to financetheir ideas. The U.S. venture capital pool is unparal-leled, and the magnitude of the federally fundedresearch base that fuels the DBC research agenda isunique. Despite long delays in product developmentand considerable regulatory hurdles, start-up firms

have been able to raise cash in the initial stages ofoperation. While the venture community has be-come more conservative in where it chooses toinvest, there appears to remain viable opportunitiesfor entrepreneurs with good ideas. Where there is achoke point, however, is in the ability of start-upcompanies to move forward into development,testing, and marketing of their products—the expen-sive part of the process. As much as $30 billion maybe needed just to develop the 100 biotechnologyproducts currently in human clinical trials.

Some private firms are caught pre-public, as thepublic market is less likely to play the role ofrisk-taker since Black Monday. This has left mostfirms cash poor and unable to move into develop-ment. The companies fortunate enough to have gonepublic well before 1987 are, on average, able togenerate cash when needed through limited partner-ships, secondary public offerings, and strategicalliances. The top 20 firms will most likely remainstable, surrounded by an ever-changing backdrop ofDBCs. Start-ups will continue to appear, but thesecompanies will likely face the reality of merger oracquisition. Only a dramatic surge in the publicmarkets will dislodge some of these companies fromthis fate.

Consolidation of existing companies is inevitableand most likely necessary. What concerns someobservers is the role that foreign acquisition andinvestment will play in the fate of many of thesevulnerable fins. Although it is true that the amountof joint activity between U.S. firms and foreign firmshas been on the rise, much of this activity isnecessary to conduct business in a global market,i.e., licensing, marketing, and co-marketing agree-ments. To date, there is insufficient evidence tostate that U.S. commercial interests in biotech-nology are currently threatened by foreign com-petition. Acquisition is a costly and risky means toacquire a technology, and most corporations haveavoided this mechanism. As U.S. DBCs move closerto product reality, however, foreign corporationswith large pools of cash may be more willing topursue acquisition to obtain and ensure manufactur-ing rights. Executives of DBCs tend to feel thatmanufacturing rights will be crucial for the viabilityof their companies.

While some foreign firms-usually the bigcompanies such as Kirin, Ciba-Geigy, Hoffmann-LaRoche, and Hoechst—are actively investing in


U.S. DBCs, so are American firms such as Lilly,Monsanto, Johnson & Johnson, and EastmanKodak. United States corporations are slightlydisadvantaged when it comes to acquisition, how-ever, because American accounting and tax prac-tices prevent them from deducting the full expenseof acquisition in the year it occurs. Some analystsfeel this practice allows foreign corporations tomove more rapidly toward acquisition. In addition,the relatively high cost of capital in the United Statesmakes it harder for U.S. corporations to save thesums needed for acquisition and for DBCs to raisethe cash needed to take biotechnology products tomarket.

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Chapter 5


‘‘It has now been more than fifteen years since Robert Swanson, a young man who understood bothfinance and science, invited Herbert Boyer, a shy molecular biologist at the University of California,San Francisco, out for a beer. Swanson described his vision to Boyer: that the techniques and ideasthat Boyer had devised for manipulating DNA could be translated into products at a privatecompany yet to be established. As a result of that meeting, Genentech, the first well-knownbiotechnology corporation, was founded; Swanson and Boyer made their fortunes; and profoundchanges ensued in academic biomedical research, ’

Robert BazellThe New Republic, April 1991.

CONTENTSPage

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73RESEARCH AND Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Drug Discovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...+........~”+ 73Drug Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

BIOTECHNOLOGY-DEWED DRUGS .. .. .. .. .+ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75COMPETITIVE FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Industry Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........9. . . . . 81Dedicated Biotechnology Companies and the Pharmaceutical Industry . . . . . . . . . . . . . . 87Competitive Influence of Government policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....+. 93CHAPTER PREFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

BoxesBox Page5-A. FDA Clinical Trials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 765-B. Types of Biotechnology Products in Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 795-C. Pharmaceuticals-A Global Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 825-D. Price and Cost Containment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 845-E. Japan’s Pharmaceutical Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 865-F. Effects of Regulatory Decisions on Wall Street . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 905-G. The Drug Export Amendments Act of 1986 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 915-H. The Orphan Drug Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 925-I. Patent Term Extension for Pharmaceuticals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

TablesTable Page5-1. Approved Biotechnology Drugs/Vaccines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 775-2. Conditions for Which Biotechnology-Derived Drugs Are Under Development . . . 785-3. Testing for Additional Indications for Approved Drugs . . . . . . . . . . . . . . . . . . . . . . . . 785-4. Marketing of Approved Biotechnology-Derived Drugs . . . . . . . . . . . . . . . . . . . . . . . . . 815-5. Company Rank by Pharmaceutical Sales 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 855-6. Merger and Acquisition Activity in the Pharmaceutical Industry . . . . . . . . . . . . . . . . 87

Chapter 5


INTRODUCTIONThe development of biotechnology-based phar-

maceutical products is flourishing. Since the early1970s, independent, dedicated biotechnology com-panies (DBCs) have been examining the technol-ogy’s potential for commercial development, and inmore recent years, the technology has diffused intoresearch laboratories and the development processesof most major companies in the pharmaceuticalindustry. Currently, both dedicated biotechnologycompanies and established, multinational pharma-ceutical companies are using the tools and tech-niques of biotechnology in their drug discovery anddevelopment efforts.

Despite the strong barriers to entry, characteristicof the global pharmaceutical industry, there aremany DBCs focusing on niche markets and develop-ing biotechnology-based pharmaceutical products.Established pharmaceutical companies use biotech-nology as a research tool and are increasinglydeveloping in-house capabilities to complementtheir conventional research. Strategic alliances andmergers between major, multinational pharmaceuti-cal companies use biotechnology as a research tooland DBCs allow both to compete in the industry andcombine their strengths-the innovative technolo-gies and products of the DBCs blended with thefinancial and marketing power and development andregulatory experience of the major companies.

This chapter examines dedicated biotechnologycompanies, specifically with respect to humantherapeutics and the diffusion of biotechnology intoestablished pharmaceutical companies. The chapteralso discusses the dynamics and economics of thepharmaceutical industry as they influence the adop-tion and commercialization of biotechnology.

RESEARCH AND DEVELOPMENTPharmaceutical research and development (R&D)

is a risky business. Scientifically, the research anddiscovery of new drugs is interdisciplinary, involv-ing medicinal chemistry, molecular biology, bio-chemistry, physics, pharmacology, and other sci-ences and technologies. Biotechnology has provento be a source of innovation in pharmaceutical

R&D, contributing as both a production technol-ogy and a research tool. It is particularly impor-tant in drug discovery, as it enables scientists tostudy the molecular basis for disease and todesign drugs that respond to a particular diseaseprocess. Once the drug discovery process is com-pleted, the product development process and cycleare virtually the same for biotechnology-deriveddrugs and conventionally derived drugs. The devel-opment process is lengthy and tightly regulated,requiring significant investment in time and money(7). Drug development includes clinical researchand trials and the completion of regulatory require-ments.

Drug Discovery

Pharmaceutical research began as a chemicalscience, focusing on chemical structures and corre-sponding activity, dominated by medicinal andorganic chemists. Little was known about thebiology, biochemistry, and pharmacology of earlyproducts, and drug development in the days follow-ing World War II was speculative, based on mass-screening of chemical compounds (56). Since then,the development of physiology, biochemistry, ge-netics, and other biological sciences—includingbiotechnology-has provided information at themolecular and cellular level. This has contributed toincreased understanding of the relationships be-tween chemical structure and biological activity

Photo credit: National Institutes of Hsalth

Flasks filled with microbes that have been geneticallyengineered to produce interferon.

–73–


necessary for the discovery and development of newpharmaceutical products (14).

Pharmaceutical R&D is now an interdisciplinaryprocess in which a rational approach to drug design,based on an improved understanding of the biologi-cal mechanisms of disease and drug interactions, isincreasingly used to complement conventionalchemical investigation. Biotechnology is likely tobe the principal scientific driving force for thediscovery of new drugs as we enter the 21stcentury, and the impact of biotechnology on thediscovery of new therapeutic entities is difficult tounderestimate (28).

Conventional Screening

Traditional approaches to discovering new drugsinclude continued research on existing products, theinvestigation and characterization of natural prod-ucts, and the screening of synthetic chemicals andcompounds for medicinal and pharmacologic activ-ity (14). Existing drugs will always be researched forpossible improvements, be they in terms of dosage,side effects, or increased activity. Screening com-pounds, both natural and synthetic, for biologicaland pharmacological activity is the conventionalapproach to drug discovery (55).

Thousands of natural and synthetic chemicals andcompounds are screened every year for biologicaland pharmacological activity. Natural products havebeen used to develop many new medicines. Exam-ples include: molds, bacteria, plant products, ven-oms, and toxins. Penicillins were developed frompenicillium mold, and other antibiotics, includingstreptomycin and bacitracin, were discovered byscreening soil samples for biological activity. Plantproducts often have pharmacological activity andcan be used to develop medicines. Morphine andheroin, for example, axe derived from the opiumpoppy. The study of venoms and toxins has led tomuscle relaxants, anticoagulants, and ion-channelblockers. Screening and modification of syntheticchemicals have also resulted in the development ofimportant drugs, including chemotherapeutic drugs,sulphonamide antibacterial, and nonsteroidal anti-inflammatory drugs (14).

Screening is a massive, time-consuming, random,and very risky effort. About 10,000 compounds arescreened every year, one or two of which willeventually be marketed as a drug (54). Despite thepoor odds associated with conventional screening,

these methods have worked well and provided theindustry with many drugs. Since the 1950s and1960s, the most fruitful period of drug discoveryusing conventional screening, this traditional routetoward the discovery of new chemical entities hasbecome more costly and has provided fewer drugs(39).

Rational Drug Design

Conventional screening is increasingly beingaugmented and complemented by biological sci-ences that allow a more mechanistic and physiolog-ical approach to drug discovery and design. Thisrational approach to drug design requires closecollaboration between many scientific disciplinesand is characteristic of drug development efforts ofmany biotechnology companies and, increasingly,established pharmaceutical companies.

Rational drug design depends on an increasedknowledge of cellular mechanisms and control. Thiscontributes not only to the discovery of new drugs,but also improves the understanding of the mode ofaction of existing drugs (25). Rational drug designfocuses on understanding the physiological basis ofdisease; and research concentrates, in part, on theactivity of enzymes, hormones and hormone recep-tors, cell replication and protein synthesis, and othermolecular-level aspects of disease and drug treat-ment (9,14). The techniques of biotechnology,specifically recombinant DNA (rDNA) and hybrid-oma technology, are important research tools forrational drug design. Biotechnology can provideinformation about both the state and mechanism ofdisease, allowing the discovery aspect of pharma-ceutical research to be more specific and targeted.For an in-depth discussion of the use and potentialof biotechnology for therapeutic development seeOTA’s 1988 report, U.S. Investment in Biotechnol-ogy (48).

The pharmaceutical industry uses biotechnologyfor both its products and techniques, and there axetwo basic approaches to its use in drug development.First, biotechnology can be a production technologyusing rDNA techniques to manufacture otherwiseunmakeable human proteins, such as human growthhormone. The majority of biotechnology-baseddrugs currently on the market are natural humanproteins that, before rDNA, were not available insufficient quantities to use as drugs. The second waybiotechnology is used is in the rational design ofsynthetic molecules (33). An example is the use of

Chapter 5--The Pharmaceutical Industry . 75

biotechnologies to clone and express genes thatproduce receptors. These receptors are then used toscreen for receptor-binding compounds that willeither enhance or inhibit receptor-ligand perform-ance. In this case, biotechnology is used to researchthe disease mechanism and to design drugs tointeract in the disease process. The product ulti-mately derived from this discovery effort willgenerally be a synthesized chemical, but its discov-ery depended on biotechnologies (40). This exem-plifies the use of biotechnology as a research tool.

Rational drug design has been made possible bythe increase in information about the physiologicalmechanisms of disease--providing additional ap-proaches (aside from conventional screening) todrug discovery. However, there is much more stillunknown, and drug discovery remains highly specu-lative, risky, and uncertain.

Drug Development

Once drug discovery is complete, the develop-ment process begins. This is a very lengthy, expen-sive, and tightly regulated process. Companiesspend much of the product development timeconducting clinical trials required to prove thesafety, efficacy, and quality of the drug (see box5-A) and waiting for Food and Drug Administration(FDA) review and approval. The actual drug devel-opment process, in terms of procedure, regulatoryrequirements, time, and expense, is very similar forbiotechnology-derived drugs and conventionalproducts. However, while the process and the issuesare the same for both, the major competitivepharmaceutical companies have the resources,which most DBCs lack, to conduct clinical trials,research new products, and market existing prod-ucts. Whereas some DBCs have funded and con-ducted the research and discovery portion independ-ently, the expense, time requirements, and compli-cated regulatory process lead them to collaboratewith established pharmaceutical companies to com-plete the actual clinical research and product devel-opment.

Product development time, for a specific product,has been estimated to be as long as 10 to 12 years (6).In estimating the cost of drug development, anattempt is made to include expenses for products andprojects that are not successful and never reach themarket. However, the actual cost for developing anew drug is not known and estimates vary.

In the United States, FDA regulates R&D, testing,manufacturing, quality control, labeling, marketing,and postmarketing studies of drugs. Biotechnology-derived drugs must go through the same FDAprocess as conventional pharmaceuticals, howeverthe actual products are evaluated by differentdivisions within FDA. Biotechnology-deriveddrugs, most often classified as biologics, are evalu-ated by the Center for Biologic Evaluation andResearch; conventionally derived drugs are evalu-ated by the Center for Drug Evaluation and Re-search. FDA has made its intent to regulate theproduct, not the process, clear, and has said it sees noneed to institute new procedures or requirements fornew biotechnology products (46). FDA’s finalpolicy statement regarding biotechnology indicatedthat it would not classify products of rDNA orhybridoma technologies any differently from thoseproduced by traditional techniques and that suchproducts are already covered under existing statu-tory provisions and regulations for drugs and biol-ogics for human use (48,46).

Drug development requires time, financial re-sources, and regulatory expertise. DBCs have beenextremely successful and innovative in the discoveryphase but often lack the resources to independentlydevelop the products. The majority of biotechnologyderived drugs, both approved and in development,were discovered by DBCs and are being jointlydeveloped with established pharmaceutical compa-nies.

BIOTECHNOLOGY-DERIVEDDRUGS

In 1982, the first biotechnology-based drug,recombinant human insulin, was approved in theUnited States by FDA. As of August 1991, 15biotechnology-based drugs and vaccines were onthe market (see table 5-l). The drugs are all largeproteins which, before advances in biotechnology,were either not available at all, not available in largeenough quantities, or not of sufficient purity for wideuse as treatments. The exception, insulin, wasavailable from pig and bovine pancreases.

Many new products are in the pipeline, andseveral are in the final stages of testing. Accord-ing to the most recent survey of the Pharmaceuti-cal Manufacturer% Association (PMA), there areover 100 biotechnology drugs and vaccines inhuman testing for a variety of conditions (see


Box 5-A—FDA Clinical Trials

In the United States, new drugs must be approved by the Food and Drug Administration (FDA). Conductingclinical trials and obtaining FDA approval is a rigorous process that can take as long as 10 to 12 years to complete.After completion of preclinical and clinical testing, companies may be required to conduct post-marketingsurveillance. The human testing is done on both healthy and patient volunteers. Throughout the process, the drugcompanies work with FDA to design clinical trials and organize their material and studies. FDA uses expert advisorycommittees in addition to staff scientists to review new drugs. A brief discussion of the process follows.

Initially there is preclinical testing that involves laboratory and animal testing to determine the compound’sbiological activity and safety. This stage takes approximately 1 to 2 years after which the sponsoring companyapplies for permission to test the compound in humans. The company files an Investigational New Drug (IND)application with FDA that provides information on drug composition, manufacturing data, data on experimentalcontrols, results from laboratory and animal testing, intended procedures for obtaining the consent of subjects andprotecting their rights, and an overall plan for human clinical studies. The FDA has 30 days in which to act on theIND application, after which the company can begin human clinical testing.

Human clinical testing is done in three phases, which can take up to 6 years or more to complete. Phase I studiesinvolve safety and pharmacological profiling of the drug. The studies are designed to determine safe dosage range,and how the drug is absorbed, distributed, metabolized, and excreted, as well as its duration in the body. Typically,a small number of healthy subjects, not patients, are involved in Phase I testing, which usually is completed within1 year. Phase II testing consists of controlled studies in an average of 200 to 300 patients to determine the drug’seffectiveness. Additional safety studies are also done on both animals and humans. Phase II testing usually requires2 to 4 years to complete. Phase III studies require a large number of patients: from 1,000 to 3,000 volunteers areinvolved. Practicing physicians administer the drug to patients suffering from the indication for which the drug isbeing tested. Phase III studies are designed to confirm Phase II efficacy studies and identify adverse reactions. Theseusually take about 3 years to complete.

After the successful completion of the three phases of clinical testing, the sponsoring company submits a NewDrug Application (NDA), or a Product License Application (PLA) (in the case of biologic), to FDA that includesall information collected during the trials. The information not only includes all preclinical and clinical test resultson the drug’s safety and efficacy, but also includes the drug’s chemical structure and formulation, manufacturing,production, and labeling details. Average NDA approval time runs 2 to 3 years. After NDA approval is given,companies maintain contact with FDA and provide information on adverse reactions, production, quality control,and distribution records, Post-marketing surveillance is sometimes formalized in what are known as Phase IVstudies, which provide the information from studies on the long-term effects fo the drug’s use to FDA.

FDA instituted anew process, known as the Treatment IND process, in 1989 for drugs used for life-threateningand severely debilitating diseases, the goal being to reduce approval time. The Treatment IND process allows forbroader access to experimental drugs and allows a company to recoup some of its investment while continuingclinical investigation and preparation of its NDA or PLA. Under the plan, if a drug shows particular promise afterPhase I clinical trials, then Phase II and Phase III maybe combined, saving several years time.SOURCE: Pharmaceutical Manufactunm Associatio~ 1990.

table 5-2). Over half of the drugs in development Several approved drugs are replacement therapiestarget cancer or cancer-related conditions, and vac-cine research is heavily concentrated on finding avaccine to combat acquired immunodeficiency syn-drome (AIDS) (32). A brief description of the typesof products in development (see box 5-B) reveals thepotential variety of biotechnology-derived therapeu-tics. Both biotechnology companies and establishedpharmaceutical companies are involved in the re-search and development of these products, indicat-ing a commitment by both to use the latest availabletechnology.

for patients who lack the biochemical capability toproduce or process the necessary proteins. Theseinclude insulin for diabetics and human growthhormone for children with growth deficiency. Tissueplasminogen activator (tPA) is used to treat acutemyocardial infarction and works to dissolve bloodclots, which are causative agents for many heartattacks (56). Other products are approved for spe-cific conditions, and research is continuing to findnew indications for their use. Alpha interferon isused to treat hairy cell leukemia, AIDS-related

Chapter 5—The Pharmaceutical Industry ● 77

Table 5-l-Approved Biotechnology Drugs/Vaccines— .Revenues” Revenues”

U.S. approval 1989 1990Product name Company Indication

Epogen (tin)**Epoetin Alfa


Dialysis anemia June 1989

February 1991

95

NA

300

NANeupogen**Granulocyte colonystimulating factorG-CSF


Chemotherapyeffects

50Humatrope (R)*’SomatotropinrDNA origin forinjection



March 1987 40

Humulin(R)Human insulinrDNA origin


Diabetes October 1982 200

NA

175

100

250

NA

200

120

Actimmune**Interferon gamma 1-b


Infection/chronicgranulomatous disease

December 1990

November 1987

October 1985

Activase (R)Alteplase, rDNA origin



Protropin (R)**Somatrem for injection



Roferon (R)-A**Interferon alfa-2a(recombinant/Roche)

40 60Hoffmann-La RocheNutley, NJ

Hairy cellleukemiaAIDS-relatedKaposi’s sarcoma

June 1986

November 1988

March 1991Leukine**Granulocyte microphagecolony stimulatingfactor GM-CSF

ImmunexSeattle, WA

Infection related tobone marrow transplant

NA NA

July 1986 100 110Recombivax HB (R)Hepatitis B vaccine(recombinant MSD)

MerckRahway, NJ

Hepatitis Bprevention

Orthoclone OKT(R)3Muromonab CD3



Kidney transplantrejection

June 1986 30 35

December 1990 NA NAProcrit**Erythropoietin

AIDS-relatedanemiaPre-dialysis anemia

December 1988 10

60

30

80

HibTiter (tin)Haemophilus Bconjugate vaccine

Praxis BiologicsRochester, NY

Haemophilusinfluenza type B

Intron (R) A**lnterferon-alpha2b

Schering-PloughMadison, NJ

Hairy cellleukemia

Genital wartsAIDS-relatedKaposi’s sarcomaHepatitis C

June 1986

June 1988November 1988

February 1991

September 1989

NA NA

20 30Energix-BHepatitis B vaccine(recombinant)

● Estimated U.S. revenues in millions of dollars● *Orphan DrugNA = not applicable

SmithKline BeechamPhiladelphia, PA

Hepatitis B

SOURCE: Office of Technology Assessment, 1991; adapted from Pharmaceutical Manufacturers Association-Biotechnology Medicines in Development,1990 Annual Survey.


Table 5-2-Conditions for Which BiotechnoIogy-Derived Drugs Are Under Development

AIDS and AIDS Related Complex (ARC)Chemotherapy effectsLeukemiaAplastic anemiaCancerBone marrow transplantHematologic neoplasmsNeutropeniaMyelodysplastic syndromeInfectious diseasesThermal injuryReperfusion injury related to myocardial infarction and renal

transplantationAnemia secondary to kidney disease, AIDS, premature infants,

chemotherapy, rheumatoid arthritisAutologous transfusionHemophiliaCorneal transplantsWound healingChronic soft tissue ulcersDiabetesWasting syndromesNutritional and growth disordersVenous stasisTurner’s syndromeBurnsVenereal wartsHerpes simplex 2Hepatitis-B, non-A, non-B hepatitisHypertensionPlatelet deficienciesSeptic shockPseudomonas infectionsHeart and liver transplant rejectionMalariaCervical ripening to facilitate childbirth in women experiencing

certain implicationsMyocardial infarctionDeep vein thrombosisAcute strokePulmonary embolismSOURCE: Pharmaceutical Manufacturers Association, Biotechnology

Medicines in Development, 1990 Annual Survey.

Kaposi’s sarcoma, genital warts, and Hepatitis C.Erythropoietin (EPO) is used to treat anemia associ-ated with end-stage renal disease and AIDS. Manyof these drugs also have other potential uses forwhich they are being tested (see table 5-3) and, ifapproved, will increase their potential market val-ues.

The market for many biotechnology-deriveddrugs is potentially large. Much of this drugdevelopment is market-driven, with a defined andexpectant market. Examples include erythropoietin,human growth hormone, insulin, and tissue plasmin-ogen activator, as well as recombinant Hepatitis Bvaccines. All have performed well and are signifi-cant and much needed new drugs. Some signifi-

Table 5-3-Testing for Additional Indications forApproved Drugs

Drug Approved use Additional indications

EPO

tPA

Interferonalpha-2a

Interferonalpha 2b

Dialysis anemia,AIDS relatedanemia


Hairy cell leukemia,AIDS-relatedKaposi’sSarcoma, Hepatitisc

Hairy cell leukemia,Genital warts,AIDS-reIatedKaposi’ssarcoma

Autologous transfusion,Premature infants,Rheumatoid arthritis,chemotherapy, pre- andpost-surgical use

Deep vein thrombosis,acute stroke, pulmonaryembolism

Cancer, infectious disease,Genital herpes, colorectalcancer, Chronic and acutehepatitis B, Chronicmyelogenous leukemiagastric Malignancies, HIVpositive ARC, AIDS

Genital herpes, superficialbladder cancer, basal cellcarcinoma, chronic andacute hepatitis B, non-A,and non-B hepatitis, deltahepatitis, chronicmyelogenous leukemia HIV

SOURCE: Pharmaoeutioal Manufacturers Association, BiotechnologyMedicines in Development, 1990 Annual Survey.

cantly smaller development is more technology-driven, with a less defined market opportunity (56).An example is alpha interferon, which appeared tobe a promising treatment for a variety of diseasesbecause of its antiviral activity. Before biotechnol-ogy, it was not possible to isolate enough naturalalpha interferon to conduct research to determine itsbiological activities and potential therapeutic bene-fits. Using rDNA techniques, alpha interferon is nowmass-produced and research is continuing. As re-search and clinical trials have progressed, however,it has become obvious that much more must belearned about the drug’s activity and mechanism ofaction, with respect to disease, before its use andeffectiveness can be better defined.

Interleukin II (several different interleukins, atleast 10, have been identified) is another example ofa naturally occurring immune system protein withsomewhat uncertain actions that is, however, poten-tially effective in the treatment of cancer (28). Onceagain, neither the market nor the drug’s mechanismof action is as yet particularly well defined, thus itsultimate marketplace success is unpredictable. It isimportant to differentiate between these drugs (inter-feron, interleukin, tumor necrosis factor, and others),now being researched, whose development is moretechnology-driven, and other biotechnology drugs

Chapter S-The Pharmaceutical Industry ● 79

Box 5-B—Types of Biotechnology Products in Development

According to a 1990 Pharmaceutical Manufacturers Association survey of biotechnology products in development, PMAmember companies have over 100 new biotechnology-derived drugs and vaccines in human clinical testing. Many of theproducts are being developed by multiple companies, and they can be placed in several defined categories. Research continueson several of the already approved products, including erythropoietin, tissue plasminogen activator, growth hormone, andinterferon. A brief description of the other types of products in development follows.

Seven different Colony Stimulating Factors are being developed to treat white blood cell disorders including: somecancers, AIDS, aplastic anemia, bone marrow transplants, neutropenia (a condition characterized by a decrease in the numberof neutrophilic leukocytes in the blood), and thermal injury. These products stimulate bone marrow to increase blood cellproduction and restore white cell counts.

Two companies are competing in the development of Superoxide Dismutase indicated for the treatment of conditionsrelated to myocardial infarction and renal transplantation, as well as oxygen toxicity in premature infants.

Hemophiliacs lack the blood clotting protein Factor VIII and are susceptible to severe, life-threatening internal bleeding.Factor VIII can be genetically engineered, resulting in a pure protein in sufficient quantities for treatment. Two companies haveapplications submitted to the Food and Drug Admini“ stration (FDA) and are awaiting final marketing approval.

Growth Factors regulate cell proliferation, function, and differentiation. There are several different types of growthfactors that are involved indifferent cellular processes and operate in distinct cells. Several growth factors, including epidermalgrowth factor, transforming growth factor, fibroblast growth factor, and insulin-like growth factor, are being developed bycompanies to treat a variety of conditions. Growth factors have many potential uses: including wound healing and the treatmentof diabetes, growth disorders, ulcers, wounds, and transplants.

Interleukin is a natural substance that seems to have a wide potential variety of uses but is poorly understood. Interleukinsappear to be useful in treating disorders of the immune system. Seven companies have one form of Interleukin or another inclinical testing. Recently, Cetus’ Proleukin (interleukin-2) New Drug Application was turned down by FDA. FDA requestedmore information and additional testing to determine subsets of kidney cancer patients that will benefit from Proleukintreatment. Many of the indications for which interleukins are being tested have no alternative treatment, and thus, interleukin,while mechanistically poorly understood, is the only potential therapeutic treatment.

Monoclinal antibodies are protein molecules produced by white blood cells that can recognize and target foreign matter(antigens) in the cells. As such, there is potential for monoclonal antibodies to be able to target the delivery of drugs to particularcells on the basis of antigen recognition. One monoclinal antibody-based therapeutic, Ortho’s Orthoclone OKT-3, is availableon the market for treatment of kidney transplant rejection. Eighteen companies have other monoclinal antibody-basedtherapeutics in clinical trials for a variety of indications, including: treatment of graft-host disease, cancer and, septic shock,as well as prevention of blood clots, pseudomonas infections, rheumatoid arthritis, and diabetes. Centocor’s Centoxin andXoma’s Xomen-E5 are both awaiting approval for the treatment of septic shock, and the two companies are already engagedin a patent dispute. A large market is anticipated for these two products in particular. As with interferon and interleukins, themarket potential for monoclinal antibodies is promising but somewhat unclear.

Three companies are testing Tumor Necrosis Factor (TNF) for the treatment of cancer, and all are in early stages ofclinical testing. TNF is a cellular messenger involved in the triggering of immune defenses. It damages tumor-related bloodvessels and interferes with the blood supply and nourishment of the tumor. Again, research continues in efforts to determineexact mechanisms of action, and market potential at this point is relatively unknown as efficacy studies are continuing.

Research and early clinical testing on Recombinant Soluble CD4s for the treatment of AIDS are being conducted byseveral companies. CD4s are cell surface receptors believed to be involved with the AIDS virus’ (HIV) cell surface binding.Research concentrates on creating an analog to the naturally occurring CD4 receptor that will bind to HIV and prevent it frombinding to the cell receptor, thus inactivating the virus. CD4 research represents just one use of biotechnology in AIDS research.

Vaccine research has been greatly enhanced with the advent of biotechnology. Biotechnology allows for the design andproduction of subunit vaccines, which are much safer than conventional vaccines that incorporate the actual virus. Subunitvaccines are developed from the viral protein coat, which by itself is incapable of reproducing and infecting the patient. Twovaccines for Hepatitis-B are available on the market, and testing is continuing on a variety of potential AIDS, malaria, andherpes vaccines. The market for these vaccines is very large, and if safe and effective vaccines are produced, their manufacturersshould be richly rewarded by a most-welcoming marketplace.

Several other products are in early clinical testing as well. The market potential for many of the drugs described is verylarge. Infectious disease, cancer, and AIDS all lack effective conventional treatments. If the mechanism of action and thefunction of the naturally occurring proteins being studied for use as therapeutics are further delineated, a realistic market anddemand can be estimated. Right now, some of the products being developed are being pulled by the market, while others aremore research driven and their commercial potential is difficult to evaluate as further scientific understanding is still needed.

SOURCE: Pharmaceutical Manufacturers Association% 1990.


Photo credit:

Since its approval in 1987, Genentech’s Activase brandtPA has been used to treat heart attack victims.

(erythropoietin, insulin, and human growth hor-mone), whose development is both technology andmarket-driven. The questionable therapeutic poten-tial of the former drugs, along with regulatoryuncertainty, make it difficult to predict future salesand success of such biotechnology drugs. It is clear,however, that without biotechnology there wouldhave been no opportunity to study many of theseproducts.

Another way to describe the difference betweenproducts that are market-driven and those that aremore technology-driven is to think in terms ofdiseases looking for drugs and drugs looking fordiseases. In the case of tPA, human growth hormone,human insulin, and erythropoietin, the action of theprotein was fairly well understood, allowing a focus

on one or more specific diseases. In the case ofInterleukin-2, Tumor Necrosis Factor (TNF), andthe like, complicated, multiple biological effectshave been exhibited, and researchers have had tosearch for relevant diseases to address (21).

Estimates of the market value of biotechnologyproducts, including drugs, vaccines, and diagnos-tics, vary. Revenues in the United States frombiotechnology-derived products were estimated tohave been $1.5 billion in 1989 and $2 billion in 1990(50,51). Competitive factors, such as marketing, willplay a large role in determining the market share ofthese drugs. Major, established pharmaceutical com-panies have primary marketing rights to 8 of the 15approved biotechnology-derived therapeutics (seetable 5-4), and they have licensed development andmarketing rights to many of the products underdevelopment. Almost all of the 15 approved drugswere invented by DBCs but needed the aid of largercompanies’ funding and expertise in the develop-ment, regulatory, and marketing stages. These agree-ments were necessitated by the fact that DBCslacked sales forces in the early 1980s. Now thatsome companies have the resources to field salesrepresentatives, there will likely be more productsmarketed, at least in part, by the companies thatdeveloped the products (2).

Amgen’s EPO and granulocyte colony stimulat-ing factor (G/CSF); Genentech’s tPA, humangrowth hormone, and gamma interferon; PraxisBiologics’(now owned by Lederlee, a subsidiary ofAmerican Cyanamid) haemophilus influenza typeB vaccine; and Immunex’s granulocyte microphagecolony stimulating factor (GM/CSF) are, in part,marketed by the biotechnology companies thatdiscovered them. These companies also have agree-ments with established companies for marketingtheir products outside of the United States and, insome cases, co-marketing in the United States. EliLilly, Hoffmann-La Roche, Merck, Ortho Biotech,Schering-Plough, and SmithKline Beecham--allestablished pharmaceutical companies-have li-censed marketing rights to the other approvedproducts from the DBCs that developed them.

These arrangements demonstrate the aforemen-tioned dependence of biotechnology companies onpharmaceutical companies for clinical developmentand marketing resources, as well as the establishedcompanies’ commitments to making biotechnology-derived drugs part of their product portfolios. While

Chapter S-The Pharmaceutical Industry .81

Table 5-4-Marketing of ApprovedBiotechnology-Derived Drugs

Drug Marketer

Amgen-erythropoietin Amgen-United States fortreatment of dialysis anemia.

Ortho Biotech--United Statesfor nondialysis anemia, AIDSrelated anemia and all otherindications awaiting FDAapproval. All ex-U.S. marketterritories except Japan andChina for all indications.Kirin Brewery Ltd.-Japan andChina for all indications.

Genentech-human growth Eli Lillyhormone

Genentech-human insulin Eli Lilly

Genentech-tPA GenentechBoehringer-lngelheim

Genentech-alpha interferon Hoffmann-La Roche

Chiron-Hepatitis B vaccine Merck

Ortho-OKT-3 Ortho

Praxis Biologics-Haemophilus Praxis (bought by Lederlee)B vaccine


large companies have demonstrated successful re-cords in conducting clinical trials with drugs discov-ered elsewhere (in DBCs, universities, and govern-ment laboratories for example), they have nothistorically been as successful in innovation (33).This may change as the established companiescontinue to develop in-house capabilities in biotech-nology and to integrate biotechnology into theirR&D programs, while, at the same time, comple-menting these efforts by collaboration with biotech-nology companies.

COMPETITIVE FACTORSAnalysis of the diffusion of biotechnology into

the development of human therapeutics and of theUnited States’ competitiveness with respect toglobal commercialization of biotechnology requiresan understanding of the structure and economics ofthe pharmaceutical industry. The pharmaceuticalindustry’s approach to biotechnology is two-foldand includes efforts by both established pharmaceu-tical companies and biotechnology companies.Many industry characteristics serve both to deter-mine an established firm’s competitiveness and tobar entry by new firms. These include R&D,marketing, and related costs. A description of the

structure and economics of the pharmaceuticalindustry follows. This will illustrate the difficultiesfaced by small biotechnology companies and willserve to introduce and help explain the differentapproaches taken toward biotechnology by DBCsand established pharmaceutical companies.

Industry Overview

The modern pharmaceutical industry is aglobal, competitive, high-risk, and high-returnindustry that develops and sells innovative, high-value-added products in a tightly regulated proc-ess. Competitiveness results from the successfulintroduction of new products, a dynamic processrevolving around innovative R&D in the majorglobal markets. Major industry players are finan-cially strong, vertically integrated firms that controlall aspects of the business, from R&D, to manufac-turing, to marketing (43). Many of the top firms,especially U. S., Swiss, and British firms, are multi-national, with R&D, manufacturing, and marketingoperations spread around the globe (see box 5-C).There are also many companies that are moreregional, maintaining fully integrated operationsonly in their home market. The top companies havefinancial, scientific, regulatory, and marketing re-sources, enabling them to compete worldwide on thebasis of existing products and, importantly, newproduct introduction.

The industry has faced increased competitivepressure in recent years, leading to a wave ofconsolidation among established companies.DBCs are trying to enter a high-cost, high-risk, andvery competitive industry characterized by lengthyproduct development schedules and delays betweendiscovery and marketing, which postpone return oninvestment and require both time and money fromparticipating companies. The costs, risks, and timeframe required for drug development can act to barnew companies’ entrance into the pharmaceuticalindustry and affect both DBCs and establishedpharmaceutical companies with respect to commer-cialization of biotechnology.

Research and Development

Success and competitiveness in the pharma-ceutical business depends on research and newproduct development, followed by successfulmarketing. In 1990, the top U.S. pharmaceuticalcompanies spent almost 17 percent of sales on R&D,up from 12 percent in 1980 (44,51). The proportion


Box 5-C—Pharmaceuticals-A Global Industry

When Roche Holdings, Ltd. of Basel, Switzerland bought a 60-percent share of Genentech of San Francisco,CA, concern was raised about the foreign acquisition of the United States’ leading biotechnology company.However, Roche, although based in Switzerland, has more operations outside of its small home market than inside.Roche, like most of the top companies in the pharmaceutical industry, operates on a global basis, and has significantU.S. operations, including its wholly owned subsidiary, Hoffman LaRoche, in Nutley, NJ. The head of internationaldrug research and development for Roche operates, not out of Basel, but in the United States, where Roche’sworldwide R&D efforts are coordinated. So one may ask, should Roche really be viewed as a Swiss company? Howmuch significance can be attached to the home country of any of the top pharmaceutical companies?

In 1989,4 of the top 10 ranked pharmaceutical companies in terms of sales (see table 5-5) were U.S. companies;two were German, two were Swiss, one was British, and the remaining, SmithKline Beecham, was both a U.S. anda British company created by the merger of SmithKline Beckman of the United States and Beecham of the UnitedKingdom. All of these companies operate on a global basis with fully integrated operations in countries outside oftheir home base. These companies do more than just sell their products on a global basis. They conduct R&D,manufacture products, and employ local citizens around the world.

Glaxo, based in the United Kingdom, is the second-ranked company in terms of pharmaceutical sales and isa good example of a company that operates on a global basis. A look at Glaxo’s worldwide R&D personnel revealssignificant operations outside of the United Kingdom, Glaxo has 3,529 R&D staff in the United Kingdom, 740 inthe United States, 353 in Italy, 210 in Japan, 185 in France, 134 in Switzerland, 70 in Canada, 68 in Germany, 54in Spain, and 379 elsewhere in the world. Glaxo’s manufacturing efforts are also multinational, with plants in theU.K., Taiwan, Indonesia, Spain, Scotland, and another being developed in Singapore. Sales are undertaken on aglobal basis as well, and Glaxo controls approximately 3.5 percent of the world pharmaceutical market. Glaxo’sU.S. operations are located in Research Triangle Park, NC, alongside Burroughs Wellcome, which is the U.S.subsidiary of The Wellcome Foundation Ltd. of the United Kingdom, and Ciba-Geigy, whose parent company isSwiss.

Johnson & Johnson, a U.S. company based in New Brunswick NJ, has 175 operating units in 55 countries.Merck & Co., Inc. of Rahway, NJ, has research labs in seven countries, experimental farms in six countries, andmanufacturing plants in 18 countries. SmithKline Beecham, of Philadelphia, PA and the United Kingdom, hasprincipal operating units in 28 countries. Syntex Corp. has its head office in Panama, its principal U.S. office in PaloAlto, CA, and production facilities in 11 countries. With an increasing percentage of sales overseas, companies arechoosing more often to establish their own sales forces in foreign markets rather than licensing their products toforeign companies for royalties. Having operating units abroad supports companies’ efforts to obtain foreignregulatory approval. Investment in pharmaceutical operations, including sales and R&D, in Japan, which is wellrecognized as being a difficult market to enter, is rapidly increasing.

Conspicuously absent from this type and extent of global pursuit of pharmaceutical operations is Japan. Japan’smajor companies have begun to internationalize their operations, however, no Japanese companies currently haveglobal representation comparable to the top U.S. and European companies.

SOURCES: offkeof Teclmology Assessrnen~ 1991, based on *’Glaxo Stresses International Presence,” Scrip, No. 1558, OCL 17, 1990, p, 14;“Roche’s Worldwide Phmmaceutical R&D Will Be Directed From U.S.,” F-D-C Repu~, Sept. 3, 1990, pp. T&G 1-2; Merck&Co., Inc. Annuall?eportlW19, SmithKlineBeckmanAnnual Repwt 1989, SyntexAnnu.alReport 1989; and M. Freudenhe& “GlobalPush for Profit at Jolmsow” New York Times, Aug. 3, 1990.

of income spent on R&D has increased over the last many of which do not currently have products on the30 years, due, at least in part, to both the increasedconcern about the safety and efficacy of new drugs(which has promoted increased regulatory scrutiny)and the diminished returns from conventionalscreening techniques of drug discovery. The latterhas resulted in increased time and effort for drugdiscovery and has led to the development andincorporation of new technologies (38). The spend-ing ratio of R&D to sales is much higher for DBCs,

market. According to a recent survey conducted byErnst & Young, therapeutically oriented biotechnol-ogy firms spend an average of 69 percent of revenueson R&D (13).

Pharmaceutical R&D is very risky and companiesare not guaranteed any return for several years, if atall. There is no assurance that any project will leadto a marketable product (42). Only 1 drug in 10 thatenters clinical trials will make it to market, and only

Chapter S-The Pharmaceutical Industry ● 83

30 percent of marketed drugs recover their R&Dcosts (6). Due to the high risk involved, companiesmust have diverse R&D capabilities to ensureproduct differentiation (16,1). In 1989, worldwidepharmaceutical R&D spending was estimated to be$16 billion (37). The U.S. pharmaceutical industryinvested an estimated $8.3 billion on R&D in 1990,up from $7.3 billion in 1989 (50,51). Seven coun-tries-the United States, Japan, the United King-dom, Germany, Switzerland, France, and Italy—accounted for approximately 80 percent of R&Dspending (37).

Barriers to entry in the pharmaceutical indus-try related to R&D are not so much a result of thedemands for resources to conduct research, butrather, for development. DBCs can usually secureenough initial or first-round financing to conduct atleast the research part of the R&D. With no salescontributing revenue, when full-scale developmentbegins, many companies find themselves in finan-cial straits with neither enough money nor experi-ence to conduct the necessary clinical trials (47). Atthis point, many DBCs turn to pharmaceuticalcompanies for joint product development.

Marketing

Marketing is an extremely expensive aspect of thepharmaceutical business. Companies have increasedspending in recent years as they increased the size oftheir sales forces to cover world markets. Large,multinational companies have the resources tomarket their products in each major market. Foreignmarkets can differ from domestic markets in manyways, including cultural differences, distribution,pricing, payment, and regulatory requirements. Pen-etrating a foreign market often requires local exper-tise and local sales forces (22). Companies accessforeign markets by licensing marketing rights toproducts, acquiring local companies, and/or locatingnew facilities abroad (l).

Drug companies tend to make the bulk of theirprofits from only a few products, which adds to theriskiness of R&D and the need to spread money intomany areas and compounds with the expectation thatonly a few will bring big results. The dependence ona few products makes effective marketing, includingadvertising and promotion, important. Pharmaceuti-cal companies market to doctors, which requiresoffice visits by salespeople. In 1989, representativesof pharmaceutical companies made nearly 30 mil-lion visits to U.S. doctors’ offices. Marketing costs

Photo credit:

Advertisement for recombinant G-CSF.

represent about 24 percent of drug revenues, twicewhat was spent 10 years ago (11). The pharmaceuti-cal industry, in the United States alone, spends over$5 billion a year on promotional activities (49).

The industry is unique in that companies do notmarket directly to the consumer; rather, there is anindirect relationship between the company, theprescriber (the doctor), and the payer (patient or thirdparty.) The industry markets to hospitals and doctorsthat prescribe drugs but do not pay for them. Thishas, historically, allowed companies to focus on thequality and efficacy of a drug--not on the price (20).However, with the increased worldwide emphasison health care cost containment, and the increasedpresence and control of third-party payers in thepurchasing decision—insurance companies andMedicare in the United States and national healthpolicies in other countries-pharmaceutical compa-nies are being pressured to develop cost-effectivetherapies, and price has become a sensitive issue (seebox 5-D).


Box 5-D--Price and Cost Containment

Pharmaceutical companies and DBCs are operating in an increasingly cost-conscious environment.Governments worldwide are trying to decrease health care expenditures and are cutting reimbursement prices ondrugs. Governments are increasingly looking (at least indirectly) at drugs’ economic benefits, in addition to theirtherapeutic benefits, and are becoming more discriminating in their payment decisions. Price controls are used tocontain escalating costs of health care, but they also raise the level of financial risk involved in new drugdevelopment. Should they excessively hinder return on investment, price controls have the potential to deterinvestment, and thus, decrease innovation.

Many countries control the prices of prescription pharmaceuticals under their national health policies andinsurance programs. Several countries, including Brazil, Japan, and Canada, impose strict price controls onpharmaceuticals, resulting in both unprofitable production and decreased investment by companies. There areseveral different approaches taken to cut the cost of pharmaceuticals. Some countries, including Denmark andFrance, do not include all drugs under their national health policies. They exclude particularly costly drugs fromreimbursement. The creation of formularies, lists of specific drugs that qualify for reimbursement, is also beingconsidered by Medicaid and Medicare programs in the United States, with the latest step taken being the passageof the Medicare Pharmaceutical and Prudent Purchasing Act by the 101st Congress. Other cost-cutting measuresincluded price freezes in The Netherlands, Greece, and Italy; the allowance of higher prices in return for increasedR&D spending in Australia; and higher prices allowed for innovative drugs in Japan to stimulate R&D. The UnitedKingdom controls pharmaceuticals, not by price controls but by profit controls, limiting the amount of profit madeby pharmaceutical manufacturers.

Pricing and reimbursement policies by third-party payers have already been an issue with biotechnology-derived drugs, many of which are very expensive. Amgen’s erythropoietin, used to treat dialysis and AIDS patients’anemia, costs approximately $5,000 per year for dialysis patients. Human growth hormone, used to treat humangrowth hormone deficiency in children, costs approximately $10,000 per year. Genentech’s recombinant tissueplasminogen activator (Activase), used to treat acute myocardial infarction, costs $2,200 per dose.

If companies cannot expect to charge reasonable sums for their products or cannot be guaranteed third-partyreimbursement, the incentive for further efforts is decreased and the viability of the firms maybe compromised. Thedownward pressure on pricing affects both large, multinational pharmaceutical companies and DBCs. In responseto pricing pressure and cost-containment efforts, companies developing pharmaceuticals will increasingly beconducting cost/benefit analyses along with R&D to justify the expense of product development and the high pricesthey charge and to determine the potential for return on investment.SOURCES: Derived fsom: “The New World of Drugs,” The Ecorwnu”st, vol. 310, No. 7588, Feb. 4, 1989; pp. 63-64; “Managing R&&No

Easy Solutio%” Scrip, No. 15(X2, Apr. 4, 1990, pp. 4-6; Scrip review issue, 198% Ernst & Young, Biowh 91: A ChangingEnvironment (San Francisco, CA: 1990); G. - dean, School of Public Health and Community Medicine, University ofW8shin@on, Seattle, WA personal cwmnunicatioq 1990.

In recent years the trend has been to increase the staffs and established distribution routes forsize of the marketing forces by adding new sales their products. At the same time, many of therepresentatives in all the major markets. In addition,co-promotion has been a new phenomenon in whichcompanies share the responsibility for marketingeach other’s products. This allows sales representa-tives to market more products using establishedcontacts with doctors and hospitals. In addition,access to a familiar market and success in thedomestic market is extremely important. Sales areeasier in this market than in foreign markets becausethere is no language or cultural barrier and domesticsales can support international sales (2).

Few DBCs, perhaps only Genentech (S. SanFrancisco, CA), Centocor (Malvern, PA), andAmgen (Thousand Oaks, CA) have marketing

biotechnology-derived drugs on the market areentirely new therapeutic products. For these drugs,including erythropoietin, alpha interferon, Inter-leukin II, and others, doctors must be educated aboutentirely new classes of products, their uses, and theirpotential for effective treatment. This can be accom-plished most effectively by very large marketingorganizations (23). Most DBCs with approvedproducts have licensed marketing rights to estab-lished pharmaceutical companies.

There are obvious advantages to teaming up withan established pharmaceutical company for market-ing purposes. For example, Centocor (Malvern, PA)and Xoma (Berkeley, CA) both have products in

Chapter 5--The Pharmaceutical Industry ● 85

development to treat gram negative sepsis septicshock. Centocor plans to market its product, Cen-toxin, with its own sales force consisting of 75 salesrepresentatives in the United States and 45 inEurope. Xoma plans to market its product, Xomen-E5, under a licensing agreement with Pfizer’s Roerigsubsidiary using the latter’s 750 sales representa-tives. Xoma is benefiting from an established salesforce and distribution network and Roerig’s famili-arity with the medical community. The obviousdisadvantage of licensing agreements is that DBCsretain only a portion of the profits from the drug’ssale (4) (see ch. 4).

Market

The size of the global pharmaceutical marketwas estimated to be $150 billion in 1989 (50). TheUnited States is the largest drug market, account-ing for approximately 30 percent of the worldmarket (3). The European Community (EC) isthe second largest total market. Japan is thesecond largest single-country market, with anapproximate 17.6 percent market share (57).Pharmaceutical products are marketed globally and,in 1989, 34.4 percent of the $51.2 billion in sales byU.S. drug companies were overseas (8,6). The maincompetitors for the world pharmaceutical market areprincipally U.S. and European companies (see table5-5), more specifically the multinational firms basedin Switzerland, the United Kingdom (U.K.), andGermany, which are huge, multinational organiza-tions with research, manufacturing, and marketingoperations worldwide. Focus on penetrating worldmarkets, not only domestic markets, is crucial tosuccess in the pharmaceutical industry (18).

The Japanese market has, historically, been diffi-cult to enter without a Japanese partner; thus, U.S.and European companies, to ensure market pres-ence, have collaborated with Japanese companiesthat dominate their domestic market. For many yearsU.S. and European companies increased their pres-ence in Japan by establishing their own marketingforces. In recent years, in a few cases, they builtresearch facilities, e.g., Roche, or acquired a Japa-nese company, e.g., Merck, which bought BanyuPharmaceutical in 1983 (56,12). Currently, 24 U.S.pharmaceutical companies operate in Japan andaccount for about 15 percent of the $33 billionJapanese market. The domestic market is stilldominated by Japanese companies, and no Ameri-can or European company is among the top 10 in

Table 5-5-Company Rank by PharmaceuticalSales 1989

Company Sales($miilions)

Merck (U. S.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,405.5Glaxo (U. K.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,679.5Bristol-Myers Squibb (U. S.) . . . . . . . . . . . . . . . . . . . . . . $4,442.0Bayer (Germany) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$4,237.8Hoechst (Germany) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$4,200.5Eastman Kodak (U.S.) . . . . . . . . . . . . . . . . . . . . . . . . . .$4,009.0Ciba-Geigy (Switzerland) . . . . . . . . . . . . . . . . . . . . . . . . $3,775.9SmithKline Beecham (U. S./U.K.) . . . . . . . . . . . . . . . . . $3,668.8Sandoz (Switzerland) . . . . . . . . . . . . . . . . . . . . . . . . . . .$3,464.1American Home Products (U. S.) ................. $3,276.5SOURCE: “MergerEffeot on Top Pharma Firms,” SC@, No. 1570, Nov. 28,

1990, p. 13.

Japan (29). At the same time, Japanese companies,which for the most part are not multinational, arenow pushing to increase their export markets and arebeginning to globalize their operations (41) (see box5-E).

The pharmaceutical industry, despite high-entrybarriers, is not particularly concentrated. No com-pany holds even a 5-percent share of the worldmarket (26,30). In 1987, the largest 10 firms heldonly 27.6 percent of the world market (38). The fourlargest firms in the PMA account for only 25 percentof sales in the United States; the top 8 account forunder 50 percent, and the top 21 for only 75 percent(29). However, it is important to recognize that thereis neither a central product in the pharmaceuticalmarket nor a long-term product leader (27). Availa-bility of financial resources can serve both todetermine existing fins’ competitiveness and to barnew entrants, including biotechnology companies.Because comparatively few drugs maintain largemarket shares for extended time periods, companiesmust aggressively market approved products anddevelop innovative new ones in order to compete.Competition is both static and dynamic. In the staticsense, competition is based on product differentia-tion, but not price. Dynamic competition is derivedfrom R&D and new product introduction. Marketshare, which changes with new product introduction,also is a measure of competition (16,38).

Consolidation

In recent years, the industry has experiencedtwo rather opposite phenomenons: consolidationand the development of small startups focusingon biotechnology derived therapeutics. Together,these illustrate the increased resources demanded bythe competitive nature of the industry and the need


Box 5-E—Japan’s Pharmaceutical Industry

Japan is the second largest pharmaceutical market in the world behind the United States. The domestic market isdominated by Japanese companies that are relatively big, although smaller than the top U.S. companies, and profitable athome, but that lack a significant global presence. Historically, the Japanese pharmaceutical market was protected by thegovernment, and foreign penetration was very difficult. Since the mid-1980s, this has begun to change, increasing thecompetitiveness of the Japanese pharmaceutical market and driving Japanese companies toward globalization.

Before 1986, foreign drug companies were required to conduct clinical trials in Japan, on Japanese, and submit the datain Japanese. Companies were not allowed to apply directly to the Japanese Government, specifically the Ministry of Healthand Welfare, for drug approval (shonin) and license (kyoka), but were required to have a Japanese partner. These requirementswere changed and foreign companies are now allowed to apply directly to the government for new drug approvals. However,the changed laws applied only to new products, so firms had to maintain their contracts with Japanese partners for oldproducts. After the 1985 Market-Oriented Sector-Selective (MOSS) talks, bilateral trade negotiations between the UnitedStates and Japan, some of the problems related to market access and regulatory processes were resolved and the Japanesemarket opened significantly to foreign entrants.

There are several significant differences between the pharmaceutical industry in Japan and that of other countries, asidefrom language and cultural differences. In the United States, doctors prescribe, but do not sell drugs to patients, and they donot earn money by prescribing any particular drug. In Japan, pharmaceutical companies sell the drugs to doctors or hospitals,which often have in-house pharmacies, at prices below the government’s official price. The doctor or hospital then sells thedrugs to patients at the government price, thus making a profit from the sale of the drugs. Another difference is the researchintensity of Japanese firms vis-a-vis American and European companies. Japanese pharmaceutical companies historicallyconducted little basic research and were not known for their R&D capabilities. They tended to license new drugs from foreignfirms that needed a partner to penetrate the market.

The direct entrance of foreign firms into the Japanese market, combined with efforts, since 1980, to control pharmaceuticalprices in Japan, resulted in increased competition. The domestic firms that dominated the market had, until this point, beenprotected from foreign competition by the Japanese Government. Japan now reduces the government price forpharmaceuticals biennially. Japanese companies also export few drugs, selling abroad only about 2 percent of the totaldomestic pharmaceutical production. In the face of increased competition, Japanese companies have sought export marketsand have begun to globalize their operations.

Japanese companies are now seeking to penetrate global markets, through both increased export and by locatingoperations outside of Japan. Japanese companies have established joint ventures with foreign companies and are establishingsales forces in Europe and the United States. Japanese companies are also investing in U.S. biotechnology companies andlicensing the Japanese and Far East marketing rights to new biotechnology-derived drugs. To increase their R&D capabilities,Japanese companies are funding research at American universities and biotechnology companies. Japanese companiesmaintain significantly smaller R&D budgets than their U.S. and European counterparts.

A recent Japanese survey examined Japanese pharmaceutical companies’ representation in foreign countries. The surveycounted joint ventures, research centers, and subsidiary companies, but not local distributors or licensees. Thirteen Japanesecompanies had a total of 24 offices, research centers, joint ventures, or wholly owned subsidiaries in the United States. Sixteencompanies had direct representation in Taiwan; nine in Germany; eight in the United Kingdom; seven in Thailand; six inIndonesia; and five in South Korea. This demonstrates Japanese companies’ efforts to globalize their businesses and 1ocateoperations at sites around the world. However, these efforts do not nearly meet the already established global operations ofthe top U.S. and European companies, some of which operate at fully integrated levels in 20 or more countries.

The Japanese market is becoming more competitive and so are Japanese pharmaceutical companies, which areincreasing their presence in international markets. While the pharmaceutical market in Japan is still dominated by domesticfirms, foreign firms are now able to establish their own facilities and sales forces in what was previously a tightly protectedmarket. The increase in foreign competition, along with increased cost-containment pressure, have driven the historicallydomestic Japanese companies to seek foreign markets in order to increase their competition with U.S. and Europeancompanies.

It is important to note that while Japanese companies are entering the global marketplace, significant differences remainbetween them and their international competitors. U.S. and European companies maintain a significant scientific andtechnological edge over their Japanese counterparts and are more R&D-intensive. Japanese companies face a significantreorganizational challenge by trying to improve their research capabilities and globalize their operations at the same time,and globalization is sure to be more difficult and slower than it has been in other Japanese industries.

SOURCES: Office of Tecbnology#wxmen$ 1991 derived fkom: A. Yoshikawa “The Other Drug War U.S.-Japan Trade in Phamlacmlticals,”California ManagementReview, vol. 31, No. 2, winter 1989; “Japanese Pharma. F- @OrS(%tS,” scrip, No. 153!5, Jrdy 27,1990,p. 23; G. Mossinghoff, statement before the International Trade Commissio% Jan. 17, 1991; D. Swinbanks, “Iluge Profit FromDrugs,” Nature, vol. 342, No. 23, November 1989, p. 333.

Chapter 5-The Pharmaceutical Industry . 87

Table 5-6-Merger and Acquisition Activity in thePharmaceutical Industry

1988 Eastman Kodak (U.S.)--Sterling Drug (U.S.)American Home Products (U.S.)--Robins (U.S.)

1989 SmithKline Beckman (U.S.)--Beecham Products (U. K.)Novo (Denmark)--Nordisk (Denmark)Merrell Dow (U.S.)--Marion Laboratories (U.S.)Bristol-Myers (U.S.)--Squibb (U.S.)

1990 Rhoune-Poulenc (FR)--Rorer (U.S.)Hoffmann-La Roche (Switz)--Genentech (U. S.)

1991 Kodak (Sterling Drug) (U. S.)-Sanofi (FR)Chiron (U.S.)-Celvs (U.S.)

SOURCE Office of Technology Assessment, 1991.

for innovative R&D and new products. In the lastseveral years, there has been significant merger andacquisition activity between established firms (seetable 5-6) (11). Consolidation strengthens the scien-tific base, expands the technology and productportfolios of the companies, and reflects the in-creased costs of doing business-especially R&Dand marketing.

By pooling R&D budgets, companies can ensurea broad R&D program, covering many therapeuticcategories, and a more complete product portfolio.With the increased resources of what used to be twoseparate R&D budgets, companies can ensure thebreadth of R&D necessary to develop products forthe many therapeutic submarkets and spread risk,increasing the chances of developing a successfulproduct (43). These mergers have, in some cases,resulted in more than doubling the size of compa-nies’ sales forces and providing an economy ofscale. The larger sales forces enable companies toreach more doctors and hospitals, further penetratemarkets, and enter markets in which they previouslyhad no representation. This is especially true offoreign markets (19).

Dedicated Biotechnology Companies and thePharmaceutical Industry

DBCs are almost exclusively a U.S. phenome-non. No other country has a remotely comparablenumber. Biotechnology companies are created spe-cifically to exploit the commercial potential ofbiotechnology. These companies start as researchinstitutions with science and technology but withoutproducts. They do not undertake R&Don nearly asbroad a scale as established companies. Instead, theypursue niche markets by focusing either in specifictechnologies (e.g., drug delivery) or particular prod-ucts (e.g., growth factors). The companies must fundthe initial costs of infrastructure development, in-

Photo credit: Amgen

Since FDA approval in 1989, more than 90,000 patientshave used EPOGEN brand recombinant EPO, the best

selling biotechnology-derived drug to date.

eluding buildings, plants, equipment, and people(scientists, managers, salespeople, and lawyers),without the benefit of internally generated revenues.They depend on venture capital, stock offerings, andrelationships with established pharmaceutical com-panies for their financing needs.

Biotechnology companies are fully capable andcompetitive when it comes to research and applica-tions of technologies. However, the very fact thattheir expertise is focused in biotechnology andrelated niche areas of pharmaceutical research illus-trates the difference between them and large phar-maceutical companies. Established pharmaceuticalcompanies maintain a greater breadth of R&D, workto penetrate multiple therapeutic markets world-wide, and devote major resources to product devel-opment and, at the same time, can integrate andimplement newer aspects of biotechnology to com-plement their conventional research capabilities.Biotechnology is being introduced into the pharma-ceutical industry as it proves itself, as products aredeveloped and technologies perfected, and as theirpotential for use in the industry is observed (9).

DBCs are attempting to break into an industrymarked by high costs and risks, in which successful,established pharmaceutical companies with largeR&D budgets and marketing clout feel pressure toconsolidate to be competitive. While some compa-nies have been successful operating at all levels,


from R&D to manufacturing to marketing, nonecompete head-to-head with major established com-panies except in niche markets and on a product-by-product basis (21). DBCs that are able to verticallyintegrate their operations, as Genentech and Amgenhave done, are likely to continue to concentrate onniche markets.

The original intent of many of the early DBCs wasto become fully integrated, competitive pharmaceu-tical companies, but the economics of the pharma-ceutical industry may very well deny this opportu-nity to most. Perhaps in recognition of those barriers,many of the newer companies were founded with theintention of developing one idea or targeting a nichemarket and, perhaps, being acquired. The latter wastrue for Hybritech, which was acquired by Eli Lilly,and Genetic Systems, which was bought by Bristol-Myers (now Bristol-Myers Squibb) and recentlysold to the Sanofi of France. According to a recentErnst & Young survey, 39 percent of all companiessurveyed expect to be acquired by a large firm withinthe next 5 years, and 32 percent expect to merge withan equal-size firm in the same period (13).

Strategic Alliances

DBCs have been able to secure initial financingand certainly have excellent scientific and techno-logical capabilities, but they often lack other impor-tant resources. The vast majority of DBCs lack themoney to fund clinical development and to success-fully market their products worldwide. It is for thesereasons that DBCs team up with major pharmaceuti-cal companies (19). Biotechnology companies thatdo not turn to larger drug companies for help areusually forced to hold special public offerings toraise the capital for clinical development. Suchpublic financing has been in the form of R&Dlimited partnerships, debt offerings, or new stockofferings (2).

There are several reasons for companies in thepharmaceutical industry to collaborate, be it withanother established pharmaceutical firm or a bio-technology company. Collaboration creates accessto markets, access to technological skills and compe-tences that may not be developed in-house, and anopportunity to share the costs and risks associatedwith the development of new drugs and the use ofnew technologies. When DBCs were first created inthe 1970s, the risks were very high as the potentialfor commercial development and profits was un-proven. It was not known if biotechnology could be

successfully used to develop and produce new drugs,and the costs of scaling-up biotechnological produc-tion methods were unknown. Due to these un-knowns, many pharmaceutical companies did notchoose to pursue the development of biotechnology,at least in-house, until the early 1980s when theinitial uncertainties about the technology wereresolved. Another reason for this delay was that mostestablished firms did not have the personnel orinterdisciplinary expertise required to use and de-velop the technology. Pharmaceutical companiesneeded to restructure their research departments andprograms and hire skilled personnel before theycould integrate biotechnology into their drug devel-opment efforts (38).

Strategic alliances are often established afterDBCs have conducted significant research anddevelopment on particular products. The pharma-ceutical company uses its established resources tofurther develop the drug and conduct clinical trials,thus gaining new products without having to makethe initial investment and assume the entire riskinherent in new product development. DBCs receivenecessary financing and development, regulatory,and marketing expertise, while pharmaceutical com-panies are able to complement their in-house R&Dactivities and add innovative new products toincrease the breadth of their product portfolios.Often, the pharmaceutical company will take fullresponsibility for putting the drug through theregulatory process (the U.S. FDA and foreignregulatory approval) and for introducing the drug inforeign markets. Increasingly, the more successfulbiotechnology companies maintain U.S. marketingrights to their products, allowing both DBCs andestablished firms to receive revenues from productsales.

There are many types of strategic alliancesbetween DBCs and pharmaceutical companies.They include agreements to exchange technology,joint ventures, equity arrangements, and R&D con-tracts (38). At the current level of commercializa-tion, the most common type of agreement islicensing, which can include joint development ofspecific products as well as the exchange of market-ing rights for financial support. Examples of U.S.pharmaceutical companies’ alliances with DBCsinclude Ortho Biotech, a subsidiary of Johnson &Johnson, which has agreements with Xoma(Berkeley, CA) and Amgen (Thousand Oaks, CA),among others; Pfizer’s subsidiary, Roerig’s, agree-

Chapter 5--The Pharmaceutical Industry .89

ment with Xoma; Merck & Co.’s agreements withGenentech (S. San Francisco, CA), California Bio-technology, Inc. (Mountain View, CA), Immu-nomedics, Inc. (Warren, NJ), Repligen, Inc. (Cambr-idge, MA), and Chiron (Emery vine, CA);Hoffmann-La Roche’s licensing agreements withCetus Corp. (Emeryville, CA) and Genetics Insti-tute, Inc. (Cambridge, MA); SmithKline BeechamPLC’s agreements with Nova Pharmaceutical Corp.(Baltimore, MD), and T Cell Sciences, Inc. (Cam-bridge, MA) and others (13).

European companies tend to depend both onstrategic alliances and, more so than U.S. compa-nies, on in-house capabilities in biotechnology.There are few European DBCs with which tocollaborate, and the majority of European compa-nies’ strategic alliances are with U.S. DBCs. Somerecent strategic alliances include Sandoz’s $30million investment in Cytel (La Jolla, CA), Ciba-Geigy’s investment in Texas-based Tanox Biosys-tems (Houston, TX), and Glaxo’s $20 millioninvestment in Gilead Sciences (Foster City, CA)(34). In addition, many European pharmaceuticalcompanies have licensed European marketing rightsfrom U.S. DBCs. Examples include BoehringerMannheim’s agreement with Genetics Institute tomarket EPO in Europe and Boehringer Ingelheim’sarrangements for marketing Genentech’s tPA.

European companies, such as Bayer, Ciba-Geigy,Roche, and Sandoz have developed significantin-house capabilities in biotechnology and maintainlarge biotechnology R&D budgets. Bayer has abiotechnology research budget of $100 million andCiba-Geigy recently spent $60 million on a newcentral biotechnology research unit. Roche, in addi-tion to acquiring Genentech, spent between $130million and $140 million on biotechnology in 1989.Sandoz expects to invest $150 million in biotechnol-ogy in 1991 and a total of $1 billion by 1995 inbiotechnology R&D, including both in-house andcollaborative activities. European companies’ ex-penditures for biotechnology are global. Roche, forexample, funds R&D not only in its native Switzer-land but also in the United States, the UnitedKingdom, and Japan. Sandoz conducts research inSwitzerland, the United States, the United Kingdom,and Austria (17,36).

Japanese companies, in addition to increasingexports and their presence overseas, are also invest-ing in U.S. DBCs. Examples include the following:

Chugai Pharmaceutical’s deals with Genetics Insti-tute and Upjohn and its $110 million acquisition ofGen-Probe (San Diego, CA); Tokyo’s Institute forImmunology’s $20 million investment in IDECPharmaceuticals (La Jolla, CA); and Genetics Insti-tute’s collaboration with Japan’s Yamanouchi Phar-maceutical Co. (34).

Competitive Influence of Government Policies

At the current level of commercialization, most ofthe factors influencing the competitiveness of U.S.pharmaceutical and dedicated biotechnology com-panies with respect to biotechnology are marketforces and general economic variables. There aremany U.S. Government policies that influencebusinesses based on health and life sciences withoutaddressing biotechnology specifically. Federalfunding for biomedical research, regulatory policies,and intellectual property protection are importantpublic policies that affect the commercialization andcompetitiveness of U.S. biotechnology.

Federal Funding for Basic Research

The United States’ lead in biotechnology is due inlarge part to strong government support for basicresearch in biological and biomedical sciences. Thevast majority of Federal research support in thebiological sciences goes to university scientistsconducting basic research, whereas applied researchand development has always been considered theresponsibility of industry (48). Industry worldwide,including DBCs and pharmaceutical companies, hasbenefited from the strong research base funded bythe U.S. Government (see app. C). Technologytransferred between government laboratories, uni-versities, and industry enables applied research andcommercial development of biotechnology. Contin-ued funding for basic research in biological scienceswill be important for the future of biotechnology.

Regulation

The regulatory component of the human therapeu-tic development process is perceived, by bothentrepreneurial and established companies, as themajor factor influencing the time required to developa pharmaceutical product. The debate over therigorous and lengthy drug regulatory process hasgone on for years. Arguments have been made thatwhen too strict, regulation becomes prohibitive topharmaceutical development. Overly stringent regu-lation could impede international competitiveness


and compromise human health by reducing theavailability of therapeutic products. However, theimportance of protecting the public from unsafe orineffective drugs is stressed (48).

The FDA, its mission, responsibilities, and struc-ture, is currently under review by an advisorycommittee of the U.S. Department of Health andHuman Services (U.S. DHHS) which is addressingmany of the concerns of industry, government, andthe public (52). Representatives of the pharmaceuti-cal industry and biotechnology firms, testifyingbefore the advisory committee’s drugs and biologicssubcommittee, raised several issues of concern,including: the increased workload and resources ofthe Center for Biologics Evaluation and Research,responsible for reviewing biotechnology-derivedtherapeutics, the use of advisory committees, and theneed for sufficient resources in terms of bothpersonnel and equipment (15).

The regulatory process is a burden for bothestablished pharmaceutical companies and DBCs.The time delay and lack of regulatory approval canbe damaging to both DBCs and established compa-nies, but, arguably, perhaps more so to a DBC. Veryfew DBCs benefit from product sales and profits tosupport R&D, and for many, FDA approval is thefirst positive sign of potential earning power—animportant characteristic required for financing.Companies have expressed concern that FDA delayshave negatively affected their ability to gain financ-ing, especially from Wall Street (see box 5-F).However, thus far, the experience with biotechnol-ogy drugs has been mostly positive, with manybiotechnology-derived drugs experiencing signifi-cantly shorter approval times than conventionaldrugs. According to the FDA Office of Biotechnol-ogy, marketing approval times for new biotechnol-ogy products have averaged about half of the mean32 months (for approval of the New Drug Applica-tion which is fried after all clinical trials have beencompleted) required for approval of nonbiotechnol-ogy products (46).

In order to introduce products in markets world-wide, pharmaceutical companies and DBCs mustobtain regulatory approval h-em each individualcountry in which they choose to market a drug. Thedrug approval process is different in each majormarket, and attempts are being made to harmonizeregulatory procedures. Drug approval often takeslongest in the United States. Of the 135 new drugs

Box 5-F—Effects of Regulatory Decisions onWall Street

A lack of regulatory approval is a setback for anydrug developer, but for biotechnology companies itis potentially devastating, Wall Street, a primarysource of financing for many biotechnology compa-nies, places great importance on the Food and DrugAdministration’s (FDA) actions and often uses theadministration’s decisions as a basis for their stockrecommendations for biotechnology companies, inlieu of product performance. Thus, a negativereaction from FDA leaves biotechnology compa-nies, seeking their first product approval, muchmore vulnerable than an established company witha significant product portfolio currently generatingrevenue.

For example, in May 1987 an FDA advisorycommittee recommended against approval ofGenentech’s tissue plasminogen activator (tPA)(later approved and now on the market). Genen-tech’s stock dropped 14 points in 2 days and lost 25percent of its value. A more recent example isFDA’s 1990 recommendation against Cetus’ Inter-leukin-2 for the treatment of kidney cancer. In the2 weeks surrounding FDA’s decision, Cetus’ stockdropped over 40 percent. After FDA’s decision,Cetus’ stock price fell from its 52-week high of$22.50 to $8.63. Since Wall Street cannot evaluatecompanies without products on the basis of sales,revenues, and profits, it must value them on thebasis of research, people, potential, and scientificpromise. FDA approval, or lack thereof, reflects ona company’s scientific and product developmentability; thus, when FDA approval is not granted, thevalue given the company by Wall Street drops.SOURCES: R, BauQ “Biotech Industry Moving Phwmaceuti-

cal Products to Mark%,” Chemical and Engineer-ing News, vol. 6$, No. 29, July 20, 1987, pp. 11-14,20, 28-32; “Cetus Lass Widened in Fiscal 4thQuart&, Drug Costs Are Cited,” Wall SfreetJournal,Aug. 8, 1990, p. B4; L. Christense% “CetusConsidm Strategic Options After the Delay inFDA’s Approval of Proleukin IL-2,” GeneticBngi-nea”ng News, vol. 10, No, 9, October 1990, pp. 1,40, 48; B. Cutlitou ‘T.etus’s Costly Stumble onIL-2, ’’Science, vol. 250, No. 4977, Oct.5, l%)tl,pp.2021; U.S. C!ongress, Office of Technology As-sessmen~ “Financial issues Affeeting Biotechnol-ogy: At Home and AbroaA” transcript of aworkshop held Sept. 13, 1990.

approved by FDA during the period 1984 to 1989,106 were first approved abroad; in 1990, 18 of 23drugs approved in the United States were frostapproved abroad (29,5 1). Until 1986, with the


Box 5-G—The Drug Export Amendments Act of 1986

The Drug Export Amendments Act of 1986 allows the export of new drugs not yet approved by the Food andDrug Administration (FDA) for use in the United States. Export is restricted to 21 countries that have sophisticateddrug approval processes and is dependent on the individual country’s approval. The importer must sign a writtenagreement guaranteeing that they will not re-export the drug to countries other than the 21 approved.

FDA approval often takes longer than approval outside the United States. Before the act was passed, exportof unapproved drugs was not allowed, and companies were forced to manufacture drugs abroad or license theirtechnology to foreign firms in order to enter the marketplace. The amended act allows companies to recoup researchand development costs and generate income sooner than if they had to wait for FDA.

The act holds particular importance for biotechnology companies, which in the early stages of developmentoften lack the resources to establish manufacturing facilities abroad. Before the act was passed in 1986,biotechnology companies had to forfeit the proprietary rights to their technology to multinational partners overseasin order to ensure supply of the product and guarantee access to foreign markets and return on investment. Althoughmany companies still license technology and marketing rights abroad, since 1986 many biotechnology companieshave been able to preserve the right to supply their products from the United States. This change in the law is ofconsiderable significance to international trade. Cetus has taken advantage of the act by exporting Proleukin(Interleukin-II) to several European countries, which have approved the drug, while waiting for FDA approval inthe United States.

The Drug Export Amendments Act of 1986 applies only to human drugs. The export of drugs not registeredin the United States for use in animals is not permitted. This maybe of significance to biotechnology in the future,as biotechnology has applications to veterinary medicine and animal health.SOURCES: Drug Exports Amendments Act of 1986, Public Law 99-660; B. Andrews, vice presiden~ Agricultural Divisioq Cyanamid

International, Wayne, NJ, personal communication Aug. 6, 1990; G. Ra_ chairman emeritus, Amgen Inc., Thousand Oaks,CA, personal communication Aug. 3, 1990.

passage of the Drug Export Amendments Act, it was ence the competitiveness of pharmaceutical fins.against the law to export drugs from the UnitedStates not approved by FDA (see box 5-G).

Inconsistent worldwide regulations and thelack of acceptance of foreign clinical trial testdata in particular, have caused problems for thepharmaceutical industry. The latter has, in thepast, been a significant problem in Japan, where theU.S. Trade Representative concluded in 1989 thatthis, along with the difficulty of obtaining regulatoryapproval for drugs, increases the cost of doingbusiness in Japan. The industry is somewhat pro-tected by both the Standards Code, and the TechnicalBarriers to Trade Code of the General Agreement onTariffs and Trade (GATT), which refers to the

Attempts to harmonize regulations and improve thecurrent drug approval processes will benefit allcompanies, independent of national origin, in theirintroduction of new products in global markets.

Intellectual Property Rights Protection

Patent protection has been judged to be ofsubstantial importance to innovation, new productdevelopment, and new product introduction inseveral industries-including pharmaceuticals (24).Intellectual property protection, in the form ofpatents and orphan drug market exclusivity (see box5-H), is critical to the pharmaceutical industry fortwo primary reasons:

application of technical standards to products, in- ●

eluding testing, labeling, and certification. It re-quires that standards are applied so as not to ●

discriminate against imported products (45). Thiscode is very important in ensuring that health andsafety regulations are not used as trade barriers todiscriminate against imported products (53).

Governments’ approach to pharmaceutical regu-

It can provide the temporary market monopolynecessary to recoup the high costs of R&D.Drugs with new therapeutic values depend onpatent protection in order to capture and hold asignificant market share. Patent expirationallows competing products, either generics orbrand names from other companies, to enter themarket (43).

lation, including both the lengthy approval times and Patents contribute to market success by denyingthe inconsistency of worldwide regulations, influ- market access to those products that will infringe a

292-87[) - 91 - 4 : QL 3


Box 5-H—The Orphan Drug Act

The 1983 Orphan Drug Act seeks to induce the development of drugs for rare diseases. Rare diseases aredefined by the legislation as conditions that affect fewer than 200,000 people in the United States. The act offersincentives to invest in orphan product development that, due to the small patient population, is not likely to offera full return on investment to the company. The government offers grants, tax breaks, and most importantly, 7 yearsof market exclusivity to the first manufacturer to gain the Food and Drug Administration’s (FDA) approval for aproduct with orphan designation. The market exclusivity provision is a form of intellectual property protection andhas proven to be controversial.

Since the act was passed in 1983, over 375 products have received orphan designation from FDA, and over40 orphan drugs are on the market. Nine of the 15 biotechnology-derived drugs on the market have orphan drugstatus, as do 19 additional biotechnology-derived drugs currently under development. Controversy was raised inthe 101st Congress over three orphan drugs that turned out to be very profitable: 1) aerosol pentamidine, 2)erythropoietin (EPO), and 3) human growth hormone. The latter two are biotechnology-derived drugs. Argumentswere made that these drugs would have been developed without the Orphan Drug Act incentives because there wasgreat opportunity for profit.

The U.S. House of Representatives and the Senate passed amendments to the Orphan Drug Act that would haveremoved orphan drug status if the patient population exceeds 200,000 and also would have allowed for sharedmarket exclusivity if another company could prove it was developing the same orphan drug simultaneously to thefirst company that received FDA approval. After much debate, and divided industry lobbying, the final bill appliedonly to new orphan products and not to the three drugs that spurred the debate. The bill, as passed, would haveallowed market competition for products that proved to be particularly profitable. The President vetoed thelegislation, claiming the shared exclusivity provision would remove incentive for developing orphan products.

