Indian Biotech Industry Survey

8/8/2019 Indian Biotech Industry Survey

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Ind ian Bio tech Indus t ry SurveyBiotech Industry turnover zooms to Rs 1,830 crore ($400 million) in 2002-03

• Biocon, Panacea Biotec, Wipro, Wockhardt, and Haffkine the top five players.

• Biotech employs 6,400 people, up by 64 per cent

• Exports account for 53 % at Rs 875 crore

• Investments top Rs 600 crore in 2002-03

• 39 % companies are based in the South

• Industry expects 25-30 % growth and double in two years

The first ever survey of the biotech industry in India, conducted jointly by BioSpectrum and ABLE(Association of Biotechnology Led Enterprises) , reveals that the total biotech industry size during2002-03 was Rs 1,830 crore. This figure takes into consideration the biopharma, bioagri and bioindustrialproducts, bioinformatics, and the clinical trials and contract research services market into account. Thisdoes not include the hybrid seeds and the sale of equipment (the suppliers to the biotech industry).Including the suppliers business to the industry sizing, the total grows to Rs 2,305 crore.

"With this BioSpectrum -ABLE Survey, we hope to give the biotech industry in India a shape,size and an identity,” said BioSpectrum Editor-in-Chief , Mr Shyam Malhotra.

Bangalore-based Biocon India is the country's largest biotech company with a turnover of Rs 255 crore.The second and third spots were taken by Panacea Biotec of New Delhi ( Rs 169.88 crore) and WiproHealth Science, Bangalore ( Rs 98.55 crore). The survey lists India's Top 50 biotech companies byrevenue and carries details of over 120 of the country's most promising biotech companies.

The industry in 2003-04 expects to register 25-30 percent growth and the investments are expected todouble in the next two years.

"Investment in Biotech continues to remain inadequate, Venture funding is scarce,infrastructure is expensive and regulatory regimes are deficient. Despite this difficultenvironment, entrepreneurs are bravely setting up new venture signifying the intrinsic belief inBiotechnology being the business of the future,” commented ABLE President and Biocon

Chairperson Ms. Kiran Mazumdar-Shaw. " The BioSpectrum-ABLE Index will now generatereliable national data with respect to the Biotech sector and will allow a systematic tracking of the various sub-sectors that constitute the biotechnology industry.”

Out of the total market of Rs 1,830 crore, the biopharma sector accounted for 70 percent of the marketshare, with total sales touching Rs 1,275 crore. Vaccines, therapeutics, diagnostics and animal health careproducts form the key products. Bioindustrial segment, consisting of enzymes, organic amino acids, andyeast and yeast-based products, accounted for 13 percent market share with total sales in excess of Rs235 crore. Bio services--clinical research, contract research and contract manufacturing--accounted for 7percent of the market share with Rs 135 crore in revenues. The bioagri market, consisting of Bt cotton inthe seeds category and biopesticides and biofertilizers, with a total share of 6 percent was Rs 110 crore.The Hybrid seeds was estimated at about Rs 180 crores . The Bio-IT market was estimated at Rs 75 crore.

The Biotech pie changes significantly if the supplier's market is taken into account. It is the second largestmarket after biopharma with total sales of Rs 475 crore.

Interestingly, exports have been a major factor contributing to the growth of the industry. The totalexports without considering the suppliers segment was Rs 975 crore, while the domestic sales stood at Rs855 crore. Exports figure for 53 percent of the total market share as the biopharma, bioservices, andbioinformatics markets have seen significant exports. While the biopharma market has a ratio of 52:48 infavor of the exports figure, the bioservices and informatics market account for close to 85 percent share inexports.

The total investment in the industry in 2002-03 was Rs 635 crore, up from Rs 505 crore the previous year.



Bulk of the investment has gone into setting up the infrastructure or for expansion, followed by R&D. Theinvestments are expected to double in the next two years. These two account for about 80 percent of thetotal investments. The total investment on infrastructure activity was close to 40 percent of the totalinvestments and R&D accounted for 20 percent. In terms of percentage share of the total sales, theinfrastructure spending was 13.8 percent, and R&D was 7 percent.

The manpower employed during the year grew by about 68 percent over that in the previous year. Thetotal manpower in the industry is estimated at 6,400. The same during 2001-02 was 3,800. Interestingly,the sales and marketing teams have been beefed up. The R&D manpower has grown over 74 percent,while the sales and marketing professionals have grown by 51 percent. Women form a significant part of the workforce in research intensive companies. They account for nearly 30 percent of the employees inthis sector. However, biotech companies, which are primarily sales and marketing driven, are exceptionsto the general trend of biotech companies having more women employees. Many of these companies arekeen to induct women even in marketing, sales and technical functions, which require extensive traveling.Also, a large number of companies said they were actively pursuing steps to increase the diversity of theworkforce.

The top 10 companies in the biotech industry including the suppliers include:

Rank CompanyRevenue*

(Rs. Crore)1. Biocon India 255.002. Panacea Biotec 169.883. Wipro HealthScience 98.554. Wockhardt 74.00

5.Haffkine Bio-Pharmaceutical

72.90

6. Eli Lilly 71.317. Nicholas Piramal 70.648. Krebs Biochem 64.169. Bharat Serums 58.00

10. Indian Immunologicals 55.31*Note: BioSpectrum estimates

The biotech activities have been well spread across the country. The North, South and the West regionsare the prime ones where the activities have been concentrated. Out of the total market of Rs 2,305crore, South-based companies account for nearly 39 percent of the business done, while West accountsfor 32 percent, and the North for 29 percent. The reason for South being the number one is obvious.Biocon is South-based and is the single largest contributor. With total sales of Rs 255 crore, the companyis almost 1.5 times larger than the #2 company, Panacea Biotec, whose total biotech business was aboutRs 169 crore. Further detailed representation shows that among the top 50 companies, 19 are fromSouth, 17 from West and 14 from North. The third biggest company Wipro is also based out of South.

About the survey.BioSpectrum, in association with ABLE, sent out detailed questionnaires to the companies in the biotechfield in July and August. Despite the biotech universe being widespread and the definition of biotech notclear, the industry sincerely responded to the survey, telling us the extent to which they deal in biotech.Various surveys so far have talked about the presence of some 160 companies in the biotech sector. TheBioSpectrum-ABLE survey got an overwhelming response from over 100 companies. We have profiled over120 active companies.BioSpectrum: Launched in March 2003, BioSpectrum is India's first national business magazine onbiotechnology. It is being published by CyberMedia, South East Asia's largest technology publishingcompany with leading brands such as DATAQUEST, PC Quest, DQ Week, Living Digital, DQ Channels India,Voice& DATA and CIOL. BioSpectrum is published from Bangalore.ABLE: ABLE, Association of Biotechnology Led Enterprises is the national body and collective face of theIndian Biotech Industry. Its mandate is to be the forum that generates a symbiotic interface between the



industry, the government, academic & research bodies, and domestic and international investors. ABLEembodies and represents the interests of all stakeholders of Biotechnology in India.

http://www.ableindia.org/html/resources/survey.html

Bangalore , August 11: India's fledgling biotechnology industry registered a 39 percent growth inrevenues in 2003-04 to reach Rs 3,265 crore ( $ 705 million). And the number of companies in thebiotechnology sector has grown to 235 from about 150 in the previous year, according to the 2ndBioSpectrum-ABLE Biotechnology Industry Survey.

"Biotech is recognized the world over as technology of the future. The Indian biotechnology industry isgathering momentum. With revenues of over $700 million (Rs 3,265 crore) in 2003-04, the fledglingbiotech Industry, despite all the hurdles in its path, is on the way to cross the psychological barrier of $1billion in the current year. And if the momentum continues, the industry will reach its goal of $5 billion in2010," emphasized Kiran Mazumdar-Shaw, President, ABLE (Association of Biotechnology-Led Enterprises)and CMD, Biocon Ltd.

The first BioSpectrum-ABLE Survey in 2003 had estimated the industry size to be Rs 1,840 crore whichwas later revised to Rs 2,345 crore. There were about 150 companies in this sector in 2002-03.

During the year, two leading biotech groups--Serum and Biocon--surpassed the Rs 500 crore mark and

accounted for a third of the industry size. While Serum was the largest biotech group with revenues of Rs555 crore, Biocon was a close second with Rs 549 crore from Biocon Ltd, Syngene International, andClinigene.

Biocon Ltd held on to its No.1 spot in the BioSpectrum Top 20 ranking for the second consecutive yearwith biotech revenues of Rs 502 crore. Pune-based Serum Institute of India Ltd, part of the PoonawallaGroup, is the largest exporter of vaccines and immuno-biologicals from India and was ranked No.2 withrevenues of approximately Rs 491 crore from the sale of biotechnology products in 2003-04.

Panacea Biotec, New Delhi, was the third largest company with Rs 149 crore of biotech product sales.While Nicholas Piramal, Mumbai, was No. 4, followed by Novo Nordisk at No. 5. Their respective biotechbusinesses stood at Rs 130 crore and Rs 110 crore. Interestingly all these five companies grossed inexcess of Rs 100 crore in sales. With total biotech revenues of Rs 1,382 crore, the top five aloneaccounted for about 42 percent of the total market share.

"For this year's analysis, we considered biopharma products under four broad categories of vaccines,therapeutics, diagnostics and others like statins. Products made from fermentation or animal cell culture(not animal extracts) and plant cell culture (not plant extracts) were taken into account. In the agrisector, transgenic crops, biopesticides and biofertilizers were considered along with biomarkers and agriresearch services. The other sectors considered included bioinformatics, bioindustrial mainly consisting of enzymes and bioservices mainly falling into the clinical trials and custom research, informed BioSpectrumChief Editor, E Abraham Mathew.

"Though the overall industry grew by 39 percent. Different subsegments within the sectors had differentrates of growth. The biopharma sector is the largest sector in the country with a total market share closeto 76 percent. The sector has been led by strong growth in the statins market and by Biocon. The vaccinesbusiness is the largest contributor to the biopharma sector. It accounted for almost 28 percent of themarket share. While the exports for the human health vaccine manufacturers nearly remained the same,

the animal health care segment grew by about 25-30 percent," added N Suresh, Editor, BioSpectrum.While the total biotech exports accounted for 55.65 percent share of the total biotech sector. The domesticbusiness accounted for 44.35 percent market share. BioPharma sector accounted for the largest share of the exports. Its share was estimated in excess of 76 percent. Vaccines and statins have largely beenexported, while the therapeutic products have been largely responsible for the domestic business.

The next biggest sector was the BioServices industry. With total sales of Rs 275 crore, this sectoraccounted for 8.42 percent of the total biotech market. It witnessed over 100 percent growth. Companieslike Quintiles, Syngene and SIRO Clinpharm are doing extremely well.





Fiscal 2003-04 has clearly ushered in a new era for the bioagri sector. Bt cotton was a major success. Theend consumers have accepted Bt technology and the demand outgrew the supply, resulting in thespawning of illegal or fake Bt cotton seeds. Mahyco's Bt cotton seeds, which were the only permittedvarieties for cultivation, were cultivated in over 92,000 hectare of land.

The biocluster in the Western region is the clear leader among the regions. Interestingly, though West is

leading the biotechnology industry in terms of revenue, South region which houses over 60 percent of thebiotechnology companies is doing well in terms of the growth rate over the previous year.

The South is growing at the rate of 46 percent while West is growing at the rate of 41 percent. This ismainly because of the good working environment, government support and initiatives for the growth of the industry.

The manpower in the biotech sector grew by over 42 percent to grow to 9,100. The biotech companiesthis fiscal would end at about 11,000. And the investments have climbed up by 25.99 percent to Rs 635crore during the year. In 2004-05 this is forecast to grow by 33.86 percent to Rs 850 crore.

BioSuppliers market grows to Rs 820 crore in FY 2004"The BioSuppliers market was estimated separately. The total industry grew from Rs 561.40 crore in FY2003 to Rs 820 crore in FY 2004. It is predominantly an importer's market, with domestic sales accountingfor more than 97 percent share of the total industry size. Most of the leading global suppliers have theirpresence in India either directly or indirectly," added Suresh. The top five companies were AgilentTechnologies, Becton Dickinson, Thermo Electron, Lab India and Millipore. These five alone accounted for40 percent of the total suppliers market, with a total business of Rs 343 crore. This sector too expects togrow by about 40 percent in 2004-05.

About BioSpectrumBioSpectrum, published from Bangalore as India's first exclusive magazine on biotechnology, waslaunched by CyberMedia in March 2003.

CyberMedia is South Asia's first and largest specialty media house, with nine publications (includingDataquest and PCQuest) in the infotech, telecom, consumer electronics and biotech areas; and a mediavalue chain including the internet (www.ciol.com), events and television. The group's media servicesinclude market research (IDC India), content outsourcing, multimedia, gaming, and media education.

For more details, contact www.biospectrumindia.com .About ABLEThe Association of Biotechnology-Led Enterprises was launched in April 2003 in Bangalore to act as theforum to represent India's unique biotech environments. ABLE acts as the forum to generate a symbioticinterface between the industry, government, academic and research bodies, domestic and internationalinvestors.

For more details contact, www.ableindia.org

BioSpectrum-ABLE Top 20 Biotech Companies

Rank CompanyBiotech Revenue*(Rs. Crore)

1 Biocon 502.00

2Serum Institute of India

491.00

3 Panacea Biotec 149.00

4 Nicholas Piramal 130.00

http://www.biospectrumindia.com/

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5 Novo Nordisk 110.00

6VenkateshwaraHatcheries

88.00

7 Wockhardt 84.00

8 GlaxoSmithKline 80.00

9 Bharat Serums 79.68

10 Eli Lilly and Company 67.40

11 Novozymes 65.00

12 Quintiles Spectral 62.55

13 Krebs Biochemicals 56.88

14IndianImmunologicals

56.70

15 Zydus Cadila 55.00

16 Mahyco Monsanto 54.00

17 Shantha Biotechnics 40.00

18 Syngene International 38.48

19 Biological E 38.37

20 Span Diagnostics 35.62

Total 2283.68

http://www.ableindia.org/html/resources/survey2_index.html

Top 10 Biotech Companies in IndiaBiotech industry is one of the fastest growing knowledge-based industries in India. It also has got thepotential to play a pivotal role in the rapid economic development of the country. Due to numerousadvantages that the country has such as skills, knowledge, research & development (R&D) facilities,and cost effectiveness, a number of top biotech companies have started their operations in this country. Withcomparative advantages and the presence of some top companies in the market, India has got the potential to come





out as one of the key players in the global biotech sector. Currently it holds 2% of the global market share. The top 10biotech companies in India play an important role in the development of the biotech industry in the country.

