Biotechnology in a Global Economy

October 1991

OTA-BA-494

NTIS order #PB92-115823
Recommended Citation:

U.S. Congress, Office of Technology Assessment, Biotechnology in a Global Economy,

OTA-BA-494 (Washington, DC: U.S. Government Printing Office, October 1991).

For sale by the U.S. Government Printing Office

Superintendent of Documents, Mail Stop: SSOP, Washington, DC 20402-9328

ISBN 0-16 -035541-9
Foreword

Since the discovery of recombinant DNA technology in the early 1970s, biotechnology

has become an essential tool for many researchers and the underpinning of new industrial

firms. Biotechnology-which has the potential to improve the Nation’s health, food supply,

and the quality of the environment—is viewed by several countries as a key to the marketplace

of the 21st century. In order to understand the potential of biotechnology in a global economy,

it is first necessary to identify current and potential applications of biotechnology, and to learn

how various Nations support and regulate the uses of biotechnology in commerce.

This report examines the impact of biotechnology in several industries, including

pharmaceuticals, chemicals, agriculture, and hazardous waste clean-up; the efforts of 16

Nations to develop commercial uses of biotechnology; and the actions, both direct and

indirect, taken by various governments that influence innovation in biotechnology.

The report was requested by the House Committee on Science, Space, and Technology;

the Senate Committee on Agriculture, Nutrition, and Forestry; the Senate Committee on the

Budget; and the Senate Committee on Governmental Affairs. OTA was assisted in preparing

this study by a panel of advisers, experts from 16 countries who participated in an international

conference, two workshop groups, and more than 140 reviewers selected for their expertise

and diverse points of view on the issues covered in the report. OTA gratefully acknowledges

the contributions of each of these individuals. As with all OTA reports, responsibility for the

content of the final report is OTA’s alone. The report does not necessarily constitute the

consensus or endorsement of the advisory panel, the workshop groups, or the Technology

Assessment Board.

JOHN H.-GIBBONS

Director

,.,

Ill
Biotechnology in a Global Economy Advisory Panel

Alberto Adam

Vice President

International Agricultural Division

American Cyanamid Co.

Wayne, NJ

Robert Reich, Chair

John F. Kennedy School of Government

Harvard University

Cambridge, MA

Brian Ager

Director, Senior Advisory Group on Biotechnology

Brussels, Belgium

Robert H. Benson

Senior Patent Attorney

Genentech, Inc.

South San Francisco, CA

Stephen A. Bent, Partner

Foley & Lardner

Alexandria, VA

Jerry Caulder

. Chairman, President, and Chief Executive Officer

Mycogen Corp.

San Diego, CA

Peter F. Drake

Executive Vice President and

Director of Equity Research

Vector Securities International, Inc.

Deerfield, IL

Anne K. Hollander

Washington, DC

Michael Hsu

President

Asia/Pacific Bioventures Co.

New York, NY

Dennis N. Longstreet

President

Ortho Biotech

Raritan, NJ

Lita L. Nelsen

Associate Director

Technology Licensing Office

Massachusetts Institute of Technology

Cambridge, MA

Richard K. Quisenberry

Vice President, Central Research

and Development

DuPont Experimental Station

Wilmington, DE

Sarah Sheaf Cabot

Biotechnology Licensing Consultant

Malvern, PA

James 3?. Sherblom . Chairman and Chief Executive Officer

TSI Corp.

Worcester, MA

Donna M. Tanguay,

Willian, Brinks, Olds, Hofer, Gilson, & Lione

Washington, DC

William J. Walsh

Executive Vice President and Chairman

Currents International, Inc.

Oakton, VA

Thomas C. Wiegele*

Director

program for Biosocial Research

Northern Illinois University

DeKalb, IL

W. Wayne Withers,

Senior Vice President, Secretary and

General Counsel

Emerson Electric Co.

St. Louis, MO

Kenneth J. Macek

President

TMS Management Consulting

Framingham, MA

* Deceased.

NOTE:

iv

OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the advisory panel members.

The panel does not, however, necessarily approve, disapprove, or endorse this report. OTA assumes full responsibility for the

report and the accuracy of its contents.
OTA Project Staff-Biotechnology in a Global Economy

Roger C. Herdman, Assistant Director, OTA

Health and Life Sciences Division

Michael Gough, Biological Applications Program Manager

Gretchen S. Kolsrud, Biological Applications Program Manager1

Kevin W. O’Connor, Project Director

Kathi E. Hanna, Senior Analyst

Margaret McLaughlin, Analyst

Randolph R. Snell, Analyst 2

Suzie Rubin, Research Analyst

Editor

Bart Brown, Washington, DC

Support Staff

Cecile Parker, Office Administrator

Linda Rayford-Journiette, Administrative Secretary

Jene Lewis, Secretary

Contractors

Evan Berman, Arlington, VA

Sue Markland Day, University of Tennessee

Genesis Technology Group, Cambridge, MA

Kathi E. Hanna, Churchton, MD

Gregory J. Mertz, Washington, DC

Michael K. Hsu, Asia/Pacific Bioventures Co.

Tai Sire, Washington, DC

Paul J. Tauber, Ithaca, NY

William J. Walsh, Oakton, VA

Hal Wegner, Washington, DC

Aki Yoshikawa, University of California, Berkeley
Page

Chapter 1: Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Part I: Commercial Activity

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

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

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

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

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

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

Part II: Industrial Policy

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

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

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

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

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

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

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

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

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

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

3

29

39

45

73

99

119

129

147

151

173

203

229

243

249

257

260

265

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

vi
Chapter 1

Summary

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

computer. ‘‘

John Naisbitt & Patricia Aburdene

Megatrends 2000

“Biotechnology-the very word was invented on Wall Street-is a set of techniques, or

tools, not a pure science like much of academic biology.”

Robert Teitelman

Gene Dreams
CONTENTS

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

COMMERCIAL ACTIVITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Financing of Biotechnology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Pharmaceutical Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Chemical Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Environmental Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

INDUSTRIAL POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Science and Technology Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Intellectual Property Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

INTERNATIONAL COMPETITIVENESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Japan ● . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

OPTIONS FOR ACTION BY CONGRESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Federal Funding for Biotechnology Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Targeting Biotechnology Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Developing Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Coordinating Federal Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Protecting Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ● . . . .

Improving Industry-University Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Structuring Coherent Tax Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3

3

3

7

8

10

12

13

13

14

16

19

19

19

21

21

21

22

22

23

23

24

24

Box

l-A. Defining Biotechnology . . . .

l-B.

l-C.

Sixteen Countries . . . . . . . . . .

Biotech’s 1991 Stock Boom

Boxes

Page

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

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

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

l-D. Arrangements Between Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

l-E. Measuring International Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5

5

7

8

20

Figure

Figure

l-1. States Where Releases of Genetically Engineered Organisms

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

Page

Have

. . . . . . . . . . . . . . . . . . . . 17

Tables

Table Page

l-1. Major Events in the Commercialization of Biotechnology . . . . . . . . . . . . . . . . . . . . . . . 2

l-2. Approved Biotechnology Drugs/Vaccines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

l-3. Characteristics, Pharmaceutical Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

l-4. Proposed Pending or Performed Field Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

l-5. U.S. Federal Funding for Biotechnology, Fiscal Year 1990 . . . . . . . . . . . . . . . . . . . . . . 20
Chapter 1

Summary

INTRODUCTION

Biotechnology-both as a scientific art and commercial entity—is less than 20 years old (see table

l-l). In that short period of time, however, it has

revolutionized the way scientists view living matter

and has resulted in research and development (R&D)

that may lead to commercialization of products that

can dramatically improve human and animal health,

the food supply, and the quality of the environment

(see box l-A). Developed Primarily in U.S. laboratories, many applications of biotechnology are now

viewed by companies and governments throughout

the world as essential for economic growth in several

different, seemingly disparate industries.

To what degree is biotechnology being used as a

tool in basic research, product development, and

manufacturing? In what industries is biotechnology

being used, and how are various national governments promoting and regulating its uses? Will the

United States retain its preeminence in biotechnology, or will the products and services created by

biotechnology be more successfully commercialized in other nations? What is the role played by

multinational corporations, and how is international

biotechnology R&D funded? Because of its importance to U.S. competitiveness in an increasingly

global economy, biotechnology is viewed as one of

the keys to U.S. competitiveness during the years

ahead. This report describes the increasing international use of commercial biotechnology in industrialized and newly industrializing countries (NICs)

(see box l-B) and the ways governments promote

and regulate the uses of biotechnology.

COMMERCIAL ACTIVITY

Biotechnology is not an industry. It is, instead,

a set of biological techniques, developed through

decades of basic research, that are now being

applied to research and product development in

several existing industrial sectors. Biotechnology

provides the potential to produce new, improved,

safer, and less expensive products and processes.

Pharmaceuticals and diagnostics for humanS and

animals, seeds, entire plants, animals, fertilizers,

food additives, industrial enzymes, and oil-eating

and other pollution degrading microbes are just a

few of the things that can be created or enhanced

through the use of biotechnology.

Many early claims about biotechnology, seen in

retrospect, were premature. Products have not been

developed and marketed as quickly as previously

thought possible, and many scientific and public

policy issues remain to be settled. However, biotechnology has arrived as an important tool for both

scientific research and economic development. Its

effect on the world’s economy will certainly grow in

the years ahead, as research leads to new products,

processes, and services.

Financing of Biotechnology

The competitiveness of U.S.-developed biotechnology products and processes may ultimately

depend on broad issues, e.g., fair trade practices,

protection of intellectual property, regulatory

climate, and tax policies. The competitiveness of

U.S. innovation, however, could very well rely on

the ability of biotechnology companies to stay in

business. Because biotechnology is capitalintensive, staying in business means raising substantial sums of cash. Start-up companies’ fundamental

need for cash, coupled with the desire of venture

capitalists in the United States to profit from the

creation of high-value-added products (based’ on

cutting-edge technology) have led to the financial

community’s substantial involvement in the formation of biotechnology-based firms.

Venture Capital and the Dedicated

Biotechnology Company

The United States has led the world in the

commercial development of biotechnology because

of its strong research base-most notably in biomedical sciences--and the ability of entrepreneurs

to finance their ideas. During the early 1980s, a

combination of large-scale Federal funding for basic

biomedical research, hype surrounding commercial

potential, and readily available venture capital

funding led to the creation of hundreds of dedicated

biotechnology companies (DBCs).

Dedicated biotechnology companies are almost

exclusively a U.S. phenomenon; no other country

has a remotely comparable number. Biotechnology companies are created specifically to exploit the

- 3-
4 ● Biotechnology in a Global Economy

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

1973 First cloning of a gene.

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

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

First hybridoma created.

1976 First firm to exploit rDNA technology founded in the United States (Genentech).

Genetic Manipulation Advisory Group started in the United Kingdom.

1980 Diamond v. Chakrabarty--U.S. Supreme Court rules that micro-organisms can be patented.

Cohen/Boyer patent issued on the technique for the construction of rDNA.

United Kingdom targets biotechnology for research and development (Spinks’ report).

Federal Republic of Germany targets biotechnology for R&D (Leistungsplan).

initial public offering by Genentech sets Wall Street record for fastest price per share increase ($35 to $89 in 20 minutes).

1981 First monoclonal antibody diagnostic kits approved for use in the United States.

First automated gene synthesizer marketed.

Japan targets biotechnology (Ministry of international Trade and Technology declares 1981, “The Year of Biotechnology”).

initial public offering by Cetus sets WallStreet record for the largest amount of money raked in an initial public offering ($1 15

million).

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

1982 First rDNA animal vaccine (for colibacillosis) approved for use in Europe.

First rDNA pharmaceutical product (human insulin) approved for use in the United States and the United Kingdom.

1983 First expression of a plant gene in a plant of a different species.

New biotechnology firms raise $500 million in U.S. public markets.

1984 California Assembly passes resolution establishing the creation of a task force on biotechnology. Two years later, a guide

clarifying the regulatory procedures for biotechnology is published.

1985 Advanced Genetic Sciences, inc. receives first experimental use permit issued by EPA for small-scale environmental release

of a genetically altered organism (strains P. syringae and P. fluorescens from which the gene for ice-nucleation protein had

been deleted.

1986 Coordinated Framework for the Regulation of Biotechnology published by Office of Science and Technology Policy.

Technology Transfer Act of 1986 provides expanded rights for companies to commercialize government-sponsored

research.

1987 U.S. Patent and Trademark Office announces that nonhuman animals are patentable subject matter.

October 19th-Dow Jones Industrial Average plunged a record 508 points. initial public offerings in biotechnology-based

companies virtually cease for 2 years.

1988 NIH establishes program to map the human genome.

First U.S. patent on an animal--transgenic mouse engineered to contain cancer genes.

1989 Bioremediation gains attention, as microbe-enhanced fertilizers are used to battle Exxon Valdezoil spill.

Court in Federal Republic of Germany stops construction of a test plant for producing genetically engineered human insulin.

Gen-Probe is first U.S. biotechnology company to be purchased by a Japanese company (Chugai Pharmaceuticals).

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

the United States.

Federal Republic of Germany enacts Gene Law to govern use of biotechnology.

Hoffman-LaRoche (Basel, Switzerland) announces intent to purchase a majority interest in Genentech.

Mycogen becomes first company to begin large-scale testing of genetically engineered biopesticide, following EPA approval.

First approval of human gene therapy clinical trial.

1991 Biotechnology companies sell $17.7 billion in new stock, the highest 5-month total in history.

Chiron Corp. acquires Cetus Corp. for $660 million in the largest merger yet between two biotechnology companies.

EPA approves the first genetically engineered biopesticide for sale in the United States.

SOURCE: Office of Technology Assessment, 1991.
Chapter 1--Summary ● 5

Box 1-A—Defining Biotechnology

The first challenge in describing the effect of

biotechnology on a global economy is to define

what biotechnology is. The term “biotechnology”

means different things to different people. Some

view biotechnology as all forms of biological

research, be it cheesemaking and brewing or

recombinant DNA (rDNA) technology. Others,

only view biotechnology as including modern

biological techniques (e.g., rDNA, hybridoma technology, and monoclonal antibodies). Some people

have analogized biotechnology to a set of new tools

in the biologist’s toolbox by referring to “biotechnologies.’ To Wall Street financiers and venture

capitalists who invested in the creation of companies in this area, biotechnology represents a hot new

source of financial risk and opportunity. Congress,

increasingly invoked in public policy questions

raised by biotechnology, in one statute referred to

products “primarily manufactured using recombinant DNA recombinant RNA, hybridoma technology, or other processes involving site specific

genetic manipulation techniques” (35 U.S.C.

156(2)(B)).

In 1984, OTA arrived at two definitions of

biotechnology. The first definition--broad in

scope--described biotechnology as any technique

that uses living organisms (or Parts of organisms) to

make or mod@ products, to improve plants or

animals, or to develop micro-organisms for specific

uses. This definition encompassed both new biological tools as well as ancient uses of selecting

organisms fur improving agriculture, animal husbandry, or brewing. A second, more narrow

definition refers only to “new” biotechnology:

the industrial use of rDNA, cell fusion, and novel

bioprocessing techniques. It is the development

and uses of the new biotechnology that has

captured the imagination of scientists, financiers, policymakersy journalists, and the public.

As in earlier OTA reports, the term biotechnology, unless otherwise specified, is wed in reference to new biotechnology.

SCX,JFNX: Office of ‘Bcbnology Assmsm4 1991,

commercial potential of biotechnology. These companies generally start as research organizations with

science and technology but without products. They

do not undertake R&Don nearly so broad a scale as

established companies. Instead, they focus on specific technologies, particular products, and niche

markets. The companies must fund the initial costs

of infrastructure development—including buildings,

Box 1-B--Sixteen Countries

In compiling this report, OTA focused on biotechnology-related developments in the following

countries:

Australia

Brazil

Canada

Denmark

Federal Republic of Germany

France

Ireland

Japan

The Netherlands

Singapore

South Korea

Sweden

Switzerland

Taiwan (Republic of China)

United Kingdom

united states

In addition, the biotechnology-related activities

of the European Community (EC) as a whole are

considered. The countries chosen are representative

of a range of commercial and governmental activity. This roster is not exhaustive; biotechnology

plays an important role in many other nations. As

this report was compiled, major political changes

occurred including the merging of the Federal

Republic of Germany and the German Democratic

Republic. The merger of both countries raises many

questions regarding industrial competitiveness that

are beyond the scope of this report.

SOURCE: CMice of ‘IWmlogy Assessmon$ 1991.

plants, equipment, and people-without the benefit

of internally generated revenues. They depend on

venture capital, stock offerings, and relationships

with established companies for their financing

needs.

The boom era for founding DBCs occurred

between 1980 and 1984, when approximately 60

percent of existing companies were founded. In

1988, the Office of Technology Assessment (OTA)

verified that there were 403 DBCs in existence

and over 70 major corporations with significant

investments in biotechnology. The majority of

these companies have a strong focus on human

health care products, largely because capital

availability has been greater for pharmaceuticals

than for food or agricultural products, due to the

prospect of greater and faster market reward.
6 ● Biotechnology in a Global Economy

In the early 1980s, companies had little trouble

raising cash, often obtained by licensing away key

first-generation products and vital market segments.

As time passed, the term “biotechnology” lost its

ability to turn promises of future products into

instant cash. Several factors have been cited for

tightened availability of venture capital financing:

Basic gene-splicing technology became readily

available to an increasing number of companies, both in the United States and abroad.

Product development was slower than expected

(e.g., unforeseen technical problems, slow regulatory approval and patent issuance, and

difficulties in scale-up and in obtaining meaningful clinical results).

The 1987 stock market crash slammed shut

opportunities for initial public offerings, and

for 18 months biotechnology companies had to

get by with little new public financing.

Expected returns on investments have not

materialized as expected.

To date, most U.S. biotechnology companies

have no sales and have been losing money since

their inceptions. Capital and market value are

concentrated in only a few of the hundreds of firms

involved in biotechnology. Only one-fifth of biotechnology companies surveyed in 1990 were profitable. Most companies are still several years away

from profitability and positive cash flow, but the top

20 firms could last more than 3 years on current cash

levels without needing to raise additional money.

Despite the slower-than-expected commercialization of biotechnology, start-up firms have been

able to raise cash in the initial stages of operation.

Second and third rounds of needed financing, that

are necessary to bridge the gap between basic

research and a marketable product, are more difficult

to come by. While the venture capital community

has become more conservative in where they

choose to invest, viable opportunities appear to

remain for entrepreneurs with good ideas. However, a bottleneck is developing as start-up

companies attempt to move forward toward

development, testing, and marketing—the expensive part of the process. As much as $5 to $10

billion may be needed just to develop the 100

biotechnology products currently in human clinical trials.

Companies fortunate enough to have gone public

before 1987 are generally able to obtain needed cash

through limited partnerships, secondary public offerings, and strategic alliances. The stock market

crash in October 1987 virtually stopped all initial

public offerings in biotechnology-based companies.

By 1991, however, stock offerings were again in

vogue, both for new and established firms (see box

l-C). The top DBCs will most likely remain stable,

surrounded by an ever-changing backdrop of startup companies. Those DBCs that do survive will rely

on corporate relationships of every form and combination of forms imaginable (see box l-D).

Consolidation

Start-up companies will continue to appear, but

these new DBCs will likely face the reality of merger

or acquisition. Only a dramatic surge in the public

markets or the creation of breakthrough products or

processes will save some of these companies from

this fate. Consolidation of DBCs is inevitable, most

likely necessary, and desirable for some companies.

What concerns some observers is the role that

foreign acquisition and investment will play in the

fate of many of these vulnerable fins. Although it

is true that joint activity between firms has been on

the rise (involving both U.S. companies with foreign

firms and between U.S.-based firms themselves),

much of this activity is necessary to conduct

business in a global market, i.e., licensing, marketing, and co-marketing agreements. Currently, there

is insufficient evidence to state that U.S. commercial interests in biotechnology are threatened by

foreign acquisition. To date, most corporations

have avoided this mechanism. As U.S. DBCs move

closer to product reality, however, foreign corporations with large pools of cash may be more willing

to pursue acquisition in order to ensure manufacturing rights. Executives of DBCs tend to feel that

manufacturing rights will be crucial for the viability

of their companies.

The recent merger of the United States’ largest

biotechnology company, Genentech, with Swissowned Hoffmann-LaRoche, has increased public

interest and concern in foreign acquisition of U.S.

biotechnology concerns. While some foreign firms

(usually large, multinational corporations) are

actively investing in U.S. DBCs, approximately

three-quarters of all mergers and acquisitions

involving biotechnology companies are between

U.S.-based firms (e.g., the 1991 merger between

Chiron and Cetus). However, U.S. corporations are

disadvantaged when it comes to acquisition because
Chapter l---Summary . 7

Box 1-C—Biotech’s 1991 Stock Boom

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

Average plunged a record 508 points. Following the

stock market crash, there was little interest on Wall 1600 ~ü -1

Street in stock offerings for biotechnology-related ,Aoo {

companies. By early 1991, however, the U.S. market

for new stock offerings had heated up to a record pace, lzoo ~

I

despite the fact that the U.S. economy was in a

recession and stock sales in general were sluggish. 1000 ~

\

Between January and May 1991, companies sold 800 :

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

/ \

/

600 ;

total in history. Various reasons were cited by analysts

for the hot market: the approval by FDA of new 400 “

/ \

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

/ ‘p)\

economic hard times, and pent-up demand following 200 “ 1

slow stock activity over a 3-year period. O ‘- “ - 

~ ‘- “T” ‘-—~ “~ ‘1-–— ~

--

1980 81 82 83 84 85 86 87 88 89 90 911 Unlike earlier bull markets for biotechnology ,~~,OU~~ ~aY *4 ,991

stocks, however, analysts generally view the 1991

boom as short term in nature. By the end of May, there

were signs that the stock demand was cooling. For SOURCE: IDD Information Services, Inc., New York.

example, Regeneron Pharmaceuticals (Tarrytown,

NY), a start-up company that had set a record for biotechnology companies by raising $99 million in its initial public

offering in April (4.5 million shares sold at $22 per share), saw its stock value drop to $12 per share by the end of

May after reporting first-quarter losses of $1.1 million.

SOURCE: Ofi%ce of lkchnology Assessmen4 1991, adapted from IDD Information Services; R. Rhe& “Bioteeh Stocks: M the Good Times

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

1991, p. 404.

American accounting practices prevent them from are in the final stages of testing. Of the more than

deducting the full expense of acquisition in the year

that it occurs. Some analysts believe that this

difference in accounting practices allows foreign

corporations to move more rapidly toward acquisition. In addition, the cost of capital in the United

States makes it harder for U.S. corporations to save

the sums needed for acquisition and more difficult

for DBCs to raise the cash needed to take biotechnology products to market.

The Pharmaceutical Industry

Although the arrival of products has been

slower than expected, the development of biotechnology-based pharmaceutical products is

flourishing. To date, 15 biotechnology-based drugs

and vaccines are on the market (see table 1-2). Both

DBCs and established multinational pharmaceutical

companies are utilizing the tools and techniques of

biotechnology in their drug development efforts.

Revenues in the United States from biotechnologyderived products were estimated to be approximately $1.5 billion in 1989, and $2 billion in 1990.

Many new products are in the pipeline, and several

100 biotechnology drugs and vaccines undergoing

human testing for a variety of conditions, 18 have

essentially completed clinical trials and are awaiting

Food and Drug Administration (FDA) approval.

Biotechnology is particularly important for research

involving drug discovery as it allows for a molecular

and cellular level approach to understanding disease,

drug-disease interaction, and drug design. Biotechnology is likely to be the principal scientific

driving force for the discovery of new drugs and

therapeutic chemical entities as the industry

enters the 21st century.

The modern pharmaceutical industry is a global,

competitive, high-risk, high-return industry that

develops and sells innovative high-value-added

products in a tightly regulated process (see table

1-3). Because of the strong barriers to entry which

characterize the global pharmaceutical industry,

many DBCs are focusing on niche markets and

developing biotechnology-based pharmaceutical

products. Established pharmaceutical companies

have been increasingly developing in-house capabilities to complement their conventional research with
8 . Biotechnology in a Global Economy

Box 1-D--Arrangements Between

Companies

Acquisition. One company taking over controlling interest in another company. Investors are

always looking for companies that are likely to be

acquired, because those who want to acquire such

companies are often willing to pay more than the

market price for the shares they need to complete

the acquisition.

Merger. Combination of two or more companies, either through a pooling of interests, where the

accounts are combined; a purchase, where the

amount paid over and above the acquired company’s book value is carried on the books of the

purchaser as goodwill; or a consolidation, where a

new company is formed to acquire the net assets of

the combining companies.

Strategic alliances. Associations between separate business entities that fall short of a formal

merger but that unite certain agreed on resources of

each entity for a limited purpose. Examples are

equity purchase, licensing and marketing agreements, research contracts, and joint ventures.

SOURCE: mm Qf lkclmoktgy Assewmen$ 1991.

biotechnological techniques for use as research

tools. Strategic alliances and mergers between major

multinational pharmaceutical companies and DBCs

allow both to compete in the industry and combine

their strengths: the innovative technologies and

products of those DBCs with financial and marketing power blended with the development and

regulatory experience of the major companies.

The original intent of many of the early DBCs was

to become fully integrated, competitive pharmaceutical companies, but the economic realities of the

pharmaceutical business will likely deny this opportunity to most DBCs. Biotechnology, while not

likely to fundamentally change the structure of

the pharmaceutical industry, has provided a

much needed source of innovation for both

research and product development. Currently,

much of the success or failure with the commercialization of biotechnology in the pharmaceutical industry rests on economic, market, scientific, and technical considerations. Government policies that affect

these conditions contribute to, but are not likely to

independently determine, success or failure.

Agriculture

Biotechnology has the potential to be the latest in

a series of technologies that have led to astonishing

increases in the productivity of world agriculture in

recent decades. Biotechnology can increase food

production by contributing to further gains in

yield, by lowering the cost of agricultural inputs;

and by contributing to the development of new

high-value-added products to meet the needs of

consumers and food processors. These potential

products include agricultural input (e.g., seeds and

pesticides), veterinary diagnostics and therapeutics,

food additives and food processing enzymes, more

nutritious foods, and crops with improved food

processing qualities. Thus far, R&D has focused on

crops and traits that are easiest to manipulate,

particularly single-gene traits in certain vegetable

crops. As technical roadblocks are lifted, research is

likely to increase and spread to other crops and other

traits.

In the United States, DBCs are applying biotechnology to agriculture, and well-established firms are

adapting biotechnology to their existing research

programs. The ability to profit from new products

depends on a variety of factors, such as the potential

size of the market for these products, the existence

of substitutes, the rate at which new products and

technologies are adopted, the potential for repeat

sales using patent or technical protection, the

existence of regulatory hurdles, and the prospect for

consumer acceptance of these new foods. Because

these factors vary considerably from country-toPhoto credit: Calgene

Tomatoes, 25 days postharvest. The transgenic tomatoes,

left, have not deteriorated, contrasted to the

nonengineered tomatoes, right.
Chapter 1--Summary . 9

Table 1-2—Approved Biotechnology Drugs/Vaccines

Revenues* Revenues*

Product name Company Indication U.S. approval 1989 1990

Epogen (tin)**

Epoetin Alfa

Neupogen**

Granulocyte colony

stimulating factor

G-CSF

Humatrope (R)**

Somatotropin

rDNA origin for

injection

Humulln(R)

Human insulin

rDNA origin

Actimmune**

Interferon gamma 1-b

Activase (R)

Alteplase, rDNA origin

Protropln (R)**

Somatrem for injection

Amgen

Thousand Oaks, CA

Dialysis anemia June 1989

February 1891

March 1987

October 1982

December 1990

November 1987

October 1985

June 1986

November 1988

March 1991

95

NA

300

Amgen

Thousand Oaks, CA

Chemotherapy

effects

NA

Eli Lilly 40 50

Indianapolis, IN

Human growth

hormone deficiency

in children

Eli Lilly

Indianapolis, IN

Diabetes 200

NA

175

100

40

250

Genentech

San Francisco, CA

Infection/chronic

granulomatous disease

NA

200

120

Genentech

San Francisco, CA

Acute myocardial

infarction

Genentech

San Francisco, CA

Human growth

hormone deficiency

in children

Roferon (R)-A**

Interferon alfa-2a

(recombinant/Roche)

Hoffmann-La Roche

Nutley, NJ

Hairy cell

leukemia

AlDS-related

Kaposi’s sarcoma

60

Leukine** NA

Granulocyte microphage

colony stimulating

factor GM-CSF

Recombivax HB (R)

Hepatitis B vaccine

(recombinant MSD)

Orthoclone OKT(R)3

Muromonab CD3

Procrit**

Erythropoietin

Immunex

Seattle, WA

Infection related to

bone marrow transplant

NA

Merck

Rahway, NJ

Hepatitis B

prevention

July 1986 100 110

Ortho Biotech

Raritan, NJ

Ortho Biotech

Raritan, NJ

Kidney transplant

rejection

June 1986

December 1990

30

NA

35

AIDS-related NA

anemia

Pre-dialysis anemia

HibTiter (tin)

Haemophilus B

conjugate vaccine

Intron (R) A**

lnterferon-alpha2b

Praxis Biologics

Rochester, NY

Haemophilus

influenza type B

December 1988 10 30

Schering-Plough

Madison, NJ

June 1986

June 1988

November 1988

February 1991

September 1989

Hairy cell 60 80

leukemia

Genital warts

AIDS-related

Kaposi’s sarcoma

Hepatitis C NA NA

Energix-B SmithKline Beecham Hepatitis B 20 30

Hepatitis B vaccine Philadelphia PA

(recombinant)

● Estimated U.S. revenues in millions of dollars

● *Orphan Drug

NA = not applicable

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

1990 Annual Survey.
10 ● Biotechnology in a Global Economy

Table 1-3-Characteristics, Pharmaceutical Industry

●

●

●

●

●

●

●

●

●

●

●

Top firms are huge, multinational firms primarily based in the

United States and Europe.

Significant entry barriers; very expensive to develop, test, and

market new products.

Not particularly concentrated.

Tightly regulated.

Development of high-value-added products.

Consolidation of companies occurring.

Size of global market in 1989: $150 billion.

United States the largest market; combined EC is second;

Japan is second largest single country.

Major companies are financially strong and vertically integrated

firms, controlling all aspects of business (R&D, manufacturing,

and marketing).

Main competitors for the world pharmaceutical market: huge,

multinational companies based in the United States, Switzerland, the United Kingdom, Germany, and increasingly, Japan.

Japanese market historically difficult to enter; U.S. and European companies, to ensure market presence, have collaborated with those Japanese companies that dominate their

domestic market. Japanese companies are now beginning to

globalize their operations.

SOURCE: Office of Technology Aesesement, 1991.

country, the climate for application of biotechnology

to agriculture also varies. These applications are

being explored throughout the world, mainly in

developed countries that are major food exporters

(e.g., Australia, Canada, France, and the United

States).

Because most biotechnology products for agricultural use are still being developed, comparison

of numbers of products actually manufactured in

different countries is not yet meaningful. However, since field tests of many potential plant

products are regulated by national agricultural

or environmental authorities, comparison of

some test numbers is possible. As of 1990, over

60 percent of all field tests worldwide (most

involving transgenic plants) have occurred in the

United States (see table 1-4).

Although there is much active European agricultural biotechnology research in northern Europe,

particularly Germany and Denmark, public concern

about possible environmental risks and ethical

issues associated with biotechnology has translated

into regulations that discourage field testing of

genetically engineered organisms. The lack of patent

protection for transgenic organisms also tends to

inhibit investment in transgenic plants in Europe. In

Japan and other Asian countries, public perception

of biotechnology appears to be mixed. Biotechnological methods used to produce pharmaceuticals and

industrial and food processing enzymes are accepted, however, agricultural applications are less

so. Consequently, relatively little attention has been

paid to transgenic plants and animals in Asia. One

exception is work on plants, especially rice, derived

from plant cell cultures. The application of biotechnology to food processing has received a great deal

of interest in Japan, where the country’s expertise in

fermentation is likely to be applied to food production.

The Chemical Industry

The chemical industry is one of the largest

manufacturing industries in the United States and

Europe. Currently, over 50,000 chemicals and formulations are produced in the United States. The

consumption of chemical products by industry gives

these products a degree of anonymity as they usually

reach consumers in altered forms or as parts of other

goods.

Biotechnology has a limited, though varied,

role in chemical production. The production of

some chemicals now produced by fermentation,

such as amino acids and industrial enzymes, may be

improved using biotechnology. Similarly, biotechnology can be used to produce enzymes with altered

characteristics (e.g., greater” stability in harsh solvents or greater heat resistance). In many instances,

biotechnology products will probably be developed

and introduced by major firms without the fanfare

that has accompanied other biotechnology developments and, like much of chemical production, will

remain unknown to those outside the industry. The

/%oto credit: Kevin O’Connor

Transgenic pigs born with a bovine growth hormone gene

inserted in the embryo.
Chapter 1--Summary ● 11

Table 1-4-Proposed Pending or Performed Field Tests

1986 1987 1988 1989 1990 Undated Total

Australia . . . . . . . . . . . . . . . . . . . . . . . . . . —

Belgium . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . —

Denmark . . . . . . . . . . . . . . . . . . . . . . . . . . —

Finland . . . . . . . . . . . . . . . . . . . . . . . . . . . —

France . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . . —

tidy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —

The Netherlands . . . . . . . . . . . . . . . . . . . —

New Zealand . . . . . . . . . . . . . . . . . . . . . . —

Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —

Sweden . . . . . . . . . . . . . . . . . . . . . . . . . .

United Kingdom . . . . . . . . . . . . . . . . . . . . 1

United States . . . . . . . . . . . . . . . . . . . . . . 4

1

2

2

4

15

6

4

4

5

14

—

3

—

2

4

3

—

1

1

1

2

4

—

23

5

14

21

2

1

10

1

2

4

6

3

1

10

132

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

 1990.

The abilityto produce high-value-added products is one reason the pharmaceutical industry is attractiveto venture capitalists.

Genentech’s tissue plasminogen activator (left) costs $2,200 per dose. In contrast, Solmar Corp’s. Bio Cultures, used in waste

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

chemical industry’s greatest use of biotechnology the worldwide industry response to oil shocks,

may be the result of the industry’s expanding recessions, and increasing competition.

investment in pharmaceuticals and agriculture.

This reflects the industry’s shift away from the The use of biochemistry or fermentation to

production of bulk chemicals and toward investment produce chemicals has historically received a great

in research-intensive, high-value-added products; deal of attention in Japan, and the Ministry of
12 ● Biotechnology in a Global Economy

International Trade and Industry (MITI) targeted

improvements in these processes through biotechnology in 1980. Another application that has received particular attention in Japan is the biosensor

(a device that uses immobilized biomolecules to

interact with specific environmental chemicals and

then detects and quantifies either the interaction

itself or the product of the interaction, e.g., a change

in color, fluorescence, temperature, current, or

voltage).

In the very long run, biotechnology may have a

major impact in shifting the production of fuel and

bulk chemicals away from reliance on nonrenewable

resources (e.g., oil) and toward renewable resources

(e.g., biomass). However, current work in this field

appears to be limited, in part, because the international price of oil has remained too low to encourage

investment in alternatives, and, in part, because the

chemical industry throughout the world has restructured during the last 10 years, moving away from

bulk chemical production and toward the production

of specialty chemicals, pharmaceuticals, and agricultural products.

Environmental Applications

Although biotechnology has several potential

environmental applications-including pollution

control, crop enhancement, pest control, mining,

and microbial enhanced oil recovery (MEOR)—

commercial activity to date is minuscule compared to other industrial sectors. Bioremediation,

efforts to use biotechnology for waste cleanup, has

received public attention recently because of the use

of naturally occurring micro-organisms in oil-spill

cleanups. The U.S. bioremediation industry includes

more than 130 firms, but it is the focus of few DBCs.

Nevertheless, though small, the size of the commercial bioremediation sector in the United States far

exceeds activity in other nations.

Although bioremediation offers several advantages over more conventional waste treatment technologies, several factors hinder its widespread use.

Relatively little is known about the effects of

micro-organisms in various ecosystems. Research

data are not disseminated as well as research in other

industrial sectors because of limited Federal funding

of basic research and the proprietary nature of

business relationships under which bioremediation

is most often used. Regulations provide a market for

bioremediation by dictating what must be cleaned

up, how clean it must be, and which cleanup

methods may be used; but regulations also hinder

commercial development, due to their sheer volume

and lack of standards governing biological waste

treatment.

Bioremediation, unlike the pharmaceutical industry, does not result in the production of high-valueadded products. Thus, venture capital has been slow

to invest in the technology, and little incentive exists

for product development. The majority of the

bioremediation firms are small and lack sufficient

capital to finance sophisticated research and product

development programs. Bioremediation primarily

depends on trade secrets, not patents, for intellectual

property protection.

Although some research is being conducted on

genetically engineered organisms for use in bioremediation, today's bioremediation sector relies

on naturally occurring micro-organisms. Scientific, economic, regulatory, and public perception

limitations that were viewed as barriers to the

development of bioremediation a decade ago still

exist. Thus, the commercial use of bioengineered

micro-organisms for environmental cleanup is not

likely for the near future.
INDUSTRIAL POLICY

Industrial policy is the deliberate attempt by a

government to influence the level and composition of a nation’s industrial output. Industrial

policies can be implemented through measures such

as allocation of R&D funds, subsidies, tax incentives, industry regulation, protection of intellectual

property, and trade actions.

Industrial policies in the United States are complex, fragmented, continually evolving, and rarely

targeted comprehensively at a specific industry.

There is no industrial policy pertaining to biotechnology per se, but rather, a series of policies formulated by various agencies to encourage growth,

innovation, and capital formation in various hightechnology industries. And, just as there is no

biotechnology policy in the United States, biotechnology companies tend to behave not as an industry

but rather, as agrichemical firms, diagnostic firms,

or human therapeutic firms. Biotechnology companies have been built on a unique system of

financing, but they largely confront the same

regulatory, intellectual property, and trade policies faced by other U.S. high-technology firms.

There may be a need for the Federal bureaucracy to

fine-tune its policies as biotechnology moves

through the system, but, to date, Federal agencies

have not seen the need to revolutionize their

practices for biotechnology.

Science and Technology Policy

National policies promoting biotechnology R&D

can be categorized as targeted or diffuse. In general,

countries that have targeted biotechnology (e.g.,

Japan, Korea, Singapore, and Taiwan) share an
14 ● Biotechnology in a Global Economy

emphasis on export-driven growth, and they view

comprehensive government policies strongly promoting biotechnology and other critical technologies as key to future development. In the United

States and much of Europe, in contrast, growth

promotion is less prominent and is one of many

competing social concerns. In these countries, fundamental goals are more diffuse.

A challenge to the adoption of a national biotechnology policy is the increasing internationalization

of research, development, and product commercialization. The advent of EC 1992 has led to the creation

of unique regional biotechnology research programs

that offer yet another approach to strategic planning.

These programs are currently modest in size, and

their eventual success will likely hinge on political

and economic integration of the European Community (EC).

Government targeting of biotechnology for special support is one of the least significant factors

affecting competitiveness in the technology. Many

components of targeting strategies such as the

emphasis on technology transfer, the development

of incubator facilities and venture capital for start-up

fins, and the establishment of interdisciplinary

centers for research are certainly helpful for focusing

attention. However, in a sense, they operate at the

margins.

There are two prerequisites for a nation to fully

compete in biotechnology: 1) a strong research

base and 2) the industrial capacity to convert the

basic research into products. A strong research

base is the first priority, allowing small companies

and venture capitalists the opportunity to take risks.

Without this, industry-oriented programs will not be

very successful. Targeted national biotechnology

strategies have been generally unsuccessful, in large

part because of the way biotechnology arose out of

basic biomedical research only to become fully

integrated into the various fields of life sciences. The

term ‘biotechnology’ retains coherence only to the

extent that regulation, public perception, and intellectual property law deal with specific biotechnology techniques as something unique.

A major challenge for national governments is to

sort out national from private interests, a task that

will become more difficult as competitiveness is

used as a justification for particular expenditures.

Economic nationalism may be particularly difficult

to define and pursue, given the pluralistic, incremental, and increasingly global nature of the world’s

R&D system. In the emerging global research and

commercial environment, aggressive companies,

whether large multinationals or savvy newcomers,

seek the best ideas regardless of nationality. Likewise, they produce goods and services to effectively

compete in international markets regardless of

nationality. It is no longer always clear what

constitutes an American firm in a global economy.

Regulations

Governments impose regulations to avert the

costs associated with mitigating adverse effects

expected to result from the use of the technology.

But, developing regulations is difficult when a

technology is new and the risks associated with it are

uncertain or poorly understood. Because there have

been no examples of adverse effects caused by

biotechnology, projecting potential hazards rests on

extrapolations from problems that have arisen using

naturally occurring organisms. The consensus

among scientists is that risks associated with

genetically engineered organisms are similar to

those associated with nonengineered organisms

or organisms genetically modified by traditional

methods, and that they may be assessed in the

same way. Where similar technologies have been

used extensively, past experience can be an

important guide for risk assessment.

Many countries, in addition to the United States,

have adapted existing laws and institutions to

accommodate advances in biotechnology. However,

it is no simple matter to base scientifically sound

biotechnology regulation on legislation written for

other purposes. The differences in approach from

nation to nation, particularly through their effects on

investment and innovation, will influence the ability

of the United States to remain competitive in

biotechnology on the international scene.

Worldwide, there have been three basic approaches to the regulation of biotechnology:

No regulations. A number of countries with

active investment in biotechnology have no

regulations specific to biotechnology. In most

of the growth-oriented countries of the Pacific

Rim, such as Taiwan, South Korea, and Singapore, biotechnology has been targeted as a

strategic industry. Some industrialized European nations, including Italy and Spain, which

have no regulations specifically dealing with
Photo credit: Advanced Genetic 

Two applications of “ice-minus” bacteria at Advanced Genetic Sciences in 1987 reflect varying requirements of regulation.

At left, worker in protective clothing applies bacteria on strawberry test plot in April 1987; at right, worker in

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

biotechnology, expect to develop them to

harmonize with EC directives on biotechnology.

Stringent biotechnology-specific regulations. Some northern European countries have

responded to public pressure to impose stringent regulations specific to biotechnology by

enacting new legislation. Under a 1986 law,

Denmark prohibits the deliberate release of

genetically engineered organisms without the

express permission of the Minister of the

Environment. Germany enacted new legislation imposing tight restrictions, in 1990. The

EC’s 1990 directives on contained use and

deliberate release of modified organisms, while

not as restrictive as the Danish or German laws,

follow a similar approach in regulating products based on the means by which they were

produced, rather than based on their intended

use.

Limited restrictions. Australia, Brazil, France,

Japan, The Netherlands, the United Kingdom,

and the United States allow the use of biotechnology with some restrictions and oversight. In

these countries, regulations based on existing

or amended legislation governing drugs,

worker health and safety, agriculture, and

environmental protection are being applied to

the use of biotechnology. Stringency varies, as

do the enforcement mechanisms.

In 1986, the Office of Science and Technology

Policy (OSTP) of the White House described the

regulatory policy of the Federal agencies in the

Coordinated Framework for Regulation of Biotechnology. Recognizing that biotechnology is basically

a set of techniques for producing new biochemical

and altered organisms, and that chemicals and

organisms are usually regulated according to their

intended use and not their method of production;

Federal policy fit the products of biotechnology into

the existing web of Federal legislation and regulation. The framework also outlined the approach to

interagency coordination, identifying the lead

agency in several areas of overlapping jurisdiction.

Under the existing Framework for Regulation

of Biotechnology, FDA has approved hundreds of

diagnostic kits, 15 drugs and biologics, and 1 food

additive; the Department of Agriculture (USDA)

and the Environmental Protection Agency (EPA)
16 ● Biotechnology in a Global Economy

have established procedures for reviewing field

tests of modified plants and micro-organisms,

and have approved 236 field tests as of May 1991

(see figure l-l). Although farm activists are concerned about the potential economic effects of

bovine somatotropin (bST), public concern about

the contained uses of modified organisms and their

testing in the field has dissipated in the United

States. However, some problems remain:

Mechanisms established to provide Federal

coordination of activities related to biotechnology have instead become the center of interagency ideological disputes over the scope of

proposed regulations.

The time required for clinical trials necessary

for FDA approval of new drugs and biologics

hurts young firms attempting to commercialize

their first products.

EPA has yet to publish proposed rules for the

regulation of micro-organisms under the Toxic

Substances Control Act of 1976 (TSCA) and

Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA).

EPA considers micro-organisms to be chemical

substances subject to TSCA, an interpretation

that could be legally challenged.

There is little funding for research that would

support risk assessment of planned introductions.

FDA has given little indication of its intentions

for the development of regulations and procedures for evaluating the food safety of genetically modified plants and animals.

Field-testing requirements have been criticized

as too burdensome, especially for the academic

community, and disproportionate to the small

risk associated with these organisms, particularly transgenic crops with no nearby wild,

weedy relatives.

The problems associated with developing regulations add to the costs borne by firms, and is

especially burdensome for small biotechnologybased firms. Despite these difficulties, however,

there is anecdotal evidence that some European

firms have decided to open research and production

facilities in Japan and the United States, in part

because of the more favorable regulatory climate.

Intellectual Property Protection

Intellectual-property law, which provides a personal property interest in the work of the mind, is of

increasing importance to people using biotechnology to create new inventions. Intellectual property

involves several areas of the law: patent, copyright,

trademark, trade secret, and plant variety protection.

All affect emerging high-technology industries because they provide incentives for individuals and

organizations to invest in and carry out R&D. Many

see protection of intellectual property as a paramount consideration when discussing a nation’s

competitiveness in industries fostered by the new

biology.

Broad patent protection exists for all types of

biotechnology-related inventions in the United

States. The Supreme Court decision in Diamond v.

Chakrabarty, that a living organism was patentable,

along with action by Congress and the executive

branch changing Federal policy to increase opportunities for patenting products and processes resulting

from federally funded research have spurred biotechnology-related patent activity. Internationally,

several agreements (e.g., the Paris Union Convention, the Patent Cooperation Treaty, the Budapest

Treaty, the Union for the Protection of New Varieties of Plants, and the European Patent Convention)

provide substantive and procedural protection for

inventions created through the use of biotechnology.

Despite a generally favorable international climate, a number of elements affect U.S. competitiveness in protecting intellectual property. The patent

application backlog at the Patent and Trademark

Office (PTO), domestic and international uncertainties regarding what constitutes patentable subject

matter, procedural distinctions in U.S. law (e.g.,

first-to-invent versus frost-to-file, priority dates,

grace periods, secrecy of patent applications, and

deposit considerations), uncertainties in interpreting

process patent protection, and the spate of patent

infringement litigation, all constitute unsettled areas

that could affect incentives for developing new

inventions.

The backlog of patent applications at PTO is

frequently cited as the primary impediment to

commercialization of biotechnology-related

processes and products. Recent studies reveal that

the pendency period for biotechnology patent applications is longer than that of any other technology.
Chapter 1--Summary ● 17

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

The number in each state equals the number of tests approved

by USDA and EPA in that state as of May 15, 1991.

Total tests ■ 2 3 6

“’”-l U1

~a

Hawaii -

6

cl

6

to Rico 3

‘d

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

IWO, in an effort to reduce the backlog, created a

special biotechnology examining group and instituted an action plan to reduce the average pendancy.

The PTO plan, while showing some promise, stands

little chance of significantly reducing the backlog

for two reasons: the number of filed biotechnology

patent applications grows at a significantly higher

average rate than that for all other types of patent

applications, and PTO is unable to train and keep

qualified patent examiners. The backlog creates

uncertainty for business planning and a disincentive for proceeding with some R&D projects;

however, there is no evidence to suggest that it

significantly affects international competitiveness in biotechnology. Accelerated examination, a

procedural option open to those needing expedited

examination of a patent application, is rarely used

for biotechnology applications. When compared to

other countries, biotechnology patents are granted

faster in the United States than in any major

examining office in the world. And, for products that

have a long regulatory approval time, the delay in

obtaining a patent can result in an extended length of

protection, since the 17-year term does not begin

until the patent is actually issued.

Subject matter protection—what can and cannot be patented—is an issue that has received

much attention because of the types of inventions

created through biotechnology. U.S. law is the

broadest and most inventor-generous statute in the

world; in addition to processes, patents have now

issued for microbes, plants, and, in one instance, a

transgenic animal. The subject of patenting plant and

animal varieties (permitted in the United States but

not in most other countries) and products (pharma-
18 ● Biotechnology in a Global Economy

Photo credit: Claudia 

ceuticals, for example, are patentable in some law. The ability of inventors to understand and

countries but not in others) is of concern to those easily meet the procedural requirements of variwho seek consistent worldwide protection for their ous patent offices may, in the long term, be the

inventions. issue of most importance to inventors of biotechnology products and processes. Procedural issues

Procedural distinctions between the laws of vari- currently under debate in international forums inous nations are receiving increased attention in elude: determining how a priority date is set,

forums convened to harmonize international patent establishing a consistent grace period, determining
Chapter 1--Summary ● 19

requirements for publication of patent applications,

and standardizing translation requirements of applications.

A major concern of U.S. biotechnology companies is the adequacy of U.S. laws to protect against

patent piracy. Process patents constitute the majority of patents issued in the biotechnology area. Such

patents can be vital, especially if they cover a new

process for making a known product. Congress

enacted legislation in 1988 to address concerns

regarding process patent protection. Debate, however, continues as to whether additional protection is

needed. The large number of patents in the emerging

biotechnology field has resulted in a surge of

litigation as companies seek to enforce their rights

against infringement and defend the patent grant in

opposition or revocation proceedings. Such litigation is not surprising given the web of partially

overlapping patent claims, the high-value products,

the problem of prior publication, and the fact that

many companies are interested in the same products.

Litigation, while important to those staking their

property claims, is extremely expensive and a major

drain on finances that could otherwise be directed

toward R&D.

INTERNATIONAL

COMPETITIVENESS

Industrial competitiveness is viewed by some as

the ability of companies in one country to develop,

produce, and market equivalent goods or services at

lower costs than firms in other countries. The

increasingly global economy, however, makes it

more difficult to view industrial competitiveness

this way. Many companies actively investing in

biotechnology are multinational, conducting research, manufacturing, and marketing throughout

the world. These companies contribute to the

economies of nations other than the one in which

they are headquartered. Despite these complications,

it is still possible to broadly discuss strengths and

weaknesses in various countries with respect to

biotechnology.

A number of nations have targeted biotechnology

as being critical for future economic growth. Nationally based R&D programs have arisen in several

countries, and biotechnology has been singled out in

many public policy debates as having economic,

social, ethical, and legal consequences. Using a

number of measures (see box l-E), in 1984 OTA

found that the United States was at the forefront in

the commercialization of biotechnology, that Japan

was likely to be the leading competitor of the United

States, and that European countries were not moving

as rapidly toward commercialization of biotechnology as either the United States or Japan.

United States

In retrospect, the diffusion of biotechnology into

several industrial sectors in many nations makes it

difficult to define what constitutes a strong national

program in biotechnology and to rank the countries

in competitive order. By many measures, the

United States remains preeminent in biotechnology, based on strong research programs and

well-established foundations in pharmaceuticals

and agriculture. Broad-based, federally funded

basic research-especially in biomedicine-is a

hallmark of U.S. capability in biotechnology. In

fiscal year 1990 alone, the Federal Government

spent more than $3.4 billion to support R&D in

biotechnology-related areas (see table 1-5).

Dedicated biotechnology companies, a uniquely

American phenomenon, aided by the vast resources

of venture capital and public markets have provided

innovation to a number of preexisting industries.

U.S. patent law provides generous protection for all

kinds of biotechnology-derived inventions, and laws

and regulations are largely in place to protect the

public health and the environment. Public concern

regarding the uses of biotechnology is minimal

when compared to many other nations.

Japan

In 1981, Japan’s MITI announced that biotechnology, along with microelectronics and new materials, was a key technology for future industries.

The announcement attracted interest and concern

abroad, largely because of the key role MITI played

in guiding Japan’s economic growth in the postwar

period. While government policies encouraged biotechnology investment by a large variety of companies, Japanese investment in biotechnology predates

MITI’s 1981 action. Regardless of earlier actions,

MITI’s naming of biotechnology as an area of

interest probably gave it the legitimacy it previously

lacked and eased financing for private investment—

as it had done earlier for other industries and

technologies. As in the United States and elsewhere,

however, the broad range of potential biotechnology

applications has led to a wide variety of frequently
20 ● Biotechnology in a Global Economy

overlapping initiatives by various Japanese agencies.

Today, MITI is continuing to support R&D efforts

in areas such as: marine biotechnology and biodegradable plastics, addressing relevant industrial

policy (e.g., tax incentives, Japan Development

Bank, and Small Business Finance Corp. loans, and

promotion of industry standards), improving safety

measures (new contained-use regulations and developing lists of industrially exploitable organisms),

and internationalization (regulatory harmonization,

international R&D cooperation, and funding develTable 1-5--U.S. Federal Funding for Biotechnology,

Fiscal Year 1990 (millions of dollars)

Agency Amount

National Institutes of Health. . . . . . . . . . . . . . . . . . .

National Science Foundation . . . . . . . . . . . . . . . . .

Department of Agriculture . . . . . . . . . . . . . . . . . . . . .

Department of Defense. . . . . . . . . . . . . . . . . . . . . . .

Department of Energy. . . . . . . . . . . . . . . . . . . . . . . .

Agency for International Development . . . . . . . . . .

Food and Drug Administration. . . . . . . . . . . . . . . . .

Environmental Protection Agency. . . . . . . . . . . . . .

Veterans Administration . . . . . . . . . . . . . . . . . . . . . .

National Institute of Standards and Technology. . .

National Aeronautics and Space Administration . .

National Oceanic and Atmospheric Administration.

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SOURCE: Office of Technology )ksessment, 1991.

$2,900.0

167.9

116.0

98.0

82.2

28.7

19.4

8.3

7.5

4.8

4.5

2.0

$3,439.3

oping country research). However, in contrast to

the United States, Japan suffers from the lack of

a strong research base, which has led firms to

seek access to research and training abroad,

especially in the United States.

Japan also suffers some weaknesses in the industrial sectors to which biotechnology is most applicable. Japan’s pharmaceutical industry, for example,

was sheltered from international competition until

recently and is only now beginning to develop

international skills in drug development, testing, and

marketing. In agriculture, research is limited to

specialized areas (e.g., rice), as Japan is not a food

exporting country. Additionally, concern regarding

field testing of genetically modified organisms is

pervasive; governmental approval for the first environmental release of a genetically engineered organism-a transgenic tomato---did not occur until

January 1991.

Japan is, however, effectively combining biotechnology with its traditional strength in fermentation, especially in the production of amino

acids and industrial enzymes. There is also active

research with biosensors, based on Japan’s strength

in micro-electronics. The efforts of MITI to promote

biotechnology as a key technology, intergrate biotechnology into existing industrial sectors, while at

the same time bearing some fruit, clearly has been

less successful than many anticipated. As in the

United States and Europe, commercialization has

taken longer, been more technically difficult, and

been more dependent on factors unique to each

industrial sector than expected. Biotechnology has

not yet achieved the spectacular success for Japanese
Chapter l-Summary ● 21

industry that other fields have in the past. For the

foreseeable future, corporate strategies, rather than

MITI initiatives, will likely determine Japan’s investment in biotechnology.

Europe

A number of European countries have technology

policies that resemble those of the United States

National policies, however, are becoming less distinctive as Europe moves closer to economic integration.

Unlike Japan, Europe’s strengths in pharmaceuticals and agriculture lend themselves to the

adoption of biotechnology. Germany, Switzerland,

and the United Kingdom are home to major multinational pharmaceutical companies. These companies

are investing heavily in both in-house and collaborative research in biotechnology, with much of the

latter conducted with U.S. DBCs. Promising research in agricultural biotechnology is under way in

several countries, especially Belgium, France, Germany, and the United Kingdom. The picture is

clouded, however, by several factors: the fragmentation of research efforts, adverse public

opinion, and uncertain effects of recently enacted

European Community directives on field testing

of genetically modified organisms.

While many countries are targeting biotechnology, those that have not developed a research base

and the industrial capacity to convert basic research

into products are not likely to be serious commercial

competitors in the near future.

OPTIONS FOR ACTION

BY CONGRESS

There is no way to directly measure a nation’s

competitiveness in biotechnology. Modern biology

is being used in many nations, by many multinational corporations, and in many industrial sectors.

In addition, there is no consensus as to what

constitutes the so-called “national interest” in

promoting a technology. Some view competitiveness in terms of who ultimately owns a company

(i.e., where do the profits eventually go), while

others view competitiveness as where jobs and skills

are located.

U.S. competitiveness in the global commercialization of biotechnology has come to the attention of

Congress for three reasons. First, the U.S. Government indirectly supports industrial applications of

biotechnology by funding basic research in a wide

range of relevant disciplines. Second, Federal agencies have the authority to regulate the commercial

development of biotechnology. Third, international

economic competitiveness in various technologies,

including biotechnology, has emerged as a key

bipartisan concern.

In all three areas, Congress plays a direct role.

Through its annual appropriations to Federal agencies, it increases or decreases the level of research

and regulatory oversight. Through its authorization

powers, Congress can create programs and set

priorities for Federal agencies. Through oversight of

agencies’ conduct of research and regulatory programs, Congress can express its enthusiasm and

concern.

Seven policy issues relevant to U.S. competitiveness in biotechnology were identified during the

course of this study:

Federal funding for biotechnology research,

targeting biotechnology development,

developing regulations,

coordinating Federal agencies,

protecting intellectual property,

improving industry-university relationships,

and

structuring coherent tax policies.

Options for congressional action discussed here

build on the discussion in chapters 3 through 12 of

this report. Some options are oriented toward the

actions of the executive branch but involve congressional oversight or direction. The order in which the

options are presented does not imply their priority.

Moreover, the options are not mutually exclusive.

Federal Funding for Biotechnology Research

An issue central to the competitive position of

U.S. efforts in biotechnology is a sufficient and

stable level of funding for areas of science crucial to

the field. In relative and absolute terms, the United

States supports more research relevant to biotechnology than any other country. Clearly, intensive

and sustained Federal investment in applications of

biotechnology to the life sciences has been transformed into commercial products in some industries

faster than others. Commercial applications continue to be more advanced in areas such as human

therapeutics and diagnostics, largely due to the high
22 ● Biotechnology in a Global Economy

levels of funding of basic biological research by the

National Institutes of Health (NIH). Other areas,

such as agriculture, chemicals, and waste degradation, have not come close to approaching the same

levels of funding enjoyed by the biomedical sciences. In some cases, such as agriculture and waste

degradation, slow progress in commercial activity

could be due in part to insufficient funds for basic

research; in other cases, such as chemicals, potential

products are simply not being developed because

industry does not consider the biotechnology products or processes sufficiently better (either functionally or economically) than those that already exist.

Congress could determine that Federal levels of

investment in R&D over recent years have adequately supported the forward integration of biotechnology into many sectors and have contributed

to the commercial successes of U.S. biotechnology

companies. Proceeding with the current funding

patterns would ensure a stable level of research

relevant to biotechnology and its applications. Such

an approach, however, would perpetuate current

disparities in research emphases, with biomedicine

continuing to fare better than agriculture and waste

management.

Congress could conclude that because of social,

economic, and strategic importance, biotechnology

research relevant to agriculture, chemicals, and

waste management deserves additional support. Or

it could direct Federal agencies to dedicate more of

their budgets to applied and multidisciplinary research in biotechnology critical to those industries at

a competitive disadvantage. This option would not

necessarily require new money but would direct

agencies to identify areas of applied research in

biotechnology where awards could be made. Applied areas deserving increased funding could be

identified by committees of peers comprised of

government, academic, and industrial scientists. In

addition, areas of research that require multidisciplinary involvement could receive higher levels of

support. However, any effort to increase emphases

on applied research carries the risk of harming the

support base for basic research. Each agency needs

to consider the balance of support between basic and

applied work within its mission.

Targeting Biotechnology Development

Because it encompasses several processes that

have applications to many sectors of the U.S.

economy, some argue that biotechnology should be

targeted by the Federal Government for aggressive

government support and promotion. Currently, U.S.

industrial growth depends on private sector entrepreneurship, Federal funding of research, and regulatory oversight of various research applications and

commercial development.

Congress could target biotechnology through

legislation that broadly singles it out for favorable

treatment, or through measures that address specific

problems faced by researchers and companies seeking to commercialize products developed through

biotechnology. Legislative attempts to target biotechnology have focused on the establishment of

national biotechnology policy boards and advisory

panels for specific areas of research interest (e.g.,

agriculture, human genome, and biomedical ethics)

and development of a national center for biotechnology information. Those who argue against targeting

biotechnology say that it is not the role of the Federal

Government to pick winners and losers in the world

of commerce, that such efforts have more often

failed than succeeded, and that attempts to target

biotechnology cannot succeed due to the number of

industries involved, all of which face different

scientific, regulatory, patent, and commercial problems. Targeting biotechnology alone cannot assure

increased competitiveness; fostering a research base

(funding, training, and personnel) and maintaining

an industrial capacity to convert basic research into

products also is required.

Developing Regulations

Six years after the Coordinated Framework for

Regulation of Biotechnology was first proposed and

4 years after it became final, regulations for genetically modified pesticides and for certain microorganisms have yet to be issued. This is due to

disagreements among some Federal agencies about

the need for and appropriate scope of regulations.

The failure to promulgate final regulations has led to

complaints by industry representatives that the

regulatory approval process is unclear and inhibits

investment. Manufacturers have also complained of

a lack of guidance on food biotechnology and a lack

of information on FDA’s regulatory intentions. The

Biotechnology Science Coordinating Committee

(BSCC), in one of its last acts before disbanding,

issued a policy statement giving guidance on the

scope of organisms to be regulated. But still no

proposed rules are in sight. Congress could decide to
Chapter 1--Summary .23

use its oversight authority to encourage the agencies

to give informal guidance to manufacturers and to

encourage the rapid development of rules.

TSCA includes a regulatory scheme to screen new

chemicals for their potential to cause unreasonable

risk to human health and the environment. Manufacturers and importers must notify EPA 90 days before

manufacturing or importing a new chemical or

before a chemical is put to a‘ ‘significant new use.’

If EPA determines that the chemical poses an

unreasonable risk of injury to health or the environment, EPA can prohibit or limit its manufacture,

import, or use. As a matter of policy, EPA considers

micro-organisms to be chemical substances subject

to TSCA. EPA’s interpretation has not been challenged in court, and it is not clear how the courts

would rule if it were challenged. Congress could

decide to amend TSCA to specifically include

micro-organisms within its scope. This would assure

EPA review of micro-organisms not fitting under the

jurisdiction of other statutes prior to field testing.

Coordinating Federal Agencies

There will be a continuing need for interagency

consideration of scientific advances, research needs,

and regulatory jurisdiction. OSTP founded the

Biotechnology Science Coordinating Committee

(BSCC) to provide a formal mechanism for discussion of these issues. BSCC became embroiled in

questions of agency policy, specifically in the

content of EPA’s proposed rules, which caused it to

neglect its role as a forum for discussion of broad

scientific issues and as a mechanism for interagency

cooperation. BSCC was also criticized for conducting many of its activities away from public view.

OSTP disbanded the BSCC and replaced it with the

Biotechnology Research Subcommittee (BRS).

BRS has been asked to focus on scientific issues, but

the subcommittee will continue to be involved in

regulatory matters as well. However, BRS has no

statutory authority nor was its formation or purpose

published in the Federal Register. It is not clear what

measures are being taken to ensure that BRS avoids

the difficulties that stymied its predecessor, nor is it

clear that steps are being taken to open its activities

to public scrutiny.

Congress could decides that interagency coordination is adequate or that problems of coordination

are best resolved through Congress’ oversight authority.

Protecting Intellectual Property

Many researchers and companies cite protection

of intellectual property as being of utmost importance to preserving competitiveness in biotechnology. This is less a domestic issue than an international one as U.S. law provides broad protection for

those who invent new and useful processes and

products. However, as markets in biotechnology

become increasingly global, issues arise regarding

subject matter protection, harmonization of patent

procedure, and the context of intellectual property in

international trade.

U.S. law permits patents to issue for any new,

useful and unobvious process, machine, manufacture, composition of matter, or new and useful

improvement of these items. As a result, U.S. law

has permitted the patenting of micro-organisms,

plants, and nonhuman animals. The patenting of

nonhuman animals has led to legislative debate

regarding subject matter protection. Options for

congressional action-which included discussion

on issues such as deposit considerations and exemptions from infringement for certain classes of

users—were presented in an earlier OTA report

(New Developments in Biotechnology: Patenting

Life) and are incorporated here by reference. In

terms of patentable subject matter, U.S. patent law

is the most inventor-friendly statute in the world; it

is unique in that it makes no exceptions to patentability, which are often found in the statutes of other

countries (e.g., animal and plant varieties, public

order or morality, and products such as pharmaceuticals and foods). If Congress takes no action regarding patentable subject matter, broad protection for

inventions created by biotechnology will continue.

Laws created by Congress to regulate interstate

commerce would be relied on to govern the development, approval, sale, and use of such inventions.

Congress could, either through moratorium or prohibition, specifically bar patents from issuing for

nonhuman animals or human beings. Such action

would clarify congressional intent regarding the

limits of subject matter protection, but it would also

create the precedent of using patent law, rather than

laws regulating commerce, to limit the creation of

certain types of inventions.