The case of EPO is particularly controversial and complicated. Amgen (Thousand Oaks, CA) received FDAapproval in June 1989 to market its EPO to dialysis patients suffering from anemia associated with end-stage renaldisease, a patient population of under 200,000. EPO, paid for mostly by the government’s Medicare program thatcovers dialysis patients, costs about $5,000 per patient per year, and Amgen has sold over $300 million worth ofthe drug. Amgen received 7 years of marketing exclusivity, under the Orphan Drug Act, for EPO used to treatchronic kidney failure. Genetics Institute (Cambridge, MA) also has developed EPO as an orphan drug, but thecompany has yet to receive FDA approval due in large part to Amgen’s orphan drug claims.

SOURCE: Office of Technology Assessment 1991.

patent position during the lifetime of the patent. A public policies to provide incentives for companiesU.S. patent provides 17 years of protection, but sincethe patent is usually applied for prior to broadtesting, several of the initial 17 years of protectiongranted are lost during the years of clinical develop-ment. The regulatory process reduces the effectivepatent life to approximately 9 to 10 years, resultingin shorter protected market time and increaseddifficulty in obtaining return on investment (5).

In the 1980s, legislation was passed in the UnitedStates and Japan, and draft legislation is now beingconsidered by the EC to extend patent protection tomake up for at least some of the years lost duringclinical development (see box 5-I). This extension ofeffective patent life recognizes the importance ofpatent protection, the effect of the regulatory processon new product development, and the need for

to continue investing in R&D.

Intellectual property protection has historicallybeen a problem for the pharmaceutical industry.Many countries, particularly newly industrializingcountries (NICs) such as India, Argentina, and otherSouth American countries, do not provide patentprotection for pharmaceuticals. Their reasoningincludes the desire to protect domestic industriesfrom competition, to encourage domestic productionwithout the need to pay hard currency royalties toother countries (10), and to reduce or control retailprices (31). Copying pharmaceuticals is relativelyeasy, and companies have lost significant sales andrevenues to patent infringers and markets wherepatent protection is not available or effective (37).

Until recently, neither Brazil nor Canada grantedpharmaceutical patents. Brazil is working on a draft


Box 5-I—Patent Term Extension for Pharmaceuticals

Drug companies usually secure patent protection early in drug development, before the drug enters theregulatory process. Regulatory approval for new drugs takes, on average, 7 to 10 years to complete. This translatesinto a 7- to 10-year reduction in patent protection for pharmaceutical products when they reach the market, leavingsuch products with, on average, 9 years of protected life. In response, the United States and Japan passed legislationallowing the extension of patent terms for pharmaceuticals. Similar legislation in being considered by the Europeancommunity (EC).

In 1984, the Unites States passed the Drug Price Competition and Patent Term Restoration Act of 1984. Theact restores part of the patent life lost due to lengthy regulatory approval The act allows extension of the patent termfor up to 5 years, but it does not allow extension beyond 14 years of effective patent life. The actualextension grantedis equal to the total time taken by the Food and Drug Adminib ‘stration (FDA) to review the New Drug Application,plus one-half of the clinical testing time. In addition, the act promotes generic competition by providing FDA withan Abbreviated New Drug Application (ANDA) process. This process facilitates the approval of generic drugs byeliminating the need for costly clinical studies. An ANDA does require the sponsoring company to demonstrate itsgeneric’s bioequivalence to the pioneer drug. This is much less costly and time-consuming than complete clinicaltrials and facilitates the market entrance of generic drugs.

Japan also allows similar patent term extension for pharmaceuticals. In 1988, revisions were made to Japanesepatent law to allow for an extension of the patent term for pharmaceutical products. Extension can be granted forperiods up to 5 years, on the basis of time lost during the required drug approval procedures.

Pressure has been put on the European Commission to amend its patent law to allow for patent term extensionsimilar to that offered by the United States and Japan. France and Belgium provided the first draft legislation to thecommission, which responded with a proposal for a supplementary protection certificate (SPC). It was adopted in1990 and currently is in front of the European Parliament. The proposal would provide effective protection for 16years by granting a supplementary certificate to holders of a basic European patent. The guaranteed 16-yearmonopoly is longer than that created by the U.S. and Japanese patent term extensions.

The formula for deriving the extension is somewhat complex. The SPC takes effect the day after the basicpatent expires and will be equal to the time elapsed between the filing of an application for a basic patent and thedate of the first marketing approval in the EC, minus 4 years. The term for a European patent is 20 years, thus SPCwill guarantee a monopoly of 16 years after marketing approval in almost all cases. The maximum length of an SPCis 10 years, thus for all cases in which marketing authorization is given up to 15 years after the basic patentapplication is filed, the company will be granted a 16-year monopoly. If 15 or more years pass, the company willnot be given a 16-year monopoly, but it will receive a maximum SPC of 10 years.

Patent term extension in the United States and Japan and the proposed legislation in Europe recognize theimportance of patent protection and market exclusivity for pharmaceutical producers, and acknowledge the burdenof regulation.SOURCl%% H, Grabowski and J. Verno~ “Longer Patents for Imwer Imitation Barriers: The 1984 Drug *$” American Econo~”ci?eview,

vO~. 76, No. 2, kfky 1986, Al%% Papers and Pmceedm“ gs, pp. 195-198; R. Wbaite and N. Jones, “Supplementary protectionCertMicatex+-Restoration of the Patent %rm for pharmaceutical, The European Commission’s proposed Regulatio&” Liaklaters& Paines, 199& M. Fujti “Government’s Support for Phanmuxutical Industry,” Business Japan, vol. 33, Issue 7, July 1988, pp.80-83.

law that will provide both product and processpatents for pharmaceutical products and which maybe approved in 1991. In response, the United Stateshas lifted sanctions against Brazilian pharmaceuticalproducts, levied in 1988 in response to Braziliancompanies’ infringement on U.S. pharmaceuticalpatents. Canada has tied patent protection to anincrease in R&D within the country. Bill C-22,passed in 1987, provides 10 years of patent protec-tion to companies in return for an increase in theirR&D spending in Canada as a percentage of sales:

from 4.9 percent in 1986, to 8 percent in 1991, 9percent in 1994, and 10 percent in 1996. Theincentive has worked, with Merck Frosst (Canadiansubsidiary of Merck & Co.), Glaxo, and Sandoz,among others, making substantial R&D investmentsin Canada (35).

SUMMARYBiotechnology has found its place in the research-

based pharmaceutical industry, both as a productiontechnology and a research tool. Biotechnology is


particularly important for research and drug discov-ery as it allows for a molecular- and cellular-levelapproach to disease, drug-disease interaction, anddrug design. Biotechnology is likely to be theprincipal scientific driving force for the discovery ofnew drugs as we enter the 21st century, and theimpact of biotechnology on the discovery of newtherapeutic chemical entities is difficult to overesti-mate.

Dedicated biotechnology companies and estab-lished pharmaceutical companies are pursuing thecommercial development of biotechnology inde-pendently and through joint efforts. While the futureof the technology itself is bright, that of thepioneering, innovative DBCs is less clear. Thepharmaceutical industry is highly competitive,global, and risky and requires significant resources.The markets are global, the R&D and marketing areexpensive, the regulatory requirements axe strict,and the financiers of biotechnology companies arebecoming more discriminatory in their funding.

DBCs and pharmaceutical companies often workin concert, each contributing valuable assets re-quired for new drug development. DBCs’ strengthsinclude innovative research and technological capa-bilities which, when combined with the monetary,regulatory, and marketing strengths of establishedpharmaceutical companies, translate into new phar-maceutical products. The majority of DBCs, whichfocus exclusively on the commercialization ofbiotechnology, could not survive without strategicalliances. Pharmaceutical companies, which areincreasingly integrating biotechnology into theirin-house research programs, use biotechnology tocomplement traditional approaches to drug discov-ery and depend on strategic alliances for innovativenew products and technological know-how.

At this point in the commercialization of biotech-nology, much of the success or failure rests oneconomic and market forces, in addition to scientificand technological feasibility. Government policiesthat affect these conditions contribute to, but are notlikely to independently determine, the success orfailure of either the companies or the technologyitself. Several government policies that are affectingthe successful commercialization of biotechnologyand the competitiveness of the U.S. pharmaceuticalindustry as a whole have been identified. Thesepolicies include:

. government support for basic research in bio-logical and biomedical science,

● regulatory policies for the approval of newdrugs and biologics, and

● intellectual property rights protection.

Continued support for basic research in biologicaland biomedical sciences is essential to maintain thestrong scientific base that has given the UnitedStates the acknowledged lead in biotechnology.Improved intellectual property protection at homeand abroad and efforts to harmonize worldwidepatent polices will benefit both DBCs and pharma-ceutical companies in their drug development ef-forts. Scrutiny and improvement of regulatory poli-cies, especially the length of time required to obtainFDA approval, will contribute to increased competi-tiveness of U.S. industry. Action on these pointswould likely contribute to U.S. competitiveness inthe commercialization of biotechnology, which, atthis

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stage, is highly dependent on market forces.

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Chapter 6

Agriculture

“Biotechnology has been a vital part of human activity for many thousands of years. In allprobability the first biotechnologists were Neolithic men and women who may well havepreferred the taste of fermented cereals to raw groin.”

Industrial Biotechnology AssociationBiotechnology. . . in Perspective

“I suspect that virtually all of our current policy thinking about agriculture is very near intime to being totally irrelevant. Major crops such as corn and wheat could see thousandfoldincreases in yield through genetic manipulation. ’

Terry SharrerSmithsonian Institution curator of agriculture

CONTENTS

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . .APPLICATIONS OF BIOTECHNOLOGY TO

Page. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99AGRICULTURE . . . . . . . . . . . . . . . . . . .

Applications to Animals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Applications to Plant Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Applications to Food Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CASE STUDY: THE SEED INDUSTRY . . . . . . . . . . . . . + . . . . . . . . . . . . . . . . . . . . . . . . . . . .Industry Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Research in Seeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .The Response of Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

THE INTERNATIONAL CLIMATE FOR AGRICULTURALBIOTECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .CHAPTER 6 REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100100102107107107109112

112113114

BoxesBox Page6-A. Plant Genome Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1046-B. Developing New Hybrids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

FiguresFigure Page6-1. Preparation of Monoclinal Antibodies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1016-2. Plant Propagation: From Single Cells To Whole Plants . . . . . . . . . . . . . . . .*....,. 105

TablesTable Page6-1. Major World Seed Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1086-2. Major Exporters of Basic Agricultural Commodities Traded Worldwide . . . . . . . . 1136-3. Field Tests, by Country (summer 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

Chapter 6

Agriculture

INTRODUCTIONBiotechnology has the potential to be the latest in

a series of technologies that have led to astonishingincreases in productivity of world agriculture inrecent decades. Since 1948, for example, the wide-spread use of fertilizers, synthetic chemical pesti-cides, and high-yielding varieties of major graincrops have produced yield increases in the UnitedStates of about 2-percent per acre annually. The useof farm machinery of steadily increasing power hasled to a sharp decrease in labor needed to farm anacre of land. Since 1940, labor requirements in theUnited States have decreased 75 percent, whileoutput per acre has doubled. The decreasing amountof labor required to produce increasing amounts ofproducts has allowed farm size to increase aboutthree fold over the years, while the total number offarms declined. Total harvested acreage in theUnited States, however, has remained relativelyconstant at approximately 340 million acres. Accessto farm equipment, better seeds, and other inputs hasled to productivity gains in other major agriculturalexporting nations as well (6, 11, 51).

Until about 10 years ago, U.S. agricultural re-search was directed toward maximizing yield—thequantity of production per acre. But, to compete withagricultural producers in developing countrieswhere land and labor are cheap and to compete withproducers in developed countries with access tosophisticated technology, U.S. farmers will have toproduce their crops more efficiently. Today there isincreased interest in the development of technolo-gies that will help to reduce the cost of agriculturalproduction (42). There is also research in thedevelopment of new, higher value-added products.Biotechnology can contribute to agriculture in eachof these ways:

. The application of biotechnology to agriculturecan result in further gains in yield. Someexamples include new animal health care prod-ucts, new plants that are more resistant toenvironmental stresses (e.g., frost or drought),or the use of new reproductive technologies todevelop higher producing dairy cows.

. Biotechnology can also contribute to produc-tivity by lowering the cost. of agricultural

inputs. For example, plants that are resistant topests may require less treatment with chemicalpesticides resulting in savings in chemicals andlabor costs.There is also the potential for the developmentof higher quality foods and new higher value--added products to meet the needs of consumersand food processors. These include lower fatmeats, oilseeds with altered fat content, orvegetables with a longer shelf life.It is also hoped that biotechnology will contrib-ute to the development of environmentallybenign methods of managing weeds and insectpests through such new products as pest resis-tant crops.

Biotechnology is being applied to agriculture bynew firms dedicated to the use of biotechnology andby well-established firms adapting biotechnology totheir existing research programs. The potentialproducts vary considerably, from agricultural inputs(e.g., seeds and pesticides) to veterinary diagnosticsand therapeutics, to food processing enzymes, toproducts with improved food processing qualities.Animal health products are often manufactured bypharmaceutical firms, since there are strong similari-ties in the research required for developing humandrugs, vaccines, and diagnostics and those productsintended for livestock. Established research-basedseed companies are expanding into biotechnology,while small, new firms attempt to develop productsin this area as well. Both small dedicated biotechnol-ogy firms (DBCs) and established agrochemicalfirms are exploring biotechnological approaches topesticides (25).

Investment in biotechnology, by both small andlarge firms, depends on the potential for the develop-ment of commercial products based on research anddevelopment (R&D). The potential for profitingfrom these new products depends on a variety offactors, such as the potential size of the market forthe products and the rate at which new products andtechnologies are likely to be adopted, the potentialfor repeat sales, the existence of regulatory hurdles,and the possibility of public opposition.

Biotechnology applications to agriculture arebeing explored throughout the world but mainly in

–99-


Photo credit: U.S. Department of

Cloned strawberry plants in a growth chamber.

developed countries. Although few products arecurrently available, it is possible to get an indicationof activities in different countries through surveys offield tests reviewed by national authorities. Theclimate for developing agricultural biotechnologyvaries considerably from country-to-country, de-pending, especially, on differences in intellectualproperty protection, regulations, and public percep-tion.

APPLICATIONS OFBIOTECHNOLOGY TO

AGRICULTUREWhile there are many promising applications

of biotechnology to agriculture, biotechnology isneither a panacea nor a replacement for estab-lished tools. It provides an additional approach toagricultural problems. For example, leaner meats

can be produced by altering animal nutrition,through selective breeding or by the administrationof hormones-some of which might be producedthrough biotechnology. Eventually, transgenic ani-mals that contain less fat may be produced. Ulti-mately, the best route may be a combination oftechniques including biotechnological methods.Similarly, new plants can be produced throughselective breeding, cell culture techniques, orthrough genetic engineering techniques. Geneticengineering extends the range of new traits that maybe introduced into a plant to include traits from otherspecies.

The first products being developed are animaldiagnostic and therapeutic products that arealready on the market and biopesticides, the firstof which have won regulatory approval. Transgenicplants are currently being field tested and are likelyto be available within a few years. Transgenicanimals will first be developed for laboratory uses;technologies for producing transgenic livestock forfood will probably not be available until after theturn of the century.

Applications to Animals

Reproductive Technologies

A variety of new reproductive technologies mayhave an important impact on animal production.Some technologies that do not depend on biotech-nology are already in use. Artificial insemination,using semen from genetically superior bulls, isroutine in the dairy industry today. Technologies arealso available, although none has been widelyadopted, that separate sperm to allow sex determina-tion in artificial insemination. Sex selection wouldbe valuable for dairy farmers, for example.

Traits from genetically superior female animalscan be propagated using embryo transfer techniques.Cows treated with hormones produce several eggswhich are fertilized by artificial insemination, col-lected, and transferred to surrogates. Laboratorytechniques are also available that permit the em-bryos to be split into multiple, identical copies (43).

Animal Health Products

The application of biotechnology to animal healthcare products is similar to R&D in health productsfor humans, and often these products are developedby the same fins. Monoclinal antibodies, forexample, may be developed into new diagnostic

Chapter 6--Agriculture ● 101

Figure 6-l—Preparation of Monoclinal Antibodies

immunized with

substance or“antigen”

removed andminced torelease antibodyproducing cells(B lymphocytes)

~ ‘::g’ga0.

“. ... .. ./ :“ ~,,. t;,. : Cells divide inliquid medium

Myeloma cellsare mixed andfused withB lymphocytes

J


products for animal diseases just as they are used intests for human disease (see figure 6-l). New, saferanimal vaccines have also been developed. The firstgenetically engineered vaccine, introduced by Mo-lecular Genetics in 1984, protects against scours (adisease in calves and piglets). A genetically engi-neered swine pseudorabies vaccine was approved inthe United States in 1987, and rabies vaccines are

The products of thisfusion are grown in aselective medium. Onlythose fusion productswhich are both “immor-tal” and contain genesfrom the antibody-pro-ducing cells survive.These are called“hybridomas.”

Hybridomas are clonedand the resulting cellsare screened for anti-body production. Thosefew cells that producethe antibodies beingsought are grown inlarge quantities forproduction of mono-clonal antibodies.

being tested in the United States, Canada, andEurope (12,14,53).

Although the technical possibilities for animalhealth products may be similar to human products,and the R&D investment required may also besimilar, their profitability is not similar. Unlikehuman health care products, the decision to useanimal health care products is essentially a business


decision. Animal products do not command pricescomparable to those of human health products.

Growth Hormones

Bovine growth hormone, or bovine somatotropin(bST), which stimulates milk production is underdevelopment by four U.S. firms. The Food and DrugAdministration (FDA) found in 1985 that the milkand meat from treated cows were safe for humanconsumption, and that finding was confirmed by acommittee assembled by the National Institutes ofHealth (NIH) in 1990. Some farm organizations,however, concerned about the possible toxic effectsof BST, its possible rejection by consumers, itseffects on animal welfare, and the ultimate effects ofincreased efficiency of milk production on thesurvival of marginal dairy farmers, have opposedBST, leading to moratoriums on its use in Wisconsinand Minnesota. Similar concerns have resulted in amoratorium on BST use in the European Commu-nity (EC) (7,34).

Animal growth hormones are also being studiedas a method to produce leaner meats. The variationin body composition among animals of the samespecies depends on the growth stage of the animals,their nutritional history, and their genetic base. Theproduction of leaner meats can be accomplished bymanipulating these variables through selectivebreeding, nutrient management, and hormone ad-ministration. For example, selective breeding hasresulted in the production of modern, leaner hogs.Also, leaner beef has been produced by breedingcattle of larger frame size. The administration ofporcine growth hormone, produced through geneticengineering, can speed the growth of hogs, improvefeed efficiency, and result in leaner meat (32).

Transgenic Animals

An alternative to treatment with growth hormonesis transferring growth hormone genes directly intothe genomes of animals, so the additional hormoneis supplied endogenously rather than administeredby the farmer. Early experiments, however, haveshown that simply transferring the genes is noteffective, and further fine-tuning of the regulation ofthe genes’ expression is necessary (8). Other genes,such as the human estrogen receptor and insulin-likegrowth factor, have been transferred to cattle inattempts to produce faster growing animals (8,34).Using transgenic livestock as food, however, is notexpected before the end of the century. In the near

Photo credit: Rex Dunham, Auburn University

At top, a transgenic carp containing trout growth hormonegene; bottom, normal carp.

term, transgenic animals are being developed fornonagricultural purposes, including models forhuman disease and for use in toxicity testing. Forexample, one transgenic mouse line produces humansickle cell hemoglobin (40). Other mice, includingthe frost patented transgenic animal, have been givengenes important in cancer development (55). Thesemay eventually be used to identify carcinogens in ashorter the than is now possible and to facilitatestudies of oncogenes. Another nonagricultural appli-cation of transgenic animals is their use in theproduction of pharmaceutical proteins. A geneencoding a protein can be transferred to animals thatthen produce the desired protein in their milk, fromwhich the protein can be purified (30).

Applications to Plant Agriculture

Microbial Pesticides and Other Micro-organisms

The frost biotechnology-based products for plantagriculture to be commercialized were biopesti-cides. Many nonengineered biopesticides based onBacillus thuringiensis (BT), a bacterium that pro-duces a protein toxic to the larvae of many butterfliesand moths, have been in use since the early 1960s(31). Biopesticides, however, represent a tiny frac-tion of the international pesticide market that isdominated by chemical pesticides (49). Over 600chemical pesticides have been approved by theEnvironmental Protection Agency (EPA).


Nonrecombinant biopesticides based on BT havesome advantages over chemical pesticides: they arehighly toxic to specific pests, leaving humans, crops,wildlife, and beneficial insects unharmed; they donot persist in the environment; and they can beproduced using fermentation processes (21,31). Butcommercial weaknesses have prevented their wide-spread use. Each pesticide is active against relativelyfew pests, so the potential market for many pesti-cides is small. In addition, naturally occurringmicrobial pesticides often work too slowly anddegrade too rapidly in the field. Biotechnologyoffers a means of addressing these commercialdrawbacks. Eventually, more than one pesticidalprotein will be engineered into a micro-organism,thereby increasing its host range. The gene for theprotein can also be modified, allowing more of thepesticide to be produced and increasing its effective-ness against pests (21). In addition, pesticides can beformulated and delivered to increase their persis-tence in the environment.

For example, two U.S. firms, Mycogen and CropGenetics International, are exploring new deliverysystems. Mycogen is developing a series of biopesti-cides designed to protect vegetable crops. Mycogenscientists inserted a gene that encodes a BT toxininto a different bacterium that produces more of thetoxin. After the bacteria produce the toxin, thebacteria are killed and treated to fix the cell walls.This leaves a particle containing crystalline toxinwithin a long-lasting protective coat (47). The deadbacteria are sprayed on plants as a topical insecti-cide, killing susceptible insects that eat the sprayedplants. Although dead bacteria are not as long lastingas live, reproducing bacteria, the use of killedbacteria makes the regulatory approval processsimpler and faster.

Crop Genetics International, Inc. (CGI) has ex-plored a different method of delivering BT toxins.CGI has used micro-organisms called endophytesthat live and reproduce inside the vascular system ofplants. CGI scientists inserted a gene for a BT toxininto the genome of an endophyte that was theninoculated into seeds. When the seeds were plantedthe endophytes multiplied inside the plants. The firmhas field-tested corn and rice containing an endo-phyte with a BT gene that protects the plants againstthe European corn borer and the rice stem borer. Thefield tests have shown that the endophyte does notsurvive outside the plant, nor is the endophytetransferred to nearby uninoculated plants. CGI has

agreements with four seed companies that plan touse CGI’s technology to introduce the endophytesinto their existing seed products. The companyexpects to extend this technology to other majorcrops (49).

Microbial biopesticides compete in the market-place with chemical pesticides, and eventually, theywill compete with plants that have been made pestresistant through the incorporation of BT genesdirectly into their genomes. Biopesticides have theadvantage of being widely applicable to manyvarieties without extensive multiyear breeding pro-grams necessary for developing transgenic plants.On the other hand, both the plants containingendophytes and the transgenic plants are resistant topests without the labor of spraying crops. Thepesticide contained in dead bacteria has a strongadvantage, however, in its relatively quick regula-tory approval time. EPA approved two of Myco-gen’s recombinant biopesticides in June 1991.

Other useful micro-organisms, such as improvednitrogen-fixing bacteria, are also being field-tested.These bacteria live in nodules on the roots oflegumes, such as peas and beans. The bacteriaconvert nitrogen in the air into a form that the plantscan absorb and use. Research is directed at develop-ing strains of bacteria that fix nitrogen moreefficiently and that can effectively compete withindigenous soil bacteria in forming nodules therebybeing better able to support a healthy crop oflegumes (3).

Plant Research

Scientists also use biotechnology as a tool forbasic research on plant growth and development.One technique, restriction fragment length polymor-phism (RFLP) analysis, shows particular promise inspeeding conventional plant breeding and, eventu-ally easing breeding involving complex multigenictraits. An RFLP map consists of a set of cloneddeoxyribonucleic acid (DNA) fragments from chro-mosomal locations throughout a plant’s genome. ARFLP marker, or one DNA fragment, can be used asa tool to follow the inheritance of the particularregion of the genome in which the marker is located.This procedure can then be used as a guide toselecting plants that possess specific genetic attrib-utes desired in a seed product (see box 6-A).

A good example is the application of RFLPanalysis to backcross breeding. Many of the im-


Box 6-A—Plant Genome Projects

To identify and characterize genes that are agriculturally important, the United States and several othercountries have begun to fund research on plant genomes. The U.S. Department of Agriculture’s (USDA) PlantGenome Mapping Program is the largest of these programs, with a budget of$11 million in research funds for the1991 fiscal year. Its specific objectives are construction of high-resolution gene maps for those plants species withsufficient background information already available (e.g., tomato, corn, and rice); development of low resolutionmaps for all major crop species important to the United States (about which little information is available at themoment); high-resolution mapping and sequencing of specific regions of the chromosome for investigating specificgenes of economic interest (e.g., hybrid vigor, disease resistance, and drought resistance); and a completesequencing of the Arabidopsis genome. In addition, the USDA’s Agricultural Research Service has received a $3.7million appropriation in fiscal year 1991 to manage dissemination of information generated by the program (usingsuch tools as databases and publications). Eventually, it is hoped that the gene maps and sequences will be used toidentify and manipulate genes that encode important traits.

The National Science Foundation (NSF), the National Institutes of Health (NIH), and the Department ofEnergy (DOE) have also funded research on Arabidopsis thaliana, an agriculturally unimportant member of themustard family increasingly being used as a model system by plant scientists (just as fruit flies are used by animalgeneticists). Arabidopsis is a small plant with a small genome (about 10 percent that of the human genome), smallseeds, and a short life cycle (about 6 weeks). These qualities allow it to be grown in large numbers in greenhousesand rapidly screened for mutations. In addition, DNA can be transferred into Arabidopsis plants usingAgrobacterium vectors, and viable plants can be regenerated from cultured cells. Scientists can study genesimportant to plant growth and development, for example, in this small, easily manipulated plant and then apply thisnew knowledge to agriculturally important crop plants. The NSF is spending $4.4 million in fiscal year 1991 onstudies of the Arabidopsis genome through its existing research programs. The European Community, through itsBiotechnology Research for Industrial Development and Growth in Europe (BRIDGE) program, is also fundinggene mapping studies on the Arabidopsis genome, allocating ECU 3 million for 1991-92. The United “Kingdom,in addition to participating in BRIDGE, funds research and postdoctoral fellowships for work on Arabidopsis.

Japan’ s Ministry of Education and the Ministry of Agriculture, Forestry, and Fisheries (MAFF) fund studieson plant genomes, particularly rice. The MAFF plans a 10-year project on the rice genome to begin in 1991. TheMAFF also plans to construct a rice research facility in Tsukuba, Japan’s “Science City.”SOURCES: U.S. Department of Agriculture, 1991; National Science Foundatio~ 1991; Kagaku Kogyo Nippo, Aug. 31, 199Q A. Vasaarotti et

aI+, “Genmne Research Activitka in the EC,” Biojktzu, October 1990, pp. 1-4; “Gtxxxne Research” European BiotechnologyZ?zfornzutiOn Service, vol. 1, No. 17, 1991, p. 17.

provements introduced into modern crop plants that this technique can be used in breeding tomatoes,originated in related varieties, races, or species.Traditionally, a plant containing one desirable trait,such as disease or pest resistance, was crossed witha plant from a standard line into which the desiredtrait was being introduced. In backcross breeding,the offspring of this cross (containing the desirabletrait) would be grown and crossed again with a plantfrom the standard line. Offspring from this crosscontaining the desirable trait would again be crossedwith the parent line. After several generations, plantswill be obtained that are nearly identical with theoriginal, standard line but which now will containthe desirable trait. RFLP markers can be used toidentify offspring that have inherited the desirabletrait but that, by chance, also have inherited much ofthe genome derived from the standard line. Onegroup has estimated, using computer simulation,

cutting the number of crosses from six to-three (46).

Cell Culture

Plant cells grown in culture can be an alternativesource of valuable substances that are now isolatedfrom whole plants. Vanilla, for example, is usuallyextracted from the beans of the vanilla plant. Vanillaisolated from cultured cells of the vanilla plant canbe produced less expensively than traditional vanillaextract, according to a firm that has developed aprocess for producing vanilla in commercial quanti-ties. Other substances, including pigments andfragrances, have also been isolated from culturedplants cells (9,45).

New plants can also be developed from culturedplant cells (see figure 6-2). Unlike cultured animalcells, some cultured plant cells treated with amixture of nutrients, minerals, and hormones will


Figure 6-2—Plant Propagation: From Single Cells To Whole PlantsThe process of plant regeneration from single cells in culture

Cell multiplication Cell wallremoval

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Surviving cellsgo on to form callus

form roots and shoots and grow into viable orga- three kinds of new traits: herbicide resistance, insectnisms. Plants derived from these cultured cells maycontain mutations resulting in altered traits. Thesenew plants can then be screened for desirable traits.For example, FreshWorld, a joint venture betweenDuPont and DNA Plant Technology, is sellingcrisper, sweeter carrots and celery regenerated fromcultured cells. DNA Plant Technology is using thesame techniques to develop tomatoes having highersolids content—a product useful to food processors.In Japan, a late-maturing variety of rice was de-veloped using these techniques by a joint venturecompany formed by Mitsubishi Chemical Industriesand the Mitsubishi Corp., and a short-stemmedvariety was developed by the Mitsui Toatsu Chemi-cal co. (19).

Transgenic Plants

The ability to insert foreign genes into plants,using recombinant DNA (rDNA) methods, providesplant breeders with new strategies for plant modifi-cation and improvement. Research and field-testinghave recently been dominated by plants exhibiting

resistance, and viral resistance. Altering other planttraits important for plant growth and development,such as those affecting plant tolerance of environ-mental stress (e.g., drought and salinity) or traits thatadd to value, often require better understanding ofthe molecular basis of these traits-many of whichmay be multigenic and, therefore, more difficult totransfer.

Genes that confer resistance to several classes ofherbicides have been isolated and transferred to anumber of plants, including tomato, tobacco, cotton,oilseed rape, soybeans, sugar beets, and alfalfa.Herbicides are widely used in agriculture, leading toincreased crop yields that result when weeds com-peting for soil, light, and nutrients are removed.Herbicides also contribute to soil conservation bypermitting no-till practices in which weeds arecontrolled through herbicide use rather than byplowing. The herbicide-resistant gene enables a cropplant to tolerate the toxic effects of a herbicideapplied to kill surrounding weeds. Chemicals arecurrently available to control most weeds, but


Photo & Co.

Manduca sexta (tobacco hornworm) larva at work. Themoth will consume 95 percent of its entire life cycle’sfood supply while in the larval stage of development.Moth larvae are the most destructive insects to world

agriculture and forestry.

developing herbicide-resistant plants increases thevariety of crops to which a particular chemical maybe applied. It is possible that this could lead toincreased use of chemical herbicides. However, iftroublesome chemicals can be displaced by increas-ing the use of herbicides that require lower appli-cation rates, do not persist in the environment, andhave fewer toxic side effects, then there will be anenvironmental benefit (27).

The first successful transfer of an insect-resistance gene to a plant was done with tobacco bya Belgian firm, Plant Genetic Systems, in 1987 (54).Insect resistance has now been transferred to anumber of plant species by transferring genes forpesticidal proteins isolated from BT (31). Becauseany particular toxin is effective only against specificinsects, chemicals may still be necessary for control

Photo credit: & Co.

The effects of the BT gene transfer on laboratorytobacco plants can be easily seen in the plant on the left

which was infested with 20 tobacco hornworm larvae.Within 40 hours the hornworms were killed by the BTprotein in the plant tissue they ingested, leaving the

plant virtually undamaged. The other plant, which did nothave the gene transfer, shows total destruction by the

same number of insects in the same time period.

of multiple pests. Broader spectrum pest control mayeventually be achieved by transfers of several insect-resistance genes. It is possible, however, that in-creased use of plants containing BT toxins will resultin BT-resistant pests.

Within the last few years, it has been learned thatintroducing genes that encode viral proteins canmake plants resistant to virus infection(l). Althoughthe mechanism of viral resistance is not wellunderstood, this is an area of active research andfield-testing. Its commercial prospects are limited tospecific crops in specific regions where viral dis-eases present a significant problem, such as wheat inthe United States and cassava in the tropics.

Traits such as insect or disease resistance canincrease the value of plants to farmers. Other newplants are being developed, however, with traits thatare not aimed at increased yields or lower input costsfor farmers. These traits are intended to meet theneeds of food processors and consumers. These newplants have traits that change the nutritional contentof a plant, alter its processing qualities, or increaseits consumer appeal. For example, genetically engi-neered tomatoes, developed by Calgene and nowbeing tested, have a gene that interferes with the


ripening process that causes tomatoes to becomesoft. In the future, additional products based on adeeper understanding of molecular mechanisms maybe developed. For example, the nutritional contentof corn may be enhanced by increasing the amountof the amino acids lysine and methionine in theseeds. Work is underway to produce coffee withlower caffeine content. Oilseeds with higher oilcontents, altered ratios of fatty acids (for enhancednutritional properties), or longer shelf lives will bedeveloped. Genes that control flower colors arebeing transferred to develop new ornamental. Someof these traits can be modified through traditionalbreeding programs, but biotechnology can improvethe efficiency of making changes and extend therange of possible modifications (5).

Applications to Food Processing

Biotechnology can contribute to food processingin various ways, but most current applicationsemphasize cost reduction. Biotechnology can beused to improve the production of existing goodscurrently made using fermentation, such as vitaminsand amino acids used as additives in food and animalfeed. Biotechnology can also be used for theproduction of food processing enzymes. One foodenzyme, chymosin, used in cheesemaking, wastraditionally extracted from calves’ stomachs andsold as part of a mixture called remet. Rennet variedin quality from batch-to-batch, and its scarcity led torising prices in recent years. Researchers at Pfizer,Inc. transferred the gene encoding chymosin tobacteria that could be grown in large fermentationtanks, yielding large amounts of chymosin. Theenzyme was approved for food use by the FDA in1990 (55 Fed. Reg. 10932).

Micro-organisms are widely used in baking andbrewing. A baker’s yeast altered using biotechnol-ogy has been approved for use in the UnitedKingdom (U.K.). There is also interest in developinggenetically engineered micro-organisms for theproduction of high-value compounds currently iso-lated from plants. Among these products are dyes,vitamin s, flavors, colors, lipids, steroids, and bio-polymers (16,39,44).

The application of biotechnology to food process-ing has received a great deal of interest in Japan.Japan leads in world production of amino acids andfermented food products. Their expertise in fermen-

tation makes biotechnology a natural extension oftheir current strength (16).

CASE STUDY: THE SEEDINDUSTRY

Whether or how biotechnology is used by a firmdepends on a variety of factors, among them:

s

●

●

The potential for profits from the investment.This depends on the size of the market, rates ofadoption, intellectual property protection, theexistence of substitutes, and public acceptanceof new products.The role of R&D in the industry. This maydepend on competitive pressures to developnew products.The time it takes to realize a return from suchan investment. Anything that delays the returnon the investment, such as regulations, mayinhibit investment. A more detailed descriptionof the seed industry provides an illustration ofinterplay between the forces that influence theuse of biotechnology.

Industry Structure

In 1988, U.S. farmers spent $3.7 billion on seeds(52). The worldwide market has been estimated at$12 billion to $15 billion. But these estimatesexclude the extensive informal seed market. Farmersoften plant seed saved from a previous harvest orpurchase seed from another farmer. Estimates of thetotal seed market vary considerably, ranging as highas $62 billion (41).

The seed industry has many markets, includingthose for grass, forage, vegetable, flower, and fieldseeds, each having its own supply, demand, price,and organizational characteristics. Many seed pro-ducers are small firms that grow and distributecommon varieties of seed for regional markets. Thesmall firms conduct little or no research, but theyeffectively market new technologies provided bypublic or private seed suppliers.

A portion of the seed industry consists of largerfirms with resources to invest in the long-termresearch necessary to produce genetically improvedseeds (see table 6-l). These are the firms likely tobenefit from the use of biotechnology. For thesefins, however, investment in research has histori-cally been less than 5 percent of revenues (13).Today, investment in research is higher; in 1989,


Table 6-l—Major World Seed Firms

Pioneer Hi-Bred International . . . . . . . . . . . .Sandoz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Ciba-Geigy . . . . . . . . . . . . . . . . . . . . . . . . . . .DeKalb . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Upjohn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Limagrain . . . . . . . . . . . . . . . . . . . . . . . . . . . .Cargill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Volvo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Lubrizol . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .KwS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

United StatesSwitzerlandSwitzerlandUnitedStatesUnited StatesFranceUnited StatesSwedenUnitedStatesGermany

SOURCE:OfficeofTahnologyAssessmen~ 1991.

Pioneer Hi-Bred International invested 7.6 percentof total revenue in R&D (37). Most seed research isbased on selective breeding programs used todevelop seeds that are high yielding or have otheradvantageous traits.

Internationalization and Consolidation

Over the last 30 years, the seed industry has beenmarked by increasing internationalization. Duringthe 1960s, major U.S. firms began exporting seeds,particularly the better hybrids, into Latin Americaand Europe. This was followed, in the 1970s, byincreasing acquisitions of small firms, as U.S. firmsexpanded into Europe and large European seed firmsinvested in the United States. The major firms alsodeveloped subsidiaries in Australia and Latin Amer-ica-especially in Argentina, Brazil, and Mexico.The French firm Limagrain, for example, hassubsidiaries in Australia, Brazil, Chile, Germany,Italy, Mexico, Morocco, The Netherlands, Spain,Tunisia, Turkey, and the United States. The U.S.firm Pioneer Hi-Bred International, Inc. sells seed in80 countries worldwide and has subsidiaries inArgentina, Australia, Austria, Brazil, Canada,France, Germany, India, Italy, Japan, Mexico, thePhilippines, Spain, and Thailand (41).

Seed companies were, historically, closely heldbusinesses. Increasingly, however, both small andlarge seed firms have been acquired, not only byother seed firms but by other major multinationalcompanies. Since the mid-1960s, over 100 seedcompanies have been acquired by multinationalchemical, pharmaceutical, and oil corporations—often those with agricultural chemical subsidiaries.Few major seed companies remain independent: theU.S. firms Pioneer Hi-Bred International, Holden’sFoundation Corn Seeds, and DeKalb; the Frenchfirm, Limagrain; and the Brazilian firm, AgroceresSA, have managed to continue independently. Othermajor research-based firms are now subsidiaries of

“. /w

l%oto credit: National Agriwltural Library

;multinational corporations whose main business isnot seeds.

Many of the corporations that chose to invest inseed companies were European firms that lead inworld sales of pesticides and fertilizers. The Swissfirm, Ciba-Geigy, for example, acquired the U.S.seed firm, Funk, in 1974. The British chemical firmICI has acquired six seed companies, includingGarst, one of the leading U.S. firms. Rhone-Poulenchas recently acquired five seed firms, including


Clause, an important French company. The U.S.chemical firm Lubrizol owns eight seed firmsthrough its Agrigenetics subsidiary. Corporationsbest known for producing pharmaceuticals have alsoinvested in seed firms. Upjohn owns Asgrow Seeds,and Sandoz acquired eight seed subsidiaries from1976 to 1988, including Northrup King and StaufferSeeds in the United States. There are also examplesof major cereal and sugar producers acquiring seedfirms. Cargill, the major U.S. food producer, special-izes in seeds of corn, wheat, and sunflowers and hassubsidiaries in nine countries. Cardo, a majorSwedish sugar producer and now a subsidiary ofVolvo, has invested heavily in the production ofsugar beet seed. More recently, biotechnology firmshave begun to acquire seed firms, seeking outlets fortheir technology. For example, Calgene has pur-chased Stoneville, and Biotechnica has purchasedfive regional seed companies (17,20,41).

This recent consolidation has made the research-based sector of the seed industry extremely concen-trated. For example, in 1985, four firms supplied 64percent of corn seed in the United States; PioneerHi-Bred, alone, supplied 38 percent. Pioneer also ledin providing corn seed in France, where it held 55percent of the market, followed by Limagrain with15 percent. In Brazil, 34 percent of corn seed wassupplied by Agroceres. In France, sunflower seedsales were dominated by Cargill, which held 75percent of the market in 1985 (41).

Research in Seeds

Keeping market share requires constant develop-ment of new, improved products. For example, in1989, Pioneer released 24 new corn hybrids. A newhybrid is usually marketed for about 7 or 8 yearsbefore it is superseded by improved hybrids. Ahybrid’s lifetime depends on how unusual it is, howmuch competition there is (if a market is large,competitors will develop similar hybrids), and howinsect and disease pressures change over time. A fewexceptional hybrids have been sold for more than 20years, because they have qualities that make themsuitable for a particular region (28). A number ofother factors influence the types of research projectsthat a seed firm may choose to undertake. Amongthese are: the potential market size, the time it willtake to realize a return on investment, the availabil-ity of intellectual property protection, and technicalconstraints.

Hybrid Seed

The research-based sector of the industry grewwith the introduction of hybrid corn in the 1920s.Hybrid seeds are the first generation of a crossbetween two unrelated strains of a plant. Somehybrids have much higher yields than conventionalseed and, therefore, command high prices. The highyields more than offset the higher prices firmscharge for the seeds.

Hybrids do not breed true. The high yield isobtained only in the first generation. To obtain thehigh yield, farmers must purchase seed from sup-pliers each year. In the United States, 95 percent ofcorn planted each year is grown using seed pur-chased from seed suppliers. The assurance of repeatbusiness gives seed firms a strong incentive tocontinue research into better yielding hybrid seeds.Corn, grain sorghum, sunflowers, and some vegeta-bles are typically sold as hybrids (2).

Most other crop species are naturally self-pollinated. For many of them it is difficult to producehybrid seeds on a large scale for commercialpurposes (see box 6-B). Unlike hybrids, self-pollinated varieties breed true. Farmers can chooseto buy fresh seed or to plant seed saved from theprevious year’s harvest with little difference in yield.Although there are advantages to buying fresh seed,which has an assurance of purity and has beencleaned and tested for germination, or seed of anewly available, higher yielding variety, farmersoften choose to plant saved seed. As a result, only 35percent of wheat and 50 percent of cotton seeds arepurchased from suppliers each year (2).

Firms do research on self-pollinated crops, butthere is much less incentive to invest heavilybecause the companies cannot capture profits as theycan with hybrids. Competition with saved seed alsodepresses the prices firms can charge for their seed(2,23).

The repeat business associated with hybrid seedsguarantees a sizable market. The market size alsodepends on how widely the crop plant is grown.Most research, using both biotechnological andtraditional approaches, is performed only on thosecrops that offer markets of sufficient size to enablereturns on R&D investment.


Box 6-B—Developing New Hybrids

Some plants readily lend themselves to hybridproduction. In corn, for example, the structures thatproduce pollen, the anthers, are located at the top ofthe plant on the tassels. If a plant’s tassels arephysically removed or if a mutant is grown that doesnot produce pollen, all the eggs will be fertilized bypollen from neighboring plants. By growing plantsof one strain of corn near plants that are geneticallymale-sterile or hand-emasculated, hybrid seed canbe obtained

In many plants, however, there are no geneticmale-sterile varieties. In addition, many of theseplants have small, delicate flowers, and it is difficultand time-consuming to remove anthers by hand.Some chemical treatments are available for produc-ing sterile plants (and have been used in theproduction of hybrid wheat). For many plants,however, producing hybrids on a commercial scaleis not practical.

Recently, however, scientists from a Belgianfirm, Plant Genetic Systems NV, collaborating withscientists at UCLA have developed a generalmethod for producing male-sterile varieties. Thescientists transferred a gene that prevents antherdevelopment into otherwise normal tobacco andoilseed rape plants, resulting in male-sterile plants.The extension of this technology to additional cropshas the potential to extend the benefits of hybridproduction to other species. It is hoped that some ofthese new hybrids may show the increases in yieldtypical of hybrid corn.SOURCE: c. Mlriani et al., “XMuctiori of Male Sterility in

Plants by a Chimaeric Ribonuclease Gene,” Naturevol. 347, 1990, pp. 737-741.

Intellectual Property

To stimulate private-sector research on nonhy-brids, Congress passed the Plant Variety ProtectionAct (PVPA) in 1970. PVPA extends patent-likeprotection to sexually reproducing plant varietiesoutside the existing patent system. PVPA isadministered by the U.S. Department of Agriculture(USDA) rather than by the U.S. Patent and Trade-mark Office (PTO). It gives the owner of a protectedvariety the right to exclude others from selling,reproducing, importing, or exporting the protectedvariety for 18 years. But, there are two importantexceptions: farmers may save or sell seed they haveproduced themselves for future planting, andresearchers, including competitors, may also use

protected varieties in their research programs todevelop new seed products. A system establishingsimilar breeders’ rights was created in Europe by a1961 treaty establishing the International Union forthe Protection of Plant Varieties (UPOV).

A survey of seed companies, conducted in 1980,reported growth in the number of research programson nonhybrid crops and increases in total researchexpenditures on nonhybrid crops after PVPA wasenacted in 1970. For example, of the 21 soybeanbreeding programs the surveyors found existing in1979, only four had existed before 1970 and some ofthose were founded with the expectation that PVPAwould be enacted. Increases in cereal research werealso noted, while forage-breeding programs hadincreased slightly and seemed to be unaffected bypassage of the new law (36).

Seed firms face difficulties enforcing provisionsof PVPA. If another firm sells a protected variety,the seed company that owns the variety must find theseed pirate and sue for damages. Although the extentof infringements is unknown, it occurs often enoughthat seed firms are taking action. Asgrow Seed Co.has found violators advertising Asgrow varieties inlocal newspapers, but protected seed sold lessblatantly, under a new name, is harder to track (24).

PVPA is limited in its protection of productsdeveloped using biotechnology. It extends protec-tion to a single variety only. Today, utility patentsmay also be obtained for plants and plant parts as aresult of a 1985 Supreme Court ruling (10). Utilitypatents offer broader protection than does PVPA;there is no farmer or research exemption. Finns havefiled patent applications for, among other things,DNA sequences, plant cells, gene isolation proc-esses, DNA transfer processes, whole plants, andother plant parts. Questions remain, however, aboutthe scope of patent coverage, and in the absence ofnew legislation they will be answered as the courtsresolve disputes (31).

In Europe, intellectual property protection forplants remains confined to protection for plantvarieties established by UPOV, although DNAsequences, plasmids, and plant cells are patentable.Plant and animal varieties are generally excludedfrom patent protection in European countries. Patentlaws in Australia and Japan, on the other hand, donot exclude plants and animals (4).


Photo credit: Diversity, Genetio Resources CommunicationsSystems, Inc.

Plant culture.

Regulations

In conventional plant breeding programs, poten-tially useful new traits are bred into plants that haveother important agronomic traits, and the plants arethen field tested in different climates. The mostsuccessful varieties are then bred for several years toproduce commercial volumes of seed. This process,from the initial breeding to product introduction,takes 10 to 15 years (5). For genetically engineeredplants, this process is lengthened because of require-ments for field testing to demonstrate safety. Inaddition, firms have to obtain regulatory clearancebefore marketing a new product. These increases inthe time it takes to develop new products have theirgreatest impact on cash-starved, small fins. It isalso unclear how the FDA will evaluate food plants,although the FDA has made clear its intention to useits existing authority under the Food, Drug, andCosmetic Act (15,48).

Regulations on field testing genetically modifiedplants are particularly strict in northern Europe, dueto adverse public opinion. In Japan, regulations for

field-testing genetically modified plants were issuedby the Ministry of Agriculture, Forestry, and Fisher-ies in the summer of 1989, but, so far, only a singletest has been reported.

Technical Constraints

Technical constraints have, over the last severalyears, limited the ability of seed firms to applybiotechnology to the most valuable potential proj-ects. Of the plants that have been field-tested in theUnited States, the vast majority have been vegetablecrops altered to make them herbicide, insect, or virusresistant. There has been heavy emphasis on apply-ing biotechnology to vegetables, because they arethe easiest crops into which to transfer DNA. Themost widely used method of transferring DNA intoplant cells depends on the use of an infectiousbacteria, Agrobacterium tumefaciens, which, oninfection, transfers DNA into the genome of theplant. Altered forms of the bacteria have beendeveloped that allow researchers to transfer specificDNA fragments that confer useful, new traits into aplant. But, these bacteria do not infect cereal plants(56,57). Only recently have researchers reported anew technique for DNA transfer into plants using aparticle delivery, or ballistic, system (22). Threefirms have reported the successful application of thistechnique to corn, followed by regeneration ofviable plants with new genes incorporated stablyinto nuclear DNA. The variety of plants to whichbiotechnology can be applied will expand in time,but needed gains in transformation efficiency mustbe made for the true potential of gene-transfertechnology to be realized.

The number of traits that researchers alter is alsolikely to increase. Such qualities as herbicide, insect,and virus resistance are relatively easy to transfer,because they are carried by single genes. Many otherimportant traits, however, are probably affected bymultiple genes and are not well-understood geneti-cally or biochemically. Manipulating these traitsrequires a long-term investment in fundamentalplant metabolism research in order to understand themolecular basis of these traits.

The Congress, responding to criticism of theUSDA’s funding of basic research, has recentlyincreased the USDA’s funding for competitivegrants (33). The National Research Initiative isbeing funded at $73 million in fiscal year 1991, andits budget will increase to $500 million in 5 years.


The Response of Firms

In this market, few direct paths are open to firms.A number of companies, both large and small, havebeen developing plants with improved agronomictraits. For large firms, biotechnology presents anopportunity for growth and a way of protectingmarket share. Large firms with many popularhigh-yielding products and established distributionsystems can incorporate these new traits into theirproducts. But new dedicated biotechnology firms donot have the same access to quality germplasm ordistribution outlets. For them, biotechnology pre-sents growth opportunities, but it is important todevelop partnerships with larger firms (38). In somecases, small biotechnology firms have sought even-tual outlets for their technology through purchasesof small seed firms.

Some small firms survive solely by isolating newgenes or developing new technology that can belicensed to larger firms. These alliances, betweenlarge and small firms, provide sorely needed financ-ing to small firms while providing large firms withwider access to new technology. But, as large firmsdevelop more in-house expertise, these strategicalliances may become more focused and less avail-able.

Some firms plan to invest in the long-termresearch necessary to develop plants with improve-ments in nutritional content or processing qualities.Few firms can afford the substantial investment orthe long wait required until this research results incommercial products. In addition, marketing theseproducts presents new challenges. Traditionally,seed companies have generally sold their products tofarmers, with little emphasis on the development ofplants with traits important to their eventual users.But developing and selling a product with propertiesof interest to particular end-users (e.g., an oilseedwith altered composition making it useful to pro-ducers of commercial fried foods), require thedevelopment of close working relationships be-tween breeders and end-users (13).

THE INTERNATIONAL CLIMATEFOR AGRICULTURAL

BIOTECHNOLOGYThe major food exporting nations consist of a

handful of developed countries (see table 6-2). Somedeveloping nations, such as Argentina, Brazil, and

Thailand, are also important exporters of grains,feeds, and tropical products. Exports tend to beconcentrated among a very few countries: fivecountries are responsible for over 90 percent ofwheat exports; seven for over 90 percent of feedgrain exports, such as corn, barley, sorghum, andoats; and four countries account for over 95 percentof soybean and soy product exports. Similarly, theEC and Eastern Europe account for over 85 percentof pork exports, and six countries provide over 80percent of beef exports (26).

Because biotechnology products for agriculturaluse are still in development, it is not possible tocompare the numbers of products actually manufac-tured in different countries. Field trials of potentialplant products, however, are regulated by nationalagricultural or environmental authorities. Thesetrials are outdoor tests of genetically modifiedorganisms, conducted to gain experience importantfor future commercial development or to test the newplant under field conditions. There is no officialcensus of such tests, but the USDA has kept anunofficial tally that gives a rough estimate ofactivities in different countries (see table 6-3).Unfortunately, little is known about testing in theThird World.

Through the summer of 1990,93 field tests oftransgenic plants had been approved in theUnited States, far more than in any other coun-try. In the EC, 62 tests had been approved, including28 in France and 12 in Belgium. Canada andAustralia, major agricultural exporting nations, hadapproved 18 and 4 tests, respectively. There is littleactivity elsewhere. In general, transgenic plants arebeing developed in nations that are major exportersof agricultural products, with the greatest activity inthe United States.

In northern Europe, particularly Germany andDenmark, public concern about possible environ-mental risks and ethical issues associated withbiotechnology has translated into regulations thatdiscourage field testing of genetically engineeredorganisms. The lack of patent protection fortransgenic organisms also tends to inhibit invest-ment in transgenic plants in Europe.

In Japan and other Asian countries, public percep-tion of biotechnology appears to be mixed. The useof biotechnology to produce pharmaceuticals andindustrial and food processing enzymes is wellaccepted, but agricultural applications are less so


Table 6-2—Major Exporters of Basic Agricultural Commodities Traded Worldwide

Soybeansand soybean

Wheat Feed grains products Beef Pork

United States United States United States European EuropeanCanada Argentina Brazil Community CommunityAustralia Canada Argentina Australia EasternFrance South Africa European Argentina EuropeArgentina Thailand Community New Zealand

Australia BrazilFrance Canada

SOURCE: U.S. Department of Agriculture, A@xJtura/ Yearbook 1985.

Table 6-3-Field Tests, by Country (summer 1990)

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93European Community . . . . . . . . . . . . . . . . . . . . . . . . 62*Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Argentina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8● 28 in France; 12 in BelgiumNOTE: Because of differences in definitions, some of these statistics for

countries outside the United States may include tests of modifiedmicro-organisms as well as transgenic plants, but these tests arerelatively few.

SOURCE: U.S. Department of Agriculture, 1991.

(18). In Japan, there has even been an historicalaversion to the use of nonengineered microbialpesticides. Their use is permitted but much morestrictly regulated than in Europe or the United States.This is partly because BT was originally isolated inJapan as a potent pathogen of silkworms. Althoughstrains nontoxic to silkworms have been developed,the use of BT in Japan was banned until 1971, andthe first permits for its use were not granted until1982. It is thought that the stringency of theregulations has inhibited corporate interest andinvestment in the development and improvement ofbiopesticides in Japan (50). Japanese surveys havealso reported concern about environmental releasesand food uses of transgenic plants and animals (29).A survey of Japanese businesses found that only 38percent of the 66 responding agricultural firmsconsidered biotechnology decidedly or fairly impor-tant for their company’s future; in contrast, 89percent of manufacturers of drugs and diagnosticstook that position (35).

SUMMARYLike other technical innovations, biotechnology

has the potential to improve the productivity ofagriculture by increasing yields, decreasing costs,

and providing new products. Applications includeanimal health products, hormones, transgenic ani-mals, biopesticides, and transgenic plants. Surveysof field tests of transgenic plants reviewed bynational authorities show that the United Statesleads in this activity, followed by the EC (especiallyFrance), and then by Canada. Activity is greatest incountries that have access to biotechnology re-search, that are leading agricultural producers, andwhere there is little public concern about theapplications of biotechnology to agriculture.

In the seed industry, research investment hastraditionally been heaviest in crops sold as hybrids,particularly corn, because these crops offer the mostopportunities for profit. But corn, the crop that hasdrawn the most research in the past, has not beenamenable to biotechnological manipulation untilrecently. Therefore, research has focused on cropsand traits that are easier to manipulate. As technicalroadblocks are lifted, research is likely to increase onother crops and on more complex traits. Otherroadblocks exist:

More basic research is needed on fundamentalplant biochemistry, genetics, and physiology—in addition to plant biotechnology. This re-search would help in identifying and manipu-lating genes involved in producing complextraits of agricultural importance. Congress hasbegun to address the need for basic research byincreasing funding for competitive grants ad-ministered by the USDA.The FDA has given industry little indication ofits approach concerning food safety of geneti-cally modified plants, making it difficult forindustry to plan commercial introduction ofnew foods.Intellectual property protection is lacking forplants and animals in Europe and in lessdeveloped countries.


Currently, small dedicated biotechnology firmsare isolating genes, developing new techniques, andworking with larger firms to commercialize theirtechnology. A number of small firms are alsoacquiring small seed firms as future outlets for theirtechnology. Large seed firms and agrochemicalfirms are building in-house expertise and exploringtechnology through their relationships with smallfirms.

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Chapter 7


“Why, after so much promise . . . has the harvest in the chemical area been so thin? Threebasic, interrelated reasons give rise to the shortfall: 1) false expectations, which 2) in turntended to obscure the inherent limitations in the technology, and 3) led to underestimatingthe difficulty of competing with the power of organic chemistry and entrenched chemicalmanufacturing processes.

Richard L. Hinmanvice president of chemical products, Pfizer

CONTENTSPage

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .INDUSTRY CHARACTERISTICS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .BIOTECHNOLOGY APPLICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fermentation Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Biosensors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . .Applications to Chemical Synthesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Applications to Bulk Chemical Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

GLOBAL RESTRUCTURING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .CHAPTER PREFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

119119120120121122122122124124

BoxBox Page7-A. L-tryptophan and Eosinophilia-Myalgia Syndrome . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120

TablesTable Page7-1. World’s Largest Chemical Producers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1197-2. Sectors of the Chemical Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119

Chapter 7


INTRODUCTIONBiotechnology has a number of applications to

chemical production. Clearly, it will be used toimprove production of biochemical currently pro-duced using fermentation, such as industrial en-zymes. In addition, there are also limited applica-tions to the production of fine chemicals currentlyproduced synthetically. Chemical firms are begin-ning to invest in these obvious applications.

In the long term, biotechnology maybe importantin the production of bulk chemicals and fuels. Butthere is limited investment in this field due to therelatively low price of oil and the recent restructur-ing of the chemical industry.

INDUSTRY CHARACTERISTICSThe chemical industry is one of the Nation’s

largest manufacturing industries, with 1990 ship-ments estimated at $297 billion (24). It employs over1 million people, representing about 5 percent ofU.S. employment in manufacturing (4,25). Yet, thelargest chemical companies are European (see table7-1).

The chemical industry produces a huge and everchanging variety of products. More than 50,000chemicals and formulations are currently producedin the United States (24). Three-quarters of theindustry’s output is used within the chemical indus-try to produce more complex chemicals or is sold toother manufacturing industries. Only a quarter ofoutput is sold to consumers, purchased by govern-ment, or entered into foreign trade (16).

The consumption of chemical products by indus-try gives these products a degree of anonymitybecause they usually reach consumers in alteredforms or as parts of other goods. Basic, rawmaterials, such as crude oil, are transformed througha complex series of interlocking steps into interme-diate chemicals (e.g., benzene and acetylene) andeventually into complex final products (e.g., plasticsand fibers). Often, several possible routes of chemi-cal synthesis, using different feedstocks, can be usedto produce a final product. Because chemical proces-sors can substitute different feedstocks or intermedi-ates for one another, they have considerable flexibil-

ity in adjusting to changes in price or availability ofraw materials. Finished products can also substitutefor one another. Different plastics, for example, canbe used as packaging materials. The ease of substitu-tion among raw materials and finished productsresults in intense competition within the industry.

Driven by competition, manufacturers constantlyexplore new feedstocks and develop new products.The resulting diversity of the industry has made itsdefinition difficult. The Department of Commercedivides the chemical industry according to productclasses in its standard industrial classification (SIC)system (see table 7-2).

Frequently, however, the chemical industry isdivided according to the intensity of research anddevelopment (R&D). Some segments of the industryproduce standard, high-volume, low-value-addedbulk chemicals, such as ethylene or sulfuric acid.Because the quality of these chemicals is high and

Table 7-l—World’s Largest Chemical Producers

BASF (Germany)ICI (United Kingdom)Hoechst (Germany)DuPont (United States)Bayer (Germany)Dow Chemical (United States)Shell Oil (United Kingdom, The Netherlands)Enimont (Italy)Exxon (United States)Rhone-Poulenc (France)Union Carbide (United States)Degussa (Germany)Ciba-Geigy (Switzerland)Solvay (Belgium)Asahi Chemical (Japan)SOURCE: Chernica/ & Engirreering News, vol. 68, No. 45, 1990, p. 20.

Table 7-2-Sectors of the Chemical Industry

SIC Code Industry

SIC 28SIC 281SIC 282

SIC 283SIC 284SIC 285SIC 286SIC 287

Chemicals and allied productsIndustrial inorganic chemicalsPlastic materials, synthetic rubber, manmade

fibersDrugsSoaps, cleaners, and toilet goodsPaints and allied productsIndustrial organic chemicalsAgricultural chemicals

SIC 289 Miscellaneous chemical productsSOURCE: U.S. Department of Commerce, 1991.

–119–


consistent, these manufacturers compete almostentirely on price which, in turn, depends on the costof raw materials and the development of new processtechnology. At the other extreme are higher value--added specialty chemicals, such as catalysts, foodadditives, and industrial coatings. The highest value--added products include pharmaceuticals and pesti-cides (described in chs. 5 and 6). Manufacturers ofspecialty chemicals compete by investing in R&D inan effort to develop superior new products to meetmarket needs.

BIOTECHNOLOGYAPPLICATIONS

Biotechnology will be used within the chemicalindustry mainly in the production of chemicalscurrently produced through fermentation, such asindustrial enzymes. There are more limited applica-tions to the synthesis of complex chemicals and tothe production of bulk chemicals.

Most of these applications will be developed toimprove production processes used by major chemi-cal companies. They will, probably, be introducedwithout the fanfare that has accompanied otherbiotechnology developments. The use of biotechnol-ogy in the chemical industry is publicized only whena problem arises (see box 7-A).

Fermentation Products

Some chemicals are currently produced by grow-ing micro-organisms in large fermentation vats andisolating the products from the final fermentationmixture. Biotechnology can be used to improveyields of these chemicals.

Amino Acids

Amino acids are used mainly as food additivesand animal feed supplements, but they have otheruses as well. The sweetener Aspartame is made fromtwo amino acids: aspartic acid and phenylalanine.The food additive monosodium glutamate (MSG) isprobably the best known amino acid. The worldmarket is estimated at $800 million and is growingat 3 percent annually, although the U.S. market isgrowing slowly or not at all (27).

The use of biochemistry and fermentation toproduce chemicals has historically received a greatdeal of attention in Japan. Unlike Germany and theUnited States, Japan is resource-poor, lacking largedeposits of coal and oil, the raw materials on which

Box 7-A—L-tryptophan and Eosinophilia-Myalgia Syndrome

The amino acid L-tryptophan has been widelyavailable, mainly in health food stores, as a foodsupplement. It was often recommended as a treat-ment for insomnia, depression, and premenstrualsyndrome. In 1989, ingestion of L-tryptophan waslinked to an increase in the number of cases of a rareblood disorder, Eosinophilia-Myalgia Syndrome(EMS). In November 1989, the Food and DrugAdministration (FDA) recalled all products con-taining L-trytophan as a major component, and inMarch 1990, the FDA extended the recall to nearlyall products containing L-tryptophan. Over 1,500cases of EMS and 27 deaths in the United Stateswere eventually traced to several lots of L-tryptophan produced by a single company, Japan’sfourth largest chemical firm Showa Denko. Lots ofL-tryptophan associated with EMS contained smallamounts of a contaminant.

Like many other amino acids, L-tryptophan hadbeen manufactured by growing bacteria that pro-duce L-tryptophan in large fermentation tanks andpurifying the compound from the broth. In late1988, however, Showa Denko made two changes inits L-tryptophan manufacturing process. It replacedits original strain of bacteria with a strain geneti-cally engineered to enable it to produce moreL-tryptophan; changes were also made in thepurification process.

In October 1990, the contaminant associatedwith EMS was identified by Showa Denko scien-tists as an L-tryptophan dimer linked by ethylidene.The company announced that the contaminantt wasnot produced by the bacteria during the fermenta-tion process but was formed during the L-tryp-tophan purification process.

SOURCES: Centers for Disease Control “Update: Eosino-philia-Myalgia Syndrome Associated With Inges-tion of L-Tryptop~United States, through Aug.24, 1990,” Morbidity an.diffortality Weekly Report,vol. 38, 1990, pp. 587-589; E.A. Belongia et al,,“AaJnvestigationof the Cause of the Eosinophilia-Myalgia Syndrome Associated with TryptophanUse,” The New Englatkd.Journal of Medicine, VOL323, 1990, pp. 357-365; A.N. Mayeno et al.,‘Wharacterizstionof Peak ‘E,’ a Novel Amino AcidAssociated with Eosinophilia-Myalgia Syndrome,”Science, vol. 250,1990, pp. 1707-1708..

the chemical industry in the rest of the world wasbased; thus, Japanese firms have always had afinancial incentive to explore alternatives. WhenJapan’s Ministry of International Trade and Industry

Chapter 7—The Chemical Industry ● 121

(MITI) targeted biotechnology in 1980, three re-search areas were specifically named: 1) recombi-nant DNA (rDNA), 2) mass cell culture, and 3)bioreactors. Although in the United States, the word“bioreactor” usually refers to large chambers usedfor mass cell culture, MITI defines bioreactors, moregenerally, as any fermentation vessel. The more-advanced research in bioreactor development,funded by MITI, emphasized the use of micro-organisms or immobilized enzymes for the produc-tion of fine chemicals. Since 1981, six Japanesechemical firms have participated in a government-sponsored joint research effort in this area (15,28).So far, this consortium has conducted research buthas not produced any commercially useful productsor processes (27).

Industrial Enzymes

Enzymes are biochemical catalysts. Of the ap-proximately 18 commercially available in bulk, fiveare most important. These are amylases, whichproduce simple sugars from more complex ones, andare used in the starch industry; bacterial proteases,which digest protein, and are used in detergents;papain, for dehazing beer and tenderizing meat;glucose isomerase, for making high-fructose cornsyrup; and rennin and chymosin, both used incheesemaking (10). A variety of enzymes have beendeveloped for other industrial uses. For example,one bacteria-derived enzyme, cellulase, whichbreaks down cellulose, the molecular base of cotton,has been used to soften new blue jeans as analternative to harsh stone-washing (12).

The major producers of commercial enzymes areNovo-Nordisk (Denmark) which has about 40 per-cent of the market, and Gist Brocades (Belgium)which has about 20 percent of the market, followedby Rohm (Germany), Miles (United States), andHansens (The Netherlands) (10). The current worldmarket for industrial enzymes is over $650 millionper year (27).

Biotechnology can be used to improve the yield ofan enzyme through transfer of the gene encoding theenzyme to a micro-organism capable of producingthe enzyme in larger amounts. Novo-Nordisk re-searchers, for example, identified a fungal, fat-digesting enzyme, lipase, that helps breakdown fatstypically found in human food. To produce it incommercial amounts as a detergent additive, how-ever, they transferred the gene from the fungus inwhich it occurs naturally (in small amounts), to a

fungus that will produce lipase in higher quantities.A detergent containing this enzyme was first intro-duced in Japan (26).

But biotechnology can contribute more to theproduction of industrial enzymes than yield en-hancement. The gene encoding the enzyme can bemodified to encode an enzyme with altered charac-teristics. Research is being conducted to developenzymes that are more stable in harsh solvents, aremore heat resistant, or that react with differentsubstrates. For example, one enzyme used in deter-gents, subtilisin, degrades proteins such as thosefound in blood or food stains. Because the enzymeis sensitive to bleach, a common ingredient in manydetergent formulations, variants have been gener-ated using biotechnology, that are more resistant tobleach than is the original enzyme (2).

Biosensors

Biosensors combine biotechnology with materi-als science and electronics to produce sophisticatedmonitoring devices. This is an area of active researchthroughout the world but especially in Japan (19).

A biosensor consists of two basic parts: one layerthat responds to the presence of a specific chemical(e.g., a layer of enzymes that react with the chemicalto be measured or antibodies that bind specifically toit) and a second layer that consists of a transducerthat translates this specific interaction into electricsignals proportional to the concentration of thechemical in the sample. The electronic part of thebiosensor measures voltage, current, light, sound,temperature, or mass.

Currently, most biosensors are used to detectbiological materials. Much research is directedtoward the development of biosensors for diabetics,that could monitor glucose levels and control aninsulin pump. But biosensors have many otherpotential applications in medicine and industry.Eventually, biosensors will be developed to detectcholesterol, narcotics, or substances associated withearly disease diagnosis. In industry, biosensors willmonitor and control industrial effluents, fermenta-tion processes, and food quality. Biosensors willalso be developed to monitor the presence of toxicsubstances in water supplies and organic solvents inair (1 1).

Most existing biosensors have drawbacks. Theyare bulky, need frequent calibration, and have a short


useful lifespan. R&D is aimed at improvements inthese areas, to eventually develop disposable biosen-sors and, for some applications, sterilizable biosen-sors.

Applications to Chemical Synthesis

Some chemicals are manufactured in a series ofcomplex chemical reactions. Under certain condi-tions it might be practical to replace one or more ofthese reactions (those that are expensive or particu-larly difficult to control) with reactions controlled byenzymes, which are biochemical catalysts. Reac-tions controlled by enzymes have some advantages,e.g., they work at mild temperatures, they can oftenbe used to perform more limited reactions, they canbe used to produce chiral compounds, they arebiodegradable, they require no organic solvents, andthey are very reaction-specific. But these situationsare limited. Enzymes, altered using biotechnologyor not, are unlikely to make a big impact in this areain the new future (13).

Applications to Bulk Chemical Production

Although it is technically feasible to producemany high-volume, low-value-added chemicalsthrough fermentation, these methods are not eco-nomically competitive with established petrochemi-cal processes. This area is also unlikely to receivemuch R&D investment, as the major multinational

Photo credit: U.S. Department of Energy

Scientist mixes a chemical sample.

firms have been decreasing their interest in bulkchemical production (17,20).

GLOBAL RESTRUCTURINGIn the very long run, biotechnology may have a

major impact in shifting the production of fuel andbulk chemicals from reliance on nonrenewableresources, such as oil, to renewable resources, suchas biomass (14). There does not, however, appear tobe much industrial interest in these applications, inpart, because the international price of oil hasremained too low to encourage investment inalternatives and, in part, because the chemicalindustry throughout the world has restructuredduring the last 10 years. As major oil companieshave increased their bulk chemical production,chemical firms have decreased their share of the bulkchemical market and increased their interests in theproduction of specialty chemicals, pharmaceuticals,and agricultural products.

The industry’s restructuring has been a strategicresponse to worldwide pressures, stemming fromfluctuating oil prices, recessions, and increasingcompetition. Historically, the industry’s annualindustrial growth rate averaged two to three timesthe rise in Gross National Product (GNP). During the1970s the industry began to decline worldwide.Industrial growth fell and became even with thegrowth in GNP (7). Chemical production decreasedfor a number of reasons.

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Most importantly, the industry had reachedtechnological maturity. Innovation in productsand manufacturing processes had declined. Inaddition, substitution of synthetics for naturalmaterials had leveled off; for example, by 1970,synthetic detergents had taken 85 percent of themarket for domestic and industrial cleansers(3).Manufacturers faced erratic fluctuations in theprice of oil, which is important, both as a sourceof energy and as a basic feedstock, for theproduction of bulk chemicals. Oil supplied bythe Organization of Petroleum ExportingCountries (OPEC) constituted about 80 percentof the raw materials used by the U.S. chemicalindustry (7).Chemical companies were also facing newcosts, in the form of environmental protectionregulations, particularly in the United States.


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✎

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New competition came from multinational oilcompanies diversifying into the production ofbulk chemicals. These firms built petrochemi-cal plants in Indonesia, Mexico, and the MiddleEast producing chemicals from natural gas andwaste gases derived from oil processing andrefining. Chemical companies in major indus-trial nations often had no sources of rawmaterials as inexpensive as those in oil-richnations (1,3).The chemical industry was particularly hurt bythe worldwide recession in the early 1980s.Demand for petrochemicals slumped, alongwith the profits of the chemical industry.

Chemical companies reduced operations in bulkchemicals, generally retaining production of chemi-cals in which they were market leader or in whichthey had a price advantage based on proprietarytechnology (7). Other operations were sold. Between1981 and 1986, Dow sold more than $1.8 billion inassets and wrote-off most of its oil and gas business.Bulk, low-value chemicals once provided 61 percentof Monsanto’s profits; the proportion shrank to 35percent in a 4-year period. American Cyanamid onceconsisted of four roughly equal segments: medical,agricultural, chemical, and consumer products. By1987, medical and agricultural products made upabout 75 to 80 percent of its business (9). Americanfins, which had dominated bulk chemical produc-tion in Europe during the 1950s and 1960s, graduallywithdrew, selling their assets to local firms (3).

During the same period, chemical firms expandedinto the two sectors, pharmaceuticals and specialtychemicals, which continued to be quite profitableand recession-resistant. Most of this expansion camethrough acquisition. Major producers of agriculturalchemicals have diversified into seed production, andchemical firms have also expanded their interests inadvanced materials and instrumentation. Restructur-ing has been successful, in that industry profitsrecovered from the slump of the early 1980s. Morerecently, however, recession and rising oil pricesonce again have hurt the industry.

There are many examples of chemical industryrestructuring and resulting investment in research-intensive fields. Since 1985, Monsanto, the St.Louis-based chemical firm, has shut down or soldmore than 20 businesses that were largely producersof high-volume, low-value-added chemicals. Theyhave, simultaneously, acquired firms producing

292-870 - 91 - 5 : QL 3

Photo credit: DNAP

FreshWorld, a joint venture between DNA PlantTechnology and DuPont, has been marketing VegiSnax

brand carrot and celery sticks.

specialty products, including pharmaceuticals, foodadditives, and detergent chemicals (22). Similarly,Dow’s managers decided in 1978 to cut back on bulkchemicals and extend the fro’s interests in specialtychemicals and related high-value areas. Dow ac-quired Merrill, a U.S. pharmaceutical firm, in 1981,and in 1984 it acquired an 84-percent interest in asmall Japanese pharmaceutical firm, Funai Phar-maceuticals Co., Ltd. Dow has also expanded itsinterests in household cleaning products, polymers,and advanced ceramics (3). DuPont recently joinedwith Merck to form a new pharmaceutical firm. Ithas also joined with DNA Plant Technology in itsFreshWorld venture, selling branded vegetable pro-duce (3,8). Rohm & Haas has invested in agriculturalbiotechnology firms in the United States and Bel-gium.

Restructuring in Europe and Japan had similarresults. The major European chemical firms haveredistributed their assets and, like American firms,have invested heavily in R&D-intensive products(8). For example, Hoechst, a large German chemicalmanufacturer, purchased Celanese in 1986, acquir-ing its advanced facilities for the production offibers, chemicals, and plastics. Hoechst also placeda major emphasis on the production of pharmaceuti-cals, which represent 17 percent of its world sales(3). Hoechst was also one of the earliest big investorsin biotechnology, providing $70 million to Massa-chusetts General Hospital in 1980 in exchange forthe right to license research results and to send itsown scientists for training. The British firm ICI hasdeveloped its presence in agricultural products


through acquisition of seed companies and byexpanding its existing research in plant biology (6).

In addition to acquiring pharmaceutical andagricultural firms, some American and Europeanchemical companies have invested heavily in inter-nal research in the life sciences. Among these are:Monsanto, DuPont, Lubrizol, Royal Dutch-Shell,ICI, and the French companies, Elf-Aquitaine andRhone-Poulenc (18). The petrochemical company,Lubrizol, acquired the plant biotechnology firm,Agrigenetics, in 1988.

Although outright acquisitions of biotechnologyfirms are rare, other relationships between chemicalcompanies and small biotechnology firms are quitecommon. DuPont, for example, has R&D, market-ing, and licensing agreements with several smallfirms, including American Bionetics, Applied Bio-technology, BioTechnology General Corp., Cellu-lar Products, Cistron, Genofit SA, Molecular Bio-systems, and Synergen. American Cyanamid hasagreements with Biotechnology General Corp.,BioProbe, Cytogen Corp., and Molecular Genetics,Inc. European and Japanese firms have also con-tracted with or invested in many small U.S. firmsspecializing in biotechnology, but they have notfostered the development of similar small firms inEurope or Japan (21,23). A recent study has shownthat chemical companies provided 63 percent of theresearch funds spent by the top 15 plant biotechnol-ogy firms in 1989. The leading investors wereMonsanto (U.S.), Enimont (Italy), DuPont (U.S.),Sandoz (Switzerland), and ICI (U.K.) (5).

Global restructuring of the chemical industry inthe last 10 years has resulted in investment inhigh-value-added products, such as pharmaceuti-cals, agrochemicals, and other specialty chemicals.As firms decrease investments in the production oflow-value-added chemicals, it becomes less likelythat research in biotechnology applications to bio-mass-based production will be funded by the privatesector.

SUMMARYBiotechnology has a limited role in chemical

production. Production of some chemicals nowproduced by fermentation, such as amino acids,could be affected through improvements in micro-organisms or production processes. Similarly, bio-technology can be used to improve yields ofindustrial and food enzymes isolated from micro-

organisms. In addition, biotechnology could be usedto produce enzymes with altered characteristics.Biotechnology can also be applied to the develop-ment of enzymes that might be used to replaceexpensive or difficult steps in chemical synthesis. Inall of these cases, however, the impact of biotechnol-ogy will be incremental and unheralded, resulting inimprovements in productivity. Biotechnology isunlikely to be applied to the production of fuels orbulk chemicals in the foreseeable future, because itis not financially or technically competitive withcurrent chemical methods of production (20).

The chemical industry’s greatest impact on theuse of biotechnology, however, is likely to have littleto do with industrial chemical production per se.Indeed, its greatest impact may be the result of theindustry’s expanding investment in pharmaceuticalsand agriculture. This investment has taken the formof increased in-house research and links with smallerresearch-intensive firms.


2.

3.

4.

5.

6.

7.

8.

9.

10.

Bennett, M.J., and Klein, C.H., “Chemicals: AnJndustry Sheds Its Smokestack Image,” TechnologyReview, vol. 90, No. 5, July 1987, pp. 3745.Bluestone, M., Brand, R., and Kapstein, J., “De-signer Proteins: The Next Boom in Biotech,” Bwi-ness Week, Apr. 13, 1987, pp. 94-95.Bozdogan, K., “The Transformation of the U.S.Chemicals Industry,” The Working Papers of theMIT Commission on Industrial Productivity, 2 VOIS.(Cambridge: MIT Press, 1989).Chemical & Engineering News, “Facts and Figuresfor the Chemical Industry,” Chemical & Engineer-ing News, vol. 68, No. 25, June 1990, pp. 34-83.Chemical Weelq “Chemical Firms Feed Plant Bio-tech,” Chemical Week, vol. 147, No. 21, November1990, p. 93.Dart, E. C., “Exploitation of Biotechnology in aLarge Company,“ Phil. Trans. R. Soc. Lend. B, vol.324, 1989, pp. 599-611.DeYoung, H.G., “Chemical Makers Get in Shape forthe ‘90s,” High Technology, vol. 7, No. 5,1987, pp.28-32.The Economist, “European Chemicals: Shake, H-SqX-Pop,” The Economist, vol. 308, No. 7559,July 1988, pp. 68-69.Gibsou W.D., and Brockinton, L.C., “Americancy~“ : Moving the culture in a Different Direc-tion,” Chem”cuZ Week, vol. 141, No. 12, 1987, pp.40+.Greenshields,R. (ed.),Resources andApplications ofBiotechnology: The New Wme (New York NY:Stockton %SS, 1988).