Biotech Industry in India

There are a number of biotech companies in India. In 2008-09, the Indian biotech industry had a total turnover of US$

2.51 billion comparing to US$ 2.13 billion during 2007-08.

The segment-wise turnover (in 2008-09) was as below:

Segment Turnover (in US$ million)

Biotech Sector (Overall) 2510.00

Bio-pharma 1600.00

Bio-agri 311.28

Bio-industry 99.19

Bio-informatics 45.65

As per the report of CII (Confederation of Indian Industry) and KPMG, the biotech sector in India is estimated to be of US$ 5 billion by the year 2010. A number of companies are coming up to reap the conducive market environment.

List of Top 10 Biotech Companies in India

The top Indian biotech companies contribute a lot to the overall biotech sector of the country. The top 30 companiescontribute more than 50% of the total revenue of the industry. Following is the list of top 10 biotech companies inIndia.

Serum Institute of India Ltd.

• Biocon Ltd• Panacea Biotec• Rasi Seeds• Nuziveedu Seeds• Novo Nordisk• Shantha Biotech• Bharat Biotech• Indian Immunologicals Ltd• Syngene International

Serum Institute of India Ltd

Name Serum Institute of India Ltd



Year of Establishment 1966

Segment Bio-pharma

Revenue (2008-09) (in US$ million) 245.08

Biocon Ltd

Name Biocon Ltd


Segment Bio-pharma / Bio-industrial / Bio-services


Panacea Biotec

Name Panacea Biotec


Segment Bio-pharma


Rasi Seeds

Name Rasi Seeds


Segment Bio-agri




Nuziveedu Seeds

Name Nuziveedu Seeds


Segment Bio-agri


Novo Nordisk India

Name Novo Nordisk India


Segment Bio-pharma


Shantha Biotech

Name Shantha Biotech


Segment Bio-pharma


Bharat Biotech

Name Bharat Biotech


Segment Bio-pharma




Indian Immunologicals Ltd

Name Indian Immunologicals Ltd


Segment Bio-pharma


Syngene International

Name Syngene International


Segment Bio-services


http://business.mapsofindia.com/india-company/top-10-biotech-companies.html

SWOT Analysis of Biotech Sector

STRENGTHS

Highly skilled and qualified scientific manpowerGovernment taking initiatives to support biotech sector

Capability in handling fermentation based compounds, extraction of high quality products using plantand animal parts.

Recombinant DNA technology, plant breeding techniques, plant cell/tissue culture, bioprocessengineering, use of cell/microbial culture techniques, etc.

Setting up of effective and efficient biotech enterprises.Infrastructure in manufacturing processing equipments and bio-reactors

WEAKNESSES


http://ext.tyroo.com/click2,AAAAAA8OFQD1DGcAAAAAACsUGwAAAAAAAAAAAAcAAAAAAAAAAAAAAG.tIwAAAAAALvIjAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAgAAAAAAZEKVfSsBAAAAAAAAADAAALccmwAAAAAAAAAAAAAAAAAIBgAAAAAAAMEAAAAAAAAAgOVBVQAAAAA=,,,




Administration of resources supporting biotech research and developmentLack of awareness regarding biotech practices

OPPORTUNITIES

Accelerated growth of biotech industryIncreased opportunity of entrepreneurial activityPopulation and ecological diversity

THREATS

Lack of advanced biotechnologies and productsLack of public awareness about biotechnology issuesDifference between theory and practice in R&D

http://www.naukrihub.com/india/biotechnology/overview/swot/

India's biotech industry emerging as world innovator,collaborator, competitor

Impacts on drug prices, global health, already felt; leading north/south biotech firms tomeet in Toronto, May 2-4

India’s health biotech firms are emerging as a major global player, with growing means and know-howto produce innovative as well as generic drugs and vaccines at costs small relative to those of giantWestern firms, according to ground-breaking Canadian research published April 9.

The budding of an innovative Indian biotech sector holds major implications for the global industry andfor improving both health and prosperity in the developing world.

“India is innovating its way out of poverty,” says co-author Peter A. Singer, MD, of the McLaughlin-Rotman Centre for Global Health (University Health Network and University of Toronto). “With amassive and increasingly well-educated workforce, India is poised to revolutionize biotechnology justas it did the information technology industry.

“India’s biotech sector is like a baby elephant – when it matures, it will occupy a lot of space. Thebiotech industry is globalizing rapidly and the impact of India’s market entry and contribution toimproving world health is potentially huge.”

However, Singer and co-authors Abdallah S. Daar, MD, Sarah E. Frew, PhD, Monali Ray, Rahim Rezaieand Stephen M. Sammut, MBA, warn that the allure of world market profits may divert much neededIndian research attention away from treatments for specific developing country illnesses, unlikely tobe created by Western-based firms. “India needs to take steps to avert this outcome,” they say.

Published April 9 by Nature Biotechnology, the authors say their study of 21 home-grown firms shedsunprecedented public light on India’s private sector biotech efforts and reports “a sector preparing notonly for future growth but also, in some cases, for developing innovative products for global markets.”

It is the first known “detailed, independent, publicly available research” revealing productdevelopment capabilities and strategies used by India’s private firms to survive and grow amiddeveloping country challenges.

It also recommends ways India and others in the developing world can help domestic biotech firmssucceed.

The paper helps set the stage for a Toronto conference May 2-4 at which 20 to 30 North Americanbiotech firms will convene with more than 25 similar firms from India, China, Brazil and Africa –thought to be the biggest-ever assembly of emerging market biotech companies. The goal: toencourage more biotech success and innovation in developing countries and North-South as well asSouth-South partnerships to address pressing global health problems.





Impacts on drug prices already felt

According to the paper: “The global market for … generic biopharmaceuticals is expected to increasesignificantly in the next few years as several ‘blockbuster’ drugs lose patent protection. Indiancompanies appear well positioned to leverage their cost-effective manufacturing capabilities to cornersome of this market share and compete on a global scale.”

The paper says the 1997 launch of hepatitis B vaccine Shanvac-B, developed by Shantha Biotechnicsof Hyperabad, helped cause a 30-fold domestic price reduction – from about $15 for a comparableimported product to roughly $0.50 – and credits Shantha’s innovative, efficient manufacturing processand well as subsequent local competition.

Shantha today supplies nearly 40% of the UN Children’s Fund’s (UNICEF) global Hep-B vaccinesupplies, distributed in Africa, Latin America and elsewhere. Says Dr. Singer: “Think about the impacton health of supplying all that vaccine to UNICEF at those prices.”

Shantha also priced its recombinant interferon alpha (IFN-á) product Shanferon at about $6.50,undercutting the previous market price for a comparable imported drug by 75%.

The Serum Institute of India (Pune), meanwhile, has become the country’s largest domestic vaccinesupplier and exporter, its products reaching 138 countries. The company claims to be the world’slargest measles vaccine manufacturer and, through UNICEF and the Pan American HealthOrganization, helps immunize half the world’s children against several diseases.

Other examples of a surging Indian health biotech industry: New Delhi–based Panacea Biotec suppliesoral polio vaccine to the Indian government and to UNICEF, while the Biocon firm of Bangaloredeveloped a proprietary process for manufacturing human recombinant insulin.

Even before Biocon’s product (Insugen) entered the domestic market, international competitorsreduced the Indian price of their products by nearly 40%, the paper says. Biocon priced its producteven lower still and says Insugen remains India’s most affordable human recombinant insulin product.

“If the above trend continues, the cost of biopharmaceuticals produced by both domestic and overseassuppliers will continue to decrease as more domestic companies manufacture these products locally,” according to the paper.

It says many Indian firms are scaling up to manufacture such drugs as insulin and interferon, theirfacilities “refurbished or built in accordance with the standards of international regulatory agencies,such as the US Food and Drug Administration (FDA), European Medicines Agency (EMEA) and theWorld Health Organization (WHO), to facilitate access to international markets not only for biogenericsbut also novel protein products currently in their pipelines.”

“Indian companies are likely to accelerate the development of products for sale in US and Europeanmarkets, particularly the biogenerics for which they have developed significant manufacturingcapacity,” the paper says.

Indian firms are actively pursuing drugs to combat many medical problems, including tuberculosis,encephalitis, malaria, rotavirus, rabies, avian flu, Hepatitus-B, diabetes, cancer, heart disease,cholera, HIV-HCV, tetanus, meningitis, measles and anemia. Other strong areas of interest includecombination tests for various medical conditions, as well as antivirals and nutriceuticals.

It adds that India’s domestic firms increasingly need to offer salaries competitive with Western firmsto retain talented personnel, potentially impacting the domestic labor pool and research strategies.This trends “may put further pressure on margins of domestic products, and may push companies toshift focus to higher-margin products and services for Western markets.”

North-South collaborations

The paper says some Indian firms use services contracts with overseas firms to fund their operations,develop commercialization capabilities and access valuable international technology and expertise.Services provided include R&D, clinical trials and manufacturing. Bharat Biotech International, forexample, is the first developing country firm to manufacture a foreign proprietary vaccine product. Itis contracted by the U.S. Wyeth Company to produce its Haemophilis B (Hib) vaccine.

Multi-national corporations increasingly conduct clinical trials in India and rely on Indian contractresearch organizations to manage these trials. A Bangalore firm, Clinigene, is the first in India with a



lab certified by the College of American Pathologists, conducting trials for Merck and Pfizer (USA),AstraZeneca (UK) and others.

Notes co-author Abdallah Daar, MD, of the McLaughlin-Rotman Centre for Global Health: “It will bevital to the industry that Indian companies expanding their capabilities in clinical trials managementpay close attention not only to good clinical practice guidelines, but also to bioethical principles, toprovide a high level of care and protect the rights of patients.”

R&D alliances between Indian and Western companies have just begun and may be affected byassumptions – correct or incorrect – about the expertise and competence of workers at Indian firms,the paper says.

The paper notes too that major Western pharmaceutical firms, such as Novartis, have recently createdtheir own research facilities in India.

Indian biotech at crossroads

Indian biotech is “at a crossroads,” the authors say, and requires support to maintain it’s originaldomestic public service orientation.

“It must not only address the significant health needs of its domestic population, but also positionitself to take advantage of the often more profitable global marketplace. The country’s health biotechcompanies operate in close proximity to the shocking disparities in health that plague our globe today.Although these firms are uniquely suited to address these needs, they require financial and political

support before they will commit to doing so.” India’s health system is being hit with a ‘double burden’ of communicable and non-communicablediseases, as basic care improves and the country’s middle class grows, according to the paper.

In 2003, 5.1 million Indians had HIV/AIDS, over 3 million had tuberculosis and 1.8 million hadmalaria. Approximately 32 million Indians were diabetic in 2000, a number expected to reach 80million by 2030.

The WHO predicts that by 2015 nearly twice as many deaths across all ages in India will be due tochronic diseases than the combined toll of communicable diseases, maternal and prenatal conditions,and nutritional deficiencies.

“Historically, Indian companies have been the principal providers of medicines and vaccines for theIndian population, enabled by domestic talent and patent laws that protected processes but notproducts,” the paper says.

Revisions to India’s intellectual property regime, effective Jan. 1, 2005, offering patent protection forproducts as well as processes, have encourged innovative domestic private sector research programs,the researchers found.

In general, Indian firms are at a relatively early stage in their innovative R&D programs and have “yetto produce a truly innovative health product with the stamp ‘Made in India’,” the authors say.

However, “it isn’t a question of if but when drug product breakthroughs will start arriving from India,” says co-author Sarah Frew.

She says many Indian biotech companies were founded with the purpose of addressing specific localhealth needs.

“These were often non-innovative products developed with an innovative process and severalcompanies interviewed had success with this business model – both in terms of generating profits andin addressing local needs,” she says.

“Global health authorities want to take advantage of the capabilities of these firms to develop productsas well as the social responsibility mandate on which these firms were founded to encourage them todevelop products for so-called ‘neglected diseases.’

“We argue that yes, the capabilities are there, but if these companies are not provided political andfinancial commitments to develop products for these diseases, they too will redirect their focus todeveloped markets to stay alive.”

The paper suggests India’s government consider identifying a few priority disease areas and create adedicated fund for commercialization of products related to them.



Barriers to development

Indian biotech executives cite acute risk-aversion among Indian bankers and investors as a barrier toinnovation. Says one official: “Early-stage funding for a company that wants to do pure research andgo to the market six or seven years later does not exist. There is no money for such a business plan.”

Other barriers to growth identified:• A poorly coordinated patchwork of Indian regulatory agencies and a slow, confusing approval

process that delays health product commercialization;• A lack of expertise among officials in dealing with biologicals;• A shortage of advanced training programs and scarcity of qualified personnel;• The high cost of distribution in rural areas;• Little entrepreneurial ambition among Indian academics in the biotech sector (resident or

returning Indian scientists founded only 4 of 21 firms surveyed).

The paper says the Indian government is ramping up funding and fiscal initiatives significantly to helpgrow its biotech sector. The Department of Biotechnology’s budget quadrupled in six years, fromabout $30 to $120 million between 1999 and 2005. And the government has promised to nearlydouble its science budget – from 1.1% of gross domestic product in 2005 to 2% by 2007.

Fiscal incentives include relaxed price controls for drugs, removal of foreign ownership limits, subsidieson capital expenses and tax holidays for R&D spending.

Other lessons learned

Many start-up firms entered via vaccine markets for which significant local expertise existed andcompetition from abroad was limited.

Many resourcefully explored various financing opportunities from both domestic and internationalsources. Often they grew without surrendering much equity, adopting a hybrid business modelwhereby early revenues were reinvested to expand product and/or service portfolios and relying onproject-specific financing from external governmental and nongovernmental agencies.