Harmonization of U.S. patent law with the laws of

other nations is likely to come to Congress’ attention

as a result of several ongoing efforts: the General

Agreement on Tariffs and Trade, the World Intellec-
24 ● Biotechnology in a Global Economy

tual Property Organization, amendments to the

Union for the Protection of New Varieties of Plants,

and other bilateral and multilateral trade discussions. It is too early to predict specific options

arising from each of these forums. In all cases, the

goal of harmonization should be the creation of

consistent laws addressing substantive and procedural issues in patent practice.

Process patent protection is also of increasing

importance to industry. Legislation was introduced

in the 101st and 102d Congresses to grant the

International Trade Commission the right to bar

entry into the United States products made using any

component manufactured in violation of a U.S.

patent and to allow process patent protection on

biotechnology production processes as long as the

starting material is novel. Issues related to the scope

of process patents, obviousness, and import into the

United States of products containing patented parts

will continue to arise. Consensus among companies

is unlikely in many of these policy disputes as many

of these problems involve competing biotechnology

companies that are staking out corporate competitive positions.

Improving Industry-University Relationships

Through a series of actions, both Congress and the

executive branch have encouraged the transfer of

research findings into commercial applications.

Industrial sponsorship of university-based biotechnology research has become a widespread and

generally accepted phenomenon over the past 10

years. The resulting links between academic-based

biotechnology research and industry have several

beneficial effects (e.g., additional resources for

R&D and training, more focus on applied research,

and the development and use of patented inventions). Questions have been recently raised about

possible negative affects of some of these relationships, particularly the conflicts that could arise when

a researcher is involved in trials or testing of new

drugs developed by companies in which they have a

personal financial or fiduciary interest. Some industrialists have expressed concern that guidelines or

regulations requiring disclosure of potential conflicts of interest for federally funded scientists will

have a negative impact on the ability of U.S.

biotechnology firms to transfer the results of federally funded research into commercial application.

Currently, NIH and the Alcohol, Drug Abuse, and

NIH must approve any outside financial arrangements for its employees that could pose potential

conflicts of interest. To date, the Public Health

Service (PHS) has only proposed that investigators

who design, conduct, or report research disclose

financial interests to institutions. Comments on the

proposal were received at a November 1990 public

meeting.

Congress could take no action if it concludes that

the number of cases of alleged conflict of interest

and misconduct have been too few to warrant

legislative action, or that oversight of conflict of

interest is best managed at the university level. If

Congress decides that action is needed, it could

direct the Department of Health and Human Services

(DHHS) to promulgate PHS regulations that clearly

spell out or restrict financial ties for researchers who

conduct evaluations of a product or treatment in

which they have a vested interest. In the absence of

action by DHHS, Congress could also enact legislation to achieve the same goal.

Legislation that restricts the ability of publicly

funded researchers to collaborate with industry

could discourage the entrepreneurial initiative of

scientists and possibly limit the value of government-sponsored research. However, a lack of action

by either Congress or executive agencies to clarify

the limits of such collaboration could result in cases

of actual or perceived conflict of interest with

resulting public concern about the safety of some

biotechnology-derived products.

Structuring Coherent Tax Policies

The Tax Reform Act of 1986 (Public Law 99-514)

contained numerous provisions, including extension

and reduction from 25 to 20 percent of the R&D tax

credit, repeal of the investment tax credit for

equipment investment, and abolition of the preferential treatment for capital gains. Five options for

congressional action were presented in an earlier

OTA report (New Developments in Biotechnology:

U.S. Investment in Biotechnology). One of the

options—restoration of preferential treatment of

capital gains—was addressed by the 101st Congress.

Other options discussed the R&D tax credit,

which is designed to provide an incentive to

companies to increase their commitment to indus-
Chapter l-Summary .25

trial R&D. Firms that annually increase R&D

spending can apply for an R&D tax credit against

Federal income taxes. The credit has been available

since 1981 but is not a permanent part of the tax

code, rather it has been extended several times

through various legislation. Most recently it was

extended through December 31, 1991, by the

Omnibus Budget Reconciliation Act of 1990. Congress could grant the R&D tax credit permanent

status when it expires at the end of 1991. A

permanent credit would reduce the uncertainty that

exists for industrial R&D planners concerning the

credit’s future existence.

The statutory rate of the credit is 20 percent, and

the credit is calculated based on the excess of

qualified research over abase amount linked to R&D

spending in a specific historical period. The base

amount is figured by multiplying a “fixed-base

percentage” by a firm’s average gross receipts over

the preceding 4 years. As currently structured,

companies that do not have positive gross receipts

for the preceding 4 years are not eligible to receive

the R&D credit in the same year as the research

expenses are made. The credit is not refundable in

the current year, so only firms with positive tax

liabilities can use it immediately. Those companies

without current tax liabilities, which include many

DBCs, can carry forward tax credits to offset taxes

up to 15 years in the future. For a DBC, this

carried-forward credit is less valuable than a refundable credit, that would provide immediate returns. In

addition, when considering the time-value of

money, carried-forward tax benefits are less valuable than tax benefits rendered in the current year.

Despite these facts, some successful biotechnology

companies have expressed the opinion that the R&D

tax credit is beneficial and that it does factor into

their decisionmaking practices in terms of R&D

expenditures. Congress may wish to consider changing the structure of the R&D credit to provide more

immediate benefits to biotechnology and other small

high-technology companies that are not yet profitable, by making the credit refundable in the year of

research expenditures.

One particular accounting standard that has received recent attention is the inability of U.S. firms

to amortize goodwill for tax purposes as quickly as

foreign firms. Amortization refers to an accounting

procedure that gradually reduces the cost-value of a

limited-life or intangible asset through periodic

charges to income. Goodwill is a term used in

acquisition accounting to refer to the going-concern

value (defined as the value of a company as an

operating business to another company or individual) in excess of asset value and is considered an

intangible asset. Goodwill represents things such as

the value of a well-respected business name, good

customer relations, and other intangible factors that

lead to greater than normal earning power. Goodwill

has no independent market or liquidation value and

must be written off over time, or amortized. Accounting standards are set by the Financial Accounting Standards Board (FASB), an independent professional board over which Congress has no authority. Foreign companies are not held to FASB rules

and are not required to amortize goodwill, rather

they can write it off immediately as an expense and

in some cases receive a tax deduction. This gives

foreign companies an advantage over U.S. companies with respect to acquisitions because the former

do not have to carry a balance sheet of goodwill over

time. Since Congress has no legislative authority

over the FASB, there is no specific legislative action

that can be taken to change FASB’s rules. Congress

could, however, change the tax code to offer a tax

deduction on goodwill that is amortized. Such action

would recognize the disadvantage that U.S. companies are facing in acquiring U.S. assets, but it could

also fuel further controversial corporate acquisitions

in a number of industries.
Chapter 2

Introduction

“The United States is the world leader in biotechnology. This $2 billion domestic industry is

expected to increase to $50 billion by the year 2000.”

Vice President Dan Quayle

The President’s Council on Competitiveness

Report on National Biotechnology Policy

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

Gail D. Fosler

Chief Economist, The Conference Board
CONTENTS

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

WHAT IS BIOTECHNOLOGY? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

COMMERCIALIZATION OF BIOTECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

ORGANIZATION OF THE REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

CHAPTER 2 REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........................ 33

Box

Box Page

2-A. Three Kinds of Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . .. . .. .. ... +.. . . . . . . . . 31

Figure

Figure Page

2-1. The Structure of DNA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Tables

Table Page

2-1. Major Events in the Commercialization of Biotechnology . . . . . . . . . . . . . . . . . . . . . . 30

2-2. Some Factors That Can Affect Commercialization of Biotechnology . . . . . . . . . . . . 32

2-3. Requesters of OTA Assessment, Biotechnology in a Global Economy . . . . . . . . . . . 33
Chapter 2

Introduction

INTRODUCTION

This report examines international trends in

biotechnology-related commercial activity and governmental approaches to promotion and regulation

of biotechnology. This introductory chapter provides a context for the report’s more technical

chapters by explaining and defining what biotechnology is, by outlining some factors that influence

competitiveness in biotechnology, and by describing the congressional request for this report and the

organization of the Office of Technology Assessment’s (OTA’s) assessment of issues raised by the

requesters of this report.

WHAT IS BIOTECHNOLOGY?

The first challenge in describing the effect of

biotechnology on a global economy is to define

biotechnology. The term “biotechnology” means

different things to different people. Some view

biotechnology as all forms of biological research. To

others, biotechnology includes the use of classical

breeding techniques that have been used for years to

create new plants, animals (e.g., improved livestock), and foods (e.g., baking and brewing). Others

view biotechnology as comprising modern biological techniques (e.g., rDNA, hybridoma technology,

or monoclinal antibodies) that have resulted in

greatly increased understanding of the genetic and

molecular basis of life (see figure 2-l). Some people

have analogized biotechnology to a set of new tools

in the biologist’s toolbox, by referring to “biotechnologies. To Wall Street financiers and venture

capitalists who invested in the creation of companies

in this area, biotechnology represents a hot, new

source of financial risk and opportunity. Congress,

increasingly involved in public policy questions

raised by biotechnology, in one statute referred to

products “primarily manufactured using recombinant DNA, recombinant RNA, hybridoma technology, or other processes involving site-specific genetic manipulation techniques’ (35 U.S.C.

156(2)(B)).

In a 1984 report, after extensive canvassing of

academicians, industrialists, and government officials involved in biotechnology, OTA arrived at two

definitions of biotechnology (3). The first definition—broad in scope-described biotechnology as

any technique that uses living organisms (or parts of

organisms) to make or modify products, to improve

plants or animals, or to develop micro-organisms for

specific uses. This definition encompasses both new

biological tools as well as traditional uses of

selecting organisms for improving agriculture, animal husbandry, or brewing. A second, more narrow

definition refers only to “new” biotechnology:

the industrial use of rDNA, cell fusion, and novel

bioprocessing techniques. It is the development

and uses of this new biotechnology that has

captured the imagination of scientists, financiers,

policymakers, journalists, and the public. As in

earlier OTA reports, the term “biotechnology,”

unless otherwise specified, is used in reference to

new biotechnology.

COMMERCIALIZATION OF

BIOTECHNOLOGY

Biotechnology-both as a scientific art and commercial entity—is less than 20 years old (see table

2-l). Science, however, can find roots in the

Figure 2-l—The Structure of DNA

SOURCE: Office of Technology Assessment, 1991.

–29-
30 ● Biotechnology in a Global Economy

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

1973 First cloning of a gene.

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

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

First hybridoma created.

1976 First firm to exploit rDNA technology founded in the United States (Genentech).

Genetic Manipulation Advisory Group started in the United Kingdom.

1980 Diamond v. Chakrabarty--U.S. Supreme Court rules that micro-organisms can be patented.

Cohen/Boyer patent issued on the technique for the construction of rDNA.

United Kingdom targets biotechnology for research and development (Spinks’ report).

Federal Republic of Germany targets biotechnology for R&D (Leistungsplan).

Initial public offering by Genentech sets Wall Street record for fastest price per share increase ($35 to $89 in 20 minutes).

1981 First monoclinal antibody diagnostic kits approved for use in the United States.

First automated gene synthesizer marketed.

Japan targets biotechnology (Ministry of International Trade and Technology declares 1981, ‘The Year of Biotechnology”).

Initial public offering by Cetus sets Wall Street record for the largest amount of money raised in an initial public offering ($1 15

million).

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

1982 First rDNA animal vaccine (for colibacillosis) approved for use in Europe.

First rDNA pharmaceutioal product (human insulin) approved for use in the United States and the United Kingdom.

1983 First expression of a plant gene in a plant of a different species.

New biotechnology firms raise $500 million in U.S. public markets.

1984 California Assembly passes resolution establishing the creation of a task force on biotechnology. Two years later, a guide

clarifying the regulatory procedures for biotechnology is published.

1985 Advanced Genetic Sciences, Inc. receives first experimental use permit issued by EPA for small-scale environmental release

of a genetically altered organism (strains P. syringae and P. fluorescens from which the gene for ice-nucleation protein had

been deleted.

1986 Coordinated Framework for the Regulation of Biotechnology published by Office of Science and Technology Policy.

Technology Transfer Act of 1986 provides expanded rights for companies to commercialize government-sponsored

research.

1987 U.S. Patent and Trademark Office announces that nonhuman animals are patentable subject matter.

October 19th-Dow Jones Industrial Average plunged a record 508 points. Initial public offerings in biotechnology-based

companies virtually cease for 2 years.

1988 NIH establishes program to map the human genome.

First U.S. patent on an animal-transgenic mouse engineered to contain cancer genes.

1989 Bioremediation gains attention, as microbe-enhanced fertilizers are used to battle Exxon Valdez oil spill.

Court in Federal Republic of Germany stops construction of a test plant for producing genetically engineered human insulin.

Gen-Probe is first U.S. biotechnology company to be purchased by a Japanese company (Chugai Pharmaceuticals).

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

the United States

Federal Republic of Germany enacts Gene Law to govern use of biotechnology.

Hoffman-LaRoche (Basel, Switzerland) announces intent to purchase a majority interest in Genentech.

Mycogen becomes first company to begin Iarge-scale testing of genetically engineered biopesticide, following EPA approval.

First approval of human gene therapy clinical trial.

1991 Biotechnology companies sell $17.7 billion in new stock, the highest 5-month total in history.

Chiron Corp. acquires Cetus Corp. for $660 million in the largest merger yet between two biotechnology companies.

EPA approves the first genetically engineered biopesticide for sale in the United States.

SOURCE: Office of Technology Aseeesment, 1991.
Chapter 2--introduction . 31

discovery of the replication process of deoxyribonucleic acid (DNA)--first proposed nearly 40 years

ago by Francis H.C. Crick and James D. Watson

(1,10,1 1)—and commerce in standard fermentation

techniques, which is centuries old.

The commercialization of biotechnology, both in

terms of research and the development of products

and services, has received increased attention during

the 1980s. The promotion of high-technology is of

increasing concern—both in terms of alleviating

social problems such as hunger, disease, and pollution—and in terms of creating new sources of wealth

for national economies. In a short period of time,

biotechnology has joined a menu of other hightechnology fields, viewed as being important to the

future development of the U.S. economy.

Three main areas of research relevant to biotechnology can be described (see box 2-A). Biotechnology provides the potential to produce new, improved, safer, and less expensive products and

processes. Pharmaceuticals and diagnostics for humans and animals, seeds, whole plants, fertilizers,

food additives, industrial enzymes, and oil-eating

microbes are just a few of the things that can be

created or enhanced through biotechnology.

It is convenient to refer to biotechnology as

though it were a singular, coherent entity, and in

some respects, commercial activity in biotechnology

is unique. Federal spending for biotechnologyrelated research can be estimated, and the linking of

such activities under the term “biotechnology’ is

seen by many as useful for obtaining adequate

research and development (R&D) funding. At least

33 States are actively engaged in some form of

promotion of biotechnology R&D. Such efforts are

seen as a means to achieve academic excellence in

their colleges and universities, as a path to economic

development, or both. In U.S. industry, OTA has

identified more than 400 dedicated biotechnology

companies (DBCs) and 70 established corporations

with significant investments in biotechnology (8).

Many of these companies, especially the DBCs,

share common political concerns (as represented by

the formation of various biotechnology organizations) and business traits (e.g., methods of financing

or means of product development). On Wall Street,

biotechnology is recognized in some business reports as a portfolio of stocks—in much the same

manner as other technologies and industrial sectors

are so recognized.

Box 2-A—Three Kinds of Research

Basic research involves biotechnology by using

its component tools (e.g., recombinant DNA and

hybridomas) to study the different ways in which

biological systems work and to identify the mechanisms that govern how they work. Included in this

category are studies that address such questions as:

how viruses infect cells, how immunity to pathogens is acquired, and how fertilized egg cells

develop into highly complex and specialized organisms? Biotechnology is used in a broad range of

scientific disciplines, ranging from microbiology

(the study of micro-organisms, such as viruses and

bacteria) to biophysics (the use of physical and

chemical theories to study biological processes at

the molecular level). A greater understanding of the

mechanisms of evolution and the resilience of

ecosystems will also come from biotechnology.

Generic applied research is a useful term for

describing research that bridges the gap between

basic science, done mostly in universities, and

applied, proprietary science, done in industry for

the development of specific products. Various

groups have coined alternative phrases, such as

“bridge” research, “technical” research, and

“strategic” research. Examples of generic applied

biotechnology research include----the development

of general methods for protein engineering and

large-scale mammali‘an or plant cdl-culturing.

Applied research is directed toward a very

specific goal. The use of rDNA to develop vaccines

for specific antigens, such as malaria or the human

immunodeficiency virus (HIV) responsible for

acquired immunodeficiency syndrome (AIDS); the

transfer of herbicide or pesticide resistance to a

particular plant species; and the use of monoclonal

antibodies as purification tools in bioprocessing are

all examples of biotechnology use in applied

research.

SOURCE: (Mice of Toctilogy Assossrnm~ 1991.

Because biotechnology has become an essential

tool for many existing industries, there is no such

entity as the biotechnology industry. Rather,

biotechnology is employed by several industrial

sectors, each with its own advantages and obstacles in the race to market (see table 2-2). As DBCs

develop products and services, these companies are

facing many of the opportunities and obstacles faced

by the industrial sector in which they seek to

compete.
32 ● Biotechnology in a Global Economy

Table 2-2-Some Factors That Can Affect

Commercialization of Biotechnology

Antitrust law

Applied research

Basic research

Collaborative ventures

Congressional interest

Coordination between agencies

Cost of capital

Environmental control

Equipment

Export controls

Gaps in knowledge

Government targeting policies

Industrial capability

Intellectual property protection

Joint ventures

Legislation

Marketing agreements

Mergers

Personnel availability

Public and private funding

Public opinion

Regulations

Statutes

Tax incentives

Technology licensing

Technology transfer

Trade

Undergraduate and graduate education

University/industry relationships

SOURCE: Office of Technology Assessment, 1991.

As commercial biotechnology expands in size and

scope, its effect on the international economy is

likely to increase. Biotechnology is likely to be seen

as a national asset by more nations—both as a way

to develop a high-technology base and to increase

market share in several international industrial

sectors. As the use of biotechnology expands,

various factors and barriers come into play. Some of

these factors are business-specific, some industrywide-specific, and some recognizable across the

range of industries affected by biotechnology.

ORGANIZATION OF THE REPORT

The report, which was requested by several

congressional committees (see table 2-3), has two

parts. The first part, Commercial Activity, examines

some of the ways biotechnology has influenced the

following sectors: financing, health, agriculture and

food, chemicals, and environmental applications.

The second part, Industrial Policy, examines the role

of government in forming policies concerning science and technology, regulations, and intellectual

property. Appendixes focus on a summary of

Table 2-3-Requesters of OTA Assessment,

Biotechnology in a Global Economy

Senate

Committee on Agriculture, Nutrition, and Forestry

Committee on the Budget

Committee on Governmental Affairs

House

Committee on Science, Space, and Technology

SOURCE: Office of Technology Asessment, 1991.

biotechnology in 14 countries, U.S. Federal Government funding of biotechnology R&D, and a comparison of biotechnology in the United States and

Japan.

Because biotechnology is so ubiquitous and its

applications so far-reaching, it is impossible to study

in depth all the ways it may be used and all the ways

it may affect the economies of various nations.

Instead, this report focuses on general trends in each

area and uses case studies, as appropriate, to

highlight relevant economic and policy considerations.

This report is the latest in a series of OTA reports

on the subject of biotechnology. Earlier reports

addressed: Impacts of Applied Genetics (2), Commercial Biotechnology (3), New Developments in

Biotechnology (4,5,7,8,9), and Mapping of the

Human Genome (6). This report does not focus on

specific issues addressed in earlier OTA reports, but

rather, draws on them to examine some of the

emerging issues related to the globalization of

biotechnology. Its primary focus is on the description and analysis of commercial activity in biotechnology-related services and products—in both industrialized and newly industrializing nations. Issues solely related to biotechnology development in

Third World nations is beyond the scope of this

report.

Three public meetings were conducted by OTA in

order to develop information for this report. A

workshop of Federal agency representatives was

held in May 1989. A 2-day international conference

was held in July 1989 that brought together representatives from 16 nations. A workshop on financing

issues was held in September 1990 (see app. D for

the participants of these meetings). The proceedings

of the international conference as well as other

selected contract documents are available through

the National Technical Information Service (see

app. F).
Chapter 2-Introduction ● 33

SUMMARY

Biotechnology, broadly defined, includes any

technique that uses living organisms (or parts of

organisms) to make or modify products, to improve

plants or animals, or to develop micro-organisms for

specific purposes. Although traditional uses of

biotechnology are centuries old (e.g., baking and

brewing), it is the so-called new biotechnology

involving the uses of modern scientific techniques,

such as rDNA technology, hybridoma technology,

and bioprocess technology, that leads to issues

affecting international commercialization of research and products and is the focus of this report.

Biotechnology is not an industry. It is, instead, a

set of biological techniques developed through

decades of basic research that is now being applied

to research and product development in several

existing industrial sectors. The arrival of biotechnology has resulted in the development of products and

processes that have the potential to alleviate many of

mankind’s problems, e.g., malnutrition, disease, and

pollution. This report examines international trends

in biotechnology-related commercial activity and

industrial policy.

1.

2.

3.

CHAPTER 2 REFERENCES

Crick F.H., and Watson, J.D., “The Complementary

Structure of Deoxyribonucleic Acid,” Proceedings

of the Royal Society (A), vol. 223, 1954, pp. 80-96.

U.S. Congress, Office of Technology Assessment,

Impacts of Applied Genetics: Micro-Organisms,

Plants, and Animals (Springfield, VA: National

Technical Information Service, April 1981).

U.S. Congress, Office of Technology Assessment,

Commercial Biotechnology: An International Analy4.

5.

6.

7.

8.

9.

10.

11.

sis @lmsford, NY: Pergamon Press, Inc., January

1984).

U.S. Congress, Office of Technology Assessment,

New Developments in Biotechnology: Ownership of

Human Tissues and CellApecial Report, UIABA-337 (Washington, DC: U.S. Government Printing Office, March 1987).

U.S. Congress, Office of Technology Assessment,

Background Paper: New Developments in Biotechnology: Public Perceptions of Biotechnology, OTABA-BP-BA45 (Washington, DC: U.S. Government

Printing Office, May 1987).

U.S. Congress, Office of Technology Assessment,

Mapping Our Genes+The Genome Projects: How

Big? How Fast? OTA-BA-373 (Washington, DC:

U.S. Government Printing Office, April 1988).

U.S. Congress, Office of Technology Assessment,

New Developments in Biotechnolo@ield-Testing

Engineered Organisms: Genetic and Ecological

Issues, OTA-BA-350 (Lancaster, PA: Technomic

Publishing Co., hlC., my 1988).

U.S. Congress, Office of Technology Assessment,

New Developments in Biotechnology: U.S. Investment<pecial Report, OTA-BA-360 (Springfield,

VA: National Technical Information Service, July

1988).

U.S. Congress, Office of Technology Assessment,

New Developments in Biotechnology: Patenting

Lif@pecial Report, OTA-BA-370 (Washington,

DC: U.S. Government Printing Office, April 1989).

Watson, J.D., and Crick, F.H., “Genetic Implications

of the Structure of Deoxyribose Nucleic Acid,”

Nature, vol. 171, 1953, pp. 964-967.

Watson, J.D., and Crick, F.H., “Molecular Structure

of Nucleic Acids: A Structure for Deoxyribose

Nucleic Acid” Nature, vol. 171,1953, pp. 737-738.
Part I: Commercial Activity
Chapter 3

Introduction: Commercial Activity

‘‘Ifentrepreneurs and arbitrageurs were our heroes of the ‘80s, we hope scientists and engineers will

be the stars of the ‘90s.”

Mary Ann Liebert

Genetic Engineering News, January 1990
CONTENTS

Page

BIOTECHNOLOGY AND COMPETITIVENESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

CHAPTER 3 REFERENCES

. . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Chapter 3

Introduction: Commercial Activity

BIOTECHNOLOGY AND

COMPETITIVENESS

Biotechnology is a new set of techniques that can

be used in basic research, product development, and

manufacturing in several different industries. Although it was primarily developed in the United

States, funded mainly through government support

for basic biomedical research, there are growing

concerns that, like some other native technologies,

biotechnology will be rapidly adopted and commercially applied elsewhere, leading to a loss of U.S.

preeminence in this area.

Biotechnology was first applied commercially in

producing diagnostics and therapeutics. These applications were the most obvious because most of the

developers of the new techniques were conducting

basic biomedical research. Most recently, genetically engineered biopesticides have won regulatory

approval in the United States. Further agricultural

applications are expected within the next 10 years.

In the United States, the earliest firms to exploit

these new techniques were the dedicated biotechnology companies (DBCs). Financed with venture

capital, they were founded in the late 1970s and early

1980s to apply the new techniques to the development of diagnostics, pharmaceuticals, pesticides,

plants, and other products. Although these firms

are often referred to collectively as the “biotech

industry,” the dedicated biotechnology firms are,

in fact, developing products and competing with

firms in existing industries. DBCs, regardless of

the products they make, share some characteristics

and certainly compete with each other for capital.

But industries are defined primarily by the products

they produce and the markets in which they compete. As DBCs develop and become engaged in

commercializing products, the problems they face

are characteristic of the existing industries to which

they belong. Thus, their problems become more

understandable if DBCs are regarded not as “biotech companies’ but as young firms in, for example,

the pharmaceutical, agricultural, or waste treatment

industries.

Although DBCs have actively applied biotechnology to existing industries, more and more, established multinational firms in these industries are

investing in biotechnology, either through investment in in-house research programs or through

linkages with small firms. Over the last 10 years, as

it has become clearer which applications are potentially useful and which are not, the research and

development (R&D) conducted by small firms has

become more narrowly focused, and investments of

larger firms have become more aligned with their

long-term strategies.

Increasingly, biotechnology is becoming part

of the mainstream of R&D in several industries.

In assessing its ultimate impact on industry and

productivity, it is less useful to ask, “Is the United

States competitive in biotechnology?” and more

useful to ask, “HOW can biotechnology contribute

to the competitiveness of the industrial sectors in

which it can be used?” and, “What factors

influence the adoption of biotechnology in these

industries?” To understand the adoption of biotechnology by these industries requires some understanding of the organization of the industries and the

role of innovation and R&D.

Like other new technologies that have the potential for major effects on a number of industries, the

ultimate impact of biotechnology is impossible to

predict. But, as with other new technologies, its

incorporation into research, product development,

and manufacturing is likely to be gradual (1,2). A

number of factors influence investment in biotechnology and its diffusion into new industries, including:

. Technical feasibility. The earliest research

projects in every industry have been chosen

mainly for ease of accomplishment because

new companies or new research teams need to

demonstrate their competence and achieve

commercial success in a relatively short time.

Beyond initial projects, technical limits constrain the projects that may be done. Work in

agriculture, for example, has been limited

because of difficulties in transferring deoxyribonucleic acid (DNA) into the cells of major

cereal crops and the relative lack of basic

knowledge of plant genetics and biochemistry

–39-
40 . Biotechnology in a Global Economy

●

●

●

●

compared to knowledge of common microorganisms and mammals.

Ability to recoup investment in R&D and

capture profits. In some industries, biotechnology can provide an alternative production

process for a marketable product (e.g., insulin

or growth hormone), the development of improved versions of current products (e.g., tomatoes or cotton), or the development of novel

products (e.g., tissue plasminogen activator

(tPA) or biopesticides). But in some cases the

new production processes are not competitive

with current technology. For other products

that are technically feasible, the potential size

of the market is too small to justify the

investment in R&D needed to bring the product

to market. The cost of research can be offset by

marketing products more widely, especially

through exports. The ability to protect technology investments by patenting also influences a

firm’s ability to capture markets and therefore

profits.

Availability of a research base and labor

pool. In the United States, federally funded

basic research in biomedical sciences has

provided a wealth of information that can be

exploited by industrial research teams. Much

less basic research has been conducted in plant

biology and microbial ecology. Federal funding of research has also resulted in the training

of scientists with skills useful to some industries. The European research base is not as

extensive as that in the United States, and in

Japan and other Asian countries there is relatively little public funding of basic research in

biology. Scientists in these countries must

often go abroad to obtain training.

Availability of capital. The development of

biotechnology in the United States coincided

with the availability of a high level of funding

for new firms from venture capitalists and

public equity markets. In Europe and Japan,

venture capital and public equity have played a

much smaller role. Outside the United States,

industrial biotechnology is largely confined to

the research laboratories of major corporations.

Fit with industry or company strategy. The

chemical industry inmost industrial nations has

undergone a restructuring in the last 10 to 20

years. Many major corporations have been

reducing their operations in commodity chemicals while investing in specialtv chemicals and

●

●

●

life sciences, including pharmaceuticals. Investment has followed this corporate strategy.

Investment in biotechnology by pharmaceutical firms is also made to complement existing

product lines and research needs. Seed firms

use biotechnology to complement their efforts

in plant breeding.

Public acceptance. In the United States, farmer

resistance to the use of bovine somatotropin

(bST), a protein hormone that increases milk

production, has delayed its introduction and

may deter investment in the development of

similar products. In some parts of Europe,

particularly Germany, public concerns about

the use of biotechnology has slowed commercial development. On the other hand, consumers have favored the development of new drugs,

diagnostic products, and environmentally benign biopesticides.

Regulations. Regulations can delay the introduction of new products and thus delay returns

on investment. For example, the lengthy process for obtaining drug approval in the United

States has been widely criticized. The time it is

taking the Environmental Protection Agency

(EPA) to develop regulations for field-testing

genetically modified micro-organisms is

thought to have had a negative impact on

investment in this area. The development of

biotechnology regulations in Europe and Japan

has also been slow and, especially in Denmark

and Germany, has been thought to inhibit

investment.

Effects of other government programs. Agricultural programs that affect acreage planted or

that protect farmers can influence investment in

agricultural biotechnology. Laws on environmental protection affect the use of bioremediation. The Orphan Drug Act and the Plant

Variety Protection Act (PVPA) are intended to

encourage investment in new drug and new

plant development, respectively. Other examples of government policies that influence .

investment in biotechnology include tax policies and laws on intellectual property protection.

The ensuing five chapters are not intended to be

exhaustive descriptions of the industries or the

applications of biotechnology. The intention is to

give a fuller explanation of forces that affect
Chapter 3--Introduction: Commercial Activity .41

adoption of biotechnology. In each sector, market

forces beyond the scope of government authority

largely determine the use of biotechnology.Governments can influence the climate for technology “

development and adoption as they influence the

climate for all business activity. Congress can

influence technology adoption through its activities concerning basic scientific research and

training, regulations, patents, and in legislation

that specifically affects the industries in which “

biotechnology will be used.

CHAPTER 3 REFERENCES

David, P.A., “Technology Diffusion, Public Policy,

and Industrial Competitiveness,” The Positive-Sum

Strategy: Harnessing Technology for Economic

Growth, R. Landau and N. Rosenberg (eds.) (Washington, DC: National Academy Press, 1986).

Rosenberg, N., Perspectives on Technology (Armor&

NY: M.E. Sharpe, kC., 1985).
Chapter 4

Financing

“In this entrepreneurial world, the venture capitalist occupies an ambivalent position. Like a gigolo,

he’s involved, but not involved. He’s part entrepreneur, part accountant. He’s Santa Claus and

Ebenezer Scrooge.”

Robert Teitelman

Gene Dreams

“Interferon is a substance you rub on stockbrokers.’

A scientist quoted in Forbes, September 1980
CONTENTS

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

U.S. COMMERCIAL BIOTECHNOLOGY: AN OVERVIEW .. . . . . . . . . . . . . . . . . . . . . 45

FINANCIAL STATUS OF U.S. BIOTECHNOLOGY COMPANIES . . . . . . . . . . . . . . . . . 48

Capital and Market Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Cash Flow, Product Revenues, and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

RAISING CAPITAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...... 50

Venture Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Research and Development Limited Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

CONSOLIDATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

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

STRATEGIC ALLIANCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. ... ... ......+ 57

Equity Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. ... ... .....60

Joint Ventures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Licensing and Marketing Deals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Co-Marketing Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

TAX POLICY AND ITS EFFECTS ON FINANCING R&D . . . . . . . . . . . . . . . . . . . . . . . . . 64

Capital Gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

R&D and Investment Tax Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

Tax Credits and the Orphan Drug Act...... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

Amortization of Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

CHAPTER PREFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...... 68

Boxes

Box Page

4-A. A Glossary of Finance and Investment Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

4-B. The Genentech/Hoffmann-LaRoche Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

4-C. Country-by-Country Analysis of Strategic Alliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

4-D. R&D Tax Incentives of Selected Foreign Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Figures

Figure Page

4-1. Market Capitalization of 42 Publicly Traded US. Firms . . . . . . . . . . . . . . . . . . . . . . . 49

4-2. Reasons for Geographic Strategic Alliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Tables

Table Page

4-l. Areas of Primary R&D Focus by Biotechnology Companies (1988) . . . . . . . . . . . . 45

4-2. Profile of Market Segmentation (1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

4-3. Financial Profile of Leading Public Firms in 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

4-4. Cost of Capital for R&D Projects With 10-Year Payoff Lag in Four Countries . . . 51

4-5. Venture Investments in Biotechnology ($ in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . 52

4-6. Acquisitions of U.S. Biotechnology Companies, 1989-90 . . . . . . . . . . . . . . . . . . . . . . . 55

4-7. Breakdown of the Number of Alliances With 46 Publicly Held U.S.

Biotechnology Companies With European or Asian Partners . . . . . . . . . . . . . . . . . . . 59

4-8. Number of Agreements With European and Asian Partners for 46 Publicly

Held U.S. Biotechnology Companies As of 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

4-9. Equity Participations in 46 Publicly Held U.S. Biotechnology

Companies by European and Asian Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Chapter 4

Financing

INTRODUCTION

Until recently, genetic engineering was largely

commercialized in the United States, mainly in

top-notch academic departments and an exponentially expanding troupe of biotechnology entrepreneurial firms. In the last few years, large, established

U.S. corporations have increasingly invested in

these technologies, both in-house and through a

variety of arrangements with dedicated biotechnology companies (DBCs). The markets for new

biotechnology-derived medical and agricultural

products are worldwide, and now the innovations

themselves are starting to be developed throughout

all parts of the globe.

Although biotechnology per se is not a single

industry but a tool of industry, the financial community has had considerable interest in and effect on the

formation and survival of firms commercializing

biotechnology. While major corporations, both domestic and foreign, are spending considerable sums

to exploit the new techniques, much of the innovation in research continues to come from the smaller

firms dedicated to biotechnology. Large, established

corporations can rely on revenues from existing

operations to fund innovation, but DBCs do not have

as wide a comfort zone and, in the absence of

product revenues, must rely on equity investors for

survival (see box 4-A for a glossary of financial

terms). The competitiveness of U.S.-developed

biotechnology products and processes may ultimately depend on broader issues, such as fair

trade practices, protection of intellectual property, and the regulatory climate. The competitiveness of U.S. innovation, however, could very

well rely on the ability of DBCs to stay in

business. Because biotechnology is capitalintensive, staying in business means raising substantial sums of cash.

This chapter focuses on the current financial

status of the leading U.S. DBCs and addresses the

ability of new firms to enter the market and raise

cash. The status and importance of strategic alliances, both domestic and foreign, and direct foreign

investment in U.S. biotechnology also are discussed.

Finally, the effects of specific tax policies on the

ability of firms worldwide to raise cash are reviewed.

U.S. COMMERCIAL

BIOTECHNOLOGY: AN

OVERVIEW

The boom for founding DBCs in the United States

occurred between 1980 and 1984. During these

years, approximately 60 percent of existing companies were founded (54). In a 1988 report, the Office

of Technology Assessment (OTA) verified that there

were 403 DBCs in existence and over 70 major

corporations with significant investments in biotechnology (54). Although these numbers have most

likely grown since that time, the areas of primary

research and development (R&D) focus of these

firms have not changed radically. In 1988, OTA

found that human health care was the focus of

research for most companies, whether large or small.

Agriculture and chemicals were the focus of far

fewer firms, and environmental applications of

biotechnology were even less well represented (see

table 4-l). A 1990 survey by Ernst & Young drawn

from a large sample of firms (based on a broader

definition of biotechnology) revealed similar segmentation of primary markets (see table 4-2) (19).

Companies continue to have a strong focus on

human health care products, largely because

capital availability has been greater for pharmaceuticals than for food or agriculture, due to the

prospect of greater market reward (54,57). Thus,

Table 4-l—Areas of Primary R&D Focus by

Biotechnology Companies (1988)

Dedicated

biotechnology

companies

Research area Number (percent)

Human therapeutics . . . . .

Diagnostics . . . . . . . . . . . .

Chemicals . . . . . . . . . . . . .

Plant agriculture. . . . . . . . .

Animal agriculture . . . . . . .

Reagents . . . . . . . . . . . . . .

Waste disposal/treatment.

Equipment . . . . . . . . . . . . .

Cell culture . . . . . . . . . . . .

Diversified . . . . . . . . . . . . .

Other . . . . . . . . . . . . . . . . . .

63 (21)

52 (18)

20 ( 7)

24 ( 8)

19( 6)

34 (12)

3 ( 1)

12 ( 4)

5 ( 2)

13 ( 4)

51 (18)

Large

diversified

companies

Number (percent)

14 (26)

6(1 1)

11 (21)

7 (13)

4 ( 8)

2 ( 4)

1 ( 2)

1 ( 2)

2 ( 2)

6(1 1)

o ( o)

Total . . . . . . . . . . . . . . . . 296 (100) 53 (loo)

SOURCE: Office of Technology Assessment, New Developments in

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

4 5–
46 ● Biotechnology in a Global Economy

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

Acquisition. One company taking over controlling interest in another company. Investors are always looking

for companies that are likely to be acquired, because those who want to acquire such companies are often willing

to pay more than the market price for the shares they need to complete the acquisition.

Amortization. Accounting procedure that gradually reduces the cost-value of a limited life or intangible asset

through periodic charges to income.

Assets. Anything having commercial or exchange value that is owned by a business, institution, or individual.

Black Monday. October 19, 1987, when the Dow Jones Industrial Average plunged a record 508 points

following sharp drops the previous week—reflecting investor anxiety about inflated stock price levels, Federal

budget arid trade deficits, and foreign market activity.

Book value. Net asset value of a company’s securities, calculated as total assets minus intangible assets

(goodwill, patents, etc.), minus current liabilities, minus any long-term liabilities and equity issues that have prior

claim. The total net asset figure, divided by the number of bonds, shares of preferred stock, or shares of common

stock, gives the net asset value, or book value, per bond or per share of preferred or common stock. Book value can

be a guide in selecting stocks and is an indication of the ultimate value of securities in liquidation.

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

positive.

Cash burn rate. The rate at which a company uses cash, i.e., cash flow. Biotechnology companies are

generally cash users, not generators. Cash burn rates are very high in the years before the first profits are made.

Common stock. Units of ownership of a public corporation. Owners typically are entitled to vote on the

selection of directors and other important matters as well as to receive dividends on their holdings. In the event that

a corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stock

take precedence over the claims of those who own common stock. For the most part, however, common stock has

more potential for appreciation.

Convertible debt. Debt that is exchangeable in another form for a prestated price. Convertible debt is

appropriate for investors who want higher income than is available from common stock, Most commonly, corporate

securities (usually preferred shares or bonds) are purchased and later traded for common shares.

Cost of’ capital. The rate of return that a business could earn if it chose another investment with equivalent

risk-in other words, the opportunity cost of the funds employed as the result of an investment decision or actual

debt costs as part of the capital structure of the company.

Equity. Ownership interest possessed by shareholders in a corporation stock as opposed to bonds. Shares can

be common or preferred.

(Gontinwdon next fmge)

Table 4-2—Profile of Market Segmentation (1990) human health have had a more difficult time and

have had to follow different routes at different times.

Percent of

Research area respondents

Human therapeutics . . . . . . . . . . . . . . . . . . . . . . 35%

Diagnostics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28%

Agriculture (plant and animal). . . . . . . . . . . . . . . 8%

Supplier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18%

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11%

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 00%

SOURCE: Adapted from Ernst & Young, Biofech 97: A Changing Environment (San Francisco, CA: 1990).

most discussions about the financing of biotechnology tend to be skewed toward companies working in

human therapeutics and diagnostics because that is

where most of the activity has been (23). And while

the methods used by various DBCs to raise cash

generally have been similar, DBCs not working in

While more companies may have been formed in

the early 1980s than the late 1980s, the amount of

money invested per company (and dedicated to

biotechnology in general) increased significantly.

As a result, and despite the lack of private late-stage

capital resulting from the market crash in 1987,

many of the companies formed late in the 1980s have

had somewhat greater staying power than their

earlier competitors. In addition, due to having larger

amounts of capital at an earlier stage, some of these

companies may generate products more quickly (5).

In the early 1980s, fledgling genetic engineering

firms would do almost anything to raise cash, often

licensing away key first-generation products and
Chapter 4-Financing ● 47

Exit opportunities. A term commonly used by venture capitalists to describe opportunities for investors to

realize their investment or pull out of a deal. Examples are the public markets, mergers, and acquisitions.

Liquidity. Ability of an individual or company to convert assets into cash or cash equivalents without

significant loss. Having a good amount of liquidity means being able to meet maturing obligations promptly, earn

trade discounts, benefit from a good credit rating, and take advantage of market opportunities.

Market capitalization. Valueof a corporation as determinedly the market price of its issued and outstanding

common stock. It is calcuated by multiplying the number of outstanding shares by the current market price of a

share. institutional investors often use market capitalization as one investment criterion. Analysts look at market

capitalization in relation to book or accounting value for an indication of how investors value a company’s future

prospects.

Merger. Combination of two or more companies, either through a pooling of interests, where the accounts are

combined; a purchase, where the amount paid over and above the acquired company’s book value is carried on the

books of the purchaser as goodwill; or a consolidation, where a new company is formed to acquire the net assets

of the combining companies.

Operating profit (or loss). The difference between the revenues of a business and the related costs and

expenses, excluding income derived from sources other than its regular activities and before income deductions.

Preferred stock. A class of stock that pays dividends at a specific rate and that has preference over common

stock in the payment of dividends and the liquidation of assets. Preferred stock does not ordinarily carry voting

rights.

Royalty. Payment to the holder for the right to use property such as a patent, copyrighted material, or natural

resources, Royalties are set in advance as a percentage of income arising from the commercialization of the owner’s

rights or property.

Strategic alliances. Associations between separate business entities that fall short of a formal merger but that

unite certain agreed on resources of each entity for a limited purpose. Examples are equity purchase, licensing and

marketing agreements, research contracts, and joint ventures.

Venture capital, An important source of financing for start-up companies that entails some investment risk

but offers the potential for above-average future profits.

SOURCl% ~lce of Technology hsossmm~ 1991, adapted from Barren’s Dictionary of Finance andhwe.stment Terms, 2d ed. (New York

NY: Barren’s, 198’7).

vital market segments in order to obtain the neces- expression, in scale-up, and in obtaining meaningful

sary cash to survive. Some call this mortgaging the

future-more enthusiastic chief executives describe

it as leveraging the technology. In any case, frontrunning companies, like Genentech, Genex, and

Biogen, lined up numerous corporate partners with

relative ease, only to find later that a deal with a

major international corporation did not necessarily

prove adequate for survival. Many pharmaceutical

firms learned the hard way that biotechnology

products represented no magic bullet, and that some

of their products would succeed while many others

were destined to fail.

As time passed, the term biotechnology lost its

ability to turn promises-for-tomorrow into instant

cash today. Several changes occurred at the same

time. Basic gene-splicing technology became readily available to scientists at large pharmaceutical

companies in the United States and overseas.

However, unforeseen technical problems in gene

clinical results created a slowing of developments

and expectations. Despite technical problems and

slower-than-expected product development, the innovative U.S. financial markets supplied the growing number of genetic engineering firms with the

increased funding needed to survive. Research and

development limited partnerships (RDLPs), both

large and small, provided funds between lucrative

public offerings, and the venture capital community

continued to invest money in new start-up operations.

The 1980s may prove to have been the high water

mark for formation of DBCs. A critical event

affecting the financial strategies of DBCs came on

October 17, 1987, or “Black Monday,” when the

stock market crashed. Biotechnology companies

faced a severe problem: the fabled window for

public offerings-particularly initial public offerings-was slammed firmly shut. Although that
48 ● Biotechnology in a Global Economy

Photo credit: Newsweek, Nov. 2, 1987

Media coverage of the 1987 stock market crash.

window seemed to have slightly opened again by the

summer of 1989 (especially for convertible debt

issues for the more established companies in the

United States and Europe), biotechnology companies had to weather a full 18 months without public

financing. Some firms retrenched and focused on

their most promising or near-term projects. Others,

notably Genentech, had product revenues. Still

others, e.g., Cetus, Genetics Institute, and Mycogen,

maintained hefty bank accounts accumulated in the

early 1980s to carry them through all but the most

protracted public equity droughts. But all biotechnology firms reexamined the possibility of alliances

with major corporations. As time passed, deals were

signed increasingly between DBCs and domestic

and foreign pharmaceutical and chemical companies

(19). Top-tier DBCs, however, often find themselves

on more equal footing with their partners than in the

past. These DBCs, having a greater understanding of

the powers and limitations of biotechnology have

used this knowledge combined with their financial

resources to demand clauses securing manufacturing

rights or rights to key geographic areas or market

segments (31).

FINANCIAL STATUS OF U.S.

BIOTECHNOLOGY COMPANIES

To date, most U.S. biotechnology companies

have no sales and have been losing money since

their inceptions. According to a 1989 survey of 93

biotechnology companies, about one-fourth reported net profits (18). An updated survey in 1990

found that only 21 percent of all companies are

profitable, even though overall sales increased by 13

percent (19). Therefore, standard accounting tools,

which measure expenses and assets as a function of

sales and earnings, are not useful in determining the

value or stability of a DBC (46). However, the

leading public biotechnology companies have high

liquidity and can generate cash once product revenues begin to flow. While most companies are still

several years away from profitability and positive

cash flow, the top 20 firms could last more than 3

years on current cash levels without raising anymore

money (46).

Capital and Market Value

Capital and market value are concentrated in few

of the over 400 firms involved in biotechnology.

Individual companies that top the list in market

values are generally the same ones that lead the

industry in total assets, book value, R&D spending,

and total employment (see table 4-3). As of early

1990, public market values ranged from less than

$5 million to $1.9 billion (only two companies—

Genentech and Amgen--had market values of $1

billion or more, while the rest were valued significantly less). In a survey of 42 publicly traded

companies, total market capitalization totaled

$6.9 billion, and two companies—Genentech and

Amgen—together accounted for 42 percent of the

total market capitalization (46) (see figure 4-l).

The top seven companies have market values

ranging from $500 million to $2.5 billion (47).

Most of the companies in a Shearson Lehman

Hutton survey showed strong cash positions, with 10

having cash balances above $50 million by the end

of 1989 (47). Again, only three companies—

Genentech, Amgen, and Chiron--produced profits

in 1990, leading the industry in revenues as well as

R&D spending (5,47). With just two products it

markets plus two products from which it receives
Chapter 4--Financing ● 49

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

Percent Net

price change Market Years of R&D expense income

in stock capitalization Book value cash left (calendar (calendar

performance ($ million) ($ million) at net year 1989) year 1989)

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

Figure 4-1—Market Capitalization of 42 Publicly

Traded U.S. Firms

Dollars in billions

$8

$7

$6

$5

$4

$3

$2

$1

$0

$6.9

Premerger

$0.4

$2.7

- Total - Genentech ~ Amgen m Chiro n

~~ Cetus ~ Bioge n = Ali others combined

SOURCE: ShearsonLehman Hutton, 1990.

substantial royalties, Genentech accounted for more

than half of 1989 product sales for the 20 companies

reporting sales (50).

What remains remarkable has been the health of

biotechnology stocks. While the Standard and Poors

500 advanced 12.6 percent between June 1989 and

June 1990, health care biotechnology stocks rose an

average of 77 percent and agricultural biotechnology

stocks rose 38 percent. The medical biotechnology

sector grew by 36.7 percent in 1990 and was the

number one stock performer (20,36).

Cash Flow, Product Revenues, and Expenses

Although biotechnology companies have high

liquidity (on average, companies have 50 percent of

their assets as cash), in their early years they tend to

burn more cash than they generate. In 1989, only

Genentech and Amgen generated meaningful levels

of cash from operations (40,46). One reason that

biotechnology companies use their cash reserves so

rapidly is the intensity of R&D investment; prior to

product commercialization some companies dedicate nearly 65 percent of all expenses to R&D. In

1989, Genentech’s R&D expenditures, at 42 percent

of sales, were almost as much as those of the next

three companies combined (see table 4-3).

Estimates by Wall Street analysts predict that the

leading public firms have a mean of just over 3 years

and a median of 2.3 years of cash left, at either

current or average burn rate (46). Past experience

shows that the leading biotechnology companies

have been extraordinarily successful at financing

virtually all of their cash-flow needs. It is not clear

how much longer this success will last, and there is

evidence that a two-tiered structure has evolved

among DBCs, where leading firms are able to raise

cash and the have-nets find sources increasingly

unavailable (57). Some analysts believe that only a

few biotechnology firms will generate significant

annual revenues and thus be able to survive over the

longer term (17). This is reflected in a recent trend

toward steady financial backing for a few larger
50 ● Biotechnology in a Global Economy

firms and lesser amounts of capital available for

smaller, less successful fins.

As would be expected, companies focusing on

human health care products have larger cash reserves than those focused on other industries. The

average, or mean, cash balance of 34 publicly traded

health-based biotechnology companies was $38

million in early 1990; the median was $18 million.

The figures were $13 million and $10 million

respectively for agricultural companies (46).

Limited product sales hurt cash flows. In 1989,

only eight companies had product sales over $10

million (46). A 1989 survey showed that 5-year

sales-growth projections had dropped. Yet sales

overall are still expected to more than double over

the next 2 years (19). Companies continue to survive

on cash obtained from R&D contracts, corporate

alliances, interest income, and occasionally a common or preferred stock issue. Total industry revenues in 64 public companies reached $1 billion in

1989, up 67 percent since 1987. According to Ernst

& Young, which casts a wider net in its survey,

product sales in 1990 were $2.9 billion. Genentech

and Amgen comprised the bulk of those sales (46).

RAISING CAPITAL

Biotechnology companies in the United States

have relied heavily on the investment community for

their survival. Despite the relatively high cost of

capital in the United States compared to other

countries (see table 4-4), U.S. firms have been

remarkably successful in attracting investors in the

start-up phase. The high cost of capital, however,

may put U.S. firms at a disadvantage in the long

term. The cost of capital is less important for shorter

projects but becomes increasingly important over

time. Japanese and German fins, with lower costs,

may face fewer risks (22).1 And, although Japanese

corporations are finding it easier than U.S. firms to

raise relatively cheap capital (48), U.S. biotechnology companies to date have been able to raise funds

through creative financing. This type of financing,

however, is very costly in the long term due to the

high royalty rates and significant capital required for

the companies to buy back the product rights

normally transferred to R&D financing vehicles.

It is not clear how long DBCs can go to venture

funds and the public markets. According to a 1988

survey, 62 percent of all companies needed major

financing of a few million dollars each by the end of

1990, and 90 percent will need financing by the end

of 1991 (18). In a 1989 survey, the average company

projected a need for $3 million in financing during

1991 and $32 million in total over the next 10 years

(19). Some analysts estimate that it will take $5

billion to $10 billion to develop the 100 products

now inhuman clinical trials in the therapeutic sector

of biotechnology (16,33).

Biotechnology companies continue to be financed

primarily through equity (about 75 percent), usually

in the form of common stock (46). Debt financing is

still relatively rare. In addition to being rare, debt

financing has been relatively unsuccessful when

used. The convertible debt instruments that were

employed counted on appreciation in equity. If this

did not occur, the company was forced to service the

debt while still operating on a negative cash-flow

basis (32). Forty percent of the companies surveyed

by Shearson Lehman Hutton had no debt at all.

As biotechnology moves through the 1990s,

strategic alliances will be the most reliable, and

perhaps sensible, source of needed capital. Strategic

alliances may be the only way for some firms to

prevent takeover, bankruptcy, or liquidation as they

reach the most expensive stages of development.

The following sections cover the current state of

private and public equity funds available for biotechnology as well as recent developments in

strategic alliances between U.S. firms and between

U.S. and foreign fins.

Venture Capital

Venture capital has been the prime source of early

stage financing for new and young companies

seeking to grow rapidly. It has been a significant

source of capital for biotechnology start-ups in the

1980s. The importance of venture capital to U.S.

commercial biotechnology reflects the growth, in

general, of the venture capital industry. Biotechnology, conveniently, arrived at the right time.

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

result in a lower cost of funds and a lower cost of capital.
Chapter 4--Financing ● 51

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

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

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

Germany . . . . . . . . . 13.4 13.8 13.3 15.6 15.7 14.7 13.9 14.6 13.9 13.2 14.4 14.8

United Kingdom . . . 18.2 28.4 21.1 33.4 24.2 29.5 28.2 24.4 25.4 18.9 20.6 23.7

SOURCE: Federal Reserve Bank of New York staff estimates, 19S9. The rankinas reflect the reauired real pre-tax rate of return on an investment in plant or

equipment.

United States

Despite fluctuations through the 1980s, due,

according to some analysts, to excesses and

overvaluations in the mid-1980s, the venture

capital community is operating in a stable, if not

more conservative, environment (57). The pool of

funds in the United States managed by organized

venture capital exceeds $31 billion (28). Venture

funds are still available for biotechnology but have

become increasingly concentrated and more readily

available to firms or individuals with a proven track

record (57,14). Of the over 800 U.S. and Canadian

venture capital companies listed in a comprehensive

directory of such firms, nearly half indicated a

preference for genetic engineering for possible

investment (35). A 1989 trade journal listing of

venture capital funds with interests in biotechnology

showed 86 entries (24). Between 1985 and 1989,

about $1.1 billion in venture capital was invested in

biotechnology (see table 4-5). Some regions of the

United States are particularly well endowed with

venture funds for biotechnology. For example,

biotechnology companies remained the principal

recipients of venture funds in the San Diego area in

the last half of 1989, during which time 13 San

Diego biotechnology companies raised $113 million

(44).

But growth companies, such as biotechnology,

require continuing financing, sometimes requiring

almost twice as much equity financing between the

3rd and 6th years as required during the frost 3 years

(34). Venture capital has been available for biotechnology companies at the founding stage, but it is

increasingly difficult to come by during the development stage, which is more expensive than the

discovery stage (23). The new conservatism in

venture markets has resulted from lower rates of

return (30) and lowered likelihood that venture

capitalists will support a firm where exit might be

difficult. Small companies have been hardest hit by

constriction in the venture markets (19).

Opportunities for venture capitalists to realize

their return through sale of equity via the public

market have been limited since the stock market

crash of 1987. Until 1987, the public was willing to

play the role of late-stage venture capitalists by

buying stocks in companies far from profitable (23).

Today, initial public offerings are harder to come by,

and many companies are stuck pre-public. One

biotechnology executive testified in May 1989 that

after the 1987 crash, equity capital was no longer

available to small companies, and his company was

forced to form limited partnerships with Japanese

companies (9). United States firms were not the only

ones to suffer the consequences of the October 1987

crash. Foreign firms have also been affected. Acquiring risk capital in Sweden was not difficult prior

to that time; Swedish biotechnology firms, comprised largely of small- to medium-sized firms, are

now having trouble raising cash (55).

One analyst estimates that public equity became

a less favorable strategy for financing for as many as

75 percent of DBCs, whereas strategic alliances

gained in favor by as much as 60 percent (l). This

does not mean that all biotechnology companies

already traded publicly are being hurt. In fact,

overall, biotechnology stocks performed well in the

last years of the 1980s. Still, the largest source of

funding for biotechnology companies is established

corporations (20).

Despite positive stock activity, the valuations for

the public companies may have peaked as they have

finally reached the product stage. For smaller private

companies wanting to enter the public market,

leveling off of valuation has brought increasing

demands for greater maturity before public funds

can be raised. One analyst reported that before some

firms are willing to underwrite an initial public

offering for a health biotechnology company, the

company should have positive Food and Drug

Administration (FDA) Phase II clinical trial data (4)

indicating the product is close to the marketing

phase.
52 . Biotechnology in a Global Economy

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

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

. . . . . . . . . venture capital Industry

Total dollars raised . . . . . .

Total capital invested . . . .

Total number of

companies . . . . . . . . . .

Biotechnology industry

Dollars invested

New companies . . . . . .

Total companies . . . . . .

Percent of total capital

invested

New companies . . . . . .

Total companies . . . . . .

Number of companies . . .

Total companies . . . . . . . .

Percent of total number

of companies

New companies . . . . . .

Total companies . . . . . .

Dollars invested

Per company

New companies . . . . . .

Total Companies . . . . .

$3,300

$2,670

1,377

$4,500

$3,230

1,504

$4,900

$3,940

1,729

$2,100

$3,650

1,472

$2,200

$3,260

1,355

$13.60

$100.59

$40.15

$186.18

$54.17

$255.19

$41.28

$311.21

$57.83

$250.85

0.51%

3.77%

21

65

1.24%

5.76%

25

83

1.37%

6.48%

44

118

1.1 3%

8.53%

40

110

1 .77%

7.69%

22

97

1.53%

4.7P/0

1.66%

5.52%

2.54%

6.82%

2.72%

7.47%

1.62%

7.16%

$0.65 $1.61 $1.23 $1.03 $2.63

1.55 2.24 2.16 2.83 2.59

NA = not available

SOURCE: S.P. Galante, Venture Capita/ JourrM, August 1990.

Internationally venture use. In general, pension funds are not a

source of venture capital in other countries. In the

United States, independent private venture capital

firms (typically organized as limited partnerships)

provide about 83 percent of the total venture capital

pool (28). Banks tend to be the main sources of

venture capital in the United Kingdom (about

25 percent), Denmark (50 percent), and Germany

(56 percent). The government provides as much as

73 percent of venture capital in countries such as

Belgium and Luxembourg and nearly 40 percent of

the funds in The Netherlands. In France, insurance

companies provide 23 percent of venture capital

(37). In other European countries, venture capital

companies are relatively new. Nearly all of the

40 companies in Germany, for example, are less than

7 years old and have yet to fully realize their

investments. Most venture capital investments by

European Community (EC) countries have gone to

computer-related firms or industrial products. Biotechnology has historically received about 3 percent

of the disbursements (37).

The EC has recognized the shortage of start-up

and early stage financing across Europe and has

recently launched two initiatives: Seed Capital and

Eurotech Capital. The Seed Capital project supports

24 new seed capital funds across the EC, seeking to

stimulate cross-border investment. Eurotech Capital

Investment in biotechnology in other countries

has been very different from that in the United

States. There are few DBCs. Most of the investment has come from large pharmaceutical, chemical, and agricultural corporations spending

money on in-house research and strategic alliances with DBCs. It is not clear whether more

venture capital availability would result in the

formation of DBCs because the culture for innovation and entrepreneurialism is different. The venture

phenomenon has been uniquely American, but the

past decade has seen an increase in venture activity

overseas. In 1988, venture capitalists in the United

Kingdom (U.K.) invested over £1 billion, a 27-

percent increase over 1987 and more than twice as

much as in 1986. United Kingdom investors tend to

place their money within the United Kingdom (89

percent), but nearly 10 percent has been invested in

the United States. Still, less than 10 percent of

venture funds have been invested in biotechnology

(2).

The sources of venture funds vary between

countries. In the United States, pension funds are a

significant source of funds for venture capital.

Deregulation of types of investments allowed by

pension funds released a large pool of cash for
Chapter 4--Financing ● 53

attempts to encourage financial institutions to increase their investment in cross-border, hightechnology projects by means of investment subsidies ranging from 4 to 50 percent (2).

Some countries’ efforts are so new it is impossible

to predict how successful they will be. In Taiwan, for

example, a venture capital funding system was

recently developed to help finance new start-up

companies. Government banks led the investment

effort, and special income tax exemptions were

launched. Thirteen venture capital firms have been

established since 1986 under this program (51). In

Australia, in an effort to encourage a more healthy

venture industry, the government provides tax benefits for those who invest in licensed venture capital

companies. This scheme, however, has not been

helpful in raising biotechnology venture capital. Of

the 44 investment firms listed in a 1988 directory,

only 4 stated a preference for biotechnology investment. The average investment of 5 percent is low

when compared with a 15-percent investment in the

information industries (27).

In Japan, where most of the capital is heavily

concentrated in the banking system, venture capital

has played a limited role in high-technology financing. Because large companies develop biotechnology, financing traditionally has taken place with

debt finance. In the early 1970s, about eight venture

capital companies were established, but they functioned more as loan agents than as investors. In the

1980s, venture capital companies were organized in

limited partnerships, which provided better exits for

investors and changed the tax rate in a favorable way

(37).

In general, venture capital sources in Japan are

very different from those in the United States. Most

Japanese venture capital fund managers lack entrepreneurial management skills and usually operate

out of their parent headquarters (which tend to be

banks, security houses, or giant corporations such as

Kirin or Mitsubishi) and invest conservatively. Most

American venture capitalists would claim that Japanese venture capital really isn’t venture capital at all.

For example, Japanese venture capitalists are willing

to accept returns two-fifths of the level that U.S.

venture capitalists typically expect. Several other

reasons exist for the conservative nature of Japanese

venture capitalists-such as the stigma of failure and

an emphasis on personal relationships rather than

depersonalized sales of equity, which result in sales

of equity primarily between cooperating firms. And,

although the Nakasone government exempted taxes

on capital gains of individual investors, corporations

are taxed at a rate as high as 42 percent (37). While

the Japanese may be moving rapidly into biotechnology through the efforts of academia, governmentsupported laboratories, and their major corporations,

they have been unable (and perhaps unwilling) to

imitate the unique relationships that exist in the

United States between DBCs and venture capitalists.

Research and Development Limited

Partnerships

Until recent changes in U.S. tax law, research and

development limited partnerships (RDLPs) allowed

individuals or companies to invest in a fro’s R&D

and write-off the investment as an expense. Investors became limited partners and were entitled to

royalty payments from future sales. But current tax

laws effectively prohibit individuals from writingoff the investment as an expense. Investors do not

become limited partners until royalty payments are

received but technically become owners of the

technology to either exploit or sell back to the

company for a fixed payment plus royalties. According to some industry executives, the current tax rules

governing these partnerships are unclear and further

complicate successful transactions (26). This means

that RDLPs have to stand on their own merits, and

all deals must include equity incentives (32).

Although the dollar amount that can be raised

from RDLPs is potentially high, participants at a

September 1990 OTA workshop agreed that these

partnerships remain a valuable funding vehicle only

for established firms with a proven track record and

are not widely available (57). In 1989, Genentech

raised $72 million in an RDLP to research and

develop its CD4-based acquired immunodeficiency

syndrome (AIDS) treatment. Even so, executives of

Genentech reported difficulties in raising this

amount (6), and most biotechnology companies

would be fortunate to raise a sum that large (11).

RDLPs are not currently a good money raising

method--even for established companies (5).

CONSOLIDATION

Consolidation within industries occurs when

competition between companies becomes extreme,

when marketing of existing products becomes more

important than the development of new products,
54 ● Biotechnology in a Global Economy

when the costs for R&D of new products increase

faster than the level of sales, or when it is difficult to

raise cash. Such consolidations can take the form of

buyouts or mergers. Typically, larger companies

take over or merge with smaller companies that do

not have the marketing power of the larger firms or

that have not met the challenges posed by the level

of competition. In the 1980s, several industries

experienced consolidations, including high-technology areas, such as mainframe computer software,

cellular telephones, and semiconductors.

A general trend in high-technology-including

biotechnology-is that the basic technology is

relatively inexpensive for firms to develop. Several

factors may contribute to this phenomenon. First,

the Federal Government supports basic research

through grants to universities-the results of which

become public knowledge. Second, there are few

regulations affecting basic research. Small companies with innovative ideas can compete successfully

by exploiting their narrow specialty. However, as

ideas approach the market, the capital required to

make improvements and start production increases

dramatically. Undoubtedly, the cost of developing

biotechnology products is rising rapidly; enough to

concern the largest DBC. Although start-up companies will continue to play a crucial role in the

development of biotechnology, mergers and takeovers will become more common as the market

limits capital availability and the costs of developing

and marketing new products increases while cash

supplies become limited.

Mergers will allow large corporations to lead in

the effort to develop commercial biotechnology

products immediately, without having to engage in

basic research that is often not applicable to a

commercial product. Because of the relatively low

cost at which technology can be acquired, large

foreign- and domestic-based pharmaceutical and

pesticide firms will likely be active in takeovers and

mergers of biotechnology firms in the United States.

Moreover, foreign multinationals view U.S. firms as

particularly attractive, given the size, affluence, and

openness of the U.S. market, as well as the foundation of basic research techniques and knowledge that

many companies possess. To date, there have been

no hostile takeovers in biotechnology, largely because the assets (people) have no obligation to stay

and many takeover opportunities exist elsewhere

(40).