11.

12.

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Krull, U.J., “Biosensors for chemical Analysis,”Chemtech, vol. 20, 1990, pp. 372-377.Lubove, S., “Enzyme-eaten Jeans,” Forbes, vol.146, No. 10, oct. 29, 1990, pp. 140-141.Marrs, B., DuPont Experimental Station, personalcommunication, May 19900

Newell, N., Synertech Group, Inc., personal commu-nication, December 1990.Nikkei Sangyo Shimbun, “BioreactorDevelopmentsExamined,” Nikkei Sangyo Shimbun, May 2, 1989.Planting, M.A., “Input-Output Accounts of the U.S.Economy, 1981,” Survey of Current Business, vol.67, No. 1,1987, pp. 42-58.Quisenberry, R., director, central research and devel-opment department, DuPont Experimental Station,personal communication, February 1990.Sant’Ana, A., and Sasson, A., Production et Com-mercialisation des Semences: Le Nouveau PaysageIndustrial et les Nouvelles Stratgies d’Entreprises(Paris: I’Association Pour la Diffusion de l’lnforma-tion Technologique, November 1987).Science Watch, “Four Fields Where Japan I_eads andU.S. Lags,” Science Watch, vol. 1, No. 2, 1990, pp.1-2.Shamel, R.E., and Chow, J.J., “Biotech’s PotentialImpact on the Chemical Industry,” Bio/Techno20gy,vol. 6, 1988, pp. 681-682.Sharp, M., “David, Goliath and the BiotechnologyBusiness,” The OECD Observer, vol. 164,1990, pp.22-24.

22.

23.

24.

25.

26.

27.

28.

Storck, W.J., “Streamlined, Diversified MonsantoBecomes More Recession Resistant,” Chemical &Engineering News, vol. 68, No. 2, Jan. 8, 1990, pp.16-17.U.S. Congress, Office of Technology Assessment,New Developments in Biotechnology: U.S. Invest-ment in Biotechnology, OTA-BA-360 (Springfield,VA: National Technical Information Service, July1988).U.S. Department of Commerce, U.S. IndustrialOutZook 1991 (Washington, DC: U.S. GovernmentPrinting Office, 1991).U.S. Department of Commerce, Bureau of theCensus, 1985 Annual Survey ofillanufactures, Statis-tics for Industry Groups and Industries (IncludingSupplemental Lubor, Fuel, and Electric EnergyCosts), M85(AS)-1 (Washington, DC: U.S. Govern-ment Printing Office, 1987).Watts, S., “Engineered Enzyme Washes Whiter thanWhite,” New Scientist vol. 123, No. 1671, July 1,1989, p. 45.Woln~ B., Wolnak & Associates, personal commun-ication, December 1990.Yoshikawa, A., “The Japanese Challenge in Biotech-nology: Industrial Policy,” BRIE Working Paper#29, Berkeley Round Table on the InternationalEconomy, University of California, Berkeley, Sep-tember 1987.

Chapter 8


“If it wasn’t for the high cost of the alternative, this (bioremediation) wouldn’t be worth consideringat all. ’

Perry L. McCartyStanford University, 1987

CONTENTSPage

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .ENVIRONMENTAL USES OF BIOTECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Pollution Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Mining . .Microbial

CASEThe

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Enhanced Oil Recovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

STUDY: BIOREMEDIATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .U.S. Biotreatment Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

International Biotreatment Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Advantages of Bioremediation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Barriers to Commercialization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Prospects for Genetically Engineered Microbes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SUMMARYCHAPTER 8

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .REFERENCES ., . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

129129129129131131131132135136137139140140

BoxesBox Page8-A. The Exxon Valdez Bioremediation Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1348-B. International R&D, Improved Waste Treatment Processes . . . . . . . . . . . . . . . . . . . . . 1358-C. Federal Statutes Relevant to Bioremediation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138

FigureFigure Page8-1. Laboratory Selection and Enhancement of Micro-organisms . . . . . . . . . . . . . . . . . . . 133

TablesTable Page8-1. Challenges for Pollution Control and Toxic Waste Treatment . . . . . . . . . . . . . . . . . 1298-2. Some Potential Environmental Applications of Genetically Engineered

Organisms in Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1308-3. Challenges for Microbiological Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1318-4. Challenges for Microbial Enhanced Oil Recovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132

Chapter 8


INTRODUCTIONMicro-organisms have several potential uses in

the environment, for purposes as diverse as agricul-ture, pollution control, mining, and oil recovery.With the arrival of biotechnology, the potential ofimproving micro-organisms for selected uses hasreceived increased attention and speculation. How-ever, research and product development in theenvironmental sectors are minuscule comparedto more commercially lucrative sectors influ-enced by biotechnology, and international activ-ity to date is limited. This chapter summarizes somepotential environmental uses of biotechnology anduses a case study approach to analyze bioremedia-tion efforts to commercialize biotechnology forhazardous waste management.

ENVIRONMENTAL USES OFBIOTECHNOLOGY

Biotechnology has several potential applications,including pollution control, agriculture, mining, andmicrobial enhanced oil recovery (MEOR). For allfour areas, commercial hurdles exist: technical,research funding and priorities, scale-up, regulatoryapprovals, and economics.

Pollution ControlBiotechnology has several applications for pollu-

tion control, including solid and liquid waste treat-ment, hazardous waste management, slime control(e.g., manufacture of paper), and grease decomposi-tion (e.g., meats and certain foods, and waste watercollection) (13).

Current commercial applications of biotechnol-ogy rely on conventional techniques of geneticmanipulation and microbiology; the use of recombi-nant DNA (rDNA) to develop microbes with specialcapabilities for waste degradation has been limited.As of 1988, 65 companies were involved in someaspect of biotechnology for waste management (15).None is currently using or even testing geneticallyengineered micro-organisms in the environment,although research is going on in the lab (see table8-l).

The Exxon Valdez oil spill in Prince WilliamSound in 1989 focused public attention on the use of

Table 8-l-Challenges for Pollution Controland Toxic Waste Treatment

. The isolation and characterization of enzymes to degrade lowmolecular weight organic compounds.

. Better characterization of metallothioneins (proteins that havea high affinity for heavy metals) from various species.

. The identification of polysaccharides to serve as bioflocculants(materials that thicken sludges for separation treatment).

● The development of enzymes for sludge dewatering.. The development of microbial strains or enzymes that degrade

toxic compounds.. The development of improved polysaccharide hydrolyses to

degrade slimes.. To decrease regulatory uncertainty.SOURCE: Office of Technology Assessment, 1991.

bioremediation for oil-spill cleanups. Of the vari-ous environmental applications possible throughbiotechnology, oil-spill cleanup and hazardouswaste treatment constitute the only major com-mercial activities to date.

Agriculture

Potential environmental applications of geneti-cally engineered organisms in agriculture are varied(see table 8-2). Genes have been introduced into

Photo credit: Environmental Protection Agency

Prince William Sound, Alaska site of the extensivebioremediation experiments carried out by the

Environmental Protection Agency, Exxon,and the State of Alaska.

–129-


Table 8-2—Some Potential Environmental Applications of Genetically EngineeredOrganisms in Agriculture

Micro-organismsBacteria as pesticides:

“Ice-minus” bacteria to reduce frost damage to agricultural crops.Bacteria carrying Bacillus thuringiensis toxin to reduce loss of crops to dozens of insects.Mycorrhizal fungi to increase plant growth rates by improving efficiency of root uptake of nutrients.Nitrogen-fixing bacteria to increase nitrogen available to plants and decrease the need for fertilizers.

Viruses as pesticides:Insect viruses with narrowed host specificity or increased virulence for use against specific

agricultural insect pests, including cabbage looper, pine beauty moth, cutworms, and otherpests.

Vaccines against animal diseases:Swine pseudorabiesSwine rotavirusVesicular stomatitis (cattle)Foot and mouth disease (cattle)Bovine rotavirusRabiesSheep foot rotInfectious bronchitis virus (chickens)Avian erythroblastosisSindbis virus (sheep, cattle, chickens)

PlantsHerbicide resistance or tolerance to:

GlyphostaeAtrazineImidazolinoneBromoxynilPhosphinotricin

Disease resistance to:Crown gall disease (tobacco)Tobacco mosaic virus

Pest resistance:BT-toxin protected crops, including tobacco (principally as research tool) and tomato.Seeds with enhanced antifeedant content to reduce losses to insects while in storage.

Enhanced tolerance to environmental factors, including:SaltDroughtTemperatureHeavy metals

Enhanced marine algae:Algae enhanced to increase production of such compounds as B-carotene and agar or to

enhance ability to sequester heavy metals (e.g., gold and cobalt) from seawater.Forestry;

Trees engineered to be resistant to disease or herbicides, to grow faster, or to be more tolerantto environmental stresses.

AnimalsLivestock and poultry:

Livestock species engineered to enhance weight gain or growth rates, reproductive performance,disease resistance, or coat characteristics.

Livestock animals engineered to function as producers for pharmaceutical drugs.Fish:

Triploid salmon produced by heat shock for use as game fish in lakes and streams.Fish with enhanced growth rates, cold tolerance, or disease resistance for use in aquiculture.Triploid grass carp for use as aquatic weed control agents.


Chapter 8-Environmental Applications . 131

several plant species to confer resistance or toleranceto certain herbicides. Plants have also been betterengineered to resist disease and to confer pestresistance. Most deoxyribonucleic acid (DNA) workon animals focuses on altering livestock, poultry, orfish to improve reproductive performance, weightgain, or disease resistance. Many promising environ-mental applications of engineered micro-organismsare also being developed.

Planned introductions of genetically engineeredorganisms into the environment, often called delib-erate release, was the focus of an earlier Office ofTechnology Assessment (OTA) report (14). Com-mercialization in agriculture is discussed elsewherein this report (see ch. 6).

Mining

Natural micro-organisms have been used formineral leaching and metal concentration processes.No Federal funding directly supports microbiologi-cal mining, however, and commercial activity issparse (see table 8-3).

Limited international research in the field ofbiohydrometallurgy is proceeding. Canada, SouthAfrica, the United Kingdom (U.K.), and the UnitedStates have ongoing programs in biohydro-metallurgy. The Canadian Center for Mineral andEnergy Technology is the leading governmentalresearch agency in this area. One area of focus for theCanadians is uranium bioleaching; one mine is nowbioleaching 90,000 pounds of uranium per month.The biological mitigation of acid mine drainage isanother Canadian project (7). Research is slow,however, because of economic aspects in the min-eral market. As long as metals are plentiful andeasily mined, no economic advantage is realizedby microbiological mining.

Microbial Enhanced Oil Recovery

It has been estimated that more than 300 billionbarrels of U.S. oil cannot be recovered by conven-tional technology but may be accessible throughenhanced oil production. This volume is 2.5 times aslarge as the amount of oil produced by the UnitedStates since 1983. The actual enhanced oil recoveryproduction has been low, no greater than 5 percentof total U.S. production, even though a variety ofDepartment of Energy (DOE) incentives have beenavailable. Other countries, such as Canada, haveprojected that by the year 2010, one-third of its oil

Table 8-3-Challenges for Microbiological Mining

. The development of micro-organisms that could Ieach valuablemetals, such as thorium, silver, mercury, gold, platinum, andcadmium.

. A better understanding of the interactions between the micro-organisms and the mineral substances.

● The development of DNA transfer technologies for use at lowpH.


recovery will utilize enhanced techniques. In recentyears, advanced oil-drilling techniques have en-hanced overall yield, and it is expected that thesetechniques, not micro-organisms, may satisfy oilcompanies’ needs for greater yield in the short term.

Although most of the major oil companies havein-house staff investigating and perfecting MEOR,the methodology’s low cost may appeal more tosmall-field operators, who have already pumped andsold the easy-to-get component of their field (8).MEOR is not predictable; just like the use ofmicro-organisms for hazardous waste remediation,the use of micro-organisms for oil recovery issite-specific. Individual oil deposits have uniquecharacteristics that affect the ability of micro-organisms to mobilize and displace oil. An under-standing of the microbial ecology of petroleumreservoirs is a prerequisite to the development of anyMEOR process, whether microbial or not, since aninappropriate design may accelerate the detrimentalactivities of micro-organisms (e.g., corrosion, reser-voir souring, and microbial degradation of crude oil)(l). Basic environmental biotechnology researchunderway for contaminated soil and groundwaterwill provide much needed information to thoseworking on MEOR (see table 8-4).

CASE STUDY: BIOREMEDIATION

Cost estimates for the cleanup of contaminatedsoils and groundwater and the routine disposal ofindustrial and municipal wastes, range up to $23billion for the United States and $60 billion forWestern European countries (3,6). The price tag forconstruction and maintenance of treatment systemsused for continually produced waste is unknown. Inthe search for a cleaner environment, claims havebeen made that biotechnology holds great promisefor hazardous waste reduction and cleanup as well aspermanent restoration of air, water, and soil.


Table 8-4-Challenges for Microbial EnhancedOil Recovery

. Better biochemical and physiological understanding of micro-organisms already present in oil reservoirs.

. Development of micro-organisms that degrade only the lessuseful components of oil.

● Screening of micro-organisms for production of surfactants andviscosity enhancers and decreases.


Bioremediation is a term that refers to efforts touse biotechnology to cleanup waste. These effortsinvolve the engineering of systems that use biologi-cal processes to degrade, detoxify, or accumulatecontaminants. These systems can use naturallyoccurring or laboratory-altered microbes or both.Current applications rely on conventional tech-niques of genetic manipulation and microbiology;the use of rDNA to develop microbes with specificcapabilities for waste degradation has been limited(see figure 8-l).

Bioremediation can be used at a variety of sitesand in a variety of applications, including waste-stream cleanup, wood treatment-site cleanup, deg-radation of polychlorinated biphenyls (PCBs),groundwater treatment, and cleanup of chemicalmanufacturing wastes. The rationale for usingmicro-organisms to degrade pollutants comes fromexperience with nature. Micro-organisms have avariety of capabilities that can be exploited for wastemanagement and disposal. Many organic com-pounds of biological origin are readily degraded.Industrial chemicals similar in structure to naturalcompounds are also frequently biodegraded (15).

The recent use of naturally occurring microbes inoil-spill cleanup--off the coasts of Alaska andTexas--has focused public attention on commercialuses of bioremediation. This attention is enhancedby frequent claims that biotechnology can be used tomitigate environmental pollution (see box 8-A).

This section describes the U.S. and internationalbiotreatment industries, the advantages and barriersfacing the commercialization of bioremediation, andthe prospects for using genetically engineered orga-nisms for hazardous waste cleanup.

The U.S. Biotreatment Industry

The frost U.S. company to produce microbes forwaste treatment opened in the early 1950s. Over thenext 20 years, the U.S. biotreatment market ex-

panded to a handful of companies specializing in theproduction of microbial “cocktails” for municipalsewage treatment plants and odor control. In 1970,the establishment of the Environmental ProtectionAgency (EPA) and the creation of Federal and Stateenvironmental statutes governing the treatment ofwastes guaranteed a market for the environmentalservices industry, to which bioremediation firmsbelong. Today, the U.S. biotreatment industryincludes 134 firms and has evolved into foursegments: bioremediation services, multidiscipli-nary environmental services, products, and wastegenerators.

Bioremediation Services

Firms specializing in biotreatment services makeup the majority of the U.S. market in this area. Thesefirms are small and are generally founded by ascientist or engineer convinced that biology-basedwaste management can be commercially viable.Some firms began in university laboratories, whileothers spun-off from larger companies. Most ofthese specialized companies have relied on labora-tory analytical services or equipment sales to main-tain income as they develop their bioremediationservices component. Only a few have had venturecapital support. These small companies serve as apool of expertise for larger, full-service engineeringand consulting firms. Contract and subcontractingactivities between companies are common.

Diagnosis and treatment services are provided bybioremediation firms. Diagnosis of a waste problemcan include analyzing the site or waste treatmentfacility for indigenous microbial activity, adequatenutrients, suitable moisture, and appropriate oxygen.Treatment may involve enhancement of indigenousmicro-organisms by nutrient addition, batching pre-conditioned organisms found at the site, or usingselected off-the-shelf microbes.

Multidisciplinary Environmental Services

In 1988, few multidisciplinary environmentalcompanies offered bioremediation expertise. Biore-mediation was typically used by firms competing inthe wastewater treatment sector but not by firmsfocusing on hazardous waste markets. Growingoptimism that bioremediation can be used to tacklehazardous waste problems has led to increasedinvolvement by multidisciplinary firms incorpo-rating bioremediation expertise. Growth in thissector has generally occurred in one of three ways:

Chapter 8--Environmental Applications ● 133

Figure 8-l—Laboratory Selection and Enhancement of Micro-organisms

h I I

Collectionfrom nature

*(Mixedculture)

Purecultures Drying process

Ulll-Long-term

Reconstitution

storagevacuum

vials

o utrients

Isolation

*

Growth andselection

Isolation

(Pure cultures)

s“&./Nu’rients

(Pure cultures) Growth andIsolated adapted mutants selection

*Scale up

Shake flasks

l==?Dry

blendstore

Micro-organisms indigenous to various environmental sites can be isolated and screened for degradative capabilities. This figure showshow naturally occurring organisms can be selected in the laboratory and, if desired, subjected to mutagenizing agents such as radiation.This imprecise method can sometimes produce new strains of organisms with enhanced capabilities.SOURCE: F’Ol@XAC ckxp.

1.

2.

3.

consolidation of large environmental firms ects and to handle subcontracts with bioreme-with smaller biotreatment firms (e.g., the- diation specialty firms.merger of Theme Environmental with Biota); Productscreation of biotreatment groups in larger envi-ronmental service firms; or

hiring of a limited number of bioremediationprofessionals to recommend appropriate proj-

Approximately one dozen companies manufac-ture organisms that are sold as biological treatmentproducts. Most of these products consist of pre-selected mixtures of naturally occurring micro-


Box 8-A—The Exxon Valdez Bioremediation Project

On March 23,1989, the Exxon Valdez tanker, freshly loaded with 1.2 million barrels of crude oil, left Alaska’ssouth coast headed for California Twenty-five miles out, the ship ran into a reef at. Bligh Island in Prince WilliamSound. The accident resulted in the largest oil spill in U.S. history and the first major spill to foul the waters offAlaska’s coast. Patches of oil and water-in-oil emulsion spread over 3,000 square miles and onto unestimated 1,000miles of shoreline.

Environmental factors have been substantial obstacles in the Alaska cleanup. Alaskan waters are extremelycold and there had been little experience with oil spills in subarctic conditions. Only a half-dozen or so tanker spillshad been studied, and most occurred in temperate waters, The surface water temperature in Prince William Sound

ximately 3 degree Celsius in mid-April. At that temperature, degradation by micro-organisms, whichis approultimately removes much spilled oil, takes twice as long as it does at 10 degree Celsius.

The Valdez spill prompted a monumental cleanup effort and launched significant scientific research efforts.In addition the traditional methods (i.e., containment, skimming, and burning) of oil cleanup, the EPA Office ofResearch and Development initiated a bioremediation study to determine the feasibility of using nutrients toenhance micro-organisms’ degradation of oil on the shorelines of Prince William Sound A major portion of thisventure was funded by the Exxon Corp. In 1989, Exxon contributed approximately $3 million, and EPA contributedapproximately $1.6 million.

The major portion of the Alaskan oil spill bioremediation project involved a field test to determine if addingfertilizer to contaminated beaches would effectively stimulate native bacteria to breakdown the oil. The EPAselected two sites—Passage Cove and Snug Harbor-based on type of shoreline, area, size, and uniformity of oilconlamination. It was determined that two types of fertilizer would be needed to release nitrogen and phosphorousnutrients over an extended period of time. One type was a solid, slow-releasing briquette fertilizer that releasednutrients slowly from point sources distributed over the beach through tidal action. The second type, a liquidoleophilic fertilizer, dissolved into the oil covering rock and gravel surfaces.

Before the fertilizer was applied, each beach was hosed down to disperse the oil across the beach. Researcherspacked the fertilizer briquettes into biodegradable sacks and tied the sacks to pipes anchored in the test site beach,Over the course of a month, wave and tidal action flushed the slowly dissolving fertilizer back-and-forth across theshoreline.

Both EPA and Exxon officials acknowledged that the use of fertilizers could pose a risk to some sea life. Todetermine the potential toxicity of the fertilizers to native organisms, a wide range of species were tested. The resultsdemonstrated that certain components of the oleophilic fertilizer were mildly toxic when first applied to the mostsensitive marine species. Tidal action, however, quickly diluted these toxic components to nontoxic levels.

Approximately two weeks after the fertilizer was applied to the test plots in Snug Harbor, scientists observedreductions in the amount of oil on rock surfaces. All other plots, however, appeared as oiled as they had been at thebeginning of the field study. Toward the end of the summer season, the entire test area became steadily cleaner. Incontrast, an untreated area of Snug Harbor remained considerably contaminated.

By the end of September 1989, Exxon and EPA had treated 70 million miles of shoreline in the largestbioremediation project ever conducted. The initial findings from the study indicate that using nutrients to enhancemicrobial degradation are effective and environmentally safe.

Somm: mm of ‘Mchnology Assessmell~ 1991.

organisms advertised as additives to improve per- reliable data exist regarding the volume of sales offormance. Product uses include: decreasing pipes,degrading food processing facility wastes, odorcontrol, and remediating oil spills.

Microbial cocktails, the commercial name forcombinations of microbes packaged for sale forspecific uses, are available from companies in theUnited States, Japan, and Europe. Because informa-tion about sales of such products is proprietary, no

these products.

Waste Generators

Significant fourth players are generators of haz-ardous wastes. In addition to employing biologicaltreatment staffs, some chemical and energy compa-nies are supporting in-house research to perfectbiodegradation of their specific production facili-ties’ wastes. Such research may result in biology-

Chapter 8---Environmental Applications ● 135

based treatment methods and products that can bemarketed directly or licensed to bioremediationvendors.

International Biotreatment Industry

Despite the limited size of the bioremediationindustry in the United States, U.S. commercialactivity far exceeds that of other nations. Fourfactors account for the United States’ lead in thisarea:

1.

2.

3.

4.

The size and scope of U.S. environmental lawexceeds that of other nations.The majority of research has been conducted inthe United States.The size of the biotreatment industrial sector inthe United States, albeit small, exceeds that ofother nations.Public acceptance of bioremediation in theUnited States has been spurred by recent,well-publicized uses of bioremediation for oilspill cleanup.

Research and Industrial Development

The existence of environmental laws and regula-tions are prerequisites to the formation of a wastetreatment market. Although several nations haveenacted environmental regulatory programs, en-forcement of regulations and funding of hazardouswaste infrastructures are often not sufficient. Abarrier to the international use of bioremediation isthe view, held by many, that pollution control costsindustry money and makes industry, in its own view,less competitive in world markets. To some, invest-ment in and operation of effluent treatment facilitiesis money down the drain (5).

Several Organization of Economic Co-operationand Development (OECD) countries have beenpursuing biotechnology research and develop-ment (R&D) in improved waste treatment, nota-bly The Netherlands, France, Japan, and Ger-many (see box 8-B). Still, research efforts aregenerally minimal in many countries, and thediffusion of research results into commercialapplications is negligible when compared to othersectors affected by biotechnology. This is due tolax regulations that encourage the payment of finesby industry for waste emission rather than the use ofsystems to reduce or cleanup pollution (1 1). In theUnited States, by comparison, several Federal agen-cies support biological research related to waste

Box 84?—international R&D, ImprovedWaste Treatment Processes

The Netherlands. Companies, such as Gist-Briocades use and are attempting to market ad-vanced anaerobic waste water cleanup processes.The Dutch Government supports research in soilbiodegradation and the development of systems toconvert farm waste in small fermenters into market-able fertilizers for export to developing countries.

United Kingdom. Research and Developmentefforts are being undertaken by several smallcompanies and regional water authorities. The useof waste treatment processes by industry is min-imal, due to a less stringent regulatory climate andweak incentives for efficient industrial cleanup.

Japan. A 5-year, V5 billion project on wastewater treatment through biotechnological processeswas launched in the 1980s by the Ministry ofConstruction.

Germany. The Ministry for Research and Tech-nology plans to introduce a program supporting riskassessment research.

SOURCE: organization for Economic Co-operation and Dovol-opment, Biotechnology and the Changing Role ofGovernment, 1988.

management. In 1987, eight Federal agencies spent$11 million on such research (15).

In order to provide equal access to waste treatmentfor all industrial sectors, The Netherlands, Belgium,Denmark, and Germany have centralized wastetreatment facilities. Those handling recurrent, solidhazardous waste do not appear to utilize biologicaltreatment at this time; however, these countries havewell-maintained wastewater treatment systems thatrely on micro-organisms. The primary bioremedia-tion focus in these countries is the use of biostimula-tion to encourage indigenous organisms to degradewastes in contaminated soils and groundwater. Incontrast to publicly run treatment and disposalfacilities found in northern Europe, Italy prefersprivate-sector waste management and cleanup serv-ices. The Italian tourist industry has created a marketfor environmental restoration. Work is underway ata popular beach to biologically disperse algae.France has diversified privately run waste manage-ment and remediation services, and French firmsdominate the private-sector market.

Although stronger enforcement could generatemore demand for waste treatment, public expecta-


credit: Kevin O’Connor

This park in Torrance, California, was once the site of an oil refinery. After several years of bioremediation,a community center, several ballfields, and a playground were constructed.

tions in both Pacific Rim countries and the EuropeanCommunity (EC) are forcing some governments toinventory contamination problems, actively partici-pate in cleaning up existing pollution, and monitor-the effectiveness of waste treatment for newlycreated wastes.

The United States, in contrast, has an elaborateenvironmental protection program already in place.Unlike many other countries, the enforcement of thatprogram is generating a market for environmentalcleanup. Cleanup goals and the size of the prob-lem-the universe of waste management facilities,leaking underground storage tanks, and abandonedsites with contaminated soils and groundwater--arebetter defined for the United States than for othercountries surveyed.

Advantages of Bioremediation

Depending on the situation and type of site,bioremediation offers several advantages over moreconventional waste treatment technologies, such asincineration or chemical fixation, these include:

. Minimal disruption. Bioremediation gener-ally involves only minimal, if any, physicaldisruption of a site. This can be very importanton beaches where other available cleanup

technologies (e.g., high- and low-pressurespraying, steam cleaning, manual scrubbing,and raking of congealed oil) may cause addi-tional damage to beach-dwelling biota (2).Permanency. Micro-organisms can convert aselected number of wastes into carbon dioxide,water, and cell mass. For these completelybiodegradable wastes, no toxic residues remainto manage. For other wastes that are notcompletely mineralized by biological actions,biodegradation can transform hazardous chem-icals into stable, more benign, and less-toxiccompounds.Lower costs. The capital costs of biology-based systems are relatively low, compared toother treatment technologies. The microbesused are generally inexpensive, and once ap-plied, they self-replicate. In some cases, in situbioremediation may be utilized without exca-vation or demolition of buildings. For thesereasons, the costs of bioremediation should belower than those systems with more expensiveinput requirements.Public acceptability. Bioremediation offersthe public a treatment process that relies onnatural degradation, transformingg hazardouswastes into familiar compounds, such as carbon

Chapter 8--Environmental Applications . 137

dioxide and water. The biotreatment systemdesign, itself, is nonthreatening. For example,some bioremediation systems may only requirethe removal of contaminated soils and ground-water to a tank, which looks like the usualsewage treatment plant, or a vat as used to makebeer or wine. In situ bioremediation does noteven require moving toxic wastes or siting atreatment unit. Such in-place treatment mini-mizes the public and environmental risks cre-ated by the handling of waste.

Barriers to Commercialization

Despite the advantages of bioremediation—research, technical, and regulatory barriers hinderthe use of biotechnology for hazardous wastecleanup.

Research Barriers

Much needs to be learned regarding the scientificunderpinning s of bioremediation. Waste takes onmany forms, occurs in many sites, and is subject tovarying environmental conditions. To date, promis-ing targets for use of bioremediation include oilspills, point sources of industrial effluents with highconcentrations of specific chemicals, spills of partic-ular chemicals in contained areas, and dump sitesbeing prepared for encapsulation or excavation(9,10).

To assess the feasibility of biotreatment, severalareas of science and engineering must be under-stood.

●

●

●

Microbial physiology, biochemistry, and ge-netics, to understand the metabolic processesleading to detoxification and the geneticscontrolling the enzyme functions involved.Microbial ecology, to appreciate the structureand fiction of indigenous or inoculated micro-bial communities and the microenvironmentin which treatment must be effective.Field-site engineering, to implement the de-sired biodegradation scheme, to maintain opti-mal growth conditions, and to combine physi-cal and chemical methods (10).

The application of biotechnology to wastedisposal is still largely experimental, and invest-ment is small compared with efforts in pharma-ceuticals and agriculture. Two significant percep-tual problems have been voiced repeatedly to OTA:1) because pharmaceuticals and agriculture are seen

as being areas of greater promise (e.g., ability toproduce high-value-added products), those areasattract more dollars and more highly trained person-nel than programs involved in research targetedtoward the cleanup of waste; and 2) fears ofregulatory barriers, especially for the developmentof genetically engineered organisms for use in theenvironment, discourage researchers from investi-gating genetic engineering as a way to discoverpotentially beneficial organisms.

The EPA is the lead agency in conducting R&Din waste disposal. However, EPA’s current invest-ment in R&D for biotechnology--$8.3 million infiscal year 1990-is small compared to other Federalagencies. Additionally, there has existed a wide-spread feeling that EPA is biased against biologicalapproaches to waste disposal and is unwilling tosupport approaches involving biotechnology (15).Some researchers, however, say this bias is chang-ing, pointing to EPA involvement in the Valdez oilspill cleanup and strong statements by EPA officialstouting the use of bioremediation.

Another significant research problem is the pau-city of published scientific literature on the results ofbioremediation. Much of the activity in this area isconducted by private businesses engaged in contrac-tor-client relationships. As such, the results of manysmall-scale uses of bioremediation constitute pri-vately held business information or trade secretsand, thus, remain hidden from competitors andresearchers alike. As one company executive noted,some clients want to have hazardous waste removedfrom their property, but they do not want theirneighbors to know about the scope of the problem orthe nature of treatment undertaken (4).

Technical Barriers

Several technical problems hinder the broaderapplication of biology to waste treatment andcleanup:

●

●

Although bioremediation works faster thannatural biodegradation, it is generally slower toimplement than “burn or bury” technologiesthat are the most likely alternatives to biotreat-ment.Bioremediation must be specifically tailored toeach polluted site. Each waste site presentsunique facts, requiring individualized atten-tion. Not enough is known about bioremedia-


Box 8-C—Federal Statutes Relevant to Bioremediation

Several Federal environmental laws are relevant to biology-based waste treatment, including:Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). The 1986

amendments to CERCLA (Public Law 99-499) state" [t]he President shall select a remedial action that is protectiveof human health and the environment, that is cost effective, and that utilizes permanent solutions and alternativetreatment technologies. . . to the maximum extent practicable.’

Toxic Substances Control Act (TSCA). The TSCA was enacted by Congress in 1976 (Public Law 94-469).In contrast to other environmental statutes specifically regulating the quality of air, water, or other natural resources,TSCA gave EPA broad authority to regulate “chemical substances and mixtures.” Under TSCA, the manufacturerof a new chemical must submit a premanufacture notice to EPA that describes test data referring to identity, use,amount, disposal, and so forth. EPA then has 90 days to consider the notice and decide whether to approveproduction. Under the Coordinated Framework for Regulation of Biotechnology, EPA notified the public thatbiotechnology processes and products not covered or regulated by other Federal agencies would be included underthe jurisdiction of TSCA.

Clean Water Act (CWA). CWA’S pretreatment program’s July 24, 1990, final rule states”. . . the IndustrialUser shall certify that it has a program in place to reduce the volume and toxicity of hazardous wastes generatedto the degree it has determined to be economically practical.”

Resource Conservation and Recovery Act (RCRA). The Hazardous and Solid Waste Amendments toRCRA, enacted by Congress in 1984 (Public Law 98-616), emphasize permanent treatment technologies. Congressdeclared “it to be the national policy of the United States that, wherever feasible, the generation of hazardous wasteis to be reduced or eliminated as expeditiously as possible. Waste that is nevertheless generated should be treated,stored or disposed of so as to minimize the present and future threat to human health and the environment.”

Superfund Amendments and Reauthorization Act (SARA). SARA directs that “[remedial actions inwhich treatment which permanently and significantly reduces the volume, toxicity, pollutants, and contaminantsis a principal element, are to be preferred over remedial actions not involving such treatment. ”

SOURCE: Office of lkcbnology Assessmen4 1991.

tion to be able to predict results in specific based approaches offer destruction of selected haz-situations with a high degree of accuracy. ardous wastes without toxic residues—a result

. Successful mineralization of pollutants has certainly in accordance with the intent of these laws.been limited to relatively easy-to-degrade com-pounds (12). However, several regulatory barriers hinder the

● There are no official scientific measures for commercialization of bioremediation:

evaluating the success or failure of bioremedia- ●

tion. The only well-known successful use ofbioremediation has been for the cleanup of oilspills.

Regulatory Barriers

Regulations both drive and constrain the use ofbioremediation. Regulation creates the bioremedia- ●

tion market by dictating what must be cleaned up,how clean it must be, and which cleanup methodsmay be used. A number of Federal statutes andrelevant regulations control waste disposal activities(see box 8-C). The passage of Federal statutes has .increased pressure on waste generators to reducewaste and to find permanent solutions to waste thatis generated. Although these laws can apply to allpermanent waste treatment methodologies, biology-

Cleanup standards. How clean is clean? Theachievable endpoint for biodegradation may belimited for specific pollutants. Biology-basedremediations maybe able to reach health-basedstandards but not lower residue levels resultingfrom thermal treatment technologies, such asincineration.Standards are still under development. Treat-ability studies used by regulatory agencies todetermine the efficacy of a waste treatmentregime have not been standardized for biologi-cal treatment.Little biotreatment permit experience. Thepermitting of biotreatment activities todayrelies on individuals’ best professional judg-ment. Based on the small number of permitsissued to date, experience in the approval of

Chapter Environmental Applications . 139

%oto credit: Kevin O’Connor

Through bioremediation, former industrial sites such as this

●

may be used for other purposes.

treatment protocols using naturally occurring

and recombinant micro-organisms is limited.Land disposal regulations limit reactor de-sign. Recent land disposal regulations promul-gated by EPA’s Office of Solid Waste prohibitthe recirculation of contaminated groundwaterthrough an in situ bioreactor arrangement, acommon design for bioremediation of contami-nated soils and groundwater.

Economic Barriers

Unlike the pharmaceutical industry, bioreme-diation does not result in the production ofhigh-value-added products. Thus, venture capi-tal has been slow to invest in the technology, andcommercial activity in research and productdevelopment has lagged far behind other indus-trial sectors.

The majority of the bioremediation firms aresmall and lack sufficient capital to finance sophisti-cated research and product development programs.In addition, bioremediation lacks a strong, publiclyfunded research base. Federal research dollars havebeen scarce to support discovery or improvements ofbiology-based waste treatment.

Because basic research is limited and mostproducts and processes are developed by smallentrepreneurs or companies, bioremediation relieson trade secrets, not patents, for intellectual propertyprotection. Biological treatment currently relies onnaturally occurring organisms that cannot be pat-ented and can be reproduced by one’s competitors.

This lack of intellectual property protection subjectsthe industry to constant competitor stress. Further,many clients of bioremediation companies do notwant public attention focused on hazardous wastecleanups. This results in proprietary business rela-tionships that do not foster the sharing of scientificand business practices.

Experienced personnel are in short supply.University programs are now being establishing forbioremediation specialists, but continuing educationprograms are not common. Marketing of productsand services has, historically, been done by individ-ual companies. Few firms exist that act as brokers forthe technology. Such an arrangement is personnel-intensive.

The key marketing promise of the biotreatmentindustry is less cost through remediation. No aca-demic or regulatory agency has published a studyanalyzing the costs of biological treatment com-pared with other technologies, such as incineration.The only information currently available is found inindividual companies’ marketing materials.

Prospects for Genetically EngineeredMicrobes

Some basic research is underway on the use ofgenetically engineered microbes for waste cleanup.The first out-of-laboratory applications of geneti-cally engineered microbes for waste cleanup will bedone in bioreactors, because conditions for micro-bial survival and monitoring are easier to control ina closed system then in an open field. Today’sbioremediation sector continues to rely on naturallyoccurring micro-organisms. Due to scientific, eco-nomic, regulatory, and public perception reasons,the imminent use of bioengineered micro-organismsfor environmental cleanup is not likely to happen inthe near future. More needs to be learned aboutnaturally occurring microbes-much less those thatare genetically engineered. The lack of a strongresearch infrastructure, the predominance of smallcompanies, the lack of data sharing, and the exis-tence of regulatory hurdles all serve as dominantbarriers to commercial use of genetically engineeredorganisms.

The potential savings from the use of biology-based treatments, compared to conventional inciner-ation, and the interest of generators to limit theirlong-term liability for wastes are positive reasons forthe development and use of genetically engineered


microbes. In the United States and the EuropeanCommunity, government, private, and academicinstitutions are increasingly confident that environ-mental biotechnology offers a more ecologicallysound approach to waste remediation. This may playthe most important role in moving geneticallyengineered microbes into the field.

The majority of current bioremediation firms aresmall and lack sufficient capital to finance sophisti-cated research and product development programs.This is a problem when using naturally occurringorganisms, but a crisis for the development ofbioengineered products and related services. Untilbarriers to development are reduced, widespreadcommercial use of genetically engineered organismsfor environmental waste reduction is unlikely.

SUMMARYBiotechnology has several potential environ-

mental applications, these include: pollution con-trol, agriculture, mining, and microbial enhanced oilrecovery. Bioremediation--efforts to use biotech-nology for waste cleanup-has received publicattention recently because of the use of naturallyoccurring micro-organisms in oil-spill cleanups.Bioremediation can be used at a variety of sites andin a variety of applications, among these are waste-stream cleanup, wood treatment-site cleanup, PCBdegradation, groundwater treatment, and chemicalcleanup of manufacturing wastes. The rationale forusing micro-organisms to degrade pollutants stemsfrom experience with nature. Micro-organisms havea variety of capabilities that can be exploited forwaste management and disposal.

The use of bioremediation in the United States isincreasing. Today, the U.S. biotreatment industryincludes more than 130 firms and has evolved intofour segments: bioremediation services, multidisci-plinary environmental services, products, and wastegenerators. The commercial bioremediation sectorin the United States, though small, far exceedsactivity in other nations. Four factors account for theUnited States’ lead: the size and scope of U.S.environmental law, more advanced research, thenumber of companies, and public acceptance,spurred by recent uses of bioremediation for oil-spillcleanup.

Although bioremediation offers several advan-tages over conventional waste treatment technolo-gies, several factors hinder widespread use of

biotechnology for waste cleanup. Relatively little isknown about the scientific effects of micro-organisms in various ecosystems. Research data arenot disseminated as well as with research affectingother industrial sectors. This is caused by limitedFederal funding of basic research and the proprietarynature of the business relationships under whichbioremediation is usually used. Regulations providea market for bioremediation by dictating what mustbe cleaned up, how clean it must be, and whichcleanup methods may be used; but regulations alsohinder commercial development due to their sheervolume and the lack of standards for biologicalwaste treatment.

Bioremediation, unlike the pharmaceutical andagricultural industries, does not result in the produc-tion of high-value-added products. Thus, venturecapital has been slow to invest in the technology, andlittle incentive exists for product development. Themajority of bioremediation firms are small and lacksufficient capital to finance sophisticated researchand product development programs. Bioremediationprimarily depends on trade secrets, not patents, forintellectual property protection.

Although some research is being conducted on theuse of genetically engineered organisms for use inbioremediation, today’s bioremediation sector relieson naturally occurring micro-organisms. Scientific,economic, regulatory, and public perception limita-tions that were viewed as barriers to the develop-ment of bioremediation a decade ago still exist.Thus, the commercial use of bioengineered micro-organisms for environmental cleanup is not likely inthe near future


2.

3.

4.

5.

Ehrlich, H.L., and Brierly, C. (eds.), EnvironmentalBiotechnology: Microbial Mineral Recovery (NewYork NY: McGraw Hill, 1990).Foster, M. S., et al., “To Clean or Not To Clean: TheRationale, Methods, and Consequences of RemovingOil From Temperate Shores,” The Northwest Envi-ronmental Journal, vol. 6, 1990, pp. 105-120.Granger, T., EBASCO Environmental, personalcommunication, August 1990.Grubbs, J., president, Solmar Corp., personal com-munication, October 1990.Harrier, G., “The Impact of Government hgislationon Industrial Effluent Treatment,’ Conservation andRecycling, vol 8, Nos. 1/2, 1985, p. 27.

Chapter 8--Environmental Applications . 141

6.

7.

8.

9.

10.

11.

Henley, M., “Europe Poses Multi-billion Environ-mental Market,” WasteTech News, vol. 2, No. 24,Aug. 13, 1990.McCready, D., director, Canadian Center for MineralEnergy Technology, personal communication, Sep-tember 1990.McInerney, M. J., University of Oklahoma, personalcommunication, September 1990.Omenn, G.S. (cd.), Environmental Biotechnology:Reducing Risks from Environmental ChemicalsThrough Biotechnology (New York NY: PlenumPress, 1988).Omenn, G. S., professor and dean, School of PublicHealth & Community Medicine, University of Wash-ington, “Environmental Biotechnology: Biotechnol-ogy Solutions for Hazardous chemical Wastes andOil Spill Clean-up,” presentation at BiotechnologyForum on Oil Spills in Marine Environments, Cincin-nati, OH, September 1990.Organization for Economic Co-operation and Devel-opment, Biotechnology and the Changing Role of

12.

13.

14.

15.

Government (Paris, France: OECD PublicationsOffice, 1988).Rochkind, M.L., et al., Microbial Decomposition ofChlorinutedAromatic Compounds, EPA-600 (Wash-ington, DC: EEA Publications Office, February1986) p. 90.U.S. Congress, Office of Twhnology Assessment,Commercial Biotechnology: An International Analy-sis (Elmsford, NY: Pergamon Press, Inc., January1984).U.S. Congress, Office of T~hnology Assessment,New Developments in Biotechnology: Field-TestingEngineered Organisms: Genetic and EcologicalIssues, OTA-BA-350 (Springfield, VA: NationalT~hnical Information Service, May 1988).U.S. Congress, OffIce of Technology Assessment,New Developments in Biotechnology: U.S. Invest-ment<pecial Report OTA-BA-360 (Spring fiel~VA: National Technical Information Service, July1988).

Part II: Industrial Policy

Chapter 9

Introduction: Industrial Policy

“The USA has become the technology colony for the rest of the world. We supply the raw materials(technology), they add the value and sell to us and keep the profits! We have to change that systemif we want to be competitive.”

Jerry Caulderpresident, Mycogen, February 1991.

“In some respects, American competitiveness and Yankee ingenuity are stronger than ever. True,many of the nation’s institutions have come up for a reappraisal. But what institution shouldn’tcome up for appraisal every 50 years or so?”

David WarshColumnist, Boston Globe, June 1991.

“The most potent influences of government in advanced nations are often slow and indirect.”Michael E Porter

The Competitive Advantage of Nations

CONTENTSPage

INTR0DUCTION TO PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147CHAPTER 9 REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147

Chapter 9

Introduction: Industrial Policy

INTRODUCTION TO PART IIAlthough the concept of industrial policy has been

around in the United States since the New Deal ofthe 1930s, it has more recently returned to thenational agenda as concern has risen about U.S.competitive status in a number of industries. Indus-trial policy, in broad terms, is the deliberateattempt by a government to influence the leveland composition of a nation’s industrial output.These actions can include improving the industrialinfrastructure, training workers, shifting resources toactivities that will use them more efficiently, ormaintaining resources in existing activities deemedimportant for national or economic security. Indus-trial policies can be implemented through domesticmeasures such as: allocation of Federal funds,subsidies, tax incentives, regulation of industry, andprotection of intellectual property; or policies can beaffected through trade actions, such as tariffs andquantitative import restrictions (l). Government canalso play a central role in productivity through itseconomic policies-the manner in which it deploysthe Nation’s resources (labor and capital) and assistsindustry in adjustment to change (3).

The science and technology policy of the U.S.Government has traditionally been concerned withbasic science, health, energy, agriculture, and de-fense. It has been described as big science deployedto meet big problems (4) and as mission-orientedrather than diffusion-oriented (2). The U.S. Govern-ment, in contrast to other governments, rarely takesdeliberate actions to improve the use of technologyby U.S. manufacturers. Other government actionsintended to improve industrial performance workmore indirectly-tax and trade policies and intellec-tual property protection are examples of indirectactions. Industrial policies in technology-intensiveindustries, such as biotechnology, rarely fit easilyinto existing frameworks.

Industrial policies in the United States are com-plex, fragmented, continually evolving, and rarelytargeted comprehensively at a specific industry.There is no industrial policy pertaining to biotech-nology per se, but rather a series of policies

formulated by various agencies to encouragegrowth, innovation, and capital formation in allhigh-technology industries. And, just as there is nobiotechnology policy in the United States, biotech-nology companies tend not to behave as an industry,but rather as agrichemical, diagnostic, or humantherapeutic fins. Biotechnology companies havebeen built on a unique system of financing, but theyconfront the same regulatory, intellectual property,and trade policies faced by other U.S. firms. Theremay be a need for the Federal bureaucracy tofine-tune its policies as biotechnology movesthrough the system with its unique challenges, but todate (with the possible exception of the Federalresearch system), Federal agencies have not seen theneed to revolutionize their practices for biotechnol-ogy.

Part I of this report addressed commercial activityin biotechnology, recognizing that biotechnologyhas become an important tool in several traditionalU.S. industrial sectors.

Part II addresses the actions, both direct andindirect, taken by the United States and othergovernments that have influenced the commerciali-zation and integration of biotechnology. Specifi-cally, the importance of developing a science andtechnology infrastructure, regulatory practices, in-tellectual property protection, and trade issues. Taxlaw, which is an expression of industrial policy, isdiscussed in Part I, chapter 4 because of theimportance of tax laws on financial practices inbiotechnology.

1.

2.

3.

4.

CHAPTER 9 REFERENCESBoonekamp, C., “Industrial Policies of IndustrialCountries,” Finance and Development, March 1989.Ergas, H., “Does Technology Matter?” Technologyand Global Industry: Companies and Nations in theWorld Economy, B.R. Guile and H. Brooks (eds.)(Washington, DC: National Academy Press, 1987).Porter, M., The Competitive Advantage of Nations(New York, NY: The Free Press, 1990).Weinberg, A.M., Reflections on Big Science (Oxford:Pergamon Press, 1967).

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Chapter 10

Science and Technology Policies

“It is my personal conclusion that no plans, either present or contemplated, will prevent our gradualloss of leadership in biotechnology unless they provide for extensive and fundamental changes inthe conduct of government supported research in the United States.”

Norman G. Andersonhearing before the Technology Policy Task Force, July 1987.

“A rosy glow has long suffused our vision of biotechnology in Japan: government support, publicacceptance, highly motivated researchers, the happy reports of American research executives withjoint development agreements—it sounded ideal, a model and a challenge. So it was a shock todiscover. . . that the country may not be the land of tPA milk and recombinant honey.”

Douglas McCormickBio/Technology, July 1989

“Although the EC has the human, scientific and material resources to compete globally in thebiotechnological race, it has failed so far to match strides with its main rivals-the United Statesand Japan. ”

The European Study Service, 1991

CONTENTSPage

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151NATIONAL POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152

Japan: A Targeted Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153Europe: Moving Toward a Regional Strategy? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158Regional Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161The United States: A Diffuse Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161

NATIONAL POLICIES IN A GLOBAL ENVIRONMENT . . . . ● . . . . ● . . . . . . . . . . . . . . . 166Domestic University-Foreign Industry Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168CHAPTER 10 REFERENCES ... ..............................*.@***.*.*+.*.""*+" 168

BoxesBox10-A. The Asian Tigers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10-B. Japanese Industrial Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . + ., + . . + . . . . . . . . . + . . ● w10-C. European Biotechnology Programs . . . . . . . . . . . . . . . . . . . . . . . . . r... . . . . . . . . . . . .10-D. United States Support of R&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Chapter 10

Science and Technology Policies

INTRODUCTIONFor most governments, including the United

States, research spending serves diverse goals.Enhancing national defense, improving publichealth, training new scientists, and ensuring anadequate food supply are four common examples.Publicly funded research in these areas is expectedto support economic growth and the strength ofdomestic industry, in great part through the creationof a research and technology infrastructure. Thisinfrastructure includes training young scientists andtechnicians through support of basic research. Somegovernments put less emphasis on goal-or mission-oriented research and more on encouraging a broadcapacity for industry to adjust to technologicalchange through education, development of technicalstandards, and decentralized research activities (10).Governments generally fund basic research, forwhich there is little incentive for funding in theprivate sector or that is beyond the financial capacityof industry. The results of such research are gener-ally published openly and made available toeveryone, regardless of nationality. Sometimes,however, governments fund research closer to themarket, occasionally with the express purpose ofaiding or encouraging investment by domesticindustries in specific technologies.

National policies that bear on biotechnologyresearch and training vary around the world indesign and execution, for a variety of reasons. Theseinclude the state of the existing science base,structure and orientation of industry, mix of re-sources and markets, role of public perceptions,regulations, and relationships among government,industry, and universities.

Many countries without a previous strong founda-tion in the biological and biochemical sciences, forexample, are building research infrastructures. In-dustrializing Pacific Rim countries are encouragingresearch and commercial activities appropriate tolocal and regional markets, such as hepatitis vaccinedevelopment and production. Countries without astrong tradition of university-industry cooperationhave established programs to reorient the researchcommunity and encourage university-industry ties.Australia, lacking a large domestic market, encour-

ages its firms to establish commercial ties anddevelop markets abroad. Denmark, with a smalldomestic market and research base, actively pro-motes international research efforts through a num-ber of successful, international companies. Coopera-tive research programs between and among Euro-pean countries are growing in size and, perhaps, inimportance; however, their significance lies less inimmediate results than in the breakdown of social,cultural, and political barriers to cooperation and inthe creation of translational research networks,which are distinct European concerns.

A challenge to the adoption of a national biotech-nology policy is the internationalization of research,development, and product commercialization. Ifbasic research, by its nature, flows easily acrossborders, to what extent does the funding countrybenefit from its investment? In the emerging globalresearch and commercial environment, aggres-sive companies, whether large multinationals orsavvy newcomers, seek the best ideas regardlessof nationality. Likewise, they produce goods andservices to effectively compete in internationalmarkets regardless of nationality. It is no longeralways clear what constitutes an American firmin a global economy. Because technology, goods,and capital, flow more easily across borders thanpeople; national interest may be best defined byfocusing on the education and training of theworkforce, rather than on firms themselves (35).

In 1984, the Office of Technology Assessment(OTA) found that government targeting of biotech-nology for special support was one of the leastsignificant factors affecting competitiveness in bio-technology (44). This finding remains valid today.Government targeting efforts everywhere, in-cluding Japan, seem to have had marginal im-pact, at best. One reason may be that "biotech-nology” is a buzzword whose usefulness haspassed. A more accurate term is ‘biotechnologies,’that is a series of research and industrial techniques.It is difficult to talk about biotechnology per sebecause the techniques have been integrated intodistinct and very different industrial sectors withunique technical issues and distinct investment andmarket environments (45). These developmentsmake it difficult, and possibly futile, for any nation

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to craft and implement a coordinated biotechnologystrategy. Continued integration will make the taskmore difficult. More important will be the identifica-tion of key biotechnologies that need governmentsupport and industry encouragement.

Previous OTA reports have pointed out therelative underfunding in the United States of bio-technology-related agricultural, environmental, andrisk assessment research, when compared withbiomedicine (45). Although it has been helpful tolook at biotechnology-related expenditures in differ-ent areas of application, questions raised by suchanalyses relate more to the differences betweenvarious fields than to biotechnology as a distinctentity. Biotechniques are an important part, butnot the only part, of research in these fields. Theymay be significant to a number of industrialsectors but by themselves will not revolutionizeexisting structures. Their industrial significance,though potentially powerful, will be evolutionaryand must be viewed in the context of all factors—technical, economic, and structural—affectingsuch industries.

This chapter looks primarily at direct governmentefforts aimed at promoting biotechnology research,such as funding and training of scientists. Govern-ments also have indirect means for encouraging ordiscouraging industrial research, such as regulationof research and products, trade and tax policy, andintellectual property protection. These issues arediscussed elsewhere in this report (see chs. 4,11,12,13).

NATIONAL POLICIESNational policies to promote biotechnology re-

search and development (R&D) can be categorizedas targeted; coordinated through academia, the state,or industry; or laissez-faire. In general, countries thathave targeted biotechnology for development do sobecause the techniques are perceived to permiteconomies in other industries, have important link-ages to the rest of the economy, or because theymight establish a niche in the international marketthat will yield continuing income. Although nationsshare a number of common issues and patterns ofgovernment involvement, specific policies, adaptedto unique needs and circumstances, may not beeasily adaptable elsewhere.

A number of countries, principally Japan and theNewly Industrializing Countries (NICs) of the Pa-

Photo credit: Kevin O’Connor

The Development Center for Biotechnology (DCB) ishoused in this building in Taipei. DCB was established

by the Republic of China in 1984 to promotebiotechnology and develop internationally

competitive products.

cific Rim, have established comprehensive govern-ment policies strongly promoting economic growth(see box 10-A). In the United States and much ofEurope, growth promotion is less prominent and isone of many competing social concerns. As a result,fundamental goals are more diffuse and, therefore,less obvious than in a country like Japan.

There is considerable disagreement over whatconstitutes “the Japanese model.” But Japan’sindustrial success, the extent to which other PacificRim countries are trying to imitate that success, andthe interest in how other countries are adoptingJapanese practices, necessitate a closer look atJapanese industrial and research policies. Thissection, therefore, examines R&D policies in theUnited States, Japan, and selected European coun-tries. Appendix A provides more detailed informa-

Chapter 10--Science and Technology Policies ● 153

tion of biotechnology industrial policies in severalother countries.

Japan: A Targeted Approach

In 1981, Japan’s Ministry of International Tradeand Industry (MITI) announced that biotechnology,along with microelectronics and new materials, wasa key technology for future industries. The an-nouncement attracted interest and concern abroad,largely because of the key role MITI played inguiding Japan’s economic growth in the postwarperiod (see box 10-B). It was frequently predictedthat inclusion of biotechnology in MITI’s NextGeneration project, combined with a variety ofincentives from MITI and other agencies (e.g., taxbreaks for research investments and seed money forcooperative research projects) would prompt Japa-nese investment and eventual dominance in biotech-nology (44).

There is little doubt that government policies,including the Next Generation project, encouragedbiotechnology investment by a large variety ofchemical, food, and fermentation companies, as wellas by traditional pharmaceutical firms in Japan.

Japanese investment in biotechnology, however,predates MITI’s Next Generation project. Newinitiatives in the life sciences came earlier from theScience and Technology Agency (STA) and theMinistry of Education and Culture, which fundJapanese university research (7). A number ofcompanies made substantial investments in biotech-nology prior to 1981. Mitsubishi Kasei Corp. ’sInstitute of Life Sciences was setup in 1971, aboutthe time that Cetus was established in the UnitedStates (49).

Regardless of earlier actions, MITI’s namingbiotechnology as an area of interest probably gave itthe legitimacy that it previously lacked and easedfinancing for private investment-as it had doneearlier for other industries and technologies. It seemslikely that some firms entered biotechnology re-search as a result of government policies. It seemsalso plausible, however, that MITI jumped on thebiotechnology bandwagon because it did not want tobe left behind.

As in the United States and elsewhere, the broadrange of potential biotechnology applications hasled to a wide variety of, frequently overlapping,initiatives by various Japanese agencies.

Ministry of International Trade and Industry

Of 12 initial Next Generation research projectsproposed in 1981, three (bioreactor, mass cellculture, and recombinant DNA application) were inbiotechnology. Concomitant with these proposalswas the establishment of a Biotechnology JointResearch Association consisting of 14 companies,divided into three research groups, each associatedwith a research institution of MITI’s Agency ofIndustrial Science and Technology. Most of thecompanies were in the chemical or food business,and most of the frost product goals were recombinantDNA (rDNA) or monoclinal antibody pharmaceuti-cals and diagnostics (7). Takeda, Japan’s largestdrug firm, was the only pharmaceutical company inthe Next Generation initiative and is also the onlypharmaceutical company participating in the ProteinEngineering Research Institute (PERI), which isdiscussed in greater detail below.

The MITI faced a serious organizational problem.In contrast to previous government initiatives, par-ticularly in manufacturing technologies, the incen-tive for cooperation between competing firms waslessened by the problem of proprietary rights.


Box 10-A—The Asian Tigers

The Newly Industrializing Countries (NICs) of the Pacific Rim share with Japan an emphasis on export-drivengrowth. These countries have also developed patterns of government-industry cooperation, although these patternsdiffer significantly from those in Japan. There is a high degree of activism on the part of governments, particularlyin Korea, Taiwan, and Singapore. All use licensing of foreign technology and repatriation of foreign-trainednationals to build their domestic research infrastructure.

Korea shares with Japan a strong bias toward applied research, apparently in large part, because of anunderdeveloped research base. As in Japan, the bulk of R&D is done by industry, and several chaebols (largeindustrial combines) and pharmaceutical companies have facilities in the United States to transfer technology anddevelop their internal resources. Licensing agreements with U.S. and Japanese firms area clear part of this strategy.The government directly subsidizes some industry research, including up to 30 percent of selected proposals frommember companies of the Korea Genetic Research Association (KOGERA).

In contrast, Singapore is emphasizing basic research (roughly 80 percent of that country’s annualbiotechnology-relevant research budget) and creation of a research infrastructure through training and repatriation.Singapore’s National Program in Biotechnology also features favorable tax incentives for domestic and foreigninvestment. Although the program recognizes the need for multinational investment, the main goal is thedevelopment of biotechnology-based local industry. The new Institute of Molecular and Cell Biology at the NationalUniversity of Singapore will have 21 research teams carrying out basic research in underlying disciplines. Glaxo,a large, British-based pharmaceutical company, will provide a $50 million trust fund to underwrite neurobiologyresearch at the institute over the next 15 years.

Taiwan, like Singapore, is employing repatriated nationals to the fullest extent possible to help build theirresearch base. One of the best developed research establishments in Asia is further strengthened by the large poolof Taiwanese scientists in the United States. In addition, investment capital is readily available. The country hasroughly $75 billion in foreign reserve holdings, second only to Japan, and has invested in several U.S.high-technology firms. Nevertheless, Taiwan seems to be making more of an effort than Singapore to reachmidstream development; roughly 80 percent of biotechnology-relevant funding is devoted to applied research. (Thisis probably part of a strategy to develop products, such as Hepatitis B vaccine, which are significant to domesticand regional markets.) Of all the Asian NICs, Taiwan appears to be in the best position to take commercial advantageof biotechnology. But, Taiwan’s emphasis on publicly funded midstream and applied research could reflect thereluctance of Taiwanese industry, dominated by small and medium-size manufacturing firms, to invest in R&D,SOURCE OffIce of Toclmology Assessmen4 1991, adapted tiom 1989 International Conference on Biotechnology in a Global l!conomy; and

E. Ridurds, “lltiwan’s Latest Export: Money, “ The Washington Post, May 26, 1989.

Therefore, MITI tried to focus projects on areas inwhich Japan seemed clearly behind the UnitedStates and Europe. The level of success achieved inthese projects was disappointing. The MITI, forexample, abandoned a bioreactor project, due toindustry’s reluctance to cooperate (49).

The years 1986 to 1988 saw the establishment ofbio-industry, with MITI setting regulatory guide-lines for industrial uses of biotechnology in aminoacid, enzyme, detergent, and cosmetic production.Today, MITI is continuing to support R&D efforts inareas such as: marine biotechnology and biodegrad-able plastics, addressing relevant industrial policy(e.g., tax incentives and Japan Development Bankand Small Business Finance Corp. loans, andpromotion of industry standards), improving safetymeasures (new contained-use regulations and devel-oping lists of industrially exploitable organisms),

internationalization (regulatory harmonization, andinternational R&D cooperation, and funding devel-oping country research) (25). MITI’s patent officecontinues to play a central role in biotechnologydevelopments. The MITI planned to spend $58million on biotechnology in 1990, including fundingdozens of public-private research projects, rangingfrom waste water treatment systems to biosensors.

Ministry of Education, Science, and Culture

The Ministry of Education, Science and Culture(MESC) is the largest single source of life/scienceresearch funding in Japan. Its Bureau of Science andInternational Affairs administers university grants,training programs, and international exchange andcollaboration. The MESC also has authority over thenational universities, i.e., the Universities of Tokyo,Osaka, Kyoto, and Nogoya; the National Institute ofGenetics; and the Okazaki National Research Insti-


Box 10-B—Japanese Industrial Policy

Japan’s development into a major economic power was neither accidental nor inevitable. One analyst ofpostwar Japan argues that a system encouraging rapid economic growth resulted from three fundamental sources.First, a popular consensus on the need for economic priorities was dictated by the harsh conditions of the 1940sand Japan’s unique situation: late industrialization, limited natural resources, a large population, the need to trade,and the constraints of the international balance of payments. Second, an organizational inheritance dating backto the 1930s included experiments with control of the economy, first by powerful industrial groups and then by theState. These experiences encouraged a convergence of views on the part of bureaucratic and business elites, as didcross-penetration of these elites, due to recruitment of politicians and managers from government bureaucracies.Third, a conscious pursuit of economic growth fostered the manipulation of institutions toward this end.

A system of government-industry cooperation, based on the zaibatsu working with the government over manyyears, became even more important following World War II. At its best, it seemed to harness intense competitionbetween firms within agreed areas of development. Although a number of strong bureaucracies, especially theMinistry of Finance, played critical roles, it was the Ministry of International Trade and Industry (MITI) that becamea kind of ‘economic general staff. MITI used powerful tools, including control of foreign trade and introductionof foreign technology through the 1960s, thereby protecting domestic industry and providing domestic firms withrelatively cheap, foreign technology through licensing. But, it was primarily the development of indirectmarket-conforming tools (particularly informal ‘‘administrative guidance’ that allowed MITI to play a key rolein restructuring the Japanese economy-first into heavy industries and then into knowledge-based, high-technologyindustries. MITI transformed itself to match Japan’s changing needs and role in the global economy. It served notso much as a director of competition but, as a player itself, with its own purposes and its own means of interveningin the market to achieve its goals.

Broadly speaking, public policy in Japan has been characterized by a great degree of discretion yielded to eliteand competing bureaucracies, with conflict between bureaucracies and between these bureaucracies and strongindustries dominating policy development. Except for business, interest groups in the U.S. pluralistic sense haveplayed a relatively minor role in policy development, forcing political intervention and bureaucratic change onlyin extreme cases. For example, in the 1960s, industrial pollution stimulated public concern and resentment.

Apart from assisting structural changes, MITI, like its prewar and wartime predecessors, and other agencies,such as the Ministry of Health and Welfare, have encouraged improved management, production techniques andapplications of new technologies within specific industries. Such assistance, especially to small and medium-sizemanufacturing firms, maybe carried out through industry associations.

Although catching up with Western technology provided a clear goal for Japan through the 1970s, by the endof that decade this goal had been or soon would be reached in many areas. MITI’s Next Generation program markeda shift toward an entrepreneurial approach to technology and economic development, supporting efforts far lesscertain of success. One account, from 1986, quotes a MITI technical official, lamenting reduced funding, as saying“the era of next-generation projects and grand projects is already over.” Today, it appears MITI’s role is far lesssignificant than it once was and certainly quite different from that commonly believed in the United States.SOURC!BS: Office of TeehnoIogy Assesamen$ 1991, adapted from C. Jobnsou h4ZTZ and the .Tapunese Miracle: The Growth of Iridu@ia2

Policy, 1925-1975 (Stanford, CA: Stanford University Press, 1982); Nihon Kogyo Sluhdwn, “Follow MtTI’s Example,” My 6,1986, p. 3; L. Tyson andJ. Zysman “Politics and Productivity: Developmental Strategy and Production Innovation in Japan” BRIEWorking Paper No. 30, Berkeley Roundtable on the International Economy, Berkeley, CA 1987.

tute (8). The rigid, noncompetitive nature of thisresearch funding seems to limit the effectiveness ofthese expenditures (7,29).

In 1987, a general overhaul of Japan’s universitieswas proposed by the Provisional Council for Educa-tional Reform, appointed by Prime Minister Na-kasone. Suggestions to change entrance require-ments, encourage more international exchange, and

foster creativity and individuality are still beingstudied (13). Anecdotal evidence suggests that someresearchers have left universities for industry be-cause of poor funding, inadequate equipment, andrestrictive research environments wherein original-ity and creativity are not rewarded. Universityresearch contributes far less to the total research baseof Japan than does university research in the UnitedStates.

292-87(I - 91 - 6 : QL 3


Ministry of Health and Welfare

In 1986, MHW established the Japan HealthSciences Foundation to promote biomedical andpharmaceutical research. Some observers feel thismove was not only an attempt to meet Japan’sgrowing health needs, made more pressing by arapidly aging population, but also a response toMITI’s biotechnology initiatives (30).

This foundation emphasizes small, cooperativeR&D efforts involving companies, universities, andgovernment institutes. Industry funds two-thirds ofproject costs. More than 100 firms, including severalforeign fins, and approximately 400 researcherswere involved by early 1990. Separate programstarget biotechnology, medical materials, and im-mune mechanisms (12). In July 1989, Genentechreceived a small grant to study Werner syndrome,thus becoming the first U.S. firm to receive directfunding from MHW (2).

More significant to pharmaceutical companies arechanges in Japanese drug pricing by the MHWnational health insurance agency. Prices have beensystematically lowered for older drugs, and newdrugs are given premium pricing (see ch. 5 forfurther discussion of pricing). The result is pressureand incentive for greater innovation and higher R&Dexpenditures. These higher expenditures are forcingcompanies to seek larger markets, contributing to thecontinuing internationalization of Japanese pharma-ceutical companies. The Japanese market for phar-maceuticals, on the other hand, is the world’s secondlargest after the United States; Western companies,that have operated in Japan since World War II andnew companies entering the world market directlyare creating additional pressure on existing Japanesefirms (48).

Science and Technology Agency

The Science and Technology Agency (STA)carries primary responsibility for funding basicresearch and coordinating basic science and technol-ogy expenditures. Similar to the situation with otherindependent agencies attached to the office of thePrime Minister, control of STA is fought over byother, more powerful agencies, such as, MITI andthe Ministry of Education and Culture, which areresponsible for staffing many positions (23). Gen-eral policies are set by the Council for Science andTechnology, chaired by the Prime Minister. Thecouncil has relied heavily on its advisory Policy

Committee, consisting of senior industry executives.The council’s influence is seen most directly in itsSpecial Promotion Fund for Science and Technol-ogy, established in 1981 (49).

One project of interest was the human genomemapping and sequencing initiative, begun in 1981.This project focused on automating the sequencingprocess, with companies, such as Hitachi, Seiko,Fuji Film, Toyo Soda, and Mitsui KnowledgeIndustry, receiving funding from both the SpecialPromotion Fund and the Japan Research Develop-ment Corp. This frost-generation project, based onapproaches quickly outdated by innovations in theUnited States, nevertheless caused considerableconcern abroad. It was used by proponents ofgenome initiatives in the United States to generatepublic and private support for a human genomeproject in the United States. As in the United States,Japan’s genome activities have been the subject ofbureaucratic infighting and are controversial withinJapan’s scientific community. On the commercialfront, Hitachi’s second-generation sequencer had, asof early 1990, been made available only to JapaneseGovernment scientists, and Applied Biosystems, asmall California firm, remained the primary supplierof sequencers in Japan.

Another STA program is the System for Promo-tion of Exploratory Research for Advanced Technol-ogy (ERATO), established in 1981 to foster inter-disciplinary, advanced research and technology.ERATO projects focus on technology developmentand are carried out in the private sector over 5-yearperiods by teams of about 15 scientists. Projects arefunded by the Research Development Corp. of Japan(JRDC), a government-funded public corporationset up in 1961 to promote commercial use ofgovernment-developed technologies. Nearly half ofthe 14 current projects are relevant to biotechnology(20).

Ministry of Agriculture, Forestry, and Fisheries

In 1984, MAFF created a new BiotechnologyDivision, and the government declared biotechnol-ogy development to be the principal strategy foragricultural R&D (21). A basic research group madeup of 14 firms was organized to carry out research.None of the firms was a traditional seed or nurserycompany, and many were participating in otherbiotechnology projects organized by other minis-tries (49). Private-sector research is further pro-moted by the Bio-oriented Technology Research

Chapter IO-Science and Technology Policies ● 157

Advancement Institution, which provides up to 70percent of finding for research projects and newventures (21). Most of MAFF’s 13 specializedresearch institutes and 6 regional experimentalstations are involved in biotechnology-related re-search; the National Institute of AgrobiologicalResources holds lead responsibility. The MAFF alsofunds university research (21).

Research Associations and Cooperative Research

In Japan, the typical cooperative project1 isneither intensive nor high profile; although thelarge-scale integration semiconductor effort,mounted in the late 1970s, received much attentionin the United States. It is touted by many as anexample of how government-industry cooperationcan forge technology breakthroughs (16). Mostbiotechnology-related projects in Japan are organ-ized by government-sponsored research associationswhich coordinate modest projects carried out byresearchers at member companies. According tosome analysts, the participation of major Japanesecompanies in such projects has led outside observersto overestimate the project’s importance. Coopera-tive research in Japan is thwarted by the samebarriers found elsewhere: reluctance of the lead-ing firms involved in the program to shareinformation, difficulties over intellectual prop-erty rights, and, in the case of special researchcenters, failure of companies to supply their bestscientists. Projects, therefore, tend to address poten-tially interesting but commercially low-prioritytargets.

An exception may be projects funded by KeyTechnology Center, which provides up to 70 percentof the cost of industry joint research projects. Thecenter, which is a response to concerns about venturecapital shortages for investment in emerging tech-nologies, is largely financed by privatization ofNippon Telephone and Telegraph. The ProteinEngineering Research Institute (PERI) project inOsaka will receive $150 million in governmentfunding over a 10-year period. PERI, which involves14 chemical, pharmaceutical, and food companies,has received a great deal of attention in the UnitedStates and Europe. Roughly 70 researchers arestudying structure-function relationships with theultimate goal, according to Katsura Morita of

Takeda Chemical Industries, of fostering a strategicedge in protein engineering technology (28). Suchresearch is critical to a number of important biotech-nology applications. However, though the potentialfor PERI is great, to date there is little to show, whichis not surprising since it is a long-term project.

Other officials point out the modest industryfunding of most government-organized projects andsuggest that companies take part in cooperativeprojects to get along with government ministries, buthave little expectation of commercial return. At leastone pharmaceutical company has refrained fromparticipating in any Japan Health Sciences Founda-tion projects (organized by MHW) because manag-ers believe it is better to concentrate on their owncommercial research (43).

Research associations and cooperative projectscan serve as a means to disseminate knowledgethroughout an industry, a role played in the UnitedStates by an open university system and moreflexible employment practices. However, lead com-panies (in Japan and in the United States) are oftenreluctant to share knowledge with competitors.Cooperative projects may have helped some firmsacquire technical expertise. Their significance hasshifted, however, with the commercial success andincreased research intensity of Japanese industry andshould not be overstated. There is no evidence thatthey have played a major role in the development ofJapanese industrial biotechnology expertise.

Government-Industry Relations

Research and industry associations, along withnumerous advisory groups, play an important part ina continuing dialogue between industry and govern-ment ministries. There is dynamic tension in therelationship between ministries and “their” indus-tries. Formation of the Biotechnology DevelopmentCenter (BIDEC) in 1982, under auspices of the JapanAssociation of Industrial Fermentation, was clearlya MITI initiative. MITI’s influence is seen inBIDEC’s activities, such as the organization ofinternational conferences. It would, however, bewrong to assume that MITI controls companies inany way. MITI’s current biotechnology plans are notgreatly respected by many Japanese executives inbiotechnology-related companies. MITI’s influencedepends on a variety of factors, not least of which is

Icmwativeremhin @ ~~terrefem to r~~chinvolving thr~ or more comp~~. It sho~d not & confused with joint vmtures, joint productdevelopmen~ contract R&D, or licensing agreements that typically involve only two fm.


the perceived quality of MITI’s analysis, programs,and funding, and funding capabilities. Members ofBIDEC use the association to influence policy totheir advantage and tailor modest cooperative proj-ects to their interests, if possible.

It now appears that Japanese industry is generallytoo successful and too powerful to be unwillinglyguided into targeted investments. The power of theministries may well have decreased with time. Onthe other hand, ministries such as MITI and MHWstill have powerful regulatory roles. There are stronglinkages between research and regulatory policies asis seen most clearly in MHW manipulation of drugprices to encourage innovation. When asked whatpolicies most affect their companies, the over-whelming majority of Japanese executives in-terviewed by OTA in preparing this report namedregulatory and pricing policies.

Conclusions

Japan’s publicly funded basic research is weakwhen compared to U.S. efforts. Despite calls by theScience Council of Japan and recommendations inMITI white papers, the Ministry of Finance has notmade funding increases. Initiatives such as PERI andthe various ERATO projects, although significant,are still rare. Reform toward more creative andinnovative research and training of creative andoriginal thinking scientists in Japan’s universitieshas only just begun.

Japan’s strength is clearly in industrial R&D.The wide variety of companies attempting toutilize biotechnology in some way is impressive,from traditional sake and miso producers toJapan’s largest multinationals. However, a num-ber of companies, such as Kawasaki Steel, arepulling back from their biotechnology ventures (24).For such companies, diversification into biotechnol-ogy was a disappointment. Commercialization hastaken longer, been more technically difficult, andbeen more dependent on factors unique to eachindustrial sector than expected. Biotechnology hasnot achieved the spectacular success that other fieldshave for Japanese industry.

Japanese high-profile, though modestly funded,industrial and research policies encouraged invest-ment by a wide variety of companies. However,Japanese chemical companies were moving intohigher value-added products, such as pharmaceuti-cals, prior to government initiatives. Japanese food

processors have historically invested more heavilyin R&D, compared to their counterparts in theUnited States and Europe. Japanese pharmaceuticalcompanies now seem to view biotechnology in thesame way as their counterparts abroad--i.e., as apowerful tool to supplement other research. Thosecompanies, while more cautious than in the past, arecontinuing biotechnology research in terms of indi-vidual corporate strategies and assessments of com-mercial potential. For the foreseeable future, corpo-rate strategies, rather than MITI initiatives, willlikely determine Japan’s investment in biotechnol-ogy.

Europe: Moving Toward a Regional Strategy?

B’A number of European countries have technol-

ogy policies that resemble those of the UnitedStates. National policies, however, are becomingless distinctive as Europe moves closer to eco-nomic integration. The effectiveness of nationaltechnology policies is limited by the evolution ofan economically united European Community(EC) and, even more fundamentally, by thelarger force of international competition.

Chapter 10--Science and Technology Policies . 159

If European national technology policies seemless significant than they were once thought to be, itis not yet clear that specific, regional policies forbiotechnology-related fields will emerge. The re-search and commercial resources of EC countries,however, are enormous. Modest EC research pro-grams currently underway aim to breakdown barri-ers to the effective utilization of those resources.Integration will also directly affect the non-ECEuropean countries.

Each country promoting biotechnology illustratesa variation on how to promote science and technol-ogy of economic or strategic interest. The initialimpetus may have been born in the governmentbureaucracy, in the academic community, or inindustry. Where initial activities began, continue toinfluence how a country continues to pursue bio-technology R&D. Four European countries—France, the United Kingdom (U.K.), Germany, andSwitzerland-are described in order to illustrate avariety of strategies. Regional programs, unique to-- . - yet another approach toWestern Europe, offer strategic planning.

France: State-Initiated

o

In 1979, the FrenchGovernment responded toPresident Giscard d’Es-taing’s interest in ethanolfuels by producing awide-ranging series of re-ports. The reports out-‘bed energy research as

well as the potential for biology to change therelationship between humans and the environment,particularly in agriculture. The Mobilization Pro-gram, implemented in 1982, set for France theambitious goal of achieving 10 percent of theworld’s biologically based production by 1990 (39).

Several research areas were targeted. Firms wereto collaborate with various research institutes on anumber of projects, and regional research andtechnology-transfer centers were to be established.Today, of the European nations, France is the leaderin agricultural biotechnology. Biotechnology cen-ters are well funded and staffed, and French seedcompanies have made major investments in biotech-nology (41).

The French Government also attempted to reori-ent French researchers toward new biotechnology-

related disciplines and more industrially relevantwork. Unlike the situation in the United States,France’s research strength lies not in its universitiesbut in its government research institutes. Funding forall research, including research relevant to biotech-nology, grew through 1985 but fell steadily afterthat. Still, new emphasis has been put on molecularbiology, enzymology, immunology, plant genetics,and bioprocess engineering (42).

French planners thought that biotechnologywould be essential to economic strength and nationalsovereignty. However, the various mechanismsestablished to achieve rather lofty goals have hadlimited success in areas other than agriculture andhave been hampered by inconsistent governmentfunding. France has had modest success in pharma-ceutical applications of biotechnology-successthat cannot be ascribed solely, if at all, to theMobilization Program. While the large seed compa-nies have invested in biotechnology R&D, the smalland medium-sized firms, which make up the major-ity of the industry, continue to spend little onresearch (39). Of more significance now, may beregional policies. France is an enthusiastic par-ticipant in EC research programs and has pursuedbiotechnology through the French-inspiredEUREKA initiative.

United Kingdom:

i-z-l

and a reluctancearticulate a clearBritain does not

Academic-Initiated

The United Kingdommost closely parallels theUnited States, with astrong research base, anemphasis on basic re-search (approximately 70percent of governmentbiotechnology funding),

on the part of government toresearch or industrial policy.

have the advantages of scaleavailable to the United States, and funding decisionshave been difficult. The academic community, itself,was the force behind government initiatives, recom-mending a coordinated biotechnology policy to thereluctant, new Thatcher government in 1980 (39).But policy in the 1980’s can best be described as“muddling through,” with tight research budgetscausing struggles among funding research councils,a situation exacerbated by modest initiatives formore industrially relevant, precompetitive research.