Successful firms also established and maintained collaborations and partnerships with public andprivate organizations in India and abroad, establishing global presence through joint ventures withforeign firms or by setting up their own subsidiaries abroad

Finally, several Indian firms are becoming more competitive by patenting products and technologiesglobally.

“Most people think only of information technologies as the driver behind India’s economic emergencebut a lot of innovative research is underway in biotech and other life sciences as well,” says Dr. Daar.

“This study documents for the first time what is happening at the individual biotech company level.”

Recommendations for biotech development in India• Harmonize the pharmaceutical regulatory system into one regulatory agency and ensure

adequate training for regulatory personnel.• Increase training programs in advanced biotech;• Ensure translation of initiatives in the draft Biotech Strategy into policies that increase

effective collaborations between public and private institutions and encourage academicscientists to pursue entrepreneurial ventures to commercialize research.

• Create a favorable and enabling financial environment for enterprise creation and privatesector development, including support of early-stage research and product development.

• Identify national priorities for public health and use a targeted funding approach to ensuredevelopment of products and services that address local health needs.

• Improve public health infrastructure and/or give incentives to private firms to developinnovative distribution strategies.

###



Research funders: Genome Canada through the Ontario Genomics Institute, the RockefellerFoundation and BioVentures for Global Health. In-kind contributors are listedat www.geneticsethics.net

Mobilizing the Private Sector for Global Health Development (May 2-4 2007, MaRS Discovery District,Toronto)

Organized by the McLaughlin-Rotman Centre, Program on Life Sciences and Global Health at theUniversity of Toronto, this three-day conference convenes leaders from the global health communityand executives of biotechnology firms from India, China, Brazil, South Africa, Canada, and the UnitedStates.

Opening day discussions will center on innovative business and financial strategies for developinghealth products developing countries need. Days two and three will serve primarily as a partneringopportunity, to foster networking, information exchange and learning.

For moreinformation: www.utoronto.ca/jcb/genomics/documents/MCR_CompanyInvitation_March13.pd f

The McLaughlin-Rotman Centre for Global Health, Program on Life Sciences, Ethics and Policy is basedat the University Health Network / McLaughlin Centre for Molecular Medicine at the University of Toronto.

Created in 2001 and led by Professors Abdallah Daar and Peter A. Singer, the program’s mission is to

harness and foster innovative technology for global health equity, optimizing its benefits andminimizing social risks.

For more information: www.geneticsethics.net

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2. Biotechnology: Generation, diffusion, and policy2.1 Introduction2.2 The generation of biotechnology: Invention and innovation2.3 Economic effects of biotechnology2.4 Implications for the third world2.5 Recent additions to the literature2.6 Towards a general research agendaAcknowledgementsNotesReferences

Annotated bibliographyFor further reading

Martin Fransman

2.1 IntroductionLike new biotechnology itself, the study of biotechnology by social scientists is still inits infancy. While there is a wide consensus among governments, firms-both large and

http://www.geneticsethics.net/

http://www.utoronto.ca/jcb/genomics/documents/MCR_CompanyInvitation_March13.pd



http://www.eurekalert.org/pub_releases/2007-04/pols-ibi040107.php






http://www.eurekalert.org/pubnews.php











small, new and old-and scientists and technologists that biotechnology will have atleast as broad an impact in the future as microelectronics and information technology,its potential has yet to be realized. This makes its study both interesting anddangerous. This follows from the great degree of uncertainty that is present in anynew field of technology in the early stages of its development, and particularly aradical technology like biotechnology that will impact a broad range of products,

processes, and industries.Economists of different conceptual persuasions agree that changes in technology canhave a major economic impact. As we have seen in Chapter 1, Schumpeter (e.g.,1966) in formulating his view on technological change and its economic effects,distinguished between invention, innovation, and diffusion. In the caseof invention the ideas (sometimes embodied in material artifacts) that form the basisof the subsequent new technology are formulated. These ideas are used later to

produce and sell new or improved products, processes, and services: that is, toinnovate. In earlier work Schumpeter emphasized the role of the entrepreneur, whoseizes the new body of knowledge made available by the invention process andtransforms it into commercial output. Later, however, as corporations themselvesgrew in size and economic significance, Schumpeter increasingly stressed theimportance of the formally organized search for new commercially exploitableknowledge embodied in the research and development (R&D) activities of thesecorporations. To analyse the economic impact of new inventions and innovations,however, Schumpeter pointed out that it is necessary to understand the diffusion

process whereby new products, processes, and services are adopted and used by othersin the economic system. The more widely diffused an innovation, all other thingsequal, the greater its effects.Although writing from a perspective of neoclassical economics and emphasizingdifferent secondary causal mechanisms, Hicks (1981) also sees invention/innovationas the 'mainspring' of economic growth. In his Nobel Prize address, Hicks analysedthe process whereby invention-innovation provides an 'impulse' to the economy,raising output and thereby influencing wage rates and corresponding rates of profit.Subsequently, changes in relative factor prices induce factor substitution as well assecondary innovations, which he calls the 'children' of the initial impulse. Thesesecondary effects also influence the ultimate equilibrium into which the economicsystem settles once the consequences of the initial impulse have been worked out.The aim of this chapter is to examine critically the literature that analyses thesocioeconomic implications of biotechnology. In doing so, the frameworks suggested

by Schumpeter and Hicks will prove useful as a starting point. However, as we shallsee, the framework will have to be modified and elaborated.

Biotechnology may be defined as 'the use of biological organisms for commercialends'. According to this definition, biotechnology is almost as old as humancivilization, as is clear from activities such as brewing of beer, fermentation of wine,and production of cheese. Since the early 1970s, however, biotechnology has received



a significant boost from the introduction of a number of powerful new techniquesknown collectively as genetic engineering . These techniques (which will beconsidered in greater detail later) allow biotechnologists to alter the genetic structureof organisms by adding new genes that allow the organism to perform new functions.Genetic engineering together with other ways of manipulating and using biologicalorganisms has provided a potent new set of possibilities with profound implicationsfor a wide range of commercial activities, from agriculture to pharmaceuticals,chemicals, food and industrial to processing, and mining.The potentially wide-ranging applicability of biotechnology invites comparison withmicroelectronics, and information technology, and this theme will be taken up in moredetail later in this chapter. Certainly both sets of technologies share a number of important characteristics. Both consist of an interdependent cluster of technologieswhich jointly have a significant nonmarginal impact, modifying old products and

processes and producing new ones in a large number of economic sectors. Both sets of technology are particularly worthy of examination as a result of the wide-rangingimpulse, to use Hicks's terminology, that they provide for economic and socialchange. While biotechnology, strengthened relatively recently by the powerful newtechniques mentioned above, lags behind microelectronics and informationtechnology in terms of its current effects, there are some who believe that it will haveat least as broad an impact as electronics in future years. Their arguments arediscussed in more detail below.In examining the relationship between biotechnology on the one hand and theeconomy and society on the other (with causal factors operating simultaneously in

both directions), the first task is to identify the major questions that must be posed as a prelude to suggesting appropriate ways of analysing them. Here the frameworks putforward by Schumpeter and Hicks provide a useful starting point.Since invention initiates the impulse and its effects, it is worth beginning by delvingmore deeply into the inventive process and its determinants. In the case of

biotechnology, and particularly genetic engineering, this involves examining thescientific base which constitutes its backbone. To understand the contribution made

by science to biotechnology it is necessary to examine the relationship between science, technology, economy , and society . Two opposing arguments serve toclarify the extreme positions. According to the first argument, science constitutes anautonomous subsystem within the broader socioeconomic system, operating accordingto its own internally generated determinants (for example, the objectives and relativedegrees of influence of scientific institutions and scientists). Conversely, the secondargument denies the autonomy of the science subsystem, holding that scientificactivities are themselves shaped by technological, economic, and social determinants.The importance of these arguments becomes clearer when they are translated intoinstitutional terms and normative/policy questions are added. What is the nature of therelationships among (1) universities/ scientific research institutions; (2) firms whichdraw on scientific knowledge in creating technologies used to transform inputs into



commercial outputs; and (3) economic processes and variables such as competitionand prices? Furthermore, what kinds of relationships should be fostered, to the extentthat they are amenable to policy measures, if science is to make an effectivecontribution to biotechnology and desired economic change? As will be shown below,

policy-oriented literature has begun to emerge around questions such as these.Returning to Schumpeter and Hicks, however, these questions make it clear that the

process of invention, which results in an 'impulse' being delivered to the economy andsociety, is complex and its determinants need to be analysed carefully.In addition to these questions about the creation of biotechnological knowledge areissues connected to the appropriation of financial returns from such knowledge.According to some views, one of the fundamental differences

between science and technology is that the former deals with 'basic' knowledge withno immediate commercial applicability, while the latter is commercially exploitableand is therefore a commodity that can be bought and sold. This dichotomy hasimportant implications for the different structure and function of science-basedinstitutions such as universities and government scientific institutions on the one hand,and technology-based institutions like firms on the other. In science-based institutions,the flow of information is relatively free through publication and other forms of dissemination of results, notwithstanding factors, such as competitive rivalries

between scientists, that retard the flow of information. On the other hand, thetechnological knowledge base of a firm can be (though not in all cases) a major determinant of profitability. Accordingly, firms often take steps either to ensure thattheir knowledge base remains secret or to obtain legal guarantees, as in the case of

patents, that other firms will not be allowed to use their knowledge.However, this sharp distinction between science-based institutions and technology-

based firms is to an extent challenged by recent events in the biotechnology area. In1973 the first gene was cloned, and in 1975 the first hybridoma (fused cell) wascreated. In 1976, the first so-called new biotechnology firm - Genentech, a spin-off from university-based research-was set up to exploit recombinant DNA technology. In1980, in Diamond v Chakrabarty, the United States Supreme Court ruled thatmicroorganisms could be patented under existing law. In the same year, theCohen/Boyer patent was issued for the technique related to construction of recombinant DNA. By the end of 1981, more than eighty new biotechnology firmshad been established in the United States. In the same year E.I. du Pont de Nemoursallocated $US 120 million for R&D in the life sciences; shortly thereafter, Monsantocommitted a similar amount. Early attempts to exploit biotechnology commerciallywere based strongly on the fruits of university research. The resulting set of newinteractions between the biological sciences on the one hand and firms, old and new,on the other influenced university research in ways that will be considered in moredetail later in this chapter. At the same time, policy questions were posed about theextent to which international competitiveness depended on the appropriateness of national university functioning.



Firms also confronted difficult strategic problems as a result of the commercial potential of biotechnology. During the early stages, many of the large firms that madethe strategic decision to move into biotechnology lacked in-house capabilities in fieldsthat were becoming increasingly important, such as molecular biology, genetics, and

biochemistry. Some firms, such as the large Japanese producers of pharmaceuticals,amino acids, and enzymes, compensated for such weaknesses by strength incomplementary fields, such as bioprocessing, and by other complementary assets,such as strong marketing and distribution networks and links with financialinstitutions. Nevertheless, the longer-run strategic problems remained: how to developa knowledge base in the new technology from which to appropriate adequate rates of financial return. A number of strategies formulated to address both this strategic

problem, as well as their attendant social costs and benefits, will be assessed later inthis chapter.Small new biotechnology firms faced very different strategic problems. Althoughraising equity capital was facilitated in the early stages by the way in which

biotechnology had caught the imagination of investors, more fundamental problemssoon became apparent. (When Genentech shares were first sold on Wall Street in 1980they set a record for fastest price increase, rising from $35 to $89 per share in 20minutes. In 1981 the initial public sale of shares by Cetus established a new WallStreet record for the largest amount of money raised in an initial offering: $115million.) The new biotechnology firms had a strong knowledge base in the disciplinesunderlying biotechnology, and soon began to develop capabilities in bioprocessing(i.e., downstream processing). Nevertheless, it gradually became clear that thetransformation of such knowledge into value required additional complementaryassets. Most important of these were marketing and distribution networks. Newvaccines, drugs, diagnostic kits, or seeds, for example, have to be sold to be profitable,and this requires the kind of distributional channels that new biotechnology firmslacked. In view of the constraints on developing such channels, most new

biotechnology firms were forced to conclude marketing agreements with largecompanies in the relevant areas, thus giving up part of the financial returns from

biotechnological innovations.The structure of the biotechnology sector, which is determined by the configuration of large firms, new biotechnology firms, universities, and government researchinstitutions, as well as by the pattern of state intervention, differed between countries.In Japan, for example, new biotechnology firms have not emerged as they did in theUnited States. This is a result of several characteristics of the Japanese economy: (1)the constraints on labour mobility, which made it difficult for employees of largefirms to leave and set up their own enterprises; (2) the absence of a venture capitalmarket in a predominantly credit-based system; and (3) contractual practices in theuniversities, which constrain university staff from either setting up, or being

personally remunerated by, commercial enterprises. In addition, a very different pattern of interaction between universities and industry exists in these two countries,



and their pattern of state intervention in biotechnology has differed. These differencesraise a number of questions about the relative efficiency of the different structuralconfigurations, including complex questions of market and organizational failure,which will be examined in more detail later in this chapter. The implications for analysing the determinants of international competitiveness are clear.It is evident from the discussion above that developing scientific knowledge andtransforming it to technological knowledge are intricate processes with a large number of complex determinants. In the case of biotechnology, the processes and their determinants need to be studied far more closely. Before embarking on a study of theeffects of new technologies, however, it is worth understanding why the technologythat has been generated assumes the form and moves in the direction that it does.Furthermore, the effects of technical change feed back to influence subsequent roundsof generation of new technology (and in some cases to influence science itself). For example, as technology is diffused, its use under a variety of different circumstancesleads to the generation of further technological change as constraints are encounteredand improved methods are devised. In some cases, the problems and puzzles that arisein the diffusion process result in the development of new research agendas to betackled by scientists and technologists. In some cases of biotechnology, such as

protein engineering, it may yet turn out that the technological practice will do morefor the development of science than the other way around. On closer inspection,therefore, it often turns out that invention, innovation, and diffusion cannot be neatlyseparated into linear, sequential stages. For example, in biotechnology, downstream

bioprocessing (which involves resolving problems related to purification,development of sensors to monitor fermentation processes, and the development of more general process control technology) will have a major impact on the efficiencyof the technology. Indeed, as will be examined later, it may well be that processinnovations such as these become more important in genetic engineering than basicscientific innovations in terms of improved efficiency and therefore competitiveness.While it is important, for the reasons given above, to understand the determinants of the generation of new technologies, it is nevertheless legitimate to assume that thenew technology is given and then to examine its effects. Economists have a good dealto offer in terms of analysing impacts on economic variables, such as output, price,and distribution, using partial and economy-wide approaches. Although biotechnologyis still new with the great majority of potential products still in the experimental stage,a few important studies have been done which examine the economic effects of

biotechnology in selected areas. These studies will be critically reviewed later in thischapter.