The recent $660 million merger of Chiron and

Cetus is symptomatic of the consolidation beginning

to occur among companies involved in biotechnology. One of the frost takeovers of a biotechnology

company occurred in 1982 when Schering-Plough

Corp. acquired DNAX (Palo Alto, CA) for $29

million (3). In 1986, two important buyouts of

biotechnology companies took place. Hybritech

(San Diego, CA) was bought by Eli Lilly for $500

million, and Genetic Systems was acquired by

Bristol-Myers for nearly $300 million (3). A few

buyouts have occurred between foreign and U.S.

fins. For example, in 1988, Denmark’s NovoNordisk purchased a Seattle-based biotechnology

firm, Zymogenetics. In 1989, Gen-Probe, Inc. (San

Diego, CA) was sold to Japan’s Chugai Pharmaceutical for $110 million (39), and Seradyn, Inc. was

bought by Mitsubishi Kasei. In 1990, Schering AG

purchased Codon Corp. and Triton Biosciences. A

sampling of acquisitions can be found in table 4-6.

Further consolidation is inevitable.

Foreign Participation in Mergers and

Acquisitions

Relationships between U.S. biotechnology companies and foreign corporations have taken virtually

every form and combination of forms imaginable,

including: acquisition, merger, equity investment,

joint venture, co-marketing, technology licensing,

product licensing, and research sponsorship. Obviously, mergers and acquisitions are the most extreme

interactions that can take place between two companies. The case of Genentech and HoffmannLaRoche is the most notable (see box 4-B). Other

consolidation occurring today within the pharmaceutical industry is illustrated by Eastman Kodak’s

purchase of Sterling Drug, the trans-Atlantic merger

between SmithKline Beckman and the Beecham

Group, the union of Squibb Corp. and BristolMyers, the Marion Laboratories merger with Merrell-Dow, and the Rhone-Poulenc acquisition of

Rorer. But these are big companies merging with

other big companies. While drug companies are

teaming-up for potential synergies and improved

competitiveness in an increasingly global marketplace, traditional reasoning has long proposed that

financial pressure would eventually force biotechnology companies to sell out in order to survive.

Financing has been particularly tight ever since the

stock market crash of 1987, and the majority of

biotechnology concerns have nervously watched
Chapter 4--Financing ● 55

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

Transaction

Acquirer Target company form Date

Abbott Laboratories. . . . . . . . . . . . . . . . .

American Cyanamid Co. . . . . . . . . . . . . .

American Vaccine Corp. . . . . . . . . . . . . .

Applied Bioscience International, Inc. . .

Baxter International, Inc. . . . . . . . . . . . . .

Biomedical Technologies, Inc.. . . . . . . . .

Biopool International, Inc.. . . . . . . . . . . .

Cambridge Bioscience Corp. . . . . . . . . .

Cambridge Bioscience Corp. . . . . . . . . .

Carter-Wallace, Inc. . . . . . . . . . . . . . . . . .

Chugai Pharmaceuticals, Inc.. . . . . . . . .

Collagen Corp. . . . . . . . . . . . . . . . . . . . . .

Eastman Kodak Co./Cultor Ltd.. . . . . . . .

Eli Lilly & Co...... . . . . . . . . . . . . . . . . . .

Hoffman-LaRoche, Inc. . . . . . . . . . . . . . .

Genentech, Inc. . . . . . . . . . . . . . . . . . . . .

Genzyme Corp. . . . . . . . . . . . . . . . . . . . .

Immucor, Inc. . . . . . . . . . . . . . . . . . . . . . .

Immunotech Pharmaceuticals . . . . . . . .

Institut Merieux. . . . . . . . . . . . . . . . . . . . .

Life Sciences International, Inc. . . . . . . .

Life Technologies Inc. . . . . . . . . . . . . . . .

Microgenics Corp. . . . . . . . . . . . . . . . . . .

Mitsubishi Kasei . . . . . . . . . . . . . . . . . . . .

Moleculon, Inc. . . . . . . . . . . . . . . . . . . . . .

Murex Clinical Technologies Corp. . . . . .

Orion Pharmaceutical, Inc. . . . . . . . . . . .

Porton International, inc. . . . . . . . . . . . . .

Porton International, Inc. . . . . . . . . . . . . .

Quidel Corp. . . . . . . . . . . . . . . . . . . . . . . .

Sanofi Pharma SA...... . . . . . . . . . . . .

Schering AG . . . . . . . . . . . . . . . . . . . . . . .

Schering AG . . . . . . . . . . . . . . . . . . . . . . .

Synbiotics Corp. . . . . . . . . . . . . . . . . . . . .

Transgenic Science, Inc. . . . . . . . . . . . . .

Institute Union Carbide Corp. . . . . . . . . .

Ventrex Labs, Inc. . . . . . . . . . . . . . . . . . .

Damon Biotech, inc. . . . . . . . . . Acquisition

Praxis, Inc. . . . . . . . . . . . . . . . . . Acquisition

IAF BioChem . . . . . . . . . . . . . . . Merger

Environ Corp. . . . . . . . . . . . . . . . Merger

Bio-Response, Inc. . . . . . . . . . . Acquisition

Flow Labs . . . . . . . . . . . . . . . . . Acquisition

inter-Haemaol, Inc. . . . . . . . . . . Acquisition

Angenics, Inc. . . . . . . . . . . . . . . Acquisition

Biotech Research Labs, . . . . . . Merger

Hygenia Sciences . . . . . . . . . . . Acquisition

Gen-Prober Inc. . . . . . . . . . . . . . Acquisition

SummaCare, Inc. . . . . . . . . . . . . Acquisition

Genecor, Inc. . . . . . . . . . . . . . . . Acquisition

Pacific Biotech, Inc. . . . . . . . . . . Acquisition

Genetech, Inc. . . . . . . . . . . . . . . Acquisition

Genentech Canada . . . . . . . . . . Acquisition

Integrated Genetics. . . . . . . . . . Acquisition

Immucor, GmbH. . . . . . . . . . . . . Acquisition

Dura Pharmaceuticals . . . . . . . . Acquisition

Connaught Biosciences, . . . . . . Acquisition

International Equipment . . . . . . Acquisition

Waitaki International, Inc. . . . . . Acquisition

Bioautomated Systems, inc.. . . Acquisition

Seradyn, Inc. . . . . . . . . . . . . . . . Acquisition

Kalipharma, Inc. . . . . . . . . . . . . . Acquisition

Dominion Biological . . . . . . . . . . Acquisition

KSV Lipids . . . . . . . . . . . . . . . . . Acquisition

Hazelton Biologics, Inc. . . . . . . . Acquisition

Sera-Lab, Ltd. . . . . . . . . . . . . . . Acquisition

Monoclonal Antibodies, inc. . . . Merger

Genetic Systems, Inc. . . . . . . . . Acquisition

Codon Corp. . . . . . . . . . . . . . . . . Acquisition

Triton Biosciences . . . . . . . . . . . Acquisition

Cryschem, Inc. . . . . . . . . . . . . . . Acquisition

Mason Research . . . . . . . . . . . . Acquisition

Vitaphore Corp. . . . . . . . . . . . . . Acquisition

Cambridge Medical

Oct. ’89

NOV. ’89

Oct. ’89

May ’90

Jan. ’90

NOV. ’89

Mar. ’90

Aug. ’89

Apr. ’90

May ’90

NOV. ’89

Apr. ’90

Jan. ’90

Apr. ’90

Jan. ’90

Jan. ’90

Aug. ’89

May ’90

Jan. ’90

Dec. ’89

Apr. ’90

July ’89

Mar. ’90

Oct. ’89

NOV. ’89

Jan. ’90

Aug. ’89

Dec. ’89

Dec. ’89

July ’90

Apr. ’90

May ’90

June ’90

Feb. ’90

Dec. ’89

May ’90

Aug. ’89

NOV. ’89

Technology . . . . . . . . . . . . . . . Acquisition

Xoma Corp. . . . . . . . . . . . . . . . . . . . . . . . . _ . Ingene Corp . . . . . . . . . . . . . . . Merger

NOTE: The information displayed was gathered from publicly available sources (industry journals, newspapers, press

releases, etc.) As such, it is not meant to be an all encompassing list but rather, a reasonable sample of the

activity during the past year. No confidential survey data was used for this list.

SOURCE: Ernst & Young, 1990.

their bank accounts dwindle since then. For many

such start-up companies the choice has been one of

cutting R&D or turning to corporate sources for

various types of financial assistance.

The North Carolina Biotechnology Center

(NCBC) maintains a database that monitors public

literature citations to take a much broader approach

to biotechnology agreements. The center includes a

deal if either one of the firms involved has some

biotechnology activities. As a result, more agreements are included within the NCBC database,

which tracks more than 550 small and large firms

that work with recombinant DNA (rDNA), monoclonal antibodies, or new cell culture technologies.

For the years 1982 to 1988, a total of 33 biotechnology-related acquisitions involved a firm from the

United States and a firm from Europe, while only

three involved combinations of U.S. and Asian

companies. Many of these deals consisted of multinationals on both sides of the Atlantic exchanging

divisions, with biotechnology often an unimportant

part of the buyouts. In the three Asian acquisitions,

for example, biotechnology played virtually no role

whatsoever (31).

The long-awaited biotechnology consolidation

has been less than dramatic so far, but worldwide

acquisitions were on the rise in 1989 and 1990 (see

table 4-6). Of these deals, few involve a foreign
56 ● Biotechnology in a Global Economy ——..——— . . .—— . .— .— —..- - ——-

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

In February 1990, the biotechnology community was stunned when the Swiss pharmaceutical company Roche

Holdings, Basel, announced that it was acquiring 60 percent of Genentech for $2.1 billion. Roche Holding Ltd. is the parent

company of Hoffmann-LaRoche. In principal, the arrangement is a merger rather than a takeover and Roche’s investment

represents a much greater interest in biotechnology than it has previously taken. Hoffmann-La Roche has joint ventures

to develop specific products with at least 13 other companies and owns 4 percent of Cetus. The announcement was met

with dismay by some because of rising concern about foreign investment in the U.S. economy; Japanese firms were actively

purchasing U.S. assets, including Sony’s highly publicized acquisition of Columbia Pictures 4 months prior to Roche’s

announcement.

The merger agreement was overwhelmingly approved by Genentech shareholders and passed Federal Trade

Commission (FTC) review in September 1990. Under the terms of the agreement, Roche Holdings will exchange every

two shams of Genentech stock for $36 cash plus one share of Genentech redeemable stock. Roche has the right to buy all

of the redeemable stock at various dates between December 1990 and June 1995 at prices ranging from $38 to $60 per share.

Genentech was the largest and most successful independent U.S. biotechnology company and had become symbolic

of American superiority in the field. The biotechnology-based pharmaceutical company was founded in 1976 using venture

capital. In October 1980, Genentech was able to capitalize on the biotechnology hype during the public offering of its

shares. During the first 20 minutes of trading, the stock rose from the initial offering price of $35 to $89. This was especially

surprising given that investors’ decisions were based on expected profits from products that were not yet developed,

approved, or marketed. Nevertheless, investors were lured to Robert A. Swanson’s dream to ‘‘build a fully integrated,

independent pharmaceutical company. Swanson hoped that Genentech would achieve a billion dollars in annual sales by

1990.

Genentech’s success is considered extraordinary because it pioneered four of the first six genetically engineered

pharmaceutical products available on the market. The first three commercial successes for Genentech were human growth

hormone, human insulin, and alpha interferon. Genentech’s largest effort was in the development of tissue Plasminogen

Activator (tPA). By 1989, Genentech’s product and licensing royalties revenues had grown to $400 million from its

products-the aforementioned human insulin, human growth hormone, alpha interferon, and tPA. While revenue increased

steadily, costs of research, development, and litigation also rose. In 1989, Genentech spent 40 percent of its revenues on

research and development, amounting to $155 million.

Genentech was the primary company to develop Activase (the brand name for tPA). Sales of Activase, Genentech’s

main product, were much slower than expected because of delays in Food and Drug Administration (FDA) approval,

scientific studies questioning its effectiveness, and the availability of an inexpensive, low-technology competing product.

The inability of Activase to live up to original expectations combined with increased costs of bringing new products to the

market may have spurred Genentech’s efforts to find a partner.

Genentech executives report that they looked for a U.S. partner before approaching Roche Holdings. Roche was

deemed suitable because, among other things, it took a long-term view on the merger, it needed to take a major step forward

with its comparatively slow-moving internal biotechnology efforts, and was apparently less concerned with quarterly

performance. In addition, Genentech wanted to expand the sale of its products overseas very quickly.

During the next few years, the daily management of Genentech is expected to change little. Roche Holdings has said

that Genentech will continue to have a high degree of flexibility and independence; Roche will appoint only 2 of the 13

members of Genentech’s board of directors. How long this relationship will last is unclear. The main benefit for Genentech

appears to be an immediate infusion of $492 million. Genentech executives noted that the company simultaneously gained

the capital to finance its long-term drug development plans and reduced its need to worry about volatility in quarterly

profits. Kirk Raab, CEO and President of Genentech, implied that fluctuations in eamings were hurting Genentech’s ability

to conduct its programs and secure financing. In essence, Genentech is gaining a degree of security that will offset its lost

independence. In addition, Genentech will have access to Roche’s large international sales staff. Sales of Genentech’s

products are likely to show strong growth, especially overseas; currently only 20 percent of Genentech’s revenues originate

from sales outside the United States.

Nearly all of Genentech’s 1,850 employees hold stock options. The day the merger was completed, Genentech gave

its employees a cash windfall of approximately $120 million, or $60,000 each. Kirk Raab stands to gain $7.9 million in

stock options while Chairman and cofounder, Robert Swanson, would receive $4.2 million in cash on top of stock options.

Herbert Boyer, cofounder and co-patentee on the most famous recombinant patent, will collect $36 million in cash for

turning in his 2 million shams.

SOURCES: Oftlce of Technology Assessment 1991, based on Associated Press wire story, Sept. 9, 1990; Business Week, “Roche’s Big Buy

May Set Offa Shopping Frenzy,” Feb. 19, 199Q M. Chase, “GenentechPlans To Sell 60 Percent Stake to Roche Holdings for$2.1

Billion” Wall Street Journal, Feb. 5, IW, M. Ratner, “New Era for Genentecb and So It Goes,” Biotechnology, March 199Q

R.A. Swanso~ “Remarks Before the Vice President’s Council on Competitiveness,” February 1990.
Chapter 4--Financing ● 57

acquisitor. In fact, in the case of Genzyme’s

proposed takeover of Integrated Genetics, it was the

small U.S. acquisitor outbidding the large Italian

pharmaceutical concern, the Ares-Serono Group.

Rather than demonstrating any international trend,

1989 and 1990 proved to be the years of the teamup

between U.S. biotechnology companies: the years’

deals involve U.S. biotechnology companies on both

sides of the contracts. A 1990 survey of biotechnology companies revealed that within the next 5 years

nearly half expect to acquire another company and

39 percent expect to be acquired (19).

With such a small number of acquisitions by

foreign firms it is difficult to identify temporal

trends. It seems certain, however, that overall buyout

activity is heating up, with half the total number of

biotechnology acquisitions being made (or being

proposed) within the past 2 years. Nevertheless, it

would seem that if an onslaught of biotechnologyhungry multinationals acquiring cash-strapped biotechnology companies was going to occur, the trend

would likely have become quite evident by now. The

key is, if American biotechnology companies remain willing to arrange deals for single products or

product lines at reasonable prices, why should a

foreign firm go through all the trouble and expense

of making a complete acquisition (25). In a 1990

survey, three-quarters of the companies surveyed

believe it does not matter whether an acquirer is

foreign or domestic (19).

Analysts expect that many struggling, cash-short

American biotechnology firms will command some

of the richest takeover premiums in the years ahead

(15). The Premiums paid for recent acquisitions have

been high. Hoffmann-LaRoche acquired 60 percent

of Genentech at a 40-percent premium over its

market valuation. Chugai paid a 92-percent premium for Gen-Probe, and American Cyanamid paid

a 175-percent premium for Praxis Biologics (19).

Many industry observers disagree, however, on

the likelihood of a spate of foreign biotechnology

takeovers (57). One argument proposes that the

major assets of U.S. genetic engineering firms are

their young, energetic scientists. These assets walk

out of the building every night, and they would

likely move to another start-up company if they

didn’t like the corporate atmosphere following a

takeover. That reasoning may carry somewhat less

weight today than previously, however, as a number

of biotechnology companies are beginning to show

product revenues and operating profits and therefore

have tangible worth in addition to their scientific

expertise. But, with companies spending 70 percent

of their revenues on research, this argument is still

relevant (40).

With any takeover, be it foreign or domestic, the

new parent is likely to put in place new management

and infrastructure. An action that could have negative consequences on an entrepreneurial, researchbased biotechnology fro-these problems are multiplied if the parent company is headquartered

overseas. This may be one reason why Japanese

firms prefer strategic alliances over total acquisition.

In general, strategic alliances expose the parent

company to less risk than acquisition.

STRATEGIC ALLIANCES

As venture funds become more conservative and

the public market more difficult to penetrate, U.S.

companies increasingly rely on strategic alliances

with both domestic and foreign firms to raise

much-needed cash. While policymakers may be

concerned about asymmetrical deals wherein the

foreign firm gains more than the U.S. firm, U.S.

companies enter into alliances that offer the most

cash with the greatest flexibility. A 1989 survey

examined the reasons that biotechnology companies

turn to foreign partners for strategic alliances in the

first place (19). United States firms cite marketing

expertise as the prime reason for foreign ties,

followed by the availability of capital and the

regulatory expertise necessary to market products in

foreign countries (see figure 4-2).

It is surprisingly difficult to define exactly what

constitutes an alliance between a U.S. biotechnology

company and a European or Asian partner. For

example, the research collaboration that Cetus

signed with Hoffmann-La Roche in early 1990

covering human diagnostics based on polymerase

chain reaction (PCR) technology is really with the

New Jersey-based Hoffmann-La Roche, Inc. subsidiary of the Swiss-based parent. Nevertheless, researchers at Roche’s world headquarters in Basel

probably have a much better handle on PCR

technology than if Cetus’ deal was with a totally

unrelated company. Similarly, if Nova Pharmaceutical’s major collaboration with SmithKline Beckman

was an all-American deal when it was first signed,

does anything change now that SmithKline has

merged with England’s Beecham Group?
58 ● Biotechnology in a Global Economy

Figure 4-2—Reasons for Geographic Strategic Alliance

Market capability

Capital needs

Regulatory expertise

New products

Research capability

New science and

technology

Manufacturing capability

~

18

 27

I 48

18 ,7

1 2 2

’

5

1 2

J 20

7

I I I I

o 20 4 0 60 8 0 100

Percentage rating

m Us. = Europe ~ Japan

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

Keeping track of new alliances is often a relatively straightforward procedure because of the

publicity surrounding such announcements. Monitoring the termination of such deals, however, is

much more difficult. For example, 46 publicly held

biotechnology companies tracked by Shearson participated in 65 deals that terminated during 1988.

European partners were involved in eight of those

teruminations; Asian partners participated in four.

Reasons for ending agreements include a change in

focus on the part of one of the partners, unsatisfactory R&D progress, or the planned conclusion of

R&D contracts for better or worse. For example, in

Pharmacia’s termination of agreements with Biotechnology General and Chiron, analysts point to

major corporate restructuring going on within the

Swedish company (46).

A further difficulty with deal-counting is that one

agreement may cover just a single protein while

another may involve a whole range of products. For

example, Chiron Corp. ’s joint venture with Switzerland’s Ciba-Geigy includes a variety of biotechnology-derived vaccines; by comparison, Amgen and

Kirin have actually made three separate agreements

(plus one more between Amgen and the KirinAmgen joint venture) with each covering a specific

therapeutic product obtained using a DNA technology.

Despite these difficulties and limitations, it is

instructive to step back and examine the overall

numbers of agreements forged between U.S. biotechnology companies and European and Asian

partners. The investment bank Shearson Lehman

Hutton has kept track of the various domestic and

foreign alliances currently in place for 46 publicly

traded U.S. biotechnology fins. It lists transactions

that have taken place from the inception of the

biotechnology companies through February 1,1989.

Biotechnology firms have an average of six corporate partners each. The average number of foreign

alliances for each U.S. biotechnology company is

3.5, which includes an average of 2.1 European

alliances and 1.4 deals with Asian companies,

almost always Japanese firms (see table 4-7). These

figures have been confirmed in a separate survey by

Ernst & Young (1990).

A half-dozen biotechnology companies have

forged an extraordinary number of foreign ties;

Chiron, Biogen, and Genentech lead the way (see

table 4-8). The data reveal several different strategies for foreign strategic alliances: some U.S. firms

have emphasized European accords (e.g., Chiron

and Immunex), others have stressed Asian over

European alliances (e.g., Amgen, Bio-Technology

General Corp., and The Liposome Co.), and still

others have opted for a balanced approach (e.g.,

Biotech Research Labs, Genentech, Integrated Genetics, and Mycogen).

‘Timing the tables and examining the situation

from the perspective of the foreign partners reveals
Chapter 4--Financing ● 59

Table 4-7—Breakdown of the Number of Alliances

With 46 Publicly Held U.S. Biotechnology

Companies With European or Asian Partners

Total number Number with Number with

of alliances European firms Asian firms

1

2

3

4

5

6

7

8+

28

9

4

0

0

0

3

1

18

11

2

3

0

1

0

0

SOURCE: Teena Lerner, Shearson Lehman Hutton, 1990.

that 62 percent of European firms that have made

deals with U.S. biotechnology companies have

made just one such accord, while 91 percent have

made three or fewer; the average number of deals per

European company is two. The European outliers

are Switzerland’s Hoffmann-La Roche (13 deals),

Ciba-Geigy (7 deals), Sandoz (7 deals), and Germany’s Hoechst (7 deals). Although these represent

a large number of alliances, the European corporate

dealmakers have struck nowhere near the number of

biotechnology accords as the most active of U.S.-

based multinationals, such as Johnson & Johnson

(23 deals) and Eastman Kodak (20 deals) (46). A

country-by-country analysis of strategic alliances

appears in box 4-C.

As for Asian firms, the overall pattern is similar.

Some 51 percent of those companies that do have

strategic alliances with biotechnology companies

have only one agreement, with all but one Asian

company having four deals or fewer. The one Asian

outlier is Kirin Brewery, which has six agreements

(four with Amgen and the remaining two with Plant

Genetics, Inc.). Other major Japanese corporations

entering into alliances are Green Cross, Mitsubishi

Chemical, and Yamanouchi Pharmaceutical, each

with four agreements.

The Shearson data are useful as far as they go, but

they were constructed specifically to track and

evaluate publicly held biotechnology companies,

rather than monitoring the actual technologies involved. With over 400 U.S. companies dedicated to

biotechnology, the Shearson figures clearly leave

out small, public biotechnology companies as well

as privately held concerns. In addition, established

U.S. pharmaceutical, chemical, and other companies

with significant in-house biotechnology expertise

are also ignored.

Table 4-8-Number of Agreements With European and

Asian Partners for 46 Publicly Held U.S.

Biotechnology Companies As of 1989

Number of Number of Total number

European Asian foreign

U.S. company deals deals deals

Amgen . . . . . . . . . . . . . .

Bio-Response . . . . . . . . .

Biogen . . . . . . . . . . . . . . .

Biotech Research

Labs . . . . . . . . . . . . . .

BioTechnica

International . . . . . . . .

Bio-Technology

General . . . . . . . . . . . .

Calgene . . . . . . . . . . . . .

California

Biotechnology . . . . . . .

Cambridge

Bioscience . . . . . . . . .

Centocor . . . . . . . . . . . . .

Cetus . . . . . . . . . . . . . . . .

Chiron . . . . . . . . . . . . . . .

Collaborative

Research . . . . . . . . . . .

Crop Genetics . . . . . . . .

Cytogen . . . . . . . . . . . . .

Damon Biotech . . . . . . . .

DNA Plant Technology . .

Ecogen . . . . . . . . . . . . . .

Enzo Biochem . . . . . . . .

Epitope . . . . . . . . . . . . . .

Escagenetics. . . . . . . . . .

Genentech . . . . . . . . . . . .

Genetics Institute . . . . . .

Genex . . . . . . . . . . . . . . .

Genzyme . . . . . . . . . . . .

Gen-Probe . . . . . . . . . . . .

Immunex . . . . . . . . . . . . .

Imre . . . . . . . . . . . . . . . . .

Integrated Genetics . . . .

Ingene . . . . . . . . . . . . . . .

Invitron . . . . . . . . . . . . . .

Lipsome Technology,

Inc. . . . . . . . . . . . . . . .

Molecular Genetics . . . . .

Monoclonal Antibodies..

Mycogen . . . . . . . . . . . . .

NeoRx . . . . . . . . . . . . . . .

Nova Pharmaceutical . . .

Oncogene Sciences . . . .

Plant Genetics . . . . . . . .

Repligen . . . . . . . . . . . . .

Synergen . . . . . . . . . . . . .

Syntro . . . . . . . . . . . . . . .

T Cell Sciences . . . . . . . .

The Liposome

co. . . . . . . . . . . . . . . . .

Vestar . . . . . . . . . . . . . . .

Xoma . . . . . . . . . . . . . . . .

;

8

0

2

0

4

3

1

4

3

12

2

0

1

1

4

0

0

2

1

7

6

3

2

4

5

0

3

0

0

1

2

1

0

0

0

0

1

4

1

1

0

0

3

3

4

0

7

0

0

4

1

2

1

4

1

4

1

0

0

0

0

0

0

1

1

6

3

1

2

1

0

2

4

1

0

0

0

0

1

0

0

0

3

1

0

1

3

5

0

0

5

0

15

0

2

4

5

5

2

8

4

16

3

0

1

1

4

0

0

3

2

13

9

4

4

5

5

2

7

1

0

1

2

1

1

0

0

0

4

5

1

2

3

5

3

3

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

The NCBC data that were sorted under contract

specifically for this report show that from 1982 to

1989 both European and Japanese firms have had

significant interactions with U.S. companies. Ap292-870 - 91 - 3 : Q1- 3
60 ● Biotechnology in a Global Economy

---- . ——. . . .—.

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

Analysis of the countries involved in U.S.-Asian alliances shows Japan involved in 94 percent of the 195 deals

made from 1982 through 1988. In 1988, there was a record 52 U.S.-Japanese deals struck; but some of the other

Asian countries also signed agreements with U.S. firms. The half-dozen non-Japanese deals signed last year

involved companies from China, Israel, Singapore, Korea, and Pakistan.

Alliances between biotechnology companies from Western countries and the Soviet Union are also becoming

more common of late. In one such arrangement, Monsanto agreed to contribute $500,000 toward joint research at

the U. S. S.R. 's Shenyakin Institute for Bio-Organic Chemistry involving neurobiological processes, human and

animal growth hormones, and plant genetic engineering. In another 1989 pact, Millipore and the Soviet Institute

of Genetics opened a joint R&D facility in Moscow that will initially develop separation processes for

alpha-interferon and the amino acid L-threonine.

The leading players in U.S.-European alliances are the United Kingdom (74 deals), Switzerland (63), and

Germany (45). Even though companies from each of these countries posted a record number of trans-Atlantic

biotechnology accords last year, the United Kingdom and Germany have clearly boosted their participation, while

Switzerland’s presence has been more steady throughout the 7-year period. This may have something to do with

far-sighted Swiss pharmaceutical giants like Hoffmann-La Roche, Sandoz, and Ciba-Geigy having played such

active partnership roles from the beginning.

The European countries that make up the second-tier in terms of U.S. alliance activity are Sweden (28 deals),

France (28), Italy (25), and The Netherlands (24). French, Italian, and Dutch accords are clearly on the rise, while

Swedish participation has been more evenly spread over the analysis years.

Belgium and Denmark, with 10 agreements apiece, make up a third tier of countries when it comes to

U.S.-European deals; Czechoslovakia, Finland, Ireland, Norway, and Spain represents the fourth tier, with

companies from each country having signed between one and three pacts.

In Germany, industry invests heavily in R&D-58 percent of the national total-and the pattern extends to

biotechnology. The majority of biotechnology activities are being conducted by large firms including: Bayer,

BASF, Boehringer Ingelheim, Hoechst, and Schering. Some of the firms, such as Bayer and Hoechst, are funding

biotechnology R&D at the rate of $70 to $100 million a year—amounts equivalent to U.S. companies, such as

DuPont and Monsanto. Licensing agreements, strategic alliances, and even acquisitions involving U.S. firms (e.g.,

BASF’s $1 billion acquisition of Inmont) may help German firms gain access to cutting-edge technology. In

addition, German firms are locating biotechnology facilities in the United States, such as BASF’s production

facilities in Massachusetts. Wellcome has a joint venture manufacturing facility in the United States with Genetics

Institute.

In Switzerland, where the pharmaceutical industry is very strong, industry accounts for 75 percent of all R&D

investment (approximately US $3.25 billion annually). Commercial investment in biotechnology goes toward basic

research. Because of production costs and a small internal market, most Swiss companies prefer to produce products

abroad.

SOURCE: Office of Technology Assessmen4 1991, adapted from data obtained from the North Carolina Biotechnology Centec Decision

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

——— . —

proximately 366 European-U.S. biotechnology ac- biotechnology firm by an overseas investor (table

cords and some 266 Japanese-U.S. biotechnology

deals were struck during the 7-year period.

Equity Arrangements

Biotechnology companies are always looking for

money; selling equity to major U.S. and foreign

corporations has always been an important part of

this fundraising, often accompanying strategic marketing or distribution deals. Using data on 46

publicly traded U.S. biotechnology companies show

seven instances of equity participation in a U.S.

4-Y). This means that foreign firms accounted for 18

percent of the total 38 equity investments listed. As

with outright acquisitions, the small number of these

deals indicates that this mute has not been an

important one for European and Asian companies as

they try to compete in biotechnology. A General

Accounting Office (GAO) report confirms the relatively minor part that foreign direct investment has

played in U,S. biotechnology (52).

The NCBC databases reveal 25 cases of U. S.-

European equity arrangements and 12 cases of
Chapter 4--Financing ● 61

Table 4-9-Equity Participations in 46 Publicly Held

U.S. Biotechnology Companies by European and

Asian Partners

U.S. firm Partner Description

-. . . . . -. . --- --- -

Cetus . . . . . . . . . . . . HoffmannLaRoche

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

DNA Plant Tech. . . Adron AB

DNA Plant Tech. . . Hilleshog

Research

AB

Imre . . . . . . . . . . . . . Takeda

Chemical

Nova Pharm. . . . . . Celanese

Plant Genetics . . . . Kirin

Brewery

Purchased 950,000 Cetus

shares (3.6%) in Jan. 1989

for $15 per share

Paid $20 million for 1 million

Chiron shares in Dec. 1988

Owns 2.3% of DNAP

Owns 6% of DNAP

Takeda increased its equity

ownership to 10% in Aug.

1988

Celanese, which was

acquired by West

Germany’s Hoechst,

purchased $10 million

Nova shares in 1987

in 1986 Kirin purchased a

total of almost 95,000

shares of various classes of

preferred stock

SOURCE: Teena Lerner, Sheareon Lehman Hutton, 1990.

U.S.-Japanese deals. The European data show a

recent increase in this activity, with 13 deals being

made in the last 2 years; however, the U.S. firm was

acting as the equity purchaser in more than half of

these 13 instances. Four deals involving equity

buy-ins into U.K. biotechnology companies

Celltech and British Biotechnology Ltd. clearly

illustrate the fact that recognized genetic engineering expertise is no longer limited to U.S. shores.

Of 25 U.S.-European equity arrangements, five

contain an explicitly mentioned marketing or distribution agreement. Interestingly, however, of the 15

deals made in the last 3 years, only 1 involves such

a dual function, indicating, perhaps, U.S.-European

equity investments are now being made for their own

sake, rather than as part of a window on technology

or market access approach. On the Japanese side of

things, 6 of 12 equity deals explicitly mention

marketing or research funding with no trend away

from dual agreements in the last few years. This

seems indicative of the fact that the Japanese market

is still inaccessible to most biotechnology companies by any route other than teaming up with a large

Japanese corporation.

Joint Ventures

With the exception of complete acquisition, the

most intimate relationship two companies can have

is a joint venture. In most cases, these arrangements

consist of both parties contributing a corporate

strength. In biotechnology, the genetic engineering

company invariably contributes the necessary technology; and the partner contributes financing, perhaps some development skills, and marketing capacity down the line. For most biotechnology companies, joint ventures are almost always preferred over

licensing arrangements as they give the start-up firm

opportunity to finance internal infrastructure consistent with becoming vertically integrated and a

share in profits rather than receiving only a small

royalty on eventual sales.

Joint ventures now account for most international alliance activity in terms of dollars, while

marketing arrangements are still number one in

terms of overall numbers of deals made (58).

Many of these agreements, especially in the early

years, involved major American companies, such as

Squibb, Corning Glass, Abbott Laboratories, and

DuPont; but as time passed, the biotechnology

companies began to play a growing role, especially

the larger, big-name companies like Genetics Institute, Chiron, Amgen, and, of course, Genentech.

Whether the U.S. biotechnology company is

dealing with Europe or Japan, the more the firm

can bring to the partnership the better are its

chances of negotiating a full-scale joint venture,

as opposed to a limited and less valuable licensing

or marketing arrangement. Although it would

seem that U.S. biotechnology companies would be

maturing over the last year or two to the point where

more of them could pull their own weight in a joint

venture involving an overseas partner, the evidence

does not point to any large increase in such joint

ventures.

If one particular joint venture were to be singled

out as a model for biotechnology companies to

examine, the Kirin-Amgen venture would be a good

place to start. According to Amgen president Harry

Hixson, it took the two companies just 8 weeks in

1984 to arrange the deal from beginning to end (29).

Kirin put up $12 million and Amgen contributed

patent rights, technology, and (somewhat unusually)

$4 million in its own funding. Research took place

on both sides of the Pacific, and the companies ‘

divided up worldwide marketing rights as follows:

Amgen kept U.S. rights, Kirin took Japanese rights,

and the Kirin-Amgen joint venture itself held onto

rights for the rest of the world. Johnson & Johnson

later bargained for European marketing rights from

Kirin-Amgen as well as rights to certain U.S.
62 ● Biotechnology in a Global Economy

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Advertisement, financial services for biotechnology companies.
Chapter 4--Financing ● 63

markets from Amgen. The key factor in making the

arrangement a success was the potential success of

the product, erythropoietin (EPO), a protein that

stimulates the production of red blood cells. Erythropoietin is approved for use in close to a dozen

European countries. In June 1989, EPO received

marketing clearance from the U.S. FDA for treatment of renal dialysis patients who suffer anemias

due to their inability to produce red blood cells.

Even this joint venture wasn’t perfect. For example, one of the reasons that Amgen was able to

negotiate such a favorable arrangement was that

Kirin sells a lot more beer than it does drugs, so this

company would not immediately be considered the

best of marketing partners for a biotechnologyderived therapeutic. In fact, this marketing weakness

probably played a role in the joint venture’s eventual

decision to license European rights to EPO.

Licensing and Marketing Deals

Licensing, whether it involves technology itself

or the marketing rights to eventual products that

result from R&D, has been an important source of

funds since the inception of commercialized molecular biology.

Despite their popularity in terms of numbers of

deals, licensing agreements do not receive raves

from biotechnology executives. These arrangements, if made with a large pharmaceutical company, provide the large pharmaceutical company

very good downside protection with milestone

payments often eliminated if the research is not

going well. The biotechnology companies, however,

gain somewhat limited upside potential from these

deals, because if the product is successful it will be

the pharmaceutical company that reaps the lion’s

share of the profits (41).

So why are there so many licensing deals? The

problem, according to one executive, is that partnerships and joint ventures cannot be completed until a

company has financed its own risk capital and has

come up with a product or service in which someone

has an interest. If the primary objective is to raise

cash, a company is at a negotiating disadvantage

from the beginning (9). Mycogen, an agricultural

biotechnology company, was able to raise $18

million in its initial public offering and has been able

to add about that much again in funding from three

major international collaborations. These were with

Kuboto (covering bio-insecticides in Japan), Royal

Dutch Shell (for bioinsecticides in the rest of the

world, except North America), and Japan Tobacco

(for bioherbicides worldwide) (8).

As for new trends, some companies are now

actually more willing to give up certain enabling

technology as part of an agreement than in previous

years. In this scheme the technology per se is not so

valuable, but rather, the products; the technology is

seen as something that will become available

anyway (42). The key, however, is when a company

licenses out the use of tools, such as specific

promoters and transformation systems, it does so for

clearly restricted areas of research.

Another trend developing as biotechnology companies grow, have product sales, and develop their

own sales forces is some of the marketing agreements can switch direction. For example, in 1987 the

Japanese pharmaceutical firm Mitsubishi Kasei

selected Genentech to develop and market some of

its products in the United States. However, Genentech was one of the few DBCs that had developed a

major marketing staff in the United States. While

companies such as Amgen, Immunex, and Cetus

have developed smaller sales forces, it is unlikely

that many similar agreements will be developed in

the near term (59).

Co-Marketing Agreements

In order for biotechnology companies to participate in co-marketing agreements, they need two key,

but relatively rare, components--a product and a

marketing staff. Marketing is expensive and requires

a sales force, something most DBCs do not have.

Not surprisingly, then, only a few such deals have

been struck. Each deal is different, but all involve the

larger, more advanced biotechnology firms. Because

Genentech and Amgen have the highest market

capitalization and are widely considered bellweather

biotechnology companies, their deals are worthy of

a closer look as they may predict future activity.

As an example, Amgen created Kirin Amgen as a

joint venture with Kirin Brewery in Japan to develop

EPO and subsequently elected to include granulocyte-colony stimulating factor (G-CSF). This time,

Amgen held onto markets in the United States,

Canada, Australia, New Zealand, and Europe, while

Kirin took the marketing rights in Japan, Korea, and

Taiwan; with the rights to the rest of the world

assigned to the joint venture. Later, Kirin forged a

co-marketing arrangement with the Sankyo Co. for
64 ● Biotechnology in a Global Economy

Japanese distribution of G-CSF, and in 1989 Amgen

and Hoffmann-La Roche agreed to a 10-year copromotion deal in Europe under which the product

will be sold under Amgen’s name. After this 10-year

period, Amgen has the right to take over exclusive

European sales and marketing.

As for Genentech, under a co-promotion agreement signed in February 1989 with Boehringer

Ingelheim Pharmaceuticals, Boehringer’s 475-

person U.S. sales force joined Genentech’s sales

force in promoting Activase, tissue plasminogen

activator (tPA), to office-based physicians in the

United States. Boehringer Ingelheim Pharmaceuticals is the Connecticut-based affiliate of Germany’s

Boehringer Ingelheim International GmbH, which is

Genentech’s tPA licensee for all countries except the

United States, Canada, and Japan. The co-promotion

agreement was to run through the end of 1991 but

was eventually bought out by Genentech.

TAX POLICY AND ITS EFFECTS

ON FINANCING R&D

Biotechnology companies require higher levels of

R&D investment than companies in other industrial

sectors. Tax relief is one of the methods the Federal

Government uses to reduce the financial burden on

R&D-intensive industries. The justification for tax

relief programs is based on the premise that such

investment results in public benefits and in a greater

rate of industrial innovation than would have occurred otherwise. Taxes and effects on investment in

biotechnology were discussed in detail in a 1988

OTA report (54). More general discussion of the

relationships between tax policy and innovation can

be found in a 1990 OTA report (56). Tax issues that

have emerged since 1988 and are specific to

biotechnology are discussed in the following section. In addition, tax policies of other countries are

examined.

Capital Gains

Capital gains are profits obtained from the sale of

capital assets, such as stocks and real estate. Capital

gains are taxed in most industrialized countries,

albeit to differing extents. In fact, most Western

European countries and Japan have systems of

capital gains taxation that are more complicated and

differentiated than that in the United States (38).

After the Tax Reform Act of 1986, these gains in

the United States were taxed at a maximum of 28

percent in 1987 and at ordinary income rates starting

in 1988. Substantial capital gains are rare for most

people. In 1988, Americans filed 109.8 million tax

returns; only 7.8 million returns accounted for all

$159 billion of capital gains, equivalent to 7 percent

of the tax returns filed (43). Debate during the fiscal

year 1991 budget negotiations focused, in part, on a

proposal to cut the top rate for capital gains taxes.

While lowering the rate would likely stimulate stock

trading, past experience with lowering the rate has

shown that it does little to induce savings and thus

capital investment (43). One argument for cutting

the tax rate has been to encourage venture capital.

But venture capital accounts for only a small fraction

of total capital gains. Most of the venture capital

comes from investors not subject to taxes anyway,

such as foreigners, pension funds, and college

endowments (7).

The tax rate on capital gains is only one factor

driving venture capital. The total amount of professionally managed venture capital is an extremely

small factor in the overall economic picture, even if

it is critically important to biotechnology start-ups.

Nonetheless, should the capital gains rate be lowered, the rise in investment in both RDLPs and

venture funds will no doubt have a beneficial effect

on biotechnology companies seeking capital.

R&D and Investment Tax Credits

The R&D tax credit lowers the cost of investment

in research activities by providing a 20-percent tax

credit on incremental R&D spending. The statutory

rate of 20 percent is calculated based on the excess

of qualified research over a base amount which is

linked to R&D spending in a specific historical

period. The base amount is figured by multiplying a

freed-base percentage by a firm’s average gross

receipts over the preceding 4 years. The effective

rate of the credit is much lower than 20 percent as it

is based only on incremental spending, and the

amount of the credit is disallowed as a tax deduction.

The effective rate of the credit is, therefore, approximately 5 percent (26). The incremental nature of the

credit ties it to increasing research expenditures

rather than total expenditures made in a year, thus

encouraging companies to increase their R&D

commitment. Several other countries have similar

tax incentives (see box 4-D).

To date, the R&D tax credit has been of little

use to many U.S. biotechnology companies, be-
Chapter 4---Financing ● 65

.— ———— --- —.-—. .— — — —-

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

Australia. In Australia, biotechnology firms can avail themselves of the benefits of several industry-wide

programs, including an R&D taxation incentive (companies undertaking appropriate research can receive a tax

break at 150 percent of the value of the research), grants, and a range of consulting services through the National

Industries Extension Service.

Canada. In Canada, immediate expensing of costs for both current and capital expenditures for R&D purposes

is allowed. Canada provides for an indefinite carry-forward of excess R&D deductions. Canada also offers a

20-percent flat rate tax credit for R&D activities based on a firm’s total R&D spending. Canada’s R&D credit is

unique in reducing R&D deductions correspondingly on a dollar-for-dollar basis.

France. French tax law provides for the full deduction of current R&D expenses in the year in which they are

incurred. Until recently, buildings used solely for scientific and technical research were eligible for a special

accelerated depreciation allowance, under which 50 percent of the cost of the building was deductible over the

remaining useful life of the asset. In 1983, the special depreciation allowance was replaced by a 25-percent

incremental tax credit (very similar in structure to the U.S. R&D credit). France has adopted a generally applicable

system of accelerated depreciation in the first year of service of the assets. Finally, France also maintains a system

of cash grants for R&D, under which companies creating or expanding scientific or technical research departments

may be entitled to a taxable cash grant of 15 to 20 percent of the value of such expenditures to a maximum of 25,000

francs per-job created.

Japan. Japanese corporations undertaking R&D in Japan may deduct their current R&D expenses in full in

the year in which such expenses are incurred, with a carryover of unused deductions for up to 5 years. Since 1966,

Japan has had an R&D tax credit for current R&D expenditures equal to 20 percent of the excess of current R&D

expenditures over the largest amount of such expenditures incurred in any single prior tax year since 1966. In

addition, Japan allows a special deduction of up to 40 percent of corporate income for firms that derive some portion

or all of their income from “overseas transactions in technical services. ” Small firms which export products are

allowed special reserves, deductible at rates ranging from 0.25 to 1.4 percent of income from exports, for the

development of overseas markets.

Taiwan. In Taiwan, current expenditures on R&D are deductible in the year in which they are incurred. R&D

equipment is eligible for accelerated depreciation as well as an investment tax credit of 15 percent (in the case of

domestically produced equipment) and 5 percent of the acquisition cost (in the case of imported equipment).

Technology-intensive industries are eligible for a special reduced corporate income tax rate of 22 percent. A

20-percent incremental credit is available over the highest credit of the past 5 years. If no R&D was conducted during

the past 5 years, a tax credit for R&D in excess of 5 percent of current year revenues is available.

United Kingdom. In the United Kingdom, current expenditures on R&D are fully deductible in the year they

are incurred. In addition, capital expenditures incurred in R&D activities are fully allowable as a deduction in the

year such expenditures are incurred. Unused deductions may be carried forward for a period of up to 5 years.

Germany. The Federal Republic of Germany provides for the deduction of current R&D expenditures from

taxable income in the year they are incurred. While capital expenditures on R&D, generally must be depreciated

over the economic life of the assets, accelerated depreciation of R&D assets at rates up to 40 percent over the first

5 years are permitted with respect to personal property,

SOURCE: E. Palmer, “AntitrusL Capital Gains, and Research and Development Tax Benefits in Several Industrialized Nations,” European Law

Divisiom Law Library of Congress, April 1990.

cause they are not profitable enough to generate because the government is, in effect, subsidizing

a credit. The credit, however, can be carried

forward for 15 years and provides a strong

incentive as it increases earnings over the long

term by reducing the tax burden. The tax reductions come at a critical time, when a company starts

earning money and selling products (26). The lower

tax rate provides a company needed earnings. Still,

smaller, newer companies are at a disadvantage,

R&D of larger companies but not of smaller ones

(10). And, when considering the time-value of

money carried-forward tax benefits are less valuable than tax benefits rendered in the current year.

The investment tax credit was one of the first

specific tax incentives that the Federal Government

established to encourage investment in physical

plants and equipment, allowing the company to
66 ● Biotechnology in a Global Economy

deduct a 10-percent credit for the cost of qualified

property that was either constructed or purchased.

The credit was eliminated in 1986 in favor of an

overall reduction in the corporate tax rate, as it was

unclear how effective the tax credit was at stimulating capital investment. In addition, the costs were

deemed greater than the benefits (56). Several

studies have attempted to measure the benefits of the

investment tax credit; estimates of the additional

investment range from $0.12 to $0.80 for each dollar

not collected in taxes (56). Estimates of the actual

increase in R&D spending from 1981 to 1985 as a

result of the tax credit, range from $500 million to

$2.9 billion annually (53). The investment tax credit,

therefore, resulted in lost revenue of between $13

billion and $37 billion to the government over a

5-year period (56).

One of the most controversial tax-related issues

has been whether or not R&D tax credits and

investment tax credits induce more investment. And,

if the tax credits encourage investment, does this

additional investment activity have any measurable

effect on the U.S. economy? Following the introduction of the R&D tax credit, private R&D spending

doubled from 1980 to 1986, amounting to nearly $60

billion (45).

The R&D tax credit remains controversial to a

Congress constantly faced with a budget deficit. The

total amount of revenue lost as a result of the subsidy

was approximately $700 million in 1985 (56) and as

high as $1.8 billion in 1989 (53). The Treasury

Department projected that a permanent extension of

the credit would reduce Federal revenues by $500

million in fiscal year 1992,$1 billion in 1993, $1.3

billion in 1991, $1.6 billion in 1995, and $1.8 billion

in 1996 (21). Estimates on the effect of the credit

indicate that between $0.35 and $0.99 of additional

R&D spending is generated for every dollar not

collected in taxes. The main obstacle to the enactment of a permanent R&D tax credit is that it is very

difficult to measure its effectiveness. And, although

available since 1981, the R&D tax credit is not a

permanent part of the tax code. Most recently it was

extended through December 31, 1991, by the

Omnibus Budget Reconciliation Act of 1990. Thus,

companies are unable to take full advantage of the

program because of the uncertainties. Despite the

obvious popularity of the R&D tax credit, Congress

has not yet made it a permanent part of the tax code.

Many biotechnology companies feel that a permanent R&D tax credit would allow companies to plan,

rather than to guess, what their financial commitments will be when investing in long-term, high-risk

endeavors (9). The President’s budget request for

fiscal year 1992 included a provision to make the

credit permanent and expand it to cover 100 percent

of applicable research expenses.

Tax Credits and the Orphan Drug Act

Prior to 1983, U.S. pharmaceutical companies had

little incentive to invest in developing drugs likely

to yield only limited financial profit. Small biotechnology companies developing innovative new techniques were even less likely to invest any of their

limited R&D budgets in any potentially unprofitable

human therapeutic. Drugs available or to be made

available for such rare afflictions as Huntington’s

disease, that affect only a small population, are

commonly known as “orphan drugs” (see ch. 5 for

further discussion of orphan drugs). In 1983, Congress amended the Federal Food, Drug, and Cosmetics Act with the Orphan Drug Act (Public Law

97-414) to provide incentives for developing drugs

for rare diseases that would otherwise not be

developed. A 50-percent tax credit for the cost of

conducting clinical trials and 7-year market exclusivity were the key incentives provided in the act.

The 7-year market exclusivity provision of the act

was designed to protect companies selling drugs that

were ineligible for product or use patents, were off

patent, or had little patent term outstanding. The act

has been amended twice, and there is momentum in

the direction of another amendment.

A 1984 amendment (Public Law 98-551) defines

a rare disease or condition as that which affects

fewer than 200,000 persons in the United States--or

more than 200,000 persons when it is clear that the

cost of developing the drug will not be recovered by

sales of the drug in the United States. A 1985

amendment (Public Law 99-91) authorizes 7 years

of exclusive marketing approval for all orphan

drugs, regardless of their patentability, with the

intention of encouraging private pharmaceutical

companies to invest more in orphan drug development.

In late 1990, Congress approved a measure that

would tighten the requirements under which companies will be eligible for this 7-year market exclusivity-withdrawing orphan drug status for drugs when

the patient population grows beyond 200,000. This

provision came amidst charges that some companies
Chapter 4--Financing ● 67

were earning unexpectedly high profits from the sale

of orphan drugs. The House-approved bill also

would allow more than one company to market

different versions of a drug granted orphan status in

instances where the companies developed the drug

simultaneously. A similar version of the bill passed

the Senate in fall 1990 but was vetoed by the

President in December 1990.

Amortization of Goodwill

If company A has tangible assets valued at $2

million and company B is willing to pay $3 million

to acquire company A, the excess $1 million

company B is willing to pay is treated as an

intangible asset, or goodwill, on company B’s

balance sheet. Goodwill is generally understood to

represent the reputation of the firm and the continuing loyalty of their customers. Because this intangible asset has no independent market or liquidation

value, generally accepted accounting principles

promulgated by the Financial Accounting Standards

Board require that goodwill (the differential between

the purchase price of an acquired company and its

book value) be amortized through their earnings

stream over a period of time. Some analysts believe

this requirement hurts the competitive status of

American companies wanting to acquire firms (23).

These analysts believe it penalizes companies by

lowering their earnings enough to upset Wall Street.

This is particularly true since there is no tax

deduction for the writeoff of goodwill. Thus, earnings are penalized for the total amount of the

goodwill writeoff rather than the tax-effected

amount of the writeoff (26). This contrasts with the

rules in England. A British firm, for example, can

write-off goodwill immediately and get a tax deduction. Participants at a September 1990 OTA workshop on financing biotechnology, raised the concern

that the current requirement, that goodwill be

amortized, could lead to the sale of major assets

overseas.

SUMMARY

Commercial activity in biotechnology in the

United States has led the world because of excellent

science and the ability of entrepreneurs to finance

their ideas. The U.S. venture capital pool is unparalleled, and the magnitude of the federally funded

research base that fuels the DBC research agenda is

unique. Despite long delays in product development

and considerable regulatory hurdles, start-up firms

have been able to raise cash in the initial stages of

operation. While the venture community has become more conservative in where it chooses to

invest, there appears to remain viable opportunities

for entrepreneurs with good ideas. Where there is a

choke point, however, is in the ability of start-up

companies to move forward into development,

testing, and marketing of their products—the expensive part of the process. As much as $30 billion may

be needed just to develop the 100 biotechnology

products currently in human clinical trials.

Some private firms are caught pre-public, as the

public market is less likely to play the role of

risk-taker since Black Monday. This has left most

firms cash poor and unable to move into development. The companies fortunate enough to have gone

public well before 1987 are, on average, able to

generate cash when needed through limited partnerships, secondary public offerings, and strategic

alliances. The top 20 firms will most likely remain

stable, surrounded by an ever-changing backdrop of

DBCs. Start-ups will continue to appear, but these

companies will likely face the reality of merger or

acquisition. Only a dramatic surge in the public

markets will dislodge some of these companies from

this fate.

Consolidation of existing companies is inevitable

and most likely necessary. What concerns some

observers is the role that foreign acquisition and

investment will play in the fate of many of these

vulnerable fins. Although it is true that the amount

of joint activity between U.S. firms and foreign firms

has been on the rise, much of this activity is

necessary to conduct business in a global market,

i.e., licensing, marketing, and co-marketing agreements. To date, there is insufficient evidence to

state that U.S. commercial interests in biotechnology are currently threatened by foreign competition. Acquisition is a costly and risky means to

acquire a technology, and most corporations have

avoided this mechanism. As U.S. DBCs move closer

to product reality, however, foreign corporations

with large pools of cash may be more willing to

pursue acquisition to obtain and ensure manufacturing rights. Executives of DBCs tend to feel that

manufacturing rights will be crucial for the viability

of their companies.

While some foreign firms-usually the big

companies such as Kirin, Ciba-Geigy, HoffmannLaRoche, and Hoechst—are actively investing in
68 ● Biotechnology in a Global Economy

U.S. DBCs, so are American firms such as Lilly,

Monsanto, Johnson & Johnson, and Eastman

Kodak. United States corporations are slightly

disadvantaged when it comes to acquisition, however, because American accounting and tax practices prevent them from deducting the full expense

of acquisition in the year it occurs. Some analysts

feel this practice allows foreign corporations to

move more rapidly toward acquisition. In addition,

the relatively high cost of capital in the United States

makes it harder for U.S. corporations to save the

sums needed for acquisition and for DBCs to raise

the cash needed to take biotechnology products to

market.

1.

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Chapter 5

The Pharmaceutical Industry

‘‘It has now been more than fifteen years since Robert Swanson, a young man who understood both

finance and science, invited Herbert Boyer, a shy molecular biologist at the University of California,

San Francisco, out for a beer. Swanson described his vision to Boyer: that the techniques and ideas

that Boyer had devised for manipulating DNA could be translated into products at a private

company yet to be established. As a result of that meeting, Genentech, the first well-known

biotechnology corporation, was founded; Swanson and Boyer made their fortunes; and profound

changes ensued in academic biomedical research, ’

Robert Bazell

The New Republic, April 1991.
CONTENTS

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

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

Drug Discovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...+........~”+ 73

Drug Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

BIOTECHNOLOGY-DEWED DRUGS .. .. .. .. .+ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

COMPETITIVE FACTORS . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Industry Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........9. . . . . 81

Dedicated Biotechnology Companies and the Pharmaceutical Industry . . . . . . . . . . . . . . 87

Competitive Influence of Government policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....+. 93

CHAPTER PREFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

Boxes

Box Page

5-A. FDA Clinical Trials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

5-B. Types of Biotechnology Products in Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

5-C. Pharmaceuticals-A Global Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

5-D. Price and Cost Containment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

5-E. Japan’s Pharmaceutical Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

5-F. Effects of Regulatory Decisions on Wall Street . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

5-G. The Drug Export Amendments Act of 1986 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

5-H. The Orphan Drug Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

5-I. Patent Term Extension for Pharmaceuticals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

Tables

Table Page

5-1. Approved Biotechnology Drugs/Vaccines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

5-2. Conditions for Which Biotechnology-Derived Drugs Are Under Development . . . 78

5-3. Testing for Additional Indications for Approved Drugs . . . . . . . . . . . . . . . . . . . . . . . . 78

5-4. Marketing of Approved Biotechnology-Derived Drugs . . . . . . . . . . . . . . . . . . . . . . . . . 81

5-5. Company Rank by Pharmaceutical Sales 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

5-6. Merger and Acquisition Activity in the Pharmaceutical Industry . . . . . . . . . . . . . . . . 87
Chapter 5

The Pharmaceutical Industry

INTRODUCTION

The development of biotechnology-based pharmaceutical products is flourishing. Since the early

1970s, independent, dedicated biotechnology companies (DBCs) have been examining the technology’s potential for commercial development, and in

more recent years, the technology has diffused into

research laboratories and the development processes

of most major companies in the pharmaceutical

industry. Currently, both dedicated biotechnology

companies and established, multinational pharmaceutical companies are using the tools and techniques of biotechnology in their drug discovery and

development efforts.

Despite the strong barriers to entry, characteristic

of the global pharmaceutical industry, there are

many DBCs focusing on niche markets and developing biotechnology-based pharmaceutical products.

Established pharmaceutical companies use biotechnology as a research tool and are increasingly

developing in-house capabilities to complement

their conventional research. Strategic alliances and

mergers between major, multinational pharmaceutical companies use biotechnology as a research tool

and DBCs allow both to compete in the industry and

combine their strengths-the innovative technologies and products of the DBCs blended with the

financial and marketing power and development and

regulatory experience of the major companies.

This chapter examines dedicated biotechnology

companies, specifically with respect to human

therapeutics and the diffusion of biotechnology into

established pharmaceutical companies. The chapter

also discusses the dynamics and economics of the

pharmaceutical industry as they influence the adoption and commercialization of biotechnology.

RESEARCH AND DEVELOPMENT

Pharmaceutical research and development (R&D)

is a risky business. Scientifically, the research and

discovery of new drugs is interdisciplinary, involving medicinal chemistry, molecular biology, biochemistry, physics, pharmacology, and other sciences and technologies. Biotechnology has proven

to be a source of innovation in pharmaceutical

R&D, contributing as both a production technology and a research tool. It is particularly important in drug discovery, as it enables scientists to

study the molecular basis for disease and to

design drugs that respond to a particular disease

process. Once the drug discovery process is completed, the product development process and cycle

are virtually the same for biotechnology-derived

drugs and conventionally derived drugs. The development process is lengthy and tightly regulated,

requiring significant investment in time and money

(7). Drug development includes clinical research

and trials and the completion of regulatory requirements.

Drug Discovery

Pharmaceutical research began as a chemical

science, focusing on chemical structures and corresponding activity, dominated by medicinal and

organic chemists. Little was known about the

biology, biochemistry, and pharmacology of early

products, and drug development in the days following World War II was speculative, based on massscreening of chemical compounds (56). Since then,

the development of physiology, biochemistry, genetics, and other biological sciences—including

biotechnology-has provided information at the

molecular and cellular level. This has contributed to

increased understanding of the relationships between chemical structure and biological activity

Photo credit: National Institutes of Hsalth

Flasks filled with microbes that have been genetically

engineered to produce interferon.

–73–
74 ● Biotechnology in a Global Economy

necessary for the discovery and development of new

pharmaceutical products (14).

Pharmaceutical R&D is now an interdisciplinary

process in which a rational approach to drug design,

based on an improved understanding of the biological mechanisms of disease and drug interactions, is

increasingly used to complement conventional

chemical investigation. Biotechnology is likely to

be the principal scientific driving force for the

discovery of new drugs as we enter the 21st

century, and the impact of biotechnology on the

discovery of new therapeutic entities is difficult to

underestimate (28).

Conventional Screening

Traditional approaches to discovering new drugs

include continued research on existing products, the

investigation and characterization of natural products, and the screening of synthetic chemicals and

compounds for medicinal and pharmacologic activity (14). Existing drugs will always be researched for

possible improvements, be they in terms of dosage,

side effects, or increased activity. Screening compounds, both natural and synthetic, for biological

and pharmacological activity is the conventional

approach to drug discovery (55).

Thousands of natural and synthetic chemicals and

compounds are screened every year for biological

and pharmacological activity. Natural products have

been used to develop many new medicines. Examples include: molds, bacteria, plant products, venoms, and toxins. Penicillins were developed from

penicillium mold, and other antibiotics, including

streptomycin and bacitracin, were discovered by

screening soil samples for biological activity. Plant

products often have pharmacological activity and

can be used to develop medicines. Morphine and

heroin, for example, axe derived from the opium

poppy. The study of venoms and toxins has led to

muscle relaxants, anticoagulants, and ion-channel

blockers. Screening and modification of synthetic

chemicals have also resulted in the development of

important drugs, including chemotherapeutic drugs,

sulphonamide antibacterial, and nonsteroidal antiinflammatory drugs (14).

Screening is a massive, time-consuming, random,

and very risky effort. About 10,000 compounds are

screened every year, one or two of which will

eventually be marketed as a drug (54). Despite the

poor odds associated with conventional screening,

these methods have worked well and provided the

industry with many drugs. Since the 1950s and

1960s, the most fruitful period of drug discovery

using conventional screening, this traditional route

toward the discovery of new chemical entities has

become more costly and has provided fewer drugs

(39).

Rational Drug Design

Conventional screening is increasingly being

augmented and complemented by biological sciences that allow a more mechanistic and physiological approach to drug discovery and design. This

rational approach to drug design requires close

collaboration between many scientific disciplines

and is characteristic of drug development efforts of

many biotechnology companies and, increasingly,

established pharmaceutical companies.

Rational drug design depends on an increased

knowledge of cellular mechanisms and control. This

contributes not only to the discovery of new drugs,

but also improves the understanding of the mode of

action of existing drugs (25). Rational drug design

focuses on understanding the physiological basis of

disease; and research concentrates, in part, on the

activity of enzymes, hormones and hormone receptors, cell replication and protein synthesis, and other

molecular-level aspects of disease and drug treatment (9,14). The techniques of biotechnology,

specifically recombinant DNA (rDNA) and hybridoma technology, are important research tools for

rational drug design. Biotechnology can provide

information about both the state and mechanism of

disease, allowing the discovery aspect of pharmaceutical research to be more specific and targeted.

For an in-depth discussion of the use and potential

of biotechnology for therapeutic development see

OTA’s 1988 report, U.S. Investment in Biotechnology (48).

The pharmaceutical industry uses biotechnology

for both its products and techniques, and there axe

two basic approaches to its use in drug development.

First, biotechnology can be a production technology

using rDNA techniques to manufacture otherwise

unmakeable human proteins, such as human growth

hormone. The majority of biotechnology-based

drugs currently on the market are natural human

proteins that, before rDNA, were not available in

sufficient quantities to use as drugs. The second way

biotechnology is used is in the rational design of

synthetic molecules (33). An example is the use of
Chapter 5--The Pharmaceutical Industry . 75

biotechnologies to clone and express genes that

produce receptors. These receptors are then used to

screen for receptor-binding compounds that will

either enhance or inhibit receptor-ligand performance. In this case, biotechnology is used to research

the disease mechanism and to design drugs to

interact in the disease process. The product ultimately derived from this discovery effort will

generally be a synthesized chemical, but its discovery depended on biotechnologies (40). This exemplifies the use of biotechnology as a research tool.

Rational drug design has been made possible by

the increase in information about the physiological

mechanisms of disease--providing additional approaches (aside from conventional screening) to

drug discovery. However, there is much more still

unknown, and drug discovery remains highly speculative, risky, and uncertain.

Drug Development

Once drug discovery is complete, the development process begins. This is a very lengthy, expensive, and tightly regulated process. Companies

spend much of the product development time

conducting clinical trials required to prove the

safety, efficacy, and quality of the drug (see box

5-A) and waiting for Food and Drug Administration

(FDA) review and approval. The actual drug development process, in terms of procedure, regulatory

requirements, time, and expense, is very similar for

biotechnology-derived drugs and conventional

products. However, while the process and the issues

are the same for both, the major competitive

pharmaceutical companies have the resources,

which most DBCs lack, to conduct clinical trials,

research new products, and market existing products. Whereas some DBCs have funded and conducted the research and discovery portion independently, the expense, time requirements, and complicated regulatory process lead them to collaborate

with established pharmaceutical companies to complete the actual clinical research and product development.

Product development time, for a specific product,

has been estimated to be as long as 10 to 12 years (6).

In estimating the cost of drug development, an

attempt is made to include expenses for products and

projects that are not successful and never reach the

market. However, the actual cost for developing a

new drug is not known and estimates vary.

In the United States, FDA regulates R&D, testing,

manufacturing, quality control, labeling, marketing,

and postmarketing studies of drugs. Biotechnologyderived drugs must go through the same FDA

process as conventional pharmaceuticals, however

the actual products are evaluated by different

divisions within FDA. Biotechnology-derived

drugs, most often classified as biologics, are evaluated by the Center for Biologic Evaluation and

Research; conventionally derived drugs are evaluated by the Center for Drug Evaluation and Research. FDA has made its intent to regulate the

product, not the process, clear, and has said it sees no

need to institute new procedures or requirements for

new biotechnology products (46). FDA’s final

policy statement regarding biotechnology indicated

that it would not classify products of rDNA or

hybridoma technologies any differently from those

produced by traditional techniques and that such

products are already covered under existing statutory provisions and regulations for drugs and biologics for human use (48,46).

Drug development requires time, financial resources, and regulatory expertise. DBCs have been

extremely successful and innovative in the discovery

phase but often lack the resources to independently

develop the products. The majority of biotechnology

derived drugs, both approved and in development,

were discovered by DBCs and are being jointly

developed with established pharmaceutical companies.

BIOTECHNOLOGY-DERIVED

DRUGS

In 1982, the first biotechnology-based drug,

recombinant human insulin, was approved in the

United States by FDA. As of August 1991, 15

biotechnology-based drugs and vaccines were on

the market (see table 5-l). The drugs are all large

proteins which, before advances in biotechnology,

were either not available at all, not available in large

enough quantities, or not of sufficient purity for wide

use as treatments. The exception, insulin, was

available from pig and bovine pancreases.