The most notable U.K. initiative has been theBiotechnology Directorate, established by the Sci-ence and Engineering Research Council in 1981.The research agenda, crafted by a steering commit-tee of university scientists and industrialists, hasmoved steadily toward important biotechnologyareas, such as protein engineering (38). In 1990, theUnited Kingdom formed a Biotechnology JointAdvisory Board, which is working toward coordi-nated research strategies between its various re-search councils (9).

British research is well-regarded and attractive toforeign, as well as British, companies. (MajorBritish pharmaceutical and chemical fins, in fact,have been criticized for insufficient interest in theexisting and available academic resources.) Manymajor foreign companies have established relation-ships with British institutions. Monsanto, for exam-ple, has a £20-million agreement with OxfordUniversity. But poor salaries, combined with limitedexpectations for growth in research budgets, havecaused a brain-drain of experienced researchers fromthe United Kingdom and a consequent crisis inrecruitment that may make it difficult for Britain tomaintain the quality of its science base (38).

Germany: Industry-Initiated

The 1974 creation ofthe world’s first nationalbiotechnology program,the German Society forChemical Equipment,Chemical Technology andBiotechnology (DEC-HEMA) was backed by

West Germany’s large chemical and pharmaceuticalcompanies and an effective trade association. Mem-bers were primarily interested in new fermentationtechniques; it was not until the early 1980s thatrecombinant DNA (rDNA) and cell fusion weregiven equal treatment in targeted biotechnologyspending by the Federal Ministry of Research andTechnology (BMFT) (50). Nevertheless, today’sreunified Germany has a strong, diverse base inunderlying disciplines, a flexible and relativelydiffuse research structure with substantial Federaland State support, and interactions between indus-try, universities, and research institutes that providesupport to the country’s strong group of large andmedium-sized companies. Biotechnology tech-niques are well-integrated into those companies, and

larger German firms have established researchfacilities in other EC countries, the United States,and Japan (37). However, Federal and State initia-tives to encourage small biotechnology-basedstartup firms have had minimal success.

In August 1990, the German Federal Governmentapproved a new biotechnology R&D programknown as “Biotechnology 2000.” The program’sfinancial allocation for the period 1990 to 1994 isDME1.5 billion (approximately US$855 million).Although the program is designed to promotebiotechnology research in the areas of the environ-ment, public health, nutrition, energy, and naturalresources pharmaceuticals will be a primary focus.As a result of Germany’s reunification, biotechnol-ogy will also be promoted in what was formerly EastGermany. Research institutes and businesses in theEast will be eligible to apply for grants. It is expectedthat there will be active involvement in the programby industry (22).

German policies clearly arose from the privatesector. They were built on an established researchand educational infrastructure with less clear link-ages to trade and regulatory policies. As discussed inchapter 11, acceptance of biotechnology by theGerman public remains problematic, and the Ger-man regulatory outlook is evolving.

Switzerland: Industry- and Academic-Initiated

Switzerland shares

o

with Germany a strongemphasis on educationand close ties betweenlarge Swiss chemical andpharmaceutical compa-nies, such as Sandoz,Ciba-Geigy, and Hoff-

mann-LaRoche, as well as national universities andresearch institutes. Those ties, however, do notimply that universities emphasize developmental orapplied research over fundamental science; firmssupport fundamental research at public institutions(19). Industry itself, carries out or funds around 75percent of total country R&D. There is no formal-ized biotechnology strategy or articulated industrialpolicy. But Swiss industry, with its proven strengthand willingness to develop and apply basic advancesat Swiss or foreign laboratories and, typically, inforeign rather than Swiss production facilities, fundsaround 15 percent of university research-roughlythree times more than industrial funding in the


United States (10). It is ironic that Swiss governmentincentives for industry participation in biotechnol-ogy research centers elsewhere in Europe may divertsome research out of the country (19).

Regional Programs

The objectives of EC biotechnology programs(see box 10-C) are to mobilize the European researcheffort, target precompetitive research, and enhancethe competitiveness of European industry. Severalweaknesses are evident, however. Investment levels,for example, have been extremely low compared toother industrial areas. Altogether, the EC managesonly about 3 percent of the community’s total R&Dexpenditures; the rest are controlled by nationalgovernments (14) The new Biotechnological Re-search for Industrial Development and Growth inEurope (BRIDGE) program, which budgeted ECU25 million (approximately US$30 million) per yearfrom 1990 to 1993, is the most ambitious effort yet.It remains to be seen whether the program willmaintain industrial relevance with high levels ofindustry participation. (Administrators hope that thenew BRIDGE program will have greater industryparticipation.) Although most of these programsseek to stimulate participation by small and me-dium-size firms, this, to date, has not been the case.

Over time, however, the creation of regionalresearch networks could enhance Europe’s overallresearch capabilities and, through regional trainingand technology transfer, build the research capabili-ties of lagging countries. According to EC managers,the creation of various forms of translationalcooperation, in and of itself, constitutes the mainjustification for the programs. The commissionattempts to breakdown research barriers by connect-ing research centers (5).

Some observers fear that regional Europeanresearch initiatives could provide European firmswith advantages over their international competi-tors, thus aiding in the creation of “Europeanchampions. There is also concern that U.S. andJapanese scientists will be blocked from participat-ing in European initiatives (l). In the short run,however, it seems likely that new regional biotech-nology research initiatives will be less significant forindustry than the regulatory, legal, and trade issuessurrounding the drive to create a free internalEuropean market by the end of 1992.

Mixed Messages

The proposed links between biotechnology re-search and other EC policy areas as of now arecontradictory. European Community directives forcontained use and deliberate release of geneticallymodified organisms, for example, have come undercriticism from both promoters and critics of biotech-nology. Despite the creation, in 1984, of a Biotech-nology Steering Committee and establishment of theConcertation Unit for Biotechnology in Europe(CUBE) within the Directorate General for Science,Research, and Development (DG XXII), the verynature of biotechnology makes coordination diffi-cult. Decisions having real, immediate impact onresearch investment and commercialization aredriven by other concerns-e. g., policies on health,agriculture, and the environment-within the juris-diction of separate Directorates-General (4).

The most striking contradiction in EC policygoals comes in the agriculture-food sector. Like U.S.farm programs, the Community’s Common Agricul-tural Policy (CAP) has succeeded in easing theimpact of technological change on the countryside.However, the price paid was surpluses, massivepublic expenditures, higher food prices, and, cumu-latively, a hidden transfer of wealth from urban torural regions. Biotechnology products that improveproduction yields, directly or indirectly (e.g.,through improved animal health), run counter toCAP objectives. Suggestions that future animalhealth products show not only safety and efficacybut a positive socioeconomic impact might have achilling effect on all new products, especially onbiotechnology-related products (see ch. 11).

Continued debates on various directives needed tocomplete the internal market by 1992 reflect therivalry among European interests. Outside observersshould keep in mind the extent to which variousdirectorates-general, themselves, represent distinctpoints of view or, as in the case of agriculture, areidentified with a distinct political and economicgroup. The year 1992 is not so much a firm date asa process, and the creation of strategic policies at theregional level will be incremental before and afterthat date.

The United States: A Diffuse Approach

Japan’s biotechnology fever in the early 1980swas in large part a response to the biotechnologyboom in the United States. A series of startup


Box 10-C—European Biotechnology Programs

European Community (EC) Research Initiatives. European Community biotechnology research programsbegan with the Bimolecular Engineering Program (BEP). It dispensed ECU15 million (ECU1= @ US$l) insupport of basic research from 1982 to 1986. Although funded by the EC commission, it was not a translationalprogram. Rather, through competitive grants, BEP supported individual research groups performing isolatedprojects within the respective EC member countries. Funding amounted to 50 percent of project costs.

BEP was followed in 1986 by the 4-year Biotechnology Action program (BAP). This initiative differed fromBEP in several ways. First, it focused on precompetitive research emphasizing the development of novel processes.Second, it supported translational cooperation by requiring more than one group from more than one EC memberState participate in each project. Third, through its training stimulation scheme, it encouraged scientists to work inother EC laboratories outside their native countries. Finally, it enjoyed a generous annual budget of ECU13.75million per year.

Under BAP, expenditures continued to cover 50 percent of the cost for R&D ventures. Roughly 123 projects,involving 413 laboratories, were funded. France and the United Kingdom were the largest beneficiaries, eachreceiving roughly 18 percent of total dispersals through BAP’s competitive granting scheme. Portugal received thesmallest share, acquiring 2 percent of the cumulative expenditure.

BAP’s emphasis on translational activities gave birth to the concept of “laboratories without walls,” wherebyscientific organizations from various EC counties participate in joint research projects. One such project, the lacticacid bacteria cluster, links Ireland, the United Kingdom, The Netherlands, and Germany in R&D projects focusingon gene cloning systems, efficient gene expression, protein secretion, plasma replication, and the improvement ofvarious starter cultures. These efforts encourage the exchange of information, technology, materials, and staff; theyare designed to eliminate bottlenecks within the scientific community. As research matures, the efforts may takeon independent lives, e.g., spawning more applied research or proprietary relationships between participatinglaboratories, scientists, and industry.

The Biotechnological Research for Industrial Development and Growth in Europe program (BRIDGE) isplanned for 1990 through 1993. Its research areas include the information infrastructure, enabling technologies, andcellular biology. Its 5-year budget will total ECU1OO million, at ECU20 million per year. Support will continue tobe awarded on a competitive basis and, like the BAP, will cover 50 percent of R&D costs.

BRIDGE’s objectives are to further strengthen industrial applications of biotechnology and to enhancetranslational research. To this end, it will incorporate projects that focus on providing a link between basic andapplied research. A minimum of 10 to 20 laboratories will participate jointly in these ventures. Annual expendituresare expected to run ECU1 million to ECU3 million per project per year.

companies, founded in the United States in the late1970s and 1980s, commercialized research break-throughs. Nearly 70 new firms were begun in 1981alone (45). Companies such as Genentech wentpublic and were able to raise substantial amounts ofcash (see ch. 4). Established chemical, pharmaceuti-cal, and seed companies entered into researchagreements with the new firms, established biotech-nology research groups, or acquired startup fins.First entry of products created by rDNA technologyfed expectations of near-term revolutionary changesin the pharmaceutical industry and other sectors, thatnow seem premature.

In Japan, relevant policymaking is dominated bytension between competing bureaucracies and pow-erful industries. In the United States, policymakingis driven by the dynamics of interest-group politics.Although Japan is far from monolithic, the sheer

number of actors in the United States makesachieving consensus and continuity much moredifficult. Pluralism is reflected throughout the politi-cal process of budgeting and appropriating funds.Although business interests play a strong role in thisprocess, they are not as dominant as in Japan (seeapp. B). Congress plays a far stronger role in fundingand oversight than does the Japanese Diet, andexecutive agencies have markedly less discretion orauthority than their counterparts in Japan.

The structure of the U.S. research and technologybase is, also, vastly different. As noted previously,the Federal Government provides, in both relativeand absolute amounts, significantly more fundingthan does the government of Japan; and a muchhigher percentage of nondefense R&D goes to basicresearch (see box 1O-D). The U.S. Governmentfunds roughly half of the Nation’s total R&D, and


One project of particular interest will concentrate on sequencing the yeast genome and will involve 28laboratories throughout the EC. The total EC contribution to this project should reach ECU8 million. A secondinitiative will focus on the molecular identification of new plant genes. The EC investment in this effort will cometo ECU5 million.

Two EC agricultural programs support biotechnology research. European Collaborative Linkage ofAgriculture and Industry through Research (ECLAIR) has a 4-year budget of ECU80 million and aims at improvingthe integration of farm activities with upstream (supply) and downstream (processing) industries. The relatedFood-Linked Agro-Industrial Research (FLAIR) program will run through 1993; it is aimed at improving foodquality, safety, and diversity-rather than agricultural productivity. Funding is ECU25 million.

EUREKA. EUREKA (European Research Coordination Agency) was originally created in 1985, allegedly inresponse to the U.S. Strategic Defense Initiative (SDI). It has since evolved into a coordinating agency linkingadvanced technology projects being carried out by European industry. EUREKA projects are not limited to ECcountries, and also include Norway, Sweden, Finland, Switzerland, Austria, Iceland, and Turkey.

Number of Participating Approved budgetProject area projects companies and labs (in million ECUs)

Agro-Food . . . . . . . . . . . . . . . . . . . . . 3 6 5.4Agronomy and aqua culture . . . . . . . 9 27 55.7Biochemical engineering and

cell culture . . . . . . . . . . . . . . . . . . . . 8 25 124.2Biomedical engineering . . . . . . . . . . . 7 18 55.2Human health . . . . . . . . . . . . . . . . . . . 12 28 88.9Protein design . . . . . . . . . . . . . . . . . . 1 3 16SOURCE: f3io#ufur(Biofutur, April 1989).

Although biology was not an initial priority, as of mid-1989 EUREKA had approximately40 biotechnology,food, and biomedical projects (of over 210 total projects). They areas follows:

Although the EUREKA’ s focus on commercially significant research and translational industry cooperationcould have more immediate impact than the EC programs, it is still too early to evaluate its effectiveness. Publicfunding for EUREKA projects has been less than anticipated, and the most recent approvals may not reach 50 percent.

SOURCE: @lc~ of Technology Assessmem 1991, adapted from E. Magnien et. al., “hs Laboratoires Ilu.rop ens saris Mw,’’lliof@r,”R. van der Meer,’’lliotechnoiogy in the ZVedteriands’ paper presented at OIA international conference on Biotechnology in aGlobal Economy, vol. S4, November 1989, pp. 17-29.

OTA estimates that the Federal Government funds by embodying the way things are done. ’ However,more than half of total biotechnology-related re-search (45). The United States has a decentralizedresearch system, and several cabinet-level depart-ments have internal research divisions responsiblefor the research needs of their particular missions,such as enhancing health (46).

The system for setting research budgets in theUnited States is inherently political. Constituenciesadvise agencies informally and through officialadvisory boards and committees. The constituenciessupport their own spending priorities during thebudget and appropriations process. The role ofFederal agencies is crucial to the success of Federalresearch efforts, as the agencies are intricatelyinvolved in the day-to-day operations of the researchsystem. Each agency has its own culture. Thesecultures contribute to their success, perhaps simply

the cultures are powerful determinants of futuredirections, and specific goals may only be reflectedin the collective knowledge of agency personnel(46).

Overall Funding Trends for Biotechnology

Historically, the United States, both in absolutedollar amounts and as a percentage of its re-search budget, has had the largest commitment tobasic research in biological sciences worldwide.In 1988, OTA found that 12 Federal agencies andone cross-agency program, the Small BusinessInnovation Research Program (SBIR), spend re-search dollars on biotechnology (45). The NationalInstitutes of Health (NIH) funds nearly 85 percent ofall federally funded biotechnology, thus playing the


Box 10-D—United States Support of R&D

In 1990, the United States spent an estimated $150 billion on research and development ( R&D). This representsan annual real increase (in constant dollars) of 1.3 percent-the 15th consecutive year in which the national R&Deffort grew faster than inflation. This extraordinary record was comprised of a period of consistent growth aboveinflation in the late 1970s and early 1980s, then a short spurt of tremendous growth in the mid-1980s, and over thepast few years, a shift toward modest growth rates--around 1 percent above the inflation rate.

The United States devotes more resources to supporting R&D than any nation in the world. The estimated $150billion to be spent in fiscal year 1990 is more money than the combined R&D spending of Japan, Germany, theUnited Kingdom, and France. As a percentage of Gross National Product (GNP), however, the United States is notso dominant. Over the past 20 years the United States has consistently spent a larger share of its GNP on R&D thansome nations (like the United Kingdom and France), but since the late 1970s, West Germany and Japan haveincreased their R&D/GNP ratios considerably. By 1988, these two nations and the United States were spendingbetween 2.7 and 2.9 percent of their respective GNPs. In 1990, the estimated R&D effort in the United States of$150 billion represents 2.7 percent of the American GNP. This ratio is up from the 1971 low of 2.1 percent (whichfollowed cuts in defense and space programs), and it is just shy of the peak level of 2.9 percent achieved in 1964.Considering only nondefense R&D spending, however, the situation is somewhat different. While the ratio ofnondefense R&D to GNP in the United States is still larger than the United Kingdom and France, Japan andGermany have much higher ratios, these have been consistently higher than the U.S. ratio over the past 20 years.

The national R&D effort is shouldered primarily by the Federal Government, industry, and academicinstitutions. In 1990, industry and the Federal Government together accounted for nearly 96 percent of total support,with universities and colleges contributing 3 percent, and other nonprofit institutions funding 1 percent. Today,industry is the largest single source of R&D funds, providing $74 billion compared to the Federal Government’s$69 billion. The past decade represents a period of great growth in industrial R&D spending, as only since 1980has industry spent more than the Federal Government on R&D.

SOURCE: Ofiice of Technology Assessmen~ Fe&rally FundedResearch: Den”sions For A Decade, 1991,

special role described below. The other agency training for biotechnology, but calls for an expandedprograms are described in appendix C.

The National Institutes of Health—The NIH isthe largest research agency in dollars awarded tobasic and applied research in the Federal Govern-ment. Of fiscal year 1990’s appropriation to NIH,$2.9 billion was biotechnology-related. NIH is theprincipal biomedical research arm of the Departmentof Health and Human Services (DHHS), and it fundsbiomedical and basic research related to a broadspectrum of diseases and health problems in both itsown research facilities and at outside organizations.The NIH has been the principal funding source forbiotechnology across all fields. But should, or canNIH continue this role? This is not a new question;in 1984 and 1985, considerable public discussion onthe role of NIH took place between the President’sScience Adviser, George Keyworth, and NIH Direc-tor, James Wyngaarden. Keyworth pushed for abroader NIH role in meeting nonmedical biotechnol-ogy needs, while Wyngaarden resisted this ex-panded NIH role (6). At a 1985 NIH AdvisoryCommittee conference, some consensus wasreached on the need for expanded, interdisciplinary

role in more applied or intermediate research wereresisted (47). At the time, concerns about the effectof more targeted research on basic research fundingwere expressed, with industry coming to the aid ofacademic science in supporting the importance ofNIH's commitment to funding basic science. Morerecently, parts of the scientific community balked atthe prospect of an ambitious effort to map andsequence the human genome, fearing that suchdirected research detracts and subtracts from re-sources for fundamental research.

These concerns not only remain pertinent but alsohave become more acute in light of budget con-straints. Despite real growth over the last decade,NIH views itself as being in a steady state and findsitself under strain. With biotechnology increas-ingly integrating into other research fields, andwith budget pressures building, it will be difficultfor NIH to support biotechnology across allfields. Until 1990, scientists in plant and animalscience, who have relied on NIH for funds becausethere have been no other sources, were fearful thatbudget constraints could imperil their only source of

Chapter l&Science and Technology Policies ● 165

funding as NIH eliminates or cuts back on projectsnot central to its mission (51). But the 1990 FarmBill and the 1991 U.S. Department of Agriculture(USDA) budget showed major increases for compet-itive grants in these areas.

From the Laboratory to the Market

University-based research was the foundation ofU.S. leadership in initial commercial applications ofbiotechnology. Indeed, biotechnology in the UnitedStates is, in many respects, an example of successfultechnology transfer. Venture-funded startup firmsfirst brought advances in the biological sciences intothe commercial arena in the 1970s; today, universityresearchers often move easily between academic andcommercial pursuits. Universities themselves areseeking more financial returns from the products oftheir intellectual capital. This is not a surprisingphenomenon, given the closeness between biologi-cal research and application.

Recent trends in the biological sciences indi-cate a move away from broad, lengthy agree-ments between universities and industry andtoward numerous specific agreements. Genen-tech, until 1990 one of the largest and most visibleindependent biotechnology-based pharmaceuticalcompanies, may have up to 500 active agreements atany one time (15). Agreements such as the onebetween Monsanto and Washington University (ini-tiated in 1982 and scheduled to run through 1994,involving over $100 million) are the exception, notthe rule.

Extensive university-industry ties in the biologi-cal sciences have highlighted concerns common toa number of fields. Some critics wonder if Congressand the executive branch have gone too far inencouraging the commercial exploitation of univer-sity research. Recent congressional hearings havefocused on personal and institutional conflicts ofinterest--questioning whether the integrity of uni-versity or government laboratory research has beencompromised by allowing private gain from publicinvestment. Critics of aggressive technology trans-fer out of the universities have asked whetherscientists with a substantial financial stake inresearch outcomes can be objective in reportingresearch results. These questions, mentioned in anearlier OTA report (45), remain largely unresolved.In response to these criticisms, however, universitiesand professional journals have developed disclosureguidelines for making public the personal and

financial interests of researchers. Until recently,such disclosure was strongly resisted (15). The NIHresponded to mounting concern by proposing, inSeptember 1989, guidelines for university research-ers receiving Federal funds. Industry opposed theinitial guidelines, which were withdrawn in Decem-ber 1989, as a threat to commercialization ofuniversity biological research. In addition, the 1990Farm Bill contains a provision that requires land-grant universities to establish conflict of interestpolicies.

Subtle questions are raised as universities attemptto profit from research relationships. Are the factorsthat make such relationships attractive-includingan atmosphere fostering innovation through the freeand easy flow of ideas--threatened by agreementsthat are overly protective of a university’s financialinterests? Also, should U.S. academic institutions—encouraged by congressional, executive branch, andState actions to license technology-be criticizedwhen the licensee is foreign, even when U.S. firmsexpressed no interest in the technology?

Consortia, Centers, and Cooperative Research

In recent years, the U.S. science community hasengaged in an ongoing debate over the appropriatesize and organization of research efforts-partic-ularly in the life sciences. Proponents of moredirected research criticize the traditional investiga-tor-initiated, individually funded approach typical offederally funded biomedical research (3). The bio-logical sciences remain, for the most part, wedded tothis approach, although other disciplines have cometo rely more on fewer, but more expensive, facilitiesand larger research teams (the so-called ‘‘big sci-ence’ ‘). Some argue that the interdisciplinary natureof modern biological research requires a shift towardbig science. Others suggest that efforts requiringlarge amounts of time-consuming, repetitive work,such as mapping and sequencing the human genome,would be best carried out in centralized facilitieswith large data-handling capabilities. Flexibility hasbeen urged by many, who point out that differentapproaches could be necessary for different types ofresearch. A larger critical mass of researchers mightbe appropriate for some types of generic, applied, orintermediate work; and individuals or small teamsmight be more likely to generate both basic innova-tions and specific applications.

A more concentrated approach could be desirablefor certain bottleneck areas of basic or applied


research. Although some advocate the establishmentof industrial consortia to achieve those purposes(26), others argue that because so much of commer-cial significance comes out of basic research itself,cooperative research on a large scale is difficult ifnot impossible (27). In fact, some believe thatinnovative new companies may have little to gainfrom participating in consortia with larger but lessinnovative companies (34).

In 1987, an effort to create an industry-basedconsortium for protein engineering research in theUnited States failed. Although supported by re-searchers at a number of U.S. companies, partici-pants say that upper management was concernedabout consortium funding and the sharing of infor-mation coming out of joint research (11).

Consortia have been touted by some as a cure-allfor the perceived weaknesses of U.S. high-technology industries (36). In the United States,cooperative research usually takes the form of a“center” that is mostly university-or governmentlaboratory-based, low profile, and modestly funded.The primary function is to provide companies witha window on new technology and access to researchconducted at the center. A center may also givecompanies access to personnel. These consortia orcenters are typically organized by enterprisinguniversity or government laboratory entrepreneurs,who utilize public funds as an incentive for privateinvestment in university or government laboratorybiotechnology centers. Frequently, centers are partof State or local economic development efforts (45).An exception to this is the Midwest Plant Biotech-nology Consortium (MPBC) involving 12 States,over 15 universities, 3 Federal laboratories, andnearly 40 agribusiness corporations. The MPBCcarries out research in plant biotechnology, encom-passing Midwestern crops and cropping practices.

Universities have attempted to provide a forumwhere companies can truly cooperate in precom-petitive research. However, frequently, littlecooperative research occurs and, instead, a seriesof agreements develop between university man-agement and individual companies. Any coopera-tive work is financed through a general membershipfee paid by industrial participants, few of which havemuch riding on the outcome of such projects.Membership takes many forms, sometimes as indus-trial liaison programs. One executive of a largechemical company said that his firm participates in

a number of university-based consortia, but that inmost cases it is token participation through paymentof a small annual fee. Smaller companies may findeven a small fee prohibitive. Companies may feelsuch participation is good for public relations, buthave little expectation for tangible benefits. On theother hand, a few projects are quite serious; ingeneral, they involve fewer industrial partners, whohave specific expectations and are contributingsignificant amounts of money (33).

Although several limited consortia have beenformed in biotechnology, broad-based consortiain biotechnology are not likely to emerge unlessthere are clear technical advantages that cannotbe easily solved by companies working alone, astrong challenge is posed by foreign industry, orgovernment funding is provided as an incentiveto cooperation. Otherwise, cooperative initiativesare likely be the exception, not the rule, andlarge-scale projects few in number.

NATIONAL POLICIES IN AGLOBAL ENVIRONMENT

What is the national interest in a global researchand commercial environment? This question isbecoming more difficult for national governments toanswer. National interests affect decisions on re-search priorities, training programs, and relation-ships between universities and research instituteswith domestic and foreign fins.

In general, U.S. policy toward nonmilitary R&Dhas been to support basic research, with the expecta-tion that industry will develop and apply thatresearch in the marketplace. United States priorities,however, are brought into question by the commer-cial success of companies in countries such as Japan,that benefit from a greater emphasis in government-funded programs on applied research and technol-ogy than on basic science. The one exception maybeU.S. biotechnology, which has grown out of thelarge federally funded biomedical research base.

For several promising application areas, espe-cially human health, agriculture, and environmentalprotection, certain applications of biotechnologyhave the potential to address social needs. To some,this role indicates a moral imperative to advanceknowledge, regardless of political borders or eco-nomic issues. This is especially an issue for theUnited States, which spends significantly more than


other countries on biomedical research. Judging bycitations in published scientific articles, biomedicalresearch is markedly international (46). Few scien-tists would support limits on communication andcollaboration. Many would argue that the volumeand extent of information flows, regardless ofborders, have greatly speeded the advance of knowl-edge.

In addition, there is common interest in establish-ing new, international databases for research andregulatory purposes and in developing appropriatetechnologies for the Third World. Scientists in anumber of countries are exploring ways to cooperateon mapping and sequencing the human genome.Threats by the United States to limit access to U.S.prepublication results have caused concern at homeand abroad. Such restrictions would have a greatereffect on small foreign companies than on multi-nationals with U.S. operations (18).

Domestic University-Foreign IndustryRelations

Restricting foreign access to, and funding of,domestic research might be feasible if a countryhas the following:

●

●

●

●

a clear technology lead,firms that have little to gain by similar accessabroad,domestic companies supporting domesticresearch and licensing available technology,anda clear distinction between domestic andforeign firms.

These conditions, however, seldom apply.

The United States may have a clear advantage inmany areas of biomedical research, but it may nothave such an advantage in other fields wherebiotechniques are being developed. Significant workis also carried out in foreign institutions in almost allareas, and U.S.-based firms have established rela-tionships with foreign universities and researchinstitutes. Monsanto’s arrangement with OxfordUniversity has already been mentioned. Calgene haslicensing and technology-transfer agreements withuniversities in Canada, France, Japan, and theUnited Kingdom. Mycogen has agreements withJapanese and European firms. Genentech received asmall grant from the Japanese MHW for cooperativeresearch on premature aging, and also has several

agreements with Japanese universities. UnitedStates and European pharmaceutical firms haveestablished research facilities in Japan.

There are a number of long-term agreementsbetween foreign firms and U.S. universities. Hitachiis building a new research facility at the Universityof California-Irvine that will become fully owned bythe university in 30 years. Several European firmshave established research facilities in the UnitedStates and fired university research in this country.

Under the pressure of international competition,companies are obliged to take advantage of innova-tion quickly-regardless of origin. According to oneobserver: “Both multinational corporations and newbiotechnology firms choose their academic partnersirrespective of national borders” (17). Some U.S.industry and university observers feel that the realquestion is not why U.S. universities are doingbusiness with foreign companies, but rather, whymore U.S. firms are not taking full advantage of U.S.universities.

Some university administrators also point out thatU.S. firms, themselves, frequently license technol-ogy to and from foreign countries. Such agreementsreflect the financing needs and marketing strategiesof small and large firms. This situation raises theunderlying question of national interest in a global,commercial environment. Is funding for U.S. re-search to be rejected because it comes from aforeign-based company? Will access to publiclyfunded research be restricted to U.S. firms that maylicense products abroad or carry out substantialresearch or commercial activities abroad? UnitedStates law requires inventions developed with Fed-eral funds to be manufactured domestically for U.S.markets (Public Law 96-517).

Basic research’s significance for current biotech-nology products makes these questions more diffi-cult to answer, as do the different roles and degreesof access to universities in various countries. Re-search in Japanese universities, for example, is notcomparable to that in the United States. Some peoplein industry say that advocates of an open, interna-tional research and commercial environment arenaive, and that the only way to have any success isto keep new and important technology stateside (32).However, other industry observers say that scienceis a lousy place to say “buy American” (40).


SUMMARYWhen recombinant DNA and cell fusion tech-

niques were developed during the 1970s, the poten-tial of biotechnology excited scientists, indus-trialists, and government officials. But, as with otherprofound advances in knowledge, developmentshave confounded the predictions and expectations ofeven the best/informed observers. In some ways,early commercialization of proteins, derived fromgenetically modified organisms, fed expectations ofscientists, financiers, business people, and, not least,government officials. The expectations were unreal-istic. Biotechnology may prove to be the last greatrevolution in knowledge in the 20th century and asignificant underlying technology for the 21st cen-tury, but its full impact has not yet been felt.

Many governments, enamored by biotechnol-ogy’s potential and concerned that their domesticindustry not lose out in developing anew field, havelaunched specific biotechnology development ef-forts. Governments everywhere are realizing thathigh-technology helps drive industrial competitive-ness and economic strength. For many, biotechnol-ogy became a test case, not only at the national level,but in many States (i.e., North Carolina, Maryland,and Massachusetts).

Many components of such strategies, such as: theemphasis on technology transfer, development ofincubator facilities and venture capital for startupfins, and establishment of interdisciplinary centersfor research are certainly helpful for focusingattention. However, in a sense, they operate at themargins. In 1984, OTA found that governmentexpenditures on research (and the concomitantdevelopment of trained scientists) were among themost significant factors influencing competitivenessin biotechnology. A strong research base is the firstpriority allowing small companies and venturecapitalists the opportunity to take risks. Withoutthis, industry-oriented programs will not be verysuccessful. Observers concerned about Japan maynote that Japan is now working hard to trainscientists although spending on basic research stilllags, as compared to the United States.

If targeted biotechnology strategies have beenlargely unsuccessful, some of the reason may bebecause of the way biotechnology arose out of basicbiomedical research, only to become fully integratedinto the various fields of life sciences. The term

biotechnology retains coherence only to the extentthat regulations, public perceptions, and intellectualproperty law deal with specific biotechnology tech-niques as something unique.

The challenge, then, for national governments isto sort out national from private interests. A task thatwill become more difficult as competitiveness isused as a justification for particular expenditures.For the most part, political support of research in thiscountry is based on perceived social needs—fear ofdisease, concern for an adequate food supply or theenvironment, and national defense. Economic na-tionalism may be particularly difficult to define andpursue, given the pluralistic, incremental, and in-creasingly global nature of the world’s R&D system.


2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

Anderson, G., “EC Looks to Shut Out U.S. Sci-ence,” The Scientist, vol. 3, No. 21, Oct. 30, 1989,pp. 1 (Col. 3).Barnum, A., “Genentech Wins First Grant FromJapan to Foreign Firm,” San Jose Mercury News,July 18, 1989.Bazell, B, “Medicine Show,” The New Republic,vol. 202, No. 3 Jan. 22, 1990, p. 16.Cantley, M., “Managing an Invisible Elephant,”Bio@tur, vol. 84, November 1989, pp. 8-16.Commission of the European Communities, Biotech-nology Action Programme: Progress Report 1988,EUR 11650 EN/l Brussels, 1988.Culliton, B., “NIH Role in Biotechnology Debated,”Science, vol. 229, July 12, 1985, pp. 147-148.Dibner, M., and White, R., Biotechnology Japan(New York, NY: McGraw Hill, 1989).Dibner, M., “Japan’s Biotechnology Industry: Focuson Pharmaceuticals,’ Drug News and PerspectivesVO1. 3, No. 2, 1990, pp. 85-89.Dietz, R., chemist, Laboratory of the Government,personal communication, November 1990.Ergas, H., “Does Technology Policy Matter?”Techrwlogy and Global Industry, B.R. Guile and H.Brooks (eds.) (Washington, DC: National AcademyPress, 1987).Fox, J., director, Corporate Molecular Biology,Abbott Laboratories, personal communication, June1989.Fujii, M., director, OffIce of Advanced Research &Technology, Pharmaceutical Affairs Bureau, Japa-nese Ministry of Health and Welfare, personalcommunication, July 1989.Gittelsohn, J., “Japan’s Universities, Thking A CueFrom National Politics, Now Face Their Own Crisisof Complacency, Analysts Say,” The Chronicle ofHigher Education, vol. 45, No. 48, Sept. 20, 1989.


14. Greenberg, D., “U.S., EEC Leaders Ponder Impacton ’92 on Science,” Science & Government Report,Mar. 15, 1990.

15. Hanna, K., “Recent Trends in University-IndustryResearch Relationships in Biotechnology,” contractreport prepared for OTA, August 1989.

16. Heaton, G., Jr., “The Truth About Japan’s Coopera-tive R&D,” Issues in Science and Technology, fall1988.

17. Heusler, K., “The Commercialization of Gover-nment and University Research,” Biotechnology andthe Changing Role of Government, Organization forEconomic Cooperation and Development, Paris,1988.

18. Hodgson, J., “Europeans Feel U.S. Squeeze,” Bio/Technology, vol. 8, No. 1, January 1990, p. 15.

19. H tter, R., vice president for research, ETH Z rich,remarks at Biotechnology in a Global EconomyInternational Conference, July 6, 1989.

20. Japan Research Development Corporation, ERATO:Exploratory Research for Advanced Technology,program description, 1988.

21. Japanese Ministry of Agriculture, Forestry, andFisheries, “Biotechnology Research and Develop-ment in Agriculture, Forestry, Fisheries and the FoodIndustry in Japan,” Tokyo, 1989.

22. JPRS Report: Science &Technology, Europe, “Ger-many: Government Funds Genetic Engineering Re-search Program,’ JPRS-EST-90-023, NOV. 27,1990.

23. Johnson, C., MITI and the Japanese Miracle: TheGrowth of Industrial Policy, 1925-1975 (Stanford,CA: Stanford University Press, 1982).

24. Martin, C., “Japan Evaluates Its Commitment toBiotech as Ways Are Sought To Reorient Bioindus-try,” Genetic Engineering News, September 1989, p.1 (Col. 3).

25. Masuda, M., director, Bioindustry Office, Ministry ofInternationalTrade and Ihdustry, personal communi-cation, July 1989.

26. McConnell, J., corporate director, Advanced Tech-nology, Johnson & Johnson, New Brunswick, NJ,address to the conference ‘Unlocking Potential: ThePromise of the Human Genome Initiative,” Wash-ington, D. C., Apr. 24, 1989.

27. Morioka, S., president, Yamanouchi PharmaceuticalCo., Ltd., personal communication, July 1989.

28. Morita, K., senior managing director, Takeda Chemi-cd Industries, Osaka, address to the conference“Advancing Biomedical Science in the Twenty-FirstCentury: Competition and Collaboration, HarvardSchool of Public Health, May 31, 1989.

29. National Research Council, The Working Environ-ment for Research in U.S. and Japanese Universities(Washington, DC: National Academy Press, 1989).

30. Nihon Kogyo Shirnbun, “Follow MITI’s Example,”May 6, 1986, p. 3.

31. Nihon Kogyo Shirnbun, “Strong Emphasis on BasicTechnologies,” Mar. 18,1986, p. 3.

32. Pennisi, E., “Japanese Companies Are Gearing Up toChallenge U.S. Biotechnology l&ad,’ The Scientist,vol. 3, No. 17, Sept. 4, 1989, p. 1 (co1.1).

33. Quisenberry, R., director, Central Research andDevelopment Department, DuPont ExperimentalStation, personal communication, August 1988.

34. Rathmann, G., chairman, Amgen, personal commun-ication, April 1989.

35. Reich, R., “Who is Us?” Harvard Business Review,January-February 1990, pp. 53-64.

36. Richards, E., “Taiwan’ sLatestExport: Money,” TheWashington Post, April 9, 1989.

37. Schmid, R., “Biotechnology in West Germany,”paper presented at Bio Symposium Tokyo’ 88, Oct.19-22, 1988.

38. Sharp, M., remarks at OTA conference “Biotechnol-ogy in a Global Economy,” July 6-7, 1989.

39. Sharp, M., and Holmes, P. (eds.), StrategiesforNewTechnology (Hertfordshire, UK: Philip Allan, 1989).

40. Sherblom, J., Transgenic Sciences, Inc., personalcommunication, July 1989.

41. Steinboc~ M., international affairs specialist, U.S.department of Agriculture, persoanl communication,November 1990.

42. Thomas, D., remarks at OTA international confer-ence, July 6, 1989.

43. Tokura, S., manager, Research Planning, FujisawaPharmaceutical Co., Ltd., personal communication,August 1989.

44. U.S. Congress, Office of Technology Assessment,Commercial Biotechnology: An International Analy-sis, OTA-BA-218 (Elmsford, NY: Pergamon Press,Inc., January 1984).

45. U.S. Congress, Office of Technology Assessment,New Developments in Biotechnology: U.S. Invest-ment in Biotechnology, OTA-BA-360 (Springfield,VA: National Technical Information Service, July1988).

46. U.S. Congress, Office of Technology Assessment,Federally Funded Research : Decisions for a Decade,OTA-SET490 (Washington, DC: U.S. GovernmentPrinting Office, May 1991).

47. U.S. Department of Health and Human Services,Public Health Service, National Institutes of Health,“The NIH Role in Fostering the Nation’s hadershipin Biotechnolo~,’ Proceedings of the 51st meetingof the Advisory Committee to the Director of theNational Institutes of Health,” unpublished, Be-thesda, MD, October 1985.

48. Yoshikawa, A., Commercial Biotechnology inJapan, contract report submitted to the Office ofTechnology Assessment, September 1989.

49. Yoshikawa, A., “TheJapaneseC hallengeinBiotech-nology: Industrial Policy,” BRIE Working Paper,


Berkeley, CA, 1987. 51. Zimbelman, executive vice president, American So-50. Ziehr, H., remarks at OTA conference “Biotechnol- ciety of Animal Science, personal communication,

ogy in a Global Economy,” July 6-7, 1989. July 1990.

“One must learnuntil you try.”

by doing

“I’m drawing up theDNA? Very low.”

the thing, for although you

Chapter 11

Regulations

think you know it you may have no certainty

Under D, I have dogs,

The DNA Story: A .

Sophocles

doctors, dioxin. Where do I put

James D. WatsonDocumentary History of Gene Cloning

CONTENTSPage

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173BIOTECHNOLOGY RISK AND REGULATION IN THE UNITED STATES . . . . . . . 175

Biochemical Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175Altered Micro-organisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177Transgenic Plants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182Transgenic Animals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183Implementation and Coordination of Regulations . . . . . . . * . * ., * . . .,, . . . . . *, **....,. 186

NATURAL REGULATORY POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186No Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189Stringent Biotechnology-Specific Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189Limited Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194

EFFECT OF REGULATION ON COMPETITIVENESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195SUMMARY ... *.. ***. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196CHAPTER 11 REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197

BoxesBox Page1 l-A. Containment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17411-B. Federal Coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17611-C. Regulation Under the Federal Plant Pest Act and the Plant Quarantine Act . . . . 18011-D. Green Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18711-E. State Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18811-F. Bovine Somatotropin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1901 l-G. Regulations in Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . 19211-H. Regulations in France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19311-1. Regulations in the United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19311-J. The Organization for Economic Cooperation and Development . . . . . . . . . . . . . . . . 195

Chapter 11

Regulations

INTRODUCTION

Health and environmental regulations aimed atreducing risks associated with a new technologyimpose direct costs on industry and administrativecosts on government. These regulations also result inindirect costs to the public, in the form of higherprices and, perhaps, decreased benefits from inno-vation. Governments impose regulations, however,to avert the costs associated with mitigating adverseeffects that might result from the use of thetechnology. Ideally, the imposition of regulationsresults in a net benefit to society. But, balancing thecosts of regulation against the benefits of riskreduction through regulation is difficult when atechnology is new, and the risks associated with itare uncertain or poorly understood.

Oversight of biotechnology in the United Statesbegan in the mid-1970s when concerned scientistsasked the National Institutes of Health (NH-I) toimplement a set of laboratory-safety guidelines forbiomedical research using recombinant organisms(7). Although no evidence existed that these orga-nisms were more harmful than naturally occurringorganisms, there was uncertainty about the riskassociated with the use of recombinant organisms inthe laboratory and concern about rapid, widescaleuse of the new techniques. Therefore, the NIHGuidelines, published in 1976, outlined conditionsfor research that would reduce the possibility ofrecombinant organisms escaping the laboratory orinfecting laboratory personnel.

The NIH Guidelines were comprehensive. Theydetailed proper laboratory procedures for handlingvarious kinds of organisms in different kinds ofexperiments. They also described systems for con-tainment, using specialized equipment and disabledorganisms unable to survive outside the laboratoryand, therefore, less likely to transfer deoxyribonu-cleic acid (DNA) to other organisms (see box 1 l-A).Experiments perceived to entail more risk or uncer-tainty than others were assigned to higher categoriesof containment with concomitantly more safetyequipment and procedures.

Over the next several years, the guidelines wererevised and relaxed as more organisms and experi-

ments were shifted to lower risk categories. The laterguidelines also established a graduated oversightprocedure. Experiments thought to entail the mostrisk (e.g., those involving human subjects or theproduction of highly toxic substances) were re-viewed by NIH’s Recombinant DNA AdvisoryCommittee (RAC); experiments thought to be lessrisky (e.g., those using certain pathogens) werereviewed by local institutional biosafety commit-tees. Today, most recombinant DNA (rDNA) labora-tory research in the United States is exempt fromreview and subject to minimal restrictions.

The guidelines are not Federal regulations andcannot be enforced through the imposition of finesor penalties. They are based solely on NIH’scontract-making authority. All institutions receivingNIH funding are subject to the provisions of theguidelines, and noncompliance can result in a loss ofNIH funding. Other Federal funding agencies havealso adopted the guidelines for use by their grantrecipients, and the guidelines have been amended byRAC to encourage voluntary compliance by re-searchers in the private sector. About one-half of allfirms conducting rDNA research have voluntarilyregistered their biosafety committees with NIH, andthese firms have been found to follow the guidelinesmore closely than their public-sector counterparts(70). Because the guidelines are thorough, rational,and relatively easy to implement, they were quicklyaccepted by scientists and became the standard inmost industrialized nations.

In the early 1980s, when new biotechnology-based products approached the marketplace, manyof these new products became subject to regulationspromulgated by Federal agencies other than NIH,because of the products’ intended uses (40). Micro-organisms, for example, whether or not they aregenetically altered, are subject to EnvironmentalProtection Agency (EPA) regulations if they are tobe used as pesticides. Plants and animals used asfood are subject to Food and Drug Administration(FDA) and U.S. Department of Agriculture (USDA)regulations.

To coordinate the regulatory activities of theFederal agencies involved, a Biotechnology ScienceCoordinating Committee (BSCC), recently reorgan-

–173–


Box 11-A--Containment

The NIH Guidelines for Research Involving Recombinant Molecules prescribe increasing levels ofcontainment for experiments of increasing risk or uncertainty. The lowest level of containment, BL1, is similar toordinary laboratory facilities; the highest, BL4, resembles laboratory conditions appropriate for handling deadlypathogens. Methods used to confine organisms to the laboratory are listed in the guidelines; they are based onexisting procedures, commonly used in research on pathogens. The methods include:

containment, these practices include: restricting access to the laboratory; cleaning and decontaminating thelab daily or after a spill; forbidding eating, drinking, or smoking in the lab; wearing lab coats;

techniques-to lower the risk of contamination and infection. Good practice appropriate for experimentsentailing more risk, such as experiments using human pathogens, may include serological monitoring of labpersonnel or vaccination, if such vaccination is available.

● Laboratory design or equipment that prevent physical exposure. At the lowest levels of containment, forexample, labs should be equipped with sinks, window screens, and sterilization equipment; and the labshould also be easy to clean. At higher levels of containment, labs might be designed to be separate fromtraffic flow, with windows sealed shut, and special ventilation systems installed.

● Biological containment of micro-organisrns. Experiments use micro-organisms unable to grow outside thelaboratory and limited in their ability to transfer DNA to other organisms.

These containment procedures are complementary; standard practices can be combined with various combinationsof physical and biological barriers.

The containment principles outlined in the NIH Guidelines have formed the basis for most regulations in theUnited States which govern the use of genetically modified organisms. They have also been adopted by othercountries. Combining physical and biological containment is also possible and appropriate for higher organisms.Plants and their pollen, for example, may be contained by removing reproductive organs (detasseling corn); usingplant mutants that do not form reproductive organs (cytoplasmic male sterility); using herbicides and insecticides;geographically, isolating experimental plants from similar plants, by staggering planting dates, or physicallyseparating plants by growing them indoors or in a greenhouse.SOURCES: 51 Fed. Reg. 16958; 52 Fed. Reg. 31848; 53 Fed. Reg. 43410; 54 Fed. Reg. 10508; 55 Fed. Reg. 7438; National Research Council,

Field-Testing Genetically Modijied Organisms: Framework for Decisions (Washington DC: National Academy Press, 1989).

ized and renamed the Biotechnology Research scientifically sound biotechnology regulation onSubcommittee (BRS) (see box 1 l-B), was estab-lished under the aegis of the President’s Office ofScience and Technology Policy (OSTP). Manyquestions of agency jurisdiction were settled withOSTP’s 1986 publication of the “CoordinatedFramework for Regulation of Biotechnology.” Thedocument describes how new biotechnologicalproducts will be regulated under existing law.Although it can be argued that products made usingbiotechnology are not always treated exactly as theirnonengineered counterparts are treated, in general,an effort has been made to base regulations on theintended use of the products, rather than on themethod by which they are produced.

Many other countries have adapted existing lawsand institutions, originally developed for the over-sight of chemicals and to protect agriculture and theenvironment, to accommodate advances in biotech-nology. However, it is no simple matter to base

legislation written for other purposes. New legisla-tion specific to the regulation of biotechnology wasenacted in Denmark, Germany, and the UnitedKingdom (U.K.). Existing legislation has beenamended in The Netherlands, and further legislationis under consideration (31). The European Commu-nity (EC) has also enacted two new directivesregulating biotechnology: one concerns the con-tained uses of genetically modified organisms andthe other regulates deliberate releases of suchorganisms.

An exhaustive description of these evolvingbiotechnology laws and regulations is not appropri-ate here. Instead, this chapter offers a broad view ofnational regulatory policies. Scientific assessmentsof risks associated with different applications ofbiotechnology are summarized, along with the U.S.approach to regulating these applications. Finally,international trends in regulation are outlined. These

Chapter 11--Regulations ● 175

differences in approach from nation-to-nation, par-ticularly through their effects on investment andinnovation, will influence the ability of the UnitedStates to remain competitive in biotechnology on theinternational scene.

BIOTECHNOLOGY RISK ANDREGULATION IN THE

UNITED STATESThe first step in conventional risk assessment is

hazard identification, that is, analyzing the specificthreat to health or the environment associated witha substance or process. Much of the controversysurrounding the regulation of biotechnology hasfocused on hazard identification, as agencies attemptto evaluate the type of hazard posed by this newtechnology (53,68). Because there have been noexamples of adverse effects caused by biotechnol-ogy, projecting potential hazards rests on extrapola-tions from problems that have arisen using naturallyoccurring organisms. The consensus among scien-tists is that the risks associated with geneticallyengineered organisms are similar to those associ-ated with nonengineered organisms or organismsgenetically modified by traditional methods, andthat these risks may be assessed in the same way(18,34,49,50,53).

Many uses of biotechnology are similar to classi-cal technologies or extend these technologies.Micro-organisms, plants, and animals that have beengenetically altered through selective breeding or bytreatment with chemical mutagens are widely usedin U.S. agriculture and in the fermentation industry.The newer techniques also result in genetic altera-tions, but genetic engineering enables researchers tomake more precise, well-characterized changes thanare possible using classical techniques. The newtechniques are unique, however, because they allowthe transfer of genetic material across species.

Where similar technologies have been usedextensively, past experience can bean importantguide for risk assessment. The most familiarapplication of biotechnology is its use in theproduction of biochemical, especially proteins.Safety procedures developed for protecting chemi-cal production workers can be adapted to biotechnol-ogy, and most countries have no special regulationsgoverning the use of biochemical produced usingbiotechnology. Wide experience with the introduc-tion of new varieties of plants has also helped

scientists pinpoint potential problems in introducinggenetically engineered plants.

In other cases, however, experience is uneven.Although certain micro-organisms-for example,the nitrogen-fixing bacteria Rhizobia—have beenwidely used in agriculture, experience with manyother micro-organisms is more limited. The smallerresearch base has made planned introductions ofengineered micro-organisms into the environmentmore controversial than the introduction of newplants. Information on the structure and function ofmicrobial communities is often lacking, making itdifficult to assess the effects of environmentalintroductions. In addition, micro-organisms are rela-tively difficult to confine and track (50,68).

Because experience with similar technologies andapplications can be useful in assessing risk, it isreasonable to regulate biotechnology-derived prod-ucts under existing legislation via established agen-cies that have experience in regulating specificapplications. This policy, usually referred to as“product-based regulation,” has often been re-peated in U.S. agency and interagency policystatements.

Biochemical Products

Biotechnological processes can be used to pro-duce proteins that are found in small amounts innature and that can be difficult to isolate and purify.Instructions for making proteins are contained in thegenetic material, the DNA, of each cell, and a set ofDNA instructions for making a protein can betransferred from one organism to a single cell ofanother organism. From that cell, the new organism,usually bacteria or cultured mammalian cells, can begrown in large quantities in a production facility andtheir protein products isolated. These products canbe enzymes, which are specific catalysts produced incells to speed up intracellular chemical reactions,proteins with other life-sustaining properties, orother biochemical. The commercial product is apurified biochemical, not a living organism.

Some of these genetically engineered products aresubstitutes for commercially available products.Biotechnology, however, provides a faster, safer, ormore economical means of obtaining comparativelylarge amounts of the product. Before the develop-ment of genetic engineering for example, humangrowth hormone isolated from human cadavers wasscarce. Ultimately, it was withdrawn from the


Box 11-B-Federal Coordination

The Biotechnology Science Coordinating Committee (BSCC) was founded by the Office of Science andTechnology Policy (OSTP) in 1985 to:

. . . serve as a coordinating forum for addressing scientific problems, sharing information, and developing consensus;promote consistency in the development of Federal agencies’ review procedures and assessments; facilitatecontinuing cooperation among Federal agencies on emerging scientific issues; and identify gaps in scientificknowledge.

The committee consisted of the Commissioner of the FDA, the NIH Director, the Assistant Secretary of Agriculturefor Marketing and Inspection Services, the Assistant Secretary of Agriculture for Science and Education, theAssistant Administrator of the EPA for Pesticides and Toxic Substances, the Assistant Administrator of the EPAfor Research and Development, and the Assistant Director for Biological, Behavioral, and Social Sciences of theNational Science Foundation.

Rather than being a forum for discussion, however, BSCC became the center of interagency disagreementsabout regulatory policy. Internal dissension reached a climax in 1988, when EPA sent its proposed rule forregulation of genetically modified micro-organisms under TSCA to the Office of Management and Budget (OMB)for review before publication in the Federal Register. The chairman of BSCC wrote to OMB requesting that OMBwithhold clearance until BSCC could consider the proposed rule. A series of interagency meetings and memorandaresulted in deadlock. The chairman informed OMB, and OMB refused to approve EPA’s draft rule. In response, theEPA representative to BSCC stopped attending meetings and placed the draft rule and interagency memoranda ina public docket. As of mid-1991, no proposed rules for EPA regulation of micro-organisms under TSCA and FIFRAhad been published.

One major area of disagreement was the precise definition of organisms that would be subject to EPAregulations. In 1989, various approaches to this problem were discussed by BSCC and by the agencies’ scientificadvisory committees. Not surprisingly, BSCC failed to reach a consensus. The issue was turned over to a higherlevel committee, the Biotechnology Working Group of the President’s Council on Competitiveness, chaired by VicePresident Quayle. The OSTP’s proposed principles for the scope of oversight for the planned introduction oforganisms were published in July 1990.

In late 1990, BSCC was replaced by the Biotechnology Research Subcommittee (BRS) of the Committee onHealth and Life Sciences, a standing interagency committee of the Federal Coordinating Council on Science,Engineering, and Technology (FCCSET). The FCCSET, like OSTP, is headed by the President’s science advisor.The BRS’s charge is said to be similarto that of BSCC. Its membership is broader and includes representatives fromthe Department of Energy (DOE), NIH, FDA, the State Department and its Agency for International Development(AID), EPA, USDA, NSF, the National Aeronautics and Space Administration (NASA), the Department ofCommerce (DOC), the Department of Defense (DoD), the Department of the Interior, OMB, and OSTP.

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market, because it presented the risk of contamina- properties or more resistance to degradation thantion by infectious agents. Today, human growthhormone is uncontaminated and more plentiful,because it is isolated from bacteria engineered tocarry the human growth hormone gene and make thegrowth hormone protein.

Biotechnology can also be used to produce newproducts, for use as drugs or as industrial or foodprocessing enzymes. Some proteins, like tissueplasminogen activator (tPA) and erythropoietin(EPO), occur naturally but are too expensive tosynthesize chemically and too difficult to isolatefrom tissue. Biotechnology makes their productionfeasible. Biotechnology can also be used to producemodified forms of proteins with altered biological

naturally occurring proteins.

Basing the regulation of biochemical pro-duced through biotechnology on existing legisla-tion is widely accepted. Many regulations governthe manufacture and uses of chemicals, regardless ofthe method of production. Most proteins producedusing biotechnology, thus far, however, are intendedfor use as drugs, diagnostic products, or foodadditives. Therefore, before they may be sold, theymust meet FDA requirements under the FederalFood, Drug, and Cosmetic Act (FDCA) (21 U.S.C.§301-392). All drugs must undergo years of testingin animals and in clinical trials, followed by FDAreview of test results. The kind, size, and length of

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The Council on Competitiveness made further recommendations in their 1991 Report on NationalBiotechnology Policy, which contains “Four Principles of Regulatory Review. “ Vice President Quayle announcedPresident Bush’s approval of these principles in July 1990.

. Federal Government regulatory oversight should focus on the characteristics and risks of the biotechnologyproduct-not the process-by which it is created.

● For biotechnology products that require review, regulatory review should be designed to minimizeregulatory burden while assuring protection of public health and welfare.

. Regulatory programs should be designed to accommodate the rapid advances in biotechnology.Performance-based standards are, therefore, generally preferred over design standards.

● In order to create opportunities for the application of innovative new biotechnology products, all regulationin environmental and health areas-whether or not they address biotechnology-should use performancestandards rather than specifying rigid controls or specific designs for compliance.

The first of these principles restates long-standing Federal policy, while the second, on the importance ofminimizing undue regulatory burdens, is obvious. The third and fourth principles, promoting the use ofperformance-based standards, are new to the discussion of biotechnology regulations. While this has been animportant consideration in the development of other environmental regulations in the United States, rigid controlsand specific designs have not been mandated for compliance with biotechnology regulations.

Another advisory committee was established by NIH at the behest of Congress. The National BiotechnologyPolicy Board is to make recommendations to the President and to Congress on policies to enhance basic and appliedresearch; to enhance the competitiveness of the United States in development of commercial biotechnology-relatedindustries and products; to assure the training of sufficient scientists, engineers, and laboratory personnel for bothresearch and commercial development; and to enhance the transfer of technology from university and Federalresearch laboratories to commercial laboratories. The board is also expected to make recommendations on Federalparticipation in cooperative research initiatives and on regulatory policies. The board, which met for the first timein October 1990, consists of representatives from Federal agencies, industry, universities, State biotechnologycenters, and foundations.SOURCES: 50F.R. 47174; S.A. Shapiro, “Biotechnology and the Design of Regulation” Ecologyhw QuarterJy, vol. 17,1990, pp. 1-70; The

President’s Council on Competitiveness, Report on National Biotechnology Policy February 1991; U.S. Senate, Report toAccompany H.R. 4783, Departments of Labor, Health and Human Services, and Education and Related Agencies AppropriationsBill, 1989; Department of Health and Human Serviees, Public Health Service, National Institutes of Healti “NationalBiotechnology Policy Board,” unpublished, December 1990; Biotechnology New.rwatch, (M. 15, 1990, p. 9.

tests depend on the nature of the drug, but approvalmay take as long as 10 years. So far, 15 drugs andbiologics based on biotechnology have been ap-proved for human use, and more than 100 are inclinical trials awaiting approval. Diagnostic prod-ucts that are not taken internally require lessstringent testing, because they do not pose similarrisks. Over 200 diagnostic tests based on biotechnol-ogy have been approved by FDA. Food additives areapproved based on manufacturer tests demonstratingtheir safety under the conditions of use. In 1990,FDA approved its first food additive produced usingan engineered micro-organism: it is chymosin, anenzyme used in cheesemaking (29). It also appearsthat FDA may consider food ingredients that aregenerally recognized as safe (GRAS) when pro-duced by conventional means to also be consideredGRAS when produced using biotechnology (37,38).

Altered Micro-organisms

Contained Uses

The organisms most commonly used inproduction facilities are neither pathogenic nortoxic and present little or no risk to workers orsurrounding communities. In fact, many strainsof micro-organisms fare poorly outside special-ized growth facilities. Nevertheless, oversight mayexist in the form of restrictions on laboratory or othercontained uses of micro-organisms. Through rela-tively simple procedures that include the use ofseals, inters, sterilization equipment, and protectiveclothing, containment measures can be used to limitthe survival of the organisms outside the growthfacility and minimize human contact with theseorganisms.


The Occupational Safety and Health Administra-tion (OSHA) of the U.S. Department of Laborannounced in its guidelines in the CoordinatedFramework that no new regulations appeared to benecessary to protect the safety of laboratory workers(51 Fed. Reg. 23347). In the United States, theGovernment regulates large-scale industrial produc-tion using recombinant micro-organisms dependingon how the final product is regulated. Thus, FDA hasstandards for facilities that use micro-organisms toproduce proteins, and EPA can regulate commercialproduction under the Toxic Substances Control Act(TSCA) (15 U.S.C. §2601 et seq.).

Planned Introductions

Micro-organisms are used commercially in wastetreatment and agriculture. The first such geneticallyengineered micro-organism to reach the market wasa microbial pesticide engineered in Australia, andintroduced in 1989 (75). A derivative of an organismthat had a long history of safe use, its onlymodification was a deletion that impaired its abilityto transfer the pesticide trait (71). Biotechnologypromises improved versions of such micro-organisms and further applications to the degrada-tion of toxic substances.

A consensus seems to exist that the vastmajority of altered organisms pose minimal or norisk; nevertheless, certain environmental intro-ductions could warrant concern. This judgment isbased on prior experiences with somewhat analo-gous situations: the introduction of other species,including exotics; the spread of novel traits inexisting populations; and the agricultural use ofplants genetically altered through traditional tech-niques, such as selective breeding (15,18,49,50,53,57,68). Potential problems include the creation orenhancement of pests; unintended harm to nontargetspecies, either directly or through competition forresources; and changes in the basic biochemicalprocesses that support the ecosystem, such asnutrient cycling (18,53).

In evaluating environmental risk, the type oramount of genetic alteration is less importantthan how that change affects the characteristics(phenotype) of the organism and the interactionof the organism with the environment. Severalstudies list risk criteria and attempt to weigh orprioritize them (18,50). These criteria include:

familiarity with the parent organism and itsmodified derivatives,likelihood of the organism’s persisting in theenvironment or spreading to new environ-ments,likelihood of the organism competing success-fully against other important organisms,ease with which the organism can transfer itsgenetic material to other organisms,direct involvement of the organism in basicecosystem processes, (e.g., nutrient cycling andrespiration),response of the organism to selective pressuresin the new environment, andsize and frequency of the releases, becausegreater size or frequency can increase theprobability of long-term survival (18,68).

Because characteristics of the organism and theenvironment must both be considered, a case-by-case review process is generally viewed as necessary(18,50,68). Scaling the level of review to the level ofrisk is appropriate, however, such as the approachtaken by NIH in overseeing laboratory research. Afaster, less-detailed review may be sufficient forlow-risk introductions. For example, micro-organisms judged similar to past introductions andreturned to their native environment might eventu-ally be assigned to a low-risk category or exemptedfrom review (18,50,53,68). Another proposal sug-gests considering how a genetic modification altersan organism’s safety, compared with that of aparental strain (48).

In the United States, most planned introductionsof genetically engineered micro-organisms are sub-ject to EPA regulations. Some introductions, how-ever (e.g., vaccines and plant pest derivatives) areregulated by FDA and USDA.

Vaccines—The FDA regulates vaccines forhuman use. Many vaccines are viruses, but becausethey are weakened strains and have been used safelyunder FDA regulation for many years, regulation ofhuman vaccines has aroused relatively little contro-versy.

Animal vaccines and other animal biologics areregulated by USDA under the Virus-Serum-ToxinAct (21 U.S.C. §151-158). Some local officials havevoiced concern about the safety of proposed tests ofnew vaccines. In 1989, a proposed test of an orallyadministered recombinant rabies vaccine, intendedto immunize wild animals, was abandoned after

Chapter n-Regulations ● 179

State public health officials raised objections inSouth Carolina, but a similar test took place inVirginia in mid-1990. Other outdoor tests of recom-binant animal rabies vaccines have taken place inBelgium, Canada, and France (25,27). The USDAgranted 42 licenses for veterinary biologic productsthrough the end of 1990.

Plant Pest Derivatives--Release of geneticallyengineered micro-organisms derived from plantpests is regulated by the Animal and Plant HealthInspection Service (APHIS) of USDA, under theauthority of the Federal Plant Pest Act (PPA) and thePlant Quarantine Act (PQA) (see box 11-C).

Pesticides-Genetically engineered micro-orga-nisms intended for use as pesticides are regulated byEPA under the Federal Insecticide, Fungicide, andRodenticide Act (FIFRA) (7 U.S.C. §136 et seq.).Under this law, all pesticides, whether chemical ormicrobial, genetically engineered or not, must beregistered by EPA before being sold and may onlybe distributed and used under the conditions ap-proved in the registration. The EPA also grants anExperimental Use Permit (EUP) to allow limited useof unregistered pesticides for premarket testing.EUPs are usually presumed not to be required fortesting new chemical pesticides on less than 10acres, but EPA has concluded that evaluation ofsmall-scale testing of certain genetically engineeredmicro-organisms is needed. To determine if an EUPwill be required, EPA is amending the existing EUPrule to require that it (the EPA) be notified of plansfor small-scale testing of certain categories ofmicro-organisms. Until a new rule is promulgated,EPA has requested voluntary compliance. In thecase of micro-organisms that are pesticides and arealso derived from plant pests, EPA has beendesignated the lead agency under the CoordinatedFramework, but USDA’s Animal and Plant HealthInspection Service (APHIS) also takes part in thereview. As of March 1991, EPA had approved 10applications for small-scale testing of geneticallyengineered microbial pesticides under FIFRA. Inaddition, two applications had been withdrawn, andanother review had been suspended.

Other Micro-organisms—Other releases ofmicro-organisms into the environment may beregulated by EPA under TSCA, which is a gap-filling law enabling EPA to quickly screen chemi-cals that will not be reviewed under other statutes forhealth hazards. The act gives EPA authority to

collect information on chemical substances andmixtures of chemical substances, so it can identifypotential hazards and exposures. The TSCA givesEPA jurisdiction over manufacturing, processing,distribution, use, and disposal of all chemicals incommerce or intended for entry into commerce thatare not specifically covered by other regulatoryauthorities. In practice, firms are required to provideEPA with information on the characteristics of anynew chemical 90 days before commercial manufac-ture of the chemical begins. These requirements donot apply to small amounts of chemicals producedfor research or analysis, as long as workers areinformed of health risks. Noncommercial work, suchas academic research, is not regulated under TSCA.

The EPA has announced, in its policy statement inthe Coordinated Framework (51 Fed. Reg. 23301),that it considers certain types of micro-organisms tobe chemical substances subject to regulation underTSCA if they are not regulated under other statutes.The EPA has requested voluntary compliance withits policy until formal rules are in place. Premanu-facture notification is requested for intergenericmicro-organisms, that is, those containing DNA,derived from organisms of different genera, unlessthe transferred DNA consists of a well-character-ized, noncoding regulatory region. The EPA hasannounced that it will amend its regulations so thatthe research and development (R&D) exemptionwould not apply to field releases of micro-organisms. It has also stated its intention to developa significant new-use rule for pathogenic micro-organisms, and it has requested voluntary notifica-tion in the interim. Further rulemaking is needed toimplement the policy, so EPA’s current policy maychange. As of March 1991, nine applications forfield tests of genetically engineered micro-organisms had been approved by EPA under TSCA,mainly for nitrogen-fixing bacteria.

Some environmentalists charge that TSCA isinadequate for regulating environmental releases ofgenetically engineered organisms (39,46). TheEPA’s authority to regulate organisms as chemicalsunder TSCA has not been legally tested. Anotherdifficulty some environmentalists find with TSCA isthat it is not applicable to academic research. Inaddition, TSCA is a notification statute, not alicensing statute. Under TSCA, firms inform EPA oftheir intention to manufacture a chemical; EPA, inturn, has 90 days to review the submission. AsTSCA has been applied to the manufacture of


Box 11-C-Regulation Under the Federal Plant Pest Act and the Plant Quarantine Act

Under the authority of the Federal Plant Pest Act (PPA)(7 USC. §150aa-jj) and the Plant Quarantine Act(PQA) (7 U.S.C. §151-164a, $166-167), the Animal and Plant Health Inspection Service (APHIS) of USDA isresponsible for regulating plants, plant products, and plant pests that may threaten U.S. agriculture. Under theselaws, APHIS also has the authority to regulate the import, interstate movement, and release of genetically engineeredorganisms derived from plant pests into the environment. The definition of plant pests is broad, encompassing anyorganism that directly or indirectly causes disease or damage to plants (e.g., bacteria, viruses, protozoa, fungi, andother parasitic plants, insects, mites, snails, nematodes, and slugs).

APHIS uses a permit system to restrict entry, dissemination, and establishment of plant pests into the UnitedStates. A permit is required for any organism if it has been genetically altered using rDNA techniques; if it is beingimported, moved interstate, or released to the environment; and if the donor, vector, or recipient is a plant pest oris unclassified. APHIS may also regulate genetically engineered organisms or products altered or produced usinggenetic engineering that the deputy administrator determines are plant pests or has reason to believe are plant pests.

To receive a permit for a small-scale, planned introduction into the environment, an applicant must submitdetailed information on the identity of the organism and how it was produced; a description of the changes in theorganism resulting from introduction of new genetic material; a statement on the purpose of the introduction anddetails of the experimental protocol, including the size and schedule of releases; and a description of the methodsused to prevent dissemination beyond the test site.

Before a permit for an introduction maybe issued, APHIS prepares an environmental assessment based on thesubmitted information and must notify and coordinate its review with the appropriate agency in the State where therelease is planned. This process takes up to 120 days. Through mid-1991, USDA had issued more than 150 permitsfor the release of genetically engineered plants into the environment.

To receive a permit to import a regulated organism or to transfer a regulated organism across State lines, anapplicant must submit an application containing information on the identity of the organisms and where and howthey were produced, a description of how they will be transported and how they will be maintained and used at theirfinal destination, a description of the safeguards that will be used to prevent their dissemination, and a descriptionof the final disposition of the organisms. For interstate movement alone, an application for a single permit, goodfor 1 year, can cover multiple interstate transfers of multiple organisms. The USDA has issued more than 650permits for movement.

To sell a genetically engineered plant or micro-organism that is a regulated article under PPA and PPQ, a firmmust petition APHIS for an exemption from these regulations. The firm must submit data establishing that theorganism is not a plant pest and is not otherwise deleterious to the environment+ No petitions have been receivedyet, and it is not yet clear precisely what data must be submitted to receive approval.

Individuals may also submit petitions to amend the list of organisms regulated as plant pests by adding ordeleting any genus, species, or subspecies. The petition must include copies of papers from scientific literature orunpublished data that support the petitioner’s contention that an organism is a plant pest and should be added tothe list or that the organism is not a plant pest and should be deleted from the list. After publication in the FederalRegister and an opportunity for public comment, the Deputy Administrator will approve or deny the petitioncompletely or in part.SOURCES: 51 F.R, 23352; 52 F.R. 22892; 7 CFR 340; H.G. Purchase and D.R. MacKenzie (eds.), Agricultural Biotechnobgy: Introduction

to Field Testing (Washingto% DC: OffIce of Agricultural Biotechnology, USDA, March 1990); J.W. Glasser, testitnony before theHouse Committee on Agriculture, Subcommittee on Department Operations, Researck and Foreign Agricukure, Oct. 2, 1990.

chemicals, the burden of proof is on the agency, not aspect of the new rules has been the preciseon the manufacturer. Critics would prefer to see a definition of the organisms whose release into thestatute that requires a manufacturer to demonstrate environment would be subject to review. A defini-safety of a new product before a permit is issued tion needs to meet several standards. It must be very(39,46,62). clear to the regulated community which organisms

are subject to the regulations and which are not. ForThe Scope Issue—Rules under FIFRA and TSCA example, in setting some types of regulations,

have been under development since the Coordinated agencies often rely on precise lists of items that areFramework was published. The most controversial subject to regulation. In addition, a good definition


would make regulation easy for the agency toadminister. It should also focus the agency’s re-sources on those organisms most likely to behazardous, while exempting or focussing less atten-tion on organisms presenting minimal risk.

Developing a product- or risk-based rule, how-ever, is more difficult than it appears. It has alwaysbeen hard to define the risks posed by modifiedorganisms. Defining risky organisms in an adminis-tratively simple way, that will be clear to theregulated community is extremely difficult. In 1988,this issue became the focus of acrimonious intera-gency debate (see box 11-B) (61). As a result, BSCCand the agencies’ scientific advisory committeesconsidered several alternative definitions. Someproposals were criticized for being process based,that is, that the organisms to be reviewed wereidentified by the process by which they were made.

Such process-based definitions maybe construedto mean that certain types of genetically engineeredorganisms carry inherently greater risk than theirnonengineered counterparts, a view that criticscharge is unscientific. On the other hand, unlikeclassical techniques, biotechnology can be used toproduce organisms carrying traits derived fromorganisms of different species, potentially raisingmore regulatory questions (18,50). In addition, thereare particular difficulties in using a risk-baseddefinition to describe organisms subject to reviewunder TSCA. The TSCA applies to all commercialchemicals, not only hazardous ones. It can be arguedthat the fact that a chemical is subject to EPAnotification under section 5 of TSCA impliesnothing about its risk, since TSCA is used as amethod of screening all new chemicals.

In mid-1990, a proposed Federal policy, devel-oped by BSCC and the President’s Council onCompetitiveness, was issued (55 Fed. Reg. 31118).The aim of the policy was to promote consistencyamong the agencies. The OSTP recognized, how-ever, that the agencies may take different approachesin promulgating specific rules and guidelines underexisting legislation. The OSTP acknowledged thatagencies had difficulty in developing operationaldefinitions of BSCC’s 1986 proposal, namely, thatorganisms whose introduction should be subject toreview would be either intergeneric organisms orthose derived from pathogens. The new proposaloutlines the general principle that agencies should

use in determining whether a planned introductionshould be subject to oversight:

To the extent permitted by law, planned introduc-tions into the environment of organisms with delib-erately modified hereditary traits should not besubject to oversight . . . unless information concern-ing the risk posed by the introduction indicates thatoversight is necessary.

The specific definition that was proposed,however, is not risk-based. The proposed scopeincludes “organisms deliberately modified by theintroduction of genetic material into, or manipula-tion of genetic material within, their genomes,”excluding:

plants and animals resulting from natural repro-duction or from the use of traditional breedingtechniques;

micro-organisms modified through physical orchemical mutagenesis, physiological processessuch as conjugation, or spontaneous deletion;

vascular plants regenerated from tissue culture;

organisms modified through the introduction ofnoncoding, nonexpressed sequences that causeno physiological or phenotypic changes; or

other organisms that could have been producedusing these techniques or for which there existssufficient familiarity to determine that theirenvironmental effects are equivalent to those ofpast safe introductions.

The OSTP listed examples of risk criteria thatagencies may use to evaluate planned introductions;these criteria are similar to those recommended inother recent reports from scientific societies (18,50).

In defining the scope of organisms whose intro-ductions into the environment will be subject toregulation, OSTP ultimately proposed a largelyprocess-based definition. The proposed scope in-cludes all genetically modified organisms, whileexcluding a number of defined categories of orga-nisms. It is unclear, however, how much this policywill change by the time it is published in its finalform. In a widely leaked memorandum in May 1991,OSTP officials discussed abandoning the process-based definition for one based solely on risk. Whilethis is an intellectually sound and internally consist-ent approach, it would lack administrative simplicityand could result in burdensome regulations.


Food Uses

Micro-organisms have been used since prehistorictimes in baking, brewing, and fermenting. Theorganisms can die or be removed before the food issold, or, as in the case of yogurt, live cultures mayremain when the food is consumed. Strictly speak-ing, using micro-organisms in food processing is anenvironmental release. But because of familiaritywith these organisms, their long history of safe use,their use in relatively small amounts, and theirspecialized environmental niches, micro-organismsin food have elicited less concern than large-scaleenvironmental releases of genetically engineeredorganisms.

When Congress gave FDA authority to regulatefood additives in 1958, many micro-organisms andother materials in use were recognized by FDA tohave a special status-GRAS, or “generally recog-nized as safe’—because of their long record of safeuse in food. Those entering the market since haveeither achieved GRAS status or received FDAclearances as food additives, based on submission ofextensive information on their physical and chemi-cal properties, intended use, and safety (21 CFR part173 subpart B).

The FDA has decided that “the use of a newmicro-organism found in a food could be considereda food additive” (51 Fed. Reg. 23310). Furthermore,a micro-organism can lose its GRAS status if it isproduced or modified by new biotechnology thatalters it, so that it is no longer generally recognizedas safe by qualified experts. Such micro-organismswould then be considered food additives and thus,subject to premarket FDA review and clearance(51Fed. Reg. 23313). One genetically modified micro-organism, a variety of baker’s yeast, has beenapproved for food use in the United Kingdom (2).

Transgenic Plants

For generations, plants have been geneticallyaltered using traditional methods of selective breed-ing, bringing enormous benefits to farmers andconsumers. Biotechnology promises to extend thesebenefits by providing a means of endowing plantswith new traits that are difficult or impossible totransfer using classical techniques. These new traitscould result in plants more resistant to disease andinsect pests or more amenable to food processingtechnology. Current research is also aimed at pro-

Photo credit:

Genetically engineered tomatoes from a Yolo (CA) Countyfield trial conducted in 1990.

ducing foods that are more nutritious and that havea longer shelf life.

Much less concern has been voiced about theagricultural use of transgenic plants than plannedintroductions of micro-organisms. Larger organismsare much easier to track, and more techniques areavailable to ensure their confinement. In addition, abroader, deeper range of experience exists foragricultural uses of altered plants. In the UnitedStates, over 150 field tests have been approved byUSDA and have been carried out without incident.In The Netherlands and Germany, however, pressuregroups protested against field tests of transgenicplants in 1989 and 1990 (44,77).


New strains of plants are usually tested in astepwise fashion, beginning with small-scale field


tests, followed by increasingly larger tests, andfinally commercial sale. Potential problems canoften be recognized while the plant is being tested ona small scale. Similar procedures can be effectivelyused to test genetically engineered plants.

A major concern associated with the use oftransgenic plants is enhanced weediness. Althoughdomesticated crops are unlikely to become weeds, itis possible they can transfer advantageous traits towild, weedy relatives by cross-pollination (18,19).This is not a major problem in the United States,however, where few crop plants are native species,and many crop plants have no wild or weedyrelatives (50,53). Of the 15 major U.S. field crops,only sorghum, sunflower, clover, and tobacco havewild, weedy relatives in the United States (9). Someminor crop plants also have wild relatives in theUnited States, such as those in the crucifer family,which includes broccoli, cauliflower, kale, andrapeseed, as well as weedy yellow mustards (69).

Field trials of genetically engineered plants thatcarry pesticidal traits will be subject to EPA reviewunder FIFRA. Other recombinant plants are cur-rently reviewed USDA under the authority of PPAand PQA (See box 11-C).

Thus far, these laws have only been applied totransgenic plants containing rDNA derived fromplant pests. The earliest method of transferring DNAto plants resulted in the transfer of some DNAderived from a plant pest, Agrobacterium tumefa-ciens. Therefore, virtually all transgenic plants todate have been subject to USDA regulation. Morerecently, however, new techniques for transferringDNA to plants have been developed that do notnecessarily result in the incorporation of plant-pestDNA. Eventually, plants developed through thesenewer techniques will be ready for field testing, butunless the nature of the inserted trait triggers areview, they will not be subject to USDA regulationunder PPA and PQA. Such transgenic plants thathave been developed with Federal support wouldprobably be subject to review under NIH Guidelinesor USDA’s research guidelines, but privately fundedresearch would not be covered (54).

Food Uses

The FDA will regulate genetically modifiedplants used as foods in the same way it oversees therest of the food supply. Whole foods (e.g., fruits,vegetables, and grains) are not subject to premarket

review. The FDA, however, has authority to seizeadulterated food and take steps to halt its distribu-tion. This authority is generally used to removefoods from the market that have become contami-nated. It could be used, although this has neverhappened, against new varieties of plants containingharmful substances.

In its policy statement in the Coordinated Frame-work, FDA states that a food produced usingbiotechnology could be in violation of FDCA if itcontains a harmful substance not ordinarily found inthe food or if it contains an abnormally high level ofa substance that can be injurious to health. Beyondthis, however, FDA has given little indication of itsapproach to ensuring safety of new food plants.Industry representatives have expressed a desire formore guidance. In December 1990, Calgene, aCalifornia plant biotechnology firm, asked FDA toapprove its use of kanamycin, a marker gene thatmakes plants resistant to the antibiotic, (59).