Numerous questions have been raised regarding the implications of biotechnology for Third World countries. As in the case of microelectronics and information technology,the international diffusion of biotechnology is creating new opportunities in thesecountries and will do so increasingly in the future. This process is being assisted bythe relatively low barriers to entry that currently exist in the development cycle in



biotechnology. The relatively low barriers to entry are evident in the emergence of large numbers of new biotechnology firms in many industrialized countries, as well asin the biotechnology programmes being developed not only in larger Third Worldcountries, such as India, Brazil, Mexico, and China, but also in smaller countries, suchas Cuba, Venezuela, and Kuwait. The current low barriers to entry are, however,unlikely to remain a permanent feature of biotechnology. It is already becomingapparent, for example, that sophistication, scale, and therefore entry costs areincreasing in the bioprocessing side of biotechnology. It is likely that larger size of enterprise will be an increasing advantage in the future. One reason for this is thateconomies of scale are beginning to be realized in bioprocessing. Another is thetechnological synergies that are increasingly becoming a major source of competitiveness. An example of such synergy is the convergence of microelectronicsand information technology on the one hand and biotechnology on the other-the fieldof bioinformatics-in areas such as automated bioprocess control, automatic DNAsynthesizers, protein modelling, and biosensors. Firms that either have in-house

capabilities in the area of microelectronics, information technology, and scientificinstrumentation, or like the large Japanese groups, are easily able to call onobligationally related enterprises for such expertise, are likely to develop considerableadvantage in biotechnology. A third factor favouring larger size is synergy indistribution. For example, a firm with an extensive marketing network in conventionaldrugs will tend to be able to distribute new genetically engineered drugs at lower cost(by reaping the synergistic economies) than firms which lack this facility.For all these reasons it is likely that the entry barriers will increase over time.However, this does not necessarily mean that Third World countries will be

progressively excluded from participation as producers of biotechnology. Judiciouscontrol of the domestic market, particularly in the case of the larger Third Worldcountries such as Brazil, India, and China, together with an appropriate set of scienceand technology policies which facilitate development of the necessary biocapabilities,may allow a country to participate actively as a biotechnology producer. The earlier example of microelectronics and information technology is instructive here. Despitesimilar economies of scale and attendant barriers to entry, countries like Brazil andKorea are managing to carve out areas that stand a reasonable chance of becominginternationally competitive. Second, Third World countries have the opportunity toopt for specialist niches in the international market. Finally, there are a number of areas in which their specific resources and problems will provide them with a decided

competitive advantage. Examples include local plant varieties and diseases.However, reference to opportunities in the field of biotechnology must not obscure thesubstantial difficulties that lie in the way of a successful entry into biotechnology, nomatter how specialist the niche. Enough frustration has developed from post-war attempts to transfer science and technology to the Third World to require even themost optimistic person to remain cautious with regard to the prospects. For example, aCommittee of Scientific Advisors from the United Nations Industrial Development



Organization (UNIDO) evaluated Third World capabilities and facilities in search of asite for the new International Centre for Genetic Engineering and Biotechnology. TheCommittee noted serious weaknesses in key scientific disciplines, such as molecular

biology, biochemistry, and genetics (UNIDO, 1986). The difficulties of developingsuch scientific capabilities in Third World countries, while simultaneously creatingconditions necessary for successful operation and servicing of scientific laboratoriesand equipment, must not be underestimated. Scaling-up and development of efficient

bioprocessing capabilities present additional difficulties. Even more problems arise inensuring that the necessary links are established between the scientific base on the onehand and the productive using sector of the economy on the other. Despite thesedifficulties, the power and flexibility of biotechnology should allow many ThirdWorld countries to benefit from this technology.As in the case of microelectronics and information technology, there is the potential togain by using the fruits of biotechnology. In this connection, as will be seen in theliterature survey below, a good deal of apprehension has been expressed regarding theincreasingly proprietary nature of biotechnology. This is most evident in agriculture:many previous technological breakthroughs were made in public institutions, such asuniversities, government research centres, and international agricultural researchinstitutes, and the resulting technological knowledge was disseminated relativelyquickly and at relatively low cost. With the potential to patent microorganisms andnew seed varieties, however, and in some cases to keep the knowledge underlyingnew agricultural products and processes secret, a good deal of agricultural research ismoving into the private domain. In some cases, under circumstances that will beconsidered in more detail below, this may raise the cost of using new biotechnology-

based products as the supplying firms set prices consistent with their attempts tomaximize profits. This will have further consequences for diffusion rates, and thusoutput effects, as well as for distributional impacts.Considering the effects of biotechnology in the Third World invites comparison withthe Green Revolution, which refers to the development, using conventionaltechniques, of high-yielding plant varieties. As in the case of the Green Revolution,there is no inherent technological reason why biotechnology should not benefit the

poor. In principle, genetically engineered saline-tolerance, pest and disease resistance,and nitrogen-fixation could have a significant effect on the incomes of the poor inThird World countries, even if, as in the case of the Green Revolution, they are slower to adopt the new technologies and their gain relative to richer farmers is reduced bylonger-run decreases in commodity prices. In practice, however, as with the GreenRevolution, the socioeconomic factors shaping the evolution of biotechnology arelikely to favour the needs of those who constitute important sources of market demandand political influence. Despite such tendencies, the wide range and flexibility of

biotechnology holds out at least the possibility of extending the agricultural revolutionto geographical areas and agricultural products that have hitherto been largelyunaffected while at the same time increasing the benefit derived by the poor.



This raises a large number of important policy questions for Third World countries.To the extent that they want to take advantage of biotechnology in productiveactivities, questions have to be asked and answered regarding the necessary

preconditions, the constraints and the capabilities, that are required. For example,what is the best way for a country, given its particular circumstances, to go aboutdeveloping general capabilities in genetic engineering and biotechnology? Whatfactors should be considered in choosing areas of specialization? What sorts of science, technology, industrial, and trade policy should be adopted to facilitate the useof biotechnology in production? As will be shown in this chapter, while questionssuch as these have not yet begun to be examined, a fair amount can be learned fromclosely related issues in the literature on technology and development.

2.2 The generation of biotechnology: Invention andinnovation2.2.1 The scientific base2.2.2 The technologies2.2.3 The evolution of biotechnological knowledge2.2.4 Appropriating the rent from biotechnological knowledge2.2.5 The role of government

Social scientists have generally been reluctant to examine the causes of technicalchange, preferring instead to analyse its consequences. This is evident, for example, inthe approach adopted by Hicks (1981) in his Nobel Prize address titled 'TheMainspring of Economic Growth', which was summarized in the introduction to thischapter. For Hicks, 'invention', which provides the major impulse for economicgrowth, remains exogenous to the economic system. Hicks's main concerns are theresponse of prices and profits to the impulse and the secondary innovations whichthey in turn induce. Similarly, until relatively recently (see Mackenzie and Wajcman,1985), many sociologists of technology have been proponents of a technologicaldeterminism, whereby technology is seen to influence society unidirectionally.The temptations underlying the bias to study the consequences of technical change areeasy to understand. To begin with, technical change is a major force for economic andsocial change and social scientists are therefore correctly interested in the impact of changing technology. Furthermore, if the analysis were broadened to examinethe causes of technical change, the task would be considerably complicated (andwould present economists the additional problem raised by the need to consider determinants and processes that are not narrowly economic). For reasons such as thesethe causes of technical change, as Rosenberg (1982) noted, remain understudied.Although understandable, this bias in the literature presents important difficulties.Since the analysis is partial, leaving out the determinants of technical change,technology is necessarily assumed to be static. This assumption more than any other has been the target of attack for students of technology, including economistsinterested in the process of technical change and related economic change.



However, far from being static, technology changes constantly, with importantimplications for studying the consequences of technical change. In short,understanding the consequences of technical change over time requires amore general conceptual framework which includes analysing the causes of technicalchange. Such a framework would acknowledge that the consequences of technicalchange also influence, through a variety of feedback mechanisms, the generation of further technical change with implications for later-round impacts of such change.This section is devoted to an examination of the generation of biotechnology which atthe same time will facilitate a critical review of the literature. The discussion isassisted by reference to Figure 2.1.2.2.1 The scientific base

A distinct definition that draws a sharp boundary between science and technology isdifficult, if not impossible, to produce. Science and technology frequently overlap.

Nevertheless, it is possible to produce working definitions

of science and technology that make a broad distinction. Accordingly, science may bedefined as 'attempts to produce "basic" knowledge about natural phenomena whichdoes not necessarily have any immediate commercial applicability'. Technology can

be defined as knowledge related to transformation of inputs into commercial outputs,including production of new or different outputs.Figure 2.1 Configuration of industries and institutions involved in biotechnology



Technological knowledge may be embodied in people, hardware (plant andequipment) and software, and forms of organization.



According to these definitions, biotechnology is related to science in the sense that theknowledge which underlies its three main technologies-recombinant DNA, cellfusion, and bioprocessing-clearly emerged from the science system. In a detailedaccount, for example, Cherfas (1982) traces the origins of biotechnology from the firstrecognition of DNA by Miescher in 1869, to Watson and Crick's model of the doublehelix in 1953, to the breakthrough of Boyer and Cohen on the recombinant DNAtechnique in 1973, and the work by Millstein and Kohler on cell fusion in 1975. Agood deal of this work was influenced by research on the behaviour of bacteria andviruses and by the war on cancer. Despite the ultimately pragmatic objectives of suchresearch, the research remained for the most part 'basic' in nature. Rosenberg (1982)

points out that in many cases 'basic' knowledge has resulted from research undertakenwith 'applied' motivations. This makes it difficult to sustain a distinction between

basic and applied research in terms of the motivation for such research.In this respect, biotechnologies contrast sharply with semiconductors, whichdeveloped largely, though not entirely, in response to the war and early post-war military demands of the U.S. Department of Defense (Borrus and Millstein, 1984). Incontrast to biotechnology, whose major breakthroughs have occurred in universities,the transistor was invented in 1947 at Bell Labs, a part of AT&T which purchased itstelecommunications equipment from Western Electric, its manufacturing arm. In 1959the integrated circuit was invented at Texas Instruments and Fairchild, two smallcommercial companies which had spun off from Bell Labs. The milieu within whichsemiconductor technology was developed was therefore oriented more towards

practical objectives than in the case of biotechnology, where 'basic' universityscientific research, albeit health-related, played a more significant role. However,Borrus and Millstein (1984) can probably fairly be accused of being overly simplisticwhen they conclude that 'In the development of biotechnology, "science push", rather than the "market pull" that gave impetus to the US semiconductor industry, was

particularly important' (p. 533). Nevertheless, this dichotomy does raise the important question of what role thescience base plays in science-oriented industries, such as microelectronics/informationtechnology and biotechnology. Clearly, it is inadequate to see science as a subsystem,autonomous from the rest of the economy and society, or scientists as uninfluencedseekers of the truth attempting to understand the basic nature of the universe. Theemergence of microelectronics/information technology and biotechnology has had agood deal to do with the twin social concerns-one may almost say neuroses-of military defence and health. Furthermore, scientific controversy and the progressionof scientific ideas have often been greatly influenced by the interests of scientiststhemselves as some sociologists of science have documented (see Barnes and Edge,1982, and references therein).

Neither can basic science that forms the core of biotechnology be assumed to beuninfluenced by commercial considerations or at least by the possibility of technological applications. Cohen and Boyer, for example, were aware of the



commercial applicability of their recombinant DNA technique and this awareness ledStanford University to apply for a patent for the recombinant DNA (rDNA) processtechnique within the statutory one year after initial publication of results. In December 1980, Patent No. 4.237.224 was granted, providing for an initial nonexclusive licencefee of $10,000 and an equivalent annual amount for using the technique in researchand development. In addition, the patent granted a royalty of I % on sales up to $5million, falling to 0.5% on sales over $10 million. Since this technique is fundamentalto work in genetic engineering, the implications for Stanford University funding areenormous. Stanford University subsequently filed a second patent onthe products produced by the rDNA technique. [The Cohen and Boyer patent isdiscussed, for example, in Yoxen (1983, pp. 95-97), and U.S. Congress, Office of Technology Assessment (1984, Chapter 16).]Millstein, who together with Kohler developed the cell fusion technique in 1975, wasalso aware to some extent of the commercial implications of his research.Accordingly, he wrote to the Medical Research Council informing them of the

possible implications, hoping the National Research and Development Corporation(NRDC), which was responsible for commercialization and protection of intellectual

property rights of inventions coming out of public laboratories, might make thenecessary arrangements for patents. However, the NRDC did not act and the key

patents to work on monoclonal antibodies were eventually taken out by Americanresearchers. In 1980, partly in response to this failure, Celltech was formed by theBritish Technology Group, which took over the role of the NRDC, and the NationalEnterprise Board. The company was partly publicly and partly privately funded andwas given exclusive access to the research output of the Medical Research Council'slaboratories (see Yoxen, 1983, pp. 128-132).These examples and their implications make it clear that, while there is a functional,institutional, and organizational difference between scientific establishments on theone hand and commercially oriented establishments on the other, neither are entirelyself-contained but rather exert a mutual influence on one another. This suggests that amore general approach, which will consider these and other interactions, is needed tounderstand and evaluate the function of these organizations. This has importantimplications for the study of factors like international competitiveness.2.2.2 The technologies

As is clear from Figure 2.1, the science base influences the development of

biotechnologies. The influence is mutual, however, since problems and puzzles thatarise in technological applications often feed back to determine scientific researchagendas (see Rosenberg, 1982, on the notion of endogenous science).In the case of biotechnology there are three closely related sets of technology (U.S.Congress, Office of Technology Assessment, 1984):1. Recombinant DNA technology (rDNA) allows genes from different organisms to becombined within a single organism, enabling it to produce biological molecules which



it does not normally create. In this way new products can be created or previouslyexisting products, such as enzymes or other proteins, can be produced moreefficiently. Applications for this technology include pharmaceuticals (for example,insulin, interferon, and interleukin); chemicals; food-processing; and modification of microorganisms that can then perform commercially useful functions (such asdegradation of toxic waste products, or mineral leaching to assist in mineralsextraction).2. Cell fusion technology allows different cells to be artificially combined into a fusedcell or hybridoma , which allows their desirable properties to be combined. For example, fusing an antibody-producing cell with a cancer cell results in a hybridomathat can produce pure antibodies, and that is robust and able to multiply continuously.These pure antibodies, or monoclonal antibodies (MAbs), can be used for diagnostic

purposes in divergent fields such as human or animal health or to diagnose viruses incrops.