Many new products are in the pipeline, and

several are in the final stages of testing. According to the most recent survey of the Pharmaceutical Manufacturer% Association (PMA), there are

over 100 biotechnology drugs and vaccines in

human testing for a variety of conditions (see
76 ● Biotechnology in a Global Economy

Box 5-A—FDA Clinical Trials

In the United States, new drugs must be approved by the Food and Drug Administration (FDA). Conducting

clinical trials and obtaining FDA approval is a rigorous process that can take as long as 10 to 12 years to complete.

After completion of preclinical and clinical testing, companies may be required to conduct post-marketing

surveillance. The human testing is done on both healthy and patient volunteers. Throughout the process, the drug

companies work with FDA to design clinical trials and organize their material and studies. FDA uses expert advisory

committees in addition to staff scientists to review new drugs. A brief discussion of the process follows.

Initially there is preclinical testing that involves laboratory and animal testing to determine the compound’s

biological activity and safety. This stage takes approximately 1 to 2 years after which the sponsoring company

applies for permission to test the compound in humans. The company files an Investigational New Drug (IND)

application with FDA that provides information on drug composition, manufacturing data, data on experimental

controls, results from laboratory and animal testing, intended procedures for obtaining the consent of subjects and

protecting their rights, and an overall plan for human clinical studies. The FDA has 30 days in which to act on the

IND application, after which the company can begin human clinical testing.

Human clinical testing is done in three phases, which can take up to 6 years or more to complete. Phase I studies

involve safety and pharmacological profiling of the drug. The studies are designed to determine safe dosage range,

and how the drug is absorbed, distributed, metabolized, and excreted, as well as its duration in the body. Typically,

a small number of healthy subjects, not patients, are involved in Phase I testing, which usually is completed within

1 year. Phase II testing consists of controlled studies in an average of 200 to 300 patients to determine the drug’s

effectiveness. Additional safety studies are also done on both animals and humans. Phase II testing usually requires

2 to 4 years to complete. Phase III studies require a large number of patients: from 1,000 to 3,000 volunteers are

involved. Practicing physicians administer the drug to patients suffering from the indication for which the drug is

being tested. Phase III studies are designed to confirm Phase II efficacy studies and identify adverse reactions. These

usually take about 3 years to complete.

After the successful completion of the three phases of clinical testing, the sponsoring company submits a New

Drug Application (NDA), or a Product License Application (PLA) (in the case of biologic), to FDA that includes

all information collected during the trials. The information not only includes all preclinical and clinical test results

on the drug’s safety and efficacy, but also includes the drug’s chemical structure and formulation, manufacturing,

production, and labeling details. Average NDA approval time runs 2 to 3 years. After NDA approval is given,

companies maintain contact with FDA and provide information on adverse reactions, production, quality control,

and distribution records, Post-marketing surveillance is sometimes formalized in what are known as Phase IV

studies, which provide the information from studies on the long-term effects fo the drug’s use to FDA.

FDA instituted anew process, known as the Treatment IND process, in 1989 for drugs used for life-threatening

and severely debilitating diseases, the goal being to reduce approval time. The Treatment IND process allows for

broader access to experimental drugs and allows a company to recoup some of its investment while continuing

clinical investigation and preparation of its NDA or PLA. Under the plan, if a drug shows particular promise after

Phase I clinical trials, then Phase II and Phase III maybe combined, saving several years time.

SOURCE: Pharmaceutical Manufactunm Associatio~ 1990.

table 5-2). Over half of the drugs in development Several approved drugs are replacement therapies

target cancer or cancer-related conditions, and vaccine research is heavily concentrated on finding a

vaccine to combat acquired immunodeficiency syndrome (AIDS) (32). A brief description of the types

of products in development (see box 5-B) reveals the

potential variety of biotechnology-derived therapeutics. Both biotechnology companies and established

pharmaceutical companies are involved in the research and development of these products, indicating a commitment by both to use the latest available

technology.

for patients who lack the biochemical capability to

produce or process the necessary proteins. These

include insulin for diabetics and human growth

hormone for children with growth deficiency. Tissue

plasminogen activator (tPA) is used to treat acute

myocardial infarction and works to dissolve blood

clots, which are causative agents for many heart

attacks (56). Other products are approved for specific conditions, and research is continuing to find

new indications for their use. Alpha interferon is

used to treat hairy cell leukemia, AIDS-related
Chapter 5—The Pharmaceutical Industry ● 77

Table 5-l-Approved Biotechnology Drugs/Vaccines

— .

Revenues” Revenues”

Product name Company Indication U.S. approval 1989 1990

Epogen (tin)**

Epoetin Alfa

Amgen

Thousand Oaks, CA

Dialysis anemia June 1989

February 1991

95

NA

300

Neupogen** NA

Granulocyte colony

stimulating factor

G-CSF

Amgen

Thousand Oaks, CA

Chemotherapy

effects

Humatrope (R)*’ 50

Somatotropin

rDNA origin for

injection

Eli Lilly

Indianapolis, IN

Human growth

hormone deficiency

in children

March 1987 40

Humulin(R)

Human insulin

rDNA origin

Eli Lilly

Indianapolis, IN

Diabetes October 1982 200

NA

175

100

250

NA

200

120

Actimmune**

Interferon gamma 1-b

Genentech

San Francisco, CA

Infection/chronic

granulomatous disease

December 1990

November 1987

October 1985

Activase (R)

Alteplase, rDNA origin

Genentech

San Francisco, CA

Acute myocardial

infarction

Protropin (R)**

Somatrem for injection

Genentech

San Francisco, CA

Human growth

hormone deficiency

in children

Roferon (R)-A**

Interferon alfa-2a

(recombinant/Roche)

Hoffmann-La Roche 40 60

Nutley, NJ

Hairy cell

leukemia

AIDS-related

Kaposi’s sarcoma

June 1986

November 1988

Leukine** March 1991

Granulocyte microphage

colony stimulating

factor GM-CSF

Immunex

Seattle, WA

Infection related to

bone marrow transplant

NA NA

Recombivax HB (R) July 1986 100 110

Hepatitis B vaccine

(recombinant MSD)

Merck

Rahway, NJ

Hepatitis B

prevention

Orthoclone OKT(R)3

Muromonab CD3

Ortho Biotech

Raritan, NJ

Ortho Biotech

Raritan, NJ

Kidney transplant

rejection

June 1986 30 35

Procrit** December 1990 NA NA

Erythropoietin

AIDS-related

anemia

Pre-dialysis anemia

December 1988 10

60

30

80

HibTiter (tin)

Haemophilus B

conjugate vaccine

Praxis Biologics

Rochester, NY

Haemophilus

influenza type B

Intron (R) A**

lnterferon-alpha2b

Schering-Plough

Madison, NJ

Hairy cell

leukemia

Genital warts

AIDS-related

Kaposi’s sarcoma

Hepatitis C

June 1986

June 1988

November 1988

February 1991

September 1989

NA NA

Energix-B 20 30

Hepatitis B vaccine

(recombinant)

● Estimated U.S. revenues in millions of dollars

● *Orphan Drug

NA = not applicable

SmithKline Beecham

Philadelphia, PA

Hepatitis B

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

1990 Annual Survey.
78 ● Biotechnology in a Global Economy

Table 5-2-Conditions for Which BiotechnoIogyDerived Drugs Are Under Development

AIDS and AIDS Related Complex (ARC)

Chemotherapy effects

Leukemia

Aplastic anemia

Cancer

Bone marrow transplant

Hematologic neoplasms

Neutropenia

Myelodysplastic syndrome

Infectious diseases

Thermal injury

Reperfusion injury related to myocardial infarction and renal

transplantation

Anemia secondary to kidney disease, AIDS, premature infants,

chemotherapy, rheumatoid arthritis

Autologous transfusion

Hemophilia

Corneal transplants

Wound healing

Chronic soft tissue ulcers

Diabetes

Wasting syndromes

Nutritional and growth disorders

Venous stasis

Turner’s syndrome

Burns

Venereal warts

Herpes simplex 2

Hepatitis-B, non-A, non-B hepatitis

Hypertension

Platelet deficiencies

Septic shock

Pseudomonas infections

Heart and liver transplant rejection

Malaria

Cervical ripening to facilitate childbirth in women experiencing

certain implications

Myocardial infarction

Deep vein thrombosis

Acute stroke

Pulmonary embolism

SOURCE: Pharmaceutical Manufacturers Association, Biotechnology

Medicines in Development, 1990 Annual Survey.

Kaposi’s sarcoma, genital warts, and Hepatitis C.

Erythropoietin (EPO) is used to treat anemia associated with end-stage renal disease and AIDS. Many

of these drugs also have other potential uses for

which they are being tested (see table 5-3) and, if

approved, will increase their potential market values.

The market for many biotechnology-derived

drugs is potentially large. Much of this drug

development is market-driven, with a defined and

expectant market. Examples include erythropoietin,

human growth hormone, insulin, and tissue plasminogen activator, as well as recombinant Hepatitis B

vaccines. All have performed well and are significant and much needed new drugs. Some signifiTable 5-3-Testing for Additional Indications for

Approved Drugs

Drug Approved use Additional indications

EPO

tPA

Interferon

alpha-2a

Interferon

alpha 2b

Dialysis anemia,

AIDS related

anemia

Acute myocardial

infarction

Hairy cell leukemia,

AIDS-related

Kaposi’s

Sarcoma, Hepatitis

c

Hairy cell leukemia,

Genital warts,

AIDS-reIated

Kaposi’s

sarcoma

Autologous transfusion,

Premature infants,

Rheumatoid arthritis,

chemotherapy, pre- and

post-surgical use

Deep vein thrombosis,

acute stroke, pulmonary

embolism

Cancer, infectious disease,

Genital herpes, colorectal

cancer, Chronic and acute

hepatitis B, Chronic

myelogenous leukemia

gastric Malignancies, HIV

positive ARC, AIDS

Genital herpes, superficial

bladder cancer, basal cell

carcinoma, chronic and

acute hepatitis B, non-A,

and non-B hepatitis, delta

hepatitis, chronic

myelogenous leukemia HIV

SOURCE: Pharmaoeutioal Manufacturers Association, Biotechnology

Medicines in Development, 1990 Annual Survey.

cantly smaller development is more technologydriven, with a less defined market opportunity (56).

An example is alpha interferon, which appeared to

be a promising treatment for a variety of diseases

because of its antiviral activity. Before biotechnology, it was not possible to isolate enough natural

alpha interferon to conduct research to determine its

biological activities and potential therapeutic benefits. Using rDNA techniques, alpha interferon is now

mass-produced and research is continuing. As research and clinical trials have progressed, however,

it has become obvious that much more must be

learned about the drug’s activity and mechanism of

action, with respect to disease, before its use and

effectiveness can be better defined.

Interleukin II (several different interleukins, at

least 10, have been identified) is another example of

a naturally occurring immune system protein with

somewhat uncertain actions that is, however, potentially effective in the treatment of cancer (28). Once

again, neither the market nor the drug’s mechanism

of action is as yet particularly well defined, thus its

ultimate marketplace success is unpredictable. It is

important to differentiate between these drugs (interferon, interleukin, tumor necrosis factor, and others),

now being researched, whose development is more

technology-driven, and other biotechnology drugs
Chapter S-The Pharmaceutical Industry ● 79

Box 5-B—Types of Biotechnology Products in Development

According to a 1990 Pharmaceutical Manufacturers Association survey of biotechnology products in development, PMA

member companies have over 100 new biotechnology-derived drugs and vaccines in human clinical testing. Many of the

products are being developed by multiple companies, and they can be placed in several defined categories. Research continues

on several of the already approved products, including erythropoietin, tissue plasminogen activator, growth hormone, and

interferon. A brief description of the other types of products in development follows.

Seven different Colony Stimulating Factors are being developed to treat white blood cell disorders including: some

cancers, AIDS, aplastic anemia, bone marrow transplants, neutropenia (a condition characterized by a decrease in the number

of neutrophilic leukocytes in the blood), and thermal injury. These products stimulate bone marrow to increase blood cell

production and restore white cell counts.

Two companies are competing in the development of Superoxide Dismutase indicated for the treatment of conditions

related to myocardial infarction and renal transplantation, as well as oxygen toxicity in premature infants.

Hemophiliacs lack the blood clotting protein Factor VIII and are susceptible to severe, life-threatening internal bleeding.

Factor VIII can be genetically engineered, resulting in a pure protein in sufficient quantities for treatment. Two companies have

applications submitted to the Food and Drug Admini “ stration (FDA) and are awaiting final marketing approval.

Growth Factors regulate cell proliferation, function, and differentiation. There are several different types of growth

factors that are involved indifferent cellular processes and operate in distinct cells. Several growth factors, including epidermal

growth factor, transforming growth factor, fibroblast growth factor, and insulin-like growth factor, are being developed by

companies to treat a variety of conditions. Growth factors have many potential uses: including wound healing and the treatment

of diabetes, growth disorders, ulcers, wounds, and transplants.

Interleukin is a natural substance that seems to have a wide potential variety of uses but is poorly understood. Interleukins

appear to be useful in treating disorders of the immune system. Seven companies have one form of Interleukin or another in

clinical testing. Recently, Cetus’ Proleukin (interleukin-2) New Drug Application was turned down by FDA. FDA requested

more information and additional testing to determine subsets of kidney cancer patients that will benefit from Proleukin

treatment. Many of the indications for which interleukins are being tested have no alternative treatment, and thus, interleukin,

while mechanistically poorly understood, is the only potential therapeutic treatment.

Monoclinal antibodies are protein molecules produced by white blood cells that can recognize and target foreign matter

(antigens) in the cells. As such, there is potential for monoclonal antibodies to be able to target the delivery of drugs to particular

cells on the basis of antigen recognition. One monoclinal antibody-based therapeutic, Ortho’s Orthoclone OKT-3, is available

on the market for treatment of kidney transplant rejection. Eighteen companies have other monoclinal antibody-based

therapeutics in clinical trials for a variety of indications, including: treatment of graft-host disease, cancer and, septic shock,

as well as prevention of blood clots, pseudomonas infections, rheumatoid arthritis, and diabetes. Centocor’s Centoxin and

Xoma’s Xomen-E5 are both awaiting approval for the treatment of septic shock, and the two companies are already engaged

in a patent dispute. A large market is anticipated for these two products in particular. As with interferon and interleukins, the

market potential for monoclinal antibodies is promising but somewhat unclear.

Three companies are testing Tumor Necrosis Factor (TNF) for the treatment of cancer, and all are in early stages of

clinical testing. TNF is a cellular messenger involved in the triggering of immune defenses. It damages tumor-related blood

vessels and interferes with the blood supply and nourishment of the tumor. Again, research continues in efforts to determine

exact mechanisms of action, and market potential at this point is relatively unknown as efficacy studies are continuing.

Research and early clinical testing on Recombinant Soluble CD4s for the treatment of AIDS are being conducted by

several companies. CD4s are cell surface receptors believed to be involved with the AIDS virus’ (HIV) cell surface binding.

Research concentrates on creating an analog to the naturally occurring CD4 receptor that will bind to HIV and prevent it from

binding to the cell receptor, thus inactivating the virus. CD4 research represents just one use of biotechnology in AIDS research.

Vaccine research has been greatly enhanced with the advent of biotechnology. Biotechnology allows for the design and

production of subunit vaccines, which are much safer than conventional vaccines that incorporate the actual virus. Subunit

vaccines are developed from the viral protein coat, which by itself is incapable of reproducing and infecting the patient. Two

vaccines for Hepatitis-B are available on the market, and testing is continuing on a variety of potential AIDS, malaria, and

herpes vaccines. The market for these vaccines is very large, and if safe and effective vaccines are produced, their manufacturers

should be richly rewarded by a most-welcoming marketplace.

Several other products are in early clinical testing as well. The market potential for many of the drugs described is very

large. Infectious disease, cancer, and AIDS all lack effective conventional treatments. If the mechanism of action and the

function of the naturally occurring proteins being studied for use as therapeutics are further delineated, a realistic market and

demand can be estimated. Right now, some of the products being developed are being pulled by the market, while others are

more research driven and their commercial potential is difficult to evaluate as further scientific understanding is still needed.

SOURCE: Pharmaceutical Manufacturers Association% 1990.
80 ● Biotechnology in a Global Economy

Photo credit: 

Since its approval in 1987, Genentech’s Activase brand

tPA has been used to treat heart attack victims.

(erythropoietin, insulin, and human growth hormone), whose development is both technology and

market-driven. The questionable therapeutic potential of the former drugs, along with regulatory

uncertainty, make it difficult to predict future sales

and success of such biotechnology drugs. It is clear,

however, that without biotechnology there would

have been no opportunity to study many of these

products.

Another way to describe the difference between

products that are market-driven and those that are

more technology-driven is to think in terms of

diseases looking for drugs and drugs looking for

diseases. In the case of tPA, human growth hormone,

human insulin, and erythropoietin, the action of the

protein was fairly well understood, allowing a focus

on one or more specific diseases. In the case of

Interleukin-2, Tumor Necrosis Factor (TNF), and

the like, complicated, multiple biological effects

have been exhibited, and researchers have had to

search for relevant diseases to address (21).

Estimates of the market value of biotechnology

products, including drugs, vaccines, and diagnostics, vary. Revenues in the United States from

biotechnology-derived products were estimated to

have been $1.5 billion in 1989 and $2 billion in 1990

(50,51). Competitive factors, such as marketing, will

play a large role in determining the market share of

these drugs. Major, established pharmaceutical companies have primary marketing rights to 8 of the 15

approved biotechnology-derived therapeutics (see

table 5-4), and they have licensed development and

marketing rights to many of the products under

development. Almost all of the 15 approved drugs

were invented by DBCs but needed the aid of larger

companies’ funding and expertise in the development, regulatory, and marketing stages. These agreements were necessitated by the fact that DBCs

lacked sales forces in the early 1980s. Now that

some companies have the resources to field sales

representatives, there will likely be more products

marketed, at least in part, by the companies that

developed the products (2).

Amgen’s EPO and granulocyte colony stimulating factor (G/CSF); Genentech’s tPA, human

growth hormone, and gamma interferon; Praxis

Biologics’(now owned by Lederlee, a subsidiary of

American Cyanamid) haemophilus influenza type

B vaccine; and Immunex’s granulocyte microphage

colony stimulating factor (GM/CSF) are, in part,

marketed by the biotechnology companies that

discovered them. These companies also have agreements with established companies for marketing

their products outside of the United States and, in

some cases, co-marketing in the United States. Eli

Lilly, Hoffmann-La Roche, Merck, Ortho Biotech,

Schering-Plough, and SmithKline Beecham--all

established pharmaceutical companies-have licensed marketing rights to the other approved

products from the DBCs that developed them.

These arrangements demonstrate the aforementioned dependence of biotechnology companies on

pharmaceutical companies for clinical development

and marketing resources, as well as the established

companies’ commitments to making biotechnologyderived drugs part of their product portfolios. While
Chapter S-The Pharmaceutical Industry .81

Table 5-4-Marketing of Approved

Biotechnology-Derived Drugs

Drug Marketer

Amgen-erythropoietin Amgen-United States for

treatment of dialysis anemia.

Ortho Biotech--United States

for nondialysis anemia, AIDS

related anemia and all other

indications awaiting FDA

approval. All ex-U.S. market

territories except Japan and

China for all indications.

Kirin Brewery Ltd.-Japan and

China for all indications.

Genentech-human growth Eli Lilly

hormone

Genentech-human insulin Eli Lilly

Genentech-tPA Genentech

Boehringer-lngelheim

Genentech-alpha interferon Hoffmann-La Roche

Chiron-Hepatitis B vaccine Merck

Ortho-OKT-3 Ortho

Praxis Biologics-Haemophilus Praxis (bought by Lederlee)

B vaccine

SOURCE: Office of Technology Assessment, 1991.

large companies have demonstrated successful records in conducting clinical trials with drugs discovered elsewhere (in DBCs, universities, and government laboratories for example), they have not

historically been as successful in innovation (33).

This may change as the established companies

continue to develop in-house capabilities in biotechnology and to integrate biotechnology into their

R&D programs, while, at the same time, complementing these efforts by collaboration with biotechnology companies.

COMPETITIVE FACTORS

Analysis of the diffusion of biotechnology into

the development of human therapeutics and of the

United States’ competitiveness with respect to

global commercialization of biotechnology requires

an understanding of the structure and economics of

the pharmaceutical industry. The pharmaceutical

industry’s approach to biotechnology is two-fold

and includes efforts by both established pharmaceutical companies and biotechnology companies.

Many industry characteristics serve both to determine an established firm’s competitiveness and to

bar entry by new firms. These include R&D,

marketing, and related costs. A description of the

structure and economics of the pharmaceutical

industry follows. This will illustrate the difficulties

faced by small biotechnology companies and will

serve to introduce and help explain the different

approaches taken toward biotechnology by DBCs

and established pharmaceutical companies.

Industry Overview

The modern pharmaceutical industry is a

global, competitive, high-risk, and high-return

industry that develops and sells innovative, highvalue-added products in a tightly regulated process. Competitiveness results from the successful

introduction of new products, a dynamic process

revolving around innovative R&D in the major

global markets. Major industry players are financially strong, vertically integrated firms that control

all aspects of the business, from R&D, to manufacturing, to marketing (43). Many of the top firms,

especially U. S., Swiss, and British firms, are multinational, with R&D, manufacturing, and marketing

operations spread around the globe (see box 5-C).

There are also many companies that are more

regional, maintaining fully integrated operations

only in their home market. The top companies have

financial, scientific, regulatory, and marketing resources, enabling them to compete worldwide on the

basis of existing products and, importantly, new

product introduction.

The industry has faced increased competitive

pressure in recent years, leading to a wave of

consolidation among established companies.

DBCs are trying to enter a high-cost, high-risk, and

very competitive industry characterized by lengthy

product development schedules and delays between

discovery and marketing, which postpone return on

investment and require both time and money from

participating companies. The costs, risks, and time

frame required for drug development can act to bar

new companies’ entrance into the pharmaceutical

industry and affect both DBCs and established

pharmaceutical companies with respect to commercialization of biotechnology.

Research and Development

Success and competitiveness in the pharmaceutical business depends on research and new

product development, followed by successful

marketing. In 1990, the top U.S. pharmaceutical

companies spent almost 17 percent of sales on R&D,

up from 12 percent in 1980 (44,51). The proportion
82 ● Biotechnology in a Global Economy

Box 5-C—Pharmaceuticals-A Global Industry

When Roche Holdings, Ltd. of Basel, Switzerland bought a 60-percent share of Genentech of San Francisco,

CA, concern was raised about the foreign acquisition of the United States’ leading biotechnology company.

However, Roche, although based in Switzerland, has more operations outside of its small home market than inside.

Roche, like most of the top companies in the pharmaceutical industry, operates on a global basis, and has significant

U.S. operations, including its wholly owned subsidiary, Hoffman LaRoche, in Nutley, NJ. The head of international

drug research and development for Roche operates, not out of Basel, but in the United States, where Roche’s

worldwide R&D efforts are coordinated. So one may ask, should Roche really be viewed as a Swiss company? How

much significance can be attached to the home country of any of the top pharmaceutical companies?

In 1989,4 of the top 10 ranked pharmaceutical companies in terms of sales (see table 5-5) were U.S. companies;

two were German, two were Swiss, one was British, and the remaining, SmithKline Beecham, was both a U.S. and

a British company created by the merger of SmithKline Beckman of the United States and Beecham of the United

Kingdom. All of these companies operate on a global basis with fully integrated operations in countries outside of

their home base. These companies do more than just sell their products on a global basis. They conduct R&D,

manufacture products, and employ local citizens around the world.

Glaxo, based in the United Kingdom, is the second-ranked company in terms of pharmaceutical sales and is

a good example of a company that operates on a global basis. A look at Glaxo’s worldwide R&D personnel reveals

significant operations outside of the United Kingdom, Glaxo has 3,529 R&D staff in the United Kingdom, 740 in

the United States, 353 in Italy, 210 in Japan, 185 in France, 134 in Switzerland, 70 in Canada, 68 in Germany, 54

in Spain, and 379 elsewhere in the world. Glaxo’s manufacturing efforts are also multinational, with plants in the

U.K., Taiwan, Indonesia, Spain, Scotland, and another being developed in Singapore. Sales are undertaken on a

global basis as well, and Glaxo controls approximately 3.5 percent of the world pharmaceutical market. Glaxo’s

U.S. operations are located in Research Triangle Park, NC, alongside Burroughs Wellcome, which is the U.S.

subsidiary of The Wellcome Foundation Ltd. of the United Kingdom, and Ciba-Geigy, whose parent company is

Swiss.

Johnson & Johnson, a U.S. company based in New Brunswick NJ, has 175 operating units in 55 countries.

Merck & Co., Inc. of Rahway, NJ, has research labs in seven countries, experimental farms in six countries, and

manufacturing plants in 18 countries. SmithKline Beecham, of Philadelphia, PA and the United Kingdom, has

principal operating units in 28 countries. Syntex Corp. has its head office in Panama, its principal U.S. office in Palo

Alto, CA, and production facilities in 11 countries. With an increasing percentage of sales overseas, companies are

choosing more often to establish their own sales forces in foreign markets rather than licensing their products to

foreign companies for royalties. Having operating units abroad supports companies’ efforts to obtain foreign

regulatory approval. Investment in pharmaceutical operations, including sales and R&D, in Japan, which is well

recognized as being a difficult market to enter, is rapidly increasing.

Conspicuously absent from this type and extent of global pursuit of pharmaceutical operations is Japan. Japan’s

major companies have begun to internationalize their operations, however, no Japanese companies currently have

global representation comparable to the top U.S. and European companies.

SOURCES: offkeof Teclmology Assessrnen~ 1991, based on *’Glaxo Stresses International Presence,” Scrip, No. 1558, OCL 17, 1990, p, 14;

“Roche’s Worldwide Phmmaceutical R&D Will Be Directed From U.S.,” F-D-C Repu~, Sept. 3, 1990, pp. T&G 1-2; Merck&

Co., Inc. Annuall?eportlW19, SmithKlineBeckmanAnnual Repwt 1989, SyntexAnnu.alReport 1989; and M. Freudenhe& “Global

Push for Profit at Jolmsow” New York Times, Aug. 3, 1990.

of income spent on R&D has increased over the last many of which do not currently have products on the

30 years, due, at least in part, to both the increased

concern about the safety and efficacy of new drugs

(which has promoted increased regulatory scrutiny)

and the diminished returns from conventional

screening techniques of drug discovery. The latter

has resulted in increased time and effort for drug

discovery and has led to the development and

incorporation of new technologies (38). The spending ratio of R&D to sales is much higher for DBCs,

market. According to a recent survey conducted by

Ernst & Young, therapeutically oriented biotechnology firms spend an average of 69 percent of revenues

on R&D (13).

Pharmaceutical R&D is very risky and companies

are not guaranteed any return for several years, if at

all. There is no assurance that any project will lead

to a marketable product (42). Only 1 drug in 10 that

enters clinical trials will make it to market, and only
Chapter S-The Pharmaceutical Industry ● 83

30 percent of marketed drugs recover their R&D

costs (6). Due to the high risk involved, companies

must have diverse R&D capabilities to ensure

product differentiation (16,1). In 1989, worldwide

pharmaceutical R&D spending was estimated to be

$16 billion (37). The U.S. pharmaceutical industry

invested an estimated $8.3 billion on R&D in 1990,

up from $7.3 billion in 1989 (50,51). Seven countries-the United States, Japan, the United Kingdom, Germany, Switzerland, France, and Italy—

accounted for approximately 80 percent of R&D

spending (37).

Barriers to entry in the pharmaceutical industry related to R&D are not so much a result of the

demands for resources to conduct research, but

rather, for development. DBCs can usually secure

enough initial or first-round financing to conduct at

least the research part of the R&D. With no sales

contributing revenue, when full-scale development

begins, many companies find themselves in financial straits with neither enough money nor experience to conduct the necessary clinical trials (47). At

this point, many DBCs turn to pharmaceutical

companies for joint product development.

Marketing

Marketing is an extremely expensive aspect of the

pharmaceutical business. Companies have increased

spending in recent years as they increased the size of

their sales forces to cover world markets. Large,

multinational companies have the resources to

market their products in each major market. Foreign

markets can differ from domestic markets in many

ways, including cultural differences, distribution,

pricing, payment, and regulatory requirements. Penetrating a foreign market often requires local expertise and local sales forces (22). Companies access

foreign markets by licensing marketing rights to

products, acquiring local companies, and/or locating

new facilities abroad (l).

Drug companies tend to make the bulk of their

profits from only a few products, which adds to the

riskiness of R&D and the need to spread money into

many areas and compounds with the expectation that

only a few will bring big results. The dependence on

a few products makes effective marketing, including

advertising and promotion, important. Pharmaceutical companies market to doctors, which requires

office visits by salespeople. In 1989, representatives

of pharmaceutical companies made nearly 30 million visits to U.S. doctors’ offices. Marketing costs

Photo credit: 

Advertisement for recombinant G-CSF.

represent about 24 percent of drug revenues, twice

what was spent 10 years ago (11). The pharmaceutical industry, in the United States alone, spends over

$5 billion a year on promotional activities (49).

The industry is unique in that companies do not

market directly to the consumer; rather, there is an

indirect relationship between the company, the

prescriber (the doctor), and the payer (patient or third

party.) The industry markets to hospitals and doctors

that prescribe drugs but do not pay for them. This

has, historically, allowed companies to focus on the

quality and efficacy of a drug--not on the price (20).

However, with the increased worldwide emphasis

on health care cost containment, and the increased

presence and control of third-party payers in the

purchasing decision—insurance companies and

Medicare in the United States and national health

policies in other countries-pharmaceutical companies are being pressured to develop cost-effective

therapies, and price has become a sensitive issue (see

box 5-D).
84 ● Biotechnology in a Global Economy

Box 5-D--Price and Cost Containment

Pharmaceutical companies and DBCs are operating in an increasingly cost-conscious environment.

Governments worldwide are trying to decrease health care expenditures and are cutting reimbursement prices on

drugs. Governments are increasingly looking (at least indirectly) at drugs’ economic benefits, in addition to their

therapeutic benefits, and are becoming more discriminating in their payment decisions. Price controls are used to

contain escalating costs of health care, but they also raise the level of financial risk involved in new drug

development. Should they excessively hinder return on investment, price controls have the potential to deter

investment, and thus, decrease innovation.

Many countries control the prices of prescription pharmaceuticals under their national health policies and

insurance programs. Several countries, including Brazil, Japan, and Canada, impose strict price controls on

pharmaceuticals, resulting in both unprofitable production and decreased investment by companies. There are

several different approaches taken to cut the cost of pharmaceuticals. Some countries, including Denmark and

France, do not include all drugs under their national health policies. They exclude particularly costly drugs from

reimbursement. The creation of formularies, lists of specific drugs that qualify for reimbursement, is also being

considered by Medicaid and Medicare programs in the United States, with the latest step taken being the passage

of the Medicare Pharmaceutical and Prudent Purchasing Act by the 101st Congress. Other cost-cutting measures

included price freezes in The Netherlands, Greece, and Italy; the allowance of higher prices in return for increased

R&D spending in Australia; and higher prices allowed for innovative drugs in Japan to stimulate R&D. The United

Kingdom controls pharmaceuticals, not by price controls but by profit controls, limiting the amount of profit made

by pharmaceutical manufacturers.

Pricing and reimbursement policies by third-party payers have already been an issue with biotechnologyderived drugs, many of which are very expensive. Amgen’s erythropoietin, used to treat dialysis and AIDS patients’

anemia, costs approximately $5,000 per year for dialysis patients. Human growth hormone, used to treat human

growth hormone deficiency in children, costs approximately $10,000 per year. Genentech’s recombinant tissue

plasminogen activator (Activase), used to treat acute myocardial infarction, costs $2,200 per dose.

If companies cannot expect to charge reasonable sums for their products or cannot be guaranteed third-party

reimbursement, the incentive for further efforts is decreased and the viability of the firms maybe compromised. The

downward pressure on pricing affects both large, multinational pharmaceutical companies and DBCs. In response

to pricing pressure and cost-containment efforts, companies developing pharmaceuticals will increasingly be

conducting cost/benefit analyses along with R&D to justify the expense of product development and the high prices

they charge and to determine the potential for return on investment.

SOURCES: Derived fsom: “The New World of Drugs,” The Ecorwnu”st, vol. 310, No. 7588, Feb. 4, 1989; pp. 63-64; “Managing R&&No

Easy Solutio%” Scrip, No. 15(X2, Apr. 4, 1990, pp. 4-6; Scrip review issue, 198% Ernst & Young, Biowh 91: A Changing

Environment (San Francisco, CA: 1990); G. - dean, School of Public Health and Community Medicine, University of

W8shin@on, Seattle, WA personal cwmnunicatioq 1990.

In recent years the trend has been to increase the staffs and established distribution routes for

size of the marketing forces by adding new sales their products. At the same time, many of the

representatives in all the major markets. In addition,

co-promotion has been a new phenomenon in which

companies share the responsibility for marketing

each other’s products. This allows sales representatives to market more products using established

contacts with doctors and hospitals. In addition,

access to a familiar market and success in the

domestic market is extremely important. Sales are

easier in this market than in foreign markets because

there is no language or cultural barrier and domestic

sales can support international sales (2).

Few DBCs, perhaps only Genentech (S. San

Francisco, CA), Centocor (Malvern, PA), and

Amgen (Thousand Oaks, CA) have marketing

biotechnology-derived drugs on the market are

entirely new therapeutic products. For these drugs,

including erythropoietin, alpha interferon, Interleukin II, and others, doctors must be educated about

entirely new classes of products, their uses, and their

potential for effective treatment. This can be accomplished most effectively by very large marketing

organizations (23). Most DBCs with approved

products have licensed marketing rights to established pharmaceutical companies.

There are obvious advantages to teaming up with

an established pharmaceutical company for marketing purposes. For example, Centocor (Malvern, PA)

and Xoma (Berkeley, CA) both have products in
Chapter 5--The Pharmaceutical Industry ● 85

development to treat gram negative sepsis septic

shock. Centocor plans to market its product, Centoxin, with its own sales force consisting of 75 sales

representatives in the United States and 45 in

Europe. Xoma plans to market its product, XomenE5, under a licensing agreement with Pfizer’s Roerig

subsidiary using the latter’s 750 sales representatives. Xoma is benefiting from an established sales

force and distribution network and Roerig’s familiarity with the medical community. The obvious

disadvantage of licensing agreements is that DBCs

retain only a portion of the profits from the drug’s

sale (4) (see ch. 4).

Market

The size of the global pharmaceutical market

was estimated to be $150 billion in 1989 (50). The

United States is the largest drug market, accounting for approximately 30 percent of the world

market (3). The European Community (EC) is

the second largest total market. Japan is the

second largest single-country market, with an

approximate 17.6 percent market share (57).

Pharmaceutical products are marketed globally and,

in 1989, 34.4 percent of the $51.2 billion in sales by

U.S. drug companies were overseas (8,6). The main

competitors for the world pharmaceutical market are

principally U.S. and European companies (see table

5-5), more specifically the multinational firms based

in Switzerland, the United Kingdom (U.K.), and

Germany, which are huge, multinational organizations with research, manufacturing, and marketing

operations worldwide. Focus on penetrating world

markets, not only domestic markets, is crucial to

success in the pharmaceutical industry (18).

The Japanese market has, historically, been difficult to enter without a Japanese partner; thus, U.S.

and European companies, to ensure market presence, have collaborated with Japanese companies

that dominate their domestic market. For many years

U.S. and European companies increased their presence in Japan by establishing their own marketing

forces. In recent years, in a few cases, they built

research facilities, e.g., Roche, or acquired a Japanese company, e.g., Merck, which bought Banyu

Pharmaceutical in 1983 (56,12). Currently, 24 U.S.

pharmaceutical companies operate in Japan and

account for about 15 percent of the $33 billion

Japanese market. The domestic market is still

dominated by Japanese companies, and no American or European company is among the top 10 in

Table 5-5-Company Rank by Pharmaceutical

Sales 1989

Company Sales($miilions)

Merck (U. S.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,405.5

Glaxo (U. K.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,679.5

Bristol-Myers Squibb (U. S.) . . . . . . . . . . . . . . . . . . . . . . $4,442.0

Bayer (Germany) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$4,237.8

Hoechst (Germany) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$4,200.5

Eastman Kodak (U.S.) . . . . . . . . . . . . . . . . . . . . . . . . . .$4,009.0

Ciba-Geigy (Switzerland) . . . . . . . . . . . . . . . . . . . . . . . . $3,775.9

SmithKline Beecham (U. S./U.K.) . . . . . . . . . . . . . . . . . $3,668.8

Sandoz (Switzerland) . . . . . . . . . . . . . . . . . . . . . . . . . . .$3,464.1

American Home Products (U. S.) ................. $3,276.5

SOURCE: “MergerEffeot on Top Pharma Firms,” SC@, No. 1570, Nov. 28,

1990, p. 13.

Japan (29). At the same time, Japanese companies,

which for the most part are not multinational, are

now pushing to increase their export markets and are

beginning to globalize their operations (41) (see box

5-E).

The pharmaceutical industry, despite high-entry

barriers, is not particularly concentrated. No company holds even a 5-percent share of the world

market (26,30). In 1987, the largest 10 firms held

only 27.6 percent of the world market (38). The four

largest firms in the PMA account for only 25 percent

of sales in the United States; the top 8 account for

under 50 percent, and the top 21 for only 75 percent

(29). However, it is important to recognize that there

is neither a central product in the pharmaceutical

market nor a long-term product leader (27). Availability of financial resources can serve both to

determine existing fins’ competitiveness and to bar

new entrants, including biotechnology companies.

Because comparatively few drugs maintain large

market shares for extended time periods, companies

must aggressively market approved products and

develop innovative new ones in order to compete.

Competition is both static and dynamic. In the static

sense, competition is based on product differentiation, but not price. Dynamic competition is derived

from R&D and new product introduction. Market

share, which changes with new product introduction,

also is a measure of competition (16,38).

Consolidation

In recent years, the industry has experienced

two rather opposite phenomenons: consolidation

and the development of small startups focusing

on biotechnology derived therapeutics. Together,

these illustrate the increased resources demanded by

the competitive nature of the industry and the need
86 ● Biotechnology in a Global Economy

Box 5-E—Japan’s Pharmaceutical Industry

Japan is the second largest pharmaceutical market in the world behind the United States. The domestic market is

dominated by Japanese companies that are relatively big, although smaller than the top U.S. companies, and profitable at

home, but that lack a significant global presence. Historically, the Japanese pharmaceutical market was protected by the

government, and foreign penetration was very difficult. Since the mid-1980s, this has begun to change, increasing the

competitiveness of the Japanese pharmaceutical market and driving Japanese companies toward globalization.

Before 1986, foreign drug companies were required to conduct clinical trials in Japan, on Japanese, and submit the data

in Japanese. Companies were not allowed to apply directly to the Japanese Government, specifically the Ministry of Health

and Welfare, for drug approval (shonin) and license (kyoka), but were required to have a Japanese partner. These requirements

were changed and foreign companies are now allowed to apply directly to the government for new drug approvals. However,

the changed laws applied only to new products, so firms had to maintain their contracts with Japanese partners for old

products. After the 1985 Market-Oriented Sector-Selective (MOSS) talks, bilateral trade negotiations between the United

States and Japan, some of the problems related to market access and regulatory processes were resolved and the Japanese

market opened significantly to foreign entrants.

There are several significant differences between the pharmaceutical industry in Japan and that of other countries, aside

from language and cultural differences. In the United States, doctors prescribe, but do not sell drugs to patients, and they do

not earn money by prescribing any particular drug. In Japan, pharmaceutical companies sell the drugs to doctors or hospitals,

which often have in-house pharmacies, at prices below the government’s official price. The doctor or hospital then sells the

drugs to patients at the government price, thus making a profit from the sale of the drugs. Another difference is the research

intensity of Japanese firms vis-a-vis American and European companies. Japanese pharmaceutical companies historically

conducted little basic research and were not known for their R&D capabilities. They tended to license new drugs from foreign

firms that needed a partner to penetrate the market.

The direct entrance of foreign firms into the Japanese market, combined with efforts, since 1980, to control pharmaceutical

prices in Japan, resulted in increased competition. The domestic firms that dominated the market had, until this point, been

protected from foreign competition by the Japanese Government. Japan now reduces the government price for

pharmaceuticals biennially. Japanese companies also export few drugs, selling abroad only about 2 percent of the total

domestic pharmaceutical production. In the face of increased competition, Japanese companies have sought export markets

and have begun to globalize their operations.

Japanese companies are now seeking to penetrate global markets, through both increased export and by locating

operations outside of Japan. Japanese companies have established joint ventures with foreign companies and are establishing

sales forces in Europe and the United States. Japanese companies are also investing in U.S. biotechnology companies and

licensing the Japanese and Far East marketing rights to new biotechnology-derived drugs. To increase their R&D capabilities,

Japanese companies are funding research at American universities and biotechnology companies. Japanese companies

maintain significantly smaller R&D budgets than their U.S. and European counterparts.

A recent Japanese survey examined Japanese pharmaceutical companies’ representation in foreign countries. The survey

counted joint ventures, research centers, and subsidiary companies, but not local distributors or licensees. Thirteen Japanese

companies had a total of 24 offices, research centers, joint ventures, or wholly owned subsidiaries in the United States. Sixteen

companies had direct representation in Taiwan; nine in Germany; eight in the United Kingdom; seven in Thailand; six in

Indonesia; and five in South Korea. This demonstrates Japanese companies’ efforts to globalize their businesses and 1ocate

operations at sites around the world. However, these efforts do not nearly meet the already established global operations of

the top U.S. and European companies, some of which operate at fully integrated levels in 20 or more countries.

The Japanese market is becoming more competitive and so are Japanese pharmaceutical companies, which are

increasing their presence in international markets. While the pharmaceutical market in Japan is still dominated by domestic

firms, foreign firms are now able to establish their own facilities and sales forces in what was previously a tightly protected

market. The increase in foreign competition, along with increased cost-containment pressure, have driven the historically

domestic Japanese companies to seek foreign markets in order to increase their competition with U.S. and European

companies.

It is important to note that while Japanese companies are entering the global marketplace, significant differences remain

between them and their international competitors. U.S. and European companies maintain a significant scientific and

technological edge over their Japanese counterparts and are more R&D-intensive. Japanese companies face a significant

reorganizational challenge by trying to improve their research capabilities and globalize their operations at the same time,

and globalization is sure to be more difficult and slower than it has been in other Japanese industries.

SOURCES: Office of Tecbnology#wxmen$ 1991 derived fkom: A. Yoshikawa “The Other Drug War U.S.-Japan Trade in Phamlacmlticals,”

California ManagementReview, vol. 31, No. 2, winter 1989; “Japanese Pharma. F- @OrS(%tS,” scrip, No. 153!5, Jrdy 27,1990,

p. 23; G. Mossinghoff, statement before the International Trade Commissio% Jan. 17, 1991; D. Swinbanks, “Iluge Profit From

Drugs,” Nature, vol. 342, No. 23, November 1989, p. 333.
Chapter 5-The Pharmaceutical Industry . 87

Table 5-6-Merger and Acquisition Activity in the

Pharmaceutical Industry

1988 Eastman Kodak (U.S.)--Sterling Drug (U.S.)

American Home Products (U.S.)--Robins (U.S.)

1989 SmithKline Beckman (U.S.)--Beecham Products (U. K.)

Novo (Denmark)--Nordisk (Denmark)

Merrell Dow (U.S.)--Marion Laboratories (U.S.)

Bristol-Myers (U.S.)--Squibb (U.S.)

1990 Rhoune-Poulenc (FR)--Rorer (U.S.)

Hoffmann-La Roche (Switz)--Genentech (U. S.)

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

Chiron (U.S.)-Celvs (U.S.)

SOURCE Office of Technology Assessment, 1991.

for innovative R&D and new products. In the last

several years, there has been significant merger and

acquisition activity between established firms (see

table 5-6) (11). Consolidation strengthens the scientific base, expands the technology and product

portfolios of the companies, and reflects the increased costs of doing business-especially R&D

and marketing.

By pooling R&D budgets, companies can ensure

a broad R&D program, covering many therapeutic

categories, and a more complete product portfolio.

With the increased resources of what used to be two

separate R&D budgets, companies can ensure the

breadth of R&D necessary to develop products for

the many therapeutic submarkets and spread risk,

increasing the chances of developing a successful

product (43). These mergers have, in some cases,

resulted in more than doubling the size of companies’ sales forces and providing an economy of

scale. The larger sales forces enable companies to

reach more doctors and hospitals, further penetrate

markets, and enter markets in which they previously

had no representation. This is especially true of

foreign markets (19).

Dedicated Biotechnology Companies and the

Pharmaceutical Industry

DBCs are almost exclusively a U.S. phenomenon. No other country has a remotely comparable

number. Biotechnology companies are created specifically to exploit the commercial potential of

biotechnology. These companies start as research

institutions with science and technology but without

products. They do not undertake R&Don nearly as

broad a scale as established companies. Instead, they

pursue niche markets by focusing either in specific

technologies (e.g., drug delivery) or particular products (e.g., growth factors). The companies must fund

the initial costs of infrastructure development, inPhoto credit: Amgen

Since FDA approval in 1989, more than 90,000 patients

have used EPOGEN brand recombinant EPO, the best

selling biotechnology-derived drug to date.

eluding buildings, plants, equipment, and people

(scientists, managers, salespeople, and lawyers),

without the benefit of internally generated revenues.

They depend on venture capital, stock offerings, and

relationships with established pharmaceutical companies for their financing needs.

Biotechnology companies are fully capable and

competitive when it comes to research and applications of technologies. However, the very fact that

their expertise is focused in biotechnology and

related niche areas of pharmaceutical research illustrates the difference between them and large pharmaceutical companies. Established pharmaceutical

companies maintain a greater breadth of R&D, work

to penetrate multiple therapeutic markets worldwide, and devote major resources to product development and, at the same time, can integrate and

implement newer aspects of biotechnology to complement their conventional research capabilities.

Biotechnology is being introduced into the pharmaceutical industry as it proves itself, as products are

developed and technologies perfected, and as their

potential for use in the industry is observed (9).

DBCs are attempting to break into an industry

marked by high costs and risks, in which successful,

established pharmaceutical companies with large

R&D budgets and marketing clout feel pressure to

consolidate to be competitive. While some companies have been successful operating at all levels,
88 . Biotechnology in a Global Economy

from R&D to manufacturing to marketing, none

compete head-to-head with major established companies except in niche markets and on a product-byproduct basis (21). DBCs that are able to vertically

integrate their operations, as Genentech and Amgen

have done, are likely to continue to concentrate on

niche markets.

The original intent of many of the early DBCs was

to become fully integrated, competitive pharmaceutical companies, but the economics of the pharmaceutical industry may very well deny this opportunity to most. Perhaps in recognition of those barriers,

many of the newer companies were founded with the

intention of developing one idea or targeting a niche

market and, perhaps, being acquired. The latter was

true for Hybritech, which was acquired by Eli Lilly,

and Genetic Systems, which was bought by BristolMyers (now Bristol-Myers Squibb) and recently

sold to the Sanofi of France. According to a recent

Ernst & Young survey, 39 percent of all companies

surveyed expect to be acquired by a large firm within

the next 5 years, and 32 percent expect to merge with

an equal-size firm in the same period (13).

Strategic Alliances

DBCs have been able to secure initial financing

and certainly have excellent scientific and technological capabilities, but they often lack other important resources. The vast majority of DBCs lack the

money to fund clinical development and to successfully market their products worldwide. It is for these

reasons that DBCs team up with major pharmaceutical companies (19). Biotechnology companies that

do not turn to larger drug companies for help are

usually forced to hold special public offerings to

raise the capital for clinical development. Such

public financing has been in the form of R&D

limited partnerships, debt offerings, or new stock

offerings (2).

There are several reasons for companies in the

pharmaceutical industry to collaborate, be it with

another established pharmaceutical firm or a biotechnology company. Collaboration creates access

to markets, access to technological skills and competences that may not be developed in-house, and an

opportunity to share the costs and risks associated

with the development of new drugs and the use of

new technologies. When DBCs were first created in

the 1970s, the risks were very high as the potential

for commercial development and profits was unproven. It was not known if biotechnology could be

successfully used to develop and produce new drugs,

and the costs of scaling-up biotechnological production methods were unknown. Due to these unknowns, many pharmaceutical companies did not

choose to pursue the development of biotechnology,

at least in-house, until the early 1980s when the

initial uncertainties about the technology were

resolved. Another reason for this delay was that most

established firms did not have the personnel or

interdisciplinary expertise required to use and develop the technology. Pharmaceutical companies

needed to restructure their research departments and

programs and hire skilled personnel before they

could integrate biotechnology into their drug development efforts (38).

Strategic alliances are often established after

DBCs have conducted significant research and

development on particular products. The pharmaceutical company uses its established resources to

further develop the drug and conduct clinical trials,

thus gaining new products without having to make

the initial investment and assume the entire risk

inherent in new product development. DBCs receive

necessary financing and development, regulatory,

and marketing expertise, while pharmaceutical companies are able to complement their in-house R&D

activities and add innovative new products to

increase the breadth of their product portfolios.

Often, the pharmaceutical company will take full

responsibility for putting the drug through the

regulatory process (the U.S. FDA and foreign

regulatory approval) and for introducing the drug in

foreign markets. Increasingly, the more successful

biotechnology companies maintain U.S. marketing

rights to their products, allowing both DBCs and

established firms to receive revenues from product

sales.

There are many types of strategic alliances

between DBCs and pharmaceutical companies.

They include agreements to exchange technology,

joint ventures, equity arrangements, and R&D contracts (38). At the current level of commercialization, the most common type of agreement is

licensing, which can include joint development of

specific products as well as the exchange of marketing rights for financial support. Examples of U.S.

pharmaceutical companies’ alliances with DBCs

include Ortho Biotech, a subsidiary of Johnson &

Johnson, which has agreements with Xoma

(Berkeley, CA) and Amgen (Thousand Oaks, CA),

among others; Pfizer’s subsidiary, Roerig’s, agree-
Chapter 5--The Pharmaceutical Industry .89

ment with Xoma; Merck & Co.’s agreements with

Genentech (S. San Francisco, CA), California Biotechnology, Inc. (Mountain View, CA), Immunomedics, Inc. (Warren, NJ), Repligen, Inc. (Cambridge, MA), and Chiron (Emery vine, CA);

Hoffmann-La Roche’s licensing agreements with

Cetus Corp. (Emeryville, CA) and Genetics Institute, Inc. (Cambridge, MA); SmithKline Beecham

PLC’s agreements with Nova Pharmaceutical Corp.

(Baltimore, MD), and T Cell Sciences, Inc. (Cambridge, MA) and others (13).

European companies tend to depend both on

strategic alliances and, more so than U.S. companies, on in-house capabilities in biotechnology.

There are few European DBCs with which to

collaborate, and the majority of European companies’ strategic alliances are with U.S. DBCs. Some

recent strategic alliances include Sandoz’s $30

million investment in Cytel (La Jolla, CA), CibaGeigy’s investment in Texas-based Tanox Biosystems (Houston, TX), and Glaxo’s $20 million

investment in Gilead Sciences (Foster City, CA)

(34). In addition, many European pharmaceutical

companies have licensed European marketing rights

from U.S. DBCs. Examples include Boehringer

Mannheim’s agreement with Genetics Institute to

market EPO in Europe and Boehringer Ingelheim’s

arrangements for marketing Genentech’s tPA.

European companies, such as Bayer, Ciba-Geigy,

Roche, and Sandoz have developed significant

in-house capabilities in biotechnology and maintain

large biotechnology R&D budgets. Bayer has a

biotechnology research budget of $100 million and

Ciba-Geigy recently spent $60 million on a new

central biotechnology research unit. Roche, in addition to acquiring Genentech, spent between $130

million and $140 million on biotechnology in 1989.

Sandoz expects to invest $150 million in biotechnology in 1991 and a total of $1 billion by 1995 in

biotechnology R&D, including both in-house and

collaborative activities. European companies’ expenditures for biotechnology are global. Roche, for

example, funds R&D not only in its native Switzerland but also in the United States, the United

Kingdom, and Japan. Sandoz conducts research in

Switzerland, the United States, the United Kingdom,

and Austria (17,36).

Japanese companies, in addition to increasing

exports and their presence overseas, are also investing in U.S. DBCs. Examples include the following:

Chugai Pharmaceutical’s deals with Genetics Institute and Upjohn and its $110 million acquisition of

Gen-Probe (San Diego, CA); Tokyo’s Institute for

Immunology’s $20 million investment in IDEC

Pharmaceuticals (La Jolla, CA); and Genetics Institute’s collaboration with Japan’s Yamanouchi Pharmaceutical Co. (34).

Competitive Influence of Government Policies

At the current level of commercialization, most of

the factors influencing the competitiveness of U.S.

pharmaceutical and dedicated biotechnology companies with respect to biotechnology are market

forces and general economic variables. There are

many U.S. Government policies that influence

businesses based on health and life sciences without

addressing biotechnology specifically. Federal

funding for biomedical research, regulatory policies,

and intellectual property protection are important

public policies that affect the commercialization and

competitiveness of U.S. biotechnology.

Federal Funding for Basic Research

The United States’ lead in biotechnology is due in

large part to strong government support for basic

research in biological and biomedical sciences. The

vast majority of Federal research support in the

biological sciences goes to university scientists

conducting basic research, whereas applied research

and development has always been considered the

responsibility of industry (48). Industry worldwide,

including DBCs and pharmaceutical companies, has

benefited from the strong research base funded by

the U.S. Government (see app. C). Technology

transferred between government laboratories, universities, and industry enables applied research and

commercial development of biotechnology. Continued funding for basic research in biological sciences

will be important for the future of biotechnology.

Regulation

The regulatory component of the human therapeutic development process is perceived, by both

entrepreneurial and established companies, as the

major factor influencing the time required to develop

a pharmaceutical product. The debate over the

rigorous and lengthy drug regulatory process has

gone on for years. Arguments have been made that

when too strict, regulation becomes prohibitive to

pharmaceutical development. Overly stringent regulation could impede international competitiveness
90 ● Biotechnology in a Global Economy

and compromise human health by reducing the

availability of therapeutic products. However, the

importance of protecting the public from unsafe or

ineffective drugs is stressed (48).

The FDA, its mission, responsibilities, and structure, is currently under review by an advisory

committee of the U.S. Department of Health and

Human Services (U.S. DHHS) which is addressing

many of the concerns of industry, government, and

the public (52). Representatives of the pharmaceutical industry and biotechnology firms, testifying

before the advisory committee’s drugs and biologics

subcommittee, raised several issues of concern,

including: the increased workload and resources of

the Center for Biologics Evaluation and Research,

responsible for reviewing biotechnology-derived

therapeutics, the use of advisory committees, and the

need for sufficient resources in terms of both

personnel and equipment (15).

The regulatory process is a burden for both

established pharmaceutical companies and DBCs.

The time delay and lack of regulatory approval can

be damaging to both DBCs and established companies, but, arguably, perhaps more so to a DBC. Very

few DBCs benefit from product sales and profits to

support R&D, and for many, FDA approval is the

first positive sign of potential earning power—an

important characteristic required for financing.

Companies have expressed concern that FDA delays

have negatively affected their ability to gain financing, especially from Wall Street (see box 5-F).

However, thus far, the experience with biotechnology drugs has been mostly positive, with many

biotechnology-derived drugs experiencing significantly shorter approval times than conventional

drugs. According to the FDA Office of Biotechnology, marketing approval times for new biotechnology products have averaged about half of the mean

32 months (for approval of the New Drug Application which is fried after all clinical trials have been

completed) required for approval of nonbiotechnology products (46).

In order to introduce products in markets worldwide, pharmaceutical companies and DBCs must

obtain regulatory approval h-em each individual

country in which they choose to market a drug. The

drug approval process is different in each major

market, and attempts are being made to harmonize

regulatory procedures. Drug approval often takes

longest in the United States. Of the 135 new drugs

Box 5-F—Effects of Regulatory Decisions on

Wall Street

A lack of regulatory approval is a setback for any

drug developer, but for biotechnology companies it

is potentially devastating, Wall Street, a primary

source of financing for many biotechnology companies, places great importance on the Food and Drug

Administration’s (FDA) actions and often uses the

administration’s decisions as a basis for their stock

recommendations for biotechnology companies, in

lieu of product performance. Thus, a negative

reaction from FDA leaves biotechnology companies, seeking their first product approval, much

more vulnerable than an established company with

a significant product portfolio currently generating

revenue.

For example, in May 1987 an FDA advisory

committee recommended against approval of

Genentech’s tissue plasminogen activator (tPA)

(later approved and now on the market). Genentech’s stock dropped 14 points in 2 days and lost 25

percent of its value. A more recent example is

FDA’s 1990 recommendation against Cetus’ Interleukin-2 for the treatment of kidney cancer. In the

2 weeks surrounding FDA’s decision, Cetus’ stock

dropped over 40 percent. After FDA’s decision,

Cetus’ stock price fell from its 52-week high of

$22.50 to $8.63. Since Wall Street cannot evaluate

companies without products on the basis of sales,

revenues, and profits, it must value them on the

basis of research, people, potential, and scientific

promise. FDA approval, or lack thereof, reflects on

a company’s scientific and product development

ability; thus, when FDA approval is not granted, the

value given the company by Wall Street drops.

SOURCES: R, BauQ “Biotech Industry Moving Phwmaceutical Products to Mark%,” Chemical and Engineering News, vol. 6$, No. 29, July 20, 1987, pp. 11-14,

20, 28-32; “Cetus Lass Widened in Fiscal 4th

Quart&, Drug Costs Are Cited,” Wall Sfreet

Journal,Aug. 8, 1990, p. B4; L. Christense% “Cetus

Considm Strategic Options After the Delay in

FDA’s Approval of Proleukin IL-2,” GeneticBnginea”ng News, vol. 10, No, 9, October 1990, pp. 1,

40, 48; B. Cutlitou ‘T.etus’s Costly Stumble on

IL-2, ’’Science, vol. 250, No. 4977, Oct.5, l%)tl,pp.

2021; U.S. C!ongress, Office of Technology Assessmen~ “Financial issues Affeeting Biotechnology: At Home and AbroaA” transcript of a

workshop held Sept. 13, 1990.

approved by FDA during the period 1984 to 1989,

106 were first approved abroad; in 1990, 18 of 23

drugs approved in the United States were frost

approved abroad (29,5 1). Until 1986, with the
Chapter 5—The Pharmaceutical Industry ● 91

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

The Drug Export Amendments Act of 1986 allows the export of new drugs not yet approved by the Food and

Drug Administration (FDA) for use in the United States. Export is restricted to 21 countries that have sophisticated

drug approval processes and is dependent on the individual country’s approval. The importer must sign a written

agreement guaranteeing that they will not re-export the drug to countries other than the 21 approved.

FDA approval often takes longer than approval outside the United States. Before the act was passed, export

of unapproved drugs was not allowed, and companies were forced to manufacture drugs abroad or license their

technology to foreign firms in order to enter the marketplace. The amended act allows companies to recoup research

and development costs and generate income sooner than if they had to wait for FDA.

The act holds particular importance for biotechnology companies, which in the early stages of development

often lack the resources to establish manufacturing facilities abroad. Before the act was passed in 1986,

biotechnology companies had to forfeit the proprietary rights to their technology to multinational partners overseas

in order to ensure supply of the product and guarantee access to foreign markets and return on investment. Although

many companies still license technology and marketing rights abroad, since 1986 many biotechnology companies

have been able to preserve the right to supply their products from the United States. This change in the law is of

considerable significance to international trade. Cetus has taken advantage of the act by exporting Proleukin

(Interleukin-II) to several European countries, which have approved the drug, while waiting for FDA approval in

the United States.

The Drug Export Amendments Act of 1986 applies only to human drugs. The export of drugs not registered

in the United States for use in animals is not permitted. This maybe of significance to biotechnology in the future,

as biotechnology has applications to veterinary medicine and animal health.

SOURCES: Drug Exports Amendments Act of 1986, Public Law 99-660; B. Andrews, vice presiden~ Agricultural Divisioq Cyanamid

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

CA, personal communication Aug. 3, 1990.

passage of the Drug Export Amendments Act, it was ence the competitiveness of pharmaceutical fins.

against the law to export drugs from the United

States not approved by FDA (see box 5-G).

Inconsistent worldwide regulations and the

lack of acceptance of foreign clinical trial test

data in particular, have caused problems for the

pharmaceutical industry. The latter has, in the

past, been a significant problem in Japan, where the

U.S. Trade Representative concluded in 1989 that

this, along with the difficulty of obtaining regulatory

approval for drugs, increases the cost of doing

business in Japan. The industry is somewhat protected by both the Standards Code, and the Technical

Barriers to Trade Code of the General Agreement on

Tariffs and Trade (GATT), which refers to the

Attempts to harmonize regulations and improve the

current drug approval processes will benefit all

companies, independent of national origin, in their

introduction of new products in global markets.

Intellectual Property Rights Protection

Patent protection has been judged to be of

substantial importance to innovation, new product

development, and new product introduction in

several industries-including pharmaceuticals (24).

Intellectual property protection, in the form of

patents and orphan drug market exclusivity (see box

5-H), is critical to the pharmaceutical industry for

two primary reasons:

application of technical standards to products, in- ●

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

discriminate against imported products (45). This

code is very important in ensuring that health and

safety regulations are not used as trade barriers to

discriminate against imported products (53).

Governments’ approach to pharmaceutical reguIt can provide the temporary market monopoly

necessary to recoup the high costs of R&D.

Drugs with new therapeutic values depend on

patent protection in order to capture and hold a

significant market share. Patent expiration

allows competing products, either generics or

brand names from other companies, to enter the

market (43).

lation, including both the lengthy approval times and Patents contribute to market success by denying

the inconsistency of worldwide regulations, influ- market access to those products that will infringe a

292-87[) - 91 - 4 : QL 3
92 ● Biotechnology in a Global Economy

Box 5-H—The Orphan Drug Act

The 1983 Orphan Drug Act seeks to induce the development of drugs for rare diseases. Rare diseases are

defined by the legislation as conditions that affect fewer than 200,000 people in the United States. The act offers

incentives to invest in orphan product development that, due to the small patient population, is not likely to offer

a full return on investment to the company. The government offers grants, tax breaks, and most importantly, 7 years

of market exclusivity to the first manufacturer to gain the Food and Drug Administration’s (FDA) approval for a

product with orphan designation. The market exclusivity provision is a form of intellectual property protection and

has proven to be controversial.

Since the act was passed in 1983, over 375 products have received orphan designation from FDA, and over

40 orphan drugs are on the market. Nine of the 15 biotechnology-derived drugs on the market have orphan drug

status, as do 19 additional biotechnology-derived drugs currently under development. Controversy was raised in

the 101st Congress over three orphan drugs that turned out to be very profitable: 1) aerosol pentamidine, 2)

erythropoietin (EPO), and 3) human growth hormone. The latter two are biotechnology-derived drugs. Arguments

were made that these drugs would have been developed without the Orphan Drug Act incentives because there was

great opportunity for profit.

The U.S. House of Representatives and the Senate passed amendments to the Orphan Drug Act that would have

removed orphan drug status if the patient population exceeds 200,000 and also would have allowed for shared

market exclusivity if another company could prove it was developing the same orphan drug simultaneously to the

first company that received FDA approval. After much debate, and divided industry lobbying, the final bill applied

only to new orphan products and not to the three drugs that spurred the debate. The bill, as passed, would have

allowed market competition for products that proved to be particularly profitable. The President vetoed the

legislation, claiming the shared exclusivity provision would remove incentive for developing orphan products.

The case of EPO is particularly controversial and complicated. Amgen (Thousand Oaks, CA) received FDA

approval in June 1989 to market its EPO to dialysis patients suffering from anemia associated with end-stage renal

disease, a patient population of under 200,000. EPO, paid for mostly by the government’s Medicare program that

covers dialysis patients, costs about $5,000 per patient per year, and Amgen has sold over $300 million worth of

the drug. Amgen received 7 years of marketing exclusivity, under the Orphan Drug Act, for EPO used to treat

chronic kidney failure. Genetics Institute (Cambridge, MA) also has developed EPO as an orphan drug, but the

company has yet to receive FDA approval due in large part to Amgen’s orphan drug claims.

SOURCE: Office of Technology Assessment 1991.

patent position during the lifetime of the patent. A public policies to provide incentives for companies

U.S. patent provides 17 years of protection, but since

the patent is usually applied for prior to broad

testing, several of the initial 17 years of protection

granted are lost during the years of clinical development. The regulatory process reduces the effective

patent life to approximately 9 to 10 years, resulting

in shorter protected market time and increased

difficulty in obtaining return on investment (5).

In the 1980s, legislation was passed in the United

States and Japan, and draft legislation is now being

considered by the EC to extend patent protection to

make up for at least some of the years lost during

clinical development (see box 5-I). This extension of

effective patent life recognizes the importance of

patent protection, the effect of the regulatory process

on new product development, and the need for

to continue investing in R&D.

Intellectual property protection has historically

been a problem for the pharmaceutical industry.

Many countries, particularly newly industrializing

countries (NICs) such as India, Argentina, and other

South American countries, do not provide patent

protection for pharmaceuticals. Their reasoning

includes the desire to protect domestic industries

from competition, to encourage domestic production

without the need to pay hard currency royalties to

other countries (10), and to reduce or control retail

prices (31). Copying pharmaceuticals is relatively

easy, and companies have lost significant sales and

revenues to patent infringers and markets where

patent protection is not available or effective (37).