An industry consortium, the International FoodBiotechnology Council (34), has proposed a set ofscientific principles for evaluating the safety of foodand food ingredients derived from plants and micro-organisms altered through the application of bio-technology. The proposal is based on existing lawand practice. A decision-tree for each category ofproduct-food derived from micro-organisms; sin-gle chemical entities and simple, chemically definedmixtures; and whole foods and complex mixtures—encompasses a series of detailed questions about thefood. The answers would lead to a decision to acceptor reject the food or subject it to further study (34).

Food safety is likely to be an increasinglyimportant topic of public concern. Appropriate FDAregulation of genetically altered products is criticalif a public already suspicious of food additives andpesticide residues is to be confident about thebenefits of biotechnology-derived foods.

Transgenic Animals

Genetic alteration of animals to serve humanneeds is also a centuries-old process. Biotechnologyhas the potential to accelerate this process andproduce animals with increased growth perform-ance, feed conversion efficiency, leanness, or dis-ease resistance. Transgenic animals can also be usedto produce pharmaceutical proteins, much in the waybacteria or cultured cells are used. For example, agene can be altered so that the protein appears in the

transgenic animal’s milk, from which it may bepurified (47). Eventually, this process may providea cheaper alternative to protein production in mam-malian cell culture, which remains expensive. Trans-genic animal models of disease, containing genesthat mimic human genetic defects, are also anincreasingly important research tool.

The regulation of transgenic animals is stilluncertain. Activities potentially subject to regula-tion under existing legislation were outlined in theCoordinated Framework, but no rules have beenproposed and little guidance given.


Environmental releases of a few types of animals,mainly insects or worms considered to be plant pestsor animals containing genetic material from plantpests, may be regulated under PPA. Transgenicanimals derived from infectious, contagious, patho-

genic, or oncogenic organisms may be subject toregulation under the Animal Quarantine Statutes andthe Virus-Serum-Toxin Act. Federally funded re-search is subject to research guidelines of thefunding agency (54). Releases of genetically engi-neered fish are not regulated under Federal law (35).

Food Uses

The Food Safety and Inspection Service (FSIS) ofUSDA is responsible for ensuring the safety, whole-someness, and proper labeling of food productsprepared from livestock and poultry, under theauthority of the Federal Meat Inspection Act (21U.S.C. §601 et seq.) and the Poultry ProductsInspection Act (21 U.S.C. §451 et seq.). The FSISinspects cattle, sheep, swine, goats, horses and otherequines; poultry; and food products prepared fromthese animals, but it has no oversight over fish orother aquatic animals. According to USDA’s policy


f o r

Photo credit: The U.S. Department of Agriculture

The U.S. Department of Agriculture (USDA) has developed a user’s guide for introducing genetically engineered plants andorganisms. As of July 1991, USDA had approved 165 permits for field test in 34 states and Puerto Rico.


statement, published in the Coordinated Framework,genetically engineered food animals would betreated like new breeds-subject to the same inspec-tion procedures as traditionally inspected animals.The FSIS could also amend its regulations to ensurethat genetically engineered organisms intended foruse as food are not adulterated(51 Fed. Reg. 23343).The safety of transgenic animals could be evaluatedby considering the primary and secondary effects ofthe gene product, much as drug or pesticide residuesin food are evaluated (8).

Implementation and Coordination ofRegulations

The Coordinated Framework has settled a numberof issues concerning agency jurisdiction. For manyproducts it is clear which agency has primaryresponsibility. The FDA has adapted existing proce-dures for the regulation of drugs, biologics, andmedical devices to the regulation of products devel-oped using biotechnology; EPA and USDA haveestablished procedures for reviewing small-scalefield tests of genetically engineered micro-organ-isms and plants. The review process is functioningmore smoothly as the agencies have gained experi-ence (30,58,64,67).

Nevertheless, the system is not without its prob-lems. From the outset, the regulatory system hasbeen criticized as too confusing for the regulatedcommunity, particularly for scientists working inuniversities or small firms who have little experi-ence with regulation. This situation is made worseby the lack of published guidelines and rules. TheUSDA did not issue its research guidelines untilearly 1991 (56 Fed. Reg. 4134). The EPA’s proposedrules for small-scale field testing under FIFRA andTSCA have faced long delays. Although field testsare being conducted, the policy is subject to change,making long-range planning difficult for industry. Inaddition, the organisms now being tested in smallscale will soon be ready for large-scale testing and,eventually, product approval. But regulatory re-quirements for gaining approval to market certaintypes of products, particularly foods, are unclear(14). The FDA has given industry little indication ofthe regulatory barriers it will face in bringing newfoods to market.

One reason agencies can be slow to confront newregulatory issues is an inability to anticipate newproblems and novel areas of research. In addition,

regulatory procedures are cumbersome and do notreadily lend themselves to new and rapidly changingtechnologies. Another problem, long recognized bystudents of the regulatory process, is the strongincentives bureaucracies have to move slowly or notat all. Indeed, agencies face criticism if in actingquickly they make mistakes (55).

Academic researchers, especially agricultural re-searchers, also find agency requirements, whichofficials of large firms accept as a part of the cost ofdoing business, to be burdensome (20,24). Thissituation tends to discourage academic biotechnol-ogy research that would lead to an encounter with aregulatory agency, thus discouraging work on sub-jects with little potential for commercial reward—including products aimed at small markets, environ-mental research, and research addressing agricul-tural problems of the Third World (24,66,71). Thecost of meeting regulatory requirements has asimilar effect on industry, discouraging research onproducts whose commercial potential is relativelysmall (26). Some critics maintain that the majorproblem with regulation is even more fundamental;that is, the resources that must be devoted to meetingregulatory requirements are disproportionate to risksas currently perceived (23,26,42,65).

NATIONAL REGULATORYPOLICIES

Several industrial nations and the EC are develop-ing and implementing biotechnology regulations,based in part on international scientific criteria.Strong incentives favor international harmonizationof such regulations. Export-oriented countries, espe-cially small countries without large home markets,need regulations compatible with those of potentialimporters of their products.

Regulations, however, are also influenced bypublic opinion and cultural attitudes toward risk,health, and the environment (17). Substantial coun-try-to-country differences in public opinion onenvironmental concerns are common. This can beseen, for example, in the different public responsesto the use of nuclear power in France and Germany(51). In Germany, the Green Party platform calls fora total ban on biotechnology research, development,and production; the organization has been particu-larly influential in this regard (see box 1 l-D).


Box 11-D-Green Parties

The Green parties, although still a small minority, have been increasingly successful in local and parliamentaryelections throughout Europe. In the June 1989 elections to the European Parliament, the number of seats held bymembers of Green parties more than doubled, compared with the previous election, reaching 39 out of 518. Untilrecently, the former West Germany’s Die Gr nen was the most successful Green party in Europe in terms ofmembership, electoral votes, and financial strength. They received 5.6 percent of the vote in the March 1983 Federalparliamentary election and increased its share to 8.3 percent in January 1987. In December 1990, however, in thefirst election after German reunification, the western German Greens suffered a resounding setback The party,which had taken no formal position on reunification, received only 3.9 percent of the vote. Because they failed tocapture the required 5 percent of the vote, all 46 Green members of the Bundestag lost their seats. An eastern Germancoalition of Greens and civic movements, however, won 8 seats. Racked by internal dissention, the Green Party’sfuture in Germany is uncertain.

An outgrowth of local environmental groups of the early 1970s, the Greens have become an umbrella groupfor organizations whose concerns are often unaddressed by the major parties. They draw support from peace anddisarmament activists, antinuclear-power protesters, and supporters of equal rights for gay people, women, andmembers of minority groups. Some of their success may be due to the Greens’ position as an alternative toestablished parties and thus, the obvious choice for the disillusioned voter. Green supporters tend to be, for the mostpart, moderate-to-radical left politically, well-educated, and employed in the white-collar service sector of theeconomy, in particular, universities. Although some of their supporters are radical leftists, one Green party sloganproclaims: “We are neither left nor right, but out in front.”

The Greens are less an organization than a movement. The beliefs of their members vary, and policiessupported by Green parties in different countries vary as well. Tensions within Green parties are similar to thoseamong U.S. environmentalists-between the most radical environmentalists (deep ecologists) and those who putthe needs of people first. Some generalizations are possible, however. Policies supported by the Greens include:presentation of the natural environment; unilateral disarmament; a nonaligned, nuclear-free Europe; and aid to theThird World targeting the development of self-sufficient economies. Central to the Greens’ philosophy isdissatisfaction with traditional political organizations and representative democracy. The Greens maintain thatgovernment policy often reflects the interests of the military and industry, rather than the will of the people.Therefore, they favor decentralization of decisionmaking power, including the use of plebiscites to decide majorissues. The organization of Green parties reflects this support for “direct democracy.” Local party branches areautonomous, and their leadership is either collective or rotates among members. Meetings are open to the public,and grassroots participation is encouraged. Since their recent losses in Germany, however, some Greens whodisagree with this lack of organization have become more vocal in their support for a more-established leadership.

The Greens part company with traditional leftists in their emphasis on alternative lifestyles, based less onmaterial well-being and modern technology and more on individualism, community solidarity, and self-determination. Because many Greens are skeptical about the benefits of new technology and increases in economicgrowth and industrial productivity, they often reject attempts to weigh risks to the environment against the needsof industry. One spokesman, a specialist on the chemicals industry for the British Green Party, stated that“economic growth should be limited and that the health and safety of the planet should become the chief criteriaby which to judge the worth of any activity.”

The Greens strongly favor increased controls on the chemical and energy industries and a phase-out of nuclearpower. Now that the expansion of the nuclear power industry has come to a virtual standstill in many countries, theirattention has turned to biotechnology. Like their positions on other environmental issues, the position of the mostextreme Greens concerning biotechnology is not based on estimates of risk to public health or ecological balance.Rather, they oppose biotechnology because it is unnatural and “speeds up evolution." To the Greens, the protectionand preservation of the natural environment is sacrosanct.SOURCES: A. CoghlarL “Chemieals Industry: Guilty until Proven hmoeen~” New Sci+wu’ist, vol. 123, No. 1678, Aug. 19, 1989, p. 23; K.J.

KelIey’’AGreenFringe, ’’hel%ogremive,e, V01.54, N0.4, 1990, pp. 30-33; F.M ller-Roinme~ “TheGermanGreensinthe 1980’s:Short-Term Cyclical Protest or Indicator of Transformation?” Political Studies, vol. 37, 1989, pp. 114-122; M.G. Rermer,“Europe’sGreenTide,” Widd-Watch,vol. 3,N0. 1,1990, pp. 23-27; S. Sc~ “GermanGreens, Still Fighting One Another,Survey Election Debacle,” The New York Times, Dee. 7, 1990, J.H. Vau~ “The Greens’ Vision of Germany,” Orhis, VOI. 32,1988, pp. 83-9S; H.J. VeeQ “Prom Student Movement to Eeopax: The Greens,” The Wahington Quarterly, vol. 10, 1987, pp.29-39.

292-870 - 91 - 7 : QL 3


Box 11-E--State Regulations

Several States have considered new legislation or have developed regulations based on existing legislationregulating field tests of genetically modified organisms or the use of certain products developed usingbiotechnology. This is due to a perception of gaps in Federal legislation and oversight, to the fact that Federalagencies do not require notification of local officials or citizens in the area of test sites, and to a belief that Federalagencies are not attuned to local needs.

Hawaii, Illinois, and Wisconsin require notification before the release of genetically engineered organisms intothe environment. Two other States, Minnesota and North Carolina, have more formal permit systems for field tests.Minnesota has empowered its Environmental Quality Board to coordinate State and Federal regulations pertainingto field tests and to issue permits for field tests not regulated elsewhere by the State government. A recent NorthCarolina law mandates an in-State review of proposed fieldtests. A 10-member Genetic Engineering Review Boardwill write detailed regulations to be used by North Carolina’s State Department of Agriculture when evaluating fieldtrials for both research and commercial purposes. Under these regulations, researchers would submit essentially thesame information that they now supply to Federal agencies.

The North Carolina law has received mixed reviews. Some fear that other States will follow North Carolina’slead, resulting in a confusing patchwork of laws that will impede research and slow the course of commercialization.Others see benefits. Although the new law adds an extra layer of review, it imposes no new data requirements onresearchers. The law may also help ensure public confidence in the regulatory system while prohibiting additionalregulation on the part of local communities, It has also been argued that by submitting to State laws, companies mayprotect themselves from legal challenges.

Two States, Wisconsin and Minnesota, have enacted legislation imposing a temporary ban on the use of bovinesomatotropin, a product derived from a genetically engineered micro-organism (see box 1 l-F).SOUR~S: Industrial J3iotechnology Association, Survey of State Government Legislation on Biotechnology, May 15, 1990 and fall W9Q G.

Blumensty~ “States Are Seeking Mom Regulation of Biotechnology,” The Chronicle of HigherEducation, Aug. 8,1990, p. A13;M. Cravvfon$ “Should States Regulate Biotechnology?” Science, vol. 245, 1989, p. 466; J.L. Fox, “Wide Acclaim for NorthCarolina Regulations,” Biotechnology, vol. 7, 1989, p. 1002.

Prior incidents, related or unrelated, have raised (see box 11-F). Some scientists attribute publicpublic awareness and political sensitivities. For concern about biotechnology to scientific illiteracyexample, initial concerns about the hazards of rDNAresearch arose in the mid- 1970s, roughly coincidingwith an accidental release of smallpox virus from aLondon laboratory in 1973. The incident, unrelatedto rDNA research, also coincided with the electionof a Labour Government and an increase in parlia-mentary interest in workplace safety. Consequently,in the United Kingdom the first controls on biotech-nology were based on general workplace legislation(6).

In the United States, sporadic concern aboutparticular aspects of biotechnology regulatory pol-icy has arisen. Local protests against releases ofgenetically engineered micro-organisms occurred in1986 and 1987 in California and Missouri, respec-tively (68). Although general opposition has sincedissipated, several States have introduced and insome cases enacted legislation regulating plannedintroductions (see box 1 l-E). More recently, farm,consumer, and environmental groups have raisedconcerns about the use of bovine somatotropin(BST), a hormone that increases milk production

in the general population. In addition, according tocross-national studies of health, safety, and environ-mental regulations, increasing public concern aboutsuch hazards tends to coincide with public distrust ofthose responsible for ensuring public safety: scien-tific experts, the civil service, and the businesscommunity (73).

Worldwide, there have been three basic ap-proaches to the regulation of biotechnology; theygenerally parallel approaches to controlling environ-mental pollution and nuclear power.

. No regulations. A number of countries withactive investment in biotechnology have noregulations specific to biotechnology. In mostgrowth-oriented countries (NICs) of the PacificRim (e.g., Taiwan, South Korea, and Sin-gapore), biotechnology has been targeted as astrategic industry. Some industrialized Euro-pean Nations, including Italy and Spain, whichhave no regulations specifically dealing withbiotechnology, expect to develop them to

Chapter 11-Regulations ● 189

harmonize with EC directives on biotechnol-ogy.Stringent biotechnology-Specific regulations.Some northern European countries have re-sponded to public pressure to impose stringentregulations specific to biotechnology by enact-ing new legislation. Under a 1986 law, Den-mark prohibits the deliberate release of geneti-cally engineered organisms without the expresspermission of the Minister of the Environment.Germany enacted new legislation imposingtight restrictions in 1990. The EC’s 1990directives on contained use and deliberaterelease of modified organisms, while not asrestrictive as the Danish or German laws,follow a similar approach, i.e., directives spe-cifically regulate the use of biotechnology.Limited restrictions. Australia, Brazil, France,Japan, The Netherlands, the United Kingdom,and the United States allow the use of biotech-nology with some restrictions and oversight(see boxes 11-G; 11-H; and 11-1). In thesecountries, regulations based on existing oramended legislation governing drugs, workerhealth and safety, agriculture, and environ-mental protection are being applied to the useof biotechnology. Stringency varies, as do theenforcement mechanisms.

No Regulations

The newly industrializing countries of the PacificRim (e.g., South Korea, Singapore, and Taiwan) areconsciously imitating Japan’s postwar route toeconomic success. These governments place heavyemphasis on economic growth and development,with particular interest in the production of high-technology exports. Years of neglecting the environ-ment in Pacific Rim countries, however, haveresulted in severe industrial pollution, and, in recentyears, public awareness of environmental problemshas risen. There is increasing evidence of publicinterest in regulations designed to protect health andsafety and the environment. Some observers expectthe Pacific Rim countries will eventually followJapan’s lead in the development of biotechnologyregulations as well (28,32).

Stringent Biotechnology-Specific Regulations

Denmark

In contrast to the approach of most Pacific RimNations, Denmark and Germany have enacted new

legislation specifically regulating biotechnologyk, the Environ-products and techniques. In Denmar

ment and Gene Technology Act (EGTA), passed bythe parliament in 1986, gives the Minister of theEnvironment broad power to regulate the use ofgenetically modified organisms. The law restrictsbiotechnology research with these organisms toregistered laboratories. The production, marketing,use, or import of substances or products containinggenetically manipulated organisms or cells is notpermitted, except with the approval of the Minister.Pharmaceuticals and feedstuffs, however, are ex-empt from this provision.

In addition, the deliberate release of geneticallymodified organisms is specifically prohibited inDenmark, although the Minister of the Environmentmay make exceptions. The Minister of the Environ-ment has agreed not to grant approval for releaseswithout the consent of the parliament committee forthe environment (3). Approval for field testing twostrains of genetically engineered sugar beets wasgranted in July 1989 (41,60).

A 1987 order covers small- and large-scaleresearch and production facilities using engineeredmicro-organisms and is largely aimed at protectingworker health and safety. Administered by theNational Labor Inspectorate, it specifies contain-ment conditions for R&D.

The EGTA was amended in 1989, easing somerestrictions that industry found most onerous. Forexample, pilot plants are now treated as researchlaboratories, rather than as production facilities, and,as such, are subject to fewer regulations. A secondchange allows a company to continue working aftera complaint has been lodged against it with theEnvironmental Appeals Board. Previously, suchwork had to cease until the complaint was dismissed.

Nevertheless, industry representatives charge thatthe approval process is still too time-consuming andburdensome (52). However, the 1989 amendmentsand field-test approvals suggest that, in practice, theregulations may come to be no more severe thanthose in other European countries.

Germany

New legislation enacted in Germany in 1990 waswelcomed by the regulated community, because itended a period of regulatory uncertainty (56). In1989, the Administrative Supreme Court for theState of Hesse ruled that because there was no law


Box 11-F--Bovine Somatotropin

Bovine somatotropin (bST), also known as bovine growth hormone, is a naturally occurring peptide hormoneproduced by cattle. Among other functions, it regulates the production of cows’ milk. The hormone can bemanufactured using genetically engineered organisms in a standard fermentation process, resulting in a nearlyidentical copy of the natural substance. When supplemental injections of small doses of bST are administered todairy cows, milk production increases by as much as 10 to 25 percent. The cows may eat more feed, but there isan increase in milk production per unit of feed. The increased production results in a significant decrease in theproduction cost of a unit of milk.

Like all animal drugs, whether or not genetically engineered, the use of bST is subject to FDA regulation. Toreceive approval to market any animal drug, the manufacturer must demonstrate that the drug is safe and effectivewhen used in accordance with the label directions. It must also be shown that the drug and its metabolizes do notappear as unsafe residues in the edible tissues of the animal at the time of slaughter or in other animal products, e.g.,milk or eggs. Although FDA has not yet approved bST for marketing, the agency found, in 1985, that the meat andmilk from experimental herds are safe for human consumption. A NIH panel reached the same conclusion in 1990.The FDA must evaluate the hormone’s effects on the health of cows before it can grant final approval.

In addition to concerns about the effects of bST on human health and animal welfare, concerns also exist aboutconsumer acceptance. A 1990 survey of Wisconsin consumers found that 77 percent would prefer to drink milk fromuntreated cows, and 67 percent would pay as much as 22 cents additionally per half-gallon for non-bST milk.

The strongest resistance to bST in the United States probably comes from farm activists who believe that bSTwill increase economic pressures on small farmers already pressured by increased farm productivity by larger farms.Since the 1950s, dairy farming has changed considerably, as a result of technologies that save time and labor suchas, bulk milk handling, silo unloaders, and improved milking equipment+ Higher quality feeds, artificialinsemination, and better disease control have also contributed to productivity increases. In 1955, the average cowin the United States produced less than 6,000 pounds of milk per year. By 1985, average milk production was closeto 13,000 pounds yearly. This increase in productivity has resulted in a dramatic decrease in the number of dairyfarms and a corresponding increase in their size. With or without the use of bST, this trend is expected to continue.

Industry officials, however, emphasize bST’s “size neutrality.” Unlike other new technologies, use of bSTdoes not require a large investment or impose along delay before benefits are realized. Therefore, bST can be usedprofitably by operators of both large and small farms. Farmers who are poor managers, however, and whose cowsare badly nourished or unhealthy are unlikely to realize benefits from bST use. A 1987 USDA study found:

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to ‘‘expressly permit the application of genetic including transgenic plants and animals. But, theengineering, such facilities may not be built andoperated” (4). The ruling prevented the use of aFrankfurt production facility, operated by HoechstAG, from manufacturing genetically engineeredhuman insulin. Although this decision was bindingonly in the State of Hesse, new investment inproduction facilities in Germany ceased afterward.The 1990 law will allow biotechnology productionto proceed.

The new law is based on the findings of aparliamentary commission, which spent 2 yearscompiling a thorough report on all uses of biotech-nology. Although the commission reached consen-sus on a wide variety of issues, the Green Partyrepresentative took exception to many conclusions.The commission strongly supported the use ofbiotechnology in developing pharmaceuticals, diag-nostic products, chemicals, and foodstuffs––

commission, also concerned about contained uses ofmicro-organisms, favored extending the currentcontrols on government-funded, contained uses toapply also to industrial production facilities. Thecommission was emphatically opposed to the envi-ronmental release of genetically engineered micro-organisms and viruses, except for vaccines (15).

The comprehensive Genetic Technology Law,largely based on the report of the parliamentarycommission, is broad in scope, covering recombi-nant micro-organisms, viruses, cells, plants, andanimals, in addition to plasmid vectors. The lawspecifies conditions for building and operatingproduction facilities, releasing engineered orga-nisms into the environment, and transporting orga-nisms. Specific requirements are outlined for bothresearch and commercial production.


Adoption of bST, when viewed at the national level, simply reinforces the 30-year trend toward increased milkproduction per cow and declining dairy farm numbers. When viewed at the farm level, bST use could prove profitablefor almost all commercial dairy farms. But inefficient producers who lack management skills and who do not adjustfeeding and health procedures to reflect increased milk production from bST-treated cows are not likely to captureall of bST’s potential benefits. Hence, bST will not significantly affect the national trend towards large dairy farmsin all regions.

Nonetheless, temporary bans on the sale and use of bST were in effect in Wisconsin and Minnesota until mid-199l.

Similar issues are being addressed in Europe. The U.K.’s Veterinary Products Committee sees no risk to humanhealth or to the environment stemming from bST use, but it has recommended that bST not be licensed for salebecause of questions about the manufacturing process and bST’s effects on animal welfare. The EuropeanCommunity (EC) is also hesitating to approve bST use. In 1989, the EC placed a 15-month moratorium on the useof bST and later extended the moratorium until the end of 1991, so that the EC Commission could complete itsstudies. In March 1991, the EC’s Committee for Veterinary Medicinal Products found that milk and meat nomtreated cows are safe. Some members of the committee, however, recommended further studies on the effects ofbST on the health of cows. But EC! member nations are now free to authorize the use of bST.

The ultimate impact of the use of bST on international trade is unclear. If bST is used in the United States butnot in other countries, opportunities for commercial export might grow, as domestic U.S. prices may fall belowinternational prices. It is not known, however, whether potential importers would accept milk from bST-treatedcows.SOURCES: Offkeof Technology Assessrnen~ U.S. Dairy Industry ata Crossroad: Biotechnology and Po/icy Choices, 1991. J. Juskevichand

C.G. Guyer, “Bovine Growth Hormone: Human Food Safety Evaluation” Science, vol. 249, 1990, pp. 875-884; R, Fallert et al.,Ml’ and the Dairy Zndustry: A National, Regional and Farm-level Analysis, Economic Research Service, U.S.Department ofAgriculture, Agrieukural Economic Report No. 579, October 1987; D.P. Blayney and R.F. Falleq Biotechnology andAgriculture:Emergence ofBovineSomatotropin, Commodity Economics Division, Economic Research Service, U.S. Department of Agriculture,Staff Report AGES 9037, June 1990; “Thumbs Down for Milk Hormone,” New Scientist, vol. 127, No. 1728, Aug. 4,1990, p. 25;The Economist “Bad Moos,” vol. 316, No. 7667, Aug. 11, 1990, pp. 66-7Q G. Gugliot@ “A Wonder Drug or a Threat?” TheWashington Post, June 24, 199Q B.W. Marion and RL. Wills, “A Prospective Assessment of the Impacts of Bovine Somatotropin:A Case Study of Wiscons@” American Journal of Agricultural Econom”cs, VOI, 72, 1990, pp. 326-336; R. Jennings, personaleommunicatio~ December 199Q Technology Assessment Conference, “NTH Technology Assessment Conference Statement onBovine Somatotrop~” Journal of the American Medical Association, vol. 265, 1991, pp. 1423-1425.

The law divides work with rDNA into four safety however, five firms received permission to operatelevels, depending on the source of the DNA, the hostorganism, and the vector. The most widely usedorganisms are included in the lowest safety level. Atthis level, authorities must be notified of plans toopen facilities for research. Research considered tobe riskier, requires formal approval before work canbe undertaken. All industrial or commercial work isalso subject to formal approval, but disclosure andpublic hearings are required only for work at SafetyLevels 2 through 4. The law also holds operators offacilities liable for damages, and it requires opera-tors of facilities approved for work at Safety Levels2 through 4 to arrange for liability coverage.

The Lender, or State governments, are responsiblefor implementing and enforcing the regulations, anapproach which is typical of German regulatorypolicy. The Advisory Board for Biological Safety(ZKBS), a part of the Federal Ministry of Health,plays an advisory role. Some fear that this places theburden of enforcement on local agencies lackingnecessary expertise (16,45). In the last half of 1990,

production facilities (76).

The law also grants authority to the health ministryfor regulating deliberate releases of geneticallyengineered organisms and for approving productscontaining genetically modified organisms. It listsinformation that manufacturers must provide andrequires that public hearings precede releases ofgenetically engineered organisms whose spreadcannot be limited. Germany’s first release of geneti-cally engineered organisms, a field test of alteredpetunias at the Max Planck Institute in Cologne,took place in summer 1990, after a year’s delay dueto public opposition (63).

The European Community

The EC has enacted two directives that dealspecifically with biotechnology regulation: onedirective regulates contained use of geneticallymodified micro-organisms and the other regulatesthe deliberate release into the environment ofgenetically modified organisms (12,13). Member


Box 11-G-Regulations in Japan

Japan’s regulations on biotechnology generally follow international standards. The research guidelines, basedon early versions of NIH Guidelines, were developed by the Ministry of Education, Science, and Culture and bythe Science and Technology Agency to cover research in public and private institutions, respectively. Because theprocedure for updating guidelines in Japan is relatively slow, the research guidelines tend to be more stringent thanNIH Guidelines.

Guidelines for industrial applications are generally consistent with OECD recommendations. These guidelineswere issued by the Ministry of International Trade and Industry in June 1986 and were followed by the publicationby the Ministry of Health and Welfare of guidelines for producing pharmaceuticals and biologics.

The first regulations covering the deliberate release of recombinant plants were issued in the summer of 1989by the Ministry of Agriculture, Forestry, and Fisheries. The Environment Agency has drafted safety guidelines forfieldtests of genetically modified micro-organisms, and rules for the release of transgenic animals are in preparation.The Ministry of Health and Welfare is developing guidelines for assessing the safety of food and food additivesproduced using rDNA technology. There is no body attempting to coordinate these various activities.

Reports about public perception of biotechnology in Japan are varied. Although some products advertised asbiotech products have been well-received, community protests against the building of new research facilities haveoccurred, and surveys show that the public is wary of the technology. One survey of the readership of a Japanesescience magazine, for example, found that respondents had serious misgivings about biotechnology, especiallyabout food products and environmental introductions of modified organisms. Almost three-quarters hadreservations about the marketing of genetically engineered fish, and 78 percent were very apprehensive about theprospect of planned releases of genetically engineered microbial pesticides in the United States.SOURCES: H. Wchidaj “Evolution of Recombinant DNA Guidelines in Japa~” Safety Assurance for Environmental Introductions qf

GeneticaZ/y-Ertgineered Organisms, J. Fiksel and V.T. Covello (eds.) (New Yorlq NY: Springer-Verlag, 1988); C.C. Mart@“JapaneseBioindustryT rends Thrnhto FirrnlyEstablished Strategies,” GtwticEngineen”ngNews, vol. 10, No. 2, 1990, pp. 2&21;Bulletin of the Atomic Scientists, “Biotech Lab Recalls Biowar,” BdZetin of the Atom”c Scientists, vol. 46, No. 1, 1990, p. 6; D.McCormic~ “Not As Easy As It Imoke&” Bio/Technology, vol. 7, 1989, p. 629; N.S. Shimbuq “Environment Agency DraftsSafety Guidelines,” Nikkei Sangyo Shimbun, Mar. 24, 1990, p. 13; Pharma Japan, “MAW to Prepare Safety Standard for ‘BioFoods,’ “ Pharma Japan, vol. 1222, Sept. 24, 1990, p. 18.

countries must review their laws to bring them into must also be notified before a new facility usingharmony with EC directives by October 1991.

Contained Use—The directive on contained useis based in part on the Organization for EconomicCooperation and Development (OECD) recommen-dations, and it sets minimum standards for R&D andfor industrial operations. Member countries mustadopt regulations on the contained use of geneticallymodified micro-organisms that are at least as strin-gent as those in the directive.

Regulatory requirements depend on whether themodified micro-organism is associated with high orlow risk and whether the work is large-scale orsmall-scale, noncommercial research. Records ofthe research must be kept for the use of low-riskorganisms at the small-scale level. For small-scalework with high-risk organisms or large-scale workwith low-risk organisms, researchers must notify theappropriate national authority, which then has 60days for review. Large-scale uses of high-riskorganisms are not permitted without the explicitapproval of the national authority. The authorities

these micro-organisms may be used. EC memberstates must periodically provide information ob-tained from these notifications to the EuropeanCommission, the EC’s executive branch.

Because the directive sets a minimum standardand member countries may impose more stringentstandards, regulatory requirements are likely todiffer among countries. These differences mayprovide incentives for firms to establish productionfacilities in countries with the least restrictiveregulations, thereby defeating one of the purposes ofeconomic integration.

Planned Introduction-Unlike the directive oncontained use, the directive on deliberate release ofgenetically modified organisms is not a minimumstandard; the ministers ruled that this directive isprimarily a measure to regulate trade rather than toprotect the environment. This ruling limits theability of member states to impose stricter regula-tions.

Chapter 11---Regulations ● 193

Box 11-H—Regulations in France

In France, where little public concern existsabout the use of biotechnology, a committee in theMinistry of Research and Higher Education must benotified of an intent to perform rDNA research. TheMinistry of Agriculture reviews releases of geneti-cally modified organisms, but notification is volun-tary and the committee’s recommendations are notcompulsory. Government agencies are now work-ing with trade associations to develop a set ofvoluntary guidelines for research, contained use,and deliberate release.SOURCES: OffIce of Technology Assessment, 1991.

The directive on deliberate release is also basedon OECD recommendations. Before a modifiedorganism may be released, the relevant nationalauthority must give approval, based on a case-by-case review of the researcher’s detailed environ-mental assessment. The appropriate authorities inother member states must be kept informed and may,within 90 days, suggest improvements in the pro-posed experimental protocol. The authorities inother member states, however, do not have vetopower.

The directive on deliberate release also describesrequirements for placing genetically modified orga-nisms on the market. The manufacturer or importermust obtain the approval of the national authoritiesin the country where the product will first be sold,and the national authority must inform other mem-ber nations of its approval. If there are no objectionsfrom the other states, the product may be soldthroughout the EC. If many member countries raiseobjections, approval to market the product may berevoked. Alternatively, the dispute may be resolvedthrough binding arbitration by a committee ofnational representatives and a chamber of theCouncil of Ministers.

In enacting directives that specifically regulategenetically modified organisms, the EC has estab-lished a regulatory procedure that is significantlydifferent from that of the United States. In the EC,regulation is explicitly based on the method bywhich the organism has been produced, rather thanon the intended use of the product. This implies thatthe products of biotechnology are inherently risky,a view that has been rejected by regulatory authori-ties in the United States. In addition, manufacturersare concerned that their new biotechnology-derived

Box n-I-Regulations in the UnitedKingdom

In the United Kingdom, the Health and SafetyExecutive has issued guidelines under the generalauthority of the Health and Safety at Work Act of1978. It is mandatory to notify the Health andSafety Executive, and hence, the Advisory Com-mittee on Genetic Manipulation (ACGM) of theintent to carry out genetic manipulation for researchor planned introductions. Employers are requestedto provide substantial information on the details ofthe experiment or production process.

Guidelines for planned releases were issued byACGM in 1986. At first, only notification wasrequired, and ACGM provided guidance on detailedprocedure. Since November 1989, ACGM notifica-tion of proposed releases has been required bystatute. Under the Environmental Protection Act of1990, ACGM, now renamed the Advisory Commit-tee on Genetic Modification, continues to overseeindustrial R&D and basic scientific research. Itssubcommittee responsible for case-by-case reviewshas become an independent statutory committee,called the Advisory Committee on Release to theEnvironment (ACRE). It advises both the Healthand Safety Executive and the Secretary of State forthe Environment on human health and safety issuesand, in particular, environmental issues associatedwith proposed releases. New regulations are to beput in place under the Health and Safety at WorkAct and the new Environmental Protection Act.ACRE and ACGM share six common members anda common secretariat.SOURCES: Environmental protection Act 199Q B. Ager, “The

Oversight of Planned Release in the U.K.,” llafefyAssurance for Environmental Introductions of Ge-netically-Engineered Organisnw, J. Fiksel and V.T.Covello (e&.) (New York NY: Springer-Verlag,1988); R Jennings, British Embassy, Washington,DC; personal communicatio~ Deeemtxx 1990.

products may face additional regulatory barriersbefore they can be marketed, for the product mayalso be subject to further regulations based on itsintended use (l).

Industry officials also fear that one country coulddelay product approval for the whole EC by forcinglengthy reviews (43). In addition, they are concernedthat national authorities may institute burdensomerequirements. Because EC directives leave con-siderable discretion to national authorities, muchdepends on how national laws are written andimplemented.


An industry group has identified another 12regulatory initiatives, either proposed or beingdiscussed by the European Commission, that couldinfluence the use of biotechnology (11). One ofthese, a directive on the protection of workers fromrisks related to exposure to biological agents, wasadopted by the Council of Ministers in November1990.

Another EC legislative proposal would add a newrequirement for regulatory approval for veterinaryproducts. Although it is not specifically directed atregulating biotechnology, it could have an effect onsome biotechnology products. In addition to thestandard requirements of safety, quality, and effi-cacy, the legislation would require a firm to addressthe socioeconomic consequences of the use of itsproduct. Such a requirement, known as the “fourthhurdle,” could prevent the introduction of bST,because bST could increase production of milk, aproduct often in surplus in the EC. An amendmentto the Veterinary Products Directive that wouldrequire the inclusion of socioeconomic criteria in theapproval process for veterinary products was ap-proved by a small majority of the European Parlia-ment at its frost reading, but it was rejected at thesecond reading in November 1990. A similar re-quirement, however, is still under consideration in adraft proposal for a Community regulation con-cerning the use of substances and techniques stimu-lating the productivity of animals (21,22).

Limited Restrictions

The use of biotechnology began long after mostindustrial nations had developed laws and adminis-trative procedures-including laws pertaining todrugs, agriculture, the environment, and workersafety-for regulating hazardous substances. Ingeneral, regulation of biotechnology began with anevaluation of how biotechnology could be regulatedunder existing law and whether new legislation wasnecessary at all (53). Australia, Belgium, Brazil,Canada, France, Japan, The Netherlands, Switzer-land, and the United States, for example, haveapplied existing laws to biotechnology.

Also important has been the development of ascientific basis for regulating engineered organisms,an area in which OECD has been influential (see box1 l-J). The OECD’s recommendations comprise thebasis of biotechnology regulations in many membernations.

Since OECD’s 1986 report, other analyses ofbiotechnology safety issues, particularly plannedintroductions of modified organisms, have beendeveloped by government task forces or scientificsocieties in OECD member nations (15,49,50,57,68). Most country-to-country differences in bio-technology regulation among OECD membersstem from legal, procedural, and administrativedifferences. These differences affect the designand implementation of all regulations for healthand safety or environmental protection, not justbiotechnology.

Several studies comparing U.S. and Europeanregulations concerning pesticides, food additives,industrial chemicals, workplace safety, and air andwater pollution have found that regulatory systemsin other industrial nations are markedly differentfrom the U.S. system (10,36,73,74). In other coun-tries, bureaucrats are more likely to be granteddiscretion in implementing and enforcing regula-tions, and they often enjoy good working relation-ships with representatives of regulated industries asa result. Fines and litigation are rare. Agencies aremore likely to use informal cooperative methods toobtain compliance, and these agencies see theirinteractions with the regulated community less as anadversarial relationship and more as an opportunityto provide advice and information. This is possiblebecause, in other countries, agencies rarely have tojustify their decisions. There is little oversight bylegislatures and courts, and there are few provisionsfor public notification or participation.

This situation is beginning to change, however,particularly with respect to issues of great publicconcern, such as nuclear power and biotechnology(72). Nevertheless, biotechnology regulations prob-ably will not be implemented or enforced usingprocedures similar to those used in the United States.

Biotechnology regulatory policies in France, theUnited Kingdom, and the United States, for exam-ple, vary widely in terms of complexity and enforce-ment. The French procedures not only are thesimplest but are also voluntary. In the UnitedKingdom, the Advisory Committee on GeneticManipulation, now called the Advisory Committeeon Genetic Modification, has been overseeing theuse of biotechnology on a case-by-case basis and hasissued guidelines, rather than more inflexible regula-tions. But the committee has now, apparently,introduced a more formal system.

Chapter 11--+egulations ● 195

Box 11-J—The Organization for Economic Cooperation and Development

The OECD, an international organization founded in 1%1, is the major forum for discussion of economicpolicy by member States. These include most of the industrial world: Australia, Austria, Belgium, Canada,Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, The Netherlands, NewZealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States.

The OECD is committed to economic development and the expansion of world trade, in addition to achievingthe “highest sustainable economic growth and employment” possible, while maintaining financial stability. TheOECD has limited power but often works behind the scenes to promote international understanding of the economicimpact of national policies.

In addition to holding regular meetings attended by each country’s permanent representative, and yearlymeetings at the ministerial level, OECD maintains a number of committees on specific issues, such as economicpolicy and development assistance, Delegates from national governments may also meet as expert bodies to discussparticular issues, such as biotechnology.

In 1983, OECD member countries setup a committee of experts to examine safety issues associated with theuse of engineered organisms in large-wale industrial applications and agricultural and environmental applications.Recommendations on contained uses were issued in 1986.

The report’s conceptual framework resembles the NIH Guidelines. It describes containment requirements fororganisms, based on the level of estimated risk. It outlines a control standard known as Good Industrial Large-ScalePractice (GILSP), based on extending industrial experience and practice with micro-organisms to widely used,low-risk genetically engineered organisms. The containment requirements for low-risk organisms are minimal.More stringent containment strategies are recommended for organisms that present increased risk. The report listscriteria for determining whether an organism should be grown under GILSP or under more stringent standards, butit does not assign specific organisms to risk categories.

The OECD report also recommends a case-by-case review of environmental and agricultural applications ofbiotechnology. A stepwise progression of experiments--from the laboratory, to the greenhouse, to the small-scalefield test, and then to larger field tests-is recommended, so that experience can be gained and safety evaluated.Detailed recommendations on conducting small-scale, low-risk field tests are being prepared.SOURCE: OftXce of ‘Ikcbnology Assessmen~ 1991.

The development of biotechnology regulations in precedent. But some of the benefits derived fromthe United States has been more difficult. Local Federal biotechnology regulations can be listed.protests have taken place at release sites, andperiodic litigation has been brought by environ- ●

mental groups. Infighting has also taken placeamong the Federal agencies responsible for develop-ing regulations and policy statements (14,6 1), which ●

rely more on precise definitions and detailed stand-ards than French and British regulations (see box ●

1 l-B).

EFFECT OF REGULATION ONc

COMPETITIVENESSAt best, regulations that effectively reduce risk

can result in an overall benefit to society. But

Some products produced using biotechnologywarrant premarket review and approval toreduce risk to health or the environment.A Federal review process enables agencies toact as clearinghouses for safety information.A thorough Federal regulatory system canalleviate public concern and ensure publicconfidence in biotechnology.The absence of Federal regulations could resultin a confusing array of State and local regula-tions that, in turn, could stifle commercialinnovation and development while also in-creasing costs.

measuring the benefits of biotechnology regulations Whether the benefits derived from regulatingare difficult. These regulations are intended to biotechnology outweigh the costs of regulation is theprevent problems that have never actually occurred; subject of debate. Reduction of risk through morethis means that assessing the probability of an stringent regulation may increase direct and indirectadverse effect of biotechnology cannot be based on costs to industry, government, and ultimately the


public. When regulations differ from the interna-tional norm, either in policy approach or in strin-gency, investors and researchers may move to otherlocations or shift to other investments. This generalproblem of regulation is especially acute in biotech-nology, because of the wide variety of regulatoryapproaches around the world. The direct and indirectcosts associated with biotechnology regulationsinclude:

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●

●

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●

the cost of filing applications and planning andperforming field tests;benefits lost as a result of keeping usefulproducts off the market;delays in product introduction, resulting in lostrevenues, reduced market share, and delayedreturns on investments;inappropriate health and safety regulations thatpose barriers to trade; andanother layer of uncertainty added to an alreadyrisky investment-for a potential product to becommercially viable, it must not only meet thecriterion of competitiveness in the marketplacebut must first meet regulatory criteria (33).

Large, diversified corporations are usually betterable to shoulder the costs of regulation than start-upcompanies, which may find the costs prohibitive. Itis quite common for small biopharmaceutical firmsto license potential products to larger corporations,not only for marketing and distribution but alsobecause the larger firms can finance environmentalassessments and clinical trials more easily.

Regulations may bring on changing patterns ofinvestment. Several major German corporations arebuilding plants and research facilities in the UnitedStates and Japan rather than Germany partly becauseof the less stringent regulatory environment. Forexample, BASF AG is building its new geneticengineering research facility in Massachusetts,Bayer AG is expanding a biotechnology laboratoryin Connecticut, and Henkel KGAA is building a newfacility in California (5).

An uncertain regulatory climate also inhibitsinvestment. Long delays in developing regulationsmake analysis of the potential return on an invest-ment much more difficult. The time involved inestablishing a reasonable yet comprehensive over-sight mechanism in the United States, particularly amechanism applicable to field testing, may havealready contributed to depressing investment in U.S.agricultural and environmental applications of bio-

technology. Ultimately, this loss of investmentresults in less innovation and lower technologicalcompetitiveness.

SUMMARYInternationally, there have been three approaches

to regulation: no biotechnology-specific regulationsin most of the growth-oriented countries of thePacific Rim and in some European nations, stringentregulations in countries with high levels of publicconcern about biotechnology (e.g., Denmark andGermany), and limited restrictions in mostindustrialized Nations, including Canada, France,Japan, the United Kingdom, and the United States.The EC has enacted directives that are specific tobiotechnology-derived products. In Europe there hasalso been proposals for adding an additional crite-rion for regulatory approval of veterinary products.This “fourth hurdle” would require socioeconomicassessments of new products. American manufactur-ers fear that this criterion will be used to keep theirproducts off the market in Europe.

In the United States, new legislation is consideredunnecessary because the risks posed by the newproducts are thought to be similar in kind to thoseassociated with similar products developed usingother techniques. Under existing legislation, FDAhas approved many new products, and USDA andEPA have established procedures for reviewing fieldtests of modified plants and micro-organisms. Al-though farm activists are concerned about thepotential economic effects of BST, public concernabout the contained uses of modified organisms andtheir testing in the field has dissipated in the UnitedStates. However, some problems remain:

Mechanisms established to provide Federalcoordination of activities related to biotechnol-ogy have, instead, become the center of intera-gency, ideological disputes over the scope ofproposed regulations.The time required for clinical trials necessaryfor FDA approval of new drugs and biologicshurts young firms attempting to commercializetheir first products.The EPA has yet to publish proposed rules forthe regulation of micro-organisms under TSCAand FIFRA.The EPA considers micro-organisms to bechemical substances subject to TSCA, aninterpretation that could be legally challenged.


●

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There is a lack of information necessary toassess the risks associated with some plannedintroductions, most particularly in microbialecology.The FDA has given little indication of itsintentions concerning the development of regu-lations and procedures for evaluating the foodsafety of genetically modified plants and ani-mals.Field-testing requirements have been criticizedas too burdensome, especially for the academiccommunity, and disproportionate to the smallrisk associated with these organisms, particu-larly transgenic crops with no nearby wild,weedy relatives.

The problems associated with developing regula-tions add to the costs borne by fins, and areespecially burdensome for small biotechnology-based firms. Despite these difficulties, there isanecdotal evidence that some European firms havedecided to open research and production facilities inJapan and the United States, in part, because of themore favorable regulatory climate.

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Chapter 12


“Ingenuity should receive a liberal encouragement.”Thomas Jefferson

“Congress intended statutory subject matter to include anything under the sun made byman. ’

Chief Justice Warren Burgermajority opinion, Diamond v. Chakrabarty

“What has been is what will be, and what has been done is what will be done; and thereis nothing new under the sun.’

Ecclesiastes 1:9

CONTENTSPage

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203U.S. INTELLECTUAL PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203

Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203Plant Breeders’ Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204Trade Secrets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205

INTERNATIONAL INTELLECTUAL PROPERTY PROTECTION ................. 205Paris Convention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206Patent Cooperation Treaty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206Budapest Treaty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207International Union for the Protection of New Varieties of Plants . . . . . . . . . . . . . . . . . . 207European Patent Convention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208

INTELLECTUAL PROPERTY RIGHTS IN BIOTECHNOLOGY . . . . . . . . . . . . . . . . . . 208The Chakrabarty Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209Federal Patent Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209

ELEMENTS AFFECTING INTERNATIONAL PATENT RIGHTS INBIOTECHNOLOGY ... ... ... ... ... ... ... ... ..o. ... ... .**** ****+ * c. **. cm@.** 210

Patent Application Backlog ... * .......*.*.*............*..**...*.......*.*..+*** 210Patentable Subject Matter *.*. ... ... ... ... ... ... ... ... ... ... .***. *. Q. q . ******.*, 214Procedural Distinctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217Process Patent Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219Deposit Issues ● . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221Patent Infringement Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223CHAPTER 12 REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224

BoxesBox Page12-A. What Can Be Patented? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20912-B. PTO Plan To Reduce Biotechnology Patent Backlog . ....,.****...*....,...,.* 21312-C. Patenting of “ Animals: The Legislative Response . . . ., . . *,, * ., . . . . . . . ..,***.** 21612-D. The Harvard Mouse Goes to Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21712-E, The Race to the Home Patent Office . .....*...........*,.........+****.,*,*., 21812-F. Litigation, 1990-91 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220

TablesTable Page12-1. Types of Intellectual Property Protection for Plants

● .4****.**.. . . . . . . . , . . , .*. , 20412-2. International Intellectual Property Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20512-3. Member Countries, Paris Union Convention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20612-4. Member Countries, Patent Cooperation Treaty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20712-5. Member Countries, Budapest Treaty on the International Recognition of

Micro-organisms for the Purposes of Patent Procedure . . . . . . . . . . . . . . . . . . . . . . . 20712-6. U.S. Depositories Recognized Under the Budapest Treaty

● * . + * . . . . . * *,*...... 20812-7. Member Countries, Union for the Protection of New Varieties of Plants . . . . . . . 20812-8. Member Countries, European Patent Convention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20812-9. Average Waiting Period, Application to Issue, for

Biotechnology Patents, 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212

Chapter 12


INTRODUCTIONIntellectual property law, which provides a

personal property interest in the work of themind, is of increasing importance to people whouse biotechnology to create new inventions. Intel-lectual property involves several areas of the law:patent, copyright, trademark, trade secret, and plantvariety protection. All affect emerging high-technology industries because they provide incen-tives for individuals and organizations to invest inand carry out research and development (R&D),while adding important technological informationand products into commerce.

The 1980s provided a harvest of new biotechnol-ogical processes and products as well as incentivefor research for future inventions. In industriesaffected by biotechnology, old law is merging withnew biological technology, resulting in novel ques-tions regarding the ownership of intellectual prop-erty. For example:

1.

2.3.4.

5.

Which areas of intellectual property are mostrelevant to biotechnology?What can be patented?How broad in scope can a patent be?Is U.S. law adequate to protect inventionscreated through biotechnology?Will inventors receive adequate worldwideprotection for their discoveries?

When discussing a nation’s competitiveness inindustries fostered by the new biology, protectionof intellectual property is seen by many as aparamount consideration. This chapter brieflyoutlines the types of intellectual property protectionavailable in the United States to protect biologicalinventions, the international agreements that mayaffect intellectual rights in biotechnology, how U.S.patent law impacts on new inventions createdthrough biotechnology, and emerging issues thataffect commercialization of biotechnology-relatedpatents.

U.S. INTELLECTUAL PROPERTYIntellectual property protection encompasses sev-

eral areas of statutory and common law: patent,copyright, trademark, trade secret, and plant variety

protection. Three categories-patents, trade secrets,and plant variety protection-are particularly impor-tant to biotechnology and are the focus of thischapter’s discussion.

Patents

United States (U. S.) patent law has its roots in theConstitution, which gives Congress broad powers to“promote the Progress of Science and useful Arts,by securing for limited times to authors and inven-tors the exclusive right to their respective writingsand discoveries’ (Article I, Section 8). The firstpatent act was enacted by Congress in 1790 and,though amended several times, has retained its broadscope as to what can be patented.

A patent is a grant issued by the U.S. Governmentthat gives the patent owner the right to exclude allothers from making, using, or selling the inventionwithin the United States, its territories, and posses-sions, during the term of the patent (35 U.S.C. 154).There are three types of patents. The most commontype-sometimes referred to as a utility patent—covers processes, machines, manufactures, and com-positions of matter. A second category, patents forplants, includes cultivated sports, mutants, hybrids,and newly found seedlings. A third category, patentsfor designs, is not relevant to biotechnology-relatedinventions. To qualify for utility patent protection inthe United States, an invention must meet severalrequirements:

. it must be a process, machine, manufacture, orcomposition of matter (35 U.S.C. 101);

● it must be new, useful, and not obvious (35U.S.C. 101-103); and

● it must be disclosed in sufficient detail toenable a person skilled in the same or the mostclearly related area of technology to constructand operate it (35 U.S.C. 112).

Patents serve two important policy objectives:

by rewarding successful efforts, a patent pro-vides inventors and their backers with incentiveto risk time and money in R&D; andby requiring disclosure of the manner andprocess of making an invention, a patentencourages public disclosure of otherwise se-

–203–


cret information, so that others are able to useit.

Although a patent gives the inventor the right toexclude others from making, using, or selling theinvention for 17 years, it does not grant the inventorany affirmative right to make or use an invention.Commercial use of a patented invention, just likeother products, can be regulated by Federal, State, orlocal law.

Once obtained, a patent has a term of 17 years,assuming that maintenance fees are paid (35 U.S.C.154). One exception to this general term of 17 yearsis relevant to biotechnology: where a patent claimsa human drug product, medical device, food, or coloradditive that has undergone regulatory review priorto approval for commercial marketing or use by theFood and Drug Administration (FDA), the patentmay be eligible for an extension of up to 5 years, ifcertain conditions are satisfied (35 U.S.C. 156).

Plant Breeders’ Rights

Intellectual property protection for plant life isbased on several statutes (e.g., the Plant Patent Act,Plant Variety Protection Act, and 35 U.S.C. 101), adecision by the U.S. Patent and Trademark Office(PTO) Board of Appeals, and recognized trade secretand contract law. These provide a variety of protec-tion for inventions that constitute plant life (see table12-1).

Plant Patent Act of 1930

Prior to 1930, no intellectual property rightsexisted for protecting new plant varieties. Plantbreeding and research were conducted primarily byfederally funded agricultural experiment stationsand, to a limited extent, by amateur breeders.Financial incentives for private breeders were inade-quate, since the breeders’ sole financial reimburse-ment was through high sales prices of comparativelyfew reproductions during the first 2 or 3 years afterthe variety’s initial availability. Once the plant lefta breeders’ hands, it could be reproduced in unlim-ited quantity by anyone.

In 1930, Congress passed the Plant Patent Act(PPA) (35 U.S.C. 161-164) to extend patent protec-tion to most new and distinct asexually propagatedvarieties. The PPA was the first, and to date, onlylaw passed by Congress specifically providingpatent protection for living matter. Since then,more than 6,500 plant patents have been issued by

Table 12-1—Types of Intellectual PropertyProtection for Plants

Type Citation Subject matter

Plant patent . . . . . . . . . 35 U.S.C. 161-164

Plant variety protectioncertificate . . . . . . . . . . 7 U.S.C. 2321

et seq.Utilitypatent. . . . . . . . . 735 U.S.C. 101

et seq.

Trade secret . . . . . . . . . State law

Asexually repro-duced varieties

Sexually reproducedvarieties

Process, machine,manufacture,composition ofmatter

Information used intrade or businessthat is kept secret


PTO covering flowering plants, ornamental and fruittrees, nut trees, grapes, and vegetable crops. Plantpatents cannot be obtained for seeds, tubers, biotech-nology processes, recombinant DNA (rDNA), orgenes (23). On average, more than 225 plant patentsare issued each year (34).

Plant Variety Protection Act of 1970

Commercial and international developments be-tween 1930 and 1970 influenced deliberations in theUnited States to protect sexually reproduced plants.Plant breeders had developed new sexually repro-ducing plants that could replicate “true-to-type’ butcould not be patented under the PPA. In 1961,several European countries formed the InternationalUnion for the Protection of New Varieties of Plants(UPOV) to protect breeders’ rights. Unlike breedersin UPOV countries, U.S. breeders had no lawprotecting their inventions, except for asexuallyreproduced plants covered by the PPA.

The Plant Variety Protection Act (PVPA) (7U.S.C. 2321 et seq.) was enacted by Congress in1970, to provide patent-like protection for certaintypes of new, sexually reproduced plant species. It ismainly of interest to breeders and farmers of suchsexually reproduced crops as: wheat, alfalfa, soy-beans, cotton, corn, lettuce, soybeans, and water-melon (9).

Although PVPA is not a patent statute, theprotection it provides to breeders of new plantvarieties is similar in concept to patent protec-tion. The act is administered by the U.S. Departmentof Agriculture (USDA). Upon application to USDAand examination by this agency, a plant varietyprotection certificate may be issued on any novel

Chapter 12-intellectual Property Protection ● 205

variety of sexually reproduced plant--other thanfungi, bacteria, or a frost-generation hybrid. Thenovel variety must have distinctiveness, uniformity,and stability. Amendments in 1980 (Public Law96-574) added protection for six vegetable crops andextended coverage to 18 years so the PVPA wouldbe consistent with UPOV provisions.

Under PVPA, the breeder can exclude others fromselling, offering for sale, reproducing (sexually orasexually), producing a hybrid from the variety, andimporting or exporting the protected variety.

PVPA contains two important exclusions to acertificate holder’s protection:

. a research exemption that precludes a breederfrom excluding others from using the protectedvariety to develop new varieties; and

. a farmers’ exemption which allows an indi-vidual whose primary occupation is growingcrops for sale, for other than reproductivepurposes, to save protected seed for use on hisor her farm or to sell to people whose primaryoccupation also is growing crops.

From 1970 through 1988, 2,783 applications forplant variety protection certificates were filed withthe USDA for some 100 different crops. By Decem-ber 31, 1988,2,133 certificates had been issued, and274 applications were pending. Another 376 appli-cations had been abandoned, withdrawn, declaredineligible, or denied (34).

Utility Patents for Plants

In addition to specified plant patent and plantvariety protection, U.S. inventors may also seekutility patent protection for plants. In 1985, the PTOBoard of Appeals and Interferences ruled, in Exparte Hibberd (16), that a corn plant containing anincreased level of tryptophan, an amino acid, waspatentable subject matter under 35 U.S.C. 101. Sincethe Hibberd ruling, utility patents have been grantedon plants.

Trade Secrets

Trade secrets extend protection to informationused in one’s trade or business, that is maintained insecret by its owner and provides a competitivebusiness advantage over those not having theinformation. A plan, process, tool, mechanism,recipe, chemical compound, customer list, or for-

Table 12-2—International Intellectual PropertyAgreements

Entered Number ofAgreement into force signatories

Paris Union Convention . . . . . . . July 1884 100

Union for the ProtectionNew Varieties of Plants . . . . . August 1968 19

European Patent Convention . . . October 1977 14

Patent Cooperation Treaty . . . . . January 1978 45

Budapest Treaty . . . . . . . . . . . . . August 1980 23


mula, all are examples of information that can bemaintained as trade secrets.

Unlike patents (which are governed exclusivelyby Federal law), trade secrets are the subject of Statelaw. The theft of a trade secret is a tort, and actionlies against the thief for misappropriation. Tradesecret law promotes two beneficial ends: it encour-ages commercial morality and fair dealing, and itencourages research and innovation. Unlike patentlaw, however, trade secret law does not encouragepublic disclosure of technical information.

If a trade secret is disclosed in a nonconfidentialreamer, it is lost forever. Trade secret rights requirethat a trade secret be disclosed in confidence only tothose having a reasonable need to know (e.g.,employees). Measures must be taken to preventdisclosure of the trade secret to the public or tocompetitors (e.g., expressly identifying the informa-tion as a trade secret and prohibiting its disclosure).

INTERNATIONALINTELLECTUAL PROPERTY

PROTECTIONThe need for protection of intellectual property is

well accepted inmost nations. Formal patent statuteswere first enacted by England in the 1600s; theUnited States and France adopted laws in the late1700s. With the development of international trade,patent protection was formally adopted by othernations, and mechanisms were adopted to harmonizeintellectual property rights among-trading nations.

Several international agreements are relevant toprotecting biological inventions (see table 12-2).These agreements provide comity, in the area ofpatents, plant breeders’ rights, and deposit of biolog-ical materials.


Table 12-3--Member Countries, Paris Union Convention

AlgeriaArgentinaAustraliaAustriaBahamasBangladeshBarbadosBelgiumBeninBrazilBulgariaBurkina FasoBurundiCameroonCanadaCentral African RepublicChadChinaCongoCubaCyprusCzech and Slovak Federal

RepublicDenmarkDominican RepublicEgypt “

FinlandFranceGabonGermanyGhanaGreeceGuineaGuinea-BissauHaitiHoly SeeHungaryIcelandIndonesiaIranIraqIrelandIsraelItalyIvory CoastJapanJordanKenyaKorea, Democratic People’s

Republic ofKorea, Republic ofLebanon

LesothoLibyaLiechtensteinLuxembourgMadagascarMalawiMalaysiaMaliMaltaMauritaniaMauritiusMexicoMonacoMongoliaMoroccoThe NetherlandsNew ZealandNigerNigeriaNorwayPhilippinesPolandPortugalRomaniaRwandaSan Marino

SenegalSouth AfricaSoviet UnionSpainSri LankaSudanSurinameSwedenSwitzerlandSyriaTogoTrinidad and TobagoTunisiaTurkeyUgandaUnited KingdomUnited Republic of TanzaniaUnited StatesUruguayViet NamYugoslaviaZaireZambiaZimbabwe


Paris Convention

The Paris Convention for the Protection ofIndustrial Property, first adopted in 1883, is themajor international agreement providing basic rightsfor protecting industrial property. It covers patents,industrial designs, service marks, trade names,indications of source, and unfair competition. TheUnited States ratified this treaty in 1903, and manyother nations have adopted it (see table 12-3).

The treaty provides two fundamental rights:

The principle of national treatment providesthat nationals of any signatory nation shallenjoy in all other countries of the union theadvantages that each nation’s laws grant to itsown nationals. The purpose is to eliminatediscrimination against foreigners, who, in turn,must observe the conditions and formalitiesimposed on nationals of the member country inwhich protection is sought.The right of priority enables any resident ornational of a member country to, frost, file apatent application in any member country and,thereafter, to file a patent application for thesame invention in any of the other membercountries within 12 months of the originalfiling and receive benefit of the original filingdate. The effect is to give subsequently filed

applications the right of priority established bythe first filing date.

The convention permits member nations to enterinto separate agreements for the protection ofindustrial property-as long as the agreements donot contravene the provisions of the convention.This provision has permitted the ratification of otherbilateral and multilateral agreements, between na-tions, addressing specific areas of intellectual prop-erty protection.

Patent Cooperation Treaty

The Patent Cooperation Treaty (PCT) is a world-wide convention, open to the members of any ParisConvention country. It entered into force in 1978,and has been ratified or acceded by 45 countries (seetable 12-4). Unlike the Paris Convention, whichaddresses substantive intellectual property rights,the PCT addresses procedural requirements, aimingto simplify the filing, searching, and publication ofinternational patent applications.

After an application is filed with the patent officeof a member nation (usually the national patentoffice of the country in which the applicant is aresident or national), the application is transmitted tothe international bureau of the World Intellectua1Property Organization (WIPO) in Geneva. An inter-

Chapter 12--Intellectual Property Protection ● 207

Table 12-4-Member Countries, PatentCooperation Treaty

Australia Korea, Democratic People’sAustria Republic ofBarbados Korea, Republic ofBelgium LiechtensteinBenin LuxembourgBrazil MadagascarBulgaria MalawiBurkina Faso MaliCameroon MauritaniaCanada MonacoCentral African Republic The NetherlandsChad NorwayCongo RomaniaDenmark SenegalFinland Soviet UnionFrance SpainGabon Sri LankaGermany SudanGreat Britain SwedenGreece SwitzerlandHungary TogoItaly United KingdomJapan United StatesSOURCE: Office of Technology Assessment, 1991.

national search is conducted by an appropriateinternational searching authority (ISA). In the caseof U.S.-initiated applications, the ISA is the U.S.Patent and Trademark Office or the European PatentOffice. Following the international search, theapplication and the search report are published byWIPO, and copies are provided to each of thedesignated offices in the countries where protectionis sought. These countries then subject the applica-tion to their own national procedures.

Budapest Treaty

United States patent law requires applicants to filea specification ( i.e., a writing, specifying in clear,concise terms how to make and use the invention andthe best mode contemplated by the applicant forcarrying out the invention). The patenting of livingorganisms presents a unique administrative prob-lem, because it is the only known art where-insome instances-this requirement cannot be satis-fied with words alone. In these instances, it isnecessary to deposit micro-organisms and plants forpatent purposes. This practice has become common-place internationally, leading to the need to harmo-nize deposit requirements worldwide.

The Budapest Treaty on the International Recog-nition of the Deposit of Microorganisms for thePurposes of Patent Procedure is a vehicle harmoniz-ing such requirements. It entered into force in 1980,

Table 12-5-Member Countries, Budapest Treaty onthe International Recognition of Micro-organisms

for the Purposes of Patent Procedure

AustraliaAustriaBelgiumBulgariaCzech and Slovak Federal

RepublicDenmarkFinlandFranceGermanyHungaryItaly

JapanKorea, Republic ofLiechtensteinThe NetherlandsNorwayPhilippinesSoviet UnionSpainSwedenSwitzerlandUnited KingdomUnited States


and provides that member states recognize a depositof a micro-organism strain made in another countryfor their own patent procedures. Currently, 23nations are members of the Budapest Treaty (seetable 12-5).

The key element of the treaty is the establishmentof a series of approved International DepositaryAuthorities (IDAs). These depositories are recog-nized by all member countries for deposit purposes.Once a viable deposit is made in an IDA, two factsare recognized: the deposit was made on theindicated date, and any sample furnished by the IDAis a sample of the organism or other replicablematerial deposited on that date. As of January 1990,a total of 20 depository institutions had acquiredIDA status; three are located in the United States(see table 12-6).

International Union for the Protection ofNew Varieties of Plants

With the development of plant sciences came therealization that the rights of plant breeders wereentirely overlooked in many countries. The patentlaws of many countries, for example, specificallyexcluded the patenting of any type of lifeform. Aninternational conference in 1957, led to the draftingof the International Union for the Protection of NewVarieties of Plants (UPOV); it was signed by severalnations in 1961, and entered into force in 1968.Currently, 19 nations are members of UPOV (seetable 12-7).

The International Union for the Protection of NewVarieties of Plants was designed “to recognize andto ensure the breeder of a new plant variety. . . theright to a special title of protection or of a patent. ”The goal was to provide a model for the adoption of


Table 12-6--U.S. Depositories Recognized Under theBudapest Treaty

Table 12-7—Member Countries, Union for theProtection of New Varieties of Plants

American Type Culture Collection12301 Parklawn DriveRockville, MD 20852

A private, nonprofit institution organized in 1925 for thepurposes of acquiring, preserving, and distributing cultures ofmicro-organisms to scientists. Currently holds an estimated8,000 deposits for patent purposes.

Northern Regional Research Laboratory1815 N. University StreetPeoria, IL 61604

Established in 1940 as part of the U.S. Department ofAgriculture for the study of micro-organisms of agricultural andindustrial importance. currently has approximately 3,000cultures on deposit.

In Vitro International, Inc. (IVI)611 (P) Hammonds Ferry RoadLinthicum, MD 21090

Incorporated in 1983 as a for-profit company for the purpose ofaccepting cultures for patent purposes. Approximately 100cultures are on deposit.


breeders’ rights statutes in individual countries andto assure reciprocity between countries in theconvention.

To obtain protection in each member country, it iscurrently necessary to file a separate application ineach country. There is no central filing system, andinternational protection is not available by filing inonly one member country. While both sexually andasexually reproduced plants can be protected, theUPOV convention requires that each protectedvariety have a specific, unique name for registrationpurposes. In all member nations except the UnitedStates, new varieties are subject to official inspec-tion establishing that conditions for protection aresatisfied.

The UPOV Convention is presently under consid-eration for revision. A recent diplomatic conference,held in March 1991, may lead to revision of Article2, which currently does not allow both patent andbreeders’ rights for the same botanical species orgenus (35).

European Patent Convention

The European Patent Convention (EPC) is anagreement between European nations to centralizeand standardize patent law and procedure. To date,14 countries are members of the EPC, which tookeffect in 1977 (see table 12-8).

Because the patchwork of traditional nationalpatent systems in Europe was recognized as creating

AustraliaBelgiumDenmarkFranceGermanyHungaryIrelandIsraelItalyJapan

The NetherlandsNew ZealandPolandSouth AfricaSpainSwedenSwitzerlandUnited KingdomUnited States


Table 12-8-Member Countries, EuropeanPatent Convention

Austria ItalyBelgium LiechtensteinFrance LuxembourgDenmark The NetherlandsGermany SpainGreat Britain SwedenGreece SwitzerlandSOURCE: Office of Technology Assessment, 1991.

a potential conflict with the need for free trade, EPCestablished the so-called “European patent,” asingle, supranational patent obtained by filing oneapplication with the European Patent Office inMunich. Once granted, the patent matures into abundle of individual patents-one in each membercountry. The ultimate goal is for each membercountry to adopt, in its national law, the samesubstantive and procedural law of patents estab-lished by the EPC agreement.

EPC streamlines procedural requirements forapplicants seeking a European patent. It avoidsduplicate filing, searching, and examination costs;minimizes the number of translations that must bemade; and economizes on the use of professionaltime, both on the part of the applicant’s domesticpatent representative and representatives in coun-tries where protection is sought (3).

INTELLECTUAL PROPERTYRIGHTS IN BIOTECHNOLOGYThe merging of intellectual property law and

biotechnology represents the joining of old lawwith new technology. In theory, statutes designed tofacilitate creation of unforeseen technologies andreward inventors for their creativity should blendeasily with the inventions of biotechnology. Al-though intellectual property laws have fostered

Chapter 12-intellectual Property Protection .209

R&D in biotechnology, novel legal and socialquestions have also arisen.

During the 1980s, events in the United Statesshaped the application of intellectual property law tobiotechnology. First, the Supreme Court was calledon to determine whether a living organism could bepatented. Second, Congress and the executivebranch took actions making it easier for federallyfunded inventions to become commercialized.These actions ignited a flood of biotechnologypatent activity. By 1989, an examining unit specifi-cally for biotechnology was established at the PTO.

The Chakrabarty Decision

The development of rDNA technology in the1970’s led to debate regarding what constitutes apatentable invention. Although patents on biotech-nological processes had been issued since the1800’s, PTO did not permit patents on livingproducts created by the technology, on the groundsthat such matter were ‘‘products of nature” and notstatutory subject matter as defined by 35 U.S.C. 101(see box 12-A).

Although proposed patent claims were rejected ifdirected to living organisms per se, patent protectionwas granted for many compositions containingliving things (e.g., sterility test devices containingliving microbial spores, food yeast compositions,vaccines containing attenuated bacteria, milky sporeinsecticides, and various dairy products) (29).

The issue of whether a genetically engineeredorganism could be patented was addressed by theSupreme Court in 1980, in Diamond v. Chakrabarty(10). In this case, the patent applicant had developeda genetically engineered, but not recombinant,bacterium capable of breaking down multiple com-ponents of crude oil. Because no naturally occurringbacterium possessed this property, Chakrabarty’sbacterium was thought to have significant value forthe cleanup of oil spills.

Chakrabarty filed a patent application with 36claims. Process claims for the method of producingthe bacteria were allowed by the PTO; but claims forthe bacterium, itself, were rejected on two grounds:1) micro-organisms are ‘products of nature,’ and 2)as living things, micro-organisms are not patentablesubject matter under 35 U.S.C. 101. The case waseventually heard by the Supreme Court; the justices,in a 5-4 ruling, held that a live, human-made

Box 12-A—What Can Be Patented?

One section of the U.S. patent law, 35 U.S.C.101, was part of the first U.S. patent law enacted byCongress in 1790, It defines what constitutes apatentable invention:

Whoever invents or disoovers any new and usefulprocess, machine, manufacture, or composition ofmatter, or any new and useful improvement thereof,may obtain a patent therefore, subject to theconditions and requirements of this title.

This section of the patent Code has changed little,and its broad language has made possible theissuance of more than 5 million U.S. patents.

SOURCE: Mice of Technology Assessm eng 1991.

micro-organism is patentable subject matter undersection 101 as a “manufacture” or “composition ofmatter .

The Chakrabarty decision provided a judicialframework for subsequent PTO decisions to issuepatents under 35 U.S.C. 101 for plants and nonhu-man animals. The decision also provided greatstimulus for the economic development of biotech-nology processes and products in the 1980’s.

Federal Patent Policy

Other revisions in Federal patent policy encour-aged increased patent activity from federally fundedresearch. Prior to 1980, no single patent policyexisted for such research, resulting in the develop-ment of 26 separate patent policies by variousgovernment agencies (33).

To promote efforts to develop a uniform patentpolicy that would encourage cooperative relation-ships and to commercialize government-fundedinventions, Congress passed the Patent and Trade-mark Amendments of 1980 (Public Law 96-517) andamendments in 1984 (Public Law 98-260). The lawallows nonprofit institutions (including universities)and small businesses to retain title to patents arisingout of federally funded research, with the Federalagency retaining a nonexclusive, worldwide license.Universities are required to share royalties with theinventor and to use any net income for research andeducation (35 U.S.C. 202).

The law, which gave statutory preference to smallbusinesses and nonprofit organizations, was ex-tended by executive order to larger businesses (with


some exceptions) in 1983 (24). The TechnologyTransfer Act of 1986 (Public Law 99-502) grantedFederal authority to form consortia with privateconcerns. Executive order 12591, issued in 1987,further encouraged technology-transfer programs,including the transfer of patent rights to governmentgrantees.

ELEMENTS AFFECTINGINTERNATIONAL PATENT

RIGHTS IN BIOTECHNOLOGY

A number of differences exist among nations,regarding intellectual property protection for bio-technological inventions. International agreementshave set norms for substantive intellectual propertyprotection (e.g., national treatment under the ParisConvention) and for procedures for obtaining pat-ents (e.g., simplified searching and filing under thePatent Cooperation Treaty and deposits under theBudapest Treaty), but further harmonization ofintellectual property law is seen by many as neces-sary for improved trade and effective protection ofintellectual property in a global marketplace.

Biotechnology is a particularly good example oftechnology where patent questions are raised byrapid scientific and technological change. The majorinternational agreements governing intellectualproperty were ratified prior to the development ofnew biotechnological inventions (25). As legalissues are developed and dealt with in variousnations, a primary consideration arises: what impactdo these issues have on the development of aninternational marketplace for inventions developedby biotechnological means?

Intellectual property is an important componentof U.S. competitiveness in fields relying on biotech-nology. Without adequate international protection,this valuable asset is seriously tarnished and dimin-ished in value, and future investment is discouraged.American competitiveness in this area focuseslargely on securing patents, both in the United Statesand abroad, while understanding and operatingsmoothly within the procedural requirements forobtaining substantive patent rights.

This section focuses on six elements that affectU.S. competitiveness based on international intel-lectual property rights for biotechnology:

1. the patent application backlog,2. patentable subject matter,3. procedural distinctions,4. process patent protection,5. deposit issues, and6. patent infringement litigation.

Patent Application Backlog

The Process

When a patent application is received by the PTO,it is assigned to 1 of 16 examining groups in theagency. Each examining group includes a number ofart units, each responsible for a specific area oftechnology. Examiners in the art units review patentapplications to decide whether the invention claimedin the application is entitled to patent protection. Theexamination process includes a search through U.S.patents, available foreign patent documents, andrelevant nonpatent literature.

After the examiner decides whether to grant apatent, the PTO, through a procedure called anaction, notifies the applicant of the examiner’sdecision, or any objection or requirement, andprovides information that may assist the applicant injudging whether to pursue the application. If theinvention is not considered patentable subject mat-ter, the claims will be rejected. Some or all of theclaims may be rejected on the first action by theexaminer; relatively few applications result in pat-ents as originally filed (31).

If an application is rejected or objected to, theapplicant can either abandon the application orrequest a reconsideration, responding in writing toevery rejection raised by the PTO. The PTO thenissues a second action, which is normally final.Following a second action rejection, the applicant isnormally limited to administrative review (eitherthrough the PTO Board of Patent Appeals andInterferences or Federal court action) or to filing acontinuing application.

Continuing applications are an alternative toappealing the rejected application. If the applicationis filed within an allotted period of time and refers toan earlier application, the applicant is entitled to thedate of the earliest filed application for subjectmatter common to both applications (35 U.S.C.120). The ability to maintain the earliest filing dateis an important benefit to the applicant, since theearlier priority date determines patent rights.


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The Problem

The abnormally long patent application reviewand action by PTO is frequently cited as theprimary impediment to commercialization ofbiotechnology-related processes and products.Recent congressional reports reveal the pendencyperiod for biotechnology patent applications islonger than that of any other technology (averagependency is 36.1 months from the date of applicationto the date of issue, compared to 21.0 months for allpatents issued (30). Several reasons have been cited:

. due to the nature of the technology, its newness,and its rapid development, the level of technicalscrutiny required to process an application fora biotechnology patent exceeds that required toprocess patent applications in most other areasof technology (30);

● high turnover among patent examiners, lured tothe private sector by higher pay (8);

● failure to retain senior staff, well-trained inbiotechnology patent prosecution, results in alack of continuity, increased examination timeper application, and inconsistent examination;and

● the pressure on examiners to meet certainefficiency quotas results in increased pressureand job disenchantment, further causing deple-tion of personnel.

Two key elements play a part in the patentapplication backlog: 1) the number of applicationsreceived by PTO and 2) the amount of time it takesfor an application to be acted on. The number ofbiotechnology applications filed has grown at asignificantly higher average rate--20 percent-than


that for all patent applications-2.9 percent—from1983 through 1988 (30). On the other hand, theamount of time between filing and first actiondeclined-from 14.5 months in 1989 to 13.1 monthsin 1990 (30,31). Despite the improved performanceby PTO in reaching first actions, total pendancyappears to be increasing.

The effect of delays in obtaining patents variesbetween different subgroups in the biotechnologyexamining area. Although the average pendency ofa biotechnology patent application is 36.1 months,the average time is shorter for applications related toplants and animals (24.9 months) and longer forapplications related to genetic engineering (47.4months) (see table 12-9). The actual time requiredto process inventions disclosed in patent applica-tions is longer than the pendancy reported by thePTO, because they measure pendancy of applica-tions, not inventions. A patent granted on aninvention may be the result of a chain of replace-ment applications, or continuing applications.For example, during 1989, about one-third of allbacklogged patent applications resulted from a chainof continuing applications. Factoring in the chain ofcontinuing applications adds 9 months to PTO’sreported average patent pendance of 26.3 months(31).

While there is clearly a difference between theaverage pendancy in biotechnology, as comparedto an average pendancy for all technologies in thePTO, patents, even in biotechnology, are grantedfaster in the United States than in any majorexamining office in the world—and faster by asignificant amount of time (35). In Japan andEurope, for example, pendancy time does notnormally include the 18 months prior to publicationof the application. In Japan, publication often leadsto oppositions being filed against the application—nearly 30 such oppositions were filed against thepatent for human tissue plasminogen activator (tPA)in Japan—further delaying the issuance of the patent(35).

Effect on Commercialization

Because patents are one of the most importantassets of a startup, high-technology company, failureto procure timely patent protection can adverselyaffect a company’s ability to secure the financingneeded to develop processes and products. From theviewpoint of an individual inventor or assignee of apatent, several problems are apparent.

Table 12-9—Average Waiting Period, Application toIssue, for Biotechnology Patents, 1989

Total AverageArt unit/description patents issued months

181/equipment. . . . . . . . . . . . . 723 37.2182/immunology . . . . . . . . . . . 417 44.1183/biochemicals . . . . . . . . . . 665 36.7184/plants & animals . . . . . . . 754 24.9185/genetic engineering . . . . . 307 47.4186/biochemicals . . . . . . . . . . 268 37.7187/equipment and

immunology . . . . . . . . . . . . . 1 33.4188/microbiology . . . . . . . . . . 0 0.0

Biotechnology total . . . . . . . 3,135 36.1SOURCE: General Accounting Office, Biotechnology: Processing Delays

Continue for Growhg 8ack/og of Patent Appkations, 1990.