3. Bioprocess technology allows biological processes to be used for large-scaleindustrial purposes. Such processes typically involve reproduction of cells andmicroorganisms in an appropriate environment, and subsequent extraction and

purification of the desired biological substances. Although not in itself a newtechnology, the efficiency of bioprocess technology is an important determinant of the

price and quality of biotechnologically produced products. Some have suggestedthat protein engineering should be thought of as a second-generation 'new

biotechnology' (see Fransman et al., forthcoming, for more details on proteinengineering).These technologies are not static; they are constantly being modified and developed.

Examples include automated DNA synthesizers or 'gene machines' and, in the field of bioprocessing, immobilization techniques, biosensors, and automated process control.Since this chapter mainly addresses socioeconomic aspects of biotechnology,scientific and technical factors are not discussed in great detail. Nevertheless, it isworth mentioning a number of sources that give a good introductory account of thescientific and technical aspects of biotechnology. These include Cherfas (1982), whogives a detailed historical description of the development of the main techniques usedin biotechnology; and two issues of Scientific American (1981 and 1985), which

provide details on the molecular and bioprocess underpinnings of biotechnology. Twomajor reports on biotechnology by the U.S. Congress, Office of Technology

Assessment (1984, 1986) provide readable and well-illustrated accounts of thetechnology; the first addresses biotechnology in general while the second considersagricultural applications. Yoxen (1983) situates his discussion of the scientific andtechnical aspects of biotechnology in a broader societal context by examining theso2.2.3 The evolution of biotechnological knowledge

In analysing the evolution of biotechnological knowledge it is helpful to think interms of a development cycle. During the earliest stages of this cycle individuals





These examples illustrate the extent to which competition betweentechnologies influences technological development. As Rosenberg (1976) has shown,this competition can also stimulate change in old technologies. For example, SCP may

provide a replacement for soya as an animal feed. On the other hand, by introducingnitrogen fixation systems to nonleguminous plants, biotechnologies may also increasethe productivity of soya plants, which is the old competing product.In other cases biotechnology opened up the possibility of entirely new products andmarkets. For example, the production of monoclonal antibodies made possible thedevelopment of diagnostic techniques in humans, animals, and plants. One instanceis in vivo diagnosis using injectable radiolabelled antibodies to facilitate tumour imaging. In addition, monoclonal antibodies have potential therapeutic uses (e.g., away to target attack accurately on a particular kind of cancer).In these cases the uncertainty relates more to potential markets and desired productcharacteristics. In the early stages of the development cycle, profitability and

competition are often based on product characteristics rather than cost (although, asshown above in the case of soya, when there is competition with preexisting productsrelative cost can be important). Furthermore, there is a relatively high degree of flexibility and variation in process technology as scaling-up proceeds and the searchtakes place for new methods to overcome constraints and bottlenecks and to makeimprovements.In this respect there are important similarities between biotechnology and other industries whose innovation process over time has been closely studied. Therelationship between product innovation, including design and process innovation, has

been examined for a number of industries (e.g., Abernathy and Utterback, 1975;

Utterback, 1979; Abernathy et al., 1983; and Clark, 1985). These studies show that inthe early stages of the development cycle, before the emergence of hierarchicallystructured dominant design concepts, process technology remains flexible, andcompetition is based largely on product innovation. Clark (1985) elaborates further onthe relationship between the emerging dominant concepts that underlie marketdemand and the development of dominant design concepts.During later stages of the development cycle, however, the dominant market conceptsand dominant design concepts tend to converge. It is during these later stages that

Nelson and Winter (1982) hypothesize that further technical change occurs onlywithin the confines of the prevailing 'technological regime'. Such change may result

from alterations in relative costs; from shifts in demand within the limits of theexisting dominant market and design concepts; or from 'compulsive sequences'(Rosenberg, 1976), 'technological trajectories' (Nelson and Winter, 1977), or 'technological momenta' (Hughes, 1983), which are relatively impervious to shifts ineconomic variables. Abernathy and Utterback (1975) and Utterback (1979) argue thatduring these later stages, process technology becomes relatively rigid; processinnovation becomes incremental rather than radical; and considerations of economiesof scale tend to dominate as the basis of competition shifts increasingly to cost-



competition. During these stages market structure also changes, with oligopolisticmarkets becoming increasingly prevalent.The main difference between the industries studied by these authors and

biotechnology lies in the relationship between the final product (including itsdominant design concepts) and the production process. For products such asautomobiles, the relationship is close: production is partly structured by thecharacteristics and stability of design. In bioprocessing, on the other hand, systems areemployed in which complete living cells or their components (such as enzymes) areused to effect desired physical or chemical changes. The output of a bioprocessingsystem (for example, a packed-bed or fluidized-bed reactor) can be used for anynumber of final products. Accordingly, the relationships among market demand,

product design characteristics, and process technology differ from those in industrieslike automobiles or semiconductors. In this sense, biotechnology is more like processindustries, such as chemicals, petrochemicals, or steel, in which the output can beincorporated into a wide range of final products.Despite these differences, there are important similarities between biotechnology andthe innovation cycle studied by the authors cited above. This can be seen clearly bythe flexibility and variability of process technologies being employed during thecurrent early stages of the cycle. One example of this flexibility is the current choice

between the alternative techniques of batch processing and continuous steady-state processing . Both processes are used in the conventional chemical industry (thisoverlap also illustrates how knowledge in the 'new' biotechnology industry draws andelaborates on the inherited stock of knowledge). In batch processing the bioreactor isfilled with the medium containing the substrate and the nutrients and the biocatalystare added. After the conversion is completed, the bioreactor is emptied and separationand purification take place. In continuous steady-state processing, raw materials areadded and spent medium withdrawn continuously from the bioreactor.Although most biotechnology production currently employs batch-processingmethods, they do have a number of drawbacks. These include the costly turnover time

between batches; the greater difficulty of product recovery due to the presence of contaminating biocatalyst; and the greater cost resulting from the difficulty of reusingthe biocatalyst. In principle these difficulties can be overcome by using continuous

processing methods, which have resulted from the development of techniques toimmobilize biocatalysts. This allows the catalyst to be reused, which reduces cost andsimplifies product recovery. However, continuous processing methods have their owndrawbacks. These drawbacks include the difficulty of optimizing reaction conditionsin a single-stage process; of maintaining the stability of biocatalysts over long time

periods; and of maintaining sterile conditions over time.Alternative techniques, and therefore flexibility, also exist at the product-recoverystage. The alternatives include ultrafiltration, which employs membranes and other filters to separate and purify the product; electrophoresis, in which separation isachieved using the different ionic charges of the products; and the use of immobilized



monoclonal antibodies as purification agents (U.S. Congress, Office of TechnologyAssessment, 1984).Careful analysis of the determinants of process innovation in biotechnology is animportant area for future research. To what extent is the search (always an uncertain

process) for new and improved biotechnology processes a response to economicconditions, such as cost, availability, and demand? And to what extent is it shaped by'technological trajectories and momenta' that are relatively uninfluenced by economicconsiderations? Do competitive processes play a role in bringing about a convergencein processing techniques in areas where one or some techniques begin to establishtheir superiority to other alternatives? Questions such as these are not purely academicand answers to them would improve our understanding of the forces shaping

biotechnological innovation.One tendency noted in virtually all other industries and which has begun to assertitself in biotechnology is the attempt to realize economies of scale (i.e., reduction in

unit costs as volume increases). Indeed Nelson and Winter (1977) go so far as to refer to the tendency towards increasing economies of scale as a 'natural trajectory'. Oneexample in the field of biotechnology is the preparation of monoclonal antibodies(MAbs). The standard technique, pioneered by Millstein and Kohler, involvesinjecting a purified antigen into a mouse and then, after the mouse has produced theantibodies, removing its spleen and extracting the antibody-producing B lymphocytes.These cells are then fused with mouse myeloma (tumour cells). These tumour cellsresult in a fused cell, or hybridoma, with the ability to multiply continuously. Thehybridomas are then cloned and screened for their ability to produce the desiredantibodies (additional details are given in U.S. Congress, Office of TechnologyAssessment, 1984).There are two ways to produce the antibody. When relatively small quantities aredesired and purity is not at a premium, a hybridoma clone may be injected into micewhere it will grow in the abdominal cavity fluid (ascites) from which the antibodiescan be collected. When larger quantities are required, or when greater purity is desired(for example MAbs used for human therapeutic purposes must be free of mouse-derived contaminants), the hybridoma clones may be established in an in vitro culturesystem.Large-scale cell culture systems may employ techniques of cell immobilization, whichallow the MAbs secreted from the cells to be recovered. Damon Biotech Corporation

of the United States has patented a microencapsulation technique. In this technique,the hybridoma is surrounded by a porous capsule, which allows nutrients andmetabolic wastes to be circulated while retaining the antibodies. The company claimsthat this technique significantly reduces unit costs in comparison to the ascites method(U.S. Congress, Office of Technology Assessment, 1984).The importance of economies of scale emerges from data released by Celltech (UK).As can be seen in Figure 2.2, as batch yield increases, the cost of labour per unit of



output falls. The cost of materials per unit of output rises, but somewhat less than proportionally at batch yields greater than 100 g. The cost of depreciation per unit of output also rises, but begins to fall slightly after the same yield. Reduced unit costswith increased output thus appears to result primarily from a fall in unit labour costs.This leads the authors to comment that 'The development of small, highly productivefermenters is therefore less critical in terms of production costs than has beensupposed' (Birch et al., 1985). Conversely, however, larger reactors do not appear tooffer significant capital savings.Figure 2.2 Effects of scale on components of unit cost

Whatever cost components are responsible, to the extent that economies of scale arerealized and become important, they imply (1) increasing barriers to entry and (2)increasing tendencies towards concentration of capital and oligopoly on the

processing side of the biotechnology industry. These implications are important for the future of small firms and Third World countries in biotechnology, and they will beexamined in more detail below.



These consequences of scale economies may be accentuated by other advantages thatlarge firms or groups of firms might have in bringing together diverse technologies toimprove bioprocessing. One example is the use of computers to analyse data fromsensors and other monitoring instruments and to make optimal adjustments innutrients and other variables during bioprocessing. Computer-aided design of proteinscan facilitate the production of new enzymes. Another example is specialinstrumentation: liquid chromatography is used to identify chemical compounds andflow cytometry is used to measure factors, such as cell size, and to indicate theadequacy of nutrient flows.

The role of government There has been a good deal of interest in the role of public policy in biotechnology. Insome cases, such as the report by the U.S. Congress, Office of TechnologyAssessment (1984), this has resulted from a concern with issues of internationalcompetitiveness.There are a number of good descriptive accounts of biotechnology policy in theUnited States, Japan, and Western Europe (for example, see U.S. Congress, Office of Technology Assessment, 1984; Sharp, 1985a,b, 1986; Davies, 1986; U.S. Departmentof Commerce 1985a,b; Lewis, 1984; Anderson, 1984; Tanaka, 1985; Fransman et al.,forthcoming).One of the most interesting points to emerge from this literature is the substantiallydifferent pattern of government intervention that exists in the biotechnology field inthe different countries studied. For example, in the United States there is strongsupport for basic research and relatively little for applied generic research and appliedresearch. [It has been noted that 'The United States, both in absolute dollar amountsand in relative terms, has the largest commitment to basic research in the biologicalsciences.... On the other hand, the U.S. Government's commitment to generic appliedresearch (defined as research which bridges the gap between basic science donemostly in universities and applied, proprietary science done in industry) in

biotechnology is relatively small' (U.S. Congress, Office of Technology Assessment,1984). The report goes on to observe that in 'fiscal year 1983, the Federal Governmentspent $511 million on basic biotechnology research compared to $6.4 million ongeneric applied research in biotechnology'. On the other hand, 'The governments of Japan, the Federal Republic of Germany, and the United Kingdom fund a significantamount of generic applied science in biotechnology' (p.14)]. In the United States thereis little attempt to direct government research funding into areas selected for their



strategic and competitive value. Furthermore, little or no attempt is made bygovernment to influence interfirm interactions in the area of biotechnology.The pattern of government policy in biotechnology is fundamentally different inJapan, where the biotechnology system is characterized by a number of distinctivefeatures, including (1) the relative absence of national new biotechnology firms; (2)the weakness of Japanese university research in frontier basic research in the lifesciences relative to universities in other advanced Western countries; and (3) theevolution of government-initiated, innovative forms of organization for theacquisition, assimilation, generation, and diffusion of new generic biotechnologies.These organizational innovations include the biotechnology component of the NextGeneration Basic Technologies Development Programme initiated by the Ministry of International Trade and Industry in 1981 and the Protein Engineering ResearchInstitute (PERI) supported by the Japan Key Technologies Center, under the controlof MITI and the Ministry of Post and Telecommunications (MPT). These features of the Japanese system are analysed in Fransman et al. (forthcoming).The United Kingdom has displayed a pattern of government intervention somewhatintermediate between those of the United States and Japan. Although there is no'grand strategy' for biotechnology in Britain, there are nonetheless some similaritieswith the Japanese case. In 1980, for example, a year before the MITI biotechnology