Until recently, neither Brazil nor Canada granted

pharmaceutical patents. Brazil is working on a draft
Chapter 5—The Pharmaceutical Industry ● 93

Box 5-I—Patent Term Extension for Pharmaceuticals

Drug companies usually secure patent protection early in drug development, before the drug enters the

regulatory process. Regulatory approval for new drugs takes, on average, 7 to 10 years to complete. This translates

into a 7- to 10-year reduction in patent protection for pharmaceutical products when they reach the market, leaving

such products with, on average, 9 years of protected life. In response, the United States and Japan passed legislation

allowing the extension of patent terms for pharmaceuticals. Similar legislation in being considered by the European

community (EC).

In 1984, the Unites States passed the Drug Price Competition and Patent Term Restoration Act of 1984. The

act restores part of the patent life lost due to lengthy regulatory approval The act allows extension of the patent term

for up to 5 years, but it does not allow extension beyond 14 years of effective patent life. The actualextension granted

is equal to the total time taken by the Food and Drug Admini b ‘stration (FDA) to review the New Drug Application,

plus one-half of the clinical testing time. In addition, the act promotes generic competition by providing FDA with

an Abbreviated New Drug Application (ANDA) process. This process facilitates the approval of generic drugs by

eliminating the need for costly clinical studies. An ANDA does require the sponsoring company to demonstrate its

generic’s bioequivalence to the pioneer drug. This is much less costly and time-consuming than complete clinical

trials and facilitates the market entrance of generic drugs.

Japan also allows similar patent term extension for pharmaceuticals. In 1988, revisions were made to Japanese

patent law to allow for an extension of the patent term for pharmaceutical products. Extension can be granted for

periods up to 5 years, on the basis of time lost during the required drug approval procedures.

Pressure has been put on the European Commission to amend its patent law to allow for patent term extension

similar to that offered by the United States and Japan. France and Belgium provided the first draft legislation to the

commission, which responded with a proposal for a supplementary protection certificate (SPC). It was adopted in

1990 and currently is in front of the European Parliament. The proposal would provide effective protection for 16

years by granting a supplementary certificate to holders of a basic European patent. The guaranteed 16-year

monopoly is longer than that created by the U.S. and Japanese patent term extensions.

The formula for deriving the extension is somewhat complex. The SPC takes effect the day after the basic

patent expires and will be equal to the time elapsed between the filing of an application for a basic patent and the

date of the first marketing approval in the EC, minus 4 years. The term for a European patent is 20 years, thus SPC

will guarantee a monopoly of 16 years after marketing approval in almost all cases. The maximum length of an SPC

is 10 years, thus for all cases in which marketing authorization is given up to 15 years after the basic patent

application is filed, the company will be granted a 16-year monopoly. If 15 or more years pass, the company will

not be given a 16-year monopoly, but it will receive a maximum SPC of 10 years.

Patent term extension in the United States and Japan and the proposed legislation in Europe recognize the

importance of patent protection and market exclusivity for pharmaceutical producers, and acknowledge the burden

of regulation.

SOURCl%% H, Grabowski and J. Verno~ “Longer Patents for Imwer Imitation Barriers: The 1984 Drug *$” American Econo~”ci?eview,

vO~. 76, No. 2, kfky 1986, Al%% Papers and Pmceedm“ gs, pp. 195-198; R. Wbaite and N. Jones, “Supplementary protection

CertMicatex+-Restoration of the Patent %rm for pharmaceutical, The European Commission’s proposed Regulatio&” Liaklaters

& Paines, 199& M. Fujti “Government’s Support for Phanmuxutical Industry,” Business Japan, vol. 33, Issue 7, July 1988, pp.

80-83.

law that will provide both product and process

patents for pharmaceutical products and which may

be approved in 1991. In response, the United States

has lifted sanctions against Brazilian pharmaceutical

products, levied in 1988 in response to Brazilian

companies’ infringement on U.S. pharmaceutical

patents. Canada has tied patent protection to an

increase in R&D within the country. Bill C-22,

passed in 1987, provides 10 years of patent protection to companies in return for an increase in their

R&D spending in Canada as a percentage of sales:

from 4.9 percent in 1986, to 8 percent in 1991, 9

percent in 1994, and 10 percent in 1996. The

incentive has worked, with Merck Frosst (Canadian

subsidiary of Merck & Co.), Glaxo, and Sandoz,

among others, making substantial R&D investments

in Canada (35).

SUMMARY

Biotechnology has found its place in the researchbased pharmaceutical industry, both as a production

technology and a research tool. Biotechnology is
94 ● Biotechnology in a Global Economy

particularly important for research and drug discovery as it allows for a molecular- and cellular-level

approach to disease, drug-disease interaction, and

drug design. Biotechnology is likely to be the

principal scientific driving force for the discovery of

new drugs as we enter the 21st century, and the

impact of biotechnology on the discovery of new

therapeutic chemical entities is difficult to overestimate.

Dedicated biotechnology companies and established pharmaceutical companies are pursuing the

commercial development of biotechnology independently and through joint efforts. While the future

of the technology itself is bright, that of the

pioneering, innovative DBCs is less clear. The

pharmaceutical industry is highly competitive,

global, and risky and requires significant resources.

The markets are global, the R&D and marketing are

expensive, the regulatory requirements axe strict,

and the financiers of biotechnology companies are

becoming more discriminatory in their funding.

DBCs and pharmaceutical companies often work

in concert, each contributing valuable assets required for new drug development. DBCs’ strengths

include innovative research and technological capabilities which, when combined with the monetary,

regulatory, and marketing strengths of established

pharmaceutical companies, translate into new pharmaceutical products. The majority of DBCs, which

focus exclusively on the commercialization of

biotechnology, could not survive without strategic

alliances. Pharmaceutical companies, which are

increasingly integrating biotechnology into their

in-house research programs, use biotechnology to

complement traditional approaches to drug discovery and depend on strategic alliances for innovative

new products and technological know-how.

At this point in the commercialization of biotechnology, much of the success or failure rests on

economic and market forces, in addition to scientific

and technological feasibility. Government policies

that affect these conditions contribute to, but are not

likely to independently determine, the success or

failure of either the companies or the technology

itself. Several government policies that are affecting

the successful commercialization of biotechnology

and the competitiveness of the U.S. pharmaceutical

industry as a whole have been identified. These

policies include:

. government support for basic research in biological and biomedical science,

● regulatory policies for the approval of new

drugs and biologics, and

● intellectual property rights protection.

Continued support for basic research in biological

and biomedical sciences is essential to maintain the

strong scientific base that has given the United

States the acknowledged lead in biotechnology.

Improved intellectual property protection at home

and abroad and efforts to harmonize worldwide

patent polices will benefit both DBCs and pharmaceutical companies in their drug development efforts. Scrutiny and improvement of regulatory policies, especially the length of time required to obtain

FDA approval, will contribute to increased competitiveness of U.S. industry. Action on these points

would likely contribute to U.S. competitiveness in

the commercialization of biotechnology, which, at

this

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

stage, is highly dependent on market forces.

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Chapter 6

Agriculture

“Biotechnology has been a vital part of human activity for many thousands of years. In all

probability the first biotechnologists were Neolithic men and women who may well have

preferred the taste of fermented cereals to raw groin.”

Industrial Biotechnology Association

Biotechnology. . . in Perspective

“I suspect that virtually all of our current policy thinking about agriculture is very near in

time to being totally irrelevant. Major crops such as corn and wheat could see thousandfold

increases in yield through genetic manipulation. ’

Terry Sharrer

Smithsonian Institution curator of agriculture
CONTENTS

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . .

APPLICATIONS OF BIOTECHNOLOGY TO

Page

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

AGRICULTURE . . . . . . . . . . . . . . . . . . .

Applications to Animals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Applications to Plant Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Applications to Food Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CASE STUDY: THE SEED INDUSTRY . . . . . . . . . . . . . + . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Industry Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Research in Seeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Response of Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

THE INTERNATIONAL CLIMATE FOR AGRICULTURAL

BIOTECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

100

100

102

107

107

107

109

112

112

113

114

Boxes

Box Page

6-A. Plant Genome Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

6-B. Developing New Hybrids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

Figures

Figure Page

6-1. Preparation of Monoclinal Antibodies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

6-2. Plant Propagation: From Single Cells To Whole Plants . . . . . . . . . . . . . . . .*....,. 105

Tables

Table Page

6-1. Major World Seed Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

6-2. Major Exporters of Basic Agricultural Commodities Traded Worldwide . . . . . . . . 113

6-3. Field Tests, by Country (summer 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
Chapter 6

Agriculture

INTRODUCTION

Biotechnology has the potential to be the latest in

a series of technologies that have led to astonishing

increases in productivity of world agriculture in

recent decades. Since 1948, for example, the widespread use of fertilizers, synthetic chemical pesticides, and high-yielding varieties of major grain

crops have produced yield increases in the United

States of about 2-percent per acre annually. The use

of farm machinery of steadily increasing power has

led to a sharp decrease in labor needed to farm an

acre of land. Since 1940, labor requirements in the

United States have decreased 75 percent, while

output per acre has doubled. The decreasing amount

of labor required to produce increasing amounts of

products has allowed farm size to increase about

three fold over the years, while the total number of

farms declined. Total harvested acreage in the

United States, however, has remained relatively

constant at approximately 340 million acres. Access

to farm equipment, better seeds, and other inputs has

led to productivity gains in other major agricultural

exporting nations as well (6, 11, 51).

Until about 10 years ago, U.S. agricultural research was directed toward maximizing yield—the

quantity of production per acre. But, to compete with

agricultural producers in developing countries

where land and labor are cheap and to compete with

producers in developed countries with access to

sophisticated technology, U.S. farmers will have to

produce their crops more efficiently. Today there is

increased interest in the development of technologies that will help to reduce the cost of agricultural

production (42). There is also research in the

development of new, higher value-added products.

Biotechnology can contribute to agriculture in each

of these ways:

. The application of biotechnology to agriculture

can result in further gains in yield. Some

examples include new animal health care products, new plants that are more resistant to

environmental stresses (e.g., frost or drought),

or the use of new reproductive technologies to

develop higher producing dairy cows.

. Biotechnology can also contribute to productivity by lowering the cost. of agricultural

inputs. For example, plants that are resistant to

pests may require less treatment with chemical

pesticides resulting in savings in chemicals and

labor costs.

There is also the potential for the development

of higher quality foods and new higher value-

-added products to meet the needs of consumers

and food processors. These include lower fat

meats, oilseeds with altered fat content, or

vegetables with a longer shelf life.

It is also hoped that biotechnology will contribute to the development of environmentally

benign methods of managing weeds and insect

pests through such new products as pest resistant crops.

Biotechnology is being applied to agriculture by

new firms dedicated to the use of biotechnology and

by well-established firms adapting biotechnology to

their existing research programs. The potential

products vary considerably, from agricultural inputs

(e.g., seeds and pesticides) to veterinary diagnostics

and therapeutics, to food processing enzymes, to

products with improved food processing qualities.

Animal health products are often manufactured by

pharmaceutical firms, since there are strong similarities in the research required for developing human

drugs, vaccines, and diagnostics and those products

intended for livestock. Established research-based

seed companies are expanding into biotechnology,

while small, new firms attempt to develop products

in this area as well. Both small dedicated biotechnology firms (DBCs) and established agrochemical

firms are exploring biotechnological approaches to

pesticides (25).

Investment in biotechnology, by both small and

large firms, depends on the potential for the development of commercial products based on research and

development (R&D). The potential for profiting

from these new products depends on a variety of

factors, such as the potential size of the market for

the products and the rate at which new products and

technologies are likely to be adopted, the potential

for repeat sales, the existence of regulatory hurdles,

and the possibility of public opposition.

Biotechnology applications to agriculture are

being explored throughout the world but mainly in

–99-
100 . Biotechnology in a Global Economy

Photo credit: U.S. Department of 

Cloned strawberry plants in a growth chamber.

developed countries. Although few products are

currently available, it is possible to get an indication

of activities in different countries through surveys of

field tests reviewed by national authorities. The

climate for developing agricultural biotechnology

varies considerably from country-to-country, depending, especially, on differences in intellectual

property protection, regulations, and public perception.

APPLICATIONS OF

BIOTECHNOLOGY TO

AGRICULTURE

While there are many promising applications

of biotechnology to agriculture, biotechnology is

neither a panacea nor a replacement for established tools. It provides an additional approach to

agricultural problems. For example, leaner meats

can be produced by altering animal nutrition,

through selective breeding or by the administration

of hormones-some of which might be produced

through biotechnology. Eventually, transgenic animals that contain less fat may be produced. Ultimately, the best route may be a combination of

techniques including biotechnological methods.

Similarly, new plants can be produced through

selective breeding, cell culture techniques, or

through genetic engineering techniques. Genetic

engineering extends the range of new traits that may

be introduced into a plant to include traits from other

species.

The first products being developed are animal

diagnostic and therapeutic products that are

already on the market and biopesticides, the first

of which have won regulatory approval. Transgenic

plants are currently being field tested and are likely

to be available within a few years. Transgenic

animals will first be developed for laboratory uses;

technologies for producing transgenic livestock for

food will probably not be available until after the

turn of the century.

Applications to Animals

Reproductive Technologies

A variety of new reproductive technologies may

have an important impact on animal production.

Some technologies that do not depend on biotechnology are already in use. Artificial insemination,

using semen from genetically superior bulls, is

routine in the dairy industry today. Technologies are

also available, although none has been widely

adopted, that separate sperm to allow sex determination in artificial insemination. Sex selection would

be valuable for dairy farmers, for example.

Traits from genetically superior female animals

can be propagated using embryo transfer techniques.

Cows treated with hormones produce several eggs

which are fertilized by artificial insemination, collected, and transferred to surrogates. Laboratory

techniques are also available that permit the embryos to be split into multiple, identical copies (43).

Animal Health Products

The application of biotechnology to animal health

care products is similar to R&D in health products

for humans, and often these products are developed

by the same fins. Monoclinal antibodies, for

example, may be developed into new diagnostic
Chapter 6--Agriculture ● 101

Figure 6-l—Preparation of Monoclinal Antibodies

immunized with

substance or

“antigen”

removed and

minced to

release antibody

producing cells

(B lymphocytes)

~‘::g’ga

0

. “. .

.

. .. ./ :

“ ~,,. t;,. : Cells divide in

liquid medium

Myeloma cells

are mixed and

fused with

B lymphocytes

J

SOURCE: Office of Technology Assessment, 1991.

products for animal diseases just as they are used in

tests for human disease (see figure 6-l). New, safer

animal vaccines have also been developed. The first

genetically engineered vaccine, introduced by Molecular Genetics in 1984, protects against scours (a

disease in calves and piglets). A genetically engineered swine pseudorabies vaccine was approved in

the United States in 1987, and rabies vaccines are

The products of this

fusion are grown in a

selective medium. Only

those fusion products

which are both “immortal” and contain genes

from the antibody-producing cells survive.

These are called

“hybridomas.”

Hybridomas are cloned

and the resulting cells

are screened for antibody production. Those

few cells that produce

the antibodies being

sought are grown in

large quantities for

production of monoclonal antibodies.

being tested in the United States, Canada, and

Europe (12,14,53).

Although the technical possibilities for animal

health products may be similar to human products,

and the R&D investment required may also be

similar, their profitability is not similar. Unlike

human health care products, the decision to use

animal health care products is essentially a business
102 . Biotechnology in a Global Economy

decision. Animal products do not command prices

comparable to those of human health products.

Growth Hormones

Bovine growth hormone, or bovine somatotropin

(bST), which stimulates milk production is under

development by four U.S. firms. The Food and Drug

Administration (FDA) found in 1985 that the milk

and meat from treated cows were safe for human

consumption, and that finding was confirmed by a

committee assembled by the National Institutes of

Health (NIH) in 1990. Some farm organizations,

however, concerned about the possible toxic effects

of BST, its possible rejection by consumers, its

effects on animal welfare, and the ultimate effects of

increased efficiency of milk production on the

survival of marginal dairy farmers, have opposed

BST, leading to moratoriums on its use in Wisconsin

and Minnesota. Similar concerns have resulted in a

moratorium on BST use in the European Community (EC) (7,34).

Animal growth hormones are also being studied

as a method to produce leaner meats. The variation

in body composition among animals of the same

species depends on the growth stage of the animals,

their nutritional history, and their genetic base. The

production of leaner meats can be accomplished by

manipulating these variables through selective

breeding, nutrient management, and hormone administration. For example, selective breeding has

resulted in the production of modern, leaner hogs.

Also, leaner beef has been produced by breeding

cattle of larger frame size. The administration of

porcine growth hormone, produced through genetic

engineering, can speed the growth of hogs, improve

feed efficiency, and result in leaner meat (32).

Transgenic Animals

An alternative to treatment with growth hormones

is transferring growth hormone genes directly into

the genomes of animals, so the additional hormone

is supplied endogenously rather than administered

by the farmer. Early experiments, however, have

shown that simply transferring the genes is not

effective, and further fine-tuning of the regulation of

the genes’ expression is necessary (8). Other genes,

such as the human estrogen receptor and insulin-like

growth factor, have been transferred to cattle in

attempts to produce faster growing animals (8,34).

Using transgenic livestock as food, however, is not

expected before the end of the century. In the near

Photo credit: Rex Dunham, Auburn University

At top, a transgenic carp containing trout growth hormone

gene; bottom, normal carp.

term, transgenic animals are being developed for

nonagricultural purposes, including models for

human disease and for use in toxicity testing. For

example, one transgenic mouse line produces human

sickle cell hemoglobin (40). Other mice, including

the frost patented transgenic animal, have been given

genes important in cancer development (55). These

may eventually be used to identify carcinogens in a

shorter the than is now possible and to facilitate

studies of oncogenes. Another nonagricultural application of transgenic animals is their use in the

production of pharmaceutical proteins. A gene

encoding a protein can be transferred to animals that

then produce the desired protein in their milk, from

which the protein can be purified (30).

Applications to Plant Agriculture

Microbial Pesticides and Other Micro-organisms

The frost biotechnology-based products for plant

agriculture to be commercialized were biopesticides. Many nonengineered biopesticides based on

Bacillus thuringiensis (BT), a bacterium that produces a protein toxic to the larvae of many butterflies

and moths, have been in use since the early 1960s

(31). Biopesticides, however, represent a tiny fraction of the international pesticide market that is

dominated by chemical pesticides (49). Over 600

chemical pesticides have been approved by the

Environmental Protection Agency (EPA).
Chapter 6--Agriculture ● 103

Nonrecombinant biopesticides based on BT have

some advantages over chemical pesticides: they are

highly toxic to specific pests, leaving humans, crops,

wildlife, and beneficial insects unharmed; they do

not persist in the environment; and they can be

produced using fermentation processes (21,31). But

commercial weaknesses have prevented their widespread use. Each pesticide is active against relatively

few pests, so the potential market for many pesticides is small. In addition, naturally occurring

microbial pesticides often work too slowly and

degrade too rapidly in the field. Biotechnology

offers a means of addressing these commercial

drawbacks. Eventually, more than one pesticidal

protein will be engineered into a micro-organism,

thereby increasing its host range. The gene for the

protein can also be modified, allowing more of the

pesticide to be produced and increasing its effectiveness against pests (21). In addition, pesticides can be

formulated and delivered to increase their persistence in the environment.

For example, two U.S. firms, Mycogen and Crop

Genetics International, are exploring new delivery

systems. Mycogen is developing a series of biopesticides designed to protect vegetable crops. Mycogen

scientists inserted a gene that encodes a BT toxin

into a different bacterium that produces more of the

toxin. After the bacteria produce the toxin, the

bacteria are killed and treated to fix the cell walls.

This leaves a particle containing crystalline toxin

within a long-lasting protective coat (47). The dead

bacteria are sprayed on plants as a topical insecticide, killing susceptible insects that eat the sprayed

plants. Although dead bacteria are not as long lasting

as live, reproducing bacteria, the use of killed

bacteria makes the regulatory approval process

simpler and faster.

Crop Genetics International, Inc. (CGI) has explored a different method of delivering BT toxins.

CGI has used micro-organisms called endophytes

that live and reproduce inside the vascular system of

plants. CGI scientists inserted a gene for a BT toxin

into the genome of an endophyte that was then

inoculated into seeds. When the seeds were planted

the endophytes multiplied inside the plants. The firm

has field-tested corn and rice containing an endophyte with a BT gene that protects the plants against

the European corn borer and the rice stem borer. The

field tests have shown that the endophyte does not

survive outside the plant, nor is the endophyte

transferred to nearby uninoculated plants. CGI has

agreements with four seed companies that plan to

use CGI’s technology to introduce the endophytes

into their existing seed products. The company

expects to extend this technology to other major

crops (49).

Microbial biopesticides compete in the marketplace with chemical pesticides, and eventually, they

will compete with plants that have been made pest

resistant through the incorporation of BT genes

directly into their genomes. Biopesticides have the

advantage of being widely applicable to many

varieties without extensive multiyear breeding programs necessary for developing transgenic plants.

On the other hand, both the plants containing

endophytes and the transgenic plants are resistant to

pests without the labor of spraying crops. The

pesticide contained in dead bacteria has a strong

advantage, however, in its relatively quick regulatory approval time. EPA approved two of Mycogen’s recombinant biopesticides in June 1991.

Other useful micro-organisms, such as improved

nitrogen-fixing bacteria, are also being field-tested.

These bacteria live in nodules on the roots of

legumes, such as peas and beans. The bacteria

convert nitrogen in the air into a form that the plants

can absorb and use. Research is directed at developing strains of bacteria that fix nitrogen more

efficiently and that can effectively compete with

indigenous soil bacteria in forming nodules thereby

being better able to support a healthy crop of

legumes (3).

Plant Research

Scientists also use biotechnology as a tool for

basic research on plant growth and development.

One technique, restriction fragment length polymorphism (RFLP) analysis, shows particular promise in

speeding conventional plant breeding and, eventually easing breeding involving complex multigenic

traits. An RFLP map consists of a set of cloned

deoxyribonucleic acid (DNA) fragments from chromosomal locations throughout a plant’s genome. A

RFLP marker, or one DNA fragment, can be used as

a tool to follow the inheritance of the particular

region of the genome in which the marker is located.

This procedure can then be used as a guide to

selecting plants that possess specific genetic attributes desired in a seed product (see box 6-A).

A good example is the application of RFLP

analysis to backcross breeding. Many of the im-
104 ● Biotechnology in a Global Economy

Box 6-A—Plant Genome Projects

To identify and characterize genes that are agriculturally important, the United States and several other

countries have begun to fund research on plant genomes. The U.S. Department of Agriculture’s (USDA) Plant

Genome Mapping Program is the largest of these programs, with a budget of$11 million in research funds for the

1991 fiscal year. Its specific objectives are construction of high-resolution gene maps for those plants species with

sufficient background information already available (e.g., tomato, corn, and rice); development of low resolution

maps for all major crop species important to the United States (about which little information is available at the

moment); high-resolution mapping and sequencing of specific regions of the chromosome for investigating specific

genes of economic interest (e.g., hybrid vigor, disease resistance, and drought resistance); and a complete

sequencing of the Arabidopsis genome. In addition, the USDA’s Agricultural Research Service has received a $3.7

million appropriation in fiscal year 1991 to manage dissemination of information generated by the program (using

such tools as databases and publications). Eventually, it is hoped that the gene maps and sequences will be used to

identify and manipulate genes that encode important traits.

The National Science Foundation (NSF), the National Institutes of Health (NIH), and the Department of

Energy (DOE) have also funded research on Arabidopsis thaliana, an agriculturally unimportant member of the

mustard family increasingly being used as a model system by plant scientists (just as fruit flies are used by animal

geneticists). Arabidopsis is a small plant with a small genome (about 10 percent that of the human genome), small

seeds, and a short life cycle (about 6 weeks). These qualities allow it to be grown in large numbers in greenhouses

and rapidly screened for mutations. In addition, DNA can be transferred into Arabidopsis plants using

Agrobacterium vectors, and viable plants can be regenerated from cultured cells. Scientists can study genes

important to plant growth and development, for example, in this small, easily manipulated plant and then apply this

new knowledge to agriculturally important crop plants. The NSF is spending $4.4 million in fiscal year 1991 on

studies of the Arabidopsis genome through its existing research programs. The European Community, through its

Biotechnology Research for Industrial Development and Growth in Europe (BRIDGE) program, is also funding

gene mapping studies on the Arabidopsis genome, allocating ECU 3 million for 1991-92. The United “Kingdom,

in addition to participating in BRIDGE, funds research and postdoctoral fellowships for work on Arabidopsis.

Japan’ s Ministry of Education and the Ministry of Agriculture, Forestry, and Fisheries (MAFF) fund studies

on plant genomes, particularly rice. The MAFF plans a 10-year project on the rice genome to begin in 1991. The

MAFF also plans to construct a rice research facility in Tsukuba, Japan’s “Science City.”

SOURCES: U.S. Department of Agriculture, 1991; National Science Foundatio~ 1991; Kagaku Kogyo Nippo, Aug. 31, 199Q A. Vasaarotti et

aI+, “Genmne Research Activitka in the EC,” Biojktzu, October 1990, pp. 1-4; “Gtxxxne Research” European Biotechnology

Z?zfornzutiOn Service, vol. 1, No. 17, 1991, p. 17.

provements introduced into modern crop plants that this technique can be used in breeding tomatoes,

originated in related varieties, races, or species.

Traditionally, a plant containing one desirable trait,

such as disease or pest resistance, was crossed with

a plant from a standard line into which the desired

trait was being introduced. In backcross breeding,

the offspring of this cross (containing the desirable

trait) would be grown and crossed again with a plant

from the standard line. Offspring from this cross

containing the desirable trait would again be crossed

with the parent line. After several generations, plants

will be obtained that are nearly identical with the

original, standard line but which now will contain

the desirable trait. RFLP markers can be used to

identify offspring that have inherited the desirable

trait but that, by chance, also have inherited much of

the genome derived from the standard line. One

group has estimated, using computer simulation,

cutting the number of crosses from six to-three (46).

Cell Culture

Plant cells grown in culture can be an alternative

source of valuable substances that are now isolated

from whole plants. Vanilla, for example, is usually

extracted from the beans of the vanilla plant. Vanilla

isolated from cultured cells of the vanilla plant can

be produced less expensively than traditional vanilla

extract, according to a firm that has developed a

process for producing vanilla in commercial quantities. Other substances, including pigments and

fragrances, have also been isolated from cultured

plants cells (9,45).

New plants can also be developed from cultured

plant cells (see figure 6-2). Unlike cultured animal

cells, some cultured plant cells treated with a

mixture of nutrients, minerals, and hormones will
Chapter 6--Agriculture ● 105

Figure 6-2—Plant Propagation: From Single Cells To Whole Plants

The process of plant regeneration from single cells in culture

Cell multiplication Cell wall

removal

R R

q

.

Desired plant “; /

@

8

/

Leaf

Virus-free

Field performance tests

\

Tissue (5 Protoplasts

-@@

%) @\

Exposure to

selection pressure, .Ow

e.g., high salt

- ● ° - ● .O

concentration ● .**.

Roots and

shoots

*.@

+ Root-promoting

hormones

The process of plant regeneration from single cells or plant tissue in culture.

SOURCE: Office of Technology Assessment, 1991.

Surviving cells

go on to form callus

form roots and shoots and grow into viable orga- three kinds of new traits: herbicide resistance, insect

nisms. Plants derived from these cultured cells may

contain mutations resulting in altered traits. These

new plants can then be screened for desirable traits.

For example, FreshWorld, a joint venture between

DuPont and DNA Plant Technology, is selling

crisper, sweeter carrots and celery regenerated from

cultured cells. DNA Plant Technology is using the

same techniques to develop tomatoes having higher

solids content—a product useful to food processors.

In Japan, a late-maturing variety of rice was developed using these techniques by a joint venture

company formed by Mitsubishi Chemical Industries

and the Mitsubishi Corp., and a short-stemmed

variety was developed by the Mitsui Toatsu Chemical co. (19).

Transgenic Plants

The ability to insert foreign genes into plants,

using recombinant DNA (rDNA) methods, provides

plant breeders with new strategies for plant modification and improvement. Research and field-testing

have recently been dominated by plants exhibiting

resistance, and viral resistance. Altering other plant

traits important for plant growth and development,

such as those affecting plant tolerance of environmental stress (e.g., drought and salinity) or traits that

add to value, often require better understanding of

the molecular basis of these traits-many of which

may be multigenic and, therefore, more difficult to

transfer.

Genes that confer resistance to several classes of

herbicides have been isolated and transferred to a

number of plants, including tomato, tobacco, cotton,

oilseed rape, soybeans, sugar beets, and alfalfa.

Herbicides are widely used in agriculture, leading to

increased crop yields that result when weeds competing for soil, light, and nutrients are removed.

Herbicides also contribute to soil conservation by

permitting no-till practices in which weeds are

controlled through herbicide use rather than by

plowing. The herbicide-resistant gene enables a crop

plant to tolerate the toxic effects of a herbicide

applied to kill surrounding weeds. Chemicals are

currently available to control most weeds, but
106 . Biotechnology in a Global Economy

Photo & Co.

Manduca sexta (tobacco hornworm) larva at work. The

moth will consume 95 percent of its entire life cycle’s

food supply while in the larval stage of development.

Moth larvae are the most destructive insects to world

agriculture and forestry.

developing herbicide-resistant plants increases the

variety of crops to which a particular chemical may

be applied. It is possible that this could lead to

increased use of chemical herbicides. However, if

troublesome chemicals can be displaced by increasing the use of herbicides that require lower application rates, do not persist in the environment, and

have fewer toxic side effects, then there will be an

environmental benefit (27).

The first successful transfer of an insectresistance gene to a plant was done with tobacco by

a Belgian firm, Plant Genetic Systems, in 1987 (54).

Insect resistance has now been transferred to a

number of plant species by transferring genes for

pesticidal proteins isolated from BT (31). Because

any particular toxin is effective only against specific

insects, chemicals may still be necessary for control

Photo credit: & Co.

The effects of the BT gene transfer on laboratory

tobacco plants can be easily seen in the plant on the left

which was infested with 20 tobacco hornworm larvae.

Within 40 hours the hornworms were killed by the BT

protein in the plant tissue they ingested, leaving the

plant virtually undamaged. The other plant, which did not

have the gene transfer, shows total destruction by the

same number of insects in the same time period.

of multiple pests. Broader spectrum pest control may

eventually be achieved by transfers of several insectresistance genes. It is possible, however, that increased use of plants containing BT toxins will result

in BT-resistant pests.

Within the last few years, it has been learned that

introducing genes that encode viral proteins can

make plants resistant to virus infection(l). Although

the mechanism of viral resistance is not well

understood, this is an area of active research and

field-testing. Its commercial prospects are limited to

specific crops in specific regions where viral diseases present a significant problem, such as wheat in

the United States and cassava in the tropics.

Traits such as insect or disease resistance can

increase the value of plants to farmers. Other new

plants are being developed, however, with traits that

are not aimed at increased yields or lower input costs

for farmers. These traits are intended to meet the

needs of food processors and consumers. These new

plants have traits that change the nutritional content

of a plant, alter its processing qualities, or increase

its consumer appeal. For example, genetically engineered tomatoes, developed by Calgene and now

being tested, have a gene that interferes with the
Chapter 6--Agriculture ● 107

ripening process that causes tomatoes to become

soft. In the future, additional products based on a

deeper understanding of molecular mechanisms may

be developed. For example, the nutritional content

of corn may be enhanced by increasing the amount

of the amino acids lysine and methionine in the

seeds. Work is underway to produce coffee with

lower caffeine content. Oilseeds with higher oil

contents, altered ratios of fatty acids (for enhanced

nutritional properties), or longer shelf lives will be

developed. Genes that control flower colors are

being transferred to develop new ornamental. Some

of these traits can be modified through traditional

breeding programs, but biotechnology can improve

the efficiency of making changes and extend the

range of possible modifications (5).

Applications to Food Processing

Biotechnology can contribute to food processing

in various ways, but most current applications

emphasize cost reduction. Biotechnology can be

used to improve the production of existing goods

currently made using fermentation, such as vitamins

and amino acids used as additives in food and animal

feed. Biotechnology can also be used for the

production of food processing enzymes. One food

enzyme, chymosin, used in cheesemaking, was

traditionally extracted from calves’ stomachs and

sold as part of a mixture called remet. Rennet varied

in quality from batch-to-batch, and its scarcity led to

rising prices in recent years. Researchers at Pfizer,

Inc. transferred the gene encoding chymosin to

bacteria that could be grown in large fermentation

tanks, yielding large amounts of chymosin. The

enzyme was approved for food use by the FDA in

1990 (55 Fed. Reg. 10932).

Micro-organisms are widely used in baking and

brewing. A baker’s yeast altered using biotechnology has been approved for use in the United

Kingdom (U.K.). There is also interest in developing

genetically engineered micro-organisms for the

production of high-value compounds currently isolated from plants. Among these products are dyes,

vitamin s, flavors, colors, lipids, steroids, and biopolymers (16,39,44).

The application of biotechnology to food processing has received a great deal of interest in Japan.

Japan leads in world production of amino acids and

fermented food products. Their expertise in fermentation makes biotechnology a natural extension of

their current strength (16).

CASE STUDY: THE SEED

INDUSTRY

Whether or how biotechnology is used by a firm

depends on a variety of factors, among them:

s

●

●

The potential for profits from the investment.

This depends on the size of the market, rates of

adoption, intellectual property protection, the

existence of substitutes, and public acceptance

of new products.

The role of R&D in the industry. This may

depend on competitive pressures to develop

new products.

The time it takes to realize a return from such

an investment. Anything that delays the return

on the investment, such as regulations, may

inhibit investment. A more detailed description

of the seed industry provides an illustration of

interplay between the forces that influence the

use of biotechnology.

Industry Structure

In 1988, U.S. farmers spent $3.7 billion on seeds

(52). The worldwide market has been estimated at

$12 billion to $15 billion. But these estimates

exclude the extensive informal seed market. Farmers

often plant seed saved from a previous harvest or

purchase seed from another farmer. Estimates of the

total seed market vary considerably, ranging as high

as $62 billion (41).

The seed industry has many markets, including

those for grass, forage, vegetable, flower, and field

seeds, each having its own supply, demand, price,

and organizational characteristics. Many seed producers are small firms that grow and distribute

common varieties of seed for regional markets. The

small firms conduct little or no research, but they

effectively market new technologies provided by

public or private seed suppliers.

A portion of the seed industry consists of larger

firms with resources to invest in the long-term

research necessary to produce genetically improved

seeds (see table 6-l). These are the firms likely to

benefit from the use of biotechnology. For these

fins, however, investment in research has historically been less than 5 percent of revenues (13).

Today, investment in research is higher; in 1989,
108 . Biotechnology in a Global Economy

Table 6-l—Major World Seed Firms

Pioneer Hi-Bred International . . . . . . . . . . . .

Sandoz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

DeKalb . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Upjohn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Limagrain . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cargill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Volvo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Lubrizol . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

KwS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

United States

Switzerland

Switzerland

UnitedStates

United States

France

United States

Sweden

UnitedStates

Germany

SOURCE:OfficeofTahnologyAssessmen~ 1991.

Pioneer Hi-Bred International invested 7.6 percent

of total revenue in R&D (37). Most seed research is

based on selective breeding programs used to

develop seeds that are high yielding or have other

advantageous traits.

Internationalization and Consolidation

Over the last 30 years, the seed industry has been

marked by increasing internationalization. During

the 1960s, major U.S. firms began exporting seeds,

particularly the better hybrids, into Latin America

and Europe. This was followed, in the 1970s, by

increasing acquisitions of small firms, as U.S. firms

expanded into Europe and large European seed firms

invested in the United States. The major firms also

developed subsidiaries in Australia and Latin America-especially in Argentina, Brazil, and Mexico.

The French firm Limagrain, for example, has

subsidiaries in Australia, Brazil, Chile, Germany,

Italy, Mexico, Morocco, The Netherlands, Spain,

Tunisia, Turkey, and the United States. The U.S.

firm Pioneer Hi-Bred International, Inc. sells seed in

80 countries worldwide and has subsidiaries in

Argentina, Australia, Austria, Brazil, Canada,

France, Germany, India, Italy, Japan, Mexico, the

Philippines, Spain, and Thailand (41).

Seed companies were, historically, closely held

businesses. Increasingly, however, both small and

large seed firms have been acquired, not only by

other seed firms but by other major multinational

companies. Since the mid-1960s, over 100 seed

companies have been acquired by multinational

chemical, pharmaceutical, and oil corporations—

often those with agricultural chemical subsidiaries.

Few major seed companies remain independent: the

U.S. firms Pioneer Hi-Bred International, Holden’s

Foundation Corn Seeds, and DeKalb; the French

firm, Limagrain; and the Brazilian firm, Agroceres

SA, have managed to continue independently. Other

major research-based firms are now subsidiaries of

“. w/

l%oto credit: National Agriwltural Library

;

multinational corporations whose main business is

not seeds.

Many of the corporations that chose to invest in

seed companies were European firms that lead in

world sales of pesticides and fertilizers. The Swiss

firm, Ciba-Geigy, for example, acquired the U.S.

seed firm, Funk, in 1974. The British chemical firm

ICI has acquired six seed companies, including

Garst, one of the leading U.S. firms. Rhone-Poulenc

has recently acquired five seed firms, including
Chapter 6--Agriculture ● 109

Clause, an important French company. The U.S.

chemical firm Lubrizol owns eight seed firms

through its Agrigenetics subsidiary. Corporations

best known for producing pharmaceuticals have also

invested in seed firms. Upjohn owns Asgrow Seeds,

and Sandoz acquired eight seed subsidiaries from

1976 to 1988, including Northrup King and Stauffer

Seeds in the United States. There are also examples

of major cereal and sugar producers acquiring seed

firms. Cargill, the major U.S. food producer, specializes in seeds of corn, wheat, and sunflowers and has

subsidiaries in nine countries. Cardo, a major

Swedish sugar producer and now a subsidiary of

Volvo, has invested heavily in the production of

sugar beet seed. More recently, biotechnology firms

have begun to acquire seed firms, seeking outlets for

their technology. For example, Calgene has purchased Stoneville, and Biotechnica has purchased

five regional seed companies (17,20,41).

This recent consolidation has made the researchbased sector of the seed industry extremely concentrated. For example, in 1985, four firms supplied 64

percent of corn seed in the United States; Pioneer

Hi-Bred, alone, supplied 38 percent. Pioneer also led

in providing corn seed in France, where it held 55

percent of the market, followed by Limagrain with

15 percent. In Brazil, 34 percent of corn seed was

supplied by Agroceres. In France, sunflower seed

sales were dominated by Cargill, which held 75

percent of the market in 1985 (41).

Research in Seeds

Keeping market share requires constant development of new, improved products. For example, in

1989, Pioneer released 24 new corn hybrids. A new

hybrid is usually marketed for about 7 or 8 years

before it is superseded by improved hybrids. A

hybrid’s lifetime depends on how unusual it is, how

much competition there is (if a market is large,

competitors will develop similar hybrids), and how

insect and disease pressures change over time. A few

exceptional hybrids have been sold for more than 20

years, because they have qualities that make them

suitable for a particular region (28). A number of

other factors influence the types of research projects

that a seed firm may choose to undertake. Among

these are: the potential market size, the time it will

take to realize a return on investment, the availability of intellectual property protection, and technical

constraints.

Hybrid Seed

The research-based sector of the industry grew

with the introduction of hybrid corn in the 1920s.

Hybrid seeds are the first generation of a cross

between two unrelated strains of a plant. Some

hybrids have much higher yields than conventional

seed and, therefore, command high prices. The high

yields more than offset the higher prices firms

charge for the seeds.

Hybrids do not breed true. The high yield is

obtained only in the first generation. To obtain the

high yield, farmers must purchase seed from suppliers each year. In the United States, 95 percent of

corn planted each year is grown using seed purchased from seed suppliers. The assurance of repeat

business gives seed firms a strong incentive to

continue research into better yielding hybrid seeds.

Corn, grain sorghum, sunflowers, and some vegetables are typically sold as hybrids (2).

Most other crop species are naturally selfpollinated. For many of them it is difficult to produce

hybrid seeds on a large scale for commercial

purposes (see box 6-B). Unlike hybrids, selfpollinated varieties breed true. Farmers can choose

to buy fresh seed or to plant seed saved from the

previous year’s harvest with little difference in yield.

Although there are advantages to buying fresh seed,

which has an assurance of purity and has been

cleaned and tested for germination, or seed of a

newly available, higher yielding variety, farmers

often choose to plant saved seed. As a result, only 35

percent of wheat and 50 percent of cotton seeds are

purchased from suppliers each year (2).

Firms do research on self-pollinated crops, but

there is much less incentive to invest heavily

because the companies cannot capture profits as they

can with hybrids. Competition with saved seed also

depresses the prices firms can charge for their seed

(2,23).

The repeat business associated with hybrid seeds

guarantees a sizable market. The market size also

depends on how widely the crop plant is grown.

Most research, using both biotechnological and

traditional approaches, is performed only on those

crops that offer markets of sufficient size to enable

returns on R&D investment.
110 ● Biotechnology in a Global Economy

Box 6-B—Developing New Hybrids

Some plants readily lend themselves to hybrid

production. In corn, for example, the structures that

produce pollen, the anthers, are located at the top of

the plant on the tassels. If a plant’s tassels are

physically removed or if a mutant is grown that does

not produce pollen, all the eggs will be fertilized by

pollen from neighboring plants. By growing plants

of one strain of corn near plants that are genetically

male-sterile or hand-emasculated, hybrid seed can

be obtained

In many plants, however, there are no genetic

male-sterile varieties. In addition, many of these

plants have small, delicate flowers, and it is difficult

and time-consuming to remove anthers by hand.

Some chemical treatments are available for producing sterile plants (and have been used in the

production of hybrid wheat). For many plants,

however, producing hybrids on a commercial scale

is not practical.

Recently, however, scientists from a Belgian

firm, Plant Genetic Systems NV, collaborating with

scientists at UCLA have developed a general

method for producing male-sterile varieties. The

scientists transferred a gene that prevents anther

development into otherwise normal tobacco and

oilseed rape plants, resulting in male-sterile plants.

The extension of this technology to additional crops

has the potential to extend the benefits of hybrid

production to other species. It is hoped that some of

these new hybrids may show the increases in yield

typical of hybrid corn.

SOURCE: c. Mlriani et al., “XMuctiori of Male Sterility in

Plants by a Chimaeric Ribonuclease Gene,” Nature

vol. 347, 1990, pp. 737-741.

Intellectual Property

To stimulate private-sector research on nonhybrids, Congress passed the Plant Variety Protection

Act (PVPA) in 1970. PVPA extends patent-like

protection to sexually reproducing plant varieties

outside the existing patent system. PVPA is

administered by the U.S. Department of Agriculture

(USDA) rather than by the U.S. Patent and Trademark Office (PTO). It gives the owner of a protected

variety the right to exclude others from selling,

reproducing, importing, or exporting the protected

variety for 18 years. But, there are two important

exceptions: farmers may save or sell seed they have

produced themselves for future planting, and

researchers, including competitors, may also use

protected varieties in their research programs to

develop new seed products. A system establishing

similar breeders’ rights was created in Europe by a

1961 treaty establishing the International Union for

the Protection of Plant Varieties (UPOV).

A survey of seed companies, conducted in 1980,

reported growth in the number of research programs

on nonhybrid crops and increases in total research

expenditures on nonhybrid crops after PVPA was

enacted in 1970. For example, of the 21 soybean

breeding programs the surveyors found existing in

1979, only four had existed before 1970 and some of

those were founded with the expectation that PVPA

would be enacted. Increases in cereal research were

also noted, while forage-breeding programs had

increased slightly and seemed to be unaffected by

passage of the new law (36).

Seed firms face difficulties enforcing provisions

of PVPA. If another firm sells a protected variety,

the seed company that owns the variety must find the

seed pirate and sue for damages. Although the extent

of infringements is unknown, it occurs often enough

that seed firms are taking action. Asgrow Seed Co.

has found violators advertising Asgrow varieties in

local newspapers, but protected seed sold less

blatantly, under a new name, is harder to track (24).

PVPA is limited in its protection of products

developed using biotechnology. It extends protection to a single variety only. Today, utility patents

may also be obtained for plants and plant parts as a

result of a 1985 Supreme Court ruling (10). Utility

patents offer broader protection than does PVPA;

there is no farmer or research exemption. Finns have

filed patent applications for, among other things,

DNA sequences, plant cells, gene isolation processes, DNA transfer processes, whole plants, and

other plant parts. Questions remain, however, about

the scope of patent coverage, and in the absence of

new legislation they will be answered as the courts

resolve disputes (31).

In Europe, intellectual property protection for

plants remains confined to protection for plant

varieties established by UPOV, although DNA

sequences, plasmids, and plant cells are patentable.

Plant and animal varieties are generally excluded

from patent protection in European countries. Patent

laws in Australia and Japan, on the other hand, do

not exclude plants and animals (4).
Chapter 6--Agriculture ● 111

Photo credit: Diversity, Genetio Resources Communications

Systems, Inc.

Plant culture.

Regulations

In conventional plant breeding programs, potentially useful new traits are bred into plants that have

other important agronomic traits, and the plants are

then field tested in different climates. The most

successful varieties are then bred for several years to

produce commercial volumes of seed. This process,

from the initial breeding to product introduction,

takes 10 to 15 years (5). For genetically engineered

plants, this process is lengthened because of requirements for field testing to demonstrate safety. In

addition, firms have to obtain regulatory clearance

before marketing a new product. These increases in

the time it takes to develop new products have their

greatest impact on cash-starved, small fins. It is

also unclear how the FDA will evaluate food plants,

although the FDA has made clear its intention to use

its existing authority under the Food, Drug, and

Cosmetic Act (15,48).

Regulations on field testing genetically modified

plants are particularly strict in northern Europe, due

to adverse public opinion. In Japan, regulations for

field-testing genetically modified plants were issued

by the Ministry of Agriculture, Forestry, and Fisheries in the summer of 1989, but, so far, only a single

test has been reported.

Technical Constraints

Technical constraints have, over the last several

years, limited the ability of seed firms to apply

biotechnology to the most valuable potential projects. Of the plants that have been field-tested in the

United States, the vast majority have been vegetable

crops altered to make them herbicide, insect, or virus

resistant. There has been heavy emphasis on applying biotechnology to vegetables, because they are

the easiest crops into which to transfer DNA. The

most widely used method of transferring DNA into

plant cells depends on the use of an infectious

bacteria, Agrobacterium tumefaciens, which, on

infection, transfers DNA into the genome of the

plant. Altered forms of the bacteria have been

developed that allow researchers to transfer specific

DNA fragments that confer useful, new traits into a

plant. But, these bacteria do not infect cereal plants

(56,57). Only recently have researchers reported a

new technique for DNA transfer into plants using a

particle delivery, or ballistic, system (22). Three

firms have reported the successful application of this

technique to corn, followed by regeneration of

viable plants with new genes incorporated stably

into nuclear DNA. The variety of plants to which

biotechnology can be applied will expand in time,

but needed gains in transformation efficiency must

be made for the true potential of gene-transfer

technology to be realized.

The number of traits that researchers alter is also

likely to increase. Such qualities as herbicide, insect,

and virus resistance are relatively easy to transfer,

because they are carried by single genes. Many other

important traits, however, are probably affected by

multiple genes and are not well-understood genetically or biochemically. Manipulating these traits

requires a long-term investment in fundamental

plant metabolism research in order to understand the

molecular basis of these traits.

The Congress, responding to criticism of the

USDA’s funding of basic research, has recently

increased the USDA’s funding for competitive

grants (33). The National Research Initiative is

being funded at $73 million in fiscal year 1991, and

its budget will increase to $500 million in 5 years.
112 ● Biotechnology in a Global Economy

The Response of Firms

In this market, few direct paths are open to firms.

A number of companies, both large and small, have

been developing plants with improved agronomic

traits. For large firms, biotechnology presents an

opportunity for growth and a way of protecting

market share. Large firms with many popular

high-yielding products and established distribution

systems can incorporate these new traits into their

products. But new dedicated biotechnology firms do

not have the same access to quality germplasm or

distribution outlets. For them, biotechnology presents growth opportunities, but it is important to

develop partnerships with larger firms (38). In some

cases, small biotechnology firms have sought eventual outlets for their technology through purchases

of small seed firms.

Some small firms survive solely by isolating new

genes or developing new technology that can be

licensed to larger firms. These alliances, between

large and small firms, provide sorely needed financing to small firms while providing large firms with

wider access to new technology. But, as large firms

develop more in-house expertise, these strategic

alliances may become more focused and less available.

Some firms plan to invest in the long-term

research necessary to develop plants with improvements in nutritional content or processing qualities.

Few firms can afford the substantial investment or

the long wait required until this research results in

commercial products. In addition, marketing these

products presents new challenges. Traditionally,

seed companies have generally sold their products to

farmers, with little emphasis on the development of

plants with traits important to their eventual users.

But developing and selling a product with properties

of interest to particular end-users (e.g., an oilseed

with altered composition making it useful to producers of commercial fried foods), require the

development of close working relationships between breeders and end-users (13).

THE INTERNATIONAL CLIMATE

FOR AGRICULTURAL

BIOTECHNOLOGY

The major food exporting nations consist of a

handful of developed countries (see table 6-2). Some

developing nations, such as Argentina, Brazil, and

Thailand, are also important exporters of grains,

feeds, and tropical products. Exports tend to be

concentrated among a very few countries: five

countries are responsible for over 90 percent of

wheat exports; seven for over 90 percent of feed

grain exports, such as corn, barley, sorghum, and

oats; and four countries account for over 95 percent

of soybean and soy product exports. Similarly, the

EC and Eastern Europe account for over 85 percent

of pork exports, and six countries provide over 80

percent of beef exports (26).

Because biotechnology products for agricultural

use are still in development, it is not possible to

compare the numbers of products actually manufactured in different countries. Field trials of potential

plant products, however, are regulated by national

agricultural or environmental authorities. These

trials are outdoor tests of genetically modified

organisms, conducted to gain experience important

for future commercial development or to test the new

plant under field conditions. There is no official

census of such tests, but the USDA has kept an

unofficial tally that gives a rough estimate of

activities in different countries (see table 6-3).

Unfortunately, little is known about testing in the

Third World.

Through the summer of 1990,93 field tests of

transgenic plants had been approved in the

United States, far more than in any other country. In the EC, 62 tests had been approved, including

28 in France and 12 in Belgium. Canada and

Australia, major agricultural exporting nations, had

approved 18 and 4 tests, respectively. There is little

activity elsewhere. In general, transgenic plants are

being developed in nations that are major exporters

of agricultural products, with the greatest activity in

the United States.

In northern Europe, particularly Germany and

Denmark, public concern about possible environmental risks and ethical issues associated with

biotechnology has translated into regulations that

discourage field testing of genetically engineered

organisms. The lack of patent protection for

transgenic organisms also tends to inhibit investment in transgenic plants in Europe.

In Japan and other Asian countries, public perception of biotechnology appears to be mixed. The use

of biotechnology to produce pharmaceuticals and

industrial and food processing enzymes is well

accepted, but agricultural applications are less so
Chapter 6--Agriculture ● 113

Table 6-2—Major Exporters of Basic Agricultural Commodities Traded Worldwide

Soybeans

and soybean

Wheat Feed grains products Beef Pork

United States United States United States European European

Canada Argentina Brazil Community Community

Australia Canada Argentina Australia Eastern

France South Africa European Argentina Europe

Argentina Thailand Community New Zealand

Australia Brazil

France Canada

SOURCE: U.S. Department of Agriculture, A@xJtura/ Yearbook 1985.

Table 6-3-Field Tests, by Country (summer 1990)

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

European Community . . . . . . . . . . . . . . . . . . . . . . . . 62*

Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Argentina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

● 28 in France; 12 in Belgium

NOTE: Because of differences in definitions, some of these statistics for

countries outside the United States may include tests of modified

micro-organisms as well as transgenic plants, but these tests are

relatively few.

SOURCE: U.S. Department of Agriculture, 1991.

(18). In Japan, there has even been an historical

aversion to the use of nonengineered microbial

pesticides. Their use is permitted but much more

strictly regulated than in Europe or the United States.

This is partly because BT was originally isolated in

Japan as a potent pathogen of silkworms. Although

strains nontoxic to silkworms have been developed,

the use of BT in Japan was banned until 1971, and

the first permits for its use were not granted until

1982. It is thought that the stringency of the

regulations has inhibited corporate interest and

investment in the development and improvement of

biopesticides in Japan (50). Japanese surveys have

also reported concern about environmental releases

and food uses of transgenic plants and animals (29).

A survey of Japanese businesses found that only 38

percent of the 66 responding agricultural firms

considered biotechnology decidedly or fairly important for their company’s future; in contrast, 89

percent of manufacturers of drugs and diagnostics

took that position (35).

SUMMARY

Like other technical innovations, biotechnology

has the potential to improve the productivity of

agriculture by increasing yields, decreasing costs,

and providing new products. Applications include

animal health products, hormones, transgenic animals, biopesticides, and transgenic plants. Surveys

of field tests of transgenic plants reviewed by

national authorities show that the United States

leads in this activity, followed by the EC (especially

France), and then by Canada. Activity is greatest in

countries that have access to biotechnology research, that are leading agricultural producers, and

where there is little public concern about the

applications of biotechnology to agriculture.

In the seed industry, research investment has

traditionally been heaviest in crops sold as hybrids,

particularly corn, because these crops offer the most

opportunities for profit. But corn, the crop that has

drawn the most research in the past, has not been

amenable to biotechnological manipulation until

recently. Therefore, research has focused on crops

and traits that are easier to manipulate. As technical

roadblocks are lifted, research is likely to increase on

other crops and on more complex traits. Other

roadblocks exist:

More basic research is needed on fundamental

plant biochemistry, genetics, and physiology—

in addition to plant biotechnology. This research would help in identifying and manipulating genes involved in producing complex

traits of agricultural importance. Congress has

begun to address the need for basic research by

increasing funding for competitive grants administered by the USDA.

The FDA has given industry little indication of

its approach concerning food safety of genetically modified plants, making it difficult for

industry to plan commercial introduction of

new foods.

Intellectual property protection is lacking for

plants and animals in Europe and in less

developed countries.
114 ● Biotechnology in a Global Economy

Currently, small dedicated biotechnology firms

are isolating genes, developing new techniques, and

working with larger firms to commercialize their

technology. A number of small firms are also

acquiring small seed firms as future outlets for their

technology. Large seed firms and agrochemical

firms are building in-house expertise and exploring

technology through their relationships with small

firms.

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Chapter 7

The Chemical Industry

“Why, after so much promise . . . has the harvest in the chemical area been so thin? Three

basic, interrelated reasons give rise to the shortfall: 1) false expectations, which 2) in turn

tended to obscure the inherent limitations in the technology, and 3) led to underestimating

the difficulty of competing with the power of organic chemistry and entrenched chemical

manufacturing processes.

Richard L. Hinman

vice president of chemical products, Pfizer
CONTENTS

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

INDUSTRY CHARACTERISTICS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

BIOTECHNOLOGY APPLICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fermentation Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Biosensors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . .

Applications to Chemical Synthesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Applications to Bulk Chemical Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

GLOBAL RESTRUCTURING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CHAPTER PREFERENCES . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

119

119

120

120

121

122

122

122

124

124

Box

Box Page

7-A. L-tryptophan and Eosinophilia-Myalgia Syndrome . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120

Tables

Table Page

7-1. World’s Largest Chemical Producers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119

7-2. Sectors of the Chemical Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
Chapter 7

The Chemical Industry

INTRODUCTION

Biotechnology has a number of applications to

chemical production. Clearly, it will be used to

improve production of biochemical currently produced using fermentation, such as industrial enzymes. In addition, there are also limited applications to the production of fine chemicals currently

produced synthetically. Chemical firms are beginning to invest in these obvious applications.

In the long term, biotechnology maybe important

in the production of bulk chemicals and fuels. But

there is limited investment in this field due to the

relatively low price of oil and the recent restructuring of the chemical industry.

INDUSTRY CHARACTERISTICS

The chemical industry is one of the Nation’s

largest manufacturing industries, with 1990 shipments estimated at $297 billion (24). It employs over

1 million people, representing about 5 percent of

U.S. employment in manufacturing (4,25). Yet, the

largest chemical companies are European (see table

7-1).

The chemical industry produces a huge and ever

changing variety of products. More than 50,000

chemicals and formulations are currently produced

in the United States (24). Three-quarters of the

industry’s output is used within the chemical industry to produce more complex chemicals or is sold to

other manufacturing industries. Only a quarter of

output is sold to consumers, purchased by government, or entered into foreign trade (16).

The consumption of chemical products by industry gives these products a degree of anonymity

because they usually reach consumers in altered

forms or as parts of other goods. Basic, raw

materials, such as crude oil, are transformed through

a complex series of interlocking steps into intermediate chemicals (e.g., benzene and acetylene) and

eventually into complex final products (e.g., plastics

and fibers). Often, several possible routes of chemical synthesis, using different feedstocks, can be used

to produce a final product. Because chemical processors can substitute different feedstocks or intermediates for one another, they have considerable flexibility in adjusting to changes in price or availability of

raw materials. Finished products can also substitute

for one another. Different plastics, for example, can

be used as packaging materials. The ease of substitution among raw materials and finished products

results in intense competition within the industry.

Driven by competition, manufacturers constantly

explore new feedstocks and develop new products.

The resulting diversity of the industry has made its

definition difficult. The Department of Commerce

divides the chemical industry according to product

classes in its standard industrial classification (SIC)

system (see table 7-2).

Frequently, however, the chemical industry is

divided according to the intensity of research and

development (R&D). Some segments of the industry

produce standard, high-volume, low-value-added

bulk chemicals, such as ethylene or sulfuric acid.

Because the quality of these chemicals is high and

Table 7-l—World’s Largest Chemical Producers

BASF (Germany)

ICI (United Kingdom)

Hoechst (Germany)

DuPont (United States)

Bayer (Germany)

Dow Chemical (United States)

Shell Oil (United Kingdom, The Netherlands)

Enimont (Italy)

Exxon (United States)

Rhone-Poulenc (France)

Union Carbide (United States)

Degussa (Germany)

Ciba-Geigy (Switzerland)

Solvay (Belgium)

Asahi Chemical (Japan)

SOURCE: Chernica/ & Engirreering News, vol. 68, No. 45, 1990, p. 20.

Table 7-2-Sectors of the Chemical Industry

SIC Code Industry

SIC 28

SIC 281

SIC 282

SIC 283

SIC 284

SIC 285

SIC 286

SIC 287

Chemicals and allied products

Industrial inorganic chemicals

Plastic materials, synthetic rubber, manmade

fibers

Drugs

Soaps, cleaners, and toilet goods

Paints and allied products

Industrial organic chemicals

Agricultural chemicals

SIC 289 Miscellaneous chemical products

SOURCE: U.S. Department of Commerce, 1991.

–119–
120 . Biotechnology in a Global Economy

consistent, these manufacturers compete almost

entirely on price which, in turn, depends on the cost

of raw materials and the development of new process

technology. At the other extreme are higher value-

-added specialty chemicals, such as catalysts, food

additives, and industrial coatings. The highest value-

-added products include pharmaceuticals and pesticides (described in chs. 5 and 6). Manufacturers of

specialty chemicals compete by investing in R&D in

an effort to develop superior new products to meet

market needs.

BIOTECHNOLOGY

APPLICATIONS

Biotechnology will be used within the chemical

industry mainly in the production of chemicals

currently produced through fermentation, such as

industrial enzymes. There are more limited applications to the synthesis of complex chemicals and to

the production of bulk chemicals.

Most of these applications will be developed to

improve production processes used by major chemical companies. They will, probably, be introduced

without the fanfare that has accompanied other

biotechnology developments. The use of biotechnology in the chemical industry is publicized only when

a problem arises (see box 7-A).

Fermentation Products

Some chemicals are currently produced by growing micro-organisms in large fermentation vats and

isolating the products from the final fermentation

mixture. Biotechnology can be used to improve

yields of these chemicals.

Amino Acids

Amino acids are used mainly as food additives

and animal feed supplements, but they have other

uses as well. The sweetener Aspartame is made from

two amino acids: aspartic acid and phenylalanine.

The food additive monosodium glutamate (MSG) is

probably the best known amino acid. The world

market is estimated at $800 million and is growing

at 3 percent annually, although the U.S. market is

growing slowly or not at all (27).

The use of biochemistry and fermentation to

produce chemicals has historically received a great

deal of attention in Japan. Unlike Germany and the

United States, Japan is resource-poor, lacking large

deposits of coal and oil, the raw materials on which

Box 7-A—L-tryptophan and EosinophiliaMyalgia Syndrome

The amino acid L-tryptophan has been widely

available, mainly in health food stores, as a food

supplement. It was often recommended as a treatment for insomnia, depression, and premenstrual

syndrome. In 1989, ingestion of L-tryptophan was

linked to an increase in the number of cases of a rare

blood disorder, Eosinophilia-Myalgia Syndrome

(EMS). In November 1989, the Food and Drug

Administration (FDA) recalled all products containing L-trytophan as a major component, and in

March 1990, the FDA extended the recall to nearly

all products containing L-tryptophan. Over 1,500

cases of EMS and 27 deaths in the United States

were eventually traced to several lots of Ltryptophan produced by a single company, Japan’s

fourth largest chemical firm Showa Denko. Lots of

L-tryptophan associated with EMS contained small

amounts of a contaminant.

Like many other amino acids, L-tryptophan had

been manufactured by growing bacteria that produce L-tryptophan in large fermentation tanks and

purifying the compound from the broth. In late

1988, however, Showa Denko made two changes in

its L-tryptophan manufacturing process. It replaced

its original strain of bacteria with a strain genetically engineered to enable it to produce more

L-tryptophan; changes were also made in the

purification process.

In October 1990, the contaminant associated

with EMS was identified by Showa Denko scientists as an L-tryptophan dimer linked by ethylidene.

The company announced that the contaminantt was

not produced by the bacteria during the fermentation process but was formed during the L-tryptophan purification process.

SOURCES: Centers for Disease Control “Update: Eosinophilia-Myalgia Syndrome Associated With Ingestion of L-Tryptop~United States, through Aug.

24, 1990,” Morbidity an.diffortality Weekly Report,

vol. 38, 1990, pp. 587-589; E.A. Belongia et al,,

“AaJnvestigationof the Cause of the EosinophiliaMyalgia Syndrome Associated with Tryptophan

Use,” The New Englatkd.Journal of Medicine, VOL

323, 1990, pp. 357-365; A.N. Mayeno et al.,

‘Wharacterizstionof Peak ‘E,’ a Novel Amino Acid

Associated with Eosinophilia-Myalgia Syndrome,”

Science, vol. 250,1990, pp. 1707-1708..

the chemical industry in the rest of the world was

based; thus, Japanese firms have always had a

financial incentive to explore alternatives. When

Japan’s Ministry of International Trade and Industry
Chapter 7—The Chemical Industry ● 121

(MITI) targeted biotechnology in 1980, three research areas were specifically named: 1) recombinant DNA (rDNA), 2) mass cell culture, and 3)

bioreactors. Although in the United States, the word

“bioreactor” usually refers to large chambers used

for mass cell culture, MITI defines bioreactors, more

generally, as any fermentation vessel. The moreadvanced research in bioreactor development,

funded by MITI, emphasized the use of microorganisms or immobilized enzymes for the production of fine chemicals. Since 1981, six Japanese

chemical firms have participated in a governmentsponsored joint research effort in this area (15,28).

So far, this consortium has conducted research but

has not produced any commercially useful products

or processes (27).

Industrial Enzymes

Enzymes are biochemical catalysts. Of the approximately 18 commercially available in bulk, five

are most important. These are amylases, which

produce simple sugars from more complex ones, and

are used in the starch industry; bacterial proteases,

which digest protein, and are used in detergents;

papain, for dehazing beer and tenderizing meat;

glucose isomerase, for making high-fructose corn

syrup; and rennin and chymosin, both used in

cheesemaking (10). A variety of enzymes have been

developed for other industrial uses. For example,

one bacteria-derived enzyme, cellulase, which

breaks down cellulose, the molecular base of cotton,

has been used to soften new blue jeans as an

alternative to harsh stone-washing (12).

The major producers of commercial enzymes are

Novo-Nordisk (Denmark) which has about 40 percent of the market, and Gist Brocades (Belgium)

which has about 20 percent of the market, followed

by Rohm (Germany), Miles (United States), and

Hansens (The Netherlands) (10). The current world

market for industrial enzymes is over $650 million

per year (27).

Biotechnology can be used to improve the yield of

an enzyme through transfer of the gene encoding the

enzyme to a micro-organism capable of producing

the enzyme in larger amounts. Novo-Nordisk researchers, for example, identified a fungal, fatdigesting enzyme, lipase, that helps breakdown fats

typically found in human food. To produce it in

commercial amounts as a detergent additive, however, they transferred the gene from the fungus in

which it occurs naturally (in small amounts), to a

fungus that will produce lipase in higher quantities.

A detergent containing this enzyme was first introduced in Japan (26).

But biotechnology can contribute more to the

production of industrial enzymes than yield enhancement. The gene encoding the enzyme can be

modified to encode an enzyme with altered characteristics. Research is being conducted to develop

enzymes that are more stable in harsh solvents, are

more heat resistant, or that react with different

substrates. For example, one enzyme used in detergents, subtilisin, degrades proteins such as those

found in blood or food stains. Because the enzyme

is sensitive to bleach, a common ingredient in many

detergent formulations, variants have been generated using biotechnology, that are more resistant to

bleach than is the original enzyme (2).