First, the delay in getting a patent can slow downefforts to commercialize the invention. A secondproblem involves filing for protection in foreigncountries. Under the Paris Convention, an applicantfiling in the United States has 1 year to file in foreigncountries and obtain the benefit of the U.S. filingdate. As a practical matter, this decision is typicallypostponed until close to the end of the frost year,because of the considerable expense of foreignfiling. Thus, it is desirable to have the U.S. patentexaminer decide on patentability prior to the close ofthe 1 year period, so that the applicant has the benefitof the initial PTO search and examiner reactionbefore deciding whether foreign filing costs arejustified. Without the PTO action, the decision ismuch more difficult and sometimes involves com-mitting substantial funds, even when patent protec-tion is not likely (7).

A third problem relates to the fact that pendingU.S. patent applications are secret (35 U.S.C. 122).When an inventor makes a preliminary search, todetermine whether the invention is novel, access toinformation is limited only to the available prior art(i.e., printed scientific and trade publications, for-eign published applications, and issued patents). Thebacklog of patent applications creates a large bodyof hidden knowledge that may later become prior art.As a result, an inventor may file an application, onlyto learn years later that the application will berejected, because a previously filed applicationmade the same claims or claims broad enough toencompass the claims made in the, later application.If the backlog could be shortened, the amount ofpotentially hidden prior art would be reducedproportionately.

The delay to an inventor caused by the patentapplication backlog results in increased costs for


processing the application. Inmost fields, the cost ofreceiving a U.S. patent runs between $3,000 and$6,000. Biotechnology patents generally cost be-tween $8,000 and $15,000. This difference isprimarily due to attorney fees and the time involvedresponding to patent examiners who are not suffi-ciently skilled in biotechnology patent prosecution(18).

Proposed Solutions

In an attempt to reduce the backlog of biotechnol-ogy patent applications, the PTO instituted a 13-point, catch up plan (see box 12-B). The plan has notsucceeded in its goal of reducing the backlog ofpatent applications. During calendar year 1989 andthe frost half of 1990, the inventory of unexaminedbiotechnology patent applications increased by ap-proximately 33 percent (from about 6,200 to about8,200) (31).

The most immediate way for an applicant to avoidthe current backlog is to request accelerated exami-nation. This is done with a written petition describ-ing the applicant’s preliminary search and descrip-tion of the prior art. The additional fee of $72, torequest accelerated examination, is worthwhile forapplicants needing to establish a definitive patentposition for investors or licensees. Of approximately5,000 biotechnology-related applications receivedby the PTO in 1987, only 17 were petitionsrequesting accelerated examination (30). Legal andbusiness considerations may explain the limited useof accelerated examination. From a legal standpoint,the PTO practice requires that an applicant seekingan accelerated examination provide a completesearch report of literature and prior art relevant to theapplication. Failure to do so can result in a rejectedapplication. (35) From a business perspective, theremay be little incentive to have the 17-year patentterm begin to run until a product is ready for market.From this perspective, a company wants theirpatents to issue more slowly than those patentsbelonging to a competitor (12).

Suggestions for reducing the backlog include:

●

●

increased pay, benefits, and training for PTOpersonnel to enhance job satisfaction andperformance.cutting down on the excessive volume of paperthat an applicant sometimes provides an exam-iner to support the application (5) .

Box 12-B—PTO Plan To ReduceBiotechnology Patent Backlog

In 1988, the Patent and Trademark Office initi-ated a 13-point plan to process biotechnologypatent applications more expeditiously:

1, Creating a new examining group to dealexclusively with the field of biotechnology.Called “Group 180,” this examining unitconsolidated units and examiners frompreexisting examining groups.

2. Adjusting examiner complexity factors.3. Obtaining greater hiring authority from the

Office of Personnel Management.4. Obtaining special engineering pay rates for

new examiners.5. Hiring as many new biotechnology exam-

iners as can be trained by senior examinerstaff.

6. Increasing overtime for several years to themaximum level sustainable.

7. Liberalizing and publicizing, as necessary,the procedure for requesting acceleratedexamination.

8. Identifying examiners in other groups whocan be transferred and retained to examinebiotechnology applications in a reasonableperiod of time.

9. Improving communication about Patent Of-fice goals and reeds and improving moralein the new biotechnology examining group.

10. Examining search tools-especially forsearching DNA, RNA, and protein se-quences.

11. Enhancing technical and legal update train-ing for all examiners.

12. Stimulating higher productivity in the newbiotechnology examining group.

13. Hiring and initially training new examinersfor the biotechnology group in otherexamining groups.

SOURCE: @neral Accounting Uffice, Biotechnology: Backlogof Patent Applications, 1989.

. adoption of a selective examination scheme,whereby applicants select cases for prioritytreatment and defer less important applicationsfor later examination.

. adoption of the 18-month publication systemfound in many other countries, whereby allapplications are published within a certain timeperiod, thus decreasing the amount of potentialhidden prior art; and


● Adoption of a payback system, similar toFederal medical training grants, whereby, inexchange for educational assistance, Ph.D-level graduates would pay back the FederalGovernment’s investment by serving a speci-fied term as an examiner.

As PTO attempts to reduce the patent applicationbacklog, some applicants complain that the qualityof patent examination has decreased. Proceduralmistakes and a general lack of understanding of thelaw occasionally results in erroneous actions bypatent examiners (e.g., the issuance of overly broadpatents, or erroneous rejections). Such errors in-crease the cost of the patent application process,either through lost opportunities or through refilingand appeal costs.

Others, however, claim that the patent applicationbacklog is not detrimental to U.S. capability inbiotechnology for two reasons:

● Despite the U.S. backlog, it takes significantlylonger to obtain a biotechnology patent in othercountries (35).

. For products that have a long regulatory ap-proval time, the delay in obtaining a patentextends the period of intellectual propertyprotection, since the 17-year term does notbegin until the patent is actually issued (1 1).

Patentable Subject Matter

Under U.S. Patent law, four broad areas constitutethe core of patentable subject matter: processes,machines, manufactures, and compositions of matter(101). As the Supreme Court noted in Chakrabarty,Congress plainly contemplated that the patent lawswould be given wide scope and ‘intended statutorysubject matter to include anything under the sunmade by man. ’

After Chakrabarty, the patenting of micro-organisms became commonplace in the UnitedStates. In 1985, the PTO’s Board of Patent Appealsand Interferences relied on Chakrabarty to rule in Exparte Hibberd (16) that corn plants, seeds, and planttissue culture containing an increased level of theamino acid, tryptophan, were patentable subjectmatter under 35 U.S.C. 101, even though such plantscould be protected under the PVPA. Today, a varietyof protections—plant patents, plant variety protec-tion certificates, utility patents, and trade secrets—exist for inventions that constitute plant life.

In April 1987, the PTO Board of Appeals andInterferences ruled that polyploid oysters werepatentable subject matter (15). Subsequently, PTOannounced that it would, henceforth, consider non-naturally occurring, nonhuman, multicellular orga-nisms (including animals) to be patentable subjectmatter. In April 1988, the first patent on a nonhumananimal was issued to Harvard University for mam-mals genetically engineered to contain a cancer-causing gene (U.S. 4,736,866). Although 120 animalpatent applications are pending, no additional pat-ents on animals have issued (35). The PTO policyand the issuance of the sole animal patent initiateda broad public debate and the introduction oflegislation in Congress (see box 12-C).

Europe

European subject matter law is noteworthy in that1) a convention exists whereby a number of nationssubscribe to one law regarding subject matterpatentability; 2) because of a developed sciencebase, the issue of subject matter patentability hasarisen in the context of biotechnology; and 3) issuesaddressed by the European Patent Office highlightsimilarities and differences with U.S. law.

Article 52(1) of the E.P.C. defines patentablesubject matter as inventions that are susceptible toindustrial application, are new, and involve aninventive step. In this respect, European and U.S.law both have expansive language defining what canbe patented. Unlike U.S. law, which identifiesclassifications that are patentable (i.e., process,machine, manufacture, and composition of matter),the European provision does not provide a defini-tive, positive definition of classes of patentableinventions. Instead, Article 52(2) narrows the broadlanguage of Article 52(1) by explicitly excludingfrom the term “inventions’

discoveries, scientific theories, and mathemati-cal methods-including naturally occurringproducts;aesthetic creations;schemes, rules, and methods for performingmental acts, playing games, or doing business;programs for computers; andpresentations of information.

Article 53(b) stipulates that European patents notbe issued for plant or animal varieties and essentiallybiological processes for the production of plants andanimals (with the exception of microbiological


Photo credit: DuPont

Advertisement for OncoMouse, the subject of the first U.S. patent on a transgenic animal.


Box 12-C—Patenting of Animals: The Legislative Response

Several pieces of legislation were introduced in the 100th and 101st sessions of Congress addressing thepatentability of animals. The following actions occurred during the 100th Congress (in session during 1987 and1988):

. An amendment to a supplemental appropriations bill (Senate Amendment 245 to H.R. 1827) to prohibit theuse of appropriated funds for the patenting of genetically altered or modified animals. The amendment wasadopted by the Senate by voice vote but not adopted by the conference committee.

. H.R. 3119 to establish a 2-year moratorium on the patenting of animals and to revoke previously grantedpatents.

. S. 2111 to prohibit animal patents and revoke previously granted patents.● H.R. 4970, the Transgenic Animal Patent Reform Act, to provide that exemptions from infringement for:

1) making or using a patented animal solely for research or experimentation without any commercial intent;or 2) for a person whose occupation is farming, to reproduce through breeding, the use, or to sell a patentedtransgenic farm animal under certain circumstances; 3) to permit the Patenting and Trademark Office toaccept a deposit of biological material; and 4) to declare that human beings are not patentable. The bill wasadopted by the House of Representatives, but no action was taken by the Senate.

The following legislation was introduced in the 101st Congress (in session during 1989 and 1990):● H.R. 1556, similar to H.R. 4970 (see above), later incorporated into H.R. 5598 (a bill addressing several

patent-related issues).● H.R. 3247, to impose a 2-year moratorium on the granting of patents on genetically altered animals, except

for animals whose commercialization is subject to a Federal regulatory process that imposes environmental,health and safety, and biomedical ethical standards.

. S. 2169, similar to H.R. 3247 (see above).SOURCE: Offk of Technology Assessment 1991.

processes or the products thereof). There are two Comparison of Subject Matter Lawsreasons for this approach, adopted in 1973. First,granting patents in this area would create legal and The principle of patenting micro-organisms is

administrative difficulties. Second, plant variety now widely accepted by many nations (25, 34). Plant

protection enacted in several European nations is the protection generally falls into the domain of national

only system applicable to that category of inventions plant variety rights statutes, which usually apply to

(1). plant products obtained by traditional breeding.,

The question of whether a process is essentiallybiological depends on the extent of technical humanintervention in the process. If such interventionplays a significant part in determining or controllingthe desired result, the process is not excluded.According to the EPC, essentially biological proc-esses and specific plant varieties, regardless ofwhether they were produced by breeding or geneticengineering, are not patentable.

Despite the exclusions in the EPC, patents haveissued on microbiological inventions. Plant varietyprotection statutes generally offer more limitedprotection than that provided by U.S. law, sinceprotection generally extends only to those varietiesspecifically set forth in varietal lists compiled byeach country.

methods-that could not be patented. United Stateslaw offers a plant breeder the most generous menuof choices for intellectual property protection ofinventions that constitute plant life.

To date, the United States is the only country toboth state a patent policy regarding animals and toissue a patent for a transgenic animal. The subjectmatter of the sole U.S. patent is currently pending atthe European Patent Office (see box 12-D). Thepatent offices of Japan and Australia may per-r-nitanimal patents, because their statutes lack subjectmatter restrictions analogous to EPC’s Article 53(b).

United States patent law is also noteworthybecause it is, generally, neutral about any potentialuse of patented inventions. Such social considera-tions are left, instead, to Federal, State, and locallaws that regulate the development and use of

Chapter 12--lntellectual Property Protection ● 217

Box 12-D—The Harvard Mouse Goes to Europe

On April 8,1988, the first U.S. patent on an animal was issued to Harvard University for transgenic nonhumanmammals genetically engineered to contain a cancer-causing gene (U.S. Patent No. 4,736,866).

The so-called “Harvard Mouse Patent” was filed with the European Patent Office on June 24, 1985. Inexamining the application, two substantial issues were raised by the patent examiner:

. Article 53(b) of the European Patent Convention (EPC) does not permit claims to animals, per se.Article 83 of the EPC, which relates to sufficiency, is satisfied only if any embodiment of the invention, as

defined in the broadest claim, is substantially capable of being realized on the basis of the disclosure. Theapplication in this case “unduly extrapolated to transgenic non-human eukaryotic animals from what hasactually been carried out, namely transgenic mice.

In response to these concerns, the applicant reformulated the application in order to emphasize themicrobiological nature of the invention and to request that “eukaryotic animals” be restricted to “nonhumanmammalian animals.

Despite these reformulations, the EPO patent examiner rejected the application in July 1989. The decisionstated that Article 53(b), which bars the patenting of animal varieties, was conceived in 1962, when “the questionof patenting transgenic animals was scarcely conceivable. ” Although the EPO Board of Appeals had interpretedplant varieties, which are also excluded under 53(b) as “excluding from patentability only plants in the geneticallyfixed form of a plant variety,’ this interpretation is based, in part, on a desire not to permit double protection underpatenting and plant variety protection. Because no similar situation exists for animal varieties, “the idea behind thisexclusion was that animal varieties are not appropriate subject matter for patent protection. ”

In finding the application objectionable under Article 83, the decision said:“The Applicant has carried out his experiments with one oncogene, the mouse mycgene, by using a mouse as

the nunhuman mammalian animal. The invention as disclosed in its broadest concept, however, relates to anyoncogene and any conceivable mammalian animal. . . The claims [refer not only to mice] but to any kind of mammalssuch as anthropoid apes or elephants, all of which have a highly different number of genes and a differently developedimmune system. . . the success with the transgenic mouse cannot be reasonably extrapolated to all mammals.”

The examiner’s decision was later reversed on appeal, and the application was remanded to the examining unit forfurther examination. As of August 1991, the application was still pending at EPO.

SOURCE: European Patent Office, In re President and Fellows of Harvard College, Decision to Rqtkse a European Patent Application,European Patent Application No. 85304490.7, Refusal Under Art. 97(1) EPC, 1989; European Patent Office, Boards of Appeal, CaseT 19/90-3.3.2, l%cisio~ Oct. 3, 1990.

commercial products. In contrast, Article 53(a) of dural aspects of obtaining a patent. In some respects,the EPC states, that patents shall not be granted if theexploitation of the patent would be contrary topublic order or morality.

Absent congressional action restricting subjectmatter patentability, U.S. law is more generousfrom an inventor’s perspective than the law ofany other nation. The concept of patenting animalshas, however, resulted in broad public debate, andcalls for both a moratorium or prohibition of animalpatents and passage of legislation by the House ofRepresentatives (H.R. 4970, 100th Congress) thatwould specifically preclude the patenting of humanbeings.

Procedural Distinctions

The patent statutes of most nations are similar inmany respects. This similarity extends to the proce-

however, U.S. law differs from that of other nations.These differences can affect competitive advantageand, thus, have become topics of discussion asnations look for ways to harmonize patent statutesand practices. All these procedural differences affectall areas of inventive inquiry. In some ways biotech-nology-related inventions are more vitally affected,due to the novelty of the sciences involved, thenumber of applications being filed, and the lack ofexperience in many patent offices for dealing withthis art.

The United States has been involved in two setsof negotiations-one under the auspices of theWorld Intellectual Property Organization (WIPO)and the other as part of the General Agreement onTariffs and Trade (GATT)-----to discuss harmoniza-tion of patent statutes in countries around the world.


Issues raised in these forums have included prioritydate, grace period, and patent application publica-tion.

Priority Date

In all Paris Convention countries, the first practi-cal step for gaining worldwide protection for apatentable invention is to be the first-to-file a patentapplication in the home country patent office. Thisbasic rule, which appears to create a level playingfield for all competitors, becomes muddled whentwo factors—1) first-to-invent v. first-to-file and 2)filing procedures-are considered.

United States law awards patent priority to thefrost inventor to conceive, diligently reduce topractice, and claim the invention. The United Statesand the Philippines are the only nations that grantpriority on this first-to-invent basis. The primaryadvantage of the first-to-invent system is that itpermits a patent applicant to determine some of thescientific implications of an observation beforerushing to the PTO, for fear that someone else willfrost file a patent application for the same invention.Japan (a first-to-file country), for example, receivesin excess of 500,000 patent application-type disclo-sures each year, almost 40 percent of which do notbecome the subject of a request for examination(35). If the United States were to adopt a first-to-filesystem, the number of patent applications wouldlikely increase dramatically.

All other nations provide priority on a frost-to-filebasis. Some argue that a patent applicant in afirst-to-file nation has an advantage because the keyrequirement is simply to file a registration orapplication that can be perfected, as needed, at a latertime. Thus, the result, it is argued, is a far lower costto the inventor per patent application and a speedierfiling of each application when compared to U.S.practice (37). However, a first-to-file system cancause disadvantages for foreign applicants if otheronerous administrative requirements are present (seebox 12-E).

Grace Period

The United States gives the inventor who pub-lishes patentable information before filing a patentapplication or who commercially uses the inventiona l-year grace period to file the patent application.Other nations either have no grace period or graceperiods of varying and more limited duration. Japan,for example, has a grace period of 6 months for

Box 12-E—The Race to the HomePatent Office

Three competitors--one in Germany, one inJapan, and one in the United States-are workingon the same area of polypeptide chemistry. Eachworks independently of the other, and has com-pleted work on anew polypeptide at about the sametime. Which of the three inventors gets worldwidepatent protection?

The answer depends on whether the inventor filesin a “first-to-file” or “first-to-invent” country. InJapan and Germany (first-to-file), the winner is theinventor who wins the race to a member country’spatent office. Even if the American and the Germaninventors have made their polypeptide before theJapanese inventor, if the Japanese inventor files apatent application in Japan before the German andU.S. inventors file applications in their respectivecountries, then, under the Paris Convention, theJapanese inventor has worldwide priority beforeeither competitor.

A different result could occur in the UnitedStates. If the American inventor made the polypep-tide before the Japanese inventor, even if theJapanese inventor was the first to file a patentapplication, the Japanese inventor would obtaincertain procedural advantages in an interferenceproceeding in the United States but would not begranted a patent if the American inventor was ableto show that the invention was made by theAmerican before the Japanese filing date. Under 35U.S.C. 104, any applicant foreign to the UnitedStates is precluded from relying on dates ofactivities in a foreign country before the filing dateof a patent application in a foreign country in orderto establish priority of invention. Consequently, theJapanese inventor is not likely to prevail in theUnited States, in this instance.SOUR~: OffIce of Teclmology Assessment 1991.

limited public disclosure (i.e., disclosure at a techni-cal meeting in Japan) (4) while Europe has no graceperiod.

The grace period in U.S. law can aid inventors ofbiotechnological processes and products, especiallysmaller companies and individual scientists who feelthe need to publish research findings immediately.However, lack of grace periods in other industrial-ized countries can mean that publication (a de factoprofessional requirement for many U.S. scientists)can result in forfeiture of patent rights in othercountries.


Publication of Patent Applications

In the United States, patent applications are, bylaw, confidential (35 U.S.C. 122). In other countries,a patent application is published 18 months after theinitial filing date. Proponents of secrecy point outthat publication can give competitors the informa-tion necessary to reverse-engineer the invention(i.e., take the idea and, through experimentation,repeat the invention) (13). On the other hand, thesecrecy provision in U.S. law makes it difficult todetermine whether the invention is being claimed byanother inventor waiting approval of a patentapplication. Either way, in determiningg whether tofile for patent protection outside of the United States,the inventor must determine whether it is commer-cially acceptable to have the application publishedprior to the grant of a patent.

Process Patent Protection

A major concern of U.S. biotechnology compa-nies is the adequacy of U.S. law to protect againstpatent piracy. Process patents constitute the majorityof patents issued in the biotechnology area. Suchpatents can be vital, especially if they cover a newprocess for making a known product. Purifiedhuman insulin, for example, has been producedbefore and thus, is unpatentable. New processes formaking insulin, however, are patentable (22). Con-cern has mounted that processes patented in theUnited States are being used abroad and the resultingproducts then exported to the United States. Con-gress enacted legislation in 1988, to address con-cerns regarding process patent protection. Debate,however, continues as to whether additional protec-tion is needed.

Process Patent Amendments Act

Until recently, the import, sale, and use in theUnited States of a product made abroad according toa process patented in the United States was notconsidered to be an act of patent infringement. Thepatent owner had no recourse in a U.S. court of lawbut could only request an investigation by theInternational Trade Commission (ITC). The ITCcould issue an import exclusion order if it was shownthat the responding party had used abroad a processpatented in the United States and imported theproduct into the United States, since such action, bylaw, was considered to be an unfair method ofcompetition. However, this alternative was seen bysome as inadequate; no monetary damages could be

obtained, and the U.S. manufacturer had to showinjury to an established domestic industry.

In an attempt to correct this problem, Congress in1988 enacted the Omnibus Trade and Competitive-ness Act (Public Law 100-418). The new law holdsthat whoever without authority imports into theUnited States or sells or uses within the UnitedStates a product made by a process patented in theUnited States shall be liable as an infringer if theimport, sale, or use of the product occurs during theterm of such process patent. This provided the U.S.patent holder with access to Federal courts as ameans of enforcement action in addition to any ITCaction. The legislation noted two limitations: aproduct made by a patented process will no longer beso considered after 1) it is materially changed bysubsequent processes, or 2) it becomes a trivial andnonessential component of another product (35U.s.c. 271(g)).

The legislative record indicates that it will bedifficult for an alleged infringer to rely on these twoexceptions:

In the biotechnology field it is well known that allliving organisms contain within them particulargenetic sequences composed of unique structuralcharacteristics. The patented process may be for theprocess of preparing a DNA molecule comprising aspecific genetic sequence. A foreign manufactureruses the patented process to prepare the DNAmolecule which is part of the patented process. Theforeign manufacturer inserts the DNA molecule intoa plasmid or other vector and the plasmid or othervector containing the DNA molecule is, in turn,inserted into a host organism; for example, abacterium. The plasmid-containing host organismstill containing the specific genetic sequence ex-presses that sequence to produce the desired pol-ypeptide. Even if a different organism was created bythis biotech procedure, it would not have beenpossible or commercially viable to make the differ-ent organism and product expressed therefrom butfor the patent process, the product will be consideredto have been made by the patented process (32).

Despite the Federal legislation, issues surround-ing the scope and use of process patents willcontinue to arise. In 1988, the ITC instituted aninvestigation into whether the import of certainrecombinant erythropoietin (EPO) constituted anunfair act under the Tariff Act (see box 12-F).

Despite unresolved problems in this area, theOmnibus Trade and Competitiveness Act of 1988,

292-870 - 91 - 8 : QL 3

220 ● Biotechnology in a Global Economy——. .—-— --- —- . . . --- -— — —— -.-— — ——

—. —.——— — ——-——.

Box 12-F—Litigation, 1990-91

Moore v. Regents of the University of CaliforniaThe California Supreme Court, in 1990, ruled that a patient does not have a property right to his body tissues

after they were used by researchers to develop a commercially important cell line.

Xoma v. CentocorOn the same day, in May 1990, that the University of California received a U.S. patent covering the therapeutic

use of certain monoclinal antibodies for treatment of septic shock, Xoma (Berkeley, CA) (the exclusive licenseeof the patent) sued Centecor (Malvern, PA), which had filed its patent application 7 years ago.

Upjohn v. SyntroIn August 1990, plaintiff and defendant settled their patent dispute over rights to a genetically engineered

veterinary product, a vaccine used against pseudorabies disease of swine. Under the terms of the agreement, Synto(San Diego, CA) will take a license under the Upjohn (Kalamazoo, MI) patent and pay a royalty to Upjohn.

Genentech v. Genetics Institute and Wellcome FoundationA Federal District Court found that the defendants infringed three Genentech tPA patents.

Cetus v. DuPontIn February 1991, a Federal court jury upheld two Cetus patents for polymerase chain reaction. Cetus had

charged DuPont with patent infringement. DuPont claimed that it should not be liable under Cetus’ patents, on thegrounds that work done in the early 1970s at the Massachusetts Institute of Technology anticipated PCR technology.

Amgen v. Genetics Institute and Chugai PharmaceuticalsIn a dispute concerning patent and marketing rights to Erythropoietin (EPO), a naturally occurring glycoprotein

produced by the kidneys, Amgen (Thousand Oaks, CA) filed four patent applications and was issued a patentclaiming rights to genetic materials and host cells used in the recombinant production of EPO. Genetics Institute(GI) (Cambridge, MA) later filed an application with the Patent and Trademark Office. The GI application claimeda purified and isolated sequence for EPO, the vectors used, and the transected host cells. The PT0 declared twointerferences between GI’s and Amgen’s patent in May 1989. The interference proceeding, which allows the PTOto investigate and determine which company was actually the first to invent, is still pending and is expected to takeseveral years to decide.

Both companies established marketing agreements with other companies to market EPO. Amgen has a jointventure with Kirin Brewery Ltd. of Japan (known as Kirin/Amgen) and GI entered an exclusive licensing agreementwith Chugai Pharmaceutical Co., Ltd. of Japan. As a result of these agreements, other subsidiaries and licensingagreements were established.

In January 1988, Amgen filed a complaint before the International Trade Commission (ITC) to prevent theimport of EPO by Chugai U.S.A. into the United States for clinical trials. The ITC, in 1989, decided that theimportation of EPO into the United States did not violate Section 337 of the Tariff Act of 1930. The ITCinvestigation marks the first time that a trade law has been used to challenge a product developed throughbiotechnology and is indicative of the problems of process protection for biotechnology in the United States.

Amgen received FDA approval in June 1989, for the treatment of anemia associated with chronic renal failure,which includes both dialysis and predialysis patients. Genetics Institute has yet to receive approval for its EPO inthe United States.

In April 1991, the U.S. Court of Appeals for the Federal Circuit held that Amgen’s patents were valid,enforceable, and infringed by GI. The ruling blocks GI from selling its version of EPO in the United States.Following the ruling, Amgen’s stock increased by 12 percent, and GI’s stock dropped 35 percent.

SOURCE: Office of Technology Assessment, 1991_—.—— ————.. .-..— .-— - --- --- .- ——..—————

.,altered the the rules of patent-based Section 337 actions. development, or licensing, is sufficient to establish

domestic industry relating to the patented invention. Another controversy in the area of process patentActivities such as substantial investment in exploit- protection is the so-called Durden Doctrine, nameding the patent. including engineering, research, after a 1985 case of increasing importance to


biotechnology patent applicants (19). Durden in-volved a challenge to the denial of a patent for aprocess to make a novel chemical. The process tomake the chemical, although similar to that of apreviously issued patent, used a novel though relatedstarting material and produced a novel, thoughrelated, end-product. Although PTO denied a patentfor the process, it did grant a patent for the novelstarting materials and the novel end-product. Thecourt, in Durden, concluded that a chemical process,otherwise obvious, is not patentable--even if thespecific starting material employed or the productobtained are novel and nonobvious.

Although the technology in Durden was notbiotechnology, the Durden decision has been asource of frustration to biotechnology-related patentapplicants; examiners are increasingly using thedoctrine to deny certain process patents on the basisthat a patent should not be issued when the processis old and predictable (38).

Opponents of the application of Durden to bio-technology cases argue that the case applies tochemicals, and its application to biotechnologycases is not warranted. As one commentator notes,expressing a gene in a cell is not always easy orobvious and thus, in certain cases should be patent-able (36). Another critic of the doctrine argues, thatDurden is in direct conflict with another case (20) inwhich it was held that a new microbe could not betreated as prior art in determining the patentability ofa method of using the microbe to produce anantibiotic, therefrom, by an otherwise standardprocess. In essence, novelty and unobviousness ofthe microbe imparted patentability to a method ofusing it (2). A third commentator questions, why aconventional process using a novel starting materialis not patentable, yet a pharmaceutical compoundcomprising a novel ingredient and a conventionalcarrier is patentable (4).

Despite widespread dissatisfaction with the Dur-den doctrine, efforts to legislate a solution have metresistance from some companies and patent attor-neys involved in biotechnology R&D. Some argue,that overruling Durden by legislative action wouldlead to the issuance of excessive numbers of processpatents, thus diluting the obviousness requirement.Another argument is, any legislative action willresult in additional uncertainty and additional patentinfringement suits. Proponents of legislative changenote that until the alleged loophole is closed,

Photo Culture Collection

Glove box for handling deposited cultures.

processes using novel and patentable starting ma-terials will be produced outside of the United Statesand then imported back to the United States. Thisapproach, would deny to product patent holdersroyalties that would have been required had theproduct been produced in the United States. Thecontroversy has resulted in public debate amongpatent practitioners and various companies (17,36).

Deposit Issues

United States patent law requires a patent applica-tion to include a specification-a written descriptionof the invention in such clear, concise, and exactterms that any person skilled in the art to which itpertains can make and use the invention. Thisrequirement, called enablement, presents a uniqueprocedural issue when words alone cannot fullydescribe the invention.

In 1949, PTO began recommending that patentapplications for inventions involving micro-organisms include the deposit of the pertinentmicro-organism with a culture collection. Althoughnot a formal requirement, patent examiners advised


applicants that, in cases where words alone were notsufficient to describe the invention adequately, adeposit was advisable. PTO first published guide-lines on the deposit of micro-organisms in 1971. In1977, the Budapest Treaty instituted a system ofInternational Depositary Authorities, making depos-its a normal part of international patent practice.

Three issues of deposit practice raise internationalquestions. When is a deposit required? When shoulda deposit be released to the public? What is the scopeof the so-called “research exemption’

When is a Deposit Required?

All Budapest Treaty nations require depositswhen it is not possible to reproduce a claimedinvention without reference to deposit. The require-ment for a deposit is determined on a case-by-casedetermin ation in all countries. When a patentapplicant is able to disclose how to re-create theinvention with mere words alone, then a deposit isnot required (21).

Uniquely, however, the United States requiresthat the application disclose the best mode forpracticing the invention, and thus, the “best”sample may sometimes be required for compliance,if that best sample cannot be recreated from thewords of the patent application alone. The best moderequirement is essentially a requirement againstconcealment. As a result, U.S. patentees are encour-aged to err on the safe side; and on issuance of a U.S.patent, deposit their best biotechnology samples,which on patent issuance are then easily available toothers, including those who would take such sam-ples outside of the jurisdiction of the United States.

Public Access to Deposits

The role of the depository is to retain and be aconvenient source of an inventor’s deposit. Thedepository is an objective entity-independent ofthe patent applicant and the PTO. The availability ofsamples from U.S. depositories for cultures involvedin the patenting process is straightforward. If thedepository number and the U.S. patent number areknown, the culture may be requested and is routinelymade available on payment of a minimal fee. Thereis no record of a U.S. depository ever denying accessto someone eligible to receive a culture (34).

Some patent owners contend that free access to adeposit amounts to super-disclosure (giving awaythe invention itself in addition to the written recipe).

Some owners of hybridoma patents, for example,contend that open access to a hybridoma depositamounts to giving away their invention plus all theknow-how the inventors might have been able to sellseparately. This claim of loss may be exaggerated,however, since knowledge of how to produce andmaintain hybridoma cells in culture does not gener-ally permit large-scale operation. The latter methodsmust either be reverse-engineered, or the knowledgemust be purchased separately (34). Nevertheless, itis generally easier to reproduce a deposited micro-organism than to create it from a written description.

To some patent owners, another issue is the timingof public accessibility to the deposit. For patentingoutside of the United States, if a deposit is needed toteach the invention, that deposit must be madebefore the first priority filing date. In the UnitedStates, where patent applications are maintained insecrecy up until the grant of the patent (often severalyears from the filing date), deposits must be madeprior to issuance of the patent. In Europe, however,patent applications are published 18 months fromthe filing date, which limits any secrecy (both interms of the contents of the patent application andany enabling deposit) to a specific time-frame. Forthose desiring a longer period of secrecy, this limitedtimeframe is seen as inadequate, because biotech-nology-related applications take far longer than 18months for processing. The result is de facto releaseof the intellectual property before the inventorknows whether a patent will issue. Another potentialproblem for patent owners involves the export of anaccessed deposit to countries where there is nopatent protection. This could result in a major loss ofproperty rights (6).

The Research Exemption

Once a sample that relates to a patented inventionis released, there is controversy over the degree towhich that sample can be used in the United Statesand other nations.

Generally, use of a deposited culture that is theenablement of an invention constitutes patent in-fringement. The United States, Japan, and Europe,however, all have research exemptions that permitvarious uses of a patented invention for experimen-tal inquiry.

Japan and Europe have statutory exemptions thatfreely permit the use of a patented invention in thelaboratory to create new inventions. Thus, a depos-

Chapter 12--Intellectual Property Protection .223

ited sample of a hybridoma may be used withoutpatent infringement to create new technology.Whether the new technology can be commercializedwithout patent infringement depends on whether ornot the claims of the patent cover the new product.

In the United States, the experimental-use defenseto patent infringement is a court-created doctrine,holding that an experiment with a patented inventionfor the sole purpose of gratifying true scientificinquiry or philosophical curiosity does not attack theright of a patentee and thus, does not constituteinfringement. In 1984, the Court of Appeals for theFederal Circuit ruled that “the limited use of apatented drug for testing and investigation strictlyrelated to FDA drug approval requirements duringthe . . . term of the patent” did not fall within theexperimental-use exemption and thus constitutedinfringement (26).

In the wake of this case, Congress amended thepatent code (Public Law 98-417), which nowprovides:

It shall not be an act of infringement to make, use,or sell a patented invention (other than a new animaldrug or veterinary biological product (as those termsare defined in the Federal Food, Drug, and CosmeticAct . . .) which is primarily manufactured usingrecombinant DNA, recombinant RNA, hybridomatechnology, or other processes involving site spe-cific genetic manipulation techniques) solely for thepurposes reasonably related to the development andsubmission of information under a Federal Lawwhich regulates the manufacture, use, or sale ofdrugs (35 U.S.C. 271(e)(l).

To date, the courts have been divided on whatactivities are permissible under 271(e)(l) (14,27,28).

Patent Infringement Litigation

The emergence of biotechnology as an importantfield in patents has resulted in a surge of litigation,as companies seek to enforce their rights againstinfringement and defend the patent grant in opposi-tion or revocation proceedings. Such litigation is notsurprising, given the web of partially overlappingpatent claims, the high-value products, the problemof prior publication, and the fact that many compa-nies are interested in the same products (see box12-F).

Because biotechnology is a new area in patentlaw, litigation is not something that Congress can

readily alleviate. By its nature, infringement is anarea that can only be addressed by Congress ingeneral terms, leaving to the courts the jurisdictionfor settling property disputes between companies.

How the courts interpret biotechnology patentclaims, and how well U.S. companies protect patentrights abroad will be issues facing biotechnologycompanies during the years ahead. Uncertainty overpatent rights will be costly and will affect the waymany biotechnology-related companies structureR&D strategies. Until precedents are set in courtrulings, predicting the outcome of patent litigationwill be extremely difficult.

SUMMARYIntellectual property law, which provides a per-

sonal property interest in the work of the mind, is ofincreasing importance to people who use biotech-nology to create new inventions. Three areas ofintellectual property law—patents, plant varietyprotection, and trade secrets-are particularly im-portant to biotechnology.

Broad patent protection exists for all types ofbiotechnology-related products and processes in theUnited States. The Supreme Court holding inDiamond v. Chakrabarty that a living organism waspatentable along with action by Congress and theexecutive branch to change Federal policy to in-crease patent activity from federally funded researchhave spurred biotechnology-related patent activity.Internationally, several agreements (e.g., the ParisUnion Convention, the Patent Cooperation Treaty,the Budapest Treaty, the Union for the Protection ofNew Varieties of Plants, and European PatentConvention) provide substantive and proceduralprotection for inventions created through the use ofbiotechnology.

Despite a generally favorable international cli-mate, a number of elements affect U.S. competitive-ness in protecting intellectual property. The patentapplication backlog at PTO, uncertainties in theUnited States and internationally regarding whatconstitutes patentable subject matter, proceduraldistinctions in U.S. law (e.g., first-to-invent v.frost-to-file, grace period, secrecy of patent applica-tions, and deposit considerations), uncertainties ininterpreting process patent protection, and the spateof patent infringement litigation all constitute unset-tled areas that could affect incentives for developingnew inventions.


Congress has considered legislation addressingconcerns, such as patentable subject matter andprocess patent protection. Other problems, particu-larly scope of patent protection and infringement,will be litigated in the courts as stakeholders in newbiological technologies attempt to assert their prop-erty rights.

International forums, such as World IntellectualProperty organization, General Agreement on Tar-riffs and Trade, and bilateral and multilateral tradenegotiations, can serve as arenas for discussionsrelating to harmonization of intellectual propertyissues.

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.11.

CHAPTER 12 REFERENCESBaeumer, L., “Protection of Inventions in the Fieldof Biotechnology,’ Symposium on the Protection ofBiological Inventions, World Intellectual PropertyOrganization and Cornell University, Ithaca, NewYorlq June 1987.Beier, D., vice president of governmental affairs,Genentech, “Biotechnology Patent Protection Act,”position paper, 1989.Bent, S.A. et. al., National Property Rights inBiotechnology Worldwide (New York, NY: Stockton%SS, 1987).Biggart, W., attorney, Sughrue, Mien, Zinn,Macpeak & Seas, personal communication, August1990.Bureau of National Affairs, Biotechnology Patents:A Business Manager’s Legal Guide (Washington,DC: Bureau of National Affairs, 1989).Cabot, S. S., director, corporate development, DNX,Inc., personal communication, July 1990.Carter, P., director of biotechnology, North CarolinaState University, testimony before U.S. Congress,House of Representatives, Subcommittee on Regula-tion and Business Opportunities, Committee onSmall Business, Backlog of Patent Applications atthe U.S. Patent and Trademark O@ce and Its Effecton Small High-Technology Firms, Mar. 29, 1988(Washington, DC: U.S. Government Printing Office,1988).Congressional Quarterly, Editorial Research Re-ports, “Is the U.S. Patent System Out of Date?” vol.1, No. 19, my 18, 1990.Cooper, I.P., Biotechnology and the Luw (New YorlqNY: Clark Boardrnan Co, Ltd., 1989).Diamond v. Chakrabarty, 477 U.S. 303 (1980).Ditzel, R., director, technology management, Uni-versity of California, personal communication, July1990.

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Dit.zel, R., director, technology management, Univer-sity of California, personal communication, Decem-ber 1990.Dryden, S.J., “The U.S. and Japan Imok for a PatentMedicine,” Business Week, no. 3068, Sept. 5, 1988,p. 28,.Eli Lilly & Co. v, Medtronic, Inc., 110 S. Ct. 2863,15USPQ2d 1121 (1990).Ex parte Allen, 2 USPQ 2d 1425 (PTO Bd.App. &Int. 1987).Exparte Hibberd, 227 USPQ 443 (I?TO Bd.App. &Int. 1985).Gershon, D., “Leading Biotechnology Companiesbave the IBA,” Nature, vol. 344, No. 5, p. 481,April 1990.Hostetler, W., director of technology transfer, Ore-gon State University, testimony before U.S. Con-gress, House of Representatives, Subcommittee onRegulation and Business Opportunities, Committeeon Small Business, Backlog of Patent Applications atthe U.S. Patent and Trademark Of6ce and Its E#ecton Small High-Technology Firms, Mar. 29, 1988(Washington, DC: U.S. Government Printing Office,1988).In re Dur&n, 763 F.2d 1406 (Fed.Cir., 1985).In re Mancy, 499 F.2d 1289, 182 U.S.P.Q. 303(CCPA 1974).In re Wands, 858 F.2d 731, 8 USPQ 1400 (Fed.Cir.1988).Industrial Biotechnolo~ Association, “Process Pat-ent Legislation Needed to Protect Against UnfairTrade Practices,” Briefiig at National Press Club,Washington, DC, March 1987.Jondle, R.J., “Overview and Status of Plant Propri-etary Rights,” Intellectual proper~ Rights Associ-ated With Plants (Madison, WI: American Society ofAgronomy, 1989).Memorandum dated Feb. 18, 1983, born the Pnxi-dent to the Heads of Executive Departments andAgencies on Government Patent Policy, 19 WayComp. Pres. Doe. 252.Organization for Economic Co-Operation and Devel-opment, Biotechnology: Economic and Wider Im-pacts (Paris: OECD, 1989).Roche Products, Inc v. Bolar Pharmaceutical Co.,733 F.2d 858,221 USPQ 937 (Fed.Cir 1984).Scripps Clinic & Research Foundation v. BaxterTravenol Laboratories, Inc., 7 USPQ 1562 (D.Del.1988).Scripps Clinic and Research Foundation v. Genen-tech, Inc., 707 F. Supp. 1547, 11 USPQ2d 1187(N.D.Cal. 1989).Tanenhbltz, Alvin E., “Genetic Engineering—Twhnological Trends From the Perspective of a U.S.PI’0 Examiner,” Fourth Annual BiotechnologyLuw

Chapter 12--Intellectual Property Protection .225

Institute (Clifton, NJ: Prentice Hall Law & Business,1988).

30. U.S. Congress, General Accounting OffIce, Biotech-nology: Backlog of Patent Applications (WashingtonDC: U.S. Government Printing OffIce, 1989).

31. U.S. Congress, General Accounting Office, Biotech-nology: Processing Delays Continue for GrowingBacklog of Patent Applications (Washington DC:U.S. Government Printing Office, 1990).

32. U.S. Congress, House Conference Report 100-576(1988).

33. U.S. Congress, Office of Technology Assessment,New Developments in Biotechnology: Ownership ofHuman Tissues and CellMpecial Report, OTA-BA-337 (Washington, DC: U.S. Government Print-ing Office, April 1989).

34. U.S. Congress, Office of Technology Assessment,New Developments in Biotechnology: Patenting

Life-Special Report, OTA-BA-370 (Washington,DC: U.S. Government Printing Office, April 1989).

35. Van Horn, C.E., patent policy& programs adminis-trator, U.S. Patent and Trademark Office, personalcommunication, December 1990.

36. Vaughan, C., “Patent Protection Act Seeks toImprove Competitiveness of U.S. Firms,” GeneticEngineering News, April 1990, p. 3.

37. Wegner, H. C., attorney, Wegner & Bretschneider,Washington, D. C., personal communication, Decem-ber 1989.

38. Wiseman, T.G., ‘‘Biotechnology Patent Practice-APrimer,” AZPLA Quarterly Journal, vol 16, Nos. 3 &4 (Washington, DC: American Intellectual PropertyLaw Association, 1989).

Appendixes

ContentsPage

Appendix A: A Global Perspective: Biotechnology in 14 Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229Biotechnology in 14 Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229Appendix A References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242

Appendix B: Comparative Analysis: Japan . * . . . * * . . . o . . . . . ..*o. .o*. oo. . * . . . e * . , * * * . . * * . * * * * * * * 243Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243

Appendix C: Federal Funding of Biotechnology Research and Development . . . . . . . . . . . . . . . . . . . . 249National Institutes of Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249National Science Foundation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251Department of Defense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252Department of Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252U.S. Department of Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253Department of Commerce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254Agency for International Development (AID) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254U.S. Environmental Protection Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255Department of Veterans Affairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255National Aeronautics and Space Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255Food and Drug Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256

Appendix D: List of Workshops and Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257Biotechnology in a Global Economy: International Conference July 6-7, 1989 . . . . . . . . . . . . . . . . . . . . . 257Participants, Workshop on Federal Coordination of Biotechnology Research and

Regulation May 2, 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258Participants, Workshop on Financial Issues Affecting Biotechnology: At Home and

Abroad September 13, 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259

Appendix E: Acknowledgments ..** **. *.. ..** .* .*.**.*..**.***.**,...**....****.*.*..**.*..*.*.. 260Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260

TableA- 1. StrengthsA- 2. StrengthsA- 3. StrengthsA- 4. StrengthsA- 5. StrengthsA- 6. StrengthsA- 7. StrengthsA- 8. StrengthsA- 9. StrengthsA-10. StrengthsA-n. StrengthsA-12. StrengthsA-13. StrengthsA-14. StrengthsB- 1.B- 2.

andandandandand

a n d and a n d a n d a n d a n d and a n d a n d

Weaknesses,Weaknesses,Weaknesses,

Biotechnology inBiotechnology in

Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Biotechnology in Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Weaknesses, Biotechnology in Denmark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Weaknesses, Biotechnology in the Federal Republic of Germany . . . . . . . . . . . . . . .Weaknesses, Biotechnology in France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Weaknesses, Biotechnology in Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Weaknesses, Biotechnology inWeaknesses, Biotechnology in

The Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weaknesses, Biotechnology in South Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Weaknesses, Biotechnology in Sweden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Weaknesses,Weaknesses,Weaknesses,Weaknesses,

Biotechnology Budgets for

Biotechnology inBiotechnology inBiotechnology in

Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Taiwan (Republic of China) . . . . . . . . . . . . . . . . . . . .United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Biotechnology in Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1985-89 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page229231231233233235236236237238239240240241243

Appendix A

A Global Perspective: Biotechnology in 14 Countries

Introduction

Modern biotechnology (i.e., recombinant DNA, cellfusion, and other novel bioprocessing techniques) is nowpracticed in many nations of the world. Increasingattention has been exerted by nations desiring to developbasic and applied science and commercial development ofthe new biotechnology.

This appendix provides a brief description ofbiotechnology in 14 industrialized and newly industrial-ized nations. Appendix C provides a more detaileddescription of biotechnology in Japan. These 15 countrieswere selected to analyze trends in a variety of countriesand thus provide material useful in writing the substantivechapters analyzing commercial activity and industrialpolicy. The inclusion of these 15 nations is not exhaus-tive-it is recognized that nations not included in thisappendix are important to the development of biotechnol-ogy in a global economy.

The primary source of information for this chapter wasdeveloped from an international conference hosted by theOffice of Technology Assessment (OTA) in July 1989(see app. D). Participants at the conference were asked todescribe the development of biotechnology in theircountries, with particular emphasis on government fund-ing, industrial policies, the industrial sector, regulations,intellectual property, and public opinion.

Biotechnology in 14 Countries

Australia

The Australian economy currently has one of thehighest growth rates among industrialized nations. Al-though Australia is geographically the size of the conti-nental United States, its manufacturing sector is limitedby a small domestic population of approximately 17million people. Government policy aims to redress thisdifficulty by encouraging the manufacturing and servicesectors to be more export oriented (21).

Australia sees itself as a Pacific Rim nation and sees itspolitical and economic future being closely aligned withJapan, Singapore, Korea and, in a geographical sense,with the West Coast of the United States. It is far closergeographically to these nations than to the UnitedKingdom (U.K.) and Brussels. The Federal Governmenthas realized that it is vital to develop and sustainhigh-technology, including biotechnology (see table A-1).

Government Support-Approximately half of allfinancial support for biotechnology comes from Federal

Table A-l-Strengths and Weaknesses,Biotechnology in Australia

StrengthsStrong research base.Biotechnology targeted as enabling technology.

WeaknessesSmall domestic market.Difficulty in establishing venture capital funding.


Government agencies, with the Commonwealth Scientificand Industrial Research Organization (consisting of 6institutes with 35 divisions) providing the greatest directgovernment commitment to biotechnology research (19).Australia’s public research capability is particularlystrong in agriculture and human health, especially inimmunology and endocrinology, that have resulted in anumber of world-firsts. The discovery of blood cellgrowth factors, and the cloning of key hormones, such ashuman growth hormone, and interleukin 3 were made byAustralian scientists (6).

In addition to Federal support, some assistance isprovided by State governments in New South Wales,Victoria, and West Australia. These efforts range from theestablishment of a biotechnology desk in one State tomaking contacts with other Southeast Asian countries inan attempt to develop new markets (6).

The government, at both the Federal and State levels,supports the development of biotechnology businessesthrough funding for research, tax incentives for researchand development (R&D), and an immigration policy thatencourages the migration of skilled scientists and entre-preneurs. Biotechnology has been designated by theFederal Government as an enabling technology, and aspecial committee to fund biotechnology research on acompetitive basis has been established. Tariffs have beeneliminated or substantially lowered, the financial sectorhas been deregulated, and foreign banks have beenadmitted. These changes in industrial policy, coupledwith an abundance of raw materials and a scientific basethat is a leader in immunology, molecular biology, andplant sciences, provide Australia with incentives for thedevelopment of biotechnology products and processes.

Industry--Currently, 65 modern biotechnology-basedbusinesses (including brewing but excluding cheese,wine, and food) exist in Australia, supported by approxi-mately 200 companies that provide commercialization,research, and financial support services (21). Total

–229–


private-sector investment in biotechnology is valued atapproximately $45 million annually.

Biotechnology firms can avail themselves of thebenefits of several industry-wide programs, including anR&D taxation incentive (i.e., companies undertakingappropriate research can receive a tax break at 150 percentof the value of the research), grants, and a range ofconsulting services through the National Industries Ex-tension Service.

To encourage the development of a venture capitalindustry, the government provides tax benefits for thosewho invest in licensed venture capital companies. Thisscheme, however, has only been modestly successful inraising biotechnology venture capital. Of the 39 invest-ment firms listed in the 1990 Australian Venture CapitalDirectory, only six had a stated preference for biotechnol-ogy investment.

Regulatory Environment--Regulation of biotechnol-ogy at the Federal level occurs through the GeneticManipulation Advisory Committee (GMAC). Estab-lished in 1988, to oversee all proposals for research andcommercial work involving genetic manipulation, in-cluding planned releases, the committee is comprised ofuniversity faculty from a wide range of disciplines.Because of its faculty-based membership, GMAC is seenas being independent of interest groups and thus has beenaccepted by the public (19).

Because biotechnology has a variety of applications inmany industries, a number of regulatory agencies areinvolved. Most of the agencies are based at the State level,and currently, a group of Federal Government officials isworking to map the current regulatory climate.

Intellectual Property-The Australian Patent Office(APO) takes a liberal view on patenting issues. As ageneral rule, anything is patentable if it meets normalpatent criteria (e.g., novelty, nonobviousness). The patentlaw is regarded as helpful by the biotechnology commu-nity, which enjoys a good dialogue with APO.

Costs incurred on intellectual property issues are seenas burdensome for small biotechnology companies,particularly when they are dealing with overseas registra-tion. The absence of a common international position onbiotechnology patent and registration issues is seen as aproblem (19).

Brazil

Brazil is a large country rich in natural resources. Whilethis nation features traits found in other newly industrial-ized nations in Latin America-a vast domestic market,a highly stratified income structure, and a huge externaldebt—Brazil is noteworthy because of its emergence in1985 from a long period of authoritarian military rule,with a pledge by the new government to alleviate poverty

and other social ills. This pledge to ‘‘redeem the socialdebt” has had repercussions on the shaping of industrialpolicy in Brazil (14).

Brazil is interested in the advancement of biotechnol-ogy. This is best demonstrated by the existence of abranch of government devoted solely to biotechnology.However, as a newly industrialized nation, Brazil lagsbehind many other nations in the number of R&Dprofessionals supporting biotechnology, and the countryis handicapped by weak intellectual property protectionfor biotechnological products and processes (see tableA-2). A program of economic policy reform was intro-duced in 1990 to promote productivity gains and techno-logical competitiveness. The program includes a doublingof science and technology funding and liberalization ofthe nation’s patent law, both of which would be beneficialto the commercialization of biotechnology (16).

Government Support—The Brazilian Government hastargeted biotechnology as one of four areas of scientificpriority. A committee for biotechnology has been estab-lished to formulate principles for promoting scientific andindustrial policy; the committee assists an associatesecretariat for biotechnology in the president’s secretariatfor science and technology. The main issues facing thecommittee are: regulation of environmental release,safety of laboratory work, intellectual property protection,high-technology development and capitalization, andnational and international trade regulations.

The government is currently the largest contributor tobiotechnology R&D. Primary recipients are universitiesand research institutes (95 percent of the funds) with somefunding allocated to industry in the form of risk-free loans(i.e., repayment is made in case of success) and cofi-nancing schemes. Industry funds biotechnology at a levelhalf that of the Federal Government. The hallmark ofBrazil’s strategy for the advancement of biotechnology istheir program of biotechnology science parks supportedby government, academia, and industry. The programcalls for the development of biotechnology centers atseveral major university campuses.

Industry--As a newly industrialized nation, the use ofbiotechnology is generally limited to basic researchconducted by academic research scientists (20). Althoughclassical biotechnology industries (e.g., fermentation,paper and pulp, mining) have developed, modern biotech-nological processes and products are limited to plantmicropropogation, cell manipulation, and human diag-nostics. Nearly 60 companies are struggling towardtechnological modernization in such areas as plant tissueculture, pharmacological biochemistry, diagnostic kits,cattle embryo transplants, and urban waste treatment.

Although Brazil has yet to market its first productstemming from recombinant DNA (rDNA) or hybridomatechnology, the number of companies using modern

Appendix A--A Global Perspective: Biotechnology in 14 Countries ● 231

Table A-2—Strengths and Weaknesses,Biotechnology in Brazil

Table A-3-Strengths and Weaknesses,Biotechnology in Canada

StrengthsGovernment commitment to biotechnology.Emergence of biotechnology-related industrial consotia

WeaknessesShortage of trained personnel in biotechnology.No patent protection for biotechnology products or

processes.Economic constraints.

StrengthsRevised patent act.Biotechnology strategy to foster growth.National networks.

WeaknessesFederal budget cutbacks.Limited sources of capital.Few Iarge companies.

SOURCE: Office of Technology Assessment, 1991,

biotechnology is increasing. The Brazilian Association ofBiotechnology Enterprises counts 36 member companiesinterested in different sectors of biotechnology with manymore nonmember companies interested in modern bio-technology (15).

Regulatory Environment—At present, Brazil followsU.S. National Institutes of Health (NIH) and U.S.Environmental Protection Agency (EPA) guidelines forlaboratory and environmental safety.

Intellectual Property-Brazil does not provide patentprotection for food or pharmaceutical products andprovides only process patents for chemical products.Although no law prohibits the patenting of biotechnologi-cal products and processes, the Brazilian Patent Office hasbeen, so far, unwilling to act on the more than 300biotechnology applications currently pending. As part ofa new economic program in Brazil, new legislation toextend patent protection to all areas of industrial en-deavor, including biotechnology, is expected in late 1991(16).

Canada

Canada has a mixed economy. Although productionand services are primarily privately owned and operated,the Federal and Provincial governments are significantlyinvolved in the economy. Canada is the most importanttrading partner of the United States (25). While biotech-nology is becoming a more important tool in Canadianindustries, challenges to its continuing developmentremain. Sources of capital are limited, budgetary cutbacksare beginning to strain Federal support programs, andforeign acquisitions of Canadian enterprises are increas-ing (see table A-3).

Government Support-A major theme of the FederalGovernment’s general economic policy has been thereduction of the deficit. In general, government programshave been cut, the size of the civil service reduced, and thedevelopment of new programs strenuously resisted (2).

Federal funding for biotechnology R&D is relativelysmall, amounting to Can$157 million in fiscal year1988-1989, up from Can$105 million in 1986-1987 (3).Universities and Federal research facilities claimed the


bulk of Federal funds. Additional funding is availablefrom Provincial governments, the majority of whichsupport research in agriculture, health care, and forestry.Eight Federal agencies are involved in biotechnologyresearch, with the National Research Council and Agri-culture Canada playing the largest roles.

Industry--In 1981 a Federal task force on biotechnol-ogy, initiated by the Ministry of State for Science andTechnology, concluded that “a practically nonexistentbiotechnological industrial base, a rapidly shrinkingFederal Government research capability and a highlyfragmented and unfocused university effort are the majorfeatures of Canada’s current biotechnological activities. ”(2)

In response to these findings, the Canadian Govern-ment launched the National Biotechnology Strategy in1983 to stimulate growth in the biotechnology sector. Thestrategy included the creation of a national advisorycommittee, the identification of priority areas, and thecreation of networks between researchers from industry,universities, and government. Although the strategy hasreaped benefits, several factors continue to threaten thehealth of Canada’s biotechnology base:

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Although many new companies have emerged since1981, most are very small (less than four employeesand annual sales under US$l million). Such compa-nies face uncertain futures with the increase ininternational competition.The new U.S.-Canada Free Trade Agreement hasincreased competition for small Canadian ventures.The difficulty in raising capital for high-technologyenterprises is a continuing problem.Complex regulations confront companies exploringnew biotechnological applications.Process patent protection is unavailable for newvarieties of plants or animals (2).

Over 200 commercial firms are involved in biotechnol-ogy. However, most are quite small, and only about 30companies may be fully involved with modern biotech-nological techniques. Only one company has more than100 employees, and firms having the highest amount of


sales tend to be large traditional companies with interestsin biotechnology (2).

Venture capital, a staple of U.S. biotechnology compa-nies, has played only a small role in the development ofbiotechnology in Canada. Only about one dozen Cana-dian venture capital funds have backed biotechnology.This limited role hinders the sharing of risks that occurwhen a number of venture capital firms back a company.In the absence of a strong equity market for raising capital(less than 20 Canadian biotechnology companies havesecured financing through public equity markets), mostsmall firms are financed through service contracts andgovernment R&D grants. With competition increasingand government funding decreasing, an increase inmergers and bankruptcies is likely.

Regulatory Environment—The regulatory frameworkfor biotechnology in Canada consists of seven statutesadministered by three Federal agencies. In addition,Provincial restrictions concerning environmental protec-tion and occupational health add additional layers ofregulatory complexity. The 1988 Canadian Environ-mental Protection Act seeks to remedy this quagmire byconsolidating the range of legal issues into one lawaddressing safety in research, production, use, anddisposal of products. Specific regulations are still in thedrafting stage, however, and many problems remainconcerning their application to products and processes.The regulatory problem in Canada is two-fold:

● industry needs a clear set of laws and regulations inorder to do business, and

. in the absence of a clear regulatory framework,industry has difficulty in attracting much neededfinancial support (2).

Intellectual Property-Canada’s Patent Act, whichpreviously had empowered the Commissioner of Patentsto issue compulsory licenses permitting Canadian genericmanufacturers to import, formulate, and market copies ofpatented pharmaceutical products, has been altered toprovide patent protection to brand-named pharmaceuticalmanufacturers. This change prompted manufacturers toannounce spending intentions in excess of $1 billion onR&D over a 10-year period (2).

Intellectual property protection, in the form of patentsis available for microbiological processes and theirproducts, but protection does not extend to processes forproducing new genetic strains or varieties of plants andanimals. Canada has not yet enacted plant breeders’rights, although pending legislation would amend thePatent Act to provide such protection.

Denmark

Denmark is a small country with a population of 5million. Of the five Nordic countries, Denmark is the only

one that is a member of the European Community (EC).Denmark’s industrial development, which has beenlinked primarily to agriculture, has been prolonged andmore gradual than other Western European nations (17).

Denmark has long been associated with advancementsin classical biology. In the late 1800s, Danish companiesbecame the first to use pure yeast strains in fermentationand to market pure bacterial cultures and enzymes for usein cheese production. In the 1920s Denmark launched theproduction of insulin and now supplies 40 percent of theworld’s supply of this important protein (see table A-4).

Government Funding for R&D-Statistics for R&Dfunding are gathered biannually in Denmark. The col-lected data do not provide precise information onbiotechnology funding, but rather, for subject-groupfunding (e.g., medical science, natural science, technicalscience, agricultural and veterinary science) and sub-groups (e.g., genetics, biochemistry, microbiology). Fur-ther, 41 percent of government-supported R&D is per-formed at universities from their normal budgets.

Direct government funding for biotechnology R&D in1987 was approximately $37 million. Funding has beenprovided for two government-led programs-a 5-yearprogram focusing on techniques in molecular biology,launched in 1984 and a much larger program for R&Dinbiotechnology, launched in 1987. The latter is by far thelargest government-funded R&D program ever under-taken in Denmark; its 1990 budget equals nearly half thecombined budget for the country’s six research councilsfor that year.

Industrial Policy and Sector—Traditionally, the Dan-ish Government has taken a laissez-faire attitude towardprivate-sector R&D efforts in biotechnology. Whileencouraging such efforts, it has not provided much directsupport. Now, that is beginning to change, though slowly.The government sponsors 14 “centers without walls” forvarious aspects of biotechnology that is hoped will leadto increased interaction between academia and industry.Other forms of governmental support include a modesttax incentive and loan programs totaling about $1.5million annually (9).

Industrial efforts are dominated by well-establishedfirms, primarily in pharmaceuticals. The pharmaceuticalsector enjoys a trade surplus second only to Switzerlandin terms of dollars per capita. Roughly 92 percent of allproduction is exported, as compared to 60 percent forDanish industry as a whole. One Danish firm, NOVO-Nordisk, today supplies roughly 40 percent of the world’sinsulin.

By comparison, the foodstuffs industry is weak. This iscause for some concern, given that agriculture accountsfor 20 percent of the country’s total exports.


Table A-4-Strengths and Weaknesses,Biotechnology in Denmark

Table A-5-Strengths and Weaknesses,Biotechnology in the Federal Republic of Germany

StrengthsStrong tradition in classical biology.Well-established pharmaceutical firms.Biotechnology seen as a priority for public and private

sectors.Weaknesses

Fragmented research base.Weak university-industry links.Restrictive legislation on use of genetic technology.


Regulatory Environment—The Environmental andGene Technology Act of 1986 sets tough health and safetystandards for laboratories experimenting with rDNA. Theact requires that processes involving rDNA receive priorapproval from local authorities and prohibits controlledreleases. Denmark was the first nation to pass specificlegislation requiring that products and processes fromrDNA and cell fusion technologies be regulated differ-ently than those obtained by normal biological andchemical processes. This regulatory system is the moststringent one in existence, and some fear it will interferewith the competitiveness of Danish industry. Danishindustry has found the 1986 law difficult to live with andis pressing to have a domestic law that is similar to otherEC nations. The law was revised in May 1989 to loosenrestrictions on pilot plant experiments (9).

Intellectual Property-Denmark is a party to a numberof treaties addressing protection of intellectual property,and U.S. citizens are entitled to receive national treatment(25). Patents for food products have been granted since1989 and for pharmaceuticals since 1984 (9).

Federal Republic of Germany

The events of 1989 portend immense change as the twoGerman states become one. The speed and sheer complex-ity of the political and economic mergers of West and EastGermany extend to all sectors, including biotechnology.

Germany is Europe’s hot spot with regard tobiotechnology. Public- and private-sector activity out-paces that of its European neighbors. The domesticchemical and pharmaceutical industries rank among themost profitable in the world. Government policy activelypromotes development. And extreme opposition to genetechnology thrives to an extent unparalleled in most othercountries. Whatever the outcome of its regulatory battles,the Federal Republic of Germany (FRG) is likely toremain a strong player in biotechnology well into thefuture (see table A-5).

Government Support-Germany became the firstcountry to establish, a government research institutedevoted exclusively to biotechnology (the National Re-search Center for Biotechnology, founded in 1976).

StrengthsFirst nation to establish biotechnology program and

institute.Europe’s highest concentration of biotechnology in

pharmaceutical and chemical fields.High-quality science training and research base.Strong industry-university relationships.

WeaknessesPublic opposition to genetic technology.Limited venture capital presence.Dominance of large companies could limit small market

opportunities typical in biotechnology.SOURCE: Office of Technology Assessment, 1991.

Within the national government the primary body han-dling the financing of R&D is the Ministry of Researchand Technology. Other ministries (defense, education andscience, and research) disseminate the remainder. Theratio of Federal-to-State funding for R&D is approxi-mately 1 to 2. Federal outlays go entirely to large-scalecenters and smaller public institutes, while States committheir research funding exclusively to R&D facilities anduniversities located within their respective borders.

Industry-Germany is the world’s largest chemicalexporter and boasts Europe’s highest concentration ofbiotechnological activities. In 1974 it became the firstnation to launch a national biotechnology program. Thenext major government action occurred in 1984 when theFederal Ministry of Research and Technology reiteratedthe government’s commitment to biotechnology bylaunching a research program with six announced objec-tives:

1. to enable top scientific performance through theproper allocation of political and financial re-sources,

2. to foster industrial innovation,3. to promote R&Din the field of health,4. to evaluate risks associated with new techniques and

to adopt safety regulations accordingly,5. to increase the pool of R&D professionals through

the support of young scientists, and6. to encourage international cooperation and technol-

ogy transfer (28).

Industry invests heavily in R&D-58 percent of thenational total--and the pattern extends to biotechnology.The majority of biotechnology activities are being con-ducted by large firms including Bayer, BASF, BoehringerIngelheim, Boehringer Mannheim, and Hoechst. Some ofthe firms, such as Bayer and Hoechst, are fundingbiotechnology R&D at the rate of $70 to $100 million ayear-amounts equivalent to U.S. companies such asDuPont and Monsanto (18). Licensing agreements, strate-gic alliances, and even acquisitions involving U.S. firms


(e.g., BASF’s $1 billion acquisition of Inmont) may helpGerman firms gain access to cutting-edge technology.

Venture capital companies are usually less than 6 yearsold in Germany, indicating a much earlier stage ofdevelopment than their counterparts in the United States.At present, they number approximately 40 and are onaverage quite small (28).

Regulatory Environment—Many Germans oppose theapplication of new biotechnological techniques, particu-larly in regard to genetic manipulation. The Green Party,for example, has made opposition to genetic engineeringits second political target, after opposition to nuclearpower. The party, which comprises a mix of environmen-talists, socialists, anti-technologists, and others generallydissatisfied with other established political parties, cur-rently holds 8.3 percent of the seats in the NationalParliament.

In 1984 the National Parliament appointed a commis-sion on the prospects and risks of genetic engineering. InJanuary 1987 the commission issued a report urging morethan 170 specific measures, covering such areas ascloning of human beings, release of genetically engi-neered cells, and genome analysis by employers and lawenforcement agencies. This has led to debate on aproposed “Gene law’ to rigidly define the legal environ-ment within which industry could conduct R&D. Somecompanies have begun shifting investments to morefavorable climates in other countries.

A West German State Court dealt a blow to thecountry’s biotechnology industry in November 1989,when it blocked the chemical company Hoechst fromcompleting a plant to manufacture genetically engineeredinsulin. The court ruled that since German law did not‘‘expressly permit the application of genetic engineering,such facilities may not be built and operated.’ The verdictis binding on all States in Germany (l).

The court decision led to passage of a national gene lawin 1990, which has provided a legal basis to permit R&Din genetic engineering. An additional factor that mightstem the tide of Germany’s growing opposition tobiotechnology is the harmonization of European marketsin 1992. This could force Germany to adapt its regulationsto meet those of other European nations which generallyhave less restrictive regulatory procedures.

Intellectual Property-Germany is party to majorinternational intellectual property accords. United Statesfirms and citizens are entitled to national treatment (i.e.,German law does not distinguish between nationalities ofregistered property (25).

France

France is the world’s fourth largest industrial economy;its Gross National Product (GNP) is about one-fifth that

of the United States. France has a centuries-old traditionof centralized administrative and governmental control ofits market economy. This tradition extends to biotechnol-ogy, for in the words of one spokesman, “laissez-fairewould not work” (see table A-6) (23).

Government Support-In 1982 the French Govern-ment established biotechnology as an area of nationalpriority with the creation of the “Mobilization Program:Rise of Biotechnology” within the Ministry of Researchand Technology. Over the next 3 years, governmentfunding for biotechnology research increased dramati-cally. Then, in 1986, it began to decrease. Still, biotech-nology is seen as an area of strategic importance forFrance (23). Despite decreased funding, France has astrong tradition of scientific research (e.g., vaccinedevelopment), support of world renowned facilities (e.g.,the Pasteur Institute), and other programs (e.g., taxincentives) to nurture scientific activity in the publicsector.

Government funding for R&D has been on the declinesince reaching a peak in 1985. From 1986 to 1989 theFrench Government spent an average of US$215 millionannually on biotechnology R&D. This funding is focusedtoward national centers for scientific research, agronomicresearch, health and medical research, and atomic re-search; the Pasteur Institute (a private institute renownedfor its work in immunology); and direct funding toindustry.

In addition to direct government funding of biotechnol-ogy research, France has set up two logistical tools underthe auspices of its national biotechnology program:

. A databank for biotechnology that collects and storesavailable information on the sequence of biologicalmolecules. This databank is connected to majorforeign biotechnology databanks.

. Improved microbial strain collections. A studyconducted by the Ministries of Research and Agri-culture led to improved collections and the creationof new collections for yeasts and other micro-organisms of biotechnological interest.

Industry-Approximately 700 companies are involvedto some extent in biotechnology in France. Of these,however, only 100 play a major role (23). Industrial R&Dis generally carried out by large firms, many of which areor were nationalized (5). Agriculture, vaccines, cosmet-ics, and water treatment are top areas of biotechnologicalapplication today (23).

The promotion of technology transfer has beenproblematic in France. This is due to a traditionalseparation within academia between basic science (tradi-tionally taught in universities) and technological training(offered only in professional colleges). Furthermore,


Table A-6—Strengths and Weaknesses,Biotechnology in France

StrengthsGovernment targeting of biotechnology as a priority area.Favorable public attitude toward biotechnology.Historic scientific tradition (e.g., vaccine development) and

research facilities (e.g., Pasteur Institute).Weaknesses

Decreasing government funding for R&D.Weak mechanisms for technologv transfer.


commercial biotechnology research facilities often lackscientific expertise.

Regulatory Environment—The handling of rDNA isgoverned by good laboratory practice and goodmanufacturing practice regulations. In addition, the Ge-netic Engineering Commission within the Ministry ofResearch and Technology is responsible for classifyingall micro-organisms according to the level of riskassociated with their release. A committee is in place toaddress ethical questions raised by biotechnology. Withinthe Ministry of Agriculture, the Bimolecular Engineer-ing Commission is in charge of providing preliminaryapproval of the controlled release of micro-organisms.This commission comprises a collection of representa-tives from the science community, consumer groups, andFrance’s Green Party. In contrast to the situation inGermany, the French Green Party does not opposebiotechnology (23).

Intellectual Property-France is a strong defender ofintellectual property rights and an advocate of improvingprotection. The nation is a signatory to major internationalagreements governing patents, copyrights, and trade-marks (25).

Ireland

Ireland’s recent economic policy has been directed inlarge measure to a recovery from an extended period ofhigh international indebtedness. Ireland’s national debtreached its peak in 1986. In 1987 there was a change ofgovernment followed by a period of cooperation amongmajor political parties, labor, and employers toward thegovernment’s program for national recovery. Althoughpersonal income taxes remain extremely high (the highestrate is 53 percent), the corporate income tax rate of 10percent is the lowest in Europe. Emigration poses asignificant problem. Biotechnology in Ireland enjoyspublic and private support. The government has targetedbiotechnology as a matter of national priority, anduniversities have emerged as major forces for furtheringbiotechnology (see table A-7).

Government Support—Figures isolating funding forbiotechnology per se are not calculated. Further, distinc-

tion is not made between classical forms of biology (e.g.,agriculture, racehorse breeding, cheese and dairy produc-tion) and modern biotechnology. In 1988 the IrishGovernment spent US$580 million on science andtechnology. R&D funding--US$lOl million in 1988—had doubled since 1986 (12). Funding is provided forindustrial production and technology, agricultural re-search, and university R&D programs.

Some 16,000 graduate students and 300 post-graduatestudents study life sciences at seven universities and ninecolleges of technology. However, many of these studentsemigrate. Still, it is estimated that as many as 60 percentof recent emigrants with graduate qualifications wish toreturn to Ireland and that 5,000 highly skilled, internation-ally experienced graduates are available to work inbiotechnology-related concerns (12).

The government has also provided startup funding toBioResearch Ireland (BRI), a contract research organiza-tion formed in 1987 to facilitate the commercialization ofbiotechnology. BRI is involved in establishing, equip-ping, and staffing biotechnology research centers. As of1989, five centers had been established at existinguniversities with specialization in diagnostics, pharma-ceuticals, food, cell and tissue culture, and agriculturaland veterinary biotechnology.

Industry-In 1987 the government created the officeof State Science Minister and identified biotechnology,microelectronics, and optronics as areas of strategicpriority. A national biotechnology program ensued. Threeagencies direct biotechnology policy in Ireland: 1) BRI;2) IDA Ireland, which supports growth within the Irishmanufacturing and service industries and promotes Ire-land as a location for foreign investment; and 3) EOLAS,the Irish Science Agency, which promotes science,technology, and the provision of technical services toindustry.

The pharmaceutical and food industries rate second andthird (behind electronics) as sectors spending the most onR&D. Agriculture is an area of weak industry R&Dfunding.

Regulatory Environment

Ireland’s regulatory environment has posed negligi-ble obstacles to industrial development. NIH guidelineshave been adopted for use in Ireland for two reasons: 1)the guidelines were seen as being adequate, and 2) U.S.companies based in Ireland are comfortable with them.Ireland applies EC-wide regulatory guidelines and hashad a rDNA committee since 1983 (13).

The Irish Government has adopted a vigorous corpora-tist strategy for the advancement of biotechnology. Itsnational biotechnology policy is clearly directed toward


Table A-7—Strengths and Weaknesses,Biotechnology in Ireland

Table A-8-Strengths and Weaknesses,Biotechnology in The Netherlands

StrengthsStrategy for enhancing high-technology and attracting new

business from abroad.Lowest corporate tax in Europe.Highly skilled labor force.

WeaknessesHigh emigration rate of skilled personnel.High personal income taxes.Small domestic market.

StrengthsStrong science base.High coordination between government, industry, and

academia.Good geographical position.

WeaknessesLack of venture capital industry.Small domestic market.High income and corporate taxes.

SOURCE: Office of Technology Assessment, 1991. SOURCE: Office of Technology Assessment, 1991.

enhancing the commercial viability of biotechnologyindustries and luring new business from abroad (12).

Intellectual Property-The government is currentlydrafting legislation that would allow Ireland to become asignatory to the European Patent Convention (EPC). Thelegislation will introduce short-term patent protection (10years) available without detailed searches and is designedto meet the needs of small domestic industries in Ireland.

The Irish Government encourages foreign investment,especially in high-technology industries such asbiotechnology. Consequently, protection of intellectualproperty rights has been an important part of thegovernment’s business policy. Protection is generally ona par with other developed countries in Europe, and thegovernment is responsive to problems that arise (25).

The Netherlands

The Netherlands has an advanced industrial economywith a strong record of prosperity. It is the sixth largestU.S. export market; the United States has traditionallyrecorded a trade surplus with The Netherlands. TheNetherlands is also the second largest foreign investor inthe United States (25). Although The Netherlands got alate start in biotechnology, the nation has a strong sciencebase and a sense of cooperative entrepreneurship that iswelcome to outside traders (see table A-8).

Government Support--The Dutch Government playsan active role in coordinating the activities of biotechnol-ogy programs. The government funds biotechnologyR&D through two national programs: 1) the InnovationOriented Program for Biotechnology (IOP-b), targetinguniversities and research institutes, and 2) the IndustrialStimulation Scheme for Biotechnology, supporting pri-vate-sector activity.

IOP-b, which was launched in 1982, helps stimulatemultidisciplinary research by engaging the country’s fiveuniversity biotechnology centers in cooperative research.The government directly provides catalytic funding(approximately f.10 per year) that is augmented byadditional funding (f.20-f.30 per year) from generalresearch budgets, creating a so-called ‘multiplier effect.

The Industrial Stimulation Scheme was initiated in1987 to support high-risk ventures in areas of newbiotechnology and to foster technology transfer from thepublic sector to the private sector. In its first 2 years, theprogram funded 100 industry projects in such areas asfermentation, pharmaceuticals, waste water treatment,fine chemicals, and biotechnological equipment (26).

Industry--In 1988 the Dutch commercial biotechnol-ogy sector was formed by four large firms (AKZO, DSM,Shell, Unilever), 12 medium-sized companies, and 34dedicated biotechnology companies (DBCs). The keysectors are food and dairy (industries of traditionalimportance in Holland), accounting for 85 percent ofDutch biotechnology sales in 1987. The second largestsector—human and veterinary pharmaceuticals-is ex-pected to play an increasingly important role, accountingfor almost half of the new company startups in 1988 (26).

Regulatory Environment—Holland is both econom-ically and politically stable. The Netherlands has enjoyedan extensive public discussion of rDNA technology.Unlike some other European countries, there is no GreenParty in Holland (1 1).

Intellectual Property-The Netherlands is a signatoryof major international intellectual property accords. TheNetherlands Patents act follows the EPC. In the beginningof the 1980s, patenting by universities was virtuallynonexistent. By late in the decade, the concept ofpatenting biotechnology inventions had become ac-cepted, although industry remained more effective inbringing applications to patent than were universities(26).

Singapore

An island nation of 2.5 million people, Singapore is aleading port and major crossroads of trade, transport, andcommunications, as well as an important provider offinancial and business services. It has a highly developedbut narrowly based economy dominated by trade andinternational services. This city-state is home to more than3,400 multinational corporations, giving Singapore theregion’s highest concentration of foreign investment.


In its aspiration to become a developed country,Singapore has placed priority on developing technologyand knowledge-intensive industries that are high-value-added, skilled, and R&D oriented. Biotechnology is onesuch industry that is considered important to Singapore’seconomic development for the future (see table A-9).

Government Support-Between 1981 and 1987 theSingapore Government spent an average of US$l.2million on biological and medical sciences. Since thattime the government has taken two actions resulting inincreased activity in biotechnology: 1) the establishment,in 1987, of the Institute of Molecular and Cell Biology(IMCB); and 2) the creation of a capital venture fund,Singapore Bio-Innovations, established with US$10.8million to invest in promising startup companies (7).

As a result of these actions, the Singapore Govern-ment’s annual commitment to biotechnology has risenfrom the 1987 average of US$l.2 million to roughlyUS$4.5 million (approximately 54 percent of the govern-ment’s funding for life sciences) in 1989. Two-thirds ofthis supports basic research at IMCB, while one-thirdfunds industry and joint industry-university projects inapplied research (22).

Industrial Policy and Sector—The focal point ofSingapore’s industrial policy for biotechnology is theNational Biotechnology Program, which was initiated in1988 to strengthen the R&D base, promote university-industry collaboration, build up the human resource pool,and spur industrial activity. This policy is supportedthrough tax incentives for industrial R&D and university-industry collaboration and available funding. Foreigninvestment-very important to Singapore given thepresence of 3,400 multinational corporations-is encour-aged by providing foreign licensers with exemptions ontaxes for royalties and know-how fees.

Private-sector development in biotechnology is still inthe early stages in Singapore with total annual outputestimated at US$20 million to US$25 million annually(7). However, the pool of potential investment funds tofinance increased industrial participation is significant(22).