programme was launched, the Spinks report (ACARD, 1980) proposed a stronggovernment-led programme in biotechnology. Although the response was not asstrong as might have been envisaged in the report, attempts were nonetheless made byvarious government agencies to encourage generic applied and applied researchthrough interfirm collaboration and cooperation with universities. The Department of Trade and Industry, which set up a specialist biotechnology unit in the Department,has established a number of research 'clubs' which bring firms together for collaborative research. [In fact, it was after these clubs, first introduced into Britain atthe end of the First World War, that MITI modelled its research associations-seeSigurdson (1986), p. 6]. Similarly, the Science and Engineering Research Council,which finances basic research, has identified a number of 'strategic' areas in which toconcentrate research and has set up a number of collaborative research programmesinvolving firms and universities (Dunnill and Rudd, 1984). Like the United States,Great Britain has had an extremely strong base in basic research, at least until recentlywhen the science budget has been adversely affected by reductions in governmentexpenditures (see Sharp, 1985b).It is one thing to describe different patterns of government intervention such as these,

but guise another to explain them. All of the governments whose policies in biotechnology have been reviewed in the literature have confronted the same set of internationally evolving biotechnologies with different institutions, strengths, andweaknesses. Why have their policies and strategies in biotechnology differed to theextent that they have? Furthermore, how is the effectiveness of the different policiesof different governments to be evaluated? Finally, how should governments go about



the task of making policy in the biotechnology field? In posing fundamental questionslike these, it becomes clear that existing studies of biotechnology policy have barely

begun to scratch the surface.Perhaps the major conclusion to emerge is that we do not yet adequately understandthe determinants of the policies of different governments in the field of biotechnology.Accordingly, for example, we are not yet able to explain why the biotechnology

policies of the United States, Japan, and the United Kingdom, discussed at the beginning of this section, differ in the ways that they do. In view of our current lack of understanding in this area it may be suggested that a priority for future researchshould be to examine why governments have intervened in the ways that they have inthe biotechnology field. With an understanding of the political influences andconstraints it will then be possible to ask how governments might attempt to construct

better, more effective, biotechnology policies. Cross-country comparisons should beof great help in highlighting national differences and helping to identify determinantsof policy.

2.3 Economic effects of biotechnology2.3.1 Introduction2.3.2 A survey of some literature2.3.3 The need for a more general approach

2.3.1 Introduction

If, as is often done in the literature, a distinction is drawn between old and new biotechnology, the latter involving the application of genetic engineering techniques,then it is clear that the effects of new biotechnology to date are only just beginning to

be realized. For example, many of the new biotechnology firms have not yet begun tomake profits. If there is to be a biorevolution, then the equivalent of the storming of the Winter Palace remains some way off.However, biotechnology has already begun to have some important effects. This isseen, for instance, in areas related to medical sciences . One example is diagnostic kitsmade with monoclonal antibodies, which are already being sold commercially.Bioscot is marketing a diagnostic kit that allows fish farmers to detect a dangerousfish virus that can rapidly kill the entire stock of fish, and is working on a similar kit,using the same technology, that will facilitate the identification of a potato virus. Inthe therapeutic area, where monoclonal antibodies can be used for tumour imagingand treatment, the potential has not yet begun to be realized.Genetically engineered products are also beginning to have an impact in the area of animal and human vaccines. In July 1986, the U.S. Food and Drug Administrationapproved the first genetically engineered vaccine for human use: a hepatitis Bvaccine. The conventionally produced vaccine for hepatitis B was introduced in 1982;it is made by harvesting the excess of a hepatitis B viral surface protein from the

blood plasma of people infected by the virus. Although there is no evidence that the



conventional vaccine may be contaminated by hepatitis itself or by AIDS, some arereluctant to use blood-derived products. This was one factor that motivated the

pharmaceutical company Merck, Sharpe and Dohme (which also produces theconventional hepatitis B vaccine) to develop a genetically engineered version insearch of an estimated market of $300 million. The genetically engineered vaccine is

produced by inserting a gene from the hepatitis B virus into yeast cells, causing thelatter to produce the viral surface protein, which triggers immunity to the virus whenincorporated into a vaccine. This method avoids the use of human blood ( New York Times , 24 July, 1986). Genetic engineering is also being used widely to producecertain proteins (for example, insulin, interferon, and some enzymes), with importantindustrial implications in some instances.In the field of agriculture and food processing , where biotechnology will possiblyhave its greatest effects, the overall impact is still limited. For example, bovine growthhormones, to be examined in more detail below, have not yet been licensed for use inthe United States, though approval is anticipated in the next two or three years.Moreover, they have been temporarily banned in Europe for environmental-healthreasons. Porcine and chicken growth hormones are even further from commercialapplications. The fruits of new biotechnology applied to plants remain distant, since

plants are far more complex organisms than the bacteria, viruses, yeasts, and fungi onwhich most work to date in biotechnology has been done. For instance, nitrogen-fixation in nonleguminous crops, such as rice, wheat, and maize, remains a distant

prospect, although genes from other plants and even from bacteria have beensuccessfully introduced into various plants. Nevertheless, new biotechnology andrelated developments are already having a significant impact by improving efficiencyand increasing the substitutability of various agricultural inputs. Examples includecorn-based fructose sweeteners, which substitute for sugar cane and sugar beet(Ruivenkamp, 1986), and the cloning of palm plants in Malaysia to increase theefficiency of palm as a source of vegetable oil (Elkington, 1984; Bijman et al., 1986).Old biotechnology is having an impact in minerals production. About 10% of thecopper in the United States is being produced by bacterial mineral leaching; similar techniques are being used and developed further in the Andean Pact countries in LatinAmerica. New biotechnology may be of use in improving the efficiency of the

bacteria (Warhurst, 1985). Although bioprocessing is technically feasible as asubstitute production method in the area of bulk chemicals and energy , it remains onthe whole uneconomic under prevailing relative prices (particularly oil) and theexisting state of bioprocess technology. Single-cell proteins are a further area wheregreat potential was foreseen as a way of producing sustenance for both humans andanimals, and where significant investment was undertaken by large corporations, suchas ICI. But a combination of relative prices and technical factors has tended to rule outrapid expansion in this area as well in the near future. [For very useful surveys of recent developments in these and other areas see Sasson (1988) and Walgate (1990) ]



In terms of actual achievement, as these examples illustrate, it is fair to conclude thatat the present time the picture remains mixed. Not only are new biotechnologies beingintroduced in limited areas, but their rate of diffusion, upon which economic impactultimately depends, is still very low. While there certainly are rumblings of change, byand large the forces of production of the old regime remain relatively firmly intact.The revolution may come. But most producers who are still, by choice or circumstance, locked into old technologies, or who refuse to be shaken by rumours of coming winds of technical change, are not yet seriously threatened.In assessing the likely future impact of biotechnology, it is worth bearing two factorsin mind, each having somewhat contradictory implications. The first is that there aremany powerful groups in our society with a vested interest in highlighting, if notexaggerating, the potential future impact of biotechnology. Since for the most part thetechnologies and their associated products and processes have not yet been tested inthe market place, the context is conducive to exaggeration. These groups include new

biotechnology firms who must satisfy shareholders on the basis of their future prospects rather than their current financial performance; old companies that havemoved into the biological area under pressure of declining profits in existing marketsand who must similarly satisfy financial backers; consultants who have moved into

biotechnology and are selling their wares; and university scientists who either were in,or have moved into, this field and who seek at least an increase in their researchgrants, or perhaps a share in the financial rewards that are to be made in an area of rising demand. All have invested their capital, financial or human, in biotechnology.Together these groups are capable of producing the same kind of 'hi-tech hype' in thefield of biotechnology that has been a feature of other areas. An example of the latter is factory automation, where the much-heralded paperless factory of the future still

performs much better on paper than on the ground [see, for example, Voss (1984) onthe substantial problems of implementation that have been encountered in factoryautomation].This is not to say, however, that the big-optimists will be denied their revolution, butrather only to stress that they often have a vested interest in the predictions they make.This is where the second factor-uncertainty-enters. As with all nonincrementaltechnical change, uncertainty is significant. In the face of such uncertainty,expectations will differ regarding what the future will bring, and therefore whereinvestment chips should be placed. One way to assess future prospects of

biotechnology is to attempt to measure these expectations, directly or indirectly. Indoing this the firms, scientists, and consultants mentioned in the preceding paragraphmay be viewed in a different light, as investors who could be placing their chips onalternative spots. Since they are placing their capital (financial or human) where their mouths are, it must be accepted that they are firm in their convictions that, likemicroelectronics and information technology, biotechnology will generate new

products and processes, and with them opportunities for profit. For example, theexpectations underlying Monsanto's investment of around $2.7 billion over the next



ten years in research in the life sciences must be taken seriously. So must the decisionof MITI in Japan to select biotechnology as one of the 'next generation basictechnologies'.Accordingly, it may be concluded that, while there are reasons to expect a degree of 'unwarranted hype', a number of important groups are strongly of the view that

biotechnology-like microelectronics and information technology-will have a broad,nonincremental, impact. However, as with previous technological revolutions, it isalso likely that the main effects will be some time in coming.In view of the infancy of new biotechnologies it is hardly surprising that very fewrigorous studies exist of the economic impact of biotechnology. When this survey wasinitially undertaken I was able to find only three that go beyond rather vagueindications of the likely direction of economic effects, and attempt further quantification. These are considered, along with some critical comments, in the nextsection.

2.3.2 A survey of some literature2.3.2.1 Technology, Public Policy, and the Changing Structure of American

Agriculture(U.S. Congress, Office of Technology Assessment, 1986)

Aim This report examines the combined impact of biotechnology and informationtechnology on U.S. agriculture.

Background This report was written within the context of a growing crisis inAmerican agriculture. During the 1980s, the financial position of many U.S. farmersdeteriorated seriously as a result of a long period of farm surpluses. According to the

report, the 'decline in agricultural exports is largely responsible for this situation'. Inturn the poor performance of U.S. agriculture is related causally to:1. A weak world economy;2. The strong value of the dollar (the report was published in March, 1986);3. The enhanced competitiveness of other countries;4. An increase in trade agreements; and5. Price support levels that permit other countries to undersell U.S. agricultural

products.The 'lower costs of production in other countries' are seen by the report as 'the long-term primary factor in the decline of [U.S.] competitiveness'. In the case of wheat,maize, rice, soybeans, and cotton, at least one foreign country has been producing ator below the average U.S. cost since 1981. A major conclusion of the report is that'Future exports will depend on the ability of American farmers to use newtechnology', hence the interest in the impact of biotechnology and informationtechnology in U.S. agriculture.A second background factor is the long-term structural change that has been taking

place in U.S. agriculture, antedating biotechnology and information technology. For



example, between 1969 and 1982 the number of small farms declined by 39% whilethe number of very large farms increased by 100%. The report expressed concern withthe impact of new technologies on the concentration of land holdings.Technologies examined The report examined the impact of both biotechnology andinformation technology. The following biotechnologies in the area of animalagriculture were analysed: production of protein (such as hormones, enzymes,activating factors, amino acids, and feed supplements); gene insertion (which allowsgenes for new traits to be inserted into the reproductive cells of animals); embryotransfer (which involves artificial insemination of super-ovulated donor animals,removing the resulting embryos nonsurgically, and implanting them nonsurgically insurrogate mothers). The technologies discussed in the field of plant agriculture includemicrobial inocula (used to increase the efficiency of, or introduce, a plant's ability tosupply its own fertilizer, and to increase its resistance to pests), plant propagation(such as cell culture methods for asexual reproduction of plants from single cell or tissue explants), and genetic modification (which, though at present the least-developed area technically, makes it possible to move DNA from one plant, or evenother species, into another plant).Information technology will also impact both animal and plant agriculture. Uses of information technology in livestock include electronic animal identification (whichassists in feed control, disease control, and genetic improvement), reproduction (for example estrus detection devices which enhance reproductive efficiency), and diseasecontrol and prevention. In plant agriculture, information technology is being used for

pest management, and irrigation monitoring and control systems. In addition, radar,sensors, and computers are being used to ensure that the correct amount of fertilizer,

pesticides, and plant growth regulators are applied by coordinating tractor slippageand chemical flow.