Biosensors

Biosensors combine biotechnology with materials science and electronics to produce sophisticated

monitoring devices. This is an area of active research

throughout the world but especially in Japan (19).

A biosensor consists of two basic parts: one layer

that responds to the presence of a specific chemical

(e.g., a layer of enzymes that react with the chemical

to be measured or antibodies that bind specifically to

it) and a second layer that consists of a transducer

that translates this specific interaction into electric

signals proportional to the concentration of the

chemical in the sample. The electronic part of the

biosensor measures voltage, current, light, sound,

temperature, or mass.

Currently, most biosensors are used to detect

biological materials. Much research is directed

toward the development of biosensors for diabetics,

that could monitor glucose levels and control an

insulin pump. But biosensors have many other

potential applications in medicine and industry.

Eventually, biosensors will be developed to detect

cholesterol, narcotics, or substances associated with

early disease diagnosis. In industry, biosensors will

monitor and control industrial effluents, fermentation processes, and food quality. Biosensors will

also be developed to monitor the presence of toxic

substances in water supplies and organic solvents in

air (1 1).

Most existing biosensors have drawbacks. They

are bulky, need frequent calibration, and have a short
122 ● Biotechnology in a Global Economy

useful lifespan. R&D is aimed at improvements in

these areas, to eventually develop disposable biosensors and, for some applications, sterilizable biosensors.

Applications to Chemical Synthesis

Some chemicals are manufactured in a series of

complex chemical reactions. Under certain conditions it might be practical to replace one or more of

these reactions (those that are expensive or particularly difficult to control) with reactions controlled by

enzymes, which are biochemical catalysts. Reactions controlled by enzymes have some advantages,

e.g., they work at mild temperatures, they can often

be used to perform more limited reactions, they can

be used to produce chiral compounds, they are

biodegradable, they require no organic solvents, and

they are very reaction-specific. But these situations

are limited. Enzymes, altered using biotechnology

or not, are unlikely to make a big impact in this area

in the new future (13).

Applications to Bulk Chemical Production

Although it is technically feasible to produce

many high-volume, low-value-added chemicals

through fermentation, these methods are not economically competitive with established petrochemical processes. This area is also unlikely to receive

much R&D investment, as the major multinational

Photo credit: U.S. Department of Energy

Scientist mixes a chemical sample.

firms have been decreasing their interest in bulk

chemical production (17,20).

GLOBAL RESTRUCTURING

In the very long run, biotechnology may have a

major impact in shifting the production of fuel and

bulk chemicals from reliance on nonrenewable

resources, such as oil, to renewable resources, such

as biomass (14). There does not, however, appear to

be much industrial interest in these applications, in

part, because the international price of oil has

remained too low to encourage investment in

alternatives and, in part, because the chemical

industry throughout the world has restructured

during the last 10 years. As major oil companies

have increased their bulk chemical production,

chemical firms have decreased their share of the bulk

chemical market and increased their interests in the

production of specialty chemicals, pharmaceuticals,

and agricultural products.

The industry’s restructuring has been a strategic

response to worldwide pressures, stemming from

fluctuating oil prices, recessions, and increasing

competition. Historically, the industry’s annual

industrial growth rate averaged two to three times

the rise in Gross National Product (GNP). During the

1970s the industry began to decline worldwide.

Industrial growth fell and became even with the

growth in GNP (7). Chemical production decreased

for a number of reasons.

●

●

●

Most importantly, the industry had reached

technological maturity. Innovation in products

and manufacturing processes had declined. In

addition, substitution of synthetics for natural

materials had leveled off; for example, by 1970,

synthetic detergents had taken 85 percent of the

market for domestic and industrial cleansers

(3).

Manufacturers faced erratic fluctuations in the

price of oil, which is important, both as a source

of energy and as a basic feedstock, for the

production of bulk chemicals. Oil supplied by

the Organization of Petroleum Exporting

Countries (OPEC) constituted about 80 percent

of the raw materials used by the U.S. chemical

industry (7).

Chemical companies were also facing new

costs, in the form of environmental protection

regulations, particularly in the United States.
Chapter 7—The Chemical Industry ● 123

●

✎

●

New competition came from multinational oil

companies diversifying into the production of

bulk chemicals. These firms built petrochemical plants in Indonesia, Mexico, and the Middle

East producing chemicals from natural gas and

waste gases derived from oil processing and

refining. Chemical companies in major industrial nations often had no sources of raw

materials as inexpensive as those in oil-rich

nations (1,3).

The chemical industry was particularly hurt by

the worldwide recession in the early 1980s.

Demand for petrochemicals slumped, along

with the profits of the chemical industry.

Chemical companies reduced operations in bulk

chemicals, generally retaining production of chemicals in which they were market leader or in which

they had a price advantage based on proprietary

technology (7). Other operations were sold. Between

1981 and 1986, Dow sold more than $1.8 billion in

assets and wrote-off most of its oil and gas business.

Bulk, low-value chemicals once provided 61 percent

of Monsanto’s profits; the proportion shrank to 35

percent in a 4-year period. American Cyanamid once

consisted of four roughly equal segments: medical,

agricultural, chemical, and consumer products. By

1987, medical and agricultural products made up

about 75 to 80 percent of its business (9). American

fins, which had dominated bulk chemical production in Europe during the 1950s and 1960s, gradually

withdrew, selling their assets to local firms (3).

During the same period, chemical firms expanded

into the two sectors, pharmaceuticals and specialty

chemicals, which continued to be quite profitable

and recession-resistant. Most of this expansion came

through acquisition. Major producers of agricultural

chemicals have diversified into seed production, and

chemical firms have also expanded their interests in

advanced materials and instrumentation. Restructuring has been successful, in that industry profits

recovered from the slump of the early 1980s. More

recently, however, recession and rising oil prices

once again have hurt the industry.

There are many examples of chemical industry

restructuring and resulting investment in researchintensive fields. Since 1985, Monsanto, the St.

Louis-based chemical firm, has shut down or sold

more than 20 businesses that were largely producers

of high-volume, low-value-added chemicals. They

have, simultaneously, acquired firms producing

292-870 - 91 - 5 : QL 3

Photo credit: DNAP

FreshWorld, a joint venture between DNA Plant

Technology and DuPont, has been marketing VegiSnax

brand carrot and celery sticks.

specialty products, including pharmaceuticals, food

additives, and detergent chemicals (22). Similarly,

Dow’s managers decided in 1978 to cut back on bulk

chemicals and extend the fro’s interests in specialty

chemicals and related high-value areas. Dow acquired Merrill, a U.S. pharmaceutical firm, in 1981,

and in 1984 it acquired an 84-percent interest in a

small Japanese pharmaceutical firm, Funai Pharmaceuticals Co., Ltd. Dow has also expanded its

interests in household cleaning products, polymers,

and advanced ceramics (3). DuPont recently joined

with Merck to form a new pharmaceutical firm. It

has also joined with DNA Plant Technology in its

FreshWorld venture, selling branded vegetable produce (3,8). Rohm & Haas has invested in agricultural

biotechnology firms in the United States and Belgium.

Restructuring in Europe and Japan had similar

results. The major European chemical firms have

redistributed their assets and, like American firms,

have invested heavily in R&D-intensive products

(8). For example, Hoechst, a large German chemical

manufacturer, purchased Celanese in 1986, acquiring its advanced facilities for the production of

fibers, chemicals, and plastics. Hoechst also placed

a major emphasis on the production of pharmaceuticals, which represent 17 percent of its world sales

(3). Hoechst was also one of the earliest big investors

in biotechnology, providing $70 million to Massachusetts General Hospital in 1980 in exchange for

the right to license research results and to send its

own scientists for training. The British firm ICI has

developed its presence in agricultural products
124 ● Biotechnology in a Global Economy

through acquisition of seed companies and by

expanding its existing research in plant biology (6).

In addition to acquiring pharmaceutical and

agricultural firms, some American and European

chemical companies have invested heavily in internal research in the life sciences. Among these are:

Monsanto, DuPont, Lubrizol, Royal Dutch-Shell,

ICI, and the French companies, Elf-Aquitaine and

Rhone-Poulenc (18). The petrochemical company,

Lubrizol, acquired the plant biotechnology firm,

Agrigenetics, in 1988.

Although outright acquisitions of biotechnology

firms are rare, other relationships between chemical

companies and small biotechnology firms are quite

common. DuPont, for example, has R&D, marketing, and licensing agreements with several small

firms, including American Bionetics, Applied Biotechnology, BioTechnology General Corp., Cellular Products, Cistron, Genofit SA, Molecular Biosystems, and Synergen. American Cyanamid has

agreements with Biotechnology General Corp.,

BioProbe, Cytogen Corp., and Molecular Genetics,

Inc. European and Japanese firms have also contracted with or invested in many small U.S. firms

specializing in biotechnology, but they have not

fostered the development of similar small firms in

Europe or Japan (21,23). A recent study has shown

that chemical companies provided 63 percent of the

research funds spent by the top 15 plant biotechnology firms in 1989. The leading investors were

Monsanto (U.S.), Enimont (Italy), DuPont (U.S.),

Sandoz (Switzerland), and ICI (U.K.) (5).

Global restructuring of the chemical industry in

the last 10 years has resulted in investment in

high-value-added products, such as pharmaceuticals, agrochemicals, and other specialty chemicals.

As firms decrease investments in the production of

low-value-added chemicals, it becomes less likely

that research in biotechnology applications to biomass-based production will be funded by the private

sector.

SUMMARY

Biotechnology has a limited role in chemical

production. Production of some chemicals now

produced by fermentation, such as amino acids,

could be affected through improvements in microorganisms or production processes. Similarly, biotechnology can be used to improve yields of

industrial and food enzymes isolated from microorganisms. In addition, biotechnology could be used

to produce enzymes with altered characteristics.

Biotechnology can also be applied to the development of enzymes that might be used to replace

expensive or difficult steps in chemical synthesis. In

all of these cases, however, the impact of biotechnology will be incremental and unheralded, resulting in

improvements in productivity. Biotechnology is

unlikely to be applied to the production of fuels or

bulk chemicals in the foreseeable future, because it

is not financially or technically competitive with

current chemical methods of production (20).

The chemical industry’s greatest impact on the

use of biotechnology, however, is likely to have little

to do with industrial chemical production per se.

Indeed, its greatest impact may be the result of the

industry’s expanding investment in pharmaceuticals

and agriculture. This investment has taken the form

of increased in-house research and links with smaller

research-intensive firms.

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1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

Bennett, M.J., and Klein, C.H., “Chemicals: An

Jndustry Sheds Its Smokestack Image,” Technology

Review, vol. 90, No. 5, July 1987, pp. 3745.

Bluestone, M., Brand, R., and Kapstein, J., “Designer Proteins: The Next Boom in Biotech,” Bwiness Week, Apr. 13, 1987, pp. 94-95.

Bozdogan, K., “The Transformation of the U.S.

Chemicals Industry,” The Working Papers of the

MIT Commission on Industrial Productivity, 2 VOIS.

(Cambridge: MIT Press, 1989).

Chemical & Engineering News, “Facts and Figures

for the Chemical Industry,” Chemical & Engineering News, vol. 68, No. 25, June 1990, pp. 34-83.

Chemical Weelq “Chemical Firms Feed Plant Biotech,” Chemical Week, vol. 147, No. 21, November

1990, p. 93.

Dart, E. C., “Exploitation of Biotechnology in a

Large Company,“ Phil. Trans. R. Soc. Lend. B, vol.

324, 1989, pp. 599-611.

DeYoung, H.G., “Chemical Makers Get in Shape for

the ‘90s,” High Technology, vol. 7, No. 5,1987, pp.

28-32.

The Economist, “European Chemicals: Shake, HSqX-Pop,” The Economist, vol. 308, No. 7559,

July 1988, pp. 68-69.

Gibsou W.D., and Brockinton, L.C., “American

cy~“ : Moving the culture in a Different Direction,” Chem”cuZ Week, vol. 141, No. 12, 1987, pp.

40+.

Greenshields,R. (ed.),Resources andApplications of

Biotechnology: The New Wme (New York NY:

Stockton %SS, 1988).
Chapter 7—The Chemical Industry ● 125

11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

21.

Krull, U.J., “Biosensors for chemical Analysis,”

Chemtech, vol. 20, 1990, pp. 372-377.

Lubove, S., “Enzyme-eaten Jeans,” Forbes, vol.

146, No. 10, oct. 29, 1990, pp. 140-141.

Marrs, B., DuPont Experimental Station, personal

communication, May 19900

Newell, N., Synertech Group, Inc., personal communication, December 1990.

Nikkei Sangyo Shimbun, “BioreactorDevelopments

Examined,” Nikkei Sangyo Shimbun, May 2, 1989.

Planting, M.A., “Input-Output Accounts of the U.S.

Economy, 1981,” Survey of Current Business, vol.

67, No. 1,1987, pp. 42-58.

Quisenberry, R., director, central research and development department, DuPont Experimental Station,

personal communication, February 1990.

Sant’Ana, A., and Sasson, A., Production et Commercialisation des Semences: Le Nouveau Paysage

Industrial et les Nouvelles Stratgies d’Entreprises

(Paris: I’Association Pour la Diffusion de l’lnformation Technologique, November 1987).

Science Watch, “Four Fields Where Japan I_eads and

U.S. Lags,” Science Watch, vol. 1, No. 2, 1990, pp.

1-2.

Shamel, R.E., and Chow, J.J., “Biotech’s Potential

Impact on the Chemical Industry,” Bio/Techno20gy,

vol. 6, 1988, pp. 681-682.

Sharp, M., “David, Goliath and the Biotechnology

Business,” The OECD Observer, vol. 164,1990, pp.

22-24.

22.

23.

24.

25.

26.

27.

28.

Storck, W.J., “Streamlined, Diversified Monsanto

Becomes More Recession Resistant,” Chemical &

Engineering News, vol. 68, No. 2, Jan. 8, 1990, pp.

16-17.

U.S. Congress, Office of Technology Assessment,

New Developments in Biotechnology: U.S. Investment in Biotechnology, OTA-BA-360 (Springfield,

VA: National Technical Information Service, July

1988).

U.S. Department of Commerce, U.S. Industrial

OutZook 1991 (Washington, DC: U.S. Government

Printing Office, 1991).

U.S. Department of Commerce, Bureau of the

Census, 1985 Annual Survey ofillanufactures, Statistics for Industry Groups and Industries (Including

Supplemental Lubor, Fuel, and Electric Energy

Costs), M85(AS)-1 (Washington, DC: U.S. Government Printing Office, 1987).

Watts, S., “Engineered Enzyme Washes Whiter than

White,” New Scientist vol. 123, No. 1671, July 1,

1989, p. 45.

Woln~ B., Wolnak & Associates, personal communication, December 1990.

Yoshikawa, A., “The Japanese Challenge in Biotechnology: Industrial Policy,” BRIE Working Paper

#29, Berkeley Round Table on the International

Economy, University of California, Berkeley, September 1987.
Chapter 8

Environmental Applications

“If it wasn’t for the high cost of the alternative, this (bioremediation) wouldn’t be worth considering

at all. ’

Perry L. McCarty

Stanford University, 1987
CONTENTS

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ENVIRONMENTAL USES OF BIOTECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Pollution Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Mining . .

Microbial

CASE

The

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

Enhanced Oil Recovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

STUDY: BIOREMEDIATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

U.S. Biotreatment Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

International Biotreatment Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Advantages of Bioremediation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Barriers to Commercialization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Prospects for Genetically Engineered Microbes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SUMMARY

CHAPTER 8

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

REFERENCES ., . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

129

129

129

129

131

131

131

132

135

136

137

139

140

140

Boxes

Box Page

8-A. The Exxon Valdez Bioremediation Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134

8-B. International R&D, Improved Waste Treatment Processes . . . . . . . . . . . . . . . . . . . . . 135

8-C. Federal Statutes Relevant to Bioremediation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138

Figure

Figure Page

8-1. Laboratory Selection and Enhancement of Micro-organisms . . . . . . . . . . . . . . . . . . . 133

Tables

Table Page

8-1. Challenges for Pollution Control and Toxic Waste Treatment . . . . . . . . . . . . . . . . . 129

8-2. Some Potential Environmental Applications of Genetically Engineered

Organisms in Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130

8-3. Challenges for Microbiological Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

8-4. Challenges for Microbial Enhanced Oil Recovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
Chapter 8

Environmental Applications

INTRODUCTION

Micro-organisms have several potential uses in

the environment, for purposes as diverse as agriculture, pollution control, mining, and oil recovery.

With the arrival of biotechnology, the potential of

improving micro-organisms for selected uses has

received increased attention and speculation. However, research and product development in the

environmental sectors are minuscule compared

to more commercially lucrative sectors influenced by biotechnology, and international activity to date is limited. This chapter summarizes some

potential environmental uses of biotechnology and

uses a case study approach to analyze bioremediation efforts to commercialize biotechnology for

hazardous waste management.

ENVIRONMENTAL USES OF

BIOTECHNOLOGY

Biotechnology has several potential applications,

including pollution control, agriculture, mining, and

microbial enhanced oil recovery (MEOR). For all

four areas, commercial hurdles exist: technical,

research funding and priorities, scale-up, regulatory

approvals, and economics.

Pollution Control

Biotechnology has several applications for pollution control, including solid and liquid waste treatment, hazardous waste management, slime control

(e.g., manufacture of paper), and grease decomposition (e.g., meats and certain foods, and waste water

collection) (13).

Current commercial applications of biotechnology rely on conventional techniques of genetic

manipulation and microbiology; the use of recombinant DNA (rDNA) to develop microbes with special

capabilities for waste degradation has been limited.

As of 1988, 65 companies were involved in some

aspect of biotechnology for waste management (15).

None is currently using or even testing genetically

engineered micro-organisms in the environment,

although research is going on in the lab (see table

8-l).

The Exxon Valdez oil spill in Prince William

Sound in 1989 focused public attention on the use of

Table 8-l-Challenges for Pollution Control

and Toxic Waste Treatment

. The isolation and characterization of enzymes to degrade low

molecular weight organic compounds.

. Better characterization of metallothioneins (proteins that have

a high affinity for heavy metals) from various species.

. The identification of polysaccharides to serve as bioflocculants

(materials that thicken sludges for separation treatment).

● The development of enzymes for sludge dewatering.

. The development of microbial strains or enzymes that degrade

toxic compounds.

. The development of improved polysaccharide hydrolyses to

degrade slimes.

. To decrease regulatory uncertainty.

SOURCE: Office of Technology Assessment, 1991.

bioremediation for oil-spill cleanups. Of the various environmental applications possible through

biotechnology, oil-spill cleanup and hazardous

waste treatment constitute the only major commercial activities to date.

Agriculture

Potential environmental applications of genetically engineered organisms in agriculture are varied

(see table 8-2). Genes have been introduced into

Photo credit: Environmental Protection Agency

Prince William Sound, Alaska site of the extensive

bioremediation experiments carried out by the

Environmental Protection Agency, Exxon,

and the State of Alaska.

–129-
130 ● Biotechnology in a Global Economy

Table 8-2—Some Potential Environmental Applications of Genetically Engineered

Organisms in Agriculture

Micro-organisms

Bacteria as pesticides:

“Ice-minus” bacteria to reduce frost damage to agricultural crops.

Bacteria carrying Bacillus thuringiensis toxin to reduce loss of crops to dozens of insects.

Mycorrhizal fungi to increase plant growth rates by improving efficiency of root uptake of nutrients.

Nitrogen-fixing bacteria to increase nitrogen available to plants and decrease the need for fertilizers.

Viruses as pesticides:

Insect viruses with narrowed host specificity or increased virulence for use against specific

agricultural insect pests, including cabbage looper, pine beauty moth, cutworms, and other

pests.

Vaccines against animal diseases:

Swine pseudorabies

Swine rotavirus

Vesicular stomatitis (cattle)

Foot and mouth disease (cattle)

Bovine rotavirus

Rabies

Sheep foot rot

Infectious bronchitis virus (chickens)

Avian erythroblastosis

Sindbis virus (sheep, cattle, chickens)

Plants

Herbicide resistance or tolerance to:

Glyphostae

Atrazine

Imidazolinone

Bromoxynil

Phosphinotricin

Disease resistance to:

Crown gall disease (tobacco)

Tobacco mosaic virus

Pest resistance:

BT-toxin protected crops, including tobacco (principally as research tool) and tomato.

Seeds with enhanced antifeedant content to reduce losses to insects while in storage.

Enhanced tolerance to environmental factors, including:

Salt

Drought

Temperature

Heavy metals

Enhanced marine algae:

Algae enhanced to increase production of such compounds as B-carotene and agar or to

enhance ability to sequester heavy metals (e.g., gold and cobalt) from seawater.

Forestry;

Trees engineered to be resistant to disease or herbicides, to grow faster, or to be more tolerant

to environmental stresses.

Animals

Livestock and poultry:

Livestock species engineered to enhance weight gain or growth rates, reproductive performance,

disease resistance, or coat characteristics.

Livestock animals engineered to function as producers for pharmaceutical drugs.

Fish:

Triploid salmon produced by heat shock for use as game fish in lakes and streams.

Fish with enhanced growth rates, cold tolerance, or disease resistance for use in aquiculture.

Triploid grass carp for use as aquatic weed control agents.

SOURCE: Office of Technology Assessment, 1991.
Chapter 8-Environmental Applications . 131

several plant species to confer resistance or tolerance

to certain herbicides. Plants have also been better

engineered to resist disease and to confer pest

resistance. Most deoxyribonucleic acid (DNA) work

on animals focuses on altering livestock, poultry, or

fish to improve reproductive performance, weight

gain, or disease resistance. Many promising environmental applications of engineered micro-organisms

are also being developed.

Planned introductions of genetically engineered

organisms into the environment, often called deliberate release, was the focus of an earlier Office of

Technology Assessment (OTA) report (14). Commercialization in agriculture is discussed elsewhere

in this report (see ch. 6).

Mining

Natural micro-organisms have been used for

mineral leaching and metal concentration processes.

No Federal funding directly supports microbiological mining, however, and commercial activity is

sparse (see table 8-3).

Limited international research in the field of

biohydrometallurgy is proceeding. Canada, South

Africa, the United Kingdom (U.K.), and the United

States have ongoing programs in biohydrometallurgy. The Canadian Center for Mineral and

Energy Technology is the leading governmental

research agency in this area. One area of focus for the

Canadians is uranium bioleaching; one mine is now

bioleaching 90,000 pounds of uranium per month.

The biological mitigation of acid mine drainage is

another Canadian project (7). Research is slow,

however, because of economic aspects in the mineral market. As long as metals are plentiful and

easily mined, no economic advantage is realized

by microbiological mining.

Microbial Enhanced Oil Recovery

It has been estimated that more than 300 billion

barrels of U.S. oil cannot be recovered by conventional technology but may be accessible through

enhanced oil production. This volume is 2.5 times as

large as the amount of oil produced by the United

States since 1983. The actual enhanced oil recovery

production has been low, no greater than 5 percent

of total U.S. production, even though a variety of

Department of Energy (DOE) incentives have been

available. Other countries, such as Canada, have

projected that by the year 2010, one-third of its oil

Table 8-3-Challenges for Microbiological Mining

. The development of micro-organisms that could Ieach valuable

metals, such as thorium, silver, mercury, gold, platinum, and

cadmium.

. A better understanding of the interactions between the microorganisms and the mineral substances.

● The development of DNA transfer technologies for use at low

pH.

SOURCE: Office of Technology Assessment, 1991.

recovery will utilize enhanced techniques. In recent

years, advanced oil-drilling techniques have enhanced overall yield, and it is expected that these

techniques, not micro-organisms, may satisfy oil

companies’ needs for greater yield in the short term.

Although most of the major oil companies have

in-house staff investigating and perfecting MEOR,

the methodology’s low cost may appeal more to

small-field operators, who have already pumped and

sold the easy-to-get component of their field (8).

MEOR is not predictable; just like the use of

micro-organisms for hazardous waste remediation,

the use of micro-organisms for oil recovery is

site-specific. Individual oil deposits have unique

characteristics that affect the ability of microorganisms to mobilize and displace oil. An understanding of the microbial ecology of petroleum

reservoirs is a prerequisite to the development of any

MEOR process, whether microbial or not, since an

inappropriate design may accelerate the detrimental

activities of micro-organisms (e.g., corrosion, reservoir souring, and microbial degradation of crude oil)

(l). Basic environmental biotechnology research

underway for contaminated soil and groundwater

will provide much needed information to those

working on MEOR (see table 8-4).

CASE STUDY: BIOREMEDIATION

Cost estimates for the cleanup of contaminated

soils and groundwater and the routine disposal of

industrial and municipal wastes, range up to $23

billion for the United States and $60 billion for

Western European countries (3,6). The price tag for

construction and maintenance of treatment systems

used for continually produced waste is unknown. In

the search for a cleaner environment, claims have

been made that biotechnology holds great promise

for hazardous waste reduction and cleanup as well as

permanent restoration of air, water, and soil.
132 ● Biotechnology in a Global Economy

Table 8-4-Challenges for Microbial Enhanced

Oil Recovery

. Better biochemical and physiological understanding of microorganisms already present in oil reservoirs.

. Development of micro-organisms that degrade only the less

useful components of oil.

● Screening of micro-organisms for production of surfactants and

viscosity enhancers and decreases.

SOURCE: Office of Technology Assessment, 1991.

Bioremediation is a term that refers to efforts to

use biotechnology to cleanup waste. These efforts

involve the engineering of systems that use biological processes to degrade, detoxify, or accumulate

contaminants. These systems can use naturally

occurring or laboratory-altered microbes or both.

Current applications rely on conventional techniques of genetic manipulation and microbiology;

the use of rDNA to develop microbes with specific

capabilities for waste degradation has been limited

(see figure 8-l).

Bioremediation can be used at a variety of sites

and in a variety of applications, including wastestream cleanup, wood treatment-site cleanup, degradation of polychlorinated biphenyls (PCBs),

groundwater treatment, and cleanup of chemical

manufacturing wastes. The rationale for using

micro-organisms to degrade pollutants comes from

experience with nature. Micro-organisms have a

variety of capabilities that can be exploited for waste

management and disposal. Many organic compounds of biological origin are readily degraded.

Industrial chemicals similar in structure to natural

compounds are also frequently biodegraded (15).

The recent use of naturally occurring microbes in

oil-spill cleanup--off the coasts of Alaska and

Texas--has focused public attention on commercial

uses of bioremediation. This attention is enhanced

by frequent claims that biotechnology can be used to

mitigate environmental pollution (see box 8-A).

This section describes the U.S. and international

biotreatment industries, the advantages and barriers

facing the commercialization of bioremediation, and

the prospects for using genetically engineered organisms for hazardous waste cleanup.

The U.S. Biotreatment Industry

The frost U.S. company to produce microbes for

waste treatment opened in the early 1950s. Over the

next 20 years, the U.S. biotreatment market expanded to a handful of companies specializing in the

production of microbial “cocktails” for municipal

sewage treatment plants and odor control. In 1970,

the establishment of the Environmental Protection

Agency (EPA) and the creation of Federal and State

environmental statutes governing the treatment of

wastes guaranteed a market for the environmental

services industry, to which bioremediation firms

belong. Today, the U.S. biotreatment industry

includes 134 firms and has evolved into four

segments: bioremediation services, multidisciplinary environmental services, products, and waste

generators.

Bioremediation Services

Firms specializing in biotreatment services make

up the majority of the U.S. market in this area. These

firms are small and are generally founded by a

scientist or engineer convinced that biology-based

waste management can be commercially viable.

Some firms began in university laboratories, while

others spun-off from larger companies. Most of

these specialized companies have relied on laboratory analytical services or equipment sales to maintain income as they develop their bioremediation

services component. Only a few have had venture

capital support. These small companies serve as a

pool of expertise for larger, full-service engineering

and consulting firms. Contract and subcontracting

activities between companies are common.

Diagnosis and treatment services are provided by

bioremediation firms. Diagnosis of a waste problem

can include analyzing the site or waste treatment

facility for indigenous microbial activity, adequate

nutrients, suitable moisture, and appropriate oxygen.

Treatment may involve enhancement of indigenous

micro-organisms by nutrient addition, batching preconditioned organisms found at the site, or using

selected off-the-shelf microbes.

Multidisciplinary Environmental Services

In 1988, few multidisciplinary environmental

companies offered bioremediation expertise. Bioremediation was typically used by firms competing in

the wastewater treatment sector but not by firms

focusing on hazardous waste markets. Growing

optimism that bioremediation can be used to tackle

hazardous waste problems has led to increased

involvement by multidisciplinary firms incorporating bioremediation expertise. Growth in this

sector has generally occurred in one of three ways:
Chapter 8--Environmental Applications ● 133

Figure 8-l—Laboratory Selection and Enhancement of Micro-organisms

h I I

Collection

from nature

*

(Mixed

culture)

Pure

cultures Drying process

UlllLong-term

Reconstitution

storage

vacuum

vials

o utrients

Isolation

*

Growth and

selection

Isolation

(Pure cultures)

“&./Nu’rients s

(Pure cultures) Growth and

Isolated adapted mutants selection

*

Scale up

Shake flasks

l==?

Dry

blend

store

Micro-organisms indigenous to various environmental sites can be isolated and screened for degradative capabilities. This figure shows

how naturally occurring organisms can be selected in the laboratory and, if desired, subjected to mutagenizing agents such as radiation.

This imprecise method can sometimes produce new strains of organisms with enhanced capabilities.

SOURCE: F’Ol@XAC ckxp.

1.

2.

3.

consolidation of large environmental firms ects and to handle subcontracts with bioremewith smaller biotreatment firms (e.g., the- diation specialty firms.

merger of Theme Environmental with Biota); Products

creation of biotreatment groups in larger environmental service firms; or

hiring of a limited number of bioremediation

professionals to recommend appropriate projApproximately one dozen companies manufacture organisms that are sold as biological treatment

products. Most of these products consist of preselected mixtures of naturally occurring micro-
134 . Biotechnology in a Global Economy

Box 8-A—The Exxon Valdez Bioremediation Project

On March 23,1989, the Exxon Valdez tanker, freshly loaded with 1.2 million barrels of crude oil, left Alaska’s

south coast headed for California Twenty-five miles out, the ship ran into a reef at. Bligh Island in Prince William

Sound. The accident resulted in the largest oil spill in U.S. history and the first major spill to foul the waters off

Alaska’s coast. Patches of oil and water-in-oil emulsion spread over 3,000 square miles and onto unestimated 1,000

miles of shoreline.

Environmental factors have been substantial obstacles in the Alaska cleanup. Alaskan waters are extremely

cold and there had been little experience with oil spills in subarctic conditions. Only a half-dozen or so tanker spills

had been studied, and most occurred in temperate waters, The surface water temperature in Prince William Sound

is approximately 3 degree Celsius in mid-April. At that temperature, degradation by micro-organisms, which

ultimately removes much spilled oil, takes twice as long as it does at 10 degree Celsius.

The Valdez spill prompted a monumental cleanup effort and launched significant scientific research efforts.

In addition the traditional methods (i.e., containment, skimming, and burning) of oil cleanup, the EPA Office of

Research and Development initiated a bioremediation study to determine the feasibility of using nutrients to

enhance micro-organisms’ degradation of oil on the shorelines of Prince William Sound A major portion of this

venture was funded by the Exxon Corp. In 1989, Exxon contributed approximately $3 million, and EPA contributed

approximately $1.6 million.

The major portion of the Alaskan oil spill bioremediation project involved a field test to determine if adding

fertilizer to contaminated beaches would effectively stimulate native bacteria to breakdown the oil. The EPA

selected two sites—Passage Cove and Snug Harbor-based on type of shoreline, area, size, and uniformity of oil

conlamination. It was determined that two types of fertilizer would be needed to release nitrogen and phosphorous

nutrients over an extended period of time. One type was a solid, slow-releasing briquette fertilizer that released

nutrients slowly from point sources distributed over the beach through tidal action. The second type, a liquid

oleophilic fertilizer, dissolved into the oil covering rock and gravel surfaces.

Before the fertilizer was applied, each beach was hosed down to disperse the oil across the beach. Researchers

packed the fertilizer briquettes into biodegradable sacks and tied the sacks to pipes anchored in the test site beach,

Over the course of a month, wave and tidal action flushed the slowly dissolving fertilizer back-and-forth across the

shoreline.

Both EPA and Exxon officials acknowledged that the use of fertilizers could pose a risk to some sea life. To

determine the potential toxicity of the fertilizers to native organisms, a wide range of species were tested. The results

demonstrated that certain components of the oleophilic fertilizer were mildly toxic when first applied to the most

sensitive marine species. Tidal action, however, quickly diluted these toxic components to nontoxic levels.

Approximately two weeks after the fertilizer was applied to the test plots in Snug Harbor, scientists observed

reductions in the amount of oil on rock surfaces. All other plots, however, appeared as oiled as they had been at the

beginning of the field study. Toward the end of the summer season, the entire test area became steadily cleaner. In

contrast, an untreated area of Snug Harbor remained considerably contaminated.

By the end of September 1989, Exxon and EPA had treated 70 million miles of shoreline in the largest

bioremediation project ever conducted. The initial findings from the study indicate that using nutrients to enhance

microbial degradation are effective and environmentally safe.

Somm: mm of ‘Mchnology Assessmell~ 1991.

organisms advertised as additives to improve per- reliable data exist regarding the volume of sales of

formance. Product uses include: decreasing pipes,

degrading food processing facility wastes, odor

control, and remediating oil spills.

Microbial cocktails, the commercial name for

combinations of microbes packaged for sale for

specific uses, are available from companies in the

United States, Japan, and Europe. Because information about sales of such products is proprietary, no

these products.

Waste Generators

Significant fourth players are generators of hazardous wastes. In addition to employing biological

treatment staffs, some chemical and energy companies are supporting in-house research to perfect

biodegradation of their specific production facilities’ wastes. Such research may result in biology-
Chapter 8---Environmental Applications ● 135

based treatment methods and products that can be

marketed directly or licensed to bioremediation

vendors.

International Biotreatment Industry

Despite the limited size of the bioremediation

industry in the United States, U.S. commercial

activity far exceeds that of other nations. Four

factors account for the United States’ lead in this

area:

1.

2.

3.

4.

The size and scope of U.S. environmental law

exceeds that of other nations.

The majority of research has been conducted in

the United States.

The size of the biotreatment industrial sector in

the United States, albeit small, exceeds that of

other nations.

Public acceptance of bioremediation in the

United States has been spurred by recent,

well-publicized uses of bioremediation for oil

spill cleanup.

Research and Industrial Development

The existence of environmental laws and regulations are prerequisites to the formation of a waste

treatment market. Although several nations have

enacted environmental regulatory programs, enforcement of regulations and funding of hazardous

waste infrastructures are often not sufficient. A

barrier to the international use of bioremediation is

the view, held by many, that pollution control costs

industry money and makes industry, in its own view,

less competitive in world markets. To some, investment in and operation of effluent treatment facilities

is money down the drain (5).

Several Organization of Economic Co-operation

and Development (OECD) countries have been

pursuing biotechnology research and development (R&D) in improved waste treatment, notably The Netherlands, France, Japan, and Germany (see box 8-B). Still, research efforts are

generally minimal in many countries, and the

diffusion of research results into commercial

applications is negligible when compared to other

sectors affected by biotechnology. This is due to

lax regulations that encourage the payment of fines

by industry for waste emission rather than the use of

systems to reduce or cleanup pollution (1 1). In the

United States, by comparison, several Federal agencies support biological research related to waste

Box 84?—international R&D, Improved

Waste Treatment Processes

The Netherlands. Companies, such as GistBriocades use and are attempting to market advanced anaerobic waste water cleanup processes.

The Dutch Government supports research in soil

biodegradation and the development of systems to

convert farm waste in small fermenters into marketable fertilizers for export to developing countries.

United Kingdom. Research and Development

efforts are being undertaken by several small

companies and regional water authorities. The use

of waste treatment processes by industry is minimal, due to a less stringent regulatory climate and

weak incentives for efficient industrial cleanup.

Japan. A 5-year, V5 billion project on waste

water treatment through biotechnological processes

was launched in the 1980s by the Ministry of

Construction.

Germany. The Ministry for Research and Technology plans to introduce a program supporting risk

assessment research.

SOURCE: organization for Economic Co-operation and Dovolopment, Biotechnology and the Changing Role of

Government, 1988.

management. In 1987, eight Federal agencies spent

$11 million on such research (15).

In order to provide equal access to waste treatment

for all industrial sectors, The Netherlands, Belgium,

Denmark, and Germany have centralized waste

treatment facilities. Those handling recurrent, solid

hazardous waste do not appear to utilize biological

treatment at this time; however, these countries have

well-maintained wastewater treatment systems that

rely on micro-organisms. The primary bioremediation focus in these countries is the use of biostimulation to encourage indigenous organisms to degrade

wastes in contaminated soils and groundwater. In

contrast to publicly run treatment and disposal

facilities found in northern Europe, Italy prefers

private-sector waste management and cleanup services. The Italian tourist industry has created a market

for environmental restoration. Work is underway at

a popular beach to biologically disperse algae.

France has diversified privately run waste management and remediation services, and French firms

dominate the private-sector market.

Although stronger enforcement could generate

more demand for waste treatment, public expecta-
136 . Biotechnology in a Global Economy

 credit: Kevin O’Connor

This park in Torrance, California, was once the site of an oil refinery. After several years of bioremediation,

a community center, several ballfields, and a playground were constructed.

tions in both Pacific Rim countries and the European

Community (EC) are forcing some governments to

inventory contamination problems, actively participate in cleaning up existing pollution, and monitorthe effectiveness of waste treatment for newly

created wastes.

The United States, in contrast, has an elaborate

environmental protection program already in place.

Unlike many other countries, the enforcement of that

program is generating a market for environmental

cleanup. Cleanup goals and the size of the problem-the universe of waste management facilities,

leaking underground storage tanks, and abandoned

sites with contaminated soils and groundwater--are

better defined for the United States than for other

countries surveyed.

Advantages of Bioremediation

Depending on the situation and type of site,

bioremediation offers several advantages over more

conventional waste treatment technologies, such as

incineration or chemical fixation, these include:

. Minimal disruption. Bioremediation generally involves only minimal, if any, physical

disruption of a site. This can be very important

on beaches where other available cleanup

technologies (e.g., high- and low-pressure

spraying, steam cleaning, manual scrubbing,

and raking of congealed oil) may cause additional damage to beach-dwelling biota (2).

Permanency. Micro-organisms can convert a

selected number of wastes into carbon dioxide,

water, and cell mass. For these completely

biodegradable wastes, no toxic residues remain

to manage. For other wastes that are not

completely mineralized by biological actions,

biodegradation can transform hazardous chemicals into stable, more benign, and less-toxic

compounds.

Lower costs. The capital costs of biologybased systems are relatively low, compared to

other treatment technologies. The microbes

used are generally inexpensive, and once applied, they self-replicate. In some cases, in situ

bioremediation may be utilized without excavation or demolition of buildings. For these

reasons, the costs of bioremediation should be

lower than those systems with more expensive

input requirements.

Public acceptability. Bioremediation offers

the public a treatment process that relies on

natural degradation, transformingg hazardous

wastes into familiar compounds, such as carbon
Chapter 8--Environmental Applications . 137

dioxide and water. The biotreatment system

design, itself, is nonthreatening. For example,

some bioremediation systems may only require

the removal of contaminated soils and groundwater to a tank, which looks like the usual

sewage treatment plant, or a vat as used to make

beer or wine. In situ bioremediation does not

even require moving toxic wastes or siting a

treatment unit. Such in-place treatment minimizes the public and environmental risks created by the handling of waste.

Barriers to Commercialization

Despite the advantages of bioremediation—

research, technical, and regulatory barriers hinder

the use of biotechnology for hazardous waste

cleanup.

Research Barriers

Much needs to be learned regarding the scientific

underpinning s of bioremediation. Waste takes on

many forms, occurs in many sites, and is subject to

varying environmental conditions. To date, promising targets for use of bioremediation include oil

spills, point sources of industrial effluents with high

concentrations of specific chemicals, spills of particular chemicals in contained areas, and dump sites

being prepared for encapsulation or excavation

(9,10).

To assess the feasibility of biotreatment, several

areas of science and engineering must be understood.

●

●

●

Microbial physiology, biochemistry, and genetics, to understand the metabolic processes

leading to detoxification and the genetics

controlling the enzyme functions involved.

Microbial ecology, to appreciate the structure

and fiction of indigenous or inoculated microbial communities and the microenvironment

in which treatment must be effective.

Field-site engineering, to implement the desired biodegradation scheme, to maintain optimal growth conditions, and to combine physical and chemical methods (10).

The application of biotechnology to waste

disposal is still largely experimental, and investment is small compared with efforts in pharmaceuticals and agriculture. Two significant perceptual problems have been voiced repeatedly to OTA:

1) because pharmaceuticals and agriculture are seen

as being areas of greater promise (e.g., ability to

produce high-value-added products), those areas

attract more dollars and more highly trained personnel than programs involved in research targeted

toward the cleanup of waste; and 2) fears of

regulatory barriers, especially for the development

of genetically engineered organisms for use in the

environment, discourage researchers from investigating genetic engineering as a way to discover

potentially beneficial organisms.

The EPA is the lead agency in conducting R&D

in waste disposal. However, EPA’s current investment in R&D for biotechnology--$8.3 million in

fiscal year 1990-is small compared to other Federal

agencies. Additionally, there has existed a widespread feeling that EPA is biased against biological

approaches to waste disposal and is unwilling to

support approaches involving biotechnology (15).

Some researchers, however, say this bias is changing, pointing to EPA involvement in the Valdez oil

spill cleanup and strong statements by EPA officials

touting the use of bioremediation.

Another significant research problem is the paucity of published scientific literature on the results of

bioremediation. Much of the activity in this area is

conducted by private businesses engaged in contractor-client relationships. As such, the results of many

small-scale uses of bioremediation constitute privately held business information or trade secrets

and, thus, remain hidden from competitors and

researchers alike. As one company executive noted,

some clients want to have hazardous waste removed

from their property, but they do not want their

neighbors to know about the scope of the problem or

the nature of treatment undertaken (4).

Technical Barriers

Several technical problems hinder the broader

application of biology to waste treatment and

cleanup:

●

●

Although bioremediation works faster than

natural biodegradation, it is generally slower to

implement than “burn or bury” technologies

that are the most likely alternatives to biotreatment.

Bioremediation must be specifically tailored to

each polluted site. Each waste site presents

unique facts, requiring individualized attention. Not enough is known about bioremedia-
138 ● Biotechnology in a Global Economy

Box 8-C—Federal Statutes Relevant to Bioremediation

Several Federal environmental laws are relevant to biology-based waste treatment, including:

Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). The 1986

amendments to CERCLA (Public Law 99-499) state" [t]he President shall select a remedial action that is protective

of human health and the environment, that is cost effective, and that utilizes permanent solutions and alternative

treatment technologies. . . to the maximum extent practicable.’

Toxic Substances Control Act (TSCA). The TSCA was enacted by Congress in 1976 (Public Law 94-469).

In contrast to other environmental statutes specifically regulating the quality of air, water, or other natural resources,

TSCA gave EPA broad authority to regulate “chemical substances and mixtures.” Under TSCA, the manufacturer

of a new chemical must submit a premanufacture notice to EPA that describes test data referring to identity, use,

amount, disposal, and so forth. EPA then has 90 days to consider the notice and decide whether to approve

production. Under the Coordinated Framework for Regulation of Biotechnology, EPA notified the public that

biotechnology processes and products not covered or regulated by other Federal agencies would be included under

the jurisdiction of TSCA.

Clean Water Act (CWA). CWA’S pretreatment program’s July 24, 1990, final rule states”. . . the Industrial

User shall certify that it has a program in place to reduce the volume and toxicity of hazardous wastes generated

to the degree it has determined to be economically practical.”

Resource Conservation and Recovery Act (RCRA). The Hazardous and Solid Waste Amendments to

RCRA, enacted by Congress in 1984 (Public Law 98-616), emphasize permanent treatment technologies. Congress

declared “it to be the national policy of the United States that, wherever feasible, the generation of hazardous waste

is to be reduced or eliminated as expeditiously as possible. Waste that is nevertheless generated should be treated,

stored or disposed of so as to minimize the present and future threat to human health and the environment.”

Superfund Amendments and Reauthorization Act (SARA). SARA directs that “[remedial actions in

which treatment which permanently and significantly reduces the volume, toxicity, pollutants, and contaminants

is a principal element, are to be preferred over remedial actions not involving such treatment. ”

SOURCE: Office of lkcbnology Assessmen4 1991.

tion to be able to predict results in specific based approaches offer destruction of selected hazsituations with a high degree of accuracy. ardous wastes without toxic residues—a result

. Successful mineralization of pollutants has certainly in accordance with the intent of these laws.

been limited to relatively easy-to-degrade compounds (12). However, several regulatory barriers hinder the

● There are no official scientific measures for commercialization of bioremediation:

evaluating the success or failure of bioremedia- ●

tion. The only well-known successful use of

bioremediation has been for the cleanup of oil

spills.

Regulatory Barriers

Regulations both drive and constrain the use of

bioremediation. Regulation creates the bioremedia- ●

tion market by dictating what must be cleaned up,

how clean it must be, and which cleanup methods

may be used. A number of Federal statutes and

relevant regulations control waste disposal activities

(see box 8-C). The passage of Federal statutes has .

increased pressure on waste generators to reduce

waste and to find permanent solutions to waste that

is generated. Although these laws can apply to all

permanent waste treatment methodologies, biologyCleanup standards. How clean is clean? The

achievable endpoint for biodegradation may be

limited for specific pollutants. Biology-based

remediations maybe able to reach health-based

standards but not lower residue levels resulting

from thermal treatment technologies, such as

incineration.

Standards are still under development. Treatability studies used by regulatory agencies to

determine the efficacy of a waste treatment

regime have not been standardized for biological treatment.

Little biotreatment permit experience. The

permitting of biotreatment activities today

relies on individuals’ best professional judgment. Based on the small number of permits

issued to date, experience in the approval of
Chapter Environmental Applications . 139

%oto credit: Kevin O’Connor

Through bioremediation, former industrial sites such as this

●

may be used for other purposes.

treatment protocols using naturally occurring

and recombinant micro-organisms is limited.

Land disposal regulations limit reactor design. Recent land disposal regulations promulgated by EPA’s Office of Solid Waste prohibit

the recirculation of contaminated groundwater

through an in situ bioreactor arrangement, a

common design for bioremediation of contaminated soils and groundwater.

Economic Barriers

Unlike the pharmaceutical industry, bioremediation does not result in the production of

high-value-added products. Thus, venture capital has been slow to invest in the technology, and

commercial activity in research and product

development has lagged far behind other industrial sectors.

The majority of the bioremediation firms are

small and lack sufficient capital to finance sophisticated research and product development programs.

In addition, bioremediation lacks a strong, publicly

funded research base. Federal research dollars have

been scarce to support discovery or improvements of

biology-based waste treatment.

Because basic research is limited and most

products and processes are developed by small

entrepreneurs or companies, bioremediation relies

on trade secrets, not patents, for intellectual property

protection. Biological treatment currently relies on

naturally occurring organisms that cannot be patented and can be reproduced by one’s competitors.

This lack of intellectual property protection subjects

the industry to constant competitor stress. Further,

many clients of bioremediation companies do not

want public attention focused on hazardous waste

cleanups. This results in proprietary business relationships that do not foster the sharing of scientific

and business practices.

Experienced personnel are in short supply.

University programs are now being establishing for

bioremediation specialists, but continuing education

programs are not common. Marketing of products

and services has, historically, been done by individual companies. Few firms exist that act as brokers for

the technology. Such an arrangement is personnelintensive.

The key marketing promise of the biotreatment

industry is less cost through remediation. No academic or regulatory agency has published a study

analyzing the costs of biological treatment compared with other technologies, such as incineration.

The only information currently available is found in

individual companies’ marketing materials.

Prospects for Genetically Engineered

Microbes

Some basic research is underway on the use of

genetically engineered microbes for waste cleanup.

The first out-of-laboratory applications of genetically engineered microbes for waste cleanup will be

done in bioreactors, because conditions for microbial survival and monitoring are easier to control in

a closed system then in an open field. Today’s

bioremediation sector continues to rely on naturally

occurring micro-organisms. Due to scientific, economic, regulatory, and public perception reasons,

the imminent use of bioengineered micro-organisms

for environmental cleanup is not likely to happen in

the near future. More needs to be learned about

naturally occurring microbes-much less those that

are genetically engineered. The lack of a strong

research infrastructure, the predominance of small

companies, the lack of data sharing, and the existence of regulatory hurdles all serve as dominant

barriers to commercial use of genetically engineered

organisms.

The potential savings from the use of biologybased treatments, compared to conventional incineration, and the interest of generators to limit their

long-term liability for wastes are positive reasons for

the development and use of genetically engineered
140 ● Biotechnology in a Global Economy

microbes. In the United States and the European

Community, government, private, and academic

institutions are increasingly confident that environmental biotechnology offers a more ecologically

sound approach to waste remediation. This may play

the most important role in moving genetically

engineered microbes into the field.

The majority of current bioremediation firms are

small and lack sufficient capital to finance sophisticated research and product development programs.

This is a problem when using naturally occurring

organisms, but a crisis for the development of

bioengineered products and related services. Until

barriers to development are reduced, widespread

commercial use of genetically engineered organisms

for environmental waste reduction is unlikely.

SUMMARY

Biotechnology has several potential environmental applications, these include: pollution control, agriculture, mining, and microbial enhanced oil

recovery. Bioremediation--efforts to use biotechnology for waste cleanup-has received public

attention recently because of the use of naturally

occurring micro-organisms in oil-spill cleanups.

Bioremediation can be used at a variety of sites and

in a variety of applications, among these are wastestream cleanup, wood treatment-site cleanup, PCB

degradation, groundwater treatment, and chemical

cleanup of manufacturing wastes. The rationale for

using micro-organisms to degrade pollutants stems

from experience with nature. Micro-organisms have

a variety of capabilities that can be exploited for

waste management and disposal.

The use of bioremediation in the United States is

increasing. Today, the U.S. biotreatment industry

includes more than 130 firms and has evolved into

four segments: bioremediation services, multidisciplinary environmental services, products, and waste

generators. The commercial bioremediation sector

in the United States, though small, far exceeds

activity in other nations. Four factors account for the

United States’ lead: the size and scope of U.S.

environmental law, more advanced research, the

number of companies, and public acceptance,

spurred by recent uses of bioremediation for oil-spill

cleanup.

Although bioremediation offers several advantages over conventional waste treatment technologies, several factors hinder widespread use of

biotechnology for waste cleanup. Relatively little is

known about the scientific effects of microorganisms in various ecosystems. Research data are

not disseminated as well as with research affecting

other industrial sectors. This is caused by limited

Federal funding of basic research and the proprietary

nature of the business relationships under which

bioremediation is usually used. Regulations provide

a market for bioremediation by dictating what must

be cleaned up, how clean it must be, and which

cleanup methods may be used; but regulations also

hinder commercial development due to their sheer

volume and the lack of standards for biological

waste treatment.

Bioremediation, unlike the pharmaceutical and

agricultural industries, does not result in the production of high-value-added products. Thus, venture

capital has been slow to invest in the technology, and

little incentive exists for product development. The

majority of bioremediation firms are small and lack

sufficient capital to finance sophisticated research

and product development programs. Bioremediation

primarily depends on trade secrets, not patents, for

intellectual property protection.

Although some research is being conducted on the

use of genetically engineered organisms for use in

bioremediation, today’s bioremediation sector relies

on naturally occurring micro-organisms. Scientific,

economic, regulatory, and public perception limitations that were viewed as barriers to the development of bioremediation a decade ago still exist.

Thus, the commercial use of bioengineered microorganisms for environmental cleanup is not likely in

the near future

CHAPTER 8 REFERENCES

1.

2.

3.

4.

5.

Ehrlich, H.L., and Brierly, C. (eds.), Environmental

Biotechnology: Microbial Mineral Recovery (New

York NY: McGraw Hill, 1990).

Foster, M. S., et al., “To Clean or Not To Clean: The

Rationale, Methods, and Consequences of Removing

Oil From Temperate Shores,” The Northwest Environmental Journal, vol. 6, 1990, pp. 105-120.

Granger, T., EBASCO Environmental, personal

communication, August 1990.

Grubbs, J., president, Solmar Corp., personal communication, October 1990.

Harrier, G., “The Impact of Government hgislation

on Industrial Effluent Treatment,’ Conservation and

Recycling, vol 8, Nos. 1/2, 1985, p. 27.
Chapter 8--Environmental Applications . 141

6.

7.

8.

9.

10.

11.

Henley, M., “Europe Poses Multi-billion Environmental Market,” WasteTech News, vol. 2, No. 24,

Aug. 13, 1990.

McCready, D., director, Canadian Center for Mineral

Energy Technology, personal communication, September 1990.

McInerney, M. J., University of Oklahoma, personal

communication, September 1990.

Omenn, G.S. (cd.), Environmental Biotechnology:

Reducing Risks from Environmental Chemicals

Through Biotechnology (New York NY: Plenum

Press, 1988).

Omenn, G. S., professor and dean, School of Public

Health & Community Medicine, University of Washington, “Environmental Biotechnology: Biotechnology Solutions for Hazardous chemical Wastes and

Oil Spill Clean-up,” presentation at Biotechnology

Forum on Oil Spills in Marine Environments, Cincinnati, OH, September 1990.

Organization for Economic Co-operation and Development, Biotechnology and the Changing Role of

12.

13.

14.

15.

Government (Paris, France: OECD Publications

Office, 1988).

Rochkind, M.L., et al., Microbial Decomposition of

ChlorinutedAromatic Compounds, EPA-600 (Washington, DC: EEA Publications Office, February

1986) p. 90.

U.S. Congress, Office of Twhnology Assessment,

Commercial Biotechnology: An International Analysis (Elmsford, NY: Pergamon Press, Inc., January

1984).

U.S. Congress, Office of T~hnology Assessment,

New Developments in Biotechnology: Field-Testing

Engineered Organisms: Genetic and Ecological

Issues, OTA-BA-350 (Springfield, VA: National

T~hnical Information Service, May 1988).

U.S. Congress, OffIce of Technology Assessment,

New Developments in Biotechnology: U.S. Investment<pecial Report OTA-BA-360 (Spring fiel~

VA: National Technical Information Service, July

1988).
Part II: Industrial Policy
Chapter 9

Introduction: Industrial Policy

“The USA has become the technology colony for the rest of the world. We supply the raw materials

(technology), they add the value and sell to us and keep the profits! We have to change that system

if we want to be competitive.”

Jerry Caulder

president, Mycogen, February 1991.

“In some respects, American competitiveness and Yankee ingenuity are stronger than ever. True,

many of the nation’s institutions have come up for a reappraisal. But what institution shouldn’t

come up for appraisal every 50 years or so?”

David Warsh

Columnist, Boston Globe, June 1991.

“The most potent influences of government in advanced nations are often slow and indirect.”

Michael E Porter

The Competitive Advantage of Nations
CONTENTS

Page

INTR0DUCTION TO PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .147

CHAPTER 9 REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .147
Chapter 9

Introduction: Industrial Policy

INTRODUCTION TO PART II

Although the concept of industrial policy has been

around in the United States since the New Deal of

the 1930s, it has more recently returned to the

national agenda as concern has risen about U.S.

competitive status in a number of industries. Industrial policy, in broad terms, is the deliberate

attempt by a government to influence the level

and composition of a nation’s industrial output.

These actions can include improving the industrial

infrastructure, training workers, shifting resources to

activities that will use them more efficiently, or

maintaining resources in existing activities deemed

important for national or economic security. Industrial policies can be implemented through domestic

measures such as: allocation of Federal funds,

subsidies, tax incentives, regulation of industry, and

protection of intellectual property; or policies can be

affected through trade actions, such as tariffs and

quantitative import restrictions (l). Government can

also play a central role in productivity through its

economic policies-the manner in which it deploys

the Nation’s resources (labor and capital) and assists

industry in adjustment to change (3).

The science and technology policy of the U.S.

Government has traditionally been concerned with

basic science, health, energy, agriculture, and defense. It has been described as big science deployed

to meet big problems (4) and as mission-oriented

rather than diffusion-oriented (2). The U.S. Government, in contrast to other governments, rarely takes

deliberate actions to improve the use of technology

by U.S. manufacturers. Other government actions

intended to improve industrial performance work

more indirectly-tax and trade policies and intellectual property protection are examples of indirect

actions. Industrial policies in technology-intensive

industries, such as biotechnology, rarely fit easily

into existing frameworks.

Industrial policies in the United States are complex, fragmented, continually evolving, and rarely

targeted comprehensively at a specific industry.

There is no industrial policy pertaining to biotechnology per se, but rather a series of policies

formulated by various agencies to encourage

growth, innovation, and capital formation in all

high-technology industries. And, just as there is no

biotechnology policy in the United States, biotechnology companies tend not to behave as an industry,

but rather as agrichemical, diagnostic, or human

therapeutic fins. Biotechnology companies have

been built on a unique system of financing, but they

confront the same regulatory, intellectual property,

and trade policies faced by other U.S. firms. There

may be a need for the Federal bureaucracy to

fine-tune its policies as biotechnology moves

through the system with its unique challenges, but to

date (with the possible exception of the Federal

research system), Federal agencies have not seen the

need to revolutionize their practices for biotechnology.

Part I of this report addressed commercial activity

in biotechnology, recognizing that biotechnology

has become an important tool in several traditional

U.S. industrial sectors.

Part II addresses the actions, both direct and

indirect, taken by the United States and other

governments that have influenced the commercialization and integration of biotechnology. Specifically, the importance of developing a science and

technology infrastructure, regulatory practices, intellectual property protection, and trade issues. Tax

law, which is an expression of industrial policy, is

discussed in Part I, chapter 4 because of the

importance of tax laws on financial practices in

biotechnology.

1.

2.

3.

4.

CHAPTER 9 REFERENCES

Boonekamp, C., “Industrial Policies of Industrial

Countries,” Finance and Development, March 1989.

Ergas, H., “Does Technology Matter?” Technology

and Global Industry: Companies and Nations in the

World Economy, B.R. Guile and H. Brooks (eds.)

(Washington, DC: National Academy Press, 1987).

Porter, M., The Competitive Advantage of Nations

(New York, NY: The Free Press, 1990).

Weinberg, A.M., Reflections on Big Science (Oxford:

Pergamon Press, 1967).

–147–
Chapter 10

Science and Technology Policies

“It is my personal conclusion that no plans, either present or contemplated, will prevent our gradual

loss of leadership in biotechnology unless they provide for extensive and fundamental changes in

the conduct of government supported research in the United States.”

Norman G. Anderson

hearing before the Technology Policy Task Force, July 1987.

“A rosy glow has long suffused our vision of biotechnology in Japan: government support, public

acceptance, highly motivated researchers, the happy reports of American research executives with

joint development agreements—it sounded ideal, a model and a challenge. So it was a shock to

discover. . . that the country may not be the land of tPA milk and recombinant honey.”

Douglas McCormick

Bio/Technology, July 1989

“Although the EC has the human, scientific and material resources to compete globally in the

biotechnological race, it has failed so far to match strides with its main rivals-the United States

and Japan. ”

The European Study Service, 1991
CONTENTS

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

NATIONAL POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152

Japan: A Targeted Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

Europe: Moving Toward a Regional Strategy? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158

Regional Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161

The United States: A Diffuse Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161

NATIONAL POLICIES IN A GLOBAL ENVIRONMENT . . . . ● . . . . ● . . . . . . . . . . . . . . . 166

Domestic University-Foreign Industry Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168

CHAPTER 10 REFERENCES ... ..............................*.@***.*.*+.*.""*+" 168

Boxes

Box

10-A. The Asian Tigers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10-B. Japanese Industrial Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . + ., + . . + . . . . . . . . . + . . ● w

10-C. European Biotechnology Programs . . . . . . . . . . . . . . . . . . . . . . . . . r... . . . . . . . . . . . .

10-D. United States Support of R&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

154

155

162

164
Chapter 10

Science and Technology Policies

INTRODUCTION

For most governments, including the United

States, research spending serves diverse goals.

Enhancing national defense, improving public

health, training new scientists, and ensuring an

adequate food supply are four common examples.

Publicly funded research in these areas is expected

to support economic growth and the strength of

domestic industry, in great part through the creation

of a research and technology infrastructure. This

infrastructure includes training young scientists and

technicians through support of basic research. Some

governments put less emphasis on goal-or missionoriented research and more on encouraging a broad

capacity for industry to adjust to technological

change through education, development of technical

standards, and decentralized research activities (10).

Governments generally fund basic research, for

which there is little incentive for funding in the

private sector or that is beyond the financial capacity

of industry. The results of such research are generally published openly and made available to

everyone, regardless of nationality. Sometimes,

however, governments fund research closer to the

market, occasionally with the express purpose of

aiding or encouraging investment by domestic

industries in specific technologies.

National policies that bear on biotechnology

research and training vary around the world in

design and execution, for a variety of reasons. These

include the state of the existing science base,

structure and orientation of industry, mix of resources and markets, role of public perceptions,

regulations, and relationships among government,

industry, and universities.

Many countries without a previous strong foundation in the biological and biochemical sciences, for

example, are building research infrastructures. Industrializing Pacific Rim countries are encouraging

research and commercial activities appropriate to

local and regional markets, such as hepatitis vaccine

development and production. Countries without a

strong tradition of university-industry cooperation

have established programs to reorient the research

community and encourage university-industry ties.

Australia, lacking a large domestic market, encourages its firms to establish commercial ties and

develop markets abroad. Denmark, with a small

domestic market and research base, actively promotes international research efforts through a number of successful, international companies. Cooperative research programs between and among European countries are growing in size and, perhaps, in

importance; however, their significance lies less in

immediate results than in the breakdown of social,

cultural, and political barriers to cooperation and in

the creation of translational research networks,

which are distinct European concerns.

A challenge to the adoption of a national biotechnology policy is the internationalization of research,

development, and product commercialization. If

basic research, by its nature, flows easily across

borders, to what extent does the funding country

benefit from its investment? In the emerging global

research and commercial environment, aggressive companies, whether large multinationals or

savvy newcomers, seek the best ideas regardless

of nationality. Likewise, they produce goods and

services to effectively compete in international

markets regardless of nationality. It is no longer

always clear what constitutes an American firm

in a global economy. Because technology, goods,

and capital, flow more easily across borders than

people; national interest may be best defined by

focusing on the education and training of the

workforce, rather than on firms themselves (35).

In 1984, the Office of Technology Assessment

(OTA) found that government targeting of biotechnology for special support was one of the least

significant factors affecting competitiveness in biotechnology (44). This finding remains valid today.

Government targeting efforts everywhere, including Japan, seem to have had marginal impact, at best. One reason may be that "biotechnology” is a buzzword whose usefulness has

passed. A more accurate term is ‘biotechnologies,’

that is a series of research and industrial techniques.

It is difficult to talk about biotechnology per se

because the techniques have been integrated into

distinct and very different industrial sectors with

unique technical issues and distinct investment and

market environments (45). These developments

make it difficult, and possibly futile, for any nation

–151–
152 . Biotechnology in a Global Economy

to craft and implement a coordinated biotechnology

strategy. Continued integration will make the task

more difficult. More important will be the identification of key biotechnologies that need government

support and industry encouragement.

Previous OTA reports have pointed out the

relative underfunding in the United States of biotechnology-related agricultural, environmental, and

risk assessment research, when compared with

biomedicine (45). Although it has been helpful to

look at biotechnology-related expenditures in different areas of application, questions raised by such

analyses relate more to the differences between

various fields than to biotechnology as a distinct

entity. Biotechniques are an important part, but

not the only part, of research in these fields. They

may be significant to a number of industrial

sectors but by themselves will not revolutionize

existing structures. Their industrial significance,

though potentially powerful, will be evolutionary

and must be viewed in the context of all factors—

technical, economic, and structural—affecting

such industries.

This chapter looks primarily at direct government

efforts aimed at promoting biotechnology research,

such as funding and training of scientists. Governments also have indirect means for encouraging or

discouraging industrial research, such as regulation

of research and products, trade and tax policy, and

intellectual property protection. These issues are

discussed elsewhere in this report (see chs. 4,11,

12,13).

NATIONAL POLICIES

National policies to promote biotechnology research and development (R&D) can be categorized

as targeted; coordinated through academia, the state,

or industry; or laissez-faire. In general, countries that

have targeted biotechnology for development do so

because the techniques are perceived to permit

economies in other industries, have important linkages to the rest of the economy, or because they

might establish a niche in the international market

that will yield continuing income. Although nations

share a number of common issues and patterns of

government involvement, specific policies, adapted

to unique needs and circumstances, may not be

easily adaptable elsewhere.

A number of countries, principally Japan and the

Newly Industrializing Countries (NICs) of the PaPhoto credit: Kevin O’Connor

The Development Center for Biotechnology (DCB) is

housed in this building in Taipei. DCB was established

by the Republic of China in 1984 to promote

biotechnology and develop internationally

competitive products.

cific Rim, have established comprehensive government policies strongly promoting economic growth

(see box 10-A). In the United States and much of

Europe, growth promotion is less prominent and is

one of many competing social concerns. As a result,

fundamental goals are more diffuse and, therefore,

less obvious than in a country like Japan.