Regulation--The regulation of biotechnology has notbeen seen as a problem to date in Singapore. Governmentefforts have focused on developing an awareness ofbiotechnology (22).

Intellectual Property-At present, Singapore does nothave its own patent act. Consequently, the country relieson the United Kingdom (U.K.) Patents Act. Under thisprocedure, domestic or foreign companies must firstapply for a patent in the United Kingdom and then registerin Singapore within a year to receive patent protection.

Table A-9-Strengths and Weaknesses,Biotechnology in Singapore

StrengthsStrong international orientation.Favorable entrepreneurial environment.Availability of specifically targeted venture capital.

WeaknessesLimited human resources.Inadequate science base.

SOURCE: Offics of Technology Assessment, 1991.

Recognizing the importance of patents in promotingand encouraging R&D initiatives, the government hastaken steps to codify its own patent act. Legislation is nowbeing reviewed by the Patent Bureau and is expected to befinalized in the near future (22).

South Korea

Beginning in the mid-1960s, the Government of SouthKorea set out to strengthen the country’s infrastructure forscience and technology in order to curb the growingvolume of high-technology imports. Its first action was toestablish the Korea Institute of Science and Technology(KIST), aided by investment from the U.S. Government.The formation of KIST produced several important sideeffects. It fostered public recognition of the value ofhigh-technology to South Korea’s future development,created confidence in the country’s R&D programs, andsparked an upsurge in private-sector research activity. Inthe 1970s KIST began to promote biotechnology withinthe government and industry. Since then, biotechnologi-cal development has advanced steadily, and business,backed by strong government support, has taken the leadin R&D activities (see table A-10).

Government Support-Public funding for biotechnol-ogy R&D is carried out by four governmental bodies: theMinistry of Science and Technology, the Ministry ofAgriculture and Fishery, the Ministry of Education, andthe Ministry of Health and Social Welfare. Of these, theMinistry of Science and Technology spends approxi-mately half of all Federal funds. Government fundingtotaled US$7 million in 1988 representing a doubling ofthe level 3 years earlier. The government’s R&D invest-ment projections call for steadily increasing commitmentsby both the government and the private sector (27).

Industry-The bulk of biotechnology R&D in Koreahas been conducted by industry. In 1988, of a total ofUS$46 million invested, US$39 million came fromindustry. The government serves largely as conductor,encouraging private activities and orchestrating the direc-tion industrial R&D will take. In many ways this parallelsthe Japanese model.

Much of South Korea’s biotechnology efforts arelinked to its strong fermentation industry (sales in this


Table A-10--Strengths and Weaknesses,Biotechnology in South Korea

StrengthsLong tradition in fermentation industry.Strong government targeting.

WeaknessesShortage of technical manpower.

SOURCE: Office of Technology Assessment 1991.

area constituted 4 percent of total GNP in 1986). Inaddition, production of pharmaceuticals is rising. TheKorea Institute for Economics and Technology estimatesthat production of biologically based pharmaceuticals hasincreased 30 percent each year since 1981, and that by theyear 2000, Korea will produce 2 percent of the world’sbiotechnologically produced pharmaceuticals (27).

No data exist on the breakdown of industrial sources ofcapital for biotechnology commercialization. Nineteenlarge firms (members of the Korean Genetic ResearchAssociation) dominate industrial activity. No startupDBCs exist in South Korea (27).

Regulatory Environment—The Genetic EngineeringPromotion law was passed in 1983. Its purpose was toeffectively promote and develop genetic engineeringtechnology by formation of research programs and also tocontribute to sound development of the national economyby promotion of industrialization of newly developedtechnology. The law called for the establishment of abasic plan for the promotion of biotechnology, a yearlyenforcing plan, and the creation of a council for geneticengineering policy.

Intellectual Property-South Korea’s new patent lawtook effect in 1987, extending the patent term to 15 yearsand expanding subject matter coverage to include protec-tion for chemical and pharmaceutical products andmicro-organisms. U.S. industry complaints regarding theKorean environment for patent protection focus oninterpretation of patent claims by the Korean PatentOffice (KPO), possible discrimination by KPO in grant-ing patents, interpretation of patent claims by the Koreancourts in patent infringement actions, adequacy of sanc-tions for patent infringement, and lack of discoveryprocedures (25). It is likely that these complaints will alsobe voiced by biotechnology patent practitioners.

Sweden

In Sweden, the government has not adopted explicitpolicies for biotechnology nor has it created a departmentcharged exclusively with promoting biotechnologicaldevelopment. Despite this lack of administrative control,the Swedish biotechnology industry has achieved adegree of success, relying largely on access to innovationand free market forces.

Acquiring risk capital in Sweden was not difficult priorto the 1987 stock market crash. Since 1987, risk capital forthe biotechnology sector has become more difficult toobtain, especially for small- and medium-sized firms. Inaddition, public perception of biotechnology has becomemore volatile, and government regulation is increasing(see table A-n).

Government Support-Between 1986 and 1989 theSwedish Government allocated the equivalent of US$60million to biotechnology R&D. Recipients of these fundsinclude universities, research institutes, and private indus-tries. Funding takes on the form of faculty grants, projectgrants, and support for public-private ventures.

Several Swedish research councils offer grants toscientists on a research project basis. Funding foruniversity-industry collaboration is available from theNational Board for Technical Development, and privatefunding is secured largely through research parks (sup-ported by a joint foundation with contributions by countycouncils, local businesses, and universities). At present,there are three science parks that emphasize biotechnol-ogical development in Sweden (10).

industry-Unlike many of the countries discussed inthis chapter, Sweden has not adopted a national policy forthe promotion of commercial biotechnology. Nor has agovernment body been formed to coordinate biotechnol-ogy R&D. Rather, a collection of public and privateentities associated with biotechnological activity carryout development as they see fit.

While not actively promoting biotechnology as aseparate area of priority, the government has, nonetheless,taken several policy actions that have indirectly aidedbiotechnological development. For example, a decision in1982 to permit the trading of stocks in small- andmedium-sized companies on an unofficial stock exchangebenefited the biotechnology industry by providing a newway to finance innovative ventures other than throughbank loans. In addition, the formation of regionaldevelopment funds and direct financing schemes target-ing small businesses has given biotechnology companiesa means of offsetting startup costs.

There are about 40 companies dealing with biotechnol-ogy in Sweden. This number has remained constant. Onlya few have gone bankrupt. Newcomers have beenbalanced by those companies that have merged withothers. The traditional strengths of Swedish biotech-nology have been in the sectors of laboratory equipment,separation, and fermentation. New areas include growthfactors, carbohydrate-based substances, and pharmaceuti-cals. R&D companies are financed primarily throughventure capital. Swedish biotechnology companies areinternationally active, a necessity since the domesticmarket is so small (10).


Table A-1 l-Strengths and Weaknesses,Biotechnology in Sweden

StrengthsGood university-industry cooperation.Traditional international stance of Swedish firms.

WeaknessesIncreasing difficulty in obtaining private capital.Overly stringent regulation.


Regulatory Environment—The regulatory environ-ment concerning biotechnology has until recently beenentirely favorable to industry. No specific legislationconcerning biotechnology R&D existed prior to 1988.Industry largely regulated itself through adherence to NIHguidelines for laboratory safety and Organization forEconomic Co-operation and Development (OECD)guidelines covering rDNA. The only official body cur-rently charged with monitoring laboratory work is theSwedish Delegation for rDNA, an advisory body toindustry and government.

The climate, however, has begun to change. In 1988animal protection legislation took effect regulating theuse of gene technology in mammals and animal experi-ments as well as the use of hormones in cattle breeding.A 1989 amendment to the Plant Protection Act was passedthat gives the government a mandate to restrict the use ofgene technology in plants, genetically modified plants,and genetically modified organisms in plant breeding. In1990 the government decided that a permit would berequired for growing genetically altered plants. Thegovernment further appointed a commission with repre-sentatives from both political parties and the scientificcommunity to conduct a 2-year study on the use of genetechnology and release of genetically engineered orga-nisms. The commission commenced its study in fall 1990(10)0

Intellectual Property-Sweden is a signatory to majorinternational agreements providing for patent protection.A Swedish patent is valid for 20 years. Undercurrent law,plant varieties, animal species, or essentially biologicalprocedures are not patentable. On the other hand,microbiological processes and plants or seeds that havebeen treated for a specific reason (e.g., disease resistance)are patentable. In addition, pharmaceuticals and feed-stuffs are patentable.

In academia, university scientists are given ownershipof their patents and therefore have the right to commer-cialize their inventions (10).

Switzerland

In Switzerland, the government does not espouse anydirect industrial policy regarding biotechnology. Instead,emphasis is on basic research within universities and

Federal research institutes. Public perception of biotech-nology remains relatively benign, which is reflected in theSwiss attitude toward regulation. This nation is home toseveral major multinational corporations that conductbiotechnology domestically. These factors, coupled withSwitzerland’s strong infrastructure in basic sciences,make future growth within the biotechnology sectorprobable (see table A-12).

Government Support-Support for biotechnology-related R&D is dominated by the private sector. Govern-ment accounts for only about one-fourth of the nationalcommitment. This, coupled with the absence of an officialstrategy for biotechnology, means that industry makesmost of the decisions concerning development in thebiotechnology sector. Federal Government funding goesexclusively to universities and government researchcenters and primarily targets basic research. The SwissFederal Institutes of Technology, in Zurich, receives thelargest amount of Federal funding (8).

Industrial Policy and Sector—Industry policy islimited to the establishment of a favorable political andregulatory climate. Direct mechanisms (e.g., R&D grants,tax incentives, and incentives for foreign investment) donot exist. This philosophy pertains to all sectors, includ-ing biotechnology.

Industry accounts for 75 percent of all R&D investmentin Switzerland (approximately US$3.25 billion annually).Commercial investment in biotechnology goes towardbasic research. Because of production costs, most Swisscompanies prefer to produce products abroad. Switzer-land, which has often been termed the pharmaceuticalcapital of the world, is home to large internationalchemical companies, including Ciba-Geigy, Sandoz, andHoffman-LaRoche.

Regulatory Environment—There are no specific lawsregulating biotechnology products or processes. At thepresent time, public perception is generally favorabletoward biotechnology. In its capacity as advisory panelfor biotechnology regulation, the Swiss Commission forBiological Safety in Research and Application takespublic reaction into account. Concerns for public safetyand moral concerns, therefore, have an official outlet forexpression. The emergence of the Green Party as a minorpolitical force in Switzerland will likely escalate thedebate on biotechnology in the future (8).

Intellectual Property-Patent applications filed inSwitzerland must be made in one of the country’s threeofficial languages (German, French, and Italian). UnderSwiss patent law, the following items are not patentable:species of plants and animals and biological processes fortheir breeding; surgical, therapy, and diagnostic processesfor application on humans and animals; and inventionsliable to offend ‘good morals.” Drugs and foodstuffs arepatentable.


Table A-12-Strengths and Weaknesses,Biotechnology in Switzerland

Table A-l Strengths and Weaknesses,Biotechnology in Taiwan (Republic of China)

StrengthsAvailability of pharmaceutical capital.International outlook spurred by multinational

corporations.Strong university-industry links.

WeaknessesLack of specific government programs for enhancing high

technology.SOURCE: Office of Technology Assessment, 1991.

Taiwan (Republic of China)

Taiwan’s economy is export-oriented; the nation is theUnited States’ fourth largest trade partner and trails onlyJapan in the amount of its trade surplus with the UnitedStates.

Biotechnology has been pronounced one of eightstrategic sciences and, as such, receives priority fundingfor R&D. In addition, the government has labeledbiotechnology as one of the country’s four strategicindustries, thereby entitling relevant companies to agenerous array of financial incentives (see table A-13).

Government Support—Eight strategic sciences aretargeted for R&D funding (energy, automation, materials,information, biotechnology, hepatitis control, electro-optics, and food technology) by the Taiwanese Govern-ment. Of the national expenditure of US$808 million in1986 for all R&D, these eight areas received over US$346million.

Of the money spent on strategic sciences, roughly 80percent is channeled into applied research, with theremainder going toward basic research. Applied researchis primarily conducted at strategic science institutesfunded by the Ministry of Economic Affairs, while basicresearch is funded by the National Science Council andoccurs mainly at universities. Biotechnology has claimedan average of 5 percent of the government’s R&D budgetfor strategic science and technology since 1985.

At the time biotechnology was labeled as a strategicarea of science, a four-pronged effort was initiated:

●

●

●

Funding for biotechnology was increased. By 1985,37 college departments around the country hadbegun offering advanced academic degrees in bio-technology, graduating approximately 200 master’sand 30 doctoral students per year.Developmental institutions were strengthened, andin 1984 the Development Center for Biotechnologywas established to promote the biotechnology indus-try and develop internationally competitive prod-ucts.Training courses in genetic engineering, cell fusion,fermentation control, and bioreactor design were

StrengthsStrong government targeting of new technology.Receptive public opinion toward biotechnology.Broad base of graduates trained in Taiwan and foreign

universities.Weaknesses

Lack of experienced managers.Lack of regulatory program.


initiated.● A venture capital funding system was developed to

help finance new startup companies. Governmentbanks led the investment effort, and special incometax exemptions were launched. Thirteen venturecapital firms have been established since 1986 underthis program (24).

Industry-Three years after making biotechnology astrategic science priority, the Taiwanese Governmentdesignated it as a strategic industry. Criteria for inclusionin this category included high-technology-based, high-value-added potential, large market potential, large eco-nomic fringe benefits, low-energy requirements, andlow-pollution production. Other strategic industries atpresent include machinery manufacturing, informationand electronics, and materials (e.g., metals, fiber optics,and industrial plastics).

As a result of receiving this designation, biotechnologyfirms became eligible for a raft of financial incentives,including government support covering half of technicaldevelopment and management costs on approved pro-jects, free technical or management consulting fromdesignated public institutes, preferred investment consid-eration and long-ten-n loans from government banks atreduced interest rates, and corporate income tax deduc-tions.

Capitalizing on governmental incentives, threebiotechnology firms were chartered in 1984 with ahandful of firms starting later. In terms of total sales,Taiwanese biotechnology companies reached $22 millionin 1987. By the year 2000, Taiwan aims to have taken 2percent of the worldwide market for biotechnologyproducts (24).

Regulatory Environment—As a strategic industry, thefocus of government efforts is on promoting biotechnol-ogy as opposed to regulating it (24).

Intellectual Property-Taiwan’s patent law wasamended in 1987 so that pharmaceutical ingredients andchemicals are now patentable. The defendant in a patentaction now bears the burden of proof in a legal action, andin a few prominent cases, convicted violators received jailsentences (24).


Pirating of new technologies has been cited as aproblem for U.S. inventors (25). However, OTA is notaware of any problem in this area affecting inventors ofbiotechnological products and processes.

United Kingdom

In the United Kingdom, the government has neveradopted a national leadership role in biotechnology.Rather, it has allowed government agencies to developtheir own policy schemes within tight budget constraints.The result has been a relatively successful policy empha-sizing university-industry links and the promotion ofsmall companies. However, some friction between agen-cies has occurred over the issue of where priorities shouldlie, particularly in respect to support for basic versusapplied science (see table A-14). This problem has tendedto blur priorities.

Government Support—As in the United States,government support for R&D in the United Kingdomgenerally targets basic research. Applied research isfunded largely through university-industry programs.

The government’s direct annual spending on allbiotechnology for 1987-88 was approximately $130million, of which 30 percent went to applied research and70 percent to basic research. Government funding forbiotechnology R&D is handled by the Department ofEducation and science (DES) and the Department ofTrade and Industry (DTI). Within DES, money isallocated by research councils, three of which share amajor interest in biotechnology: 1) the Medical ResearchCouncil, 2) the Agricultural and Food Research Council,and 3) the Science and Engineering Research Council.The Natural Environmental Research Council supportsbiotechnology R&D to a lesser degree.

Applied research support has come primarily fromDTI, whose Biotechnology Unit (established in 1982) hasbeen the prime source of aid to firms seeking help withnovel investments and innovation. During most of the1980s, DTI provided innovation funding (up to 25 percentof each proposal); this scheme has, however, beenwithdrawn on the grounds that there is no need forgovernment to support near-market research. The onlysupport now available for firm-based research is linked tocollaborative programs run in conjunction with one ormore of the research councils or with other Europeanfirms via EC programs (18).

Industry--In general, the U.K. Government’s policytoward the development of biotechnology has been one oflaissez-faire. In response to a 1980 report arguing for acoordinated policy to promote biotechnology in theUnited Kingdom, the government took the view that ifbiotechnology promoted such riches, then the privatesector would promote it, thus limiting the government

Table A-14-Strengths and Weaknesses,Biotechnology in United Kingdom

StrengthsHigh quality of science.Public acceptance of biotechnology.

WeaknessesDecreased government funding.Lack of venture capital for startup companies.Lack of coordination between government ministries.


role to providing an environment conducive to itsdevelopment.

Four points today constitute the main planks of theU.K. Government’s policy toward biotechnology:

●

●

●

●

Supporting the science base. Although the govern-ment claims to have increased the science budget by10 percent in real terms since 1982, many academicsdisagree, maintaining that no real budgetary growthhas occurred.Creating university-industry links. Establishingcloser links between the public and private sectorshas been accomplished through a number of indus-trial liaison efforts instituted by government researchcouncils. These ventures have made academic-industry links much more prevalent than a decadeago. However, there has, at times, also been somehostility between research councils that has limitedthe potential of some schemes.Promoting the venture capital market. The establish-ment of unlisted securities and over the countermarkets in the early 1980s has helped increase thefinancing of new technology enterprises in general.Still, it is difficult for small startup companies withno proven track record to obtain pilot financing.Providing a regulatory environment. Safety in drugsand food, environmental release, and health andsafety in the workplace constitute the three maincategories of regulatory concern in the UnitedKingdom. In all three areas, present U.K. regulationsdemand a case-by-case approach, and the mix ofstatutory and voluntary powers has generally workedsuccessfully. The United Kingdom has been at theforefront of experiments involving environmentalrelease. With these experiments being subject toscrutiny by the Advisory Committee on GeneticManipulation, there has been no public resistance todeliberate release experiments of genetically modi-fied organisms. Approximately 12 have occurredsince 1986 (18).

Although nearly 300 British firms are involved in someform of biotechnology, only about 40 companies activelyengage in genetic engineering or monoclinal antibodyengineering. One British company, Celltech, with acurrent value of roughly $190 million has emerged as the


world leader in monoclinal antibody production. Ingeneral, large firms predominate in British biotechnol-ogy, although the United Kingdom boasts more smallinnovative firms than any other European country (18).

Intellectual Property-United Kingdom intellectualproperty laws are strict, comprehensive, and rigorouslyenforced. The government’s positions in internationalforums, such as the World Intellectual Property Organiza-tion and the General Agreement on Tariffs and Trade talks(Uruguay Round) have been virtually identical to U.S.positions (25).

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Appendix A References

Bachter, B., “Court Blocks German Biotech Plant,”Science vol. 246, No. 4932, 1989, p. 881.Farina, C., director, Investment Prospecting Group, Invest-ment Canada, presentation before U.S. Congress, Office ofTechnology Assessment, International Conference on Bio-technology in a Global Economy, July 6, 1989.Farina, C., director, Investment Prospecting Group, Invest-ment Canada, personal communication, December 1990.Fujimara, R., Biotechnology in Japan: U.S. Department ofCommerce (Springfield, VA: National Technical Informat-ion Service, 1988).Genesis Technology Group, “Capital Availability forCommercial Biotechnology,” contract or report preparedfor the Office of Technology Assessment, November 1989.Gmm, G., “Biotechnology in Australia-1990, The Ge-netic Engineer & Biotechnologist vol. 10, No. 2, May/June1990.Hsu, M., president, Asia/Pacif3c Bioventures Co., personalcommunication, October 1990.Hutter, R., Vizepriisident Forschung, Eidgenossische Tech-nische Hochschule, Zurich, presentation before U.S. Con-gress, Office of Technology Assessment, InternationalConfenxwe on Biotechnology in a Global Economy, July 6,1989.Larsen, P.O., director, Danish Research Administration,Ministry of Research and Education, p~sentation beforeU.S. Congress, Office of Technology Assessment, Interna-tional Conference on Biotechnology in a Global Economy,Jrdy 6, 1989.Larsson, A., Technical R&D Division, Ministry of Industry,Stockholm, presentation befoxe U.S. Congress, Office ofTechnology Assessment, International Conference on Bio-technology in a Global Economy, July 6, 1989.McCormick, D., “Holland Is Busy in Biotechnology,”Biotechnology vol. 5, No. 9, 1987, pp. 911-913.McSweeney, B., director, BioResearch Ireland, presenta-tion before U.S. Congress, Office of Technology Assess-ment, International Conference on Biotechnology in aGlobal Economy, July 6, 1989.McSweeney, B., director, BioResearch Ireland, personalcommunication, December 1990.Organization for Economic Cooperation and Development(OECD), The Newly Industrzizlized Countries: Challengeand Opportunity for OECD Industries (Paris, France:OECD Publications Offke, 1988).Paes De Carvalho, A., president, Associacao Brasileira DasEmpresas de Biotechnologi~ Rio de Janiero, presentation

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befo~ U.S. Congress, Ofllce of Technology Assessment,International Conference on Biotechnology in a GlobalEconomy, July 6, 1989.Paes De Carvalho, A., president, Associacao Brasileira DasErnpresas de Biotechnologia, Rio de Janiero, personalcommunication, August 1990.Pedemen, J. L., and Wiegrnan, I.M., Biotechnology inDenmark (Jyngby: Institute of Socialk Sciences, TechnicalUniversity of Denmark, 1987).Sharp, M., senior research fellow, Science Policy ResearchUnit, University of Sussex, Brighton, presentation beforeU.S. Congnxs, Office of Technology Assessment, Interna-tional Conference on Biotechnology in a Global Economy,Jtdy 6, 1989.Smith, B., Australia Department of Industry, Technologyand Commerce, presentation before U.S. Congress, Officeof Technology Assessment, International Confenmce onBiotechnology in a Global Economy, July 6, 1989.Sorj, B., and Wilkinson, R.J., “Brazilian Policies inBiotechnologies: A Post-Ethanol Strategy?” Bio/Technology vol. 6, No. 2, 1988, pp. 150-155.Stark, P., Biotechnology and Environment ManagementIndustries, Department of Industry, Technology and Com-merce, Canberra, Australia, personal communication, Sep-tember 1990.Teoh, Y.S., di.mctor, National Biotechnology Programrne,Singapore Economic Development Board, presentationbefore U.S. Congress, OffIce of Technology Assessment,International Conference on Biotechnology in a GlobalEconomy, July 6, 1989.Thomas, D. F., professeur, Universitt5 de Compi~gne, Labo-ratoire de Technologies Enzymatique, Compi8gne, France,presentation before U.S. Congnxs, Offke of TechnologyAssessment, International Conference on Biotechnology ina Global Economy, July 6, 1989.Tien, W., president, Development Center for Biotechnol-ogy, Taipai, presentation before U.S. Congress, Offke ofTechnology Assessment, International Conference on Bio-technology in a Global Economy, July 6, 1989.U.S. Department of State, Country Reports on EconomicPolicy and Trade Practices, report submitted to theCommittee on Foreign Affairs and Committee on Ways andRAea.ns, U.S. House of Representatives, Joint CommitteePrint, IOlst Congress, 1st sess. (Washington, DC: U.S.Government Printing Office, March 1989).van der Meer, R.R., project manager, HOM ConsultancyBV, Scheveningseweg, The Netherlands, presentation be-fore U.S. Congress, Offke of Technology Assessment,International Conference on Biotechnology in a GlobalEconomy, July 6, 1989.Yun, Y.G., executive vice president, Korea DevelopmentInvestment Corp., Seoul, presentation before U.S. Con-gress, OffIce of Technology Assessment, InternationalConfenmce on Biotechnology in a Global Economy, July 6,1989.Ziehr, H., assistant director, Gesellschaft fiir Biotechnolo-gische Forschung, Braunschweig, Federal Republic ofGermanY, presentation before U.S. Congress, Office ofTechnology Assessment, International Conference on Bio-technology in a Global Economy, July 6, 1989.

Appendix B

Comparative Analysis: Japan

Introduction

This appendix, which accompanies appendix A, is asummary of information regarding biotechnology inJapan that is found in chapters 2 through 12 of this report.

The commercialization of biotechnology in Japan, as inthe United States, has matured and developed over abroadrange of industries. In 1984, the Office of TechnologyAssessment (OTA) identified Japan as the major potentialcompetitor to the United States in biotechnology commer-cialization. In the view of some, Japan continues to be theUnited States’ main competitor in the early 1990s. Others,however, assert that Japan, in the immediate past and forthe near term is not a threat. However, the diffusion ofbiotechnology into several industrial sectors, the chang-ing financial markets, the emergence of the EuropeanCommunity (EC) as a single economic and political force,and the increasing internationalization of business (e.g.,communications, strategic alliances, and technologytransfers) blur geographical lines and make simplecomparison of the competitiveness of various countriesmore difficult than in the past (see table B-l).

In Japan, industry dominates biotechnology researchand development (R&D). Industrial researchers workingin the field of natural sciences outnumber their govern-ment and university counterparts nearly two to one, andthe majority of biotechnology research facilities arecorporate-led. In addition, government strategies foradvancement of biotechnology in Japan consistentlytarget commercial development. Most government fund-ing for R&D is channeled toward applied research, andgovernment-led initiatives invariably enjoy wide industryparticipation.

These circumstances contrast sharply with the UnitedStates, where government and academia represent thedriving forces behind advancement in biotechnology, andbasic research claims a larger share of public R&D funds.

Table B-l-Strengths and Weaknesses,Biotechnology in Japan

StrengthsFermentation and bioprocess industry.Strong domestic market for pharmaceuticals.Strong applied research base.Strong government support.WeaknessesInsufficient basic research science base.Lack of innovative basic research personnel.Lack of venture capital.Rivalry between ministries inhibits cooperation.SOURCE: Office of Technology Aesesement, 1991.

Additionally, U.S. Government policy tends not toprovide direct industry leadership.

There are notable differences between R&D expendi-tures in Japan and in the United States. Japan directs arelatively small amount of government funding to R&Dand very little of those funds go to defense. Thegovernment’s share of total R&D spending in Japan hascontinued to fall over the last decade. Industrial sponsor-ship is four times greater than government sponsorshipand continues to grow as a percentage of the GrossNational Product (GNP). As a percentage of GNP, Ja-pan’s investment in R&D has already reached an interna-tional high of 2.8 percent. Still, Japan’s research expendi-ture in absolute numbers is only 38 percent of that spentby the United States.

Research relevant to economic growth is sponsoredmore frequently in Japan than in the United States. Japangives less emphasis to basic research compared to appliedresearch, a not surprising situation given the dominanceof industry funding. Trends in Japan have actually beentoward relatively more spending by industry on basicresearch (up from 5 percent of total industrial R&D in1978, to 6.6 percent in 1988) but less spending by thegovernment (down from 14.5 percent of total R&D in1980, to less than 13 percent in 1988).

Japanese universities and staff are more orientedtoward teaching than research. Japanese Governmentfunding goes primarily to institutions and senior research-ers, who control funding, rather than to individualresearchers thus, perpetuating what many feel is a rigid,hierarchical system that stifles innovation. Despite strongformal and informal ties existing between senior facultyand industry, barriers to cooperation remain between theuniversities and industry. Until 1990, national universityprofessors were considered to be government employeesand were prohibited from receiving industry funds.However, many professors have acted and continue to actas industrial consultants. Industry funding of universityresearch is only 2.6 percent of total university research inJapan, as compared to 6.2 percent in the United States.

Government Funding

The Japanese Government funds approximately 20percent of biotechnology-related R&D-a much smallerportion than the U.S. Federal Government’s stake (whichis approximately 50 percent). Japanese Governmentspending for biotechnology was Y82.5 billion in 1989, anincrease of Y12 billion (US$900 million) from theprevious year (see table B-2). This total includes expendi-tures by seven ministries. The Japanese Government’s

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Table B-2—Biotechnology Budgets for 1985-89 (In billions of Yen)

1986 1987 1988 1989

Ministry of International Trade and Industry . . . . . . . . . . . . . . 5.4 5.8 5.7 7.6Ministry of Agriculture, Forestry, and Fisheries. . . . . . . . . . . . 3.1 3.2 6.6 7.4Ministry of Health and Welfare . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 12.1 31.1 34.5Science and Technology Agency . . . . . . . . . . . . . . . . . . . . . . . 10.3 12.0 13.8 18.2Ministry of Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.6 13.6 14.0 14.4Environmental Protection Agency . . . . . . . . . . . . . . . . . . . . . . 0.1 0.1 0.3 0.3Ministry of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1 0.1 0.1 0.1SOURCE: Nikkei Biotechnology, Mar. 13, 19S9; JFWS Report, Nov. 1, 1990.

current pattern of investment in biotechnology R&D is toprovide limited seed money, as a catalyst to encouragecompanies to explore new R&D options.

The Ministry of International Trade and Industry(MITI) sponsors two important collaborative appliedresearch programs.

● the Japan BioIndustry Association (JBA), a non-profit organization dedicated to the promotion ofbiotechnology and bioindustry, involving 320 com-panies from many industrial areas; and

. the Research Association for Biotechnology whichincludes large Japanese firms, such as Ajinomoto,Mitsui, and Mitsubishi Chemicals.

MITI also provides core funding in diverse areas, such aschemicals, pharmaceuticals, food, marine biotechnology,and alcohol fuel production.

Other ministries funding biotechnology-related pro-grams include the Science and Technology Agency(promotion activities); the Ministry of Health and Welfare(research in dementia, acquired immunodeficiency syn-drome, circulatory diseases, cancer, maternal and childhealth, food safety, and drugs); the Ministry of Agricul-ture, Forestry, and Fisheries (development of leading-edge biotechnology in agricultural, forestry, fishery, andfood industries); and the Environment Agency (to copewith environmental problems associated with biotechnol-ogy).

The government supports biotechnology indirectlythrough tax incentives with R&D tax credits and attractivedepreciation schedules on equipment, loans, and educa-tion, as well as training for personnel. Often, however,incentives for R&D are more attractive overseas than inJapan. These incentives have driven several firms, such asOtsuka Pharmaceuticals and Hitachi Chemicals, to estab-lish R&D branches in the United States. Another impor-tant factor is lower prices on higher quality researchabroad.

In contrast to Japan, the Federal Government is thedriving force behind R&D funding for biotechnology inthe United States. In fiscal year 1990, the U.S. Govern-

ment provided $3.4 billion to support R&Din biotechnol-ogy-related areas (see app. C). As in Japan, fundingsupports a diverse portfolio of potential commercialapplications; unlike Japan’s focus on applied research, thebulk of U.S. Federal R&D is targeted toward basicresearch. Several other factors differentiate the U.S. andJapanese approach to funding:

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The U.S. system of authorization and appropriationof Federal programs is inherently driven by plural-ism in the political process. The U.S. Congress playsafar stronger role in funding and oversight than doesthe Japanese Diet, and executive agencies havemarkedly less discretion than their counterparts inJapan.The structure of the U.S. research and technologybase is also vastly different. The U.S. FederalGovernment provides significantly more fundingthan does the government of Japan, in both relativeand absolute amounts. The United States has adecentralized research system, and several cabinet-level departments have internal research divisionsresponsible for the research needs of their particularmissions (e.g., enhancing health).The system for setting research budgets in the UnitedStates is inherently political. Each Federal agencyhas its own culture. These cultures contribute to theirsuccess, perhaps simply by embodying the “waythings are done.” However, the culture is a powerfuldeterminant of future directions, and specific goalsmay only be reflected in the collective knowledge ofagency personnel.

Targeting of Technology and Financing

In 1981, MITI designated biotechnology to be astrategic area of science research, marking the first officialpronouncement encouraging the industrial developmentof biotechnology in Japan. Over the next few years,several ministries undertook programs to fund andsupport biotechnology.

Of particular interest, today, is governmental activity inthe pharmaceutical industry. The Ministry of Health andWelfare (MHW) annually lowers prices on existing drugs,

Appendix B--Comparative Analysis: Japan ● 245

while allowing premium prices for innovative or impor-tant new drugs, thus forcing companies to be innovativeand to seek larger markets. This trend is reinforced by theemergence of new foreign and domestic competitors. Thepush toward innovation is part of the government’soverall effort to provide care for its aging population—without bankrupting the national health insurance pro-gram.

Despite well-coordinated efforts on the part of govern-ment to stimulate biotechnology R&D, several weak-nesses persist. For example, overall funding levels remaincomparatively low, and competition among ministriesand agencies has developed. This state of affairs hasresulted in some duplication of research and also hascreated a situation in which companies wishing to testvarious processes may need authorization from more thanone ministry. Furthermore, this rivalry among govern-mental bodies tends to inhibit coordination betweenuniversities (performing basic research) and firms (focus-ing on applied research).

Approximately 300 Japanese firms report some type ofactivity related to biotechnology. A 1985 survey, placedthis number at 268; of these, 19 used recombinant DNA(rDNA) techniques commercially. Large, traditionalfirms dominate the commercial sector. The few startupcompanies that do exist usually show some link totraditional firms.

Current figures on Japanese private spending forbiotechnology are hard to obtain from Japanese sources.Estimates for 1987, place industrial biotechnology R&Dat US$l billion, roughly half the amount of U.S. industrialspending.

The Japanese stock market has played only a small rolein allocating capital. Most capital is heavily concentratedin the banking system. Venture capital plays a limited rolein high-technology and biotechnology financing. How-ever, most Japanese venture capital fund managers lack

skills and usually operateentrepreneurial managementout of their parent headquarters (e.g., banks, securityhouses, or giant corporations), and these managers investconservatively. Most American venture capitalists wouldhold that Japanese venture capital really isn’t venturecapital in the U.S. sense. Indeed, Japanese venturecapitalists are willing to accept returns at two-fifths oreven less than the level that U.S. venture capitaliststypically expect. Several other reasons exist for theconservative nature of Japanese venture capitalists. Theseinclude the stigma of failure and the emphasis on personalrelationships rather than depersonalized sales of equity,resulting in equity sales primarily occurring betweencooperating firms-a condition hardly conducive to U.S.style venture capital.

Although MITI in 1981 announced its goal of matchingU.S. biotechnology within 5 years, its catch-up, get-ahead

motto has fallen flat in recent months. The initial positivepublic perception of biotechnology-demonstrated bysales of products such as bio-lipsticks, genetically modi-fied eels, BeWell bread, and other everyday items whosesales were bolstered by advertising their biotech origins--is changing. According to a recent survey, 90 percent ofrespondents were dubious about biotechnologists’ claimsof environmental safety, and 77 percent felt thatbiotechnology would eventually develop into a majorsocial problem. This development combined with theIllustrations of young scientists over not getting enoughsupport, led one writer to note that: Japan may not be the“land of tPA milk and recombinant honey. ”

Recent disenchantment with biotechnology at a com-mercial level goes back to a failure by several companiesto rapidly commercialize products. Although biotechnol-ogy is losing its luster among Japanese investors, oneanalyst projects that funding will not decline, but insteadwill be spent in a more focused fashion on fewer projects.

With one exception, the purchase of Gen-Probe byChugai Pharmaceuticals of Japan, international biotech-nology-related mergers and acquisitions have not in-volved the purchase of a U.S. company by a Japanesecompany or vice versa. By comparison, 33 biotechnol-ogy-related acquisitions between 1982 and 1988 involveda firm from the United States and a firm from Europe.

North Carolina Biotechnology Center (NCBC) data-bases reveal 12 cases of U.S.-Japanese equity arrange-ments. Of these, six explicitly mention marketing orresearch funding. This seems to indicate that most foreignbiotechnology companies believe that the only route tothe Japanese market is by teaming up with a largeJapanese corporation. As biotechnology companies growto have product sales and their own sales forces, some ofthe marketing agreements can even switch direction.Genentech is the leader in what may become a morecommonplace occurrence by the early to mid-1990s: in1987 the Japanese chemical firm Mitsubishi Kaseiselected Genentech to develop and market some of itsPharmaceutical products in the United States.

Japanese companies are investing in U.S. dedicatedbiotechnology companies (DBCs). Examples include:

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Chugai Pharmacautical’s arrangements with Genet-ics Institute and Upjohn, and Chugai’s acquisition ofGen-Probe for$110 million;

Tokyo’s Institute for Immunology’s $20 millioninvestment in IDEC pharmaceuticals; and

the collaboration. between Genetics Institute andJapan’s Yamanouchi“ Pharmaceutical Co., and Cal-Bio’s deal with Daiichi Pharmaceutical Co.


Industrial Sector: Health

The United States is the largest pharmaceutical marketin the world, with an estimated value of $29 billion in1987. It is followed, closely, by Japan at $25 billion. It isimportant to remember, however, that the population ofthe United States is 2.5 times larger than the populationof Japan. Three of the top five brand name pharmaceuti-cals in Japan are produced by U.S. companies. Of the top50 brand names, U.S. companies produce 23; Japanproduces only 5. The United States is very competitiveand has maintained a positive trade balance in thishigh-technology sector. Japan is increasing the strength ofits pharmaceutical industry and placed second in thenumber of new drugs introduced between the years 1981and 1985.

Historically, the Japanese market has been difficult toenter without a Japanese partner. Just 20 years ago,foreign companies were prohibited from operating inde-pendently in Japan. It was not until 1984, that foreign drugcompanies could go directly to the Konseisho, theJapanese equivalent of the U.S. Food and Drug Adminis-tration, for drug approval. To ensure market presence,U.S. and European companies have collaborated with theJapanese companies that dominate the Japanese market.For many years, U.S. and European companies have beenincreasing their presence in Japan by establishing theirown marketing forces and, in a few cases, buildingresearch facilities or acquiring a Japanese company. Veryrecently, efforts have begun to establish joint R&Dprograms between U.S. companies and their Japanesecounterparts.

At the same time, Japanese companies faced withsharply rising health care costs that have involveddrastically reduced reimbursement levels for drugs, arefeeling the push to increase their export markets and areslowly beginning to globalize their operations. In the last2 years, Japanese firms have acquired four smaller U.S.pharmaceutical concerns.

Despite these developments, the main competitors forthe world market in pharmaceuticals are U.S. andEuropean companies. These organizations are largemultinationals with research, manufacturing, and market-ing operations worldwide, particularly in the UnitedStates, Europe, and Japan, the three major markets. Focuson leadership in world markets, not only domesticmarkets, is key to success in the pharmaceutical industry.Although the Japanese share of foreign markets iscurrently behind the United States and Europe, consider-able time, effort, and money could increase the Japaneseshare of the U.S. pharmaceutical market. It is unlikely,however, that serious inroads will be made by theJapanese into the U.S. market during the 1990s.

Industrial Sector: Agriculture

Because biotechnology products for agricultural useare still in development, it is not possible to compare thenumbers of products manufactured in different countries.Field tests of many products, however, are regulated bynational agricultural or environmental authorities. Thereis no official census of such tests, but the U.S. Departmentof Agriculture (USDA) keeps an unofficial tally.

Through the summer of 1990, 93 field tests oftransgenic plants with potential commercial value hadbeen approved in the United States-far more than in anyother country. In contrast, there is little activity in Japan.In general, transgenic plants are being developed innations that are major exporters of agricultural products,with the greatest activity in the United States. However,the Japanese have made important advances in the area ofornamental plants and flowers, and serious work isunderway with vegetables and rice.

Industrial Sector: Chemicals

In both the United States and Japan, biotechnology’sgreatest impact in the chemical industry is likely to havelittle to do with the production per se of industrialchemicals. Instead, its greatest impact will be the result ofthe industry’s expanding investment in pharmaceuticalsand agriculture. Recent trends in the chemical industryhave forced restructuring worldwide. In response, chemi-cal firms are emphasizing the development and produc-tion of high-value-added products, such as specialtychemicals, advanced materials, pharmaceuticals, pesti-cides, and related agricultural products (e.g., seeds).

The use of biological means for producing chemicalshas, historically, received a great of deal of attention inJapan. Unlike the United States, Japan lacks largedeposits of coal or oil, the raw materials on which thechemical industry in the rest of the world is based. Thus,Japanese firms have always had a financial incentive toexplore alternatives. When Japan’s MITI targeted bio-technology in 1980, three research areas were specificallynamed: rDNA, mass cell culture, and bioreactors. Al-though in the United States, the word “bioreactor”usually refers to large chambers used for mass cell culture,MITI defines bioreactors, more generally, as fermentationvessels. The more advanced research in bioreactor devel-opment funded by MITI emphasizes the use of micro-organisms or immobilized enzymes for the production offine chemicals. Six Japanese chemical firms have takenpart in a government-sponsored joint research effort inthis area.

Biosensors combine biotechnology with materialsscience and electronics to produce sophisticated monitor-ing devices, an area of active R&D, especially in Japan.Potential applications of biosensors include: humandiagnostics, agricultural and veterinary diagnostics, food

Appendix B-Comparative Analysis: Japan . 247

testing, environmental monitoring, and industrial processcontrol.

Industrial Sector: Environmental Applications

In the nascent bioremediation field, microbial productspackaged for sale are available in both the United Statesand Japan; these, however, have developed only smallmarkets to date. Both nations have been pursuingbiotechnology R&D in improved waste treatment. Still,research efforts are generally minimal, and the diffusionof research results into commercial applications has beenslow for a variety of reasons, including lax regulationsthat encourage the payment of fines by industry for wasteemission rather than the use of systems to reducepollution.

In the United States, several Federal agencies supportbiological research related to waste management. In 1987,eight Federal agencies spent $11 million on environ-mental biotechnology-related research. In Japan, theMinistry of Construction launched a 5-year, Y5 billion(US$40 million) project on waste water treatment throughbiotechnological processes during the 1980s.

Regulation

In Japan, relevant policymaking is dominated bytension between competing bureaucracies and powerfulindustries. In the United States, policymaking is driven bythe dynamics of interest-group politics. Although Japan isfar from monolithic, the sheer number of actors in theUnited States makes achieving consensus and continuitymuch more difficult.

As elsewhere, responsibility for regulating biotechnol-ogy

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in Japan is divided among several ministries.

University research is regulated by the Ministry ofEducation, Science, and Culture’s (MESC) “Guide-lines to Experiments in DNA Recombination inrelation to University Research,” first introduced in1979.Research organizations other than universities relyon the Science and Technology Agency’s (STA’s)“Guidelines to Experiments in DNA Recombina-tion,” also introduced in 1979.The MITI oversees the “Guidelines for IndustrialApplication of Recombinant DNA Technology,”introduced in 1986.The MHW applies “Guidelines to the TechnicalApplication of DNA Recombination in the Produc-tion of Pharmaceuticals,” introduced in 1986.The Ministry of Agriculture, Forestry, and Fisheries(MAFF) employs “Guidelines to the Usage ofRecombined Substances in the Fields of Agriculture,Forestry, and Fisheries,” proposed in 1986, andpublished in 1989.

Both the United States and Japan allow the use ofbiotechnology with some restrictions and oversight. Inboth countries, regulations based on existing legislationgoverning drugs, worker health and safety, agriculture,and environmental protection are being developed tocover the use of biotechnology.

Intellectual Property

Japan is a party to the major international treatiesdesigned to protect intellectual property. Still, Japanesepatent practice presents several problems.

Dozens of firms in Japan file well over 5,000 patentapplications annually. The top three filers in theUnited States in 1987 were Japanese firms. As aresult, a U.S. filer often finds that Japanese patentrights are closely circumscribed by applicationsalready filed for a similar invention or process.On average, the Japanese Patent Office (JPO) takes3 years to examine a patent application, compared to21 months in the United States. Anecdotal evidenceindicates that the slow pace of patent examination iseven worse for biotechnology-related patent applica-tions.The permissible scope of claims in a Japanese patentapplication is narrower than that permitted in U.S.applications. Delays in resolving scope problemscan keep applications in limbo for years.Adjudication of patent infringement is also slow.Direct evidence cannot be obtained through thediscovery process, and infringement can be difficultto prove.

Although there have been some negotiations betweenthe U. S., Japanese, and European patent offices regardingharmonization of patent practice, major differences re-main that hinder inventors in high-technology fields,including biotechnology. In part, to avoid some of thetangles of patent practice in Japan, U.S. firms tend tolicense their patents to Japanese companies in lieu ofexporting a product.

Pharmaceutical and health care patents accounted forgreater than half of the biotechnology patents issued in1988. Over three-quarters of genetic-related patentsgranted were related to pharmaceuticals and health care.U.S. corporations were the largest source of geneticengineering patents. They garnered twice as many healthand pharmaceutical genetic engineering patents as U.S.universities and six times as many as U.S. nonprofitresearch institutions. Thirty-six percent of biotechnologypatents were issued to foreigners in 1988, as compared to47 percent of all patents. Japan is the United States’leading competitor, followed by Western Europe.

In recent years, legislation was passed in the UnitedStates and Japan to extend patent protection to make upfor the years lost during clinical development. Similar


draft legislation is being considered by the EC. This The interagency dispute, therefore, is between JPO andextension of effective patent life recognizes the impor- MAFF. JPO urges that Japanese patent law should nottance of patent protection, the effect of the regulatory exclude plants per se from patent protection. MAFF, onprocess on new product development, and the need for the other hand, argues that the Seed and Saplings lawpublic policies to provide incentives for companies to should protect plants, as well as plant varieties. Similar tocontinue investing in R&D. Unfortunately, there stillremains a serious interagency controversy in Japan, which what has happened worldwide, Japanese applicants seek-

hampers the predictability of plant patent protection. The ing broad protection for a generic agricultural biotechnol-

key issue is whether new plants are to be protected by a ogy invention are critical of the weak protection currently

Japanese patent or by a registration under the Japanese afforded under the Japanese Seeds and Saplings Act.Seeds and Saplings Act, the latter resembling the U.S.Plant Variety Protection Act.

Appendix C

Federal Funding of Biotechnology Research and Development

Historically, the United States, both in absolute dollaramounts and as a percentage of its research budget, hashad the largest commitment to basic research in thebiological sciences worldwide. The vast majority ofFederal research support in the biological sciences goes touniversity scientists conducting basic research, whereasapplied research and development (R&D) has alwaysbeen considered the responsibility of industry. Thisappendix catalogues the extent to which 12 Federalagencies are funding research in biotechnology-relatedareas.

Basic research is the primary mission of several ofthese agencies, such as the National Institutes of Health(NIH) and the National Science Foundation (NSF). TheNational Aeronautics and Space Administration (NASA),the Department of Energy (DOE), and the NationalOceanic and Atmospheric Administration (NOAA) havelarge technological development programs but are alsosubstantial supporters of basic research, including bio-technology. Other agencies with diverse missions, such asthe Department of Defense (DoD) and the U.S. Depart-ment of Agriculture (USDA), fund large numbers of R&Dprojects related to biotechnology. In addition, agencieswith substantial regulatory functions, such as the Foodand Drug Administration (FDA) and the U.S. Environ-mental Protection Agency (EPA), fund research relevantto their regulatory and scientific missions. Finally,agencies traditionally viewed as service oriented, such asthe Veterans Administration (VA), the National Instituteof Standards and Technology (NET), and the Agency forInternational Development (AID), fund biotechnologyresearch relevant to their service roles.

National Institutes of Health

While the biotechnology industry is rapidly becomingone of the most significant “growth industries” in theUnited States, its creation and sustained expansion overthe recent past is in large part due to the major role insupport of basic research and research training played byseveral Federal agencies, in particular, NIH. The NIHsupports research conducted either within its own labora-tories, or, through a system of grants, contracts, andtraining awards at academic institutions, research insti-tutes, and industrial organizations throughout the country.

In the area of biotechnology, NIH-supported researchcan be divided in two categories. The first is basicresearch directly related to biotechnology, which includesrecombinant DNA techniques; gene mapping and DNAsequencing; isolation, separation, and detection of DNA;the creation of hybridomas; the production of monoclinalantibodies; protein engineering; production of antibody-

tom chimeras (immunotoxins); and the computer analysisof DNA and protein sequences. The second categoryrelates to the broad research base underlying biotechnol-ogy and refers to studies in the fields of genetics, cellularand molecular biology, biological chemistry, biophysics,immunology, virology, macromolecular structure, andpharmacology. For the basic research studies directlyrelated to biotechnology, NIH provided an estimated$1.19 billion in fiscal year 1990. For the broadly basedresearch area, NIH provided an estimated $1.7 billion infiscal year 1990. Thus, for fiscal year 1990, NIH providedan estimated $2.9 billion for biotechnological researchthrough its research grants and contracts mechanisms andits intramural component.

The basic research discoveries made over the pastseveral years have led to an era of astounding biotechnol-ogical progress. These achievements include:

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the elucidation of DNA structure;chromosomal sorting methodologies;improved techniques for the molecular cloning oflarge DNA fragments;the genetic mapping of human disease genes by theuse of restriction fragment length polymorphisms;the construction of physical maps of several complexgenomes;improved DNA sequencing methodologies andmicrochemical instrumentation;enhanced technologies for hybridoma and monoclo-nal antibody production;the discovery of, and highly specific use of, restric-tion endonucleases;methods for amplification of gene expression forsite-directed mutagenesis and chemical synthesis ofDNA probes;new methodologies for the detection, separation andcharacterization of DNA;development of posttranscriptional RNA splicingmethods and of synthesis, posttranslational process-ing, modification, transport, and secretion of pro-teins;protein structure and design;elucidation of hormone and cell surface receptormolecules;tissue and cell culture methodologies;separation technologies; andinformatics for gene mapping, DNA sequencing, andprotein structure.

Advances in basic understanding of biological proc-esses and the development of methodologies for manipu-lating both biological and chemical processes at themolecular level have created numerous opportunities for

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commercial biotechnology companies. The rapid coales-cence of basic science knowledge and advanced technolo-gies have decreased the time interval between scientificdiscoveries and their application to the development ofcommercially significant products and/or diagnostic tests.New products developed as a result of basic moleculargenetic research have enabled biotechnology firms todiagnose human genetic disorders otherwise not detect-able by conventional methods. A substantial number ofsuch diagnostic tests are currently available and manyothers are under investigation.

NIH also supports biotechnology research in severalother ways. NIH contributes significant funds to the SmallBusiness Innovation Research (SBIR) Program, whichfunds industry research. It supports research collabora-tions with industry, which facilitate the translation ofbasic research discoveries to the development of commer-cially significant products. These collaborations, usuallyin the form of cooperative agreements between NIHscientists and biotechnology companies, have focused onseveral areas, including: molecular genetics, DNA clon-ing, genetic-based diagnosis, hybridoma, monoclinalantibody, immunology, and virology research, and thedevelopment of therapeutic agents.

NIH provides research resources to university scien-tists, state-sponsored biotechnology organizations, andbiotechnology companies. These resources include theGenetic Sequence Data Bank (GenBank), the HumanGenetic Mutant Cell Repository (Cell Bank), the ProteinIdentification Resource, the American Type cultureCollection of Microorganisms and Cell cultures, theHybridoma Data Bank, the Human DNA Probe Reposi-tory, BIONET, large-scale cell production facilities, anInstrumentation Grants program, and a central database ofbiotechnology databases. In addition, NIH supportsresearch training at both the predoctoral and postdoctorallevels in basic biomedical disciplines that serve to fuelgrowth in biotechnology. In addition to institutionaltraining programs, NIH funds predoctoral training specif-ically for biotechnology through the Lawton ChilesFellowships in Biotechnology program.

As the new biotechnology has emerged, so have newpartnerships between the developing industries anduniversities, the institutional sites for most NIH-fundedextramural basic research relevant to biotechnology.These interactions, established between research univer-sities and chemical, agricultural, and pharmaceuticalfirms, range from informal exchanges of information andconsulting arrangements to research contracts, formalpartnerships, and the creation of private corporations.There are many university-industry biotechnology re-search programs encompassing industry sponsored uni-versity research; cooperative industry-university re-search; joint commercial ventures; research consortia; andbiotechnology research training centers.

NIH supports the interaction of universities withindustry as long as safeguards against conflicts of interestare maintained and government-supported research re-sults are disseminated freely. NIH awards grants toinstitutions in support of investigators who have meritori-ous proposals, regardless of whether the research will bedone at a university, a private company, some combina-tion of the two, or involves support by another Federalagency. All evidence indicates that this arrangement isworking well for both universities and the biotechnologyindustry whether it is a part of the private sector or isstate-sponsored.

There is substantial interest in the nature and scope ofcollaborative relationships between NIH, its academicgrantees, and biotechnology companies. This interest ispartly due to the remarkable basic science achievementsthat have occasioned commercial interests in marketingthe products of biotechnology; a desire to enhance thetransfer of research findings to commercial applications;and the desire to effectively utilize Federal biomedicalresearch funds not only for basic research but also tosupport private industry in the translation of such researchto the development of products. NIH interacts withindustry in diverse ways. NIH grants over $6 billion peryear to academic research institutions with the granteeretaining invention rights for licensing to industry.Through these means, the Federal Government transfersknowledge and commercial products to the private sector.Inventions made by government investigators in thecourse of intramural research are patented and licensed tocompanies under provisions of the patent law and aretransfered to industry with the aid of the FederalTechnology Transfer Act of 1986 (FTTA).

The Federal Technology Transfer Act of 1986 (PublicLaw 99-502), was designed to promote the transfer ofgovernment-developed technology into the private sector.The FTTA authorizes the Cooperative Research andDevelopment Agreement (CRADA). Under a CRADA,Federal laboratories and private sector companies conductresearch jointly and the collaborating company acquirespatent rights at the outset of the collaboration. As anincentive and a reward, the FTTA also provides for thesharing of royalties with government inventors from thelicensing of inventions developed under CRADAs andfrom inventions made through an Agency’s intramuralresearch programs. NIH currently has roughly 150 patentlicense agreements and over 100 CRADAs in effect, andabout 100 additional CRADAs in various stages ofnegotiation.

NIH provides the lion’s share of Federal support for thebasic research that is critical to the continued vitality andgrowth of biotechnology in the United States. In addition,NIH promotes the development of productive relation-ships between scientists in the public and private sectors.All of these efforts will permit the pooling of resources

Appendix C-Federal Funding of Biotechnology Research and Development .251

and expertise under well-defined conditions and therebyfacilitate the transfer of basic science findings to commer-cial research and development activities.

National Science Foundation

The NSF, until 1991, generically described itsbiotechnology efforts by categorizing research related tobiotechnology. This included activities in fundamentalgenetics, cell physiology, cell culture biology, basicbiochemistry and enzymology, and bioprocessing engi-neering, which are generally regarded as being directlyrelated to the further development of biotechnology. In1991, an internal task force study was completed thatredefined the biotechnology research being done at NSF.NSF’s current definition of biotechnology is consistentwith that used by the Office of Technology Assessment:a technique that uses living organisms or par&s oforganisms to make or modify products, to improve plantsor animals, or to develop micro-organisms for specificuses. In addition, it encompasses the development ofmaterials that mimic structure and functions occurring inliving systems. NSF’s work categorized as researchrelated to biotechnology includes all activities listed in theold definition plus microbial ecology, bimolecularmaterials, bioelectronics, and bionetworks. Funding fig-ures for fiscal year 1990 reflect the new definition.

NSF’s mission is the support of basic research incolleges and universities in the United States. The NSFbudget accounted for approximately 7 percent of the fiscalyear 1990 Federal nondefense budget for research anddevelopment. Approximately 94 percent of the NSFbudget goes to basic research, with only 6 percentawarded for applied research.

In addition to Engineering Research Centers, firstestablished in 1985 to facilitate technology transfer andmultidisciplinary research, NSF established the Scienceand Technology Centers program (STC) in 1987 as amechanism to exploit opportunities in science and engi-neering requiring complex approaches, to facilitate coop-eration among students, faculty, and industry; and toencourage rapid and timely transfer of knowledge.Twenty-five centers have been established-n in fiscalyear 1989 and 14 in fiscal year 1991. The central focus offour of those centers is biotechnology-plant resistance topathogens (University of California, Davis), protein andnucleic acid technology (California Institute of Technol-ogy), light microscope imaging (Carnegie Mellon Univer-sity), and microbial ecology (Michigan State University).

NSF monitors its biotechnology spending by using adata collection system based on review of all new awardsfor biotechnology relatedness on a subjective scale fromnone to all, by one-third increments. NSF specifies acategory of work as related to biotechnology if it includesresearch activities related to the following: environmental

applications; bioprocessing and bioconservation; bimol-ecular materials; bioelectronics and bionetworks; agricul-tural applications; medical applications; and impact ofbiotechnology.

Biotechnology research is supported by all NSFresearch directorates: Biological, Behavioral, and SocialSciences; Engineering; Mathematical and Physical Sci-ences; Computer and Information Science and Engineer-ing; Geosciences; and Scientific, Technological, andInternational Affairs.

The Directorate for Biological, Behavioral, and SocialSciences (BBS) supports basic research that provides thebasic underpinnings for biomaintenance, bioremediation,biology-based waste management, environmental diag-nostics, bioprocessing and bioconversion, bimolecularmaterials, bioelectronics, and bionetworks. In addition,within BBS are programs in Ethics and Values Studies,the History of Science, and Social and Economic Sci-ences, which offer an opportunity for scholarly work onthe impact of biotechnology.

The Engineering Directorate’s (ENG) largest amountof support for biotechnology is in bioprocessing andbioconversion. The Divisions of Biological and CriticalSystems (BCS) and Chemical and Thermal Systems(CTS) support bioseparations for downstream processing.The Bioengineering Program supports research to seekengineering solutions to health-related problems with anemphasis on research leading to new technology or tonovel applications of exising technology. The Environ-mental and Ocean Systems program supports projectsusing micro-organisms for detoxification of contaminatedwater sources.

The Directorate for Mathematical and Physical Sci-ences (MI%) supports basic research that provides thechemical and mathematical underpinning of biotechnol-ogy, and that uses the methods of biotechnology in theformulation of new biomolecular materials. Relevantresearch is conducted in the Division of MaterialsResearch (DMR), the Chemistry Division (CHE), and theDivision of Mathematical Sciences (DMS).

The Directorate for Computer and Information Scienceand Engineering (CISE) supports research in the areas ofbioelectronics and bionetworks and medical applications.Bioelectronics projects include work on algorithms anddevices for vision/imaging and speech/auditory proc-esses, as well as neuron/silicon circuits and devices.Support is provided for work in computer algorithms,techniques, and software tools pertinent to bimoleculardata modeling and management in high-performance,networked computing environments.

The Oceanography Division (OCE) of the GeosciencesDirectorate (GEO) is involved in marine biotechnologyand supports research in: the basic biochemistry and


physiology of organisms from extreme environments;chemically mediated interactions between organisms;development of methods for rapid taxa-specific character-ization and identification of marine microbial popula-tions; microbial decomposition and degradative proc-esses; molecular studies of the nitrogenase genes ofmarine nitrogen-fixing cyanobacteria; and marine vi-ruses.

The Directorate for Scientific, Technological, andInternational Affairs (STIA) supports biotechnology inthree divisions. The Science Resource Studies (SRS)Division studies biotechnology trends and research anddevelopment activities in industry, creating a database tobe used in monitoring the trends of biotechnology and itsindustrial applications. The International Division (INT)supports projects in biotechnology through its bilateralagreements with many countries such as Japan andMexico. The Division of Industrial Science and Techno-logical Innovation (ISTI), through its Small BusinessInnovation supports research projects in molecular andcell biology, environmental applications, aquiculture,waste management, water treatment, biochemical andbioprocess engineering, biomass processing, and bi-omedical engineering.

NSF’s total support for biotechnology-related researchin fiscal year 1990 was $167.9 million. The total is brokendown as follows:

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Environmental Applications, $34.93 million;Bioprocessing and Bioconversion, $34.02 million;Bimolecular Materials, $12.85 million;Bioelectronics and Bionetworks, $23.12 million;Agricultural Applications, $39.69 million;Medical Applications, $20.69 million; andImpact of Biotechnology, $2.54 million.

Department of Defense

DOD defines biotechnology to be any technique thatuses living organisms (or parts of organisms) to make ormodify products, to improve plants, or to developmicro-organisms for specific uses. The technologiesspecifically included in this definition are recombinantDNA, novel bioprocessing techniques, cell fusion tech-nology including hybridomas, and somatic cell genetics.

DOD’s efforts in biotechnology are divided betweenmedical and materials efforts. The Army is the principalparticipant in medical biotechnology, with the Navycontributing to the effort through an extramural contractprogram. In materials biotechnology, the Navy is theprincipal participant, with the Army, Air Force, andDefense Advanced Research Projects Agency providingadditional support.

Medical biotechnology is primarily directed towardcharacterization of etiologic agents of disease, develop-

ment of vaccines, and improved diagnosis of disease andidentification of agents. Vaccine development is targetedagainst militarily relevant diseases that are not of U.S.public health concern, but occur primarily in overseasareas. Examples of this work include vaccine develop-ment for dengue, malaria, anthrax, and Rift Valley Fever.Malaria vaccine research is a collaborative effort betweenDOD and NIH. The diagnostics efforts focus on use ofDNA probes and monoclinal antibodies, which are alsoutilized by DOD for its chemical/biological defenseprogram. The materials biotechnology programs in DODare diverse. The spectrum of effort includes work onbiopolymers, fibers, adhesives, intermediate compoundsfor synthesis of composites, biosensors, biocorrosion,biofouling control, compliant coatings, and bimolecularelectronics.

In fiscal year 1990, DOD’s support for both medicaland nonmedical biotechnology research and developmentwas about $98 million. The funding was divided aboutevenly between intramural and extramural programs.Medically related biotechnology R&D accounted forapproximately $60 million, nonmedical expenditurestotaled $38 million.

Department of Energy

The DOE’s total expenditures for biotechnology R&Dwere approximately $82.2 million in fiscal year 1990.DOE supports both basic and applied research relevant tobiotechnology research. DOE has three main programsthat fund biotechnology: Basic Energy Sciences andBiological and Environmental Research, which are part ofthe Office of Energy Research, and Conservation andRenewable Energy.

The Basic Energy Sciences program includes EnergyBiosciences and is focused on understanding thefundamental mechanisms of how plants produce biomass,and on the biological transformation of crude, abundantbiomass into other usable forms. The program providesthe foundation for the broad exploitation of new sophisti-cated knowledge in molecular genetics. Fiscal year 1990funding for Energy Biosciences was approximately $20.4million.

The bulk of DOE’s biotechnology funding is from theOffice of Energy Research’s Biological and Environ-mental Research program. This program was funded at$54.9 million in fiscal year 1990. The primary biotechnol-ogy efforts are the human genome and structural biologyprograms. These programs are directed at accelerating themapping of the entire human genome by improving DNAsequencing technology, developing new instrumentation,applying robotics technology, and exploiting uniqueDepartmental facilities to investigate the structure-function relationships of biomolecules. Research is alsoconducted to investigate cellular processes, such as

Appendix C-Federal Funding of Biotechnology Research and Development ● 253

growth and protein synthesis, by molecular approaches,and development of monoclinal antibody technologieslabeled with radionuclides for diagnostic and therapeuticapplications.

The Conservation and Renewable Energy Programfunded $6.9 million of biotechnology research in fiscalyear 1990. Research in biotechnology is focused on theapplication of bioprocessing to industrial and municipalwastes to produce fuels. The conversion processes areenvironmentally benign. The products, such as methanefuel or biodegradable agricultural mulch, are substitutesfor fossil liquids and gases.

U.S. Department of Agriculture

Four agencies of USDA fund biotechnology R&D:

. the Agricultural Research Service (ARS);

. the Cooperative State Research Service (CSRS);● the Forest Service; and. the Economic Research Service (ERS).

In fiscal year 1990, the four agencies reported combinedfunding of just under$116 million. A description of eachagencies’ commitment to biotechnology follows.

Agricultural Research Service

The ARS is the primary research agency within USDA.It funds both intramural research programs and coopera-tive agreements. ARS conducts research for specific usergroups within USDA, including the Animal and PlantHealth Inspection Service, Food Safety Inspection Serv-ice, and Soil Conservation Review. ARS uses biotechnol-ogy to study and understand fundamental biologicalprocesses, and to modify and regulate these processes forthe solution of agricultural problems.

ARS’ biotechnology efforts include projects that usetechniques such as gene cloning in micro-organisms,nucleic acid hybridization, biological and biochemicalsynthesis of nucleic acids and proteins, use of monoclinalantibodies, affinity column separation of antigens, use ofimmobilized enzymes and cells, protoplast fusion, regen-eration of plants from tissue culture, transfer of embryos,gene mapping, and synthesis of peptide neurohormones.In fiscal year 1990, ARS projects using biotechnologytotaled about $59.5 million. By the end of 1990, it wasestimated that about 400 scientists would be using thetools of molecular biology to address agricultural prob-lems.

Cooperative State Research Service

The CSRS is the USDA’s liaison to the State universitysystem for the conduct of agricultural research. Of all theFederal agencies, CSRS handles the most diverse types ofresearch funding, including formula funds, such as theHatch Act funds, McIntire-Stennis Cooperative Forestry

funds, 1890 Colleges and Tuskegee University funds, andthe Animal Health and Disease Section 1433 funds. Inaddition, CSRS provides competitive grants through itsSpecial Research Grants program and the CompetitiveResearch Grants program. The Competitive ResearchGrants program received funding through fiscal year1990. A new program, the National Research Initiative,started receiving funds in fiscal year 1991. There arebiotechnology programs in all of these funding catego-ries.

According to CSRS, biotechnology refers to theimproved or modified organism, microbe, plant, oranimal, and “new research techniques’ or ‘technology”refers to contemporary “tools” available to scientists forthe purpose of biotechnology development. CSRS’s totalfunding for biotechnology amounted to $52.2 million infiscal year 1990. The individual funding figures for 1990,and estimates for 1991, follow:

●

●

●

●

●

●

●

Hatch Act: $13.3 million (1990);McIntire-Stennis Cooperative Forestry: $617,000(1990);1890 Colleges and Tuskegee University: $1.0 mil-lion (1990);Special Research Grants: $10.9 million (1990);Competitive Research Grants: $24.9 million (1990);National Research Initiative: $0 (1990); andAnimal Health and Disease Section 1433: $1.5million (1990).

Forest Service

The Forest Service is the primary forestry researchagency within USDA and conducts the largest forestrybiotechnology research program in the United States.Current biotechnology research is directed toward devel-oping and testing basic techniques to employ biotechnol-ogy in accelerating tree growth and in improving thequality of woody plants. Research is also directed tounderstanding stress and disease resistance mechanisms;the development of improved natural biological controlagents; and the development and testing of new andefficient industrial processes for wood use. The ForestService’s biotechnology research budget was $3.6 millionfor all phases of the program in fiscal year 1990, andincluded both matching and cooperative funding. Ap-proximately 90 percent of this funding was allotted toin-house activities and 10 percent to support college anduniversity research.

Economic Research Service

The ERS monitors developments in agriculturaltechnology and assesses their potential economic impactson farmers, resource use, national and internationalcommodity markets, consumers, and the general econ-omy. ERSs analyses provide information for assessing thesocial, environmental, and economic tradeoffs for new


technologies. In the area of biotechnologies, research hasranged from assessing the economic conditions underwhich animal growth hormones are most likely to beadopted, to the potential consumer impacts of biotechnol-ogy, to the examination of strategies for regulating therisks of biotechnology. The technology program at ERSincludes two research sections and 7 staff-years, plustechnology components of programs throughout ERS. Intotal, technology program expenditures were $500,000 infiscal year 1990, with about one-half, focused on eco-nomic analyses of biotechnology.

Department of Commerce

The National Oceanic and Atmospheric Administra-tion (NOAA) and the National Institute of Standards andTechnology (NIST) operate within the Department ofCommerce and fund biotechnology research.

National Oceanic and AtmosphericAdministration

NOAA defines biotechnology as the application ofscientific and engineering principles to the processing ofmaterials by biological agents to provide goods andservices. For the past several years, the National Sea GrantCollege Program of NOAA has invested a small butsignificant share of its budget in the development offundamental science which will provide the basis forbiotechnological development of marine resources.NOAA’s biotechnology research falls in four categories:biochemistry and pharmacology, molecular biology, bio-chemical engineering, and microbiology and phycology.

Research in biochemistry and pharmacology is directedtoward the isolation, identification, and biological evalua-tion of novel marine substances of potential use inmedicine or industry. Biochemical engineering researchresults are also being applied in the commercial sector.For example, estuarine bacteria have been adapted toefficiently metabolize, and thereby detoxify, certainorganic substances in industrial effluents that are severelyimpacting coastal areas. The technology is also beingapplied to toxic substances. Basic studies in molecularbiology are directed to providing the science for geneticengineering of fish and algae and developing diagnosticreagents and vaccines for use in aquaculture. Research inmicrobiology aims to control biologically mediatedcorrosion and biofouling.

In fiscal year 1990, there were 47 active projects inthese categories. They were supported with $2.0 millionin Federal funds and an additional $1.6 million innon-Federal matching funds. The level of Federal supportand number of projects are down 11 percent from fiscalyear 1989.

National institute of Standards and Technology

NIST’s current biotechnology efforts are based on anumber of perceived industrial needs including:

●

●

●

●

●

●

the development of clinical standards for testing newbiotechnology products, such as standards used tocalibrate scientific instruments and to validate andevaluate data;knowledge and measurement methods for under-standing protein structure-function, modification,and expression;traceability to national standards for key measure-ment parameters in commercial fermenters (parame-ters such as cell mass and activity level, productpopulation, glucose and oxygen concentration, andpH);measurement methods, databases, and predictive mod-els for effective and efficient separation/purificationof bioproducts and for optimizing the design ofcommercial processes;kinetics, thermochemical, and thermophysicalproperties data for biochemical solutions needed forprocess design and control; and,improved analytical measurement methods, stand-ards, and standard reference materials for use indetermining composition of biological solutions.

NIST (formerly the National Bureau of Standards-NBS)funded $4.8 million of biotechnology-related research in1990.

Agency for International Development (AID)

AID broadly defines biotechnology to be cellular andmolecular biology and the new techniques derived fromthem for improving the genetic makeup and/or manage-ment of human and animal health care, crops, livestockand microbes. In accounting for biotechnology researchspending, AID also used a narrower definition of biotech-nology that refers only to research using genetic engineer-ing or cell fusion.

AID is an agency of the State Department and is theforeign assistance arm of the U.S. Government. It is not,per se, a research agency. The Agency’s mandate is towork with developing countries in their efforts to improveeconomic development and meet basic human needs-toovercome the problems of hunger, illiteracy, disease, andearly death. Technology development and transfer, in-cluding biotechnology, is one of the basic components inthe Agency’s strategy to achieve its goal. Given the natureof this goal, the research supported by AID is clearlydirected to the development of specific products orsystems that will be useful in improving human healthconditions, agricultural production, and rural develop-ment in developing countries. AID supports projects inthe United States and overseas. In general, AID finances

Appendix C--Federal Funding of Biotechnology Research and Development ● 255

research that is expected to produce usable results within3 to 5 years.

The overall research portfolio is comprised of projectssupported from several offices within AID, and reflect theAgency’s organization. AID is divided into central andregional bureaus and independent offices. Regionalbureaus focus on the needs of a specific geographic regionand serve as the Washington coordinating arm of the fieldactivities conducted by AID missions. Central bureausaddress agencywide questions, e.g., private enterprise.The central Bureau for Science and Technology providestechnical assistance for the entire agency, and supportsand initiates worldwide programs in science and technol-ogy. This bureau also coordinates AID’s support of the 13International Agricultural Research Centers. An addi-tional locus of research activity was established in 1980,with the creation of the Office of the Science Adviser. Thepurpose of this office is specifically to encourage aninnovative and collaborative approach to developmentresearch, technology transfer, and related capacity build-ing.

The latest available funding information is for fiscalyear 1989. In fiscal year 1989, biotechnology fundingfigures were $24.0 million (broad definition) and $4.7million (narrow definition).

U.S. Environmental Protection Agency

EPA is primarily a regulatory agency, although itmaintains a significant R&D budget for research pro-grams providing a scientific basis for its regulatoryactivities. Much of the research conducted by EPA dealswith biotechnology risk assessment. The research pro-gram attempts to develop the capabilities for the regula-tory programs within EPA to predict, and thus avoid,unreasonable adverse effects on the environment. Thestrategy for program development has, as a criticalcomponent, the establishment of an in-house, scientificstaff to conduct risk assessments. Concurrently, the staffscientists share responsibility for developing a compli-mentary extramural program, and fostering interactiveinformation exchange with outside scientists. Extramuralfunding comprises approximately 75 percent of the totalresources expended for biotechnology risk assessmentresearch.

Certain micro-organisms fall within the regulatoryframework of EPA under the Toxic Substances ControlAct (TSCA) and the Federal Insecticide, Fungicide, andRodenticide Act (FIFRA). For regulatory purposes, EPAis developing procedures to assess the potential risks andbenefits of the use of these micro-organisms. As acooperative adjunct, the Office of Research and Develop-ment (ORD) initiated a research program to developevaluative methodology and gather scientific informationthat would identify and adequately describe effects on

human health or the environment that may result from theintroduction of genetically altered micro-organisms intothe environment.

With the emphasis of the program on risk assessment,six areas of research were identified as essential:

1.

2.

3.

4.

5.

6.

The

development of methods for the detection andenumeration of novel organisms in complex envi-ronmental samples;determination of survival and growth in the environ-ment;assessment of the stability and transfer frequency ofintroduced genetic material in the intra- andextracellular environment;development of data and predictive models fortransport from the point of application or release toother locations;detection of adverse environmental response (e.g.,ecological effects, toxicity, host range change) dueto introduced organisms; anddetermination of changes in host range.

program deals with both recombinant andnonrecombinant bacteria, fungi, and viruses. In all areas,a primary objective is to produce appropriate scientificinformation for developing protocols. In fiscal year 1991,two additional areas of research will be pursued. One areadeals with environmental studies on pollution preventionthrough the application of bioregulation techniques. Thesecond new area of research will develop testing proce-dures, cell bioassays and screening methods to elucidatethe potential effects of biotechnology products on humanhealth. EPA’s total biotechnology funding for fiscal year1990 was $8.3 million.

Department of Veterans Affairs

The Department of Veterans Affairs adopted the OTAdefinition of biotechnology-any technique that usesliving organisms (or parts of organisms) to make ormodify products, to improve plants or *s, or todevelop micro-organisms for specific use-for the pur-pose of accounting. Specifically, funding data wereprovided for projects involving cell fusion, gene splicing,monoclinal antibodies, and recombinant DNA.

The VA’s expenditures in biotechnology-related re-search for fiscal year 1990 were $7.5 million.

National Aeronautics and SpaceAdministration

Space biotechnology uses biological materials, such ascells and proteins, to examine how the reduced gravityenvironment affects these materials, to examine whatunique products or factors are produced by cells inreduced gravity, and to use this unique environment to

292-870 - 91 - 10 : QL 3


improve processes already done on Earth, such as proteincrystallization and separations of cells or proteins.

Biotechnology research at NASA is conducted princi-pally within the Microgravity Science and ApplicationsProgram. The program objectives are:

●

●

●

●

improve methods for the crystallization of proteinsin space and their complexes with other biologicalmaterials.utilize the microgravity environment to performfundamental research on basic biological processesin cells and tissues.investigate new separation processes and approachesfor purification of biological materials, andimprove methods for the formation of complexbiological systems such as fused cells, liposomes,and biopolymer films and matrices.

Funded at a level of $4.5 million in fiscal year 1990, theprogram includes nine investigators from universities andthree investigators from NASA research centers. Thelargest and most active laboratory for doing biotechnol-ogy in space is at the University of Alabama, Birming-ham, where the effort to refine techniques for growingbetter protein crystals in space is centered.

Of the $4.5 million, NASA spent $2.0 million onresearch on protein crystal growth and macromolecularcrystallography; $1.0 million on separation techniques,theoretical flow analysis, cell culture, and productivity inreduced gravity; and $1.5 million was spent between theMarshall Space Flight Center and the Johnson SpaceCenter to support the above research areas or to developflight hardware that will support taking these experimentsto space.

Food and Drug Administration

FDA is a scientific, regulatory agency responsible forthe safety of the Nation’s foods, cosmetics, drugs,biologics, medical devices, and radiological products. Inthis role, FDA monitors and evaluates the manufacturingindustry to assure the consumer that the products pro-duced are safe as well as effective. Evaluation of productsafety requires, in part, that FDA conduct scientificresearch focused on developing technology, such asbiotechnology. Since biotechnology affects all of FDA’sproduct areas, all products evolving from biotechnologymust be evaluated from the appropriate scientific perspec-tive in order to judge their safety and efficacy. FDA’sresearch efforts, including those related to biotechnology,are targeted toward:

●

●

●

●

●

●

product testing;scientific review of new product applications;identification of hazards;development of new or improved physical, biologi-cal, toxicological, or chemical tests;determination and establishment of standards, andproduct compliance with those standards; andclarification of mechanisms underlying toxicologicand pharmacologic effects.

Biotechnology is already having a major impact on thedevelopment of products that FDA regulates; and theagency’s focus is to maintain a research expertise in thefield in order to have the knowledge necessary to approvenew pharmaceuticals, new food products, and other itemsregulated by FDA in a minimum of time. In fiscal year1990, FDA spent approximately $19.4 million on bio-technology research.

Appendix D

List of Conference and Workshop Participants

Biotechnology in a Global Economy: International ConferenceJuly 6-7,1989

Steven C. Bent, Conference ChairFoley and Lardner

Alexandria, VA

Chummer FarinaInvestment CanadaOttawa, Ontario, Canada

Ralf HutterEidgenossische Technische HochschuleZiirich, Switzerland

Peder Olesen LarsenDanish Research AdministrationCopenhagen, Denmark

Asalie LarssonMinistry of IndustryStockholm, Sweden

Barry McSweeneyBioResearch IrelandDublin, Ireland

Antonio Paes De CarvalhoAssociagao Brasileira Das Empresas De BiotechnologiaRio de Janeiro, Brazil

Margaret SharpUniversity of SussexBrighton, East Sussex, United Kingdom

Barry SmithDepartment of Industry, Technology, and CommerceCanberra, Australia

Yong-Sea TeohEconomic Development BoardSingapore

Daniel F. ThomasUniversite de CompiegneCompiegne, France

Weichen TienDevelopment Center for BiotechnologyTaipei, Taiwan

Ryuichiro TsugawaAjinomoto Co., Inc.Kawasaki, Japan

Robert R. van der MeerHOM Consultancy B.V.Den Haag, Holland

Yeo-Gyeong YunKorea Development Investment Corp.Seoul, Korea

Holger ZiehrGesellschaft fur Biotechnologische ForschungBraunschweig, Germany

NOTE: OTAappmciates and is grateful for the valuable assistance and thoughtful critiques provided by the conference participants.The conference participants do not, however, necessarily approve, disapprove, or endorse this report. OTA assumes fullresponsibility for the report and the accuracy of its contents.