Research methods The research is based largely on the so-called Delphi method (see p. 75 of the report). This involves collection and coordination of expert opinion, andthen feedback for reconsideration by the experts until a convergence is obtained. Asthe report notes, this makes the conclusions dependent on the experts chosen (and, itmay be added, their interaction as a social group).Conclusions The combined effect of biotechnology and information technology willreinforce the ongoing long-run tendencies in U.S. agriculture noted above. Morespecifically

1. These technologies will have a major effect in increasing productivity. The'biotechnology and information technology area will bring technologies that cansignificantly increase agricultural yields. The immediate impact of these technologieswill be felt first in animal production.... Impacts on plant production will take longer,almost the remainder of the century'.2. These technologies will be adopted more rapidly by large farmers partly because of their better access to information and financial resources: '70 percent or more of the



largest farms are expected to adopt some of the biotechnologies and informationtechnologies. This contrasts with only 40% for moderate-size farms and about 10%for the small farms. The economic advantage from the technologies are expected toaccrue to early adopters'.3. Biotechnology will encourage greater vertical coordination and control inagriculture which may 'induce a shift in control over production from the farmer to theintegrator'. It will 'reduce market access [defined as 'the ability of sellers ... to gainaccess to buyers'] slightly for livestock producers in the long run', although its impacton market access for crop production is expected to be neutral. Finally, 'No significantimpact on barriers to entry is expected ... for either crop or livestock production'.4. The combined effects of biotechnology and information technology, together with

preexisting trends, will significantly reduce the number of farms and increase the proportional contribution of the largest farmers to total output. 'If present trendscontinue to the end of this century, the total number of farms will continue to decline

from 2.2 million in 1982 to 1.2 million in 2000'. Approximately '50,000 of [the]largest farms will account for 75 % of the agricultural production by year 2000'.2.3.2.2 'Biotechnology and the Dairy Industry: Production Costs, CommercialPotential, and the Economic Impact of Bovine Growth Hormone'(Kalter et al., Department of Agricultural Economics, Cornell University,December 1985)

Aim The study examines the likely future impact of bovine growth hormones (bGH)on the U.S. dairy industry.Technology examined Milk productivity (output of milk per cow) has been risingsince the 1960s as a result of traditional techniques. These include improvedmanagement and feeding practices, together with conventional methods of improvingthe quality of herds such as selection. These techniques have resulted in 'an averageannual compounded increase in milk production of more than one% per cow since the1960s' (p. 71). Biotechnology, however, promises to substantially raise the rate of increase of productivity.Daily injection of bGH beginning about the 90th day of lactation has been found toincrease output by up to 40%. That level corresponds to a 25% increase over the entirelactation cycle.... While the capacity ... to stimulate milk production was recognized inthe 1930s, it has been only since the advent of biotechnology that the compound could

be produced at a level and cost making it economical for farm use.(p. 71)

Research methods Using production and financial data the minimum cost of producing bGH was calculated. The minimum cost was $1.93 per gram of bGH at a plant capacity of 6.5 million cow doses per day (p. 29). This provided the basis tocalculate the likely price of bGH to the farmer (which, accounting for distributioncosts, producer and distributor profits, etc., would be above the minimum productioncost). Allowance was also made for the fact that the cost to the farmer includes not



only the cost of the hormone and its administration costs, but also the additionalconsumption of feed by cows receiving the hormone. On the other hand the benefit tothe farmer was calculated by considering increases in productivity induced by bGH,together with assumptions about milk prices. Changes in the farmer's rate of return asa result of adopting the bGH were then computed. The resulting information wasgiven to farmers in the form of a questionnaire survey to calculate diffusion rates.Conclusions Results of the survey showed thatFarmers expressed an acute awareness of the potential of increased milk output tofurther depress milk prices. Some farmers ... questioned the desirability of bGH beingmade available given market conditions, one farmer writing, 'It should be outlawed'.Others noted that if other farmers used bGH they would, practically, have no option

but to adopt as well.(p. 81)The report concluded:

1. That bGH will be widely adopted when introduced (with the diffusion pathfollowing the usual sigmoid pattern but with a high rate of early adoption);2. That adoption will lead to a significant increase in milk output;3. That in the absence of government price support, the price of milk will fall; and4. That this will lead to a substantial reduction in both the number of dairy farms anddairy cattle (the precise numbers depending on the various assumptions made).2.3.2.3 'The Impact of Biotechnology on Living and Working Conditions inWestern Europe and the Third World'(Bijman et al., 1986)

The study by Kalter et al. (1985) is based on a partial equilibrium model. The effectsof one kind of biotechnology product, bovine growth hormones, are examined withinthe confines of a single industry, namely the dairy industry. As we will discuss inmore detail below, a partial equilibrium framework may produce misleading results

by ignoring the causes and effects of more general interactions. For example, if one isconcerned with the general effects of biotechnology on the dairy industry (and notonly bovine growth hormones), it will be necessary to take into account:1. The effects on this industry of biotechnology-induced events occurring elsewhere inthe economy; and

2. The effects on the dairy industry of its own effects on other aspects of the economy.An example of the first event is provided by Bijman et al. when they consider theimplications of increased substitutability of vegetable products for dairy productsinduced by biotechnology. Their study will now be discussed in more detail.



Aim The study examines the economic and political effects of biotechnology-inducedincreases in product substitutability (of both inputs and final products) in WesternEurope and the Third World.Technologies examined The technologies examined include both old and new

biotechnologies (for example, the use of enzymes and the use of cloning techniques toimprove the quality of oil palm trees).

Research methods The research involves collection of data, primarily from secondarysources, which are then used to calculate the effects of substitution, particularly onemployment.Conclusions Conclusions were divided into two areas:1. Substitution of sugar by other sweeteners. Biotechnology-induced substitution ismost highly advanced in the case of sugar. This process has been encouraged by thehigh sugar prices resulting from protected sugar markets in industrialized countries.Sugar may be substituted by high-fructose corn syrup, manufactured usingimmobilized enzymes, and by aspartame. A substantial increase in consumption of nonsugar sweeteners relative to sugar in the main industrialized countries has resultedin a major decrease in the world market price of sugar. Since 1982 this price has been

below production cost. The decrease in the price of sugar has had a major negativeimpact in Third World sugar-exporting countries. For example, in the Philippinesrevenues from sugar exports decreased from $US 624 million in 1980 to $US 246million in 1984, resulting in the relocation of some 500,000 field labourers.Furthermore, the potential for Third World countries to shift into alternative crops isalso limited by new technology. In the Philippines, for instance, a substantial

proportion of the sugar-producing land has been converted to rice. However, methodsof improving rice yields have been introduced by institutions such as the InternationalRice Research Institute (ironically based in the Philippines) and this has resulted in

productivity increases. Traditional rice importers such as Indonesia and India are becoming exporters with serious implications for the world market price of rice.Furthermore, as noted by the U.S. Congress, Office of Technology Assessment(1986), genetic engineering is likely to contribute further to increasing rice

productivity in the future. [For a summary of the rice story see Yanchinsky (1986).]2. Competing raw materials for oils and fats. The two most important sources of vegetable oils and fats are soya and oil palm. The productivity of the latter has beenincreased by 30% (oil yield per tree) by cloning oil palm plants. The greater

profitability of oil palm production relative to rubber in Malaysia has meant that plantations previously producing rubber have switched to oil palm. Since rubber production is more labour-intensive, the jobs of Malaysian and migrant Indonesianworkers on rubber plantations are threatened. Furthermore, future increases in the

productivity of oil palm could lead to reduced world market prices of vegetable oils,which would reduce incomes of producers of other vegetable oils, such as coconutfarmers, many of whom are small and lack the resources to switch to oil palm



production. In addition, less efficient oil palm producers, such as a number of Africancountries, may see their share of world markets dwindle.2.3.3 The need for a more general approach

Ideally we would like to be able to trace the effects of biotechnology (including

individual technologies and 'packages' of technologies) on economic variables, suchas total output, employment, income distribution, trade flows, and regional impacts. In practice, however, the task is formidable due to the complexity of the socioeconomicsystem within which changes in biotechnology are occurring. For example, it is clear from two of the three studies just examined that the system is global. The report bythe U.S. Congress, Office of Technology Assessment implies that in examining theeffects of biotechnology on U.S. agriculture it is necessary to consider the impact onU.S. international competitiveness (although this is not adequately followed throughin the study itself). To the extent that adoption of biotechnologies by Americanfarmers increases U.S. international competitiveness, there will, through the export

multiplier effect, be further consequences for U.S. output, employment, and possiblyincome distribution. Similarly, Bijman et al. (1986) note that one factor affecting theincome of coconut farmers is the planting of improved oil palm trees, which resultedfrom successful cloning in other countries.In view of the complexity of the pattern of interdependencies in the global system it ishardly surprising that analytical methods have been found wanting. Nevertheless,economists have attempted to capture more of these interdependencies, going beyondattempts to 'add up' the effects of technical change (which, because they ignoreinterdependence, often lead to erroneous results). A survey of some of these attemptsis to be found in Lipton and Longhurst (1986) in the context of an examination of the

effects on the poor in Third World countries of introducing modern seed varieties.Lipton and Longhurst argue that 'because a national or village society or economy (wewould add global economy) is a complete and interacting set of parts, the adding-upapproach implicit in almost all the analyses of how modern varieties affect the poor ...is at best seriously incomplete and at worst dangerously wrong' (p. 88). They go on toexamine three more general approaches that may be referred to as the generalequilibrium approach, the Keynesian approach, and the Leontief approach.The general equilibrium approach , based on the work by Walras and on subsequentdevelopment of this work by contemporary general equilibrium theorists, considersthe effects of technical change on demand and supply and therefore on relative prices.Changes in relative prices lead in turn to a new set of price incentives for producersand consumers and hence to a new general equilibrium. The main strength of thegeneral equilibrium approach is that it considers the effect on prices , and thereforeresource allocation, of the interaction between markets. Its main weakness lies in thelimiting assumptions which are made. It is assumed in general equilibrium theory thatland, labour, and capital are fully employed; that prices are competitively determined;and that labour and other nonland inputs are perfectly mobile. Furthermore, unrealistic



assumptions are made about technological knowledge and the nature of the production process (see Fransman, 1986b, pp. 10-11).The Keynesian approach , as discussed by Lipton and Longhurst, considers themultiplier effect of expenditures (on items relating to the modern varieties) onincomes as the money is spent through successive rounds. For example, as largefarmers purchase biotechnology packages (e.g., herbicide plus herbicide-resistantseeds) they generate income for the owners and employees of the producers anddistributors of the packages who do the same when they spend their income, etc. Tothe extent that this creates a demand for increased production and thereforeemployment, small farmers may benefit, not from adopting the new biotechnology

package, but from an increase in their off-farm income which is often an importantsource of total income for small farmers. This kind of interdependence is neglected byattempts to 'add up' the effects of technical change on different categories of farm,looking only at production while ignoring expenditures. Conversely, however, a major weakness of the 'Keynesian approach' is that it neglects a rigorous discussion of

production.The Leontief approach , on the other hand, examines the effects of successive roundsof production on incomes [for example, 'incomes from making extra grain via modernvarieties; from providing the extra irrigation water, fertilizer, pesticides, etc. to growthe extra modern variety grain; from providing the extra feedstock to make thefertilizer, etc.; and so on' (p. 95)]. The Leontief approach assumes that all inputsincrease in the same proportion as output rises. The main strength of this approach liesin its capture of intersectoral interdependencies.Despite their drawbacks, these three approaches share an attempt to move beyond the

partial analysis of the 'add-up' approach to capture more general effects. However,their progress is only relative, for the general effects are very general indeed. For example, in all three approaches, technical change remains exogenously determined.While this may be realistic in a Third World economy where at least in the initialstages, the new technologies are exogenously introduced, it does not deal adequatelywith the rich countries where, as we saw in Section 2.2, technical change isendogenous. Furthermore, as Lipton and Longhurst conclude,Even if we managed to combine neo-Walrasian, Keynesian and Leontief ... analysesof 'directional effects' of modern varieties on the poor, larger 'historical' interactions of modern varieties with the state, class structures, population change, and land

distribution would be left out. And such interactions may be the main way that, in thelong run, modern varieties affect the poor.(p. 102)Despite the difficulties, a search for a more satisfactory way to analyse general effectsis necessary if the total impact of technical change in general, and biotechnology in

particular, is to be understood. The aim of the present section has been to point brieflyto some of the ways being explored to move forward.



2.4 Implications for the third world 7

2.4.1 Introduction2.4.2 A survey of some literature2.4.3 Preconditions and constraints on third world entry and desirable patterns of

specialization

2.4.4 An illustrative case study: cuba's entry into new biotechnology2.4.5 Biotechnology and information/communication technology

2.4.1 Introduction

Three key questions need to be examined in discussing the implications of biotechnology for Third World countries:1. What are the effects of the global development of biotechnology on Third Worldcountries?2. What are the preconditions and constraints on Third World entry into the

biotechnology field?3. How may Third World countries go about selecting areas for specialization?In this section we shall first briefly survey the literature that examines the implicationsof biotechnology for Third World countries. We shall then examine these threequestions in more detail. Finally, the Cuban experience with biotechnology will besurveyed to examine the case of a small and relatively low-income country.

Contents - Previous - Next

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Opportunities like these have induced many electronics firms to become increasinglyinterested in bioprocessing, as can be seen by the recent joint venture signed betweenGenentech and Hewlett-Packard (U.S. Congress, Office of Technology Assessment,1984, p. 53). However, as we shall see in more detail later, potential contract

problems, such as opportunistic behaviour on the part of a research partner, may be anobstacle in the way of joint research. For example, the electronics company mightsubsequently sell the equipment to other biotechnology firms, thus undermining itsinitial research partner's competitive advantage derived from the research. (SeeWilliamson, 1975, for a discussion of the possible costs of transacting acrossmarkets.) As an alternative to subcontracting or jointly developing desired equipment,a firm has the option of in-house production. However, the viability of this option will

be limited by the firm's existing technological capabilities and by the attendant risksand uncertainties.When limitations such as these prevent in-house production through verticalintegration (the 'hierarchy' approach), and when high transaction costs prohibitmarket-contracted joint research (the 'market' approach), then alternative forms of organizing the search for new biotechnologies become potentially important. Oneexample of such an alternative is the Japanese group, or Keiretsu , in whichnoncompeting firms are loosely structured around the group's trading company andone or more financial institution. These firms are linked by obligational, rather thanarm's-length, market relationships, and these relationships are reinforced by (1)regular meetings between the Presidents and Vice-Presidents of the most importantfirms in the group; (2) common dependence on credit from the group's financialinstitutions; and (3) a common relationship with the group's trading company (seeFransman, 1986d, for further details). The large Japanese groups, such as Mitsubishi,Mitsui, and Sumitomo, contain both biotechnology-using firms (in areas such as

pharmaceuticals, chemicals, and brewing) as well as electronics and instrumentationfirms. As a result of the obligational relations these large groups are well placed toreap the benefits of technological synergies.Forms of cooperation also exist among firms belonging to different groups. The

biotechnology project established by the Japanese Ministry of International Trade andIndustry (MITI) will be examined in greater detail below. Other biotechnology

projects have been established privately. For example, the Biotechnology ProductResearch Development Association was established in 1983 to develop chemical

products biotechnologically. This association includes both chemical and electronicsfirms-Kao Soap, Mitsui Petrochemical, Dainippon, Sanyo Chemical, Ajinomoto,Hitachi Electric, and Mitsubishi Electric (Tanaka, 1985, p. 26).These alternative forms of organization to 'markets' and 'hierarchies' tend to favour large firms. As is made clear in a report on Japanese biotechnological capabilitiesundertaken under contract from the U.S. Department of Commerce (1985a, b), and

published in June 1985, it is from such firms that the United States 'sees the strongestfuture competition coming'.