There is considerable disagreement over what

constitutes “the Japanese model.” But Japan’s

industrial success, the extent to which other Pacific

Rim countries are trying to imitate that success, and

the interest in how other countries are adopting

Japanese practices, necessitate a closer look at

Japanese industrial and research policies. This

section, therefore, examines R&D policies in the

United States, Japan, and selected European countries. Appendix A provides more detailed informa-
Chapter 10--Science and Technology Policies ● 153

tion of biotechnology industrial policies in several

other countries.

Japan: A Targeted Approach

In 1981, Japan’s Ministry of International Trade

and Industry (MITI) announced that biotechnology,

along with microelectronics and new materials, was

a key technology for future industries. The announcement attracted interest and concern abroad,

largely because of the key role MITI played in

guiding Japan’s economic growth in the postwar

period (see box 10-B). It was frequently predicted

that inclusion of biotechnology in MITI’s Next

Generation project, combined with a variety of

incentives from MITI and other agencies (e.g., tax

breaks for research investments and seed money for

cooperative research projects) would prompt Japanese investment and eventual dominance in biotechnology (44).

There is little doubt that government policies,

including the Next Generation project, encouraged

biotechnology investment by a large variety of

chemical, food, and fermentation companies, as well

as by traditional pharmaceutical firms in Japan.

Japanese investment in biotechnology, however,

predates MITI’s Next Generation project. New

initiatives in the life sciences came earlier from the

Science and Technology Agency (STA) and the

Ministry of Education and Culture, which fund

Japanese university research (7). A number of

companies made substantial investments in biotechnology prior to 1981. Mitsubishi Kasei Corp. ’s

Institute of Life Sciences was setup in 1971, about

the time that Cetus was established in the United

States (49).

Regardless of earlier actions, MITI’s naming

biotechnology as an area of interest probably gave it

the legitimacy that it previously lacked and eased

financing for private investment-as it had done

earlier for other industries and technologies. It seems

likely that some firms entered biotechnology research as a result of government policies. It seems

also plausible, however, that MITI jumped on the

biotechnology bandwagon because it did not want to

be left behind.

As in the United States and elsewhere, the broad

range of potential biotechnology applications has

led to a wide variety of, frequently overlapping,

initiatives by various Japanese agencies.

Ministry of International Trade and Industry

Of 12 initial Next Generation research projects

proposed in 1981, three (bioreactor, mass cell

culture, and recombinant DNA application) were in

biotechnology. Concomitant with these proposals

was the establishment of a Biotechnology Joint

Research Association consisting of 14 companies,

divided into three research groups, each associated

with a research institution of MITI’s Agency of

Industrial Science and Technology. Most of the

companies were in the chemical or food business,

and most of the frost product goals were recombinant

DNA (rDNA) or monoclinal antibody pharmaceuticals and diagnostics (7). Takeda, Japan’s largest

drug firm, was the only pharmaceutical company in

the Next Generation initiative and is also the only

pharmaceutical company participating in the Protein

Engineering Research Institute (PERI), which is

discussed in greater detail below.

The MITI faced a serious organizational problem.

In contrast to previous government initiatives, particularly in manufacturing technologies, the incentive for cooperation between competing firms was

lessened by the problem of proprietary rights.
154 ● Biotechnology in a Global Economy

Box 10-A—The Asian Tigers

The Newly Industrializing Countries (NICs) of the Pacific Rim share with Japan an emphasis on export-driven

growth. These countries have also developed patterns of government-industry cooperation, although these patterns

differ significantly from those in Japan. There is a high degree of activism on the part of governments, particularly

in Korea, Taiwan, and Singapore. All use licensing of foreign technology and repatriation of foreign-trained

nationals to build their domestic research infrastructure.

Korea shares with Japan a strong bias toward applied research, apparently in large part, because of an

underdeveloped research base. As in Japan, the bulk of R&D is done by industry, and several chaebols (large

industrial combines) and pharmaceutical companies have facilities in the United States to transfer technology and

develop their internal resources. Licensing agreements with U.S. and Japanese firms area clear part of this strategy.

The government directly subsidizes some industry research, including up to 30 percent of selected proposals from

member companies of the Korea Genetic Research Association (KOGERA).

In contrast, Singapore is emphasizing basic research (roughly 80 percent of that country’s annual

biotechnology-relevant research budget) and creation of a research infrastructure through training and repatriation.

Singapore’s National Program in Biotechnology also features favorable tax incentives for domestic and foreign

investment. Although the program recognizes the need for multinational investment, the main goal is the

development of biotechnology-based local industry. The new Institute of Molecular and Cell Biology at the National

University of Singapore will have 21 research teams carrying out basic research in underlying disciplines. Glaxo,

a large, British-based pharmaceutical company, will provide a $50 million trust fund to underwrite neurobiology

research at the institute over the next 15 years.

Taiwan, like Singapore, is employing repatriated nationals to the fullest extent possible to help build their

research base. One of the best developed research establishments in Asia is further strengthened by the large pool

of Taiwanese scientists in the United States. In addition, investment capital is readily available. The country has

roughly $75 billion in foreign reserve holdings, second only to Japan, and has invested in several U.S.

high-technology firms. Nevertheless, Taiwan seems to be making more of an effort than Singapore to reach

midstream development; roughly 80 percent of biotechnology-relevant funding is devoted to applied research. (This

is probably part of a strategy to develop products, such as Hepatitis B vaccine, which are significant to domestic

and regional markets.) Of all the Asian NICs, Taiwan appears to be in the best position to take commercial advantage

of biotechnology. But, Taiwan’s emphasis on publicly funded midstream and applied research could reflect the

reluctance of Taiwanese industry, dominated by small and medium-size manufacturing firms, to invest in R&D,

SOURCE OffIce of Toclmology Assessmen4 1991, adapted tiom 1989 International Conference on Biotechnology in a Global l!conomy; and

E. Ridurds, “lltiwan’s Latest Export: Money,“ The Washington Post, May 26, 1989.

Therefore, MITI tried to focus projects on areas in

which Japan seemed clearly behind the United

States and Europe. The level of success achieved in

these projects was disappointing. The MITI, for

example, abandoned a bioreactor project, due to

industry’s reluctance to cooperate (49).

The years 1986 to 1988 saw the establishment of

bio-industry, with MITI setting regulatory guidelines for industrial uses of biotechnology in amino

acid, enzyme, detergent, and cosmetic production.

Today, MITI is continuing to support R&D efforts in

areas such as: marine biotechnology and biodegradable plastics, addressing relevant industrial policy

(e.g., tax incentives and Japan Development Bank

and Small Business Finance Corp. loans, and

promotion of industry standards), improving safety

measures (new contained-use regulations and developing lists of industrially exploitable organisms),

internationalization (regulatory harmonization, and

international R&D cooperation, and funding developing country research) (25). MITI’s patent office

continues to play a central role in biotechnology

developments. The MITI planned to spend $58

million on biotechnology in 1990, including funding

dozens of public-private research projects, ranging

from waste water treatment systems to biosensors.

Ministry of Education, Science, and Culture

The Ministry of Education, Science and Culture

(MESC) is the largest single source of life/science

research funding in Japan. Its Bureau of Science and

International Affairs administers university grants,

training programs, and international exchange and

collaboration. The MESC also has authority over the

national universities, i.e., the Universities of Tokyo,

Osaka, Kyoto, and Nogoya; the National Institute of

Genetics; and the Okazaki National Research Insti-
Chapter 10--Science and Technology Policies ● 155

Box 10-B—Japanese Industrial Policy

Japan’s development into a major economic power was neither accidental nor inevitable. One analyst of

postwar Japan argues that a system encouraging rapid economic growth resulted from three fundamental sources.

First, a popular consensus on the need for economic priorities was dictated by the harsh conditions of the 1940s

and Japan’s unique situation: late industrialization, limited natural resources, a large population, the need to trade,

and the constraints of the international balance of payments. Second, an organizational inheritance dating back

to the 1930s included experiments with control of the economy, first by powerful industrial groups and then by the

State. These experiences encouraged a convergence of views on the part of bureaucratic and business elites, as did

cross-penetration of these elites, due to recruitment of politicians and managers from government bureaucracies.

Third, a conscious pursuit of economic growth fostered the manipulation of institutions toward this end.

A system of government-industry cooperation, based on the zaibatsu working with the government over many

years, became even more important following World War II. At its best, it seemed to harness intense competition

between firms within agreed areas of development. Although a number of strong bureaucracies, especially the

Ministry of Finance, played critical roles, it was the Ministry of International Trade and Industry (MITI) that became

a kind of ‘economic general staff. MITI used powerful tools, including control of foreign trade and introduction

of foreign technology through the 1960s, thereby protecting domestic industry and providing domestic firms with

relatively cheap, foreign technology through licensing. But, it was primarily the development of indirect

market-conforming tools (particularly informal ‘‘administrative guidance’ that allowed MITI to play a key role

in restructuring the Japanese economy-first into heavy industries and then into knowledge-based, high-technology

industries. MITI transformed itself to match Japan’s changing needs and role in the global economy. It served not

so much as a director of competition but, as a player itself, with its own purposes and its own means of intervening

in the market to achieve its goals.

Broadly speaking, public policy in Japan has been characterized by a great degree of discretion yielded to elite

and competing bureaucracies, with conflict between bureaucracies and between these bureaucracies and strong

industries dominating policy development. Except for business, interest groups in the U.S. pluralistic sense have

played a relatively minor role in policy development, forcing political intervention and bureaucratic change only

in extreme cases. For example, in the 1960s, industrial pollution stimulated public concern and resentment.

Apart from assisting structural changes, MITI, like its prewar and wartime predecessors, and other agencies,

such as the Ministry of Health and Welfare, have encouraged improved management, production techniques and

applications of new technologies within specific industries. Such assistance, especially to small and medium-size

manufacturing firms, maybe carried out through industry associations.

Although catching up with Western technology provided a clear goal for Japan through the 1970s, by the end

of that decade this goal had been or soon would be reached in many areas. MITI’s Next Generation program marked

a shift toward an entrepreneurial approach to technology and economic development, supporting efforts far less

certain of success. One account, from 1986, quotes a MITI technical official, lamenting reduced funding, as saying

“the era of next-generation projects and grand projects is already over.” Today, it appears MITI’s role is far less

significant than it once was and certainly quite different from that commonly believed in the United States.

SOURC!BS: Office of TeehnoIogy Assesamen$ 1991, adapted from C. Jobnsou h4ZTZ and the .Tapunese Miracle: The Growth of Iridu@ia2

Policy, 1925-1975 (Stanford, CA: Stanford University Press, 1982); Nihon Kogyo Sluhdwn, “Follow MtTI’s Example,” My 6,

1986, p. 3; L. Tyson andJ. Zysman “Politics and Productivity: Developmental Strategy and Production Innovation in Japan” BRIE

Working Paper No. 30, Berkeley Roundtable on the International Economy, Berkeley, CA 1987.

tute (8). The rigid, noncompetitive nature of this

research funding seems to limit the effectiveness of

these expenditures (7,29).

In 1987, a general overhaul of Japan’s universities

was proposed by the Provisional Council for Educational Reform, appointed by Prime Minister Nakasone. Suggestions to change entrance requirements, encourage more international exchange, and

foster creativity and individuality are still being

studied (13). Anecdotal evidence suggests that some

researchers have left universities for industry because of poor funding, inadequate equipment, and

restrictive research environments wherein originality and creativity are not rewarded. University

research contributes far less to the total research base

of Japan than does university research in the United

States.

292-87(I - 91 - 6 : QL 3
156 ● Biotechnology in a Global Economy

Ministry of Health and Welfare

In 1986, MHW established the Japan Health

Sciences Foundation to promote biomedical and

pharmaceutical research. Some observers feel this

move was not only an attempt to meet Japan’s

growing health needs, made more pressing by a

rapidly aging population, but also a response to

MITI’s biotechnology initiatives (30).

This foundation emphasizes small, cooperative

R&D efforts involving companies, universities, and

government institutes. Industry funds two-thirds of

project costs. More than 100 firms, including several

foreign fins, and approximately 400 researchers

were involved by early 1990. Separate programs

target biotechnology, medical materials, and immune mechanisms (12). In July 1989, Genentech

received a small grant to study Werner syndrome,

thus becoming the first U.S. firm to receive direct

funding from MHW (2).

More significant to pharmaceutical companies are

changes in Japanese drug pricing by the MHW

national health insurance agency. Prices have been

systematically lowered for older drugs, and new

drugs are given premium pricing (see ch. 5 for

further discussion of pricing). The result is pressure

and incentive for greater innovation and higher R&D

expenditures. These higher expenditures are forcing

companies to seek larger markets, contributing to the

continuing internationalization of Japanese pharmaceutical companies. The Japanese market for pharmaceuticals, on the other hand, is the world’s second

largest after the United States; Western companies,

that have operated in Japan since World War II and

new companies entering the world market directly

are creating additional pressure on existing Japanese

firms (48).

Science and Technology Agency

The Science and Technology Agency (STA)

carries primary responsibility for funding basic

research and coordinating basic science and technology expenditures. Similar to the situation with other

independent agencies attached to the office of the

Prime Minister, control of STA is fought over by

other, more powerful agencies, such as, MITI and

the Ministry of Education and Culture, which are

responsible for staffing many positions (23). General policies are set by the Council for Science and

Technology, chaired by the Prime Minister. The

council has relied heavily on its advisory Policy

Committee, consisting of senior industry executives.

The council’s influence is seen most directly in its

Special Promotion Fund for Science and Technology, established in 1981 (49).

One project of interest was the human genome

mapping and sequencing initiative, begun in 1981.

This project focused on automating the sequencing

process, with companies, such as Hitachi, Seiko,

Fuji Film, Toyo Soda, and Mitsui Knowledge

Industry, receiving funding from both the Special

Promotion Fund and the Japan Research Development Corp. This frost-generation project, based on

approaches quickly outdated by innovations in the

United States, nevertheless caused considerable

concern abroad. It was used by proponents of

genome initiatives in the United States to generate

public and private support for a human genome

project in the United States. As in the United States,

Japan’s genome activities have been the subject of

bureaucratic infighting and are controversial within

Japan’s scientific community. On the commercial

front, Hitachi’s second-generation sequencer had, as

of early 1990, been made available only to Japanese

Government scientists, and Applied Biosystems, a

small California firm, remained the primary supplier

of sequencers in Japan.

Another STA program is the System for Promotion of Exploratory Research for Advanced Technology (ERATO), established in 1981 to foster interdisciplinary, advanced research and technology.

ERATO projects focus on technology development

and are carried out in the private sector over 5-year

periods by teams of about 15 scientists. Projects are

funded by the Research Development Corp. of Japan

(JRDC), a government-funded public corporation

set up in 1961 to promote commercial use of

government-developed technologies. Nearly half of

the 14 current projects are relevant to biotechnology

(20).

Ministry of Agriculture, Forestry, and Fisheries

In 1984, MAFF created a new Biotechnology

Division, and the government declared biotechnology development to be the principal strategy for

agricultural R&D (21). A basic research group made

up of 14 firms was organized to carry out research.

None of the firms was a traditional seed or nursery

company, and many were participating in other

biotechnology projects organized by other ministries (49). Private-sector research is further promoted by the Bio-oriented Technology Research
Chapter IO-Science and Technology Policies ● 157

Advancement Institution, which provides up to 70

percent of finding for research projects and new

ventures (21). Most of MAFF’s 13 specialized

research institutes and 6 regional experimental

stations are involved in biotechnology-related research; the National Institute of Agrobiological

Resources holds lead responsibility. The MAFF also

funds university research (21).

Research Associations and Cooperative Research

In Japan, the typical cooperative project1 is

neither intensive nor high profile; although the

large-scale integration semiconductor effort,

mounted in the late 1970s, received much attention

in the United States. It is touted by many as an

example of how government-industry cooperation

can forge technology breakthroughs (16). Most

biotechnology-related projects in Japan are organized by government-sponsored research associations

which coordinate modest projects carried out by

researchers at member companies. According to

some analysts, the participation of major Japanese

companies in such projects has led outside observers

to overestimate the project’s importance. Cooperative research in Japan is thwarted by the same

barriers found elsewhere: reluctance of the leading firms involved in the program to share

information, difficulties over intellectual property rights, and, in the case of special research

centers, failure of companies to supply their best

scientists. Projects, therefore, tend to address potentially interesting but commercially low-priority

targets.

An exception may be projects funded by Key

Technology Center, which provides up to 70 percent

of the cost of industry joint research projects. The

center, which is a response to concerns about venture

capital shortages for investment in emerging technologies, is largely financed by privatization of

Nippon Telephone and Telegraph. The Protein

Engineering Research Institute (PERI) project in

Osaka will receive $150 million in government

funding over a 10-year period. PERI, which involves

14 chemical, pharmaceutical, and food companies,

has received a great deal of attention in the United

States and Europe. Roughly 70 researchers are

studying structure-function relationships with the

ultimate goal, according to Katsura Morita of

Takeda Chemical Industries, of fostering a strategic

edge in protein engineering technology (28). Such

research is critical to a number of important biotechnology applications. However, though the potential

for PERI is great, to date there is little to show, which

is not surprising since it is a long-term project.

Other officials point out the modest industry

funding of most government-organized projects and

suggest that companies take part in cooperative

projects to get along with government ministries, but

have little expectation of commercial return. At least

one pharmaceutical company has refrained from

participating in any Japan Health Sciences Foundation projects (organized by MHW) because managers believe it is better to concentrate on their own

commercial research (43).

Research associations and cooperative projects

can serve as a means to disseminate knowledge

throughout an industry, a role played in the United

States by an open university system and more

flexible employment practices. However, lead companies (in Japan and in the United States) are often

reluctant to share knowledge with competitors.

Cooperative projects may have helped some firms

acquire technical expertise. Their significance has

shifted, however, with the commercial success and

increased research intensity of Japanese industry and

should not be overstated. There is no evidence that

they have played a major role in the development of

Japanese industrial biotechnology expertise.

Government-Industry Relations

Research and industry associations, along with

numerous advisory groups, play an important part in

a continuing dialogue between industry and government ministries. There is dynamic tension in the

relationship between ministries and “their” industries. Formation of the Biotechnology Development

Center (BIDEC) in 1982, under auspices of the Japan

Association of Industrial Fermentation, was clearly

a MITI initiative. MITI’s influence is seen in

BIDEC’s activities, such as the organization of

international conferences. It would, however, be

wrong to assume that MITI controls companies in

any way. MITI’s current biotechnology plans are not

greatly respected by many Japanese executives in

biotechnology-related companies. MITI’s influence

depends on a variety of factors, not least of which is

Icmwativeremhin @~~terrefem to r~~chinvolving thr~ or more comp~~. It sho~d not & confused with joint vmtures, joint product

developmen~ contract R&D, or licensing agreements that typically involve only two fm.
158 ● Biotechnology in a Global Economy

the perceived quality of MITI’s analysis, programs,

and funding, and funding capabilities. Members of

BIDEC use the association to influence policy to

their advantage and tailor modest cooperative projects to their interests, if possible.

It now appears that Japanese industry is generally

too successful and too powerful to be unwillingly

guided into targeted investments. The power of the

ministries may well have decreased with time. On

the other hand, ministries such as MITI and MHW

still have powerful regulatory roles. There are strong

linkages between research and regulatory policies as

is seen most clearly in MHW manipulation of drug

prices to encourage innovation. When asked what

policies most affect their companies, the overwhelming majority of Japanese executives interviewed by OTA in preparing this report named

regulatory and pricing policies.

Conclusions

Japan’s publicly funded basic research is weak

when compared to U.S. efforts. Despite calls by the

Science Council of Japan and recommendations in

MITI white papers, the Ministry of Finance has not

made funding increases. Initiatives such as PERI and

the various ERATO projects, although significant,

are still rare. Reform toward more creative and

innovative research and training of creative and

original thinking scientists in Japan’s universities

has only just begun.

Japan’s strength is clearly in industrial R&D.

The wide variety of companies attempting to

utilize biotechnology in some way is impressive,

from traditional sake and miso producers to

Japan’s largest multinationals. However, a number of companies, such as Kawasaki Steel, are

pulling back from their biotechnology ventures (24).

For such companies, diversification into biotechnology was a disappointment. Commercialization has

taken longer, been more technically difficult, and

been more dependent on factors unique to each

industrial sector than expected. Biotechnology has

not achieved the spectacular success that other fields

have for Japanese industry.

Japanese high-profile, though modestly funded,

industrial and research policies encouraged investment by a wide variety of companies. However,

Japanese chemical companies were moving into

higher value-added products, such as pharmaceuticals, prior to government initiatives. Japanese food

processors have historically invested more heavily

in R&D, compared to their counterparts in the

United States and Europe. Japanese pharmaceutical

companies now seem to view biotechnology in the

same way as their counterparts abroad--i.e., as a

powerful tool to supplement other research. Those

companies, while more cautious than in the past, are

continuing biotechnology research in terms of individual corporate strategies and assessments of commercial potential. For the foreseeable future, corporate strategies, rather than MITI initiatives, will

likely determine Japan’s investment in biotechnology.

Europe: Moving Toward a Regional Strategy?

B’

A number of European countries have technology policies that resemble those of the United

States. National policies, however, are becoming

less distinctive as Europe moves closer to economic integration. The effectiveness of national

technology policies is limited by the evolution of

an economically united European Community

(EC) and, even more fundamentally, by the

larger force of international competition.
Chapter 10--Science and Technology Policies . 159

If European national technology policies seem

less significant than they were once thought to be, it

is not yet clear that specific, regional policies for

biotechnology-related fields will emerge. The research and commercial resources of EC countries,

however, are enormous. Modest EC research programs currently underway aim to breakdown barriers to the effective utilization of those resources.

Integration will also directly affect the non-EC

European countries.

Each country promoting biotechnology illustrates

a variation on how to promote science and technology of economic or strategic interest. The initial

impetus may have been born in the government

bureaucracy, in the academic community, or in

industry. Where initial activities began, continue to

influence how a country continues to pursue biotechnology R&D. Four European countries—

France, the United Kingdom (U.K.), Germany, and

Switzerland-are described in order to illustrate a

variety of strategies. Regional programs, unique to

-- . - Western Europe, offer yet another approach to

strategic planning.

France: State-Initiated

o

In 1979, the French

Government responded to

President Giscard d’Estaing’s interest in ethanol

fuels by producing a

wide-ranging series of reports. The reports out-

‘bed energy research as

well as the potential for biology to change the

relationship between humans and the environment,

particularly in agriculture. The Mobilization Program, implemented in 1982, set for France the

ambitious goal of achieving 10 percent of the

world’s biologically based production by 1990 (39).

Several research areas were targeted. Firms were

to collaborate with various research institutes on a

number of projects, and regional research and

technology-transfer centers were to be established.

Today, of the European nations, France is the leader

in agricultural biotechnology. Biotechnology centers are well funded and staffed, and French seed

companies have made major investments in biotechnology (41).

The French Government also attempted to reorient French researchers toward new biotechnologyrelated disciplines and more industrially relevant

work. Unlike the situation in the United States,

France’s research strength lies not in its universities

but in its government research institutes. Funding for

all research, including research relevant to biotechnology, grew through 1985 but fell steadily after

that. Still, new emphasis has been put on molecular

biology, enzymology, immunology, plant genetics,

and bioprocess engineering (42).

French planners thought that biotechnology

would be essential to economic strength and national

sovereignty. However, the various mechanisms

established to achieve rather lofty goals have had

limited success in areas other than agriculture and

have been hampered by inconsistent government

funding. France has had modest success in pharmaceutical applications of biotechnology-success

that cannot be ascribed solely, if at all, to the

Mobilization Program. While the large seed companies have invested in biotechnology R&D, the small

and medium-sized firms, which make up the majority of the industry, continue to spend little on

research (39). Of more significance now, may be

regional policies. France is an enthusiastic participant in EC research programs and has pursued

biotechnology through the French-inspired

EUREKA initiative.

United Kingdom:

i-z-l

and a reluctance

articulate a clear

Britain does not

Academic-Initiated

The United Kingdom

most closely parallels the

United States, with a

strong research base, an

emphasis on basic research (approximately 70

percent of government

biotechnology funding),

on the part of government to

research or industrial policy.

have the advantages of scale

available to the United States, and funding decisions

have been difficult. The academic community, itself,

was the force behind government initiatives, recommending a coordinated biotechnology policy to the

reluctant, new Thatcher government in 1980 (39).

But policy in the 1980’s can best be described as

“muddling through,” with tight research budgets

causing struggles among funding research councils,

a situation exacerbated by modest initiatives for

more industrially relevant, precompetitive research.
160 ● Biotechnology in a Global Economy

The most notable U.K. initiative has been the

Biotechnology Directorate, established by the Science and Engineering Research Council in 1981.

The research agenda, crafted by a steering committee of university scientists and industrialists, has

moved steadily toward important biotechnology

areas, such as protein engineering (38). In 1990, the

United Kingdom formed a Biotechnology Joint

Advisory Board, which is working toward coordinated research strategies between its various research councils (9).

British research is well-regarded and attractive to

foreign, as well as British, companies. (Major

British pharmaceutical and chemical fins, in fact,

have been criticized for insufficient interest in the

existing and available academic resources.) Many

major foreign companies have established relationships with British institutions. Monsanto, for example, has a £20-million agreement with Oxford

University. But poor salaries, combined with limited

expectations for growth in research budgets, have

caused a brain-drain of experienced researchers from

the United Kingdom and a consequent crisis in

recruitment that may make it difficult for Britain to

maintain the quality of its science base (38).

Germany: Industry-Initiated

The 1974 creation of

the world’s first national

biotechnology program,

the German Society for

Chemical Equipment,

Chemical Technology and

Biotechnology (DECHEMA) was backed by

West Germany’s large chemical and pharmaceutical

companies and an effective trade association. Members were primarily interested in new fermentation

techniques; it was not until the early 1980s that

recombinant DNA (rDNA) and cell fusion were

given equal treatment in targeted biotechnology

spending by the Federal Ministry of Research and

Technology (BMFT) (50). Nevertheless, today’s

reunified Germany has a strong, diverse base in

underlying disciplines, a flexible and relatively

diffuse research structure with substantial Federal

and State support, and interactions between industry, universities, and research institutes that provide

support to the country’s strong group of large and

medium-sized companies. Biotechnology techniques are well-integrated into those companies, and

larger German firms have established research

facilities in other EC countries, the United States,

and Japan (37). However, Federal and State initiatives to encourage small biotechnology-based

startup firms have had minimal success.

In August 1990, the German Federal Government

approved a new biotechnology R&D program

known as “Biotechnology 2000.” The program’s

financial allocation for the period 1990 to 1994 is

DME1.5 billion (approximately US$855 million).

Although the program is designed to promote

biotechnology research in the areas of the environment, public health, nutrition, energy, and natural

resources pharmaceuticals will be a primary focus.

As a result of Germany’s reunification, biotechnology will also be promoted in what was formerly East

Germany. Research institutes and businesses in the

East will be eligible to apply for grants. It is expected

that there will be active involvement in the program

by industry (22).

German policies clearly arose from the private

sector. They were built on an established research

and educational infrastructure with less clear linkages to trade and regulatory policies. As discussed in

chapter 11, acceptance of biotechnology by the

German public remains problematic, and the German regulatory outlook is evolving.

Switzerland: Industry- and Academic-Initiated

Switzerland shares

o

with Germany a strong

emphasis on education

and close ties between

large Swiss chemical and

pharmaceutical companies, such as Sandoz,

Ciba-Geigy, and Hoffmann-LaRoche, as well as national universities and

research institutes. Those ties, however, do not

imply that universities emphasize developmental or

applied research over fundamental science; firms

support fundamental research at public institutions

(19). Industry itself, carries out or funds around 75

percent of total country R&D. There is no formalized biotechnology strategy or articulated industrial

policy. But Swiss industry, with its proven strength

and willingness to develop and apply basic advances

at Swiss or foreign laboratories and, typically, in

foreign rather than Swiss production facilities, funds

around 15 percent of university research-roughly

three times more than industrial funding in the
Chapter 10--Science and Technology Policies . 161

United States (10). It is ironic that Swiss government

incentives for industry participation in biotechnology research centers elsewhere in Europe may divert

some research out of the country (19).

Regional Programs

The objectives of EC biotechnology programs

(see box 10-C) are to mobilize the European research

effort, target precompetitive research, and enhance

the competitiveness of European industry. Several

weaknesses are evident, however. Investment levels,

for example, have been extremely low compared to

other industrial areas. Altogether, the EC manages

only about 3 percent of the community’s total R&D

expenditures; the rest are controlled by national

governments (14) The new Biotechnological Research for Industrial Development and Growth in

Europe (BRIDGE) program, which budgeted ECU

25 million (approximately US$30 million) per year

from 1990 to 1993, is the most ambitious effort yet.

It remains to be seen whether the program will

maintain industrial relevance with high levels of

industry participation. (Administrators hope that the

new BRIDGE program will have greater industry

participation.) Although most of these programs

seek to stimulate participation by small and medium-size firms, this, to date, has not been the case.

Over time, however, the creation of regional

research networks could enhance Europe’s overall

research capabilities and, through regional training

and technology transfer, build the research capabilities of lagging countries. According to EC managers,

the creation of various forms of translational

cooperation, in and of itself, constitutes the main

justification for the programs. The commission

attempts to breakdown research barriers by connecting research centers (5).

Some observers fear that regional European

research initiatives could provide European firms

with advantages over their international competitors, thus aiding in the creation of “European

champions. There is also concern that U.S. and

Japanese scientists will be blocked from participating in European initiatives (l). In the short run,

however, it seems likely that new regional biotechnology research initiatives will be less significant for

industry than the regulatory, legal, and trade issues

surrounding the drive to create a free internal

European market by the end of 1992.

Mixed Messages

The proposed links between biotechnology research and other EC policy areas as of now are

contradictory. European Community directives for

contained use and deliberate release of genetically

modified organisms, for example, have come under

criticism from both promoters and critics of biotechnology. Despite the creation, in 1984, of a Biotechnology Steering Committee and establishment of the

Concertation Unit for Biotechnology in Europe

(CUBE) within the Directorate General for Science,

Research, and Development (DG XXII), the very

nature of biotechnology makes coordination difficult. Decisions having real, immediate impact on

research investment and commercialization are

driven by other concerns-e. g., policies on health,

agriculture, and the environment-within the jurisdiction of separate Directorates-General (4).

The most striking contradiction in EC policy

goals comes in the agriculture-food sector. Like U.S.

farm programs, the Community’s Common Agricultural Policy (CAP) has succeeded in easing the

impact of technological change on the countryside.

However, the price paid was surpluses, massive

public expenditures, higher food prices, and, cumulatively, a hidden transfer of wealth from urban to

rural regions. Biotechnology products that improve

production yields, directly or indirectly (e.g.,

through improved animal health), run counter to

CAP objectives. Suggestions that future animal

health products show not only safety and efficacy

but a positive socioeconomic impact might have a

chilling effect on all new products, especially on

biotechnology-related products (see ch. 11).

Continued debates on various directives needed to

complete the internal market by 1992 reflect the

rivalry among European interests. Outside observers

should keep in mind the extent to which various

directorates-general, themselves, represent distinct

points of view or, as in the case of agriculture, are

identified with a distinct political and economic

group. The year 1992 is not so much a firm date as

a process, and the creation of strategic policies at the

regional level will be incremental before and after

that date.

The United States: A Diffuse Approach

Japan’s biotechnology fever in the early 1980s

was in large part a response to the biotechnology

boom in the United States. A series of startup
162 ● Biotechnology in a Global Economy

Box 10-C—European Biotechnology Programs

European Community (EC) Research Initiatives. European Community biotechnology research programs

began with the Bimolecular Engineering Program (BEP). It dispensed ECU15 million (ECU1= @ US$l) in

support of basic research from 1982 to 1986. Although funded by the EC commission, it was not a translational

program. Rather, through competitive grants, BEP supported individual research groups performing isolated

projects within the respective EC member countries. Funding amounted to 50 percent of project costs.

BEP was followed in 1986 by the 4-year Biotechnology Action program (BAP). This initiative differed from

BEP in several ways. First, it focused on precompetitive research emphasizing the development of novel processes.

Second, it supported translational cooperation by requiring more than one group from more than one EC member

State participate in each project. Third, through its training stimulation scheme, it encouraged scientists to work in

other EC laboratories outside their native countries. Finally, it enjoyed a generous annual budget of ECU13.75

million per year.

Under BAP, expenditures continued to cover 50 percent of the cost for R&D ventures. Roughly 123 projects,

involving 413 laboratories, were funded. France and the United Kingdom were the largest beneficiaries, each

receiving roughly 18 percent of total dispersals through BAP’s competitive granting scheme. Portugal received the

smallest share, acquiring 2 percent of the cumulative expenditure.

BAP’s emphasis on translational activities gave birth to the concept of “laboratories without walls,” whereby

scientific organizations from various EC counties participate in joint research projects. One such project, the lactic

acid bacteria cluster, links Ireland, the United Kingdom, The Netherlands, and Germany in R&D projects focusing

on gene cloning systems, efficient gene expression, protein secretion, plasma replication, and the improvement of

various starter cultures. These efforts encourage the exchange of information, technology, materials, and staff; they

are designed to eliminate bottlenecks within the scientific community. As research matures, the efforts may take

on independent lives, e.g., spawning more applied research or proprietary relationships between participating

laboratories, scientists, and industry.

The Biotechnological Research for Industrial Development and Growth in Europe program (BRIDGE) is

planned for 1990 through 1993. Its research areas include the information infrastructure, enabling technologies, and

cellular biology. Its 5-year budget will total ECU1OO million, at ECU20 million per year. Support will continue to

be awarded on a competitive basis and, like the BAP, will cover 50 percent of R&D costs.

BRIDGE’s objectives are to further strengthen industrial applications of biotechnology and to enhance

translational research. To this end, it will incorporate projects that focus on providing a link between basic and

applied research. A minimum of 10 to 20 laboratories will participate jointly in these ventures. Annual expenditures

are expected to run ECU1 million to ECU3 million per project per year.

companies, founded in the United States in the late

1970s and 1980s, commercialized research breakthroughs. Nearly 70 new firms were begun in 1981

alone (45). Companies such as Genentech went

public and were able to raise substantial amounts of

cash (see ch. 4). Established chemical, pharmaceutical, and seed companies entered into research

agreements with the new firms, established biotechnology research groups, or acquired startup fins.

First entry of products created by rDNA technology

fed expectations of near-term revolutionary changes

in the pharmaceutical industry and other sectors, that

now seem premature.

In Japan, relevant policymaking is dominated by

tension between competing bureaucracies and powerful industries. In the United States, policymaking

is driven by the dynamics of interest-group politics.

Although Japan is far from monolithic, the sheer

number of actors in the United States makes

achieving consensus and continuity much more

difficult. Pluralism is reflected throughout the political process of budgeting and appropriating funds.

Although business interests play a strong role in this

process, they are not as dominant as in Japan (see

app. B). Congress plays a far stronger role in funding

and oversight than does the Japanese Diet, and

executive agencies have markedly less discretion or

authority than their counterparts in Japan.

The structure of the U.S. research and technology

base is, also, vastly different. As noted previously,

the Federal Government provides, in both relative

and absolute amounts, significantly more funding

than does the government of Japan; and a much

higher percentage of nondefense R&D goes to basic

research (see box 1O-D). The U.S. Government

funds roughly half of the Nation’s total R&D, and
Chapter 10--Science and Technology Policies ● 163

One project of particular interest will concentrate on sequencing the yeast genome and will involve 28

laboratories throughout the EC. The total EC contribution to this project should reach ECU8 million. A second

initiative will focus on the molecular identification of new plant genes. The EC investment in this effort will come

to ECU5 million.

Two EC agricultural programs support biotechnology research. European Collaborative Linkage of

Agriculture and Industry through Research (ECLAIR) has a 4-year budget of ECU80 million and aims at improving

the integration of farm activities with upstream (supply) and downstream (processing) industries. The related

Food-Linked Agro-Industrial Research (FLAIR) program will run through 1993; it is aimed at improving food

quality, safety, and diversity-rather than agricultural productivity. Funding is ECU25 million.

EUREKA. EUREKA (European Research Coordination Agency) was originally created in 1985, allegedly in

response to the U.S. Strategic Defense Initiative (SDI). It has since evolved into a coordinating agency linking

advanced technology projects being carried out by European industry. EUREKA projects are not limited to EC

countries, and also include Norway, Sweden, Finland, Switzerland, Austria, Iceland, and Turkey.

Number of Participating Approved budget

Project area projects companies and labs (in million ECUs)

Agro-Food . . . . . . . . . . . . . . . . . . . . . 3 6 5.4

Agronomy and aqua culture . . . . . . . 9 27 55.7

Biochemical engineering and

cell culture . . . . . . . . . . . . . . . . . . . . 8 25 124.2

Biomedical engineering . . . . . . . . . . . 7 18 55.2

Human health . . . . . . . . . . . . . . . . . . . 12 28 88.9

Protein design . . . . . . . . . . . . . . . . . . 1 3 16

SOURCE: f3io#ufur(Biofutur, April 1989).

Although biology was not an initial priority, as of mid-1989 EUREKA had approximately40 biotechnology,

food, and biomedical projects (of over 210 total projects). They areas follows:

Although the EUREKA’ s focus on commercially significant research and translational industry cooperation

could have more immediate impact than the EC programs, it is still too early to evaluate its effectiveness. Public

funding for EUREKA projects has been less than anticipated, and the most recent approvals may not reach 50 percent.

SOURCE: @lc~ of Technology Assessmem 1991, adapted from E. Magnien et. al., “hs Laboratoires Ilu.rop ens saris Mw,’’lliof@r,”

R. van der Meer,’’lliotechnoiogy in the ZVedteriands’ paper presented at OIA international conference on Biotechnology in a

Global Economy, vol. S4, November 1989, pp. 17-29.

OTA estimates that the Federal Government funds by embodying the way things are done. ’ However,

more than half of total biotechnology-related research (45). The United States has a decentralized

research system, and several cabinet-level departments have internal research divisions responsible

for the research needs of their particular missions,

such as enhancing health (46).

The system for setting research budgets in the

United States is inherently political. Constituencies

advise agencies informally and through official

advisory boards and committees. The constituencies

support their own spending priorities during the

budget and appropriations process. The role of

Federal agencies is crucial to the success of Federal

research efforts, as the agencies are intricately

involved in the day-to-day operations of the research

system. Each agency has its own culture. These

cultures contribute to their success, perhaps simply

the cultures are powerful determinants of future

directions, and specific goals may only be reflected

in the collective knowledge of agency personnel

(46).

Overall Funding Trends for Biotechnology

Historically, the United States, both in absolute

dollar amounts and as a percentage of its research budget, has had the largest commitment to

basic research in biological sciences worldwide.

In 1988, OTA found that 12 Federal agencies and

one cross-agency program, the Small Business

Innovation Research Program (SBIR), spend research dollars on biotechnology (45). The National

Institutes of Health (NIH) funds nearly 85 percent of

all federally funded biotechnology, thus playing the
164 ● Biotechnology in a Global Economy

Box 10-D—United States Support of R&D

In 1990, the United States spent an estimated $150 billion on research and development ( R&D). This represents

an annual real increase (in constant dollars) of 1.3 percent-the 15th consecutive year in which the national R&D

effort grew faster than inflation. This extraordinary record was comprised of a period of consistent growth above

inflation in the late 1970s and early 1980s, then a short spurt of tremendous growth in the mid-1980s, and over the

past few years, a shift toward modest growth rates--around 1 percent above the inflation rate.

The United States devotes more resources to supporting R&D than any nation in the world. The estimated $150

billion to be spent in fiscal year 1990 is more money than the combined R&D spending of Japan, Germany, the

United Kingdom, and France. As a percentage of Gross National Product (GNP), however, the United States is not

so dominant. Over the past 20 years the United States has consistently spent a larger share of its GNP on R&D than

some nations (like the United Kingdom and France), but since the late 1970s, West Germany and Japan have

increased their R&D/GNP ratios considerably. By 1988, these two nations and the United States were spending

between 2.7 and 2.9 percent of their respective GNPs. In 1990, the estimated R&D effort in the United States of

$150 billion represents 2.7 percent of the American GNP. This ratio is up from the 1971 low of 2.1 percent (which

followed cuts in defense and space programs), and it is just shy of the peak level of 2.9 percent achieved in 1964.

Considering only nondefense R&D spending, however, the situation is somewhat different. While the ratio of

nondefense R&D to GNP in the United States is still larger than the United Kingdom and France, Japan and

Germany have much higher ratios, these have been consistently higher than the U.S. ratio over the past 20 years.

The national R&D effort is shouldered primarily by the Federal Government, industry, and academic

institutions. In 1990, industry and the Federal Government together accounted for nearly 96 percent of total support,

with universities and colleges contributing 3 percent, and other nonprofit institutions funding 1 percent. Today,

industry is the largest single source of R&D funds, providing $74 billion compared to the Federal Government’s

$69 billion. The past decade represents a period of great growth in industrial R&D spending, as only since 1980

has industry spent more than the Federal Government on R&D.

SOURCE: Ofiice of Technology Assessmen~ Fe&rally FundedResearch: Den”sions For A Decade, 1991,

special role described below. The other agency training for biotechnology, but calls for an expanded

programs are described in appendix C.

The National Institutes of Health—The NIH is

the largest research agency in dollars awarded to

basic and applied research in the Federal Government. Of fiscal year 1990’s appropriation to NIH,

$2.9 billion was biotechnology-related. NIH is the

principal biomedical research arm of the Department

of Health and Human Services (DHHS), and it funds

biomedical and basic research related to a broad

spectrum of diseases and health problems in both its

own research facilities and at outside organizations.

The NIH has been the principal funding source for

biotechnology across all fields. But should, or can

NIH continue this role? This is not a new question;

in 1984 and 1985, considerable public discussion on

the role of NIH took place between the President’s

Science Adviser, George Keyworth, and NIH Director, James Wyngaarden. Keyworth pushed for a

broader NIH role in meeting nonmedical biotechnology needs, while Wyngaarden resisted this expanded NIH role (6). At a 1985 NIH Advisory

Committee conference, some consensus was

reached on the need for expanded, interdisciplinary

role in more applied or intermediate research were

resisted (47). At the time, concerns about the effect

of more targeted research on basic research funding

were expressed, with industry coming to the aid of

academic science in supporting the importance of

NIH's commitment to funding basic science. More

recently, parts of the scientific community balked at

the prospect of an ambitious effort to map and

sequence the human genome, fearing that such

directed research detracts and subtracts from resources for fundamental research.

These concerns not only remain pertinent but also

have become more acute in light of budget constraints. Despite real growth over the last decade,

NIH views itself as being in a steady state and finds

itself under strain. With biotechnology increasingly integrating into other research fields, and

with budget pressures building, it will be difficult

for NIH to support biotechnology across all

fields. Until 1990, scientists in plant and animal

science, who have relied on NIH for funds because

there have been no other sources, were fearful that

budget constraints could imperil their only source of
Chapter l&Science and Technology Policies ● 165

funding as NIH eliminates or cuts back on projects

not central to its mission (51). But the 1990 Farm

Bill and the 1991 U.S. Department of Agriculture

(USDA) budget showed major increases for competitive grants in these areas.

From the Laboratory to the Market

University-based research was the foundation of

U.S. leadership in initial commercial applications of

biotechnology. Indeed, biotechnology in the United

States is, in many respects, an example of successful

technology transfer. Venture-funded startup firms

first brought advances in the biological sciences into

the commercial arena in the 1970s; today, university

researchers often move easily between academic and

commercial pursuits. Universities themselves are

seeking more financial returns from the products of

their intellectual capital. This is not a surprising

phenomenon, given the closeness between biological research and application.

Recent trends in the biological sciences indicate a move away from broad, lengthy agreements between universities and industry and

toward numerous specific agreements. Genentech, until 1990 one of the largest and most visible

independent biotechnology-based pharmaceutical

companies, may have up to 500 active agreements at

any one time (15). Agreements such as the one

between Monsanto and Washington University (initiated in 1982 and scheduled to run through 1994,

involving over $100 million) are the exception, not

the rule.

Extensive university-industry ties in the biological sciences have highlighted concerns common to

a number of fields. Some critics wonder if Congress

and the executive branch have gone too far in

encouraging the commercial exploitation of university research. Recent congressional hearings have

focused on personal and institutional conflicts of

interest--questioning whether the integrity of university or government laboratory research has been

compromised by allowing private gain from public

investment. Critics of aggressive technology transfer out of the universities have asked whether

scientists with a substantial financial stake in

research outcomes can be objective in reporting

research results. These questions, mentioned in an

earlier OTA report (45), remain largely unresolved.

In response to these criticisms, however, universities

and professional journals have developed disclosure

guidelines for making public the personal and

financial interests of researchers. Until recently,

such disclosure was strongly resisted (15). The NIH

responded to mounting concern by proposing, in

September 1989, guidelines for university researchers receiving Federal funds. Industry opposed the

initial guidelines, which were withdrawn in December 1989, as a threat to commercialization of

university biological research. In addition, the 1990

Farm Bill contains a provision that requires landgrant universities to establish conflict of interest

policies.

Subtle questions are raised as universities attempt

to profit from research relationships. Are the factors

that make such relationships attractive-including

an atmosphere fostering innovation through the free

and easy flow of ideas--threatened by agreements

that are overly protective of a university’s financial

interests? Also, should U.S. academic institutions—

encouraged by congressional, executive branch, and

State actions to license technology-be criticized

when the licensee is foreign, even when U.S. firms

expressed no interest in the technology?

Consortia, Centers, and Cooperative Research

In recent years, the U.S. science community has

engaged in an ongoing debate over the appropriate

size and organization of research efforts-particularly in the life sciences. Proponents of more

directed research criticize the traditional investigator-initiated, individually funded approach typical of

federally funded biomedical research (3). The biological sciences remain, for the most part, wedded to

this approach, although other disciplines have come

to rely more on fewer, but more expensive, facilities

and larger research teams (the so-called ‘‘big science’ ‘). Some argue that the interdisciplinary nature

of modern biological research requires a shift toward

big science. Others suggest that efforts requiring

large amounts of time-consuming, repetitive work,

such as mapping and sequencing the human genome,

would be best carried out in centralized facilities

with large data-handling capabilities. Flexibility has

been urged by many, who point out that different

approaches could be necessary for different types of

research. A larger critical mass of researchers might

be appropriate for some types of generic, applied, or

intermediate work; and individuals or small teams

might be more likely to generate both basic innovations and specific applications.

A more concentrated approach could be desirable

for certain bottleneck areas of basic or applied
166 ● Biotechnology in a Global Economy

research. Although some advocate the establishment

of industrial consortia to achieve those purposes

(26), others argue that because so much of commercial significance comes out of basic research itself,

cooperative research on a large scale is difficult if

not impossible (27). In fact, some believe that

innovative new companies may have little to gain

from participating in consortia with larger but less

innovative companies (34).

In 1987, an effort to create an industry-based

consortium for protein engineering research in the

United States failed. Although supported by researchers at a number of U.S. companies, participants say that upper management was concerned

about consortium funding and the sharing of information coming out of joint research (11).

Consortia have been touted by some as a cure-all

for the perceived weaknesses of U.S. hightechnology industries (36). In the United States,

cooperative research usually takes the form of a

“center” that is mostly university-or government

laboratory-based, low profile, and modestly funded.

The primary function is to provide companies with

a window on new technology and access to research

conducted at the center. A center may also give

companies access to personnel. These consortia or

centers are typically organized by enterprising

university or government laboratory entrepreneurs,

who utilize public funds as an incentive for private

investment in university or government laboratory

biotechnology centers. Frequently, centers are part

of State or local economic development efforts (45).

An exception to this is the Midwest Plant Biotechnology Consortium (MPBC) involving 12 States,

over 15 universities, 3 Federal laboratories, and

nearly 40 agribusiness corporations. The MPBC

carries out research in plant biotechnology, encompassing Midwestern crops and cropping practices.

Universities have attempted to provide a forum

where companies can truly cooperate in precompetitive research. However, frequently, little

cooperative research occurs and, instead, a series

of agreements develop between university management and individual companies. Any cooperative work is financed through a general membership

fee paid by industrial participants, few of which have

much riding on the outcome of such projects.

Membership takes many forms, sometimes as industrial liaison programs. One executive of a large

chemical company said that his firm participates in

a number of university-based consortia, but that in

most cases it is token participation through payment

of a small annual fee. Smaller companies may find

even a small fee prohibitive. Companies may feel

such participation is good for public relations, but

have little expectation for tangible benefits. On the

other hand, a few projects are quite serious; in

general, they involve fewer industrial partners, who

have specific expectations and are contributing

significant amounts of money (33).

Although several limited consortia have been

formed in biotechnology, broad-based consortia

in biotechnology are not likely to emerge unless

there are clear technical advantages that cannot

be easily solved by companies working alone, a

strong challenge is posed by foreign industry, or

government funding is provided as an incentive

to cooperation. Otherwise, cooperative initiatives

are likely be the exception, not the rule, and

large-scale projects few in number.

NATIONAL POLICIES IN A

GLOBAL ENVIRONMENT

What is the national interest in a global research

and commercial environment? This question is

becoming more difficult for national governments to

answer. National interests affect decisions on research priorities, training programs, and relationships between universities and research institutes

with domestic and foreign fins.

In general, U.S. policy toward nonmilitary R&D

has been to support basic research, with the expectation that industry will develop and apply that

research in the marketplace. United States priorities,

however, are brought into question by the commercial success of companies in countries such as Japan,

that benefit from a greater emphasis in governmentfunded programs on applied research and technology than on basic science. The one exception maybe

U.S. biotechnology, which has grown out of the

large federally funded biomedical research base.

For several promising application areas, especially human health, agriculture, and environmental

protection, certain applications of biotechnology

have the potential to address social needs. To some,

this role indicates a moral imperative to advance

knowledge, regardless of political borders or economic issues. This is especially an issue for the

United States, which spends significantly more than
Chapter 10--Science and Technology Policies . 167

other countries on biomedical research. Judging by

citations in published scientific articles, biomedical

research is markedly international (46). Few scientists would support limits on communication and

collaboration. Many would argue that the volume

and extent of information flows, regardless of

borders, have greatly speeded the advance of knowledge.

In addition, there is common interest in establishing new, international databases for research and

regulatory purposes and in developing appropriate

technologies for the Third World. Scientists in a

number of countries are exploring ways to cooperate

on mapping and sequencing the human genome.

Threats by the United States to limit access to U.S.

prepublication results have caused concern at home

and abroad. Such restrictions would have a greater

effect on small foreign companies than on multinationals with U.S. operations (18).

Domestic University-Foreign Industry

Relations

Restricting foreign access to, and funding of,

domestic research might be feasible if a country

has the following:

●

●

●

●

a clear technology lead,

firms that have little to gain by similar access

abroad,

domestic companies supporting domestic

research and licensing available technology,

and

a clear distinction between domestic and

foreign firms.

These conditions, however, seldom apply.

The United States may have a clear advantage in

many areas of biomedical research, but it may not

have such an advantage in other fields where

biotechniques are being developed. Significant work

is also carried out in foreign institutions in almost all

areas, and U.S.-based firms have established relationships with foreign universities and research

institutes. Monsanto’s arrangement with Oxford

University has already been mentioned. Calgene has

licensing and technology-transfer agreements with

universities in Canada, France, Japan, and the

United Kingdom. Mycogen has agreements with

Japanese and European firms. Genentech received a

small grant from the Japanese MHW for cooperative

research on premature aging, and also has several

agreements with Japanese universities. United

States and European pharmaceutical firms have

established research facilities in Japan.

There are a number of long-term agreements

between foreign firms and U.S. universities. Hitachi

is building a new research facility at the University

of California-Irvine that will become fully owned by

the university in 30 years. Several European firms

have established research facilities in the United

States and fired university research in this country.

Under the pressure of international competition,

companies are obliged to take advantage of innovation quickly-regardless of origin. According to one

observer: “Both multinational corporations and new

biotechnology firms choose their academic partners

irrespective of national borders” (17). Some U.S.

industry and university observers feel that the real

question is not why U.S. universities are doing

business with foreign companies, but rather, why

more U.S. firms are not taking full advantage of U.S.

universities.

Some university administrators also point out that

U.S. firms, themselves, frequently license technology to and from foreign countries. Such agreements

reflect the financing needs and marketing strategies

of small and large firms. This situation raises the

underlying question of national interest in a global,

commercial environment. Is funding for U.S. research to be rejected because it comes from a

foreign-based company? Will access to publicly

funded research be restricted to U.S. firms that may

license products abroad or carry out substantial

research or commercial activities abroad? United

States law requires inventions developed with Federal funds to be manufactured domestically for U.S.

markets (Public Law 96-517).

Basic research’s significance for current biotechnology products makes these questions more difficult to answer, as do the different roles and degrees

of access to universities in various countries. Research in Japanese universities, for example, is not

comparable to that in the United States. Some people

in industry say that advocates of an open, international research and commercial environment are

naive, and that the only way to have any success is

to keep new and important technology stateside (32).

However, other industry observers say that science

is a lousy place to say “buy American” (40).
168 ● Biotechnology in a Global Economy

SUMMARY

When recombinant DNA and cell fusion techniques were developed during the 1970s, the potential of biotechnology excited scientists, industrialists, and government officials. But, as with other

profound advances in knowledge, developments

have confounded the predictions and expectations of

even the best/informed observers. In some ways,

early commercialization of proteins, derived from

genetically modified organisms, fed expectations of

scientists, financiers, business people, and, not least,

government officials. The expectations were unrealistic. Biotechnology may prove to be the last great

revolution in knowledge in the 20th century and a

significant underlying technology for the 21st century, but its full impact has not yet been felt.

Many governments, enamored by biotechnology’s potential and concerned that their domestic

industry not lose out in developing anew field, have

launched specific biotechnology development efforts. Governments everywhere are realizing that

high-technology helps drive industrial competitiveness and economic strength. For many, biotechnology became a test case, not only at the national level,

but in many States (i.e., North Carolina, Maryland,

and Massachusetts).

Many components of such strategies, such as: the

emphasis on technology transfer, development of

incubator facilities and venture capital for startup

fins, and establishment of interdisciplinary centers

for research are certainly helpful for focusing

attention. However, in a sense, they operate at the

margins. In 1984, OTA found that government

expenditures on research (and the concomitant

development of trained scientists) were among the

most significant factors influencing competitiveness

in biotechnology. A strong research base is the first

priority allowing small companies and venture

capitalists the opportunity to take risks. Without

this, industry-oriented programs will not be very

successful. Observers concerned about Japan may

note that Japan is now working hard to train

scientists although spending on basic research still

lags, as compared to the United States.

If targeted biotechnology strategies have been

largely unsuccessful, some of the reason may be

because of the way biotechnology arose out of basic

biomedical research, only to become fully integrated

into the various fields of life sciences. The term

biotechnology retains coherence only to the extent

that regulations, public perceptions, and intellectual

property law deal with specific biotechnology techniques as something unique.

The challenge, then, for national governments is

to sort out national from private interests. A task that

will become more difficult as competitiveness is

used as a justification for particular expenditures.

For the most part, political support of research in this

country is based on perceived social needs—fear of

disease, concern for an adequate food supply or the

environment, and national defense. Economic nationalism may be particularly difficult to define and

pursue, given the pluralistic, incremental, and increasingly global nature of the world’s R&D system.

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Berkeley, CA, 1987. 51. Zimbelman, executive vice president, American So50. Ziehr, H., remarks at OTA conference “Biotechnol- ciety of Animal Science, personal communication,

ogy in a Global Economy,” July 6-7, 1989. July 1990.
“One must learn

until you try.”

by doing

“I’m drawing up the

DNA? Very low.”

the thing, for although you

Chapter 11

Regulations

think you know it you may have no certainty

Under D, I have dogs,

The DNA Story: A .

Sophocles

doctors, dioxin. Where do I put

James D. Watson

Documentary History of Gene Cloning
CONTENTS

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173

BIOTECHNOLOGY RISK AND REGULATION IN THE UNITED STATES . . . . . . . 175

Biochemical Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175

Altered Micro-organisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177

Transgenic Plants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182

Transgenic Animals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183

Implementation and Coordination of Regulations . . . . . . . * . * ., * . . .,, . . . . . *, **....,. 186

NATURAL REGULATORY POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186

No Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189

Stringent Biotechnology-Specific Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189

Limited Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194

EFFECT OF REGULATION ON COMPETITIVENESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195

SUMMARY ... *.. ***. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196

CHAPTER 11 REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .197

Boxes

Box Page

1 l-A. Containment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174

11-B. Federal Coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176

11-C. Regulation Under the Federal Plant Pest Act and the Plant Quarantine Act . . . . 180

11-D. Green Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187

11-E. State Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188

11-F. Bovine Somatotropin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190

1 l-G. Regulations in Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . 192

11-H. Regulations in France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193

11-1. Regulations in the United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193

11-J. The Organization for Economic Cooperation and Development . . . . . . . . . . . . . . . . 195
Chapter 11

Regulations

INTRODUCTION

Health and environmental regulations aimed at

reducing risks associated with a new technology

impose direct costs on industry and administrative

costs on government. These regulations also result in

indirect costs to the public, in the form of higher

prices and, perhaps, decreased benefits from innovation. Governments impose regulations, however,

to avert the costs associated with mitigating adverse

effects that might result from the use of the

technology. Ideally, the imposition of regulations

results in a net benefit to society. But, balancing the

costs of regulation against the benefits of risk

reduction through regulation is difficult when a

technology is new, and the risks associated with it

are uncertain or poorly understood.

Oversight of biotechnology in the United States

began in the mid-1970s when concerned scientists

asked the National Institutes of Health (NH-I) to

implement a set of laboratory-safety guidelines for

biomedical research using recombinant organisms

(7). Although no evidence existed that these organisms were more harmful than naturally occurring

organisms, there was uncertainty about the risk

associated with the use of recombinant organisms in

the laboratory and concern about rapid, widescale

use of the new techniques. Therefore, the NIH

Guidelines, published in 1976, outlined conditions

for research that would reduce the possibility of

recombinant organisms escaping the laboratory or

infecting laboratory personnel.

The NIH Guidelines were comprehensive. They

detailed proper laboratory procedures for handling

various kinds of organisms in different kinds of

experiments. They also described systems for containment, using specialized equipment and disabled

organisms unable to survive outside the laboratory

and, therefore, less likely to transfer deoxyribonucleic acid (DNA) to other organisms (see box 1 l-A).

Experiments perceived to entail more risk or uncertainty than others were assigned to higher categories

of containment with concomitantly more safety

equipment and procedures.

Over the next several years, the guidelines were

revised and relaxed as more organisms and experiments were shifted to lower risk categories. The later

guidelines also established a graduated oversight

procedure. Experiments thought to entail the most

risk (e.g., those involving human subjects or the

production of highly toxic substances) were reviewed by NIH’s Recombinant DNA Advisory

Committee (RAC); experiments thought to be less

risky (e.g., those using certain pathogens) were

reviewed by local institutional biosafety committees. Today, most recombinant DNA (rDNA) laboratory research in the United States is exempt from

review and subject to minimal restrictions.

The guidelines are not Federal regulations and

cannot be enforced through the imposition of fines

or penalties. They are based solely on NIH’s

contract-making authority. All institutions receiving

NIH funding are subject to the provisions of the

guidelines, and noncompliance can result in a loss of

NIH funding. Other Federal funding agencies have

also adopted the guidelines for use by their grant

recipients, and the guidelines have been amended by

RAC to encourage voluntary compliance by researchers in the private sector. About one-half of all

firms conducting rDNA research have voluntarily

registered their biosafety committees with NIH, and

these firms have been found to follow the guidelines

more closely than their public-sector counterparts

(70). Because the guidelines are thorough, rational,

and relatively easy to implement, they were quickly

accepted by scientists and became the standard in

most industrialized nations.

In the early 1980s, when new biotechnologybased products approached the marketplace, many

of these new products became subject to regulations

promulgated by Federal agencies other than NIH,

because of the products’ intended uses (40). Microorganisms, for example, whether or not they are

genetically altered, are subject to Environmental

Protection Agency (EPA) regulations if they are to

be used as pesticides. Plants and animals used as

food are subject to Food and Drug Administration

(FDA) and U.S. Department of Agriculture (USDA)

regulations.

To coordinate the regulatory activities of the

Federal agencies involved, a Biotechnology Science

Coordinating Committee (BSCC), recently reorgan-

–173–
174 ● Biotechnology in a Global Economy

Box 11-A--Containment

The NIH Guidelines for Research Involving Recombinant Molecules prescribe increasing levels of

containment for experiments of increasing risk or uncertainty. The lowest level of containment, BL1, is similar to

ordinary laboratory facilities; the highest, BL4, resembles laboratory conditions appropriate for handling deadly

pathogens. Methods used to confine organisms to the laboratory are listed in the guidelines; they are based on

existing procedures, commonly used in research on pathogens. The methods include:

containment, these practices include: restricting access to the laboratory; cleaning and decontaminating the

lab daily or after a spill; forbidding eating, drinking, or smoking in the lab; wearing lab coats;

techniques-to lower the risk of contamination and infection. Good practice appropriate for experiments

entailing more risk, such as experiments using human pathogens, may include serological monitoring of lab

personnel or vaccination, if such vaccination is available.

● Laboratory design or equipment that prevent physical exposure. At the lowest levels of containment, for

example, labs should be equipped with sinks, window screens, and sterilization equipment; and the lab

should also be easy to clean. At higher levels of containment, labs might be designed to be separate from

traffic flow, with windows sealed shut, and special ventilation systems installed.

● Biological containment of micro-organisrns. Experiments use micro-organisms unable to grow outside the

laboratory and limited in their ability to transfer DNA to other organisms.

These containment procedures are complementary; standard practices can be combined with various combinations

of physical and biological barriers.

The containment principles outlined in the NIH Guidelines have formed the basis for most regulations in the

United States which govern the use of genetically modified organisms. They have also been adopted by other

countries. Combining physical and biological containment is also possible and appropriate for higher organisms.

Plants and their pollen, for example, may be contained by removing reproductive organs (detasseling corn); using

plant mutants that do not form reproductive organs (cytoplasmic male sterility); using herbicides and insecticides;

geographically, isolating experimental plants from similar plants, by staggering planting dates, or physically

separating plants by growing them indoors or in a greenhouse.

SOURCES: 51 Fed. Reg. 16958; 52 Fed. Reg. 31848; 53 Fed. Reg. 43410; 54 Fed. Reg. 10508; 55 Fed. Reg. 7438; National Research Council,

Field-Testing Genetically Modijied Organisms: Framework for Decisions (Washington DC: National Academy Press, 1989).

ized and renamed the Biotechnology Research scientifically sound biotechnology regulation on

Subcommittee (BRS) (see box 1 l-B), was established under the aegis of the President’s Office of

Science and Technology Policy (OSTP). Many

questions of agency jurisdiction were settled with

OSTP’s 1986 publication of the “Coordinated

Framework for Regulation of Biotechnology.” The

document describes how new biotechnological

products will be regulated under existing law.

Although it can be argued that products made using

biotechnology are not always treated exactly as their

nonengineered counterparts are treated, in general,

an effort has been made to base regulations on the

intended use of the products, rather than on the

method by which they are produced.

Many other countries have adapted existing laws

and institutions, originally developed for the oversight of chemicals and to protect agriculture and the

environment, to accommodate advances in biotechnology. However, it is no simple matter to base

legislation written for other purposes. New legislation specific to the regulation of biotechnology was

enacted in Denmark, Germany, and the United

Kingdom (U.K.). Existing legislation has been

amended in The Netherlands, and further legislation

is under consideration (31). The European Community (EC) has also enacted two new directives

regulating biotechnology: one concerns the contained uses of genetically modified organisms and

the other regulates deliberate releases of such

organisms.

An exhaustive description of these evolving

biotechnology laws and regulations is not appropriate here. Instead, this chapter offers a broad view of

national regulatory policies. Scientific assessments

of risks associated with different applications of

biotechnology are summarized, along with the U.S.

approach to regulating these applications. Finally,

international trends in regulation are outlined. These
Chapter 11--Regulations ● 175

differences in approach from nation-to-nation, particularly through their effects on investment and

innovation, will influence the ability of the United

States to remain competitive in biotechnology on the

international scene.

BIOTECHNOLOGY RISK AND

REGULATION IN THE

UNITED STATES

The first step in conventional risk assessment is

hazard identification, that is, analyzing the specific

threat to health or the environment associated with

a substance or process. Much of the controversy

surrounding the regulation of biotechnology has

focused on hazard identification, as agencies attempt

to evaluate the type of hazard posed by this new

technology (53,68). Because there have been no

examples of adverse effects caused by biotechnology, projecting potential hazards rests on extrapolations from problems that have arisen using naturally

occurring organisms. The consensus among scientists is that the risks associated with genetically

engineered organisms are similar to those associated with nonengineered organisms or organisms

genetically modified by traditional methods, and

that these risks may be assessed in the same way

(18,34,49,50,53).

Many uses of biotechnology are similar to classical technologies or extend these technologies.

Micro-organisms, plants, and animals that have been

genetically altered through selective breeding or by

treatment with chemical mutagens are widely used

in U.S. agriculture and in the fermentation industry.

The newer techniques also result in genetic alterations, but genetic engineering enables researchers to

make more precise, well-characterized changes than

are possible using classical techniques. The new

techniques are unique, however, because they allow

the transfer of genetic material across species.

Where similar technologies have been used

extensively, past experience can bean important

guide for risk assessment. The most familiar

application of biotechnology is its use in the

production of biochemical, especially proteins.

Safety procedures developed for protecting chemical production workers can be adapted to biotechnology, and most countries have no special regulations

governing the use of biochemical produced using

biotechnology. Wide experience with the introduction of new varieties of plants has also helped

scientists pinpoint potential problems in introducing

genetically engineered plants.