–257–


Workshop Participants—Federal Coordination of Biotechnology Research and RegulationMay 2,1989

Nanette Newell, Workshop ChairSynertech Group, Inc.

Research Triangle Park, NC

Beverly BergerOffice of Science and Technology PolicyWashington, DC

Harry BroadmanSenate Governmental Affairs CommitteeWashington, DC

Mary ClutterNational Science FoundationWashington, DC

John CohrssenCouncil on Environmental QualityWashington, DC

Janet DoriganOffice of Science and Technology PolicyWashington, DC

Robert FrederickU.S. Environmental Protection AgencyWashington, DC

Elke JordanNational Institutes of HealthBethesda, MD

Ruth KirschsteinNational Institutes of HealthBethesda MD

Rachel LevinsonNational Institutes of HealthWashington, DC

Waker LockwoodU.S. Department of StateWashington, DC

Terry MedleyU.S. Department of AgricultureHyattsville, MD

Kathleen MerriganSenate Agriculture CommitteeWashington, DC

Elizabeth MilewskiU.S. Environmental Protection AgencyWashington, DC

Henry MillerU.S. Food and Drug AdministrationRockville, MD

Mike Miller ,Office of Management and BudgetWashington, DC

Joseph OstermanU.S. Department of DefenseWashington, DC

Greg SimonHouse Committee on Science and TechnologyWashington, DC

David SmithU.S. Department of EnergyWashington, DC

Greg ThiesSenate Agriculture CommitteeWashington, DC

Alvin YoungU.S. Department of AgricultureWashington, DC

NOTE: OTA appreciates and is gratefid for the valuable assistance and thoughtful critiques provided by the workshop participants.The workshop participants do not, however, necessarily approve, disapprove; or endorse this report. OTA ass~es ~responsibility for the report and the accuracy of its contents.

Appendix D-List of Conference and Workshop Participants ● 259

Workshop Participants-Financial Issues Affecting Biotechnology: At Home and AbroadSept. 13,1990

Peter Drake, Workshop ChairVector SecuritiesDeerfield, Illinois

Kenneth BateBiogenCambridge, MA

M. Kathy BehrensRobertson, Coleman, & StephensSan Francisco, CA

Fred FrankShearson Lehman Hutton, Inc.New York NY

Cary GarnerTransgenic Sciences, Inc.Worcester, MA

Grant HeidrichMayfield FundMenlo Park CA

Bruce PeacockCentocor, Inc.Malvern, PA

David ShawIDEXXPortland, ME

NOTE: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the workshop participants.The workshop participants do not, however, necessarily approve, disapprove, or endorse this report. OTA assumes Mlresponsibility for the report and the accuracy of its contents.

Appendix E

Acknowledgments

OTA thanks the members of the advisory panel, conference and workshop participants, contractors, and the manyindividuals and organizations that supplied information for this report. In addition, OTA acknowledges the followingindividuals for their comments on drafts of this report:

Toni K. AllenPiper & MarburyWashington, DC

Mads Bryde AndersenUniversity of CopenhagenCopenhagen, Denmark

Bruce I. Andrewscyanamid InternationalWayne, NJ

Ludwig BaeumerWorld Intellectual Property OrganizationGeneva, Switzerland

Robert F. BarnesAmerican Society of AgronomyMadison, WI

John BartonStanford Law SchoolStanford, CA

M. Kathy BehrensRobertson, Coleman, & StephensSan Francisco, CA

David BeierGenentech, Inc.Washington, DC

Evan BermanUniversity of MiamiCoral Gables, FL

Waddell A. BiggartSughrue, Mien, Zinn, Macpeak & SeasWashington, DC

Daniel F. BurtonCouncil on CompetitivenessWashington, DC

L.J. (Bees) ButlerUniversity of California at DavisDavis, CA

Noel J. ByrneUniversity of LondonLondon, England

Mark F. CantleyCommission of the European CommunitiesBrussels, Belgium

Mason C. CarterLouisiana State UniversityBaton Rouge, LA

Ananda M. ChakrabartyUniversity of IllinoisChicago, IL

David CheneyCouncil on CompetitivenessWashington, DC

Mary Dell ChiltonCiba-Geigy Corp.Research Triangle Park NC

Ralph E. ChristoffersenSmithKline BeechamKing of Prussia PA

Mary ClutterNational Science FoundationWashington, DC

Tom CopmannPharmaceutical Manufacturers AssociationWashington, DC

James H. DavisCrop Genetics InternationalHanover, MD

Lois DavisSybron Chemicals, Inc.Salem, VA

Sue Markland DayUniversity of TennesseeKnoxville, TN

Dreux de NettancourtCommission des Communautes EuropeennesBrussels, Belgium

Kate DevineApplied BioTreatment AssociationWashington, DC

–260-

Appendix E--Acknowledgments ● 261

Mark DibnerNorth Carolina Biotechnology CenterResearch Triangle Park NC

R. DietzLaboratory of the Government ChemistTeddington, England

Roger DitzelUniversity of CaliforniaAlameda CA

Harvey DruckerArgonne National LaboratoryArgonne, IL

George D. DudaU.S. Department of EnergyWashington, DC

William H. DuffeyMonsanto Co.St. Louis, MO

Donald N. DuvickJohnston, IA

Gary B. EllisInstitute of MedicineWashington, DC

Don EmlayCalgeneDavis, CA

Guilherme EmrichBiobras-Bioquimica De BrasilBelo Horizonte, Brazil

Bruce EisenGenetics InstituteCambridge, MA

Kenneth H. EvansU.S. Department of AgricultureBeltsville, MD

Ron EvansU.S. Environmental Protection AgencyWashington, DC

Chummer FarinaInvestment CanadaOttawa, Ontario

Peter FarnhamAmerican Society for Biochemistry and Molecular

BiologyBethesda MD

Nina FederoffCarnegie Institute of WashingtonBaltimore, MD

Walter FehrIowa State UniversityAmes, IA

Robert A. FildesDanville, CA

J. Lawrence FoxTexas Research and Technology FoundationSan Antonio, TX

Fred FrankShearson Lehman Hutton, Inc.New York NY

Paul E. FreimanSyntex Corp.Palo Alto, CA

Nicholas FreyPioneer Hi-Bred InternationalDes Moines, IA

Akira FujiyoshiEisai America, Inc.Teaneck NJ

Jean-Christophe GallouxLyon, France

Cary GarnerTransgenic Sciences, Inc.Worcester, MA

Luther Val GiddingsU.S. Department of AgricultureHyattsville, MD

David J. GlassBiotechnica International, Inc.Cambridge, MA

Rebecca J. GoldburgEnvironmental Defense FundNew York NY

Norman GommEmbassy of AustraliaWashington, DC

James D. GrantT Cell Sciences, Inc.Cambridge, MA

Jones GrubbsSolmar Corp.Orange, CA

Leonard GuarraiaMonsanto Co.St. Louis, MO


Robert Z. GussinJohnson & JohnsonNew Brunswick NJ

Susan K. HarlanderUniversity of MinnesotaSt. Paul, MN

Zsolt P. HarsanyiPorton International, Inc.Washington, DC

Patricia HobenHoward Hughes Medical InstituteBethesda, MD

Michael HookerUniversity of MarylandBaltimore, MD

Ralf HutterETH-ZentrumZurich, Switzerland

Roger D. JenningsBritish EmbassyWashington, DC

Daniel F. JonesU.S. Department of AgricultureWashington, DC

Nigel JonesLinklaters & PainesLondon, England

Elke JordanNational Institutes of HealthBethesda, MD

Yoshiki KaneiwaSumitomo pharmaceuticals Co., Ltd.Osaka Japan

John KirschmanFSC AssociatesLewisville, NC

Ruth L. KirschsteinNational Institute of General Medical SciencesBethesda, MD

Arthur KlausnerDomain AssociatesPrinceton, NJ

Edward L. KorwekHogan & HartsonWashington, DC

Sheldon KrimskyTufts UniversityMedford, MA

Asalie LarrsonSwedish Patent and Registration OfficeStockholm, Sweden

Peder Olesen LarsenDanish Research AdministrationCopenhagen, Denmark

Robert LeachGenencor InternationalSouth San Francisco, CA

Charles C. LeightonSharp & Dohme Research LaboratoriesWest Point, PA

William LesserCornell UniversityIthaca, NY

M.S. LinskensState University of LeidenLeiden, The Netherlands

David MacKenzieU.S. Department of AgricultureWashington, DC

William E. MarshallPioneer Hi-Bred International, Inc.West DeMonies, IA

Don MarzulloAlexandria, VA

Barbara MazurDuPont Experimental StationWilmington, DE

John McClellandU.S. Department of AgricultureWashington, DC

Barry McSweeneyBioResearch IrelandDublin, Ireland

Laura R. MeagherRutgers, The State University of New JerseyNew Brunswick NJ

Terry L. MedleyU.S. Department of AgricultureHyattsville, MD

Margaret MellonNational Wildlife FederationWashington, DC

Steven MendellXOMA Corp.Berkeley, CA

Appendix E--Acknowledgments ● 263

Chris MessinaGenesis Technology Group, Inc.Cambridge, MA

Elizabeth MilewskiU.S. Environmental Protection AgencyWashington, DC

Michael J. MontagueMonsanto Co.St. Louis, MO

David MoweryUniversity of CaliforniaBerkeley, CA

John T. NeilsonUniversity of FloridaGainesville, FL

Nan NewellSynertech Group, Inc.Research Triangle Park, NC

Ashok NimgadeGenesis Technology Group, Inc.Cambridge, MA

Suzanne M. NowakThe Upjohn Co.Kalamazoo, MI

Kirsten A. NyropKPMG Peat MarwickChicago, IL

Gilbert S. OmennUniversity of WashingtonSeattle, WA

Michael OstrachCetus Corp.Emeryville, CA

Antonio Paes De CarvalhoAssociacao Brasileira Das Empresas De BiotechnologiaRio de Janeiro, Brazil

Bruce PeacockCentocor, Inc.Malvern, PA

Walter PlosillaMontgomery County High Technology Council, Inc.Rockville, MD

Isaac RabinoEmpire State CollegeNew York NY

Lisa RainesIndustrial Biotechnology AssociationWashington, DC

George RathmannICOSBothell, WA

Craig J. RegelbruggeNational Association of Plant Patent OwnersWashington, DC

Alice SapienzaSimmons CollegeBoston, MA

Gabriel SchmergelGenetics InstituteCambridge, MA

John W. SchnellerSpencer & FrankWashington, DC

Sidney A. ShapiroUniversity of North CarolinaChapel Hill, NC

Margaret SharpUniversity of SussexBrighton, East Sussex, England

Frances E. SharplesMartin Marietta Energy Systems, Inc.Oak Ridge, TN

David ShawIDEXXPortland, ME

Robert ShawFranklin Pierce Law CenterConcord, NH

David A. SmithU.S. Department of EnergyWashington, DC

Martha SteinbeckU.S. Department of AgricultureWashington, DC

Robert E. StevensonAmerican Type Culture CollectionRockville, MD

Jacob C. StuckiUpjohn Co.Kalamazoo, MI

Tadao SuzukiDaiichi Pharmaceutical Co., Ltd.Tokyo, Japan

Paul TauberIthaca, NY


James TavaresNational Research CouncilWashington, DC

Yong-Sea TeohEconomic Development BoardSingapore

David T. ThelwallProspect Management ServicesNorth Yorkshire, England

James ThompsonState University of New YorkAlfred, NY

Weichen TienDevelopment Center for BiotechnologyTaipei, Taiwan

Ryuichiro TsugawaAjinomoto Co., Inc.Tokyo, Japan

Robert R. van der MeerFlorigeneAalsmeer, The Netherlands

Charles E. Van HornPatent and Trademark OfficeWashington, DC

D. VandergheynstCommission of the European CommunitiesBrussels, Belgium

Anne K. VidaverUniversity of NebraskaLincoln, NE

Judith WagnerOffice of Technology AssessmentWashington, DC

Bill WestermeyerOffice of Technology AssessmentWashington, DC

William J. WhelanMiami Biotechnology Winter SymposiumMiami, FL

Thomas G. WigginsSerono Laboratories, Inc.Norwell, MA

Bernard WolnakBernard Wolnak & AssociatesChicago, IL

Akihiro YoshikawaStanford UniversityPalo Alto, CA

Yeo-Gyeong YunKorea DevelopmentSeoul, Korea

Investment Corp.

Holger ZiehrGesellschaft fr Biotechnologische Forschung mbHBraunschweig, Germany

Raymond ZilinskasMaryland Biotechnology InstituteBaltimore, MD

Robert G. ZimblemanAmerican Society of Animal ScienceBethesda MD

Appendix F

Acronyms and Glossary of Terms

List of Acronyms

ACGM —Advisory Committee on GeneticManipulation (U.K.)

ACRE —Advisory Committee on Release to theEnvironment (U.K.)

ADAMHA —Alcohol, Drug Abuse, and Mental HealthAdministration (DHHS)

—Agency for International Development,U.S. (State Department)

AIDS —acquired immunodeficiency syndromeANDA —Abbreviated New Drug Application (FDA)APHIS —Animal and Plant Health Inspection

Service (USDA)—Australian Patent Office

ARC —AIDS-related complexARS —Agriculture Research Service (USDA)ATCC —American Type Culture CollectionBAP —Biotechnology Action Program (EC)BBS —Biological, Behavioral, and Social

Sciences Directorate (NSF)BEP —Biomolecular Engineering Program (EC)BIDEC —Biotechnology Development Center (Japan)BMFT —Federal Ministry of Research and

Technology (Germany)BRI —BioResearch IrelandBRIDGE —Biotechnological Research for Industrial

Development and Growth in Europe (EC)BRS —Biotechnology Research Subcommittee

(OSTP)BSC —Biological and Critical Systems Division

(NSF, ENG)BSCC —Biotechnology Science Coordinating

committee (OSTP)bST —bovine somatotropinBT —Bacillus thuringiensisCAA —Clean Air Act (U. S.)CAP —Common Agricultural Policy (EC)CCL —Commodity Control List (U.S.)Cell Bank —Human Genetic Mutant Cell Repository

—Committee for European StandardizationCERCLA —Comprehensive Environmental Response,

Compensation, and Liability Act (U.S.)—Chemistry Division (NSF, MPS)

CISE —Computer and Information Science andEngineering Directorate (NSF)

CoCom —Coordinating Committee on MultilateralExport Controls

CRADA —Cooperative Research and DevelopmentAgreement

CSRSCTS

CUBE

CWADARPA

DBCDECHEMA

DES

DGxxII

DHHS

DMR

DMS

DNADOCDoDDOEDTIECECLAIR

EGTA

EMSENGEOLASEPA

EPOERATO

ERSEUPEUREKAFASBFCCSET

FDAFDCA

–CooperativeResearch Service (USDA)—Chemical and Thermal Systems Division

(NSF, ENG)—Concertation Unit for Biotechnology in

Europe (DGXXII)--EC—Clean Water Act (U.S.)—Defense Advanced Research Projects

Agency (DoD)—dedicated biotechnology company,—German Society for Chemical Equipment,

Chemical Technology and Biotechnology—Department of Education and Science

(U.K.)—Directorate General for Science, Research

and Development (EC)—Department of Health and Human

Services, U.S.—Division of Materials Research (NSF,

MPS)—Division of Mathematical Sciences (NSF,

MPS)—deoxyribonucleic acid—Department of Commerce, U.S.—Department of Defense, U.S.—Department of Energy, U.S.—Department of Trade and Industry (U.K.)—European Community—European Collaborative Linkage of

Agriculture and Industry throughResearch (EC)

—Environmental and Gene Technology Act(Denmark)

—Eosinophilia-Myalgia Syndrome—Engineering Directorate (NSF)—Irish Science Agency—Environmental Protection Agency, U.S.—European Patent Convention—erythropoietin—Promotion of Exploratory Research for

Advanced Technology System (STA,Japan)—Economic Research Service (USDA)—Experimental Use Permit (EPA)—European Research Coordination Agency—Financial Accounting Standards Board—Federal Coordinating Council for Science,

Engineering and Technology—Food and Drug Administration, U.S.—Federal Food, Drug, and Cosmetic Act

(U.S.)—Federal Insecticide, Fungicide, and

Rodenticide Act (U.S.)

–265–


FRGFSISFTCFTTA

GAAP

GAOGATTG-CSFGDRGenBankGEOGILSP

GMAC

GM-CSF

GNPGRASHIVIDAsIFBCIMCB

IOP-b

ISAISTI

ITCJBAJPOJRDC

KIST

KOGERA

MCMCTLMEORMEsc

MOSS

—Food-Linked Agro-Industrial Researchprogram (EC)

—Federal Republic of Germany—Food Safety and Inspection Service (USDA)—Federal Trade Commission, U.S.—Federal Technology Transfer Act of 1986

(U.S.)—generally accepted accounting principles

(FASB)—General Accounting Office, U.S.—General Agreement on Tariffs and Trade—granulocyte-colony stimulating factor—German Democratic Republic—Genetic Sequence Data Bank—Geosciences Dictorate (NSF)—Good Industrial Large-Scale Practice

(OECD)—Genetic Manipulation Advisory

Committee (Australia)—granulocyle macrophage colony

stimulating factor—Gross National Product—generally recognized as safe—human immunodeficiency virus—International Depositary Authorities—International Food Biotechnology Council—Institute of Molecular and Cell Biology

(Singapore)—International Division (NSF, STIA)—Innovation Oriented program for

Biotechnology (The Netherlands)—initial public offering—international searching authority—Industrial Science and Technological

Innovation Divison (NSF, STIA)—International Trade Commission—Japan Bio-Industry Association—Japanese Patent Office—Japanese Research Development

Corporation—Korea Institute of Science and Technology

(South Korea)—Korean Genetic Research Association

(South Korea)—Korean Patent Office (South Korea)—Ministry of Agriculture, Forestry, and

Fisheries (Japan)—Ministry of Construction (Japan)—Militarily Critical Technologies List (U.S.)—microbial enhanced oil recovery—Ministry of Education, Science and

Culture (Japan)—Ministry of Health and Welfare (Japan)—Ministry of International Trade and

Industry (Japan)—Market-Oriented Sector Selective talks

MPBCMPs

MSGNASA

NBSNCBCNDANEPA

NICs

NIST

NOAA

NRC

NSFOCEOECD

OMBOPEC

ORDOSHA

OSTP

OTA

PCBsPCRPCTPERI

PHSPLAPMA

PPAPQAPTOPVPAR&DRAC

RCRARDLP

rDNARFLPSARA

—Midwest Plant Biotechnology Consortium—Mathematical and Physical Sciences

Directorate (NSF)—monosodium glutamate—National Aeronautics and Space

Administration, U.S.—National Bureau of Standards (DOC)—North Carolina Biotechnology Center—New Drug Application (FDA)—National Environmental Protection Act

(U.S.)—Newly Industrializing Countries—National Institutes of Health (U. S.)—National Institute of Standards and

Technology (DOC)—National Oceanic and Atmospheric

Administration (DOC)—National Research Council (U.S.)—Northern Regional Research Laboratory—National Science Foundation (U. S.)—Oceanography Division (NSF, GEO)—Organisation for Economic Co-operation

and Development—Office of Management and Budget (U. S.)—Organization of Petroleum Exporting

Countries—Office of Research and Development (EPA)—Occupational Safety and Health

Administration (U. S.)—Office of Science and Technology Policy

(White House)—Office of Technology Assessment (U.S.

Congress)—polychlorinated biphenyls—polymerase chain reaction—Patent Cooperation Treaty—Protein Engineering Research Institute

(Japan)—Public Health Service, U.S. (DHHS)—Product License Application (FDA)—Pharmaceutical Manufacturers

Association—Plant Patent Act (U.S.)—Plant Quarantine Act (U.S.)—Patent and Trademark Office (U. S.)—Plant Variety Protection Act (U.S.)—research and development—Recombinant DNA Advisory Committee

(NIH)—Resource Conservation and Recovery Act—research and development limited

partnership—recombinant DNA—restriction fragment length polymorphism—Superfund Amendments and

Reauthorization Act

Appendix F--Acronyms and Glossary of Terms .267

SBIR

SDI

SIC

SPCSRS

STASTCSTIA

tPATSCAU.K.U.N.UPov

USDAU.S.S.R.USTRVAWHo

ZKBS.

—Small Business Innovation ResearchAgency

—Strategic Defense Initiative (Star Wars)(U.S.)

—standard industrial classification system(DOC)

—Supplementary Protection Certificate (EC)—Science Resource Studies Division (NSF,

STIA)—Science and Technology Agency (Japan)—Science and Technology Centers (NSF)—Scientific, Technological, and

International Affairs Directorate—Tumor Necrosis Factor—tissue plasminogen activator—Toxic Substances Control Act of 1976—United Kingdom—United Nations—International Union for the Protection of

New Varieties of Plants—Department of Agriculture, U.S.—Union of Soviet Socialist Republics—United States Trade Representative—Veteran’s Administration (U. S.)—World Health Organization (U.N.)—World Intellectual Property Organization—Advisory Board for Biological Safety

(Germany)

Glossary of TermsAcquisition: One company taking controlling interest in

another company. Investors are always looking forcompanies that are likely to be acquired because thosewho want to acquire such companies are often willingto pay more than the market price for the shares theyneed to complete the acquisition.

Aerobic: Living or acting only in the presence of oxygen.Allele: Alternative form of a genetic locus (e.g., at a locus

for hair color there may be alleles for blonde or blackhair); alleles are inherited separately from each parent.

Amino acid: Any of a group of 20 molecules linkedtogether in various combinations to form proteins.Each different protein is made up of a specificsequence of these molecules with the unique sequencecoded for by DNA.

Amortization: Accounting procedure that gradually re-duces the cost-value of a limited life or intangible assetthrough periodic charges to income.

Anaerobic: Living or acting in the absence of oxygen.Animal: A nonhuman living being with a capacity for

spontaneous movement and a rapid motor response tostimulation. “Animals can be divided into two groups,invertebrates (animals without backbones) and verte-brates (animals with backbones).

Animal patents: The patenting of nonhuman transgenicanimal life forms. The United States is currently theonly country that has issued a patent for an animaldeveloped using biological techniques. The ability topatent animals introduces a new legal concept ofanimal ownership and raises a number of ethical,economic, and practical issues.

Antibody: A protein (immunoglobulin) produced by theimmune system of humans and higher animals inresponse to exposure to a specific antigen and charac-terized by specific reactivity with its complementaryantigen. (See also antigen and monoclinal antibodies.)

Antigen: A molecule (usually a protein or carbohydrate)that when introduced into an organism (usuallyhumans or higher animals) is recognized as a foreignsubstance and elicits an immune response (antibodyproduction, lymphokine production, or both) directedspecifically against that molecule. (See also antibodyand monoclinal antibodies.)

Applied research: Research done to gain knowledge orunderstanding necessary for determiningg the means bywhich a recognized and specific need may be met. Inbiotechnology, it is the use of rDNA, hybridomas, andother tools to develop specific products or processes(e.g., rDNA use to develop vaccines for specificantigens, such as malaria or HIV; the transfer ofherbicide or pesticide resistance to a particular plantspecies; or the use of monoclinal antibodies aspurification tools in bioprocessing). (See also genericapplied research.)

Asexual reproduction: Reproduction of plants by purelyvegetative means without the function and interactionof the two sexes. Examples of asexually producedplants are roses, peach trees, and lilies.

Assets: Anything having commercial or exchange valuethat is owned by a business, institution, or individual.

B lymphocyte: A specialized white blood cell involvedin the immune system response of vertebrates thatoriginates in the bone marrow and produces antibodymolecules after challenge by an antigen. In hybridomatechnology, these cells contribute antibody-producingcapability to the hybridoma. (See also T lymphocyte.)

Bacterium (p]. bacteria): Any of a group of unicellularor noncellular micro-organisms having round, rodlike,spiral, or filamentous bodies that are enclosed by a cellwall or membrane and lack fully differentiated nuclei.Bacteria may exist as free-living organisms in soil,water, organic matter, or as parasites in the live bodiesof plants or animals.

Base pair: Two complementary nucleotides (adenosineand thymidine or guanosine and cytidine) held to-gether by weak bonds. Two strands of DNA are heldtogether in the shape of a double helix by the bondsbetween base pairs.

Basic research: Research performed to gain fullerknowledge or understanding of the fundamental as-


pects of phenomena and of observable facts, withoutspecific applications toward products or processes inmind. In biotechnology it is the use of its componenttools (e.g., DNA and hybridomas) to study ways inwhich biological systems work and to identify themechanisms that govern how they work.

Biologics: Vaccines, therapeutic serums, toxoids, antitox-ins, and analogous biological products used to induceimmunity to infectious diseases or harmful substancesof biological origin.

Biomass: All organic matter that grows by the photosyn-thetic conversion of solar energy.

Bioprocess engineering: Process that uses completeliving cells or their components (e.g., enzymes,chloroplasts) to effect desired physical or chemicalchanges.

Bioreactor: A vessel used for bioprocessing.Bioremediation: A strategy that uses biotechnological

methods to cleanup wastes. These methods involveengineering systems that use biological processes todegrade, detoxify, or accumulate contaminants. Biore-mediation, or biotreatment, systems can use naturallyoccurring or laboratory-altered microbes, or both.

Biosynthesis: Production, by synthesis or degradation,by a chemical or living organism.

Biotechnology: Any technique that uses living organismsor substances from those organisms to make or modifya product, to improve plants or animals, or to developmicro-organisms for specific uses. These techniquesinclude the use of novel technologies such as recombi-nant DNA, cell fusion, and other bioprocesses. (Seealso genetic engineering and recombinant DNA.)

Black Monday: October 19, 1987, when the Dow JonesIndustrial Average plunged a record 508 points follow-ing sharp drops the previous week-reflecting investoranxiety about inflated stock price levels, Federalbudget and trade deficits, and foreign market activity.

Book value: Net asset value of a company’s securities,calculated as total assets minus intangible assets(goodwill, patents, etc.), minus current liabilities,minus any long-term liabilities and equity issues thathave prior claim. The total net asset figure, divided bythe number of bonds, shares of preferred stock, orshares of common stock, gives the net asset value, orbook value, per bond or per share of preferred orcommon stock Book value can be a guide in selectingstocks and is an indication of the ultimate value ofsecurities in liquidation.

Capital gain: The difference between an asset’s purchaseprice and selling price, when the difference is positive.

Carrier: See vector.Cash burn rate: The rate at which a company uses cash,

i.e., cash flow. Biotechnology companies are generallycash users, not generators. Cash burn rates are veryhigh in the years before the first profits are made.

Cell: The smallest component of life. A membrane-boundprotoplasmic body capable of carrying on all essentiallife processes.

Cell culture: The in vitro growth of cells isolated frommulticellular organisms; also used to refer to anyparticular individual sample. (See also tissue culture.)

Cell fusion: The joining of the membrane of two cells,thus creating a hybrid cell that contains the nuclearmatter from the parent cells.

Chloroplasts: Cellular organelles where photosynthesisoccurs.

Chromosome: A thread-like structure contained in thenucleus of a cell that carries the genes that conveyhereditary characteristics.

Claim: The part of a patent that points out and distinctlyspecifies the subject matter that the applicant regardsas the invention. Claims represent the metes andbounds of the property to be protected.

Clone: A group of genetically identical cells or organismsproduced asexually from a common ancestor.

Cloning: The process of producing clones. In rDNAtechnology, the process of using a variety of DNAmanipulation procedures to produce multiple copies ofa single gene or segment of DNA.

Common law: Law created by judicial decisions, asdistinguished from law created by the enactments oflegislatures. In the United States, common law encom-passes that portion of the common law of England(including such acts of Parliament as were applicable)that had been adopted and was in force (in the UnitedStates) at the time of the American Revolution.

Common stock: Units of ownership of a public corpora-tion. Owners typically are entitled to vote on theselection of directors and other important matters aswell as to receive dividends on their holdings. In theevent that a corporation is liquidated, the claims ofsecured and unsecured creditors and owners of bondsand preferred stock take precedence over the claims ofthose who own common stock. For the most part,however, common stock has more potential for appre-ciation.

Convertible debt: Debt that is exchangeable in anotherform for a prestated price. Convertible debt is appropri-ate for investors who want higher income than isavailable from common stock Most commonly corpo-rate securities (usually preferred shares or bonds) arepurchased and later traded for common shares.

Copyright: A patent-like instrument that protects theexpression of the idea, not the idea itself.

Cost of capital: The rate of return that a business couldearn if it chose another investment with equivalentrisk-in other words, the opportunity cost of the fundsemployed as the result of an investment decision oractual debt costs as part of the capital structure of thecompany.

Appendix F--Acronyms and Glossary of Terms ● 269

Cultivar: Often used to refer to plant strains. (See strain.)Culture deposits: See &posits.Cytoplasm: The substance within a cell, external to the

nuclear membrane.Deoxyribonucleic acid (DNA): 20 The molecule that is

the repository of genetic information in all organisms(with the exception of a small number of viruses inwhich the hereditary material is ribonucleic acid—RNA). The information coded by DNA determines thestructure and function of the organism.

Deposit: Placement of micro-organisms, vectors, cells,plant tissues, seeds, and other biological materials thatare newly isolated, novel, manmade, or not generallyavailable to the public on a long-term basis inrecognized patent depositories as part of the patentapplication process.

Depositories: A facility that accepts, maintains, classi-fies, and distributes cultures of micro-organisms,viruses, cells, and other genetic or biological material.Since 1983, a few depositories have begun to acceptseeds and plant tissue cultures, but to date nodepository has accepted any animal. Depositories canbe public, private, for-profit, or nonprofit. Threedepositories in the United States are recognized asInternational Depositary Authorities (IDAs) for patentpurposes.

Enablement: A patent requirement for adequate publicdisclosure of an invention, enabling others in therelevant field to build or use the invention.

Endotoxin: A poison produced by some gram-negativebacteria present in the cellular membrane and releasedonly on cell rupture; it is composed of complexlipopolysaccharide and is more heat-stable than pro-tein exotoxins. (See also exotoxin).

Enzyme: A protein that acts as a catalyst, speeding therate at which a biochemical reaction proceeds, but notaltering its direction or nature and without itself beingdestroyed.

Equity: In economics, the monetary value of property, orof an interest in a property, in excess of claims or liensagainst it. Also, ownership interest possessed byshareholders in a corporation stock as opposed tobonds. Shares can be common or preferred. In law, abody of law separate from common law that isdesigned to achieve a lawful result when legalprocedure is inadequate.

Equity capital: Capital proceeds arising from the sale ofcompany stock.

Equity investment: An investment made in a companyin exchange for a part ownership of that company.

Eukaryote: A cell or organism with membrane-bound,structurally discrete nuclei and well-developed cellorganelles. Eukaryotes include all organisms exceptviruses, bacteria, and blue-green algae. (See prokar-yote.)

Exit opportunities: A term commonly used by venturecapitalists to describe opportunities for investors torealize their investment or pullout of a deal. Examplesare the public markets, mergers, and acquisitions.

Exotoxin: A poison excreted by some gram-negative orgram-positive organisms; it is composed of protein.(See also endotoxin.)

Fermentation: An anaerobic process used for growingmicro-organisms for the production of various chemi-cal or pharmaceutical compounds. Microbes are nor-mally incubated under specific conditions in thepresence of nutrients in large tanks called fermenters.

Gamette: A mature reproductive cell (haploid set ofchromosomes) capable of fusing with a similar cell ofthe opposite sex to yield a zygote; it is also called a sexcell.

Gene: The fundamental physical and functional unit ofheredity; an ordered sequence of nucleotide base pairsthat produce a specific product or have an assignedfunction.

Gene pool: The sum total of genes in a breedingpopulation.

Gene probe: A molecule of known structure and/orfunction used to locate and identify a specific region ornucleotide sequence of a genome. It is usually a pieceof complementary DNA that has been labeled with atracer substance, such as a dye or radioactive label.

Generic applied research: Research that falls betweenthe extremes of basic and applied research. Thisresearch may be characterized as follows: 1) it is notcommitted to open-ended expansion of knowledge asuniversity-like basic research usually is but is lessspecific than the typical industrial product or processdevelopment effort; 2) it has more well-definedobjectives than basic research but is long term, relativeto product or process development; and 3) it is highrisk, in the sense that the stated objectives may fail andthe resources committed may be lost for practicalpurposes.

Genetic engineering: Technologies (including rDNAmethods) used to isolate genes from an organism,manipulate them in the laboratory,, and insert themstably in another organism. (See also recombinantDNA and biotechnology.)

Genome: All the genetic material in the chromosomes ofa particular organism: its size is generally given as itstotal number of base pairs.

Genome projects: Research and technology develop-ment efforts aimed at mapping and sequencing someor all of the genome of human beings and otherorganisms.

Genotype: The genetic constitution of an organism asdistinguished from its physical appearance (pheno-type).


Germ line: The earliest, primitive stage of development;P e -“ g to tissues or cell lineages producing gam-etes. (See also somatic.)

Germplasm: The total genetic variability available to aspecies.

Gram negative/positive: A classification of bacteriabased on differential staining utilizing the Gram-Wiegert procedure.

Host: A cell whose metabolism is used for growth andreproduction of a virus, plasmid, or other form offoreign DNA.

Hybrid: An offspring of a cross between two geneticallyunlike individuals.

Hybridization: The act or process of producing hybrids.More specifically, in cell culture, the formation of newcells as a result of the fusion of whole cells or cell partsof different parental origin. In rDNA, a procedure inwhich single-stranded nucleic acid segments are al-lowed to bind to identical or nearly identical se-quences, forming double-stranded heleices.

Hybridoma: A cell produced by fusing a myeloma cell(a type of tumor cell that divides continuously inculture and is ‘‘immortal’ and a lymphocyte (anantibody-producing cell). The resulting cell grows inculture and produces the specific antibody producedby the parent lymphocyte (a monoclonal antibody).

Immune response: The reaction of an organism toinvasion by a foreign substance. Immune responses areoften complex and may involve the production ofantibodies in special cells (lymphocytes), as well as theremoval of the foreign substance by other cells.

Immunoglobulin: See antibody.In vitro: Literally, in glass; pertaining to a biological

reaction taking place in an artificial apparatus.In vivo: Literally, in life; pertaining to a biological

reaction taking place in a living cell or organism.Intellectual property: The area of law encompassing

patents, trademarks, trade secrets, copyrights, andplant variety protection.

Linkage: The proximity of two or more markers (e.g.,genes, RFLP markers) on a chromosome; the closertogether the markers are, the lower the probability thatthey will be separated during meiosis and hence thegreater the probability they will be inherited together.

Liquidity: Ability of an individual or company to convertassets into cash or cash equivalents without significantloss. Having a good amount of liquidity means beingable to meet maturing obligations promptly, earn tradediscounts, benefit from a good credit rating, and takeadvantage of market opportunities.

Locus (pi. loci): A specific, physical position on achromosome occupied by a particular gene or itsalleles.

Lymphocytes: See B lymphocytes and T lymphocytes.Lymphokines: Proteins that mediate interactions among

lymphocytes and are vital to proper immune function.

Microphage: A large specialized cell that originates inthe bone marrow and is involved in many stages of theimmune response, including consumption of foreignparticles such as viruses and lymphokine production.

Marker: A gene with a known location on a chromosomeand a clear-cut phenotype that is used as a point ofreference when mapping another locus.

Market capitalization: Value of a corporation as deter-mined by the market price of its issued and outstandingcommon stock It is calculated by multiplying thenumber of outstanding shares by the current marketprice of a share. Institutional investors often usemarket capitalization as one investment criterion.Analysts look at market capitalization in relation tobook or accounting value for an indication of howinvestors value a company’s future prospects.

Meiosis: The process of two consecutive cell divisions inthe diploid progenitors of sex cells. Meiosis results infour rather than two daughter cells, each with a haploidset of chromosomes.

Merger: Combination of two or more companies, eitherthrough a pooling of interests, where the accounts arecombined; a purchase, where the amount paid over andabove the acquired company’s book value is carried onthe books of the purchaser as goodwill; or a consolida-tion, where anew company is formed to acquire the netassets of the combining companies.

Mitochondria: Structures, or organelles, within cellswhere energy is produced and stored; they containDNA molecules, inherited from the mother only, thatreplicate independently.

Monoclinal antibodies: Identical antibodies that recog-nize a single antigen; they are produced by a clone ofspecialized cells.

Mutation: Any change in DNA sequence that results ina new characteristic that can be inherited. (See alsopolymorphism.)

National treatment: A principle which provides that,with regard to the protection of industrial property,nationals of any country are to enjoy the advantages ofthe laws concerning industrial property granted tonationals of the country in which protection is beingsought.

Neoplasm: A growth of tissue serving no physiologicalfunction (e.g., a tumor).

Nitrogen fixation: A biological process (usually associ-ated with plants) whereby certain bacteria convertnitrogen in the air to ammonia, thus forming a nutrientessential for growth.

Novelty: One of the criteria used in the evaluation ofpatent applications . The invention or discovery mustbe new and not have previously existed through thework of others in order to be accepted on the groundsof novelty.

Obviousness: One of the criteria used in the evaluation ofpatent applications. Obviousness addresses the degree

Appendix F--Acronyms and Glossary of Terms .271

of difference between the invention being evaluatedand that which is already known or available. (See alsoprior art.)

Oncogene: A gene, one or more forms of which isassociated with cancer. Many oncogenes are involved,directly or indirectly, in controlling the rate of cellgrowth.

Operating profit (or loss): The difference between therevenues of a business and the related costs andexpenses, excluding income derived from sourcesother than its regular activities and before incomedeductions.

Organelle: A structure in the cytoplasm of a cell that isspecialized in its ultrastructure and biochemical com-position to serve a particular function (e.g., mitochon-dria, chloroplast).

Pathogenic: Able to cause disease; often utilized toexpress inactivation or lethality.

Phenotype: The observable characteristics of an orga-nism produced by the interaction of the genotype andthe environment

Plant patents: Plant patents protect asexually reproducedplant varieties, including cultivated sports, mutants,hybrids, and newly found seedlings. They cannot beobtained for tubers or wild varieties found in naturethat are not asexually reproduced.

Plant variety protection: Patent-like protection forcertain sexually produced plants.

Plasmid: An extrachromosomal, circular piece of DNAfound in the cytoplasm and capable of replicating andsegregating independently of the host chromosome.

Polymerase chain reaction (PCR): An in vitro process,through which repeated cycling of the reaction repro-duces a specific region of DNA, yielding millions ofcopies from the original.

Polymorphism: Difference in DNA sequence amongindividuals. Genetic variation in more than 1 percentof a population would be considered useful for geneticlinkage analysis. (See also mutation.)

Preferred stock: A class of stock that pays dividends ata specific rate and that has preference over commonstock in the payment of dividends and the liquidationof assets. Preferred stock does not ordinarily carryvoting rights.

Prior art: That which is already known or available, partof the criteria of obviousness used in evaluating patentapplications. (See also obviousness.)

Prokaryote: An organism (e.g., bacteria, virus, andblue-green algae) whose DNA is not enclosed withina nuclear membrane. (See eukaryote.)

Protein: A polypeptide consisting of amino acids whosestructure is determined by the sequence of nucleotidesin DNA. Proteins, in their biologically active statesfunction as catalysts in metabolism and as structuralelements of cells and tissues.

Recombinant DNA (rDNA): A broad range of tech-niques involving the manipulation of the geneticmaterial in organisms. The term is often used synony-mously with genetic engineering. It is also used todescribed a DNA molecule constructed by geneticengineering techniques composed of DNA from differ-ent individuals on species. (See also biotechnology andgenetic engineering.

Restriction enzymes: Certain bacterial enzymes thatrecognize short sequences of DNA and cut the DNAwhere these sites occur. Restriction enzymes can beused to isolate a gene that has been identified in theheredity material of an organism.

Restriction Fragment Length Polymorphisms (RFLPs):Variation in DNA fragment sizes cut by restrictionenzymes; polymorphic sequences that are responsiblefor RFLPs are used as markers on genetic linkagemaps.

Retrovirus: A family of viruses whose genetic materialis RNA and is further characterized by the presence ofreverse transcriptase in the viron; it is also called tumorvirus.

Reverse transcriptase: An enzyme capable of directingthe production of a single strand DNA copy from anRNA template.

Ribonucleic acid (RNA): A molecule existing in threeforms-messenger RNA, transfer RNA, and ribo-somal RNA-responsible for translating the geneticinformation encoded by an organism (i.e., DNA) intoa protein product; the heredity material of someviruses.

Right of priority: A right that enables any resident ornational regardless of nationality to first file a patentapplication in a country and thereafter file the samepatent application in another country, thus ensuringthat the subsequently filed applications enjoy the rightof priority established by the first filing date.

Royalty: Payment to the holder for the right to useproperty such as a patent, copyrighted material, ornatural resources. Royalties are set in advance as apercentage of income arising from the commercializa-tion of the owner’s rights or property.

Somatic: Pertaining to all diploid cells of an organismexcept the germ line, i.e., sex cells-sperm and eggs(See also germ.)

Species: Reproductive communities and populations thatare distinguished by their collective manifestation ofranges of variation with respect to many differentcharacteristic and qualities.

Specifications: In law, relating to patents, machinery, andbuilding contracts, a particular or detailed statement ofthe various elements involved.

Statute: A law enacted and established by the legislativebranch of a government.


Strain: A pure culture of organisms within a species,characterized by one or more particular physical orgenetic properties.

Strategic alliances: Associations between separate busi-ness entities that fall short of a formal merger but thatunite certain agreed on resources of each entity for alimited purpose. Examples include equity purchase,licensing and marketing agreements, research con-tracts, and joint ventures.

T lymphocyte: Specialized white blood cells involved inthe immune response of vertebrates that originate inthe bone marrow, mature in the thymus gland, andproduce some lymphokines. Subclasses of T lympho-cytes are important to antibody production and theenhancement or suppression of an immune response.(See also B lymphocyte.)

Technology transfer: The process of converting scien-tific knowledge into useful products. This most oftenrefers to the flow of information between public andprivate sectors or between countries.

Tissue culture: In vitro growth in a nutrient medium ofcells isolated from tissue. (See also cell culture.)

Tissue plasminogen activator (tPA): A geneticallyengineered protein drug that helps to dissolve bloodclots.

Tort law: Derived from legal principles governingwrongful acts, except those involving a breach of

contract, committed against a person or property forwhich civil action would be valid.

Toxin: See endotoxin and exotoxin.Transgenic animals: Animals whose hereditary DNA

has been augmented by the addition of DNA from asource other than parental germplasm, usually fromanother animal or human, and done in a laboratoryusing rDNA techniques.

Transgenic plants: Plants whose hereditary DNA hasbeen augmented by the addition of DNA from a sourceother than parental germplasm, usually from a relatedspecies, using rDNA techniques.

Utility patents: These are patents issued to inventors ofany new and useful process, machine, manufacture, orcomposition or any new and useful improvementthereof.

Vector: A DNA molecule used to introduce foreign DNAinto host cells.

Venture capital: An important source of financing forstart-up companies that entails some investment riskbut offers the potential for above-average futureprofits.

Virus: Any of a large group of organisms containinggenetic material but unable to reproduce outside a hostcell.

Index

Index

Abbreviated New Drug Application (ANDA), 93Acquisitions, 54-57

defined, 8foreign participation in, 54-56of independent seed companies, 108premium paid for stock during, 57See also Consolidation

Advisory Board for Biological Safety (ZBKS)-Germany, 191Advisory Committee on Genetic Modification (ACGM)--

United Kingdom, 193Advisory Committee on Release to the Environment (ACRE)-

United Kingdom, 193Agriculture

biopesticides for, 102-103, 105-106biotechnology-related R&D directed toward, 10,11,103-105,

108, 109-110biotechnology’s commercial applications to, 8-10, 11, 100-

107cell culture and, 104-105environmental applications of biotechnology to, 8-10, 11,

103-105, 108, 109-110, 129-131public opinion on biotechnology applied to, 10, 112-113

Agricultural Research Service (ARS)--USDA, 104Agrigenetics, 109Agroceres SA, 108,109AIDS (acquired immunodeficiency syndrome), biotechnology

research to combat, 76-77,78, 79Alcohol, Drug Abuse, and Mental Health Administration

(ADAMHA), conflict of interest regulations of, 24American Bionetics, Inc., 124American Cyanamid Co.

consolidations by, 57diversification by, 123product marketing arrangements by, 8

Amgen, 88,92cost of biotechnology products of, 84financing strategies, 6,48,49,50,56,59,61,63product marketing arrangements by, 80

Animal and Plant Health Inspection Service (APHIS), deliberaterelease regulation by, 179, 180

Applied Biosystems, 156Applied Biotechnology, 124Ares-Serono Group, 57Argentina

food exports by, 112intellectual property protection in, 92seed company subsidiaries in, 108

Asgrow Seed Co.acquisition of, 109patent infringements and, 110

Asiaconsolidations involving companies in, 55public opinion of agricultural biotechnology, 10, 112-113strategic alliances involving companies in, 58,59,60,61See also individual countries in

Australiapharmaceutical cost-containment in, 84plant patenting in, 110

research policies and regulation in, 15, 151seed company subsidiaries in, 108

Austria, 108

Bacillus thuringiensis (BT), 113gene transferred to plant, 105, 106-107use in biopesticides of, 102-103

Bager, 89Bangu Pharmaceutical, 85Belgium

biotechnology infrastructure in, 21centralized waste treatment facilities in, 135patent term extension proposal in, 93

Biogen, financing strategies used by, 47Bio-oriented Technology Research Advancement Institution,

156-157Biopesticides

agricultural use of, 105-106approval of Mycogen’s, 103market for, 102-103

BioProbe International, Inc., 124Bioremediation

advantages of, 136-137case study, 131-140constraints on use of, 12,40environmental protection laws effect on use of, 40

Biotechnica International Diversification of, 109Biotechnology

in chemical industry, 120-122commercial activity overview, 3-12, 29-32,39-41defining, 3,5,29,33environmental applications of, 129-140intellectual property rights in, 208-210in pharmaceutical industry, 73-94policy overview concerning industrial commercialization of,

13-19,31-32, 147products under development, 79as a singular coherent entity, 3,31,39

Biotechnology Development Center (BIDEC), 157Biotechnology Directorate (U.K.), 160Biotechnology General Corp, 124Biotechnology Joint Research Association, 153Biotechnology Research for Industrial Development and

Growth in Europe (BRIDGE) program, 104Biotechnology Research Subcommittee (BRS)-OSTP, 23,174Biotechnology Science Coordinating Committee (BSCC)-

OSTP, 22-23interagency agreements concerning regulatory policy and,

173, 176See also Biotechnology Research Subcommittee

“Black Monday”effect on biotechnology financing of, 6-7,46,47, 51,54See also Financing; Wall Street

Boehringer-Mannheim Corp., 60,89Bovine somatotropin (bST), 102, 190-191, 194, 1%

farmer resistance to, 40See also Agriculture; Pharmaceuticals

Boyer, Herbert, 56

–275–


Brazilfood exports by, 112intellectual property protection for pharmaceuticals in, 92-93pharmaceutical cost-containment policy in, 84regulation of biotechnology in, 15seed company subsidiaries in, 108

Bristol-Myers Squibb Corp., 88Budapest Treaty on the International Recognition of the Deposit

of Microorganisms for the Purposes of Patent Procedure,207

Burroughs Wellcome Co., 60,82Bush, George (President), 177

Calgene, Inc.diversification of, 109product approval requested by, 183

CaliforniaDBCs in, 89deliberate release protests in, 188

California Biotechnology, Inc., 89Canada, 51

animal vaccine development and approval in, 101biohydrometallurgy program in, 131intellectual property protection in, 92-93pharmaceutical cost-containment policy in, 84seed company subsidiaries in, 108

Canadian Center for Mineral and Energy Technology, 131Cancer, biotechnology research on, 76Capital

variations in cost of (international), 6,50,51-53See also Costs; Economics; Financing

Cardo, 109Cargill, 109Celanese Research Co., 123Cellular Products, 124Center for Biologics Evaluation and Research (FDA), 75,90Center for Drug Evaluation and Research (FDA), 75Centocor

FDA product regulation and, 79marketing alliance by, 84,85

Cetus Corp.FDA regulatory decision effect on, 79,90marketing alliance by, 89merger with Chiron, 6, 54Proleukin export by, 91

chemical industry, 119-124biotechnology’s commercial applications in, 10-12, 120-122restructuring of, 10-11,40, 122-124See also Industry

Chile, 108Chiron Corp.

financing strategies and market value of, 48-49merger with Cetus by, 6, 54

Chugai Pharmaceutical, Inc., 7,54,57,89Ciba-Geigy Corp., 58,59,60,82,89,108Cistron, 124Clause Co., acquisition of, 109Clean Water Act (CWA), 138Commercialization

activity concerning biotechnological, 3-12,29-32,39-41barriers to bioremediation, 137-139congressional options to promote biotechnology, 22

factors affecting biotechnology, 31,32national (worldwide) policies effecting biotechnological,

13-19,31-32, 147, 151,152, 161-166,169

U.S. policy effects on industrial biotechnological, 151, 152,161-166,169

U.S. policy concerning technology transfer andbiotechnological, 166-167,169

Competitiveness, 19-21,3941European industrial biotechnology commercialization’s, 21Japanese industrial biotechnology commercialization’s, 19-

21prerequisites for biotechnology, 14U.S. industrial biotechnology commercialization’s, 19See also Commercialization

Comprehensive Environmental Response, Compensation,Liability Act (CERCLA), 138

Congress, U.S.global biotechnology competitiveness interest by, 32Orphan Drug Act amendment attempt by, 92policy options for, 21-25USDA basic research finding increase by, 111

Consolidationof seed companies, 108trends in biotechnology, 6-7,53-57See also Acquisitions

ContainmentEC regulations covering, 192of genetically altered micro-organisms, 177-178NIH Guidelines for, 173,174, 186

Coordinated Framework for Regulation of Biotechnology, 180OSHA Guidelines in, 178, 179product approval under, 15-16regulation under, 22, 184, 186

Corporate relationships. See Acquisitions; Consolidation;Strategic alliances

costsbioremediation, 136pollution cleanup, 131, 139-140of receiving a U.S. patent, 215-214See also Economics; Financing

Crick, Francis H.C., 31Crop Genetics International, Inc. (CGI), 103Cytel Co., 89Cytogen Corp., 124

Dedicated biotechnology companies (DBCs)acquisition of U.S. pharmaceutical, 87,88agreements with established pharmaceutical companies for

marketing by, 84-85capital acquisition methods of U.S., 3-6,7,39,50-51,53consolidation trends of, 6-7,53-57, 87, 88patent piracy problems of, 19, 110,223strategic alliances’ use by U.S., 88-89tax law changes to aid, 24-25venture capital available for, 3-6,7,39, 50

DeKalb Seed Co., 108Denmark

biotechnology regulation development in, 15,40, 189centralized waste treatment facilities in, 135pharmaceutical cost-containment policy in, 84public opinion of agricultural biotechnology, 10

Index ● 277

research policies in, 151Department of Agriculture, U.S. (USDA)

plant genome mapping program, 104product approval by, 15regulation of plants and animals for food by, 172, 180

Department of Commerce, Us. (DOC), 119Department of Energy, U.S. (DOE)

genome project funding by, 104MEOR incentives of, 131

Department of Health and Human Services, U.S. (DHHS)biotechnology regulation by (proposed), 24FDA review by, 90See also commission’s and programs under jurisdiction of

d’Estaing, Giscard, 159Developed countries. See Industrialized nationsDeveloping countries

difficulty in meeting regulatory requirements by, 186field-tests in, 112food exports by, 112See also Newly Industrializing Countries; individual

countriesDevelopment. See CommercializationDiamond v. Chakrabarty, importance and effects of, 16,209,

214,223Dow chemical Co., diversification by, 123Dow Jones Industrial Average. See Black Monday; Wall StreetDNA Plant Technology Corp.

agricultural cell culture R&D by, 105diversification by, 123

Drugs. See PharmaceuticalsDrug Export Amendments Act of 1986,91Drug Price Competition and Patent Term Restoration Act of

1984,93du Pent& Nemours Co., E.I.

agricultural cell culture R&D by, 105diversification by, 123, 124

Eastman Kodak Co., 59Economics

of bioremediation’s commercialization, 139of biotechnology companies (worldwide), 6,45-53of consolidation involving biotechnology companies, 53-64of resource use, 12See also Costs; Financing

Elf Aquitaine Corp. diversification by, 124Eli Lilly & Co.

acquisitions by, 88licensing deals by, 80

Enimont Corp., diversification by, 124Environment

applications of biotechnology to, 12,129-140planned introductions of genetically altered micro-organisms

into, 21, 177-182Environment and Gene Technology Act (EGTA)--Denmark,

189Environmental Protection Agency (EPA)

bioremediation use by, 139Exxon Valdez cleanup involvement by, 134micro-organism regulation by, 15-16, 17,23, 172, 181pesticide regulation by, 102-103, 172, 181regulation of field testing by, 40waste disposal R&D conducted by, 137

Ernst & Young, biotechnology survey by, 45,50,82,88-Erythropoietin (EPO)

orphan drug status and profitability of, 92price of, 84See also Pharmaceuticals

Europeanimal vaccine development and approval in, 101biotechnology programs in, 160-161, 162,163-164biotechnology regulation and promotion policies in, 14, 15,

21,40,112,151,.152,191-194chemical industry in, 10, 123-124food exports from, 112intellectual property protection for plants in, 110national technology policies in, 14, 151, 152, 158-160pharmaceutical market competition by, 21,85pollution cleanup costs in Western, 131public opinion of biotechnology in, 10,40, 112seed trade by, 108strategiC alliance Use in, 58,59,60,61, 89See also European Community; individual countries in

European Community (EC)biotechnology programs in, 160-161, 162,163-164biotechnology promotion in, 14, 152biotechnology regulation in, 15,21,112$191-194bST moratoriums in, 102contaminatiton inventories in countries of, 135-136financial-related information on countries in, 50,52-53food exports by, 112gene mapping work by, 104market for drugs in, 85pharmaceutical patent term extension legislation in, 93See also Europe; member countries of

European Patent Convention (EPC), requirements of, and rightsprotected under, 208

Experimental Use Permit (EUP), 179,180Exxon Valdez

bioremediation project, 134public attention on bioremediation after oil spill in, 129

Federal Coordinating Council on Science, Engineering, andTechnology (FCCSET), 176

Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA),deliberate release regulation under, 16, 179, 180

Federal Meat Inspection Act, U.S., 184Federal Register, 23Federal Trade Commission (FTC), 56Field tests

countries performing agricultural biotechnology-related, 10,11

EPA regulation of U. S., 15-16, 17,40See also Agriculture; Regulation

Financial Accounting Standards Board (FASB), 25Financing

biotechnology R&D strategies, 45-53biotechnological environmental cleanup research efforts, 137,

139, 140congressional options for biotechnology research, 21-22German biotechnology, 160Japanese biotechnology research and development, 154,155,

157, 158overview of biotechnology, 3-7supporting microbiological mining, 131


Swiss biotechnology, 160U.S. Government R&D$ 3,19,20,21-22,111,131, 137,140See also Costs; Economics

Foodbiotechnological applications to processing, 107uses of transgenic animals, 184-186uses of transgenic plants, 182, 183

basis of biotechnology-based product regulation authority by,15, 16,22,76,

107, 111, 176-177biotechnology-based drug approval process of, 7,56,75-78,

79bST approved by, 102L-tryptophan recall by, 120orphan drug approval by, 92regulation effects on financial status of DBCs, 52,75-76,78,

79regulation of plants and animals as food, 173, 176-177, 178,

182regulatory delay’s effect on biotechnology-based industry,

75-76,78,79,90-91review by HHS,90

Food, Drug, and Cosmetic Act (FDCA), FDA regulation ofbiotechnology products under, 15,16,22,76, 107, 111,176-177, 183

Food Safety and Inspection Service (FSIS), 185, 186France

biotechnology infrastructure in, 21biotechnology policy in, 159biotechnology regulations in, 15, 193biotechnology R&D in, 83, 135patent term extension proposal in, 93pharmaceutical cost-containment policy in, 84seed company subsidiaries based in, 108

Fresh World Venture, 105, 123Fuji Film, 156Funai Pharmaceuticals Co., Ltd., 123Funding. See FinancingFunk Seed Corp., acquisition of, 108

Garst Co., consolidation activity by, 108Gen-Probe, Inc., acquisition of, 54,57,89Genentech

biotechnology product pricing by, 84FDA regulatory decision’s effect on, 90financing strategies and market value of, 47,4849,50,53,80merger with Hoffmann-La Roche by, 6, 54, 56, 57, 82, 89Ministry of Health and Welfare (Japan) grant to, 156product marketing arrangements by, 80

General Agreement on Tariffs and Trade (GATT, 217-218,224patent law harmonization effort using, 23-24pharmaceutical industry protection under, 91See also Regulation

Generally recognized as safe (GRAS), 177,182Genetic Systems, 54,57,88Genetic Technology Law (Germany), 190Genetics Institute, Inc., merger by, 48,89,92Genex, Inc., merger by, 47Genofit SA, 124Genzyme Corp., proposed takeover by, 57Germany

biotechnology infrastructure in, 21biotechnology policy and regulation in, 15,40, 160,189biotechnology R&D funding in, 83, 135centralized waste treatment facilities in, 135Green Party’s strength in, 186-187pharmaceutical market competition by, 83,85public opinion of biotechnology commercialization in, 10,40,

186, 187seed company subsidiaries in, 108

Gilead Sciences, 89Gist-Brocades, Inc., industrial enzyme production by, 121Glaxo, InC.

multilateral nature of, 81, 82R&D investments by, 93strategic alliance use by, 89

Goodwill, amortizing, 25,67Goodwill Industrial Large-Scale Practice (GILSP), 180, 195Government, U.S. See United StatesGranulocyte colony stimulating factors. See PharmaceuticalsGreece, pharmaceutical cost-containment in, 84Green parties, makeup, policies, and opinions of biotechnology

by, 186-187Gross national product (GNP)

chemical industry and, 122See also Wall Street

Growth hromones. See Human growth hormoneGuidelines

NIH laboratory safety, 174, 195.NIH standards as basis for industrializednations’, 173, 174,

175technology transfer, 165See also Regulation

Hansens Co., industrial enzyme production by, 121Harmonization. See Intellectual property; PatentsHawaii, deliberate release regulation in, 188History

of chemical industry growth rate compared to GNP, 122of seed companies, 108of U.S. commercial biotechnology, 45-48

Hitachi Corp., second-generation genome sequencer, 156Hixson, Harry, 61Hoechst Chemical Corp., diversification by, 123Hoffmann-La Roche, Inc.

licensing deals by, 80mergers by, 6,7,48,56,57,82, 89multilateral nature of, 82

Holden’s Foundation Corn Seeds, 108Human growth hormone

orphan drug status and profitability of, 92price of, 84See also Pharmaceuticals

Human immunodeficiency virus (HIV). See Acquiredimmunodeficiency syndrome

Hybridsdeveloping new, 107, 110RFLP techniques for producing, 103, 104seed, 109, 110See also Agriculture; Plant breeders’ rights

Hybritech, InC., 88

Index ● 279

ICI Chemical Corp.diversification by, 123-124seed company subsidiaries of, 108

Illinois, deliberate release regulation in, 188Immunex Corp., product marketing arrangements by, 80Immunomedics, Inc., 89Incentives

bioremediation product development, 140biotechnological R&D, 64-66,91-93intellectual property protection, 91-93investment and cooperation in biotechnology, 64-66,153-154microbial enhanced oil recovery use, 131

Indiaintellectual property protection in, 92seed company subsidiaries in, 108

Industrialized nationsagricultural applications of biotechnology in, 9-10biotechnology regulation in, 14-15, 188-195financial health of biotechnology companies in, 50-64food exports by, 112See also Newly Industrializing Countries; individual nations

Industrybiotechnology as a singular, coherent, 3,31,39case study of seed, 107-112congressional options for improving university relationships

with, 24consolidation within, 53-64facility location and regulation of European, 16financing and market values of “biotechnology”, 46-53international biotreatment, 135-136Japanese weakness in biotechnology-related sectors of, 20policy concerning biotechnology’s commercialization by,

13-19,31-32, 147R&D focus of “biotechnology”, 4546U.S. biotreatment, 132-135See also Commercialization; individual industries

In re Durden, 220-221Institute for Immunology (Japan), DBC investment by, 89Institute of Life Sciences, 153Institute of Molecular and Cell Biology, 154Integrated Genetics, Inc., 57Intellectual property protection, 203-224

agricultural-related, 110biotechnology commercialization and, 16-19,208-210congressional options concerning; 23-24international agreements concerning, 205-208See also individual forms of

Interleukin IIexport of, 91FDA regulatory decision on, 90See also Pharmaceuticals

International agreementson intellecual property, 205-208See also individual conventions, treaties

International Trade Commission (ITC), 24, 219International Union for the Protection of Plant Varieties

(UPOV),requirements of,and rights provided under, 110,207-208

Investigational New Drug (IND) application, 76Italy

biotechnology regulation in, 14-15pharmaceutical cost-containment in, 84

pharmaceutical R&D funding by, 83seed company subsidiaries in, 108

Japan, 151biotechnology promotion and commercialization in, 13-14,

19-21, 152biotechnology regulation development in, 15,40,91, 192chemical industry in, 120-121, 123, 124consolidation activity in, 88economic growth policies of, 84, 152, 153, 155, 158economics of biotechnology companies in, 50,53government-industry relations in, 157-158market penetration in, 85, 86, 91pharmaceutical industry in, 83,84,85,86,88pharmaceutical patent-term extension legislation in, 93plant patenting in, 110public opinion of biotechnology in, 10, 112-113research in, 83, 155seed company subsidiaries in, 108strategic alliances use in, 89waste treatment in, 135

Japan Association of Industrial Fermentation, 157Japan Development Bank, 20, 154Japan Health Sciences Foundation, 156-157Japan Research Development Corp. (JRDC), 156Johnson & Johnson, 59,82,88

Key Technology Center, 157Keyworth, George, 164Korea, South, biotechnology policy& research in, 13-14, 154Korea Genetic Research Association (KOGERA), 154

Latin Americaseed trade in, 108See also individual countries in

Legislationbioremediation-relevant, U.S., 138biotechnology-related, 15,214patent term extension, 93process patent protection (proposed), 24See also individual statutes

Limagrain, 108Litigation

biotechnology-related, 219,220,223financial drain from patent-related, 19See also individual cases

Lubrizol Enterprisesdiversification by, 124seed company acquisition by, 109

Market-Oriented Sector-Selective (MOSS) talks, 86Massachusetts General Hospital, 123Max Planck Institute (Germany), 191Medicaid, 84Medicare, 83,84,92Medicare Pharmaceutical and Prudent Purchasing Act, 84Merck & Co., Inc.

licensing deals by, 80,89multinational nature of, 82

Merck Frosst, 93Mergers. See consolidationMerrill (U.S.), 123


Mexico, 108Microbial Enhanced Oil Recovery (MEOR), state of and

challenges to, 131, 132Midwest Plant Biotechnology Consortium (MPBC), 166Mining, microbiological, 131Ministry of Agriculture, Forestry, and Fisheries (MAFF)-

Japanbiotechnology support by, 156-157field testing regulated by, 111gene mapping work by, 104

Ministry of Education, Science and Culture (MESC)--Japan,biotechnology support by, 153, 154-155

Ministry of Health and Welfare (MHW)--Japan, biotechnologySUpport by, 86, 156

Ministry of International Trade and Industry (MITI)--Japanbiotechnology initiatives of, 19-20, 153-154biotechnology’s targeting by, 11-12, 19, 120-121, 154industry-government cooperation and, 157-158Next Generation projects of, 153

Minnesota, bST moratorium in, 102Missouri, deliberate release protests in, 188Mitsubishi chemical Industries, agricultural cell culture R&D

by, 105Mitsubishi Kasei Corp., 153Mitsubishi Knowledge Industry, 156Mitsui Toatsu Chemical Co., agricultural cell culture R&D by,

105Molecular Biosystems, Inc., 124Molecular Genetics

diversification by, 124original genetically engineered vaccine introduced by, 101

Monosodium glutimate (MSG), 120Monsanto Agricultural Co.

diversification by, 123-124relationship with Oxford University by, 160

Morita, Katsura, 157Morocco, 108Mycogen

biopesticide development by, 103financing strategies used by, 48

Nakasone (Prime Minister Japan), 155National Biotechnology Policy Board, 177National Institute of Agrobiological Resources, 157National Institute of Genetics (Japan), 154National Institutes of Health (NIH)

basic research funding by, 21-22, 164-165bST safety confirmed by, 102conflict of interest regulations of, 24genome project funding by, 104laboratory-safety guidelines of 173, 174, 195recombinant DNA—Advisory Committee (RAC), 173

National Program in Biotechnology-Singapore, 154National Research Initiative, 111National Science Foundation (NSF), genome project funding by,

104National Technical Information Service (NTIS), 32Netherlands, The, 15

pharmaceutical cost-containment in, 84seed company subsidiaries in, 108waste treatment research by, 135

New Developments in Biotechnology: Patenting Life, 23

New Developments in Biotechnology: U.S. Investment inBiotechnology, 24,74

New Drug Application (NDA )--PTO, 76,93Newly Industrializing Countries (NICs)

biotechnology promotion and research polices of, 151-152biotechnology regulation in, 14, 188-189contaminated areas in, 135-136economic growth policies of, 152, 154intellectual property protection in, 92See also individual countries

Nippon Telephone & Telegraph, 157Northrup King, 109Nova Pharmaceutical Corp., 89Novo-Nordisk, industrial enzyme production by, 121

Office of Management and Budget (OMB), role in BSCCdissension of, 176

Office of Scientific and Technical Policy (OSTP)BSCC and BRS formation by, 23, 176, 181regulatory policy promulgated by, 15

Office of Technology Assessment (OTA), 5,23,29,31biotechnology funding conclusions in reports by, 151, 152international competitiveness measurement by, 19,20planned introduction report by, 131workshops and conferences conducted by, 32-33

Okazaki National Research Institute (Japan), 154-155Omnibus Budget Reconciliation Act of 1990,25,66Organization of Economic Co-operation and Development

(OECD)basis of differences in biotechnology regulation in, 194EC biotechnology directives based on recommendations by,

191-195waste treatment R&D in countries of, 135-136See also individual member nations of

Organization of Petroleum Exporting Countries (OPEC), 122Orphan Drug Act

biotechnology products and, 91,92cost-containment and, 83, 84, 85intentions of, 40tax credits and, 66-67See also Pharmaceuticals

Ortho Biotech, 88FDA product regulation and, 79licensing deals by, 80

Oxford University, 160

Pacific Rim countries. See Newly Industrializing CountriesParis Convention for the Protection of Industrial Property, 206Patents

biotechnology protection under, 17-18,203-204,205,210-223

farmers exemptions to, 222-223harmonization of procedural requirements worldwide for,

18-19,23-24,203-204legislation affecting, 18-19,23-24,93piracy of U.S., 19,213-214plant protection using utility, 205requirements for, objectives of, and protection offered by,

203-204See also Intellectual property protection

Patent and Trademark Office, U.S. (FTO)application backlog effects, 16-17,212-124

Index ● 281

See also Intellectual property protection; PatentsPatent Cooperation Treaty (PCT), requirements of and rights

provided by, 206-207Personnel

brain-drain of experienced English biotechnology, 160shortage of trained bioremediation, 139

Pesticidesnonchemical, nonrecombinant, 102-103recombinant, 105-106regulation of genetically engineered, 173, 179, 181

Pfizer, Inc., 107Pharmaceutical industry, 7-16

acquisition activity in, 7-8,9, 10,54-59,85-87biotechnology used in, 73-94characteristics, 7,10, 81-82Japan’s, 85,86, 156multinational nature of, 81-82regulation of, 89-91strategic alliance use by, 88-89

Pharmaceutical Manufacturer’s Association (PMA),biotechnology-derived drug survey by, 75-78,79

Pharmaceuticalsapproval of biotechnology-based, 75,76-78cost-containment and, 83, 84, 85marketing, 81,85,86orphan drug status and price of, 84, 85patent term extension for, 93planned use of recombinant, 178-179price manipulation in Japan of, 156, 158See also Pharmaceutical industry

Philippines, 108Pioneer Hi-Bred International, 108, 109Planned introductions

criteria for risk assessment of, 179of genetically altered micro-organisms, 178-182, 183of plant pest derivatives, 179of transgenic animals, 182of transgenic plants, 182-183of vaccines, 178-179regulation of, 189See also Regulation

Plant breeders’ rights, 110,204-205Plant Genetic Systems

hybrid development by, 110transfer of insecticide resistant gene by, 106

Plant genome projects, 103,104Plant Patent Act of 1930, requirements for and protection under,

110,204Plant Pest Act (PPA), deliberate release regulation under, 179,

180Plant Quarantine Act (PQA), deliberate release regulation under,

179, 180Plant Variety Protection Act of 1970 (PVPA)

intentions of, 40, 110requirements of and protection under, 31,204-205

Policycategories of, and examples of national biotechnology R&D,

152-166national regulatory, 186-195options concerning industrial commercialization of

biotechnology for Congress, 21-25,41overview of biotechnological industrial commercialization,

13-19,31-32, 147overview of biotechnological R&D, 13-14, 147U.S. national, in a global environment, 166-167

Pollutioncontrol using biotechnological techniques, 129, 134See also Toxic waste

Poultry Products Inspection Act, 184Praxis Biologic

American Cyanamid’s takeover of, 57product marketing arrangements by, 80

Product License Application (PLA), 76Protein Engineering Research Institute (PERI), 153, 157,158Provisional Council for Educational Reform (Japan), 155Public Health Service (PHS)--(DHHS), 24Public Opinion of risks and ethics of biotechnology-related

R&D, 10,40, 112-113, 129, 136-137, 186, 187

Quayle, Dan (Vice President, U.S.) 176,177

Raab, Kirk, 56Recombinant DNA Advisory Committee (RAC), 173Regeneron Pharmaceuticals, 7Regulation

agricultural, 111bioremediation commercialization and, 138-139congressional options for developing industrial

biotechnology, 22-23of contained uses of micro-organisms, 177-178effect on competitiveness of, 14-16, 111, 195-196national policies for, 186-195pesticide, 103-104,173, 179,181pharmaceutical industry, 89-91planned release, 178-182, 183, 189State biotechnology-related, 180

Remet, 107Repligen, Inc., 89Research

associations (Japan), 157biotechnology-related product, 3-7,21-22,45-46,79,154,

155, 157,158congressional options for funding biotechnology, 21-22environmental applications of biotechnology, 131-132, 134-

135, 137, 139-140funding biotechnology, 45-68importance of Japanese cooperative, 157, 158Japanese search for access to foreign, 20microbiological mining, 131problems with bioremediation, 137regulation’s effect on locating facilities for, 16seed industry, 109-110types of, 31U.S. Government biotechnology, 3,19,20,21-22, 111, 131,

137, 150Research and development (R&D). See Commercialization;

ResearchResearch and Development Limited Partnerships (RDLPs),

biotechnology investment using, 53Research and Development Tax Credit, 24-25,64-67Research base

French, 159German, 160Japanese, 153, 155, 156


relative strength of European, Japanese, and United States, 20,40

Swiss, 160-161United Kingdom’s, 160

Resource Conservation and Recovery Act (RCRA), 138Restriction fragment length polymorphism (RFLP) analysis,

plant breeding using, 103, 104Rhone-Poulenc

diversification by, 124seed company acquisition by, 108-109

Risk assessmentsbiotechnological, based on similar technologies, 14See also Guidelines; Regulation

Roche Holdings, Ltd., acquisition of Genentech by, 56,82,89Rohm & Haas

diversification by, 123industrial enzyme production by, 121

Royol Dutch-Shell, diversification by, 124

San Diego, 31Sandoz, Inc.

diversification by, 124in-home biotechnology expertise by, 89intellectual property protection’s effect on R&D investment

by, 93seed company acquisition by, 109

Sanofi (France), 88Schering AS, 57Schering-Plough Corp.

acquisitions by, 57licensing deals by, 80

Science and Technology Agency (STA)--Japan, biotechnologysupport by, 153, 156

Seiko, human genone mapping research by, 156Shearson Lehman Hutton, survey of biotechnology use in

companies, 4849,50,51,58,59Showa Denko (Japan), 120Singapore

biotechnology policies of, 154biotechnology promotion in, 13-14regulation in, 14-15

Small Business Finance Corp. (Japan), 20, 154SmithKline Beckman, merger by, 82SmithKline Beecham PLC, licensing deals by, 80South Africa, biohydrometallurgy program in, 131South Korea, regulation in, 14-15Spain

regulation in, 14-15seed company subsidiaries in, 108

Standard industrial classification (SIC), 119Standards. See Guidelines; Regulation; individual agencies’Standard and Poors 500. See Financing; Wall StreetStart-up companies. See Dedicated biotechnology companiesStates

biotechnology regulation by individual, 188See also individual States

Stauffer Seeds, 109Stoneville, acquisition of, 109Strategic alliances

European companies use of, 58,59,60,61,89increased use of, 57-60types of and trends in, 8,57-67

U.S. pharmaceutical DBCs’ use of, 88-89Strategies. See PolicySubsidies

European Community agricultural, 161See also incentives

Superfund Amendments and Reauthorization Act (SARA), 138Supplementary protection certificate (SPC), 93Swanson, Robert, 56Switzerland

biotechnology infrastructure in, 21biotechnology policy of, 160-161pharmaceutical firms in, 81,82,83,85

Synergen, 124Syntex Corp., multinational nature of, 82System for Promotion of Exploratory Research for Advanced.

Technology (ERATO), 156, 158

T Cell Sciences, Inc., 89Taiwan

biotechnology promotion in, 13-14, 154regulation in, 14-15

Takeda, 153Tanox Biosystems, 89Tax Reform Act of 1986,24Taxes

congressional options for structuring coherent policiesconcerning, 24-25

R&D financing influenced by, 64-67Technology transfer

restructuring, 167U.S. policy concerning, 166-167, 168

Thailandfood exports by, 112seed company subsidiaries in, 108

Third-party payers,phannaceutical cost-containment and, 83-84Third World. See Developing countries; Newly Industrializing

CountriesTissue plasminogen activator (tPA)

FDA regulatory decision on, 90See also Pharmaceuticals

Toxic Substances Control Act of 1976 (TSCA), EPA regulationof micro-organisms under, 16,23, 179, 180, 181

Toxic Wastebiotechnology’s use in treating, 129cleanup costs for, 131, 139-140See also Pollution

TOyO Soda 156Trade secrets. See Intellectual property protection, 205Training, Japanese need for foreign, 20Transgenic animals, 183-186,214-216,217Transgenic plants, 105-107, 182, 183Tsukuba, Japan, 104

UCLA (University of California at Los Angeles), hybriddevelopment by, 110

Union for the Protection of New Varieties of Plants (UPOV), 24,207,208,217,218

United Kingdom (U.K.)biohydrometallurgy program in, 131biotechnology-altered baker’s yeast approved in, 107biotechnology infrastructure in, 21biotechnology policy in, 15,159-160,182, 193

Index ● 283

gene mapping work by, 104pharmaceutical industry in, 81,82,83,84,85R&D funding in, 83

united states (Us.)acquisition activity in, 85-89agricultural biotechnology applications in, 108, 112biohydrometallurgy program, 131biotechnology policy in, 14,15-16,152,161-167chemical industry in, 10, 122-123, 124commercialization trends in, 3, 19-20, 165cooperative research in, 164-167drug approval process in, 75,76-77,101environmental cleanup in, 131, 136financial situation of biotechnology companies in, 48-50,51historical view of commercial biotechnology in, 45-48intellectual property variety and protection in, 16-18, 19,93,

203-205patent policy in, 93,209-210pharmaceutical industry characteristics and trends in, 81,82,

83,85-89,93research funding in, 3,21-22,83, 111-112strategic alliances’ use in, 88-89university-industry research agreements in, 164-165, 167

Universitiescongressional options for improving industrial relationships

with, 24hybrid development by, 110relationship with industry of, 164-165, 167role of Japan’s national, 154-155See also individual universities

Upjohn Co., The, 89, 109U.S. Department of Agriculture (USDA)

basic research funding by, 3,21-22,83, 111field test estimate by, 112, 113PVPA administration b y , 1 0

Vaccines. See PharmaceuticalsVenture capital

financing in the United States, 3-6,7,39,50-51role of, in Europe and Japan, 40,51-53trends in availability to DBCs, 3-6,7See also Costs; Economics; Financing

Virus-Serum-Toxin Act, 178, 184Volvo, 109

wall Streetanalyses of biotechnology firms, 6,7,49-50effects of regulatory decisions on, 90See also, “Black Monday”

Watson, James D., 31Wellcome Foundation Ltd., The, 82Wisconsin, bST moratorium in, 102, 191World Intellectual Property Organization (WIPO), patent

harmonization effort by, 23-24,207,217-218,234World War II, 73Wyngaarden, James, 164

Xoma Corp., 79,84,85,89

Other Related OTA Reports

. Ownership of Human Tissues and Cells4peciai Report

OTA-BA-337, March 1987; 176p.GPO stock #052-003-01060-7; $7.50 per copyNTIS order #PB 87-207536

. Public Perceptions of Biotechnology

OTA-BP-BA-45, May 1987; 136p.NTIS order #PB 87-207544

● Field-Testing Engineered organisms: Genetic and Ecological IssuesApecial Report

OTA-BA-350, May 1988; 160p.NTIS order #PB 88-214101

● U.S. Investment in Biotechnolog+i’pecial ReportFree summary available horn OTAOTA-BA-360, July 1988; 304p.NTIS order #PB 88-246939

● Patenting L@+$pecial Report

OTA-BA-370, Apti 1989; 204p.GPO stock W52-003-01 137-9; $8.50 per copyNTIS order #PB 89-1% 612

● Commercial Biotechnology: An International AnalysisOTA-BA-218, January 1984; 616p.NTIS order #PB 84-173608

● Impacts of Applied Genetics: Micro-organisms, Plants, and Animals

OTA-HR-132, April 1981; 332p.NTIS order #PB 81-206609.

● Mapping Our Genes: GerlOme PrOjectsaOw Big? How Fast?

OTA-BA-373, Apd 1988; 232p.NTIS order #PB 88-212402

NOTE: Reports are available from the U.S. Government Printing Offk, Superintendent of Documents, Dept. 33,Washington, DC 20402-9325, (202) 783-3238; and/or the National Technical Information Service, 5285port Royal Road, Springfield, VA 22161-0001, (703) 487-4650.

Biotechnology in a Global Economy

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