Japan will rapidly become more competitive with the US and Europe [in the field of biotechnology] because much of the commercialisation of biotechnology in Japan is being carried out by large established companies. These companies have extensiveexperience in necessary process control and the financial backing so necessary for

bringing products to market.(U.S. Department of Commerce, 1985a, p. xviii)In reporting on a recent visit to the United States, a team from the EuropeanCommunity (EC) pointed to a contradiction in the conventional wisdom there: on theone hand, a large part of the vitality and competitive strength of the U.S.

biotechnology industry is argued to be derived from the efforts of relatively small biotechnology firms, while on the other hand the greatest fear of future competitionarises not from small new biotechnology firms, but from the established Japanesegiants.Two points emerge from the present discussion. (1) As the development cycle evolves

for biotechnology, large firms and concomitant oligopolistic market structures arelikely to become more important for the reasons outlined above. This will imply atendency towards increasing barriers to entry with important implications for smallfirms in industrialized countries and for the Third World. (2) Understanding theevolution of biotechnological knowledge requires analysis of forms of organization.cial implications

There is concern among many groups that privatisation in biotechnology inindustrialised countries will result in:- increased secrecy among scientists, for whom open communication of researchresults has historically been at the heart of maintaining the integrity of scientificresearch;- development of products based on profit motivation-rather than concern for publicwelfare;- hazards relating to the technology being overlooked because of monetaryconsiderations or secrecy requirements;- a narrowing of the genetic base due to the use of more profitable (for the seedcompanies and chemical TNCs) high yielding, often hybrid varieties; and- increased concentration among industries affected by privatisationhttp://www.unu.edu/unupress/unupbooks/uu31te/uu31te0a.htm

The Industry Handbook: Biotechnology

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Biotechnology uses of biological processes in the development or manufacture of a product or in the technologicalsolution to a problem. Since the discovery of DNA in 1953, and the identification of DNA as the genetic material in alllife, there have been tremendous advances in the vast area of biotechnology. Biotech has a wide range of usesincluding food alterations, genetic research and cloning, human and animal health care, pharmaceuticals and theenvironment.

The biotech arena has not been without controversy. In the 1970s, researchers were forced to stop doing certaintypes of DNA experiments, and other countries banned the use of genetically modified agricultural products. Morerecently, we've seen the controversy over cloning as well as stem-cell research. Perhaps the biggest development inthe biotechnology field (as far as investors go) occurred when, in the 1980s, the U.S. Supreme Court ruled to allowfor patenting of genetically modified life forms. This means that intellectual property will always be at the forefront of biotechnology - some argue that the scope of patent protection actually defines the industry.

Because of extremely high research and development costs coupled with very little revenue in the years of development, many biotechnology companies must partner with larger firms to complete product development. Over

the past decade, the biotech industry, along with the hundreds of smaller companies operating in it, has beendominated by a small handful of big companies; however, any one of these smaller companies have the potentialto produce a product that sends them soaring to the top.

Common Applications of Biotechnology

AgricultureImproved foods, pest control, plant and animal

disease control, improved food production.

IndustryOil/mineral recovery, environmental protection,waste reduction. Improved detergents, chemicals,

stronger textiles.

Health CareDrugs, vaccines, gene therapy, tissuereplacements.

ResearchUnderstanding the human genome and better detection of diseases.

There are still a lot of unknowns in biotechnology, but high-profile analysts, politicians and CEOs have all beenquoted as stating that biotechnology is the future of health sciences.

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Key Ratios/Terms

Research and Development (R&D) as a percentage of Sales = R&D ExpendituresRevenue

Generally speaking, the higher the percentage spent on R&D, the more is being spent developing new products.Thus, the lower this is, the better. This ratio is useful when comparing one company to another or to the industry ingeneral. (To learn more, read The Ins And Outs Of In-Process R&D Expenses .)

Medicare/Medicaid: This national health insurance program is responsible for reimbursing individuals for certainhealth related costs. Any sudden changes in funding and reimbursement rates can have profound effects on thebiotech industry. (For more insight, read What Does Medicare Cover? )

Orphan Drugs: These are drugs designed to treat people with rare diseases and infections (occurring in less than200,000 individuals). Once the drugs are marketed to the public, orphan drug makers might not benefit from hugedemand, but governments will usually subsidize many of the costs of producing these drugs.

(For more reading, see Chasing Down Biotech Zombie Stocks and Using DCF In Biotech Valutaion .)

Because drug development is an important aspect of biotechnology, understanding the process of approval of drugsfor sale to the problem is also an important part of investing in the biotech industry.

Food & Drug Administration (FDA) Approval Process

Phase I (approx. 1 year)This is testing on 20-80 healthy individuals. The purpose of thisphase is to determine the dosage and safety of the drug.

Phase II (approx. 1-3 years)

As testing on 100-300 patients suffering from disease or condition,this phase mainly determines effectiveness and potential sideeffects.

Phase III (approx. 2-3 years)

As testing on 1000-5000 patients suffering from disease or condition,this phase monitors side effects brought on by long-term usage. Thisstage is by far the most stringent and rigorous. Some of the patientsreceive the drug and the others receive a placebo (like a sugar pill)to determine effectiveness.

Note: It has been estimated that only 1-2 out of 20 drugs that enter the FDA testing process actually gainfinal approval.

Analyst InsightAnalyzing even a blue-chip company is no easy task. The job is even more difficult when the company in questionhas very little revenue and its livelihood hinges on one or two potential products.

As with analyzing any company, estimating earnings is key. Because of the long R&D phase, during which thereis little revenue coming in, determining the prospective earnings of a biotech company is tricky. You can start bylooking at the company's products in both development and production. For a company that is already sellingproducts, looking at the sales trends makes it easy to determine the growth rates and market potential for the drug.For products in the pipeline you need to look at the disease that the drug/product intends to target and how large thatmarket is. A drug that cures the common cold, cancer or heart disease is more lucrative than an orphan drug

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often proved to be problematic. Small biotech firms don't have the distribution capabilities to promote their new drugs, so they are forced to license their drugs to other suppliers.

3. Power of Buyers. The bargaining power of customers has different levels in the biotech arena. For example, a company that sells pharmaceutical drugs has thousands of individual customers and doesn'tneed to worry too much about a buyer revolt. After all, when is the last time you were able to bargain withthe pharmacist for a better deal? On the other side are the biotech firms, which sell highly specializedproducts to governments and hospitals. These large organizations have a lot more bargaining power withbiotech companies.

4. Availability of Substitutes. The threat of substitutes in the biotechnology field, again, really depends onthe area. While patent protection might stop the threat of alternative drugs and chemicals for a period of time, eventually there will be a company that can produce a similar product at a cheaper price. Genericdrugs, for instance, are a problem: a company that spends millions of dollars on the creation of a new drugmust sell it at a high price to recoup the R&D costs, but then along comes a generic drug maker, whichsimply copies the formula and sells it for a fraction of the cost. This is a big problem in foreign countrieswhere there is a lack of government control. Organizations will illegally produce patent protected drugs andsell them at much lower prices.

5. Competitive Rivalry. There are more than 1,000 biotech companies operating in North America. With thetop 1% of these companies making up a majority of the revenue, it's a tough industry in which to make amark. The fight to see who can cure a disease or condition has researchers working day and night. Tradesecrets are also extremely valuable. In short, the rivalry is extremely intense.

http://www.investopedia.com/features/industryhandbook/biotech.asp

iotechnology uses of biological processes in the development or manufacture of a product or in the technologicalsolution to a problem. Since the discovery of DNA in 1953, and the identification of DNA as the genetic material in alllife, there have been tremendous advances in the vast area of biotechnology. Biotech has a wide range of usesincluding food alterations, genetic research and cloning, human and animal health care, pharmaceuticals and theenvironment.

The biotech arena has not been without controversy. In the 1970s, researchers were forced to stop doing certaintypes of DNA experiments, and other countries banned the use of genetically modified agricultural products. Morerecently, we've seen the controversy over cloning as well as stem-cell research. Perhaps the biggest development inthe biotechnology field (as far as investors go) occurred when, in the 1980s, the U.S. Supreme Court ruled to allowfor patenting of genetically modified life forms. This means that intellectual property will always be at the forefront of biotechnology - some argue that the scope of patent protection actually defines the industry.

Because of extremely high research and development costs coupled with very little revenue in the years of development, many biotechnology companies must partner with larger firms to complete product development. Over the past decade, the biotech industry, along with the hundreds of smaller companies operating in it, has beendominated by a small handful of big companies; however, any one of these smaller companies have the potentialto produce a product that sends them soaring to the top.

Common Applications of Biotechnology

AgricultureImproved foods, pest control, plant and animal

IndustryOil/mineral recovery, environmental protection,









disease control, improved food production.waste reduction. Improved detergents, chemicals,stronger textiles.

Health CareDrugs, vaccines, gene therapy, tissuereplacements.

ResearchUnderstanding the human genome and better detection of diseases.

There are still a lot of unknowns in biotechnology, but high-profile analysts, politicians and CEOs have all beenquoted as stating that biotechnology is the future of health sciences.

Key Ratios/Terms

Research and Development (R&D) as a percentage of Sales = R&D ExpendituresRevenue

Generally speaking, the higher the percentage spent on R&D, the more is being spent developing new products.Thus, the lower this is, the better. This ratio is useful when comparing one company to another or to the industry ingeneral. (To learn more, read The Ins And Outs Of In-Process R&D Expenses .)

Medicare/Medicaid: This national health insurance program is responsible for reimbursing individuals for certainhealth related costs. Any sudden changes in funding and reimbursement rates can have profound effects on thebiotech industry. (For more insight, read What Does Medicare Cover? )

Orphan Drugs: These are drugs designed to treat people with rare diseases and infections (occurring in less than200,000 individuals). Once the drugs are marketed to the public, orphan drug makers might not benefit from hugedemand, but governments will usually subsidize many of the costs of producing these drugs.

(For more reading, see Chasing Down Biotech Zombie Stocks and Using DCF In Biotech Valutaion .)

Because drug development is an important aspect of biotechnology, understanding the process of approval of drugsfor sale to the problem is also an important part of investing in the biotech industry.

Food & Drug Administration (FDA) Approval Process

Phase I (approx. 1 year)This is testing on 20-80 healthy individuals. The purpose of thisphase is to determine the dosage and safety of the drug.

Phase II (approx. 1-3 years)

As testing on 100-300 patients suffering from disease or condition,this phase mainly determines effectiveness and potential sideeffects.

Phase III (approx. 2-3 years)

As testing on 1000-5000 patients suffering from disease or condition,this phase monitors side effects brought on by long-term usage. This

stage is by far the most stringent and rigorous. Some of the patientsreceive the drug and the others receive a placebo (like a sugar pill)to determine effectiveness.

Note: It has been estimated that only 1-2 out of 20 drugs that enter the FDA testing process actually gainfinal approval.















Analyst InsightAnalyzing even a blue-chip company is no easy task. The job is even more difficult when the company in questionhas very little revenue and its livelihood hinges on one or two potential products.

As with analyzing any company, estimating earnings is key. Because of the long R&D phase, during which thereis little revenue coming in, determining the prospective earnings of a biotech company is tricky. You can start bylooking at the company's products in both development and production. For a company that is already sellingproducts, looking at the sales trends makes it easy to determine the growth rates and market potential for the drug.For products in the pipeline you need to look at the disease that the drug/product intends to target and how large thatmarket is. A drug that cures the common cold, cancer or heart disease is more lucrative than an orphan drugtargeting an obscure disease affecting fewer than 100,000 people in North America; furthermore, most analystsprefer companies that are developing treatments as opposed to vaccines. Treatment drugs are used continuouslyand repeatedly, whereas vaccines are a one-time shot and are not nearly as lucrative from a financial perspective.(Read Measuring The Medicine Makers to learn more.)

Ideally, you want a company to have several products in development. That way, if one does not make it through theapproval process, there are other products to balance the blow. At the same time, there is a happy medium betweena company being too focused, and a company having so many developing ideas and products that it loses focus andspreads itself too thin.

Next, you want to take a look at is how far the company's products are in the stages of clinical development, and howclose the product is to FDA approval. All companies wishing to sell drugs and/or biotech products in the U.S. requireFDA approval. If a company is relatively new at the FDA process, you can expect it to take longer for it to gainapproval. It is for this reason that many small biotech companies will partner with larger, more experienced ones. Thedifference of one year in gaining approval can mean millions of dollars.

As the key to any successful biotech company is solid financing, you also must consider where the company isgetting its money from. Take a look under current assets on the balance sheet; the company should have plenty of cash. By looking at the current ratio /working capital ratio you should be able to determine whether it is cash stricken.Because ratios vary wildly across different industries, compare the ratios only to those of similar companies within thebiotech industry. The reason for the variation is that most biotech companies use equity financing instead of borrowing, partly because equity is cheaper and partly because many banks and creditors usually refuse to finance

such high-risk ventures for which there is a gross lack of collateral.

The other question you need to answer is where the company's money is being spent. Research and developmentshould be the answer. Most biotech firms spend a majority of their money on R&D for new products. Some believethat the more a company spends on R&D, the better the company. Even more important, however, is finding acompany that does a lot of research while still controlling expenses to make the cash last for the years ahead. For companies with sales, the process is a little easier: you can look at R&D expenditures in relation to revenue,employees, or some other measure, and then compare it to similar biotech firms. This gives insight into how frugalthe company is with its money.

When considering investing in biotech, doing a simple stock screen based on earnings, revenue or some other financial figure might not uncover the diamond in the rough. You need to research the potential market for a drug,determine whether there are competitive products and, most importantly, predict whether the product will gain final

approval. This doesn't mean you need to be a doctor to analyze a biotech stock, but you do need to understand thearea of biotechnology in which the company is situated, and whether the risk of investing in the company is worth thereward.

Porter's 5 Forces Analysis

1. Threat of New Entrants. Because the biotech industry is filled with lots of small companies trying to hit the jackpot, the barriers to enter this industry are enough to scare away all but the serious companies. Biotechfirms require huge amounts of funding to finance their large R&D budgets. Having ample cash is one of the





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