In other cases, however, experience is uneven.

Although certain micro-organisms-for example,

the nitrogen-fixing bacteria Rhizobia—have been

widely used in agriculture, experience with many

other micro-organisms is more limited. The smaller

research base has made planned introductions of

engineered micro-organisms into the environment

more controversial than the introduction of new

plants. Information on the structure and function of

microbial communities is often lacking, making it

difficult to assess the effects of environmental

introductions. In addition, micro-organisms are relatively difficult to confine and track (50,68).

Because experience with similar technologies and

applications can be useful in assessing risk, it is

reasonable to regulate biotechnology-derived products under existing legislation via established agencies that have experience in regulating specific

applications. This policy, usually referred to as

“product-based regulation,” has often been repeated in U.S. agency and interagency policy

statements.

Biochemical Products

Biotechnological processes can be used to produce proteins that are found in small amounts in

nature and that can be difficult to isolate and purify.

Instructions for making proteins are contained in the

genetic material, the DNA, of each cell, and a set of

DNA instructions for making a protein can be

transferred from one organism to a single cell of

another organism. From that cell, the new organism,

usually bacteria or cultured mammalian cells, can be

grown in large quantities in a production facility and

their protein products isolated. These products can

be enzymes, which are specific catalysts produced in

cells to speed up intracellular chemical reactions,

proteins with other life-sustaining properties, or

other biochemical. The commercial product is a

purified biochemical, not a living organism.

Some of these genetically engineered products are

substitutes for commercially available products.

Biotechnology, however, provides a faster, safer, or

more economical means of obtaining comparatively

large amounts of the product. Before the development of genetic engineering for example, human

growth hormone isolated from human cadavers was

scarce. Ultimately, it was withdrawn from the
176 ● Biotechnology in a Global Economy

Box 11-B-Federal Coordination

The Biotechnology Science Coordinating Committee (BSCC) was founded by the Office of Science and

Technology Policy (OSTP) in 1985 to:

. . . serve as a coordinating forum for addressing scientific problems, sharing information, and developing consensus;

promote consistency in the development of Federal agencies’ review procedures and assessments; facilitate

continuing cooperation among Federal agencies on emerging scientific issues; and identify gaps in scientific

knowledge.

The committee consisted of the Commissioner of the FDA, the NIH Director, the Assistant Secretary of Agriculture

for Marketing and Inspection Services, the Assistant Secretary of Agriculture for Science and Education, the

Assistant Administrator of the EPA for Pesticides and Toxic Substances, the Assistant Administrator of the EPA

for Research and Development, and the Assistant Director for Biological, Behavioral, and Social Sciences of the

National Science Foundation.

Rather than being a forum for discussion, however, BSCC became the center of interagency disagreements

about regulatory policy. Internal dissension reached a climax in 1988, when EPA sent its proposed rule for

regulation of genetically modified micro-organisms under TSCA to the Office of Management and Budget (OMB)

for review before publication in the Federal Register. The chairman of BSCC wrote to OMB requesting that OMB

withhold clearance until BSCC could consider the proposed rule. A series of interagency meetings and memoranda

resulted in deadlock. The chairman informed OMB, and OMB refused to approve EPA’s draft rule. In response, the

EPA representative to BSCC stopped attending meetings and placed the draft rule and interagency memoranda in

a public docket. As of mid-1991, no proposed rules for EPA regulation of micro-organisms under TSCA and FIFRA

had been published.

One major area of disagreement was the precise definition of organisms that would be subject to EPA

regulations. In 1989, various approaches to this problem were discussed by BSCC and by the agencies’ scientific

advisory committees. Not surprisingly, BSCC failed to reach a consensus. The issue was turned over to a higher

level committee, the Biotechnology Working Group of the President’s Council on Competitiveness, chaired by Vice

President Quayle. The OSTP’s proposed principles for the scope of oversight for the planned introduction of

organisms were published in July 1990.

In late 1990, BSCC was replaced by the Biotechnology Research Subcommittee (BRS) of the Committee on

Health and Life Sciences, a standing interagency committee of the Federal Coordinating Council on Science,

Engineering, and Technology (FCCSET). The FCCSET, like OSTP, is headed by the President’s science advisor.

The BRS’s charge is said to be similarto that of BSCC. Its membership is broader and includes representatives from

the Department of Energy (DOE), NIH, FDA, the State Department and its Agency for International Development

(AID), EPA, USDA, NSF, the National Aeronautics and Space Administration (NASA), the Department of

Commerce (DOC), the Department of Defense (DoD), the Department of the Interior, OMB, and OSTP.

(Continued on next page)

market, because it presented the risk of contamina- properties or more resistance to degradation than

tion by infectious agents. Today, human growth

hormone is uncontaminated and more plentiful,

because it is isolated from bacteria engineered to

carry the human growth hormone gene and make the

growth hormone protein.

Biotechnology can also be used to produce new

products, for use as drugs or as industrial or food

processing enzymes. Some proteins, like tissue

plasminogen activator (tPA) and erythropoietin

(EPO), occur naturally but are too expensive to

synthesize chemically and too difficult to isolate

from tissue. Biotechnology makes their production

feasible. Biotechnology can also be used to produce

modified forms of proteins with altered biological

naturally occurring proteins.

Basing the regulation of biochemical produced through biotechnology on existing legislation is widely accepted. Many regulations govern

the manufacture and uses of chemicals, regardless of

the method of production. Most proteins produced

using biotechnology, thus far, however, are intended

for use as drugs, diagnostic products, or food

additives. Therefore, before they may be sold, they

must meet FDA requirements under the Federal

Food, Drug, and Cosmetic Act (FDCA) (21 U.S.C.

§301-392). All drugs must undergo years of testing

in animals and in clinical trials, followed by FDA

review of test results. The kind, size, and length of
Chapter n-Regulations ● 177

The Council on Competitiveness made further recommendations in their 1991 Report on National

Biotechnology Policy, which contains “Four Principles of Regulatory Review. “ Vice President Quayle announced

President Bush’s approval of these principles in July 1990.

. Federal Government regulatory oversight should focus on the characteristics and risks of the biotechnology

product-not the process-by which it is created.

● For biotechnology products that require review, regulatory review should be designed to minimize

regulatory burden while assuring protection of public health and welfare.

. Regulatory programs should be designed to accommodate the rapid advances in biotechnology.

Performance-based standards are, therefore, generally preferred over design standards.

● In order to create opportunities for the application of innovative new biotechnology products, all regulation

in environmental and health areas-whether or not they address biotechnology-should use performance

standards rather than specifying rigid controls or specific designs for compliance.

The first of these principles restates long-standing Federal policy, while the second, on the importance of

minimizing undue regulatory burdens, is obvious. The third and fourth principles, promoting the use of

performance-based standards, are new to the discussion of biotechnology regulations. While this has been an

important consideration in the development of other environmental regulations in the United States, rigid controls

and specific designs have not been mandated for compliance with biotechnology regulations.

Another advisory committee was established by NIH at the behest of Congress. The National Biotechnology

Policy Board is to make recommendations to the President and to Congress on policies to enhance basic and applied

research; to enhance the competitiveness of the United States in development of commercial biotechnology-related

industries and products; to assure the training of sufficient scientists, engineers, and laboratory personnel for both

research and commercial development; and to enhance the transfer of technology from university and Federal

research laboratories to commercial laboratories. The board is also expected to make recommendations on Federal

participation in cooperative research initiatives and on regulatory policies. The board, which met for the first time

in October 1990, consists of representatives from Federal agencies, industry, universities, State biotechnology

centers, and foundations.

SOURCES: 50F.R. 47174; S.A. Shapiro, “Biotechnology and the Design of Regulation” Ecologyhw QuarterJy, vol. 17,1990, pp. 1-70; The

President’s Council on Competitiveness, Report on National Biotechnology Policy February 1991; U.S. Senate, Report to

Accompany H.R. 4783, Departments of Labor, Health and Human Services, and Education and Related Agencies Appropriations

Bill, 1989; Department of Health and Human Serviees, Public Health Service, National Institutes of Healti “National

Biotechnology Policy Board,” unpublished, December 1990; Biotechnology New.rwatch, (M. 15, 1990, p. 9.

tests depend on the nature of the drug, but approval

may take as long as 10 years. So far, 15 drugs and

biologics based on biotechnology have been approved for human use, and more than 100 are in

clinical trials awaiting approval. Diagnostic products that are not taken internally require less

stringent testing, because they do not pose similar

risks. Over 200 diagnostic tests based on biotechnology have been approved by FDA. Food additives are

approved based on manufacturer tests demonstrating

their safety under the conditions of use. In 1990,

FDA approved its first food additive produced using

an engineered micro-organism: it is chymosin, an

enzyme used in cheesemaking (29). It also appears

that FDA may consider food ingredients that are

generally recognized as safe (GRAS) when produced by conventional means to also be considered

GRAS when produced using biotechnology (37,38).

Altered Micro-organisms

Contained Uses

The organisms most commonly used in

production facilities are neither pathogenic nor

toxic and present little or no risk to workers or

surrounding communities. In fact, many strains

of micro-organisms fare poorly outside specialized growth facilities. Nevertheless, oversight may

exist in the form of restrictions on laboratory or other

contained uses of micro-organisms. Through relatively simple procedures that include the use of

seals, inters, sterilization equipment, and protective

clothing, containment measures can be used to limit

the survival of the organisms outside the growth

facility and minimize human contact with these

organisms.
178 ● Biotechnology in a Global Economy

The Occupational Safety and Health Administration (OSHA) of the U.S. Department of Labor

announced in its guidelines in the Coordinated

Framework that no new regulations appeared to be

necessary to protect the safety of laboratory workers

(51 Fed. Reg. 23347). In the United States, the

Government regulates large-scale industrial production using recombinant micro-organisms depending

on how the final product is regulated. Thus, FDA has

standards for facilities that use micro-organisms to

produce proteins, and EPA can regulate commercial

production under the Toxic Substances Control Act

(TSCA) (15 U.S.C. §2601 et seq.).

Planned Introductions

Micro-organisms are used commercially in waste

treatment and agriculture. The first such genetically

engineered micro-organism to reach the market was

a microbial pesticide engineered in Australia, and

introduced in 1989 (75). A derivative of an organism

that had a long history of safe use, its only

modification was a deletion that impaired its ability

to transfer the pesticide trait (71). Biotechnology

promises improved versions of such microorganisms and further applications to the degradation of toxic substances.

A consensus seems to exist that the vast

majority of altered organisms pose minimal or no

risk; nevertheless, certain environmental introductions could warrant concern. This judgment is

based on prior experiences with somewhat analogous situations: the introduction of other species,

including exotics; the spread of novel traits in

existing populations; and the agricultural use of

plants genetically altered through traditional techniques, such as selective breeding (15,18,49,50,53,

57,68). Potential problems include the creation or

enhancement of pests; unintended harm to nontarget

species, either directly or through competition for

resources; and changes in the basic biochemical

processes that support the ecosystem, such as

nutrient cycling (18,53).

In evaluating environmental risk, the type or

amount of genetic alteration is less important

than how that change affects the characteristics

(phenotype) of the organism and the interaction

of the organism with the environment. Several

studies list risk criteria and attempt to weigh or

prioritize them (18,50). These criteria include:

familiarity with the parent organism and its

modified derivatives,

likelihood of the organism’s persisting in the

environment or spreading to new environments,

likelihood of the organism competing successfully against other important organisms,

ease with which the organism can transfer its

genetic material to other organisms,

direct involvement of the organism in basic

ecosystem processes, (e.g., nutrient cycling and

respiration),

response of the organism to selective pressures

in the new environment, and

size and frequency of the releases, because

greater size or frequency can increase the

probability of long-term survival (18,68).

Because characteristics of the organism and the

environment must both be considered, a case-bycase review process is generally viewed as necessary

(18,50,68). Scaling the level of review to the level of

risk is appropriate, however, such as the approach

taken by NIH in overseeing laboratory research. A

faster, less-detailed review may be sufficient for

low-risk introductions. For example, microorganisms judged similar to past introductions and

returned to their native environment might eventually be assigned to a low-risk category or exempted

from review (18,50,53,68). Another proposal suggests considering how a genetic modification alters

an organism’s safety, compared with that of a

parental strain (48).

In the United States, most planned introductions

of genetically engineered micro-organisms are subject to EPA regulations. Some introductions, however (e.g., vaccines and plant pest derivatives) are

regulated by FDA and USDA.

Vaccines—The FDA regulates vaccines for

human use. Many vaccines are viruses, but because

they are weakened strains and have been used safely

under FDA regulation for many years, regulation of

human vaccines has aroused relatively little controversy.

Animal vaccines and other animal biologics are

regulated by USDA under the Virus-Serum-Toxin

Act (21 U.S.C. §151-158). Some local officials have

voiced concern about the safety of proposed tests of

new vaccines. In 1989, a proposed test of an orally

administered recombinant rabies vaccine, intended

to immunize wild animals, was abandoned after
Chapter n-Regulations ● 179

State public health officials raised objections in

South Carolina, but a similar test took place in

Virginia in mid-1990. Other outdoor tests of recombinant animal rabies vaccines have taken place in

Belgium, Canada, and France (25,27). The USDA

granted 42 licenses for veterinary biologic products

through the end of 1990.

Plant Pest Derivatives--Release of genetically

engineered micro-organisms derived from plant

pests is regulated by the Animal and Plant Health

Inspection Service (APHIS) of USDA, under the

authority of the Federal Plant Pest Act (PPA) and the

Plant Quarantine Act (PQA) (see box 11-C).

Pesticides-Genetically engineered micro-organisms intended for use as pesticides are regulated by

EPA under the Federal Insecticide, Fungicide, and

Rodenticide Act (FIFRA) (7 U.S.C. §136 et seq.).

Under this law, all pesticides, whether chemical or

microbial, genetically engineered or not, must be

registered by EPA before being sold and may only

be distributed and used under the conditions approved in the registration. The EPA also grants an

Experimental Use Permit (EUP) to allow limited use

of unregistered pesticides for premarket testing.

EUPs are usually presumed not to be required for

testing new chemical pesticides on less than 10

acres, but EPA has concluded that evaluation of

small-scale testing of certain genetically engineered

micro-organisms is needed. To determine if an EUP

will be required, EPA is amending the existing EUP

rule to require that it (the EPA) be notified of plans

for small-scale testing of certain categories of

micro-organisms. Until a new rule is promulgated,

EPA has requested voluntary compliance. In the

case of micro-organisms that are pesticides and are

also derived from plant pests, EPA has been

designated the lead agency under the Coordinated

Framework, but USDA’s Animal and Plant Health

Inspection Service (APHIS) also takes part in the

review. As of March 1991, EPA had approved 10

applications for small-scale testing of genetically

engineered microbial pesticides under FIFRA. In

addition, two applications had been withdrawn, and

another review had been suspended.

Other Micro-organisms—Other releases of

micro-organisms into the environment may be

regulated by EPA under TSCA, which is a gapfilling law enabling EPA to quickly screen chemicals that will not be reviewed under other statutes for

health hazards. The act gives EPA authority to

collect information on chemical substances and

mixtures of chemical substances, so it can identify

potential hazards and exposures. The TSCA gives

EPA jurisdiction over manufacturing, processing,

distribution, use, and disposal of all chemicals in

commerce or intended for entry into commerce that

are not specifically covered by other regulatory

authorities. In practice, firms are required to provide

EPA with information on the characteristics of any

new chemical 90 days before commercial manufacture of the chemical begins. These requirements do

not apply to small amounts of chemicals produced

for research or analysis, as long as workers are

informed of health risks. Noncommercial work, such

as academic research, is not regulated under TSCA.

The EPA has announced, in its policy statement in

the Coordinated Framework (51 Fed. Reg. 23301),

that it considers certain types of micro-organisms to

be chemical substances subject to regulation under

TSCA if they are not regulated under other statutes.

The EPA has requested voluntary compliance with

its policy until formal rules are in place. Premanufacture notification is requested for intergeneric

micro-organisms, that is, those containing DNA,

derived from organisms of different genera, unless

the transferred DNA consists of a well-characterized, noncoding regulatory region. The EPA has

announced that it will amend its regulations so that

the research and development (R&D) exemption

would not apply to field releases of microorganisms. It has also stated its intention to develop

a significant new-use rule for pathogenic microorganisms, and it has requested voluntary notification in the interim. Further rulemaking is needed to

implement the policy, so EPA’s current policy may

change. As of March 1991, nine applications for

field tests of genetically engineered microorganisms had been approved by EPA under TSCA,

mainly for nitrogen-fixing bacteria.

Some environmentalists charge that TSCA is

inadequate for regulating environmental releases of

genetically engineered organisms (39,46). The

EPA’s authority to regulate organisms as chemicals

under TSCA has not been legally tested. Another

difficulty some environmentalists find with TSCA is

that it is not applicable to academic research. In

addition, TSCA is a notification statute, not a

licensing statute. Under TSCA, firms inform EPA of

their intention to manufacture a chemical; EPA, in

turn, has 90 days to review the submission. As

TSCA has been applied to the manufacture of
180 . Biotechnology in a Global Economy

Box 11-C-Regulation Under the Federal Plant Pest Act and the Plant Quarantine Act

Under the authority of the Federal Plant Pest Act (PPA)(7 USC. §150aa-jj) and the Plant Quarantine Act

(PQA) (7 U.S.C. §151-164a, $166-167), the Animal and Plant Health Inspection Service (APHIS) of USDA is

responsible for regulating plants, plant products, and plant pests that may threaten U.S. agriculture. Under these

laws, APHIS also has the authority to regulate the import, interstate movement, and release of genetically engineered

organisms derived from plant pests into the environment. The definition of plant pests is broad, encompassing any

organism that directly or indirectly causes disease or damage to plants (e.g., bacteria, viruses, protozoa, fungi, and

other parasitic plants, insects, mites, snails, nematodes, and slugs).

APHIS uses a permit system to restrict entry, dissemination, and establishment of plant pests into the United

States. A permit is required for any organism if it has been genetically altered using rDNA techniques; if it is being

imported, moved interstate, or released to the environment; and if the donor, vector, or recipient is a plant pest or

is unclassified. APHIS may also regulate genetically engineered organisms or products altered or produced using

genetic engineering that the deputy administrator determines are plant pests or has reason to believe are plant pests.

To receive a permit for a small-scale, planned introduction into the environment, an applicant must submit

detailed information on the identity of the organism and how it was produced; a description of the changes in the

organism resulting from introduction of new genetic material; a statement on the purpose of the introduction and

details of the experimental protocol, including the size and schedule of releases; and a description of the methods

used to prevent dissemination beyond the test site.

Before a permit for an introduction maybe issued, APHIS prepares an environmental assessment based on the

submitted information and must notify and coordinate its review with the appropriate agency in the State where the

release is planned. This process takes up to 120 days. Through mid-1991, USDA had issued more than 150 permits

for the release of genetically engineered plants into the environment.

To receive a permit to import a regulated organism or to transfer a regulated organism across State lines, an

applicant must submit an application containing information on the identity of the organisms and where and how

they were produced, a description of how they will be transported and how they will be maintained and used at their

final destination, a description of the safeguards that will be used to prevent their dissemination, and a description

of the final disposition of the organisms. For interstate movement alone, an application for a single permit, good

for 1 year, can cover multiple interstate transfers of multiple organisms. The USDA has issued more than 650

permits for movement.

To sell a genetically engineered plant or micro-organism that is a regulated article under PPA and PPQ, a firm

must petition APHIS for an exemption from these regulations. The firm must submit data establishing that the

organism is not a plant pest and is not otherwise deleterious to the environment+ No petitions have been received

yet, and it is not yet clear precisely what data must be submitted to receive approval.

Individuals may also submit petitions to amend the list of organisms regulated as plant pests by adding or

deleting any genus, species, or subspecies. The petition must include copies of papers from scientific literature or

unpublished data that support the petitioner’s contention that an organism is a plant pest and should be added to

the list or that the organism is not a plant pest and should be deleted from the list. After publication in the Federal

Register and an opportunity for public comment, the Deputy Administrator will approve or deny the petition

completely or in part.

SOURCES: 51 F.R, 23352; 52 F.R. 22892; 7 CFR 340; H.G. Purchase and D.R. MacKenzie (eds.), Agricultural Biotechnobgy: Introduction

to Field Testing (Washingto% DC: OffIce of Agricultural Biotechnology, USDA, March 1990); J.W. Glasser, testitnony before the

House Committee on Agriculture, Subcommittee on Department Operations, Researck and Foreign Agricukure, Oct. 2, 1990.

chemicals, the burden of proof is on the agency, not aspect of the new rules has been the precise

on the manufacturer. Critics would prefer to see a definition of the organisms whose release into the

statute that requires a manufacturer to demonstrate environment would be subject to review. A definisafety of a new product before a permit is issued tion needs to meet several standards. It must be very

(39,46,62). clear to the regulated community which organisms

are subject to the regulations and which are not. For

The Scope Issue—Rules under FIFRA and TSCA example, in setting some types of regulations,

have been under development since the Coordinated agencies often rely on precise lists of items that are

Framework was published. The most controversial subject to regulation. In addition, a good definition
Chapter 11--Regulations ● 181

would make regulation easy for the agency to

administer. It should also focus the agency’s resources on those organisms most likely to be

hazardous, while exempting or focussing less attention on organisms presenting minimal risk.

Developing a product- or risk-based rule, however, is more difficult than it appears. It has always

been hard to define the risks posed by modified

organisms. Defining risky organisms in an administratively simple way, that will be clear to the

regulated community is extremely difficult. In 1988,

this issue became the focus of acrimonious interagency debate (see box 11-B) (61). As a result, BSCC

and the agencies’ scientific advisory committees

considered several alternative definitions. Some

proposals were criticized for being process based,

that is, that the organisms to be reviewed were

identified by the process by which they were made.

Such process-based definitions maybe construed

to mean that certain types of genetically engineered

organisms carry inherently greater risk than their

nonengineered counterparts, a view that critics

charge is unscientific. On the other hand, unlike

classical techniques, biotechnology can be used to

produce organisms carrying traits derived from

organisms of different species, potentially raising

more regulatory questions (18,50). In addition, there

are particular difficulties in using a risk-based

definition to describe organisms subject to review

under TSCA. The TSCA applies to all commercial

chemicals, not only hazardous ones. It can be argued

that the fact that a chemical is subject to EPA

notification under section 5 of TSCA implies

nothing about its risk, since TSCA is used as a

method of screening all new chemicals.

In mid-1990, a proposed Federal policy, developed by BSCC and the President’s Council on

Competitiveness, was issued (55 Fed. Reg. 31118).

The aim of the policy was to promote consistency

among the agencies. The OSTP recognized, however, that the agencies may take different approaches

in promulgating specific rules and guidelines under

existing legislation. The OSTP acknowledged that

agencies had difficulty in developing operational

definitions of BSCC’s 1986 proposal, namely, that

organisms whose introduction should be subject to

review would be either intergeneric organisms or

those derived from pathogens. The new proposal

outlines the general principle that agencies should

use in determining whether a planned introduction

should be subject to oversight:

To the extent permitted by law, planned introductions into the environment of organisms with deliberately modified hereditary traits should not be

subject to oversight . . . unless information concerning the risk posed by the introduction indicates that

oversight is necessary.

The specific definition that was proposed,

however, is not risk-based. The proposed scope

includes “organisms deliberately modified by the

introduction of genetic material into, or manipulation of genetic material within, their genomes,”

excluding:

plants and animals resulting from natural reproduction or from the use of traditional breeding

techniques;

micro-organisms modified through physical or

chemical mutagenesis, physiological processes

such as conjugation, or spontaneous deletion;

vascular plants regenerated from tissue culture;

organisms modified through the introduction of

noncoding, nonexpressed sequences that cause

no physiological or phenotypic changes; or

other organisms that could have been produced

using these techniques or for which there exists

sufficient familiarity to determine that their

environmental effects are equivalent to those of

past safe introductions.

The OSTP listed examples of risk criteria that

agencies may use to evaluate planned introductions;

these criteria are similar to those recommended in

other recent reports from scientific societies (18,50).

In defining the scope of organisms whose introductions into the environment will be subject to

regulation, OSTP ultimately proposed a largely

process-based definition. The proposed scope includes all genetically modified organisms, while

excluding a number of defined categories of organisms. It is unclear, however, how much this policy

will change by the time it is published in its final

form. In a widely leaked memorandum in May 1991,

OSTP officials discussed abandoning the processbased definition for one based solely on risk. While

this is an intellectually sound and internally consistent approach, it would lack administrative simplicity

and could result in burdensome regulations.
182 . Biotechnology in a Global Economy

Food Uses

Micro-organisms have been used since prehistoric

times in baking, brewing, and fermenting. The

organisms can die or be removed before the food is

sold, or, as in the case of yogurt, live cultures may

remain when the food is consumed. Strictly speaking, using micro-organisms in food processing is an

environmental release. But because of familiarity

with these organisms, their long history of safe use,

their use in relatively small amounts, and their

specialized environmental niches, micro-organisms

in food have elicited less concern than large-scale

environmental releases of genetically engineered

organisms.

When Congress gave FDA authority to regulate

food additives in 1958, many micro-organisms and

other materials in use were recognized by FDA to

have a special status-GRAS, or “generally recognized as safe’—because of their long record of safe

use in food. Those entering the market since have

either achieved GRAS status or received FDA

clearances as food additives, based on submission of

extensive information on their physical and chemical properties, intended use, and safety (21 CFR part

173 subpart B).

The FDA has decided that “the use of a new

micro-organism found in a food could be considered

a food additive” (51 Fed. Reg. 23310). Furthermore,

a micro-organism can lose its GRAS status if it is

produced or modified by new biotechnology that

alters it, so that it is no longer generally recognized

as safe by qualified experts. Such micro-organisms

would then be considered food additives and thus,

subject to premarket FDA review and clearance(51

Fed. Reg. 23313). One genetically modified microorganism, a variety of baker’s yeast, has been

approved for food use in the United Kingdom (2).

Transgenic Plants

For generations, plants have been genetically

altered using traditional methods of selective breeding, bringing enormous benefits to farmers and

consumers. Biotechnology promises to extend these

benefits by providing a means of endowing plants

with new traits that are difficult or impossible to

transfer using classical techniques. These new traits

could result in plants more resistant to disease and

insect pests or more amenable to food processing

technology. Current research is also aimed at proPhoto credit: 

Genetically engineered tomatoes from a Yolo (CA) County

field trial conducted in 1990.

ducing foods that are more nutritious and that have

a longer shelf life.

Much less concern has been voiced about the

agricultural use of transgenic plants than planned

introductions of micro-organisms. Larger organisms

are much easier to track, and more techniques are

available to ensure their confinement. In addition, a

broader, deeper range of experience exists for

agricultural uses of altered plants. In the United

States, over 150 field tests have been approved by

USDA and have been carried out without incident.

In The Netherlands and Germany, however, pressure

groups protested against field tests of transgenic

plants in 1989 and 1990 (44,77).

Planned Introductions

New strains of plants are usually tested in a

stepwise fashion, beginning with small-scale field
Chapter 11--Regulations ● 183

tests, followed by increasingly larger tests, and

finally commercial sale. Potential problems can

often be recognized while the plant is being tested on

a small scale. Similar procedures can be effectively

used to test genetically engineered plants.

A major concern associated with the use of

transgenic plants is enhanced weediness. Although

domesticated crops are unlikely to become weeds, it

is possible they can transfer advantageous traits to

wild, weedy relatives by cross-pollination (18,19).

This is not a major problem in the United States,

however, where few crop plants are native species,

and many crop plants have no wild or weedy

relatives (50,53). Of the 15 major U.S. field crops,

only sorghum, sunflower, clover, and tobacco have

wild, weedy relatives in the United States (9). Some

minor crop plants also have wild relatives in the

United States, such as those in the crucifer family,

which includes broccoli, cauliflower, kale, and

rapeseed, as well as weedy yellow mustards (69).

Field trials of genetically engineered plants that

carry pesticidal traits will be subject to EPA review

under FIFRA. Other recombinant plants are currently reviewed USDA under the authority of PPA

and PQA (See box 11-C).

Thus far, these laws have only been applied to

transgenic plants containing rDNA derived from

plant pests. The earliest method of transferring DNA

to plants resulted in the transfer of some DNA

derived from a plant pest, Agrobacterium tumefaciens. Therefore, virtually all transgenic plants to

date have been subject to USDA regulation. More

recently, however, new techniques for transferring

DNA to plants have been developed that do not

necessarily result in the incorporation of plant-pest

DNA. Eventually, plants developed through these

newer techniques will be ready for field testing, but

unless the nature of the inserted trait triggers a

review, they will not be subject to USDA regulation

under PPA and PQA. Such transgenic plants that

have been developed with Federal support would

probably be subject to review under NIH Guidelines

or USDA’s research guidelines, but privately funded

research would not be covered (54).

Food Uses

The FDA will regulate genetically modified

plants used as foods in the same way it oversees the

rest of the food supply. Whole foods (e.g., fruits,

vegetables, and grains) are not subject to premarket

review. The FDA, however, has authority to seize

adulterated food and take steps to halt its distribution. This authority is generally used to remove

foods from the market that have become contaminated. It could be used, although this has never

happened, against new varieties of plants containing

harmful substances.

In its policy statement in the Coordinated Framework, FDA states that a food produced using

biotechnology could be in violation of FDCA if it

contains a harmful substance not ordinarily found in

the food or if it contains an abnormally high level of

a substance that can be injurious to health. Beyond

this, however, FDA has given little indication of its

approach to ensuring safety of new food plants.

Industry representatives have expressed a desire for

more guidance. In December 1990, Calgene, a

California plant biotechnology firm, asked FDA to

approve its use of kanamycin, a marker gene that

makes plants resistant to the antibiotic, (59).

An industry consortium, the International Food

Biotechnology Council (34), has proposed a set of

scientific principles for evaluating the safety of food

and food ingredients derived from plants and microorganisms altered through the application of biotechnology. The proposal is based on existing law

and practice. A decision-tree for each category of

product-food derived from micro-organisms; single chemical entities and simple, chemically defined

mixtures; and whole foods and complex mixtures—

encompasses a series of detailed questions about the

food. The answers would lead to a decision to accept

or reject the food or subject it to further study (34).

Food safety is likely to be an increasingly

important topic of public concern. Appropriate FDA

regulation of genetically altered products is critical

if a public already suspicious of food additives and

pesticide residues is to be confident about the

benefits of biotechnology-derived foods.

Transgenic Animals

Genetic alteration of animals to serve human

needs is also a centuries-old process. Biotechnology

has the potential to accelerate this process and

produce animals with increased growth performance, feed conversion efficiency, leanness, or disease resistance. Transgenic animals can also be used

to produce pharmaceutical proteins, much in the way

bacteria or cultured cells are used. For example, a

gene can be altered so that the protein appears in the
transgenic animal’s milk, from which it may be

purified (47). Eventually, this process may provide

a cheaper alternative to protein production in mammalian cell culture, which remains expensive. Transgenic animal models of disease, containing genes

that mimic human genetic defects, are also an

increasingly important research tool.

The regulation of transgenic animals is still

uncertain. Activities potentially subject to regulation under existing legislation were outlined in the

Coordinated Framework, but no rules have been

proposed and little guidance given.

Planned Introductions

Environmental releases of a few types of animals,

mainly insects or worms considered to be plant pests

or animals containing genetic material from plant

pests, may be regulated under PPA. Transgenic

animals derived from infectious, contagious, pathogenic, or oncogenic organisms may be subject to

regulation under the Animal Quarantine Statutes and

the Virus-Serum-Toxin Act. Federally funded research is subject to research guidelines of the

funding agency (54). Releases of genetically engineered fish are not regulated under Federal law (35).

Food Uses

The Food Safety and Inspection Service (FSIS) of

USDA is responsible for ensuring the safety, wholesomeness, and proper labeling of food products

prepared from livestock and poultry, under the

authority of the Federal Meat Inspection Act (21

U.S.C. §601 et seq.) and the Poultry Products

Inspection Act (21 U.S.C. §451 et seq.). The FSIS

inspects cattle, sheep, swine, goats, horses and other

equines; poultry; and food products prepared from

these animals, but it has no oversight over fish or

other aquatic animals. According to USDA’s policy
Chapter 11--Regulations ● 185

for

Photo credit: The U.S. Department of Agriculture

The U.S. Department of Agriculture (USDA) has developed a user’s guide for introducing genetically engineered plants and

organisms. As of July 1991, USDA had approved 165 permits for field test in 34 states and Puerto Rico.
186 ● Biotechnology in a Global Economy

statement, published in the Coordinated Framework,

genetically engineered food animals would be

treated like new breeds-subject to the same inspection procedures as traditionally inspected animals.

The FSIS could also amend its regulations to ensure

that genetically engineered organisms intended for

use as food are not adulterated(51 Fed. Reg. 23343).

The safety of transgenic animals could be evaluated

by considering the primary and secondary effects of

the gene product, much as drug or pesticide residues

in food are evaluated (8).

Implementation and Coordination of

Regulations

The Coordinated Framework has settled a number

of issues concerning agency jurisdiction. For many

products it is clear which agency has primary

responsibility. The FDA has adapted existing procedures for the regulation of drugs, biologics, and

medical devices to the regulation of products developed using biotechnology; EPA and USDA have

established procedures for reviewing small-scale

field tests of genetically engineered micro-organisms and plants. The review process is functioning

more smoothly as the agencies have gained experience (30,58,64,67).

Nevertheless, the system is not without its problems. From the outset, the regulatory system has

been criticized as too confusing for the regulated

community, particularly for scientists working in

universities or small firms who have little experience with regulation. This situation is made worse

by the lack of published guidelines and rules. The

USDA did not issue its research guidelines until

early 1991 (56 Fed. Reg. 4134). The EPA’s proposed

rules for small-scale field testing under FIFRA and

TSCA have faced long delays. Although field tests

are being conducted, the policy is subject to change,

making long-range planning difficult for industry. In

addition, the organisms now being tested in small

scale will soon be ready for large-scale testing and,

eventually, product approval. But regulatory requirements for gaining approval to market certain

types of products, particularly foods, are unclear

(14). The FDA has given industry little indication of

the regulatory barriers it will face in bringing new

foods to market.

One reason agencies can be slow to confront new

regulatory issues is an inability to anticipate new

problems and novel areas of research. In addition,

regulatory procedures are cumbersome and do not

readily lend themselves to new and rapidly changing

technologies. Another problem, long recognized by

students of the regulatory process, is the strong

incentives bureaucracies have to move slowly or not

at all. Indeed, agencies face criticism if in acting

quickly they make mistakes (55).

Academic researchers, especially agricultural researchers, also find agency requirements, which

officials of large firms accept as a part of the cost of

doing business, to be burdensome (20,24). This

situation tends to discourage academic biotechnology research that would lead to an encounter with a

regulatory agency, thus discouraging work on subjects with little potential for commercial reward—

including products aimed at small markets, environmental research, and research addressing agricultural problems of the Third World (24,66,71). The

cost of meeting regulatory requirements has a

similar effect on industry, discouraging research on

products whose commercial potential is relatively

small (26). Some critics maintain that the major

problem with regulation is even more fundamental;

that is, the resources that must be devoted to meeting

regulatory requirements are disproportionate to risks

as currently perceived (23,26,42,65).

NATIONAL REGULATORY

POLICIES

Several industrial nations and the EC are developing and implementing biotechnology regulations,

based in part on international scientific criteria.

Strong incentives favor international harmonization

of such regulations. Export-oriented countries, especially small countries without large home markets,

need regulations compatible with those of potential

importers of their products.

Regulations, however, are also influenced by

public opinion and cultural attitudes toward risk,

health, and the environment (17). Substantial country-to-country differences in public opinion on

environmental concerns are common. This can be

seen, for example, in the different public responses

to the use of nuclear power in France and Germany

(51). In Germany, the Green Party platform calls for

a total ban on biotechnology research, development,

and production; the organization has been particularly influential in this regard (see box 1 l-D).
Chapter 11--Regulations ● 187

Box 11-D-Green Parties

The Green parties, although still a small minority, have been increasingly successful in local and parliamentary

elections throughout Europe. In the June 1989 elections to the European Parliament, the number of seats held by

members of Green parties more than doubled, compared with the previous election, reaching 39 out of 518. Until

recently, the former West Germany’s Die Gr nen was the most successful Green party in Europe in terms of

membership, electoral votes, and financial strength. They received 5.6 percent of the vote in the March 1983 Federal

parliamentary election and increased its share to 8.3 percent in January 1987. In December 1990, however, in the

first election after German reunification, the western German Greens suffered a resounding setback The party,

which had taken no formal position on reunification, received only 3.9 percent of the vote. Because they failed to

capture the required 5 percent of the vote, all 46 Green members of the Bundestag lost their seats. An eastern German

coalition of Greens and civic movements, however, won 8 seats. Racked by internal dissention, the Green Party’s

future in Germany is uncertain.

An outgrowth of local environmental groups of the early 1970s, the Greens have become an umbrella group

for organizations whose concerns are often unaddressed by the major parties. They draw support from peace and

disarmament activists, antinuclear-power protesters, and supporters of equal rights for gay people, women, and

members of minority groups. Some of their success may be due to the Greens’ position as an alternative to

established parties and thus, the obvious choice for the disillusioned voter. Green supporters tend to be, for the most

part, moderate-to-radical left politically, well-educated, and employed in the white-collar service sector of the

economy, in particular, universities. Although some of their supporters are radical leftists, one Green party slogan

proclaims: “We are neither left nor right, but out in front.”

The Greens are less an organization than a movement. The beliefs of their members vary, and policies

supported by Green parties in different countries vary as well. Tensions within Green parties are similar to those

among U.S. environmentalists-between the most radical environmentalists (deep ecologists) and those who put

the needs of people first. Some generalizations are possible, however. Policies supported by the Greens include:

presentation of the natural environment; unilateral disarmament; a nonaligned, nuclear-free Europe; and aid to the

Third World targeting the development of self-sufficient economies. Central to the Greens’ philosophy is

dissatisfaction with traditional political organizations and representative democracy. The Greens maintain that

government policy often reflects the interests of the military and industry, rather than the will of the people.

Therefore, they favor decentralization of decisionmaking power, including the use of plebiscites to decide major

issues. The organization of Green parties reflects this support for “direct democracy.” Local party branches are

autonomous, and their leadership is either collective or rotates among members. Meetings are open to the public,

and grassroots participation is encouraged. Since their recent losses in Germany, however, some Greens who

disagree with this lack of organization have become more vocal in their support for a more-established leadership.

The Greens part company with traditional leftists in their emphasis on alternative lifestyles, based less on

material well-being and modern technology and more on individualism, community solidarity, and selfdetermination. Because many Greens are skeptical about the benefits of new technology and increases in economic

growth and industrial productivity, they often reject attempts to weigh risks to the environment against the needs

of industry. One spokesman, a specialist on the chemicals industry for the British Green Party, stated that

“economic growth should be limited and that the health and safety of the planet should become the chief criteria

by which to judge the worth of any activity.”

The Greens strongly favor increased controls on the chemical and energy industries and a phase-out of nuclear

power. Now that the expansion of the nuclear power industry has come to a virtual standstill in many countries, their

attention has turned to biotechnology. Like their positions on other environmental issues, the position of the most

extreme Greens concerning biotechnology is not based on estimates of risk to public health or ecological balance.

Rather, they oppose biotechnology because it is unnatural and “speeds up evolution." To the Greens, the protection

and preservation of the natural environment is sacrosanct.

SOURCES: A. CoghlarL “Chemieals Industry: Guilty until Proven hmoeen~” New Sci+wu’ist, vol. 123, No. 1678, Aug. 19, 1989, p. 23; K.J.

KelIey’’AGreenFringe, ’’hel%ogremive,e, V01.54, N0.4, 1990, pp. 30-33; F.M ller-Roinme~ “TheGermanGreensinthe 1980’s:

Short-Term Cyclical Protest or Indicator of Transformation?” Political Studies, vol. 37, 1989, pp. 114-122; M.G. Rermer,

“Europe’sGreenTide,” Widd-Watch,vol. 3,N0. 1,1990, pp. 23-27; S. Sc~“GermanGreens, Still Fighting One Another,

Survey Election Debacle,” The New York Times, Dee. 7, 1990, J.H. Vau~ “The Greens’ Vision of Germany,” Orhis, VOI. 32,

1988, pp. 83-9S; H.J. VeeQ “Prom Student Movement to Eeopax: The Greens,” The Wahington Quarterly, vol. 10, 1987, pp.

29-39.

292-870 - 91 - 7 : QL 3
188 ● Biotechnology in a Global Economy

Box 11-E--State Regulations

Several States have considered new legislation or have developed regulations based on existing legislation

regulating field tests of genetically modified organisms or the use of certain products developed using

biotechnology. This is due to a perception of gaps in Federal legislation and oversight, to the fact that Federal

agencies do not require notification of local officials or citizens in the area of test sites, and to a belief that Federal

agencies are not attuned to local needs.

Hawaii, Illinois, and Wisconsin require notification before the release of genetically engineered organisms into

the environment. Two other States, Minnesota and North Carolina, have more formal permit systems for field tests.

Minnesota has empowered its Environmental Quality Board to coordinate State and Federal regulations pertaining

to field tests and to issue permits for field tests not regulated elsewhere by the State government. A recent North

Carolina law mandates an in-State review of proposed fieldtests. A 10-member Genetic Engineering Review Board

will write detailed regulations to be used by North Carolina’s State Department of Agriculture when evaluating field

trials for both research and commercial purposes. Under these regulations, researchers would submit essentially the

same information that they now supply to Federal agencies.

The North Carolina law has received mixed reviews. Some fear that other States will follow North Carolina’s

lead, resulting in a confusing patchwork of laws that will impede research and slow the course of commercialization.

Others see benefits. Although the new law adds an extra layer of review, it imposes no new data requirements on

researchers. The law may also help ensure public confidence in the regulatory system while prohibiting additional

regulation on the part of local communities, It has also been argued that by submitting to State laws, companies may

protect themselves from legal challenges.

Two States, Wisconsin and Minnesota, have enacted legislation imposing a temporary ban on the use of bovine

somatotropin, a product derived from a genetically engineered micro-organism (see box 1 l-F).

SOUR~S: Industrial J3iotechnology Association, Survey of State Government Legislation on Biotechnology, May 15, 1990 and fall W9Q G.

Blumensty~ “States Are Seeking Mom Regulation of Biotechnology,” The Chronicle of HigherEducation, Aug. 8,1990, p. A13;

M. Cravvfon$ “Should States Regulate Biotechnology?” Science, vol. 245, 1989, p. 466; J.L. Fox, “Wide Acclaim for North

Carolina Regulations,” Biotechnology, vol. 7, 1989, p. 1002.

Prior incidents, related or unrelated, have raised (see box 11-F). Some scientists attribute public

public awareness and political sensitivities. For concern about biotechnology to scientific illiteracy

example, initial concerns about the hazards of rDNA

research arose in the mid- 1970s, roughly coinciding

with an accidental release of smallpox virus from a

London laboratory in 1973. The incident, unrelated

to rDNA research, also coincided with the election

of a Labour Government and an increase in parliamentary interest in workplace safety. Consequently,

in the United Kingdom the first controls on biotechnology were based on general workplace legislation

(6).

In the United States, sporadic concern about

particular aspects of biotechnology regulatory policy has arisen. Local protests against releases of

genetically engineered micro-organisms occurred in

1986 and 1987 in California and Missouri, respectively (68). Although general opposition has since

dissipated, several States have introduced and in

some cases enacted legislation regulating planned

introductions (see box 1 l-E). More recently, farm,

consumer, and environmental groups have raised

concerns about the use of bovine somatotropin

(BST), a hormone that increases milk production

in the general population. In addition, according to

cross-national studies of health, safety, and environmental regulations, increasing public concern about

such hazards tends to coincide with public distrust of

those responsible for ensuring public safety: scientific experts, the civil service, and the business

community (73).

Worldwide, there have been three basic approaches to the regulation of biotechnology; they

generally parallel approaches to controlling environmental pollution and nuclear power.

. No regulations. A number of countries with

active investment in biotechnology have no

regulations specific to biotechnology. In most

growth-oriented countries (NICs) of the Pacific

Rim (e.g., Taiwan, South Korea, and Singapore), biotechnology has been targeted as a

strategic industry. Some industrialized European Nations, including Italy and Spain, which

have no regulations specifically dealing with

biotechnology, expect to develop them to
Chapter 11-Regulations ● 189

harmonize with EC directives on biotechnology.

Stringent biotechnology-Specific regulations.

Some northern European countries have responded to public pressure to impose stringent

regulations specific to biotechnology by enacting new legislation. Under a 1986 law, Denmark prohibits the deliberate release of genetically engineered organisms without the express

permission of the Minister of the Environment.

Germany enacted new legislation imposing

tight restrictions in 1990. The EC’s 1990

directives on contained use and deliberate

release of modified organisms, while not as

restrictive as the Danish or German laws,

follow a similar approach, i.e., directives specifically regulate the use of biotechnology.

Limited restrictions. Australia, Brazil, France,

Japan, The Netherlands, the United Kingdom,

and the United States allow the use of biotechnology with some restrictions and oversight

(see boxes 11-G; 11-H; and 11-1). In these

countries, regulations based on existing or

amended legislation governing drugs, worker

health and safety, agriculture, and environmental protection are being applied to the use

of biotechnology. Stringency varies, as do the

enforcement mechanisms.

No Regulations

The newly industrializing countries of the Pacific

Rim (e.g., South Korea, Singapore, and Taiwan) are

consciously imitating Japan’s postwar route to

economic success. These governments place heavy

emphasis on economic growth and development,

with particular interest in the production of hightechnology exports. Years of neglecting the environment in Pacific Rim countries, however, have

resulted in severe industrial pollution, and, in recent

years, public awareness of environmental problems

has risen. There is increasing evidence of public

interest in regulations designed to protect health and

safety and the environment. Some observers expect

the Pacific Rim countries will eventually follow

Japan’s lead in the development of biotechnology

regulations as well (28,32).

Stringent Biotechnology-Specific Regulations

Denmark

In contrast to the approach of most Pacific Rim

Nations, Denmark and Germany have enacted new

legislation specifically regulating biotechnology

products and techniques. In Denmark, the Environment and Gene Technology Act (EGTA), passed by

the parliament in 1986, gives the Minister of the

Environment broad power to regulate the use of

genetically modified organisms. The law restricts

biotechnology research with these organisms to

registered laboratories. The production, marketing,

use, or import of substances or products containing

genetically manipulated organisms or cells is not

permitted, except with the approval of the Minister.

Pharmaceuticals and feedstuffs, however, are exempt from this provision.

In addition, the deliberate release of genetically

modified organisms is specifically prohibited in

Denmark, although the Minister of the Environment

may make exceptions. The Minister of the Environment has agreed not to grant approval for releases

without the consent of the parliament committee for

the environment (3). Approval for field testing two

strains of genetically engineered sugar beets was

granted in July 1989 (41,60).

A 1987 order covers small- and large-scale

research and production facilities using engineered

micro-organisms and is largely aimed at protecting

worker health and safety. Administered by the

National Labor Inspectorate, it specifies containment conditions for R&D.

The EGTA was amended in 1989, easing some

restrictions that industry found most onerous. For

example, pilot plants are now treated as research

laboratories, rather than as production facilities, and,

as such, are subject to fewer regulations. A second

change allows a company to continue working after

a complaint has been lodged against it with the

Environmental Appeals Board. Previously, such

work had to cease until the complaint was dismissed.

Nevertheless, industry representatives charge that

the approval process is still too time-consuming and

burdensome (52). However, the 1989 amendments

and field-test approvals suggest that, in practice, the

regulations may come to be no more severe than

those in other European countries.

Germany

New legislation enacted in Germany in 1990 was

welcomed by the regulated community, because it

ended a period of regulatory uncertainty (56). In

1989, the Administrative Supreme Court for the

State of Hesse ruled that because there was no law
190 ● Biotechnology in a Global Economy

Box 11-F--Bovine Somatotropin

Bovine somatotropin (bST), also known as bovine growth hormone, is a naturally occurring peptide hormone

produced by cattle. Among other functions, it regulates the production of cows’ milk. The hormone can be

manufactured using genetically engineered organisms in a standard fermentation process, resulting in a nearly

identical copy of the natural substance. When supplemental injections of small doses of bST are administered to

dairy cows, milk production increases by as much as 10 to 25 percent. The cows may eat more feed, but there is

an increase in milk production per unit of feed. The increased production results in a significant decrease in the

production cost of a unit of milk.

Like all animal drugs, whether or not genetically engineered, the use of bST is subject to FDA regulation. To

receive approval to market any animal drug, the manufacturer must demonstrate that the drug is safe and effective

when used in accordance with the label directions. It must also be shown that the drug and its metabolizes do not

appear as unsafe residues in the edible tissues of the animal at the time of slaughter or in other animal products, e.g.,

milk or eggs. Although FDA has not yet approved bST for marketing, the agency found, in 1985, that the meat and

milk from experimental herds are safe for human consumption. A NIH panel reached the same conclusion in 1990.

The FDA must evaluate the hormone’s effects on the health of cows before it can grant final approval.

In addition to concerns about the effects of bST on human health and animal welfare, concerns also exist about

consumer acceptance. A 1990 survey of Wisconsin consumers found that 77 percent would prefer to drink milk from

untreated cows, and 67 percent would pay as much as 22 cents additionally per half-gallon for non-bST milk.

The strongest resistance to bST in the United States probably comes from farm activists who believe that bST

will increase economic pressures on small farmers already pressured by increased farm productivity by larger farms.

Since the 1950s, dairy farming has changed considerably, as a result of technologies that save time and labor such

as, bulk milk handling, silo unloaders, and improved milking equipment+ Higher quality feeds, artificial

insemination, and better disease control have also contributed to productivity increases. In 1955, the average cow

in the United States produced less than 6,000 pounds of milk per year. By 1985, average milk production was close

to 13,000 pounds yearly. This increase in productivity has resulted in a dramatic decrease in the number of dairy

farms and a corresponding increase in their size. With or without the use of bST, this trend is expected to continue.

Industry officials, however, emphasize bST’s “size neutrality.” Unlike other new technologies, use of bST

does not require a large investment or impose along delay before benefits are realized. Therefore, bST can be used

profitably by operators of both large and small farms. Farmers who are poor managers, however, and whose cows

are badly nourished or unhealthy are unlikely to realize benefits from bST use. A 1987 USDA study found:

(Continvedon next page)

to ‘‘expressly permit the application of genetic including transgenic plants and animals. But, the

engineering, such facilities may not be built and

operated” (4). The ruling prevented the use of a

Frankfurt production facility, operated by Hoechst

AG, from manufacturing genetically engineered

human insulin. Although this decision was binding

only in the State of Hesse, new investment in

production facilities in Germany ceased afterward.

The 1990 law will allow biotechnology production

to proceed.

The new law is based on the findings of a

parliamentary commission, which spent 2 years

compiling a thorough report on all uses of biotechnology. Although the commission reached consensus on a wide variety of issues, the Green Party

representative took exception to many conclusions.

The commission strongly supported the use of

biotechnology in developing pharmaceuticals, diagnostic products, chemicals, and foodstuffs––

commission, also concerned about contained uses of

micro-organisms, favored extending the current

controls on government-funded, contained uses to

apply also to industrial production facilities. The

commission was emphatically opposed to the environmental release of genetically engineered microorganisms and viruses, except for vaccines (15).

The comprehensive Genetic Technology Law,

largely based on the report of the parliamentary

commission, is broad in scope, covering recombinant micro-organisms, viruses, cells, plants, and

animals, in addition to plasmid vectors. The law

specifies conditions for building and operating

production facilities, releasing engineered organisms into the environment, and transporting organisms. Specific requirements are outlined for both

research and commercial production.
Chapter 11--Regulations ● 191

Adoption of bST, when viewed at the national level, simply reinforces the 30-year trend toward increased milk

production per cow and declining dairy farm numbers. When viewed at the farm level, bST use could prove profitable

for almost all commercial dairy farms. But inefficient producers who lack management skills and who do not adjust

feeding and health procedures to reflect increased milk production from bST-treated cows are not likely to capture

all of bST’s potential benefits. Hence, bST will not significantly affect the national trend towards large dairy farms

in all regions.

Nonetheless, temporary bans on the sale and use of bST were in effect in Wisconsin and Minnesota until mid-199l.

Similar issues are being addressed in Europe. The U.K.’s Veterinary Products Committee sees no risk to human

health or to the environment stemming from bST use, but it has recommended that bST not be licensed for sale

because of questions about the manufacturing process and bST’s effects on animal welfare. The European

Community (EC) is also hesitating to approve bST use. In 1989, the EC placed a 15-month moratorium on the use

of bST and later extended the moratorium until the end of 1991, so that the EC Commission could complete its

studies. In March 1991, the EC’s Committee for Veterinary Medicinal Products found that milk and meat nom

treated cows are safe. Some members of the committee, however, recommended further studies on the effects of

bST on the health of cows. But EC! member nations are now free to authorize the use of bST.

The ultimate impact of the use of bST on international trade is unclear. If bST is used in the United States but

not in other countries, opportunities for commercial export might grow, as domestic U.S. prices may fall below

international prices. It is not known, however, whether potential importers would accept milk from bST-treated

cows.

SOURCES: Offkeof Technology Assessrnen~ U.S. Dairy Industry ata Crossroad: Biotechnology and Po/icy Choices, 1991. J. Juskevichand

C.G. Guyer, “Bovine Growth Hormone: Human Food Safety Evaluation” Science, vol. 249, 1990, pp. 875-884; R, Fallert et al.,

Ml’ and the Dairy Zndustry: A National, Regional and Farm-level Analysis, Economic Research Service, U.S.Department of

Agriculture, Agrieukural Economic Report No. 579, October 1987; D.P. Blayney and R.F. Falleq Biotechnology andAgriculture:

Emergence ofBovineSomatotropin, Commodity Economics Division, Economic Research Service, U.S. Department of Agriculture,

Staff Report AGES 9037, June 1990; “Thumbs Down for Milk Hormone,” New Scientist, vol. 127, No. 1728, Aug. 4,1990, p. 25;

The Economist “Bad Moos,” vol. 316, No. 7667, Aug. 11, 1990, pp. 66-7Q G. Gugliot@ “A Wonder Drug or a Threat?” The

Washington Post, June 24, 199Q B.W. Marion and RL. Wills, “A Prospective Assessment of the Impacts of Bovine Somatotropin:

A Case Study of Wiscons@” American Journal of Agricultural Econom”cs, VOI, 72, 1990, pp. 326-336; R. Jennings, personal

eommunicatio~ December 199Q Technology Assessment Conference, “NTH Technology Assessment Conference Statement on

Bovine Somatotrop~” Journal of the American Medical Association, vol. 265, 1991, pp. 1423-1425.

The law divides work with rDNA into four safety however, five firms received permission to operate

levels, depending on the source of the DNA, the host

organism, and the vector. The most widely used

organisms are included in the lowest safety level. At

this level, authorities must be notified of plans to

open facilities for research. Research considered to

be riskier, requires formal approval before work can

be undertaken. All industrial or commercial work is

also subject to formal approval, but disclosure and

public hearings are required only for work at Safety

Levels 2 through 4. The law also holds operators of

facilities liable for damages, and it requires operators of facilities approved for work at Safety Levels

2 through 4 to arrange for liability coverage.

The Lender, or State governments, are responsible

for implementing and enforcing the regulations, an

approach which is typical of German regulatory

policy. The Advisory Board for Biological Safety

(ZKBS), a part of the Federal Ministry of Health,

plays an advisory role. Some fear that this places the

burden of enforcement on local agencies lacking

necessary expertise (16,45). In the last half of 1990,

production facilities (76).

The law also grants authority to the health ministry

for regulating deliberate releases of genetically

engineered organisms and for approving products

containing genetically modified organisms. It lists

information that manufacturers must provide and

requires that public hearings precede releases of

genetically engineered organisms whose spread

cannot be limited. Germany’s first release of genetically engineered organisms, a field test of altered

petunias at the Max Planck Institute in Cologne,

took place in summer 1990, after a year’s delay due

to public opposition (63).

The European Community

The EC has enacted two directives that deal

specifically with biotechnology regulation: one

directive regulates contained use of genetically

modified micro-organisms and the other regulates

the deliberate release into the environment of

genetically modified organisms (12,13). Member
192 . Biotechnology in a Global Economy

Box 11-G-Regulations in Japan

Japan’s regulations on biotechnology generally follow international standards. The research guidelines, based

on early versions of NIH Guidelines, were developed by the Ministry of Education, Science, and Culture and by

the Science and Technology Agency to cover research in public and private institutions, respectively. Because the

procedure for updating guidelines in Japan is relatively slow, the research guidelines tend to be more stringent than

NIH Guidelines.

Guidelines for industrial applications are generally consistent with OECD recommendations. These guidelines

were issued by the Ministry of International Trade and Industry in June 1986 and were followed by the publication

by the Ministry of Health and Welfare of guidelines for producing pharmaceuticals and biologics.

The first regulations covering the deliberate release of recombinant plants were issued in the summer of 1989

by the Ministry of Agriculture, Forestry, and Fisheries. The Environment Agency has drafted safety guidelines for

fieldtests of genetically modified micro-organisms, and rules for the release of transgenic animals are in preparation.

The Ministry of Health and Welfare is developing guidelines for assessing the safety of food and food additives

produced using rDNA technology. There is no body attempting to coordinate these various activities.

Reports about public perception of biotechnology in Japan are varied. Although some products advertised as

biotech products have been well-received, community protests against the building of new research facilities have

occurred, and surveys show that the public is wary of the technology. One survey of the readership of a Japanese

science magazine, for example, found that respondents had serious misgivings about biotechnology, especially

about food products and environmental introductions of modified organisms. Almost three-quarters had

reservations about the marketing of genetically engineered fish, and 78 percent were very apprehensive about the

prospect of planned releases of genetically engineered microbial pesticides in the United States.

SOURCES: H. Wchidaj “Evolution of Recombinant DNA Guidelines in Japa~” Safety Assurance for Environmental Introductions qf

GeneticaZ/y-Ertgineered Organisms, J. Fiksel and V.T. Covello (eds.) (New Yorlq NY: Springer-Verlag, 1988); C.C. Mart@

“JapaneseBioindustryT rends Thrnhto FirrnlyEstablished Strategies,” GtwticEngineen”ngNews, vol. 10, No. 2, 1990, pp. 2&21;

Bulletin of the Atomic Scientists, “Biotech Lab Recalls Biowar,” BdZetin of the Atom”c Scientists, vol. 46, No. 1, 1990, p. 6; D.

McCormic~ “Not As Easy As It Imoke&” Bio/Technology, vol. 7, 1989, p. 629; N.S. Shimbuq “Environment Agency Drafts

Safety Guidelines,” Nikkei Sangyo Shimbun, Mar. 24, 1990, p. 13; Pharma Japan, “MAW to Prepare Safety Standard for ‘Bio

Foods,’ “ Pharma Japan, vol. 1222, Sept. 24, 1990, p. 18.

countries must review their laws to bring them into must also be notified before a new facility using

harmony with EC directives by October 1991.

Contained Use—The directive on contained use

is based in part on the Organization for Economic

Cooperation and Development (OECD) recommendations, and it sets minimum standards for R&D and

for industrial operations. Member countries must

adopt regulations on the contained use of genetically

modified micro-organisms that are at least as stringent as those in the directive.

Regulatory requirements depend on whether the

modified micro-organism is associated with high or

low risk and whether the work is large-scale or

small-scale, noncommercial research. Records of

the research must be kept for the use of low-risk

organisms at the small-scale level. For small-scale

work with high-risk organisms or large-scale work

with low-risk organisms, researchers must notify the

appropriate national authority, which then has 60

days for review. Large-scale uses of high-risk

organisms are not permitted without the explicit

approval of the national authority. The authorities

these micro-organisms may be used. EC member

states must periodically provide information obtained from these notifications to the European

Commission, the EC’s executive branch.

Because the directive sets a minimum standard

and member countries may impose more stringent

standards, regulatory requirements are likely to

differ among countries. These differences may

provide incentives for firms to establish production

facilities in countries with the least restrictive

regulations, thereby defeating one of the purposes of

economic integration.

Planned Introduction-Unlike the directive on

contained use, the directive on deliberate release of

genetically modified organisms is not a minimum

standard; the ministers ruled that this directive is

primarily a measure to regulate trade rather than to

protect the environment. This ruling limits the

ability of member states to impose stricter regulations.
Chapter 11---Regulations ● 193

Box 11-H—Regulations in France

In France, where little public concern exists

about the use of biotechnology, a committee in the

Ministry of Research and Higher Education must be

notified of an intent to perform rDNA research. The

Ministry of Agriculture reviews releases of genetically modified organisms, but notification is voluntary and the committee’s recommendations are not

compulsory. Government agencies are now working with trade associations to develop a set of

voluntary guidelines for research, contained use,

and deliberate release.

SOURCES: OffIce of Technology Assessment, 1991.

The directive on deliberate release is also based

on OECD recommendations. Before a modified

organism may be released, the relevant national

authority must give approval, based on a case-bycase review of the researcher’s detailed environmental assessment. The appropriate authorities in

other member states must be kept informed and may,

within 90 days, suggest improvements in the proposed experimental protocol. The authorities in

other member states, however, do not have veto

power.

The directive on deliberate release also describes

requirements for placing genetically modified organisms on the market. The manufacturer or importer

must obtain the approval of the national authorities

in the country where the product will first be sold,

and the national authority must inform other member nations of its approval. If there are no objections

from the other states, the product may be sold

throughout the EC. If many member countries raise

objections, approval to market the product may be

revoked. Alternatively, the dispute may be resolved

through binding arbitration by a committee of

national representatives and a chamber of the

Council of Ministers.

In enacting directives that specifically regulate

genetically modified organisms, the EC has established a regulatory procedure that is significantly

different from that of the United States. In the EC,

regulation is explicitly based on the method by

which the organism has been produced, rather than

on the intended use of the product. This implies that

the products of biotechnology are inherently risky,

a view that has been rejected by regulatory authorities in the United States. In addition, manufacturers

are concerned that their new biotechnology-derived

Box n-I-Regulations in the United

Kingdom

In the United Kingdom, the Health and Safety

Executive has issued guidelines under the general

authority of the Health and Safety at Work Act of

1978. It is mandatory to notify the Health and

Safety Executive, and hence, the Advisory Committee on Genetic Manipulation (ACGM) of the

intent to carry out genetic manipulation for research

or planned introductions. Employers are requested

to provide substantial information on the details of

the experiment or production process.

Guidelines for planned releases were issued by

ACGM in 1986. At first, only notification was

required, and ACGM provided guidance on detailed

procedure. Since November 1989, ACGM notification of proposed releases has been required by

statute. Under the Environmental Protection Act of

1990, ACGM, now renamed the Advisory Committee on Genetic Modification, continues to oversee

industrial R&D and basic scientific research. Its

subcommittee responsible for case-by-case reviews

has become an independent statutory committee,

called the Advisory Committee on Release to the

Environment (ACRE). It advises both the Health

and Safety Executive and the Secretary of State for

the Environment on human health and safety issues

and, in particular, environmental issues associated

with proposed releases. New regulations are to be

put in place under the Health and Safety at Work

Act and the new Environmental Protection Act.

ACRE and ACGM share six common members and

a common secretariat.

SOURCES: Environmental protection Act 199Q B. Ager, “The

Oversight of Planned Release in the U.K.,” llafefy

Assurance for Environmental Introductions of Genetically-Engineered Organisnw, J. Fiksel and V.T.

Covello (e&.) (New York NY: Springer-Verlag,

1988); R Jennings, British Embassy, Washington,

DC; personal communicatio~ Deeemtxx 1990.

products may face additional regulatory barriers

before they can be marketed, for the product may

also be subject to further regulations based on its

intended use (l).

Industry officials also fear that one country could

delay product approval for the whole EC by forcing

lengthy reviews (43). In addition, they are concerned

that national authorities may institute burdensome

requirements. Because EC directives leave considerable discretion to national authorities, much

depends on how national laws are written and

implemented.
194 ● Biotechnology in a Global Economy

An industry group has identified another 12

regulatory initiatives, either proposed or being

discussed by the European Commission, that could

influence the use of biotechnology (11). One of

these, a directive on the protection of workers from

risks related to exposure to biological agents, was

adopted by the Council of Ministers in November

1990.

Another EC legislative proposal would add a new

requirement for regulatory approval for veterinary

products. Although it is not specifically directed at

regulating biotechnology, it could have an effect on

some biotechnology products. In addition to the

standard requirements of safety, quality, and efficacy, the legislation would require a firm to address

the socioeconomic consequences of the use of its

product. Such a requirement, known as the “fourth

hurdle,” could prevent the introduction of bST,

because bST could increase production of milk, a

product often in surplus in the EC. An amendment

to the Veterinary Products Directive that would

require the inclusion of socioeconomic criteria in the

approval process for veterinary products was approved by a small majority of the European Parliament at its frost reading, but it was rejected at the

second reading in November 1990. A similar requirement, however, is still under consideration in a

draft proposal for a Community regulation concerning the use of substances and techniques stimulating the productivity of animals (21,22).

Limited Restrictions

The use of biotechnology began long after most

industrial nations had developed laws and administrative procedures-including laws pertaining to

drugs, agriculture, the environment, and worker

safety-for regulating hazardous substances. In

general, regulation of biotechnology began with an

evaluation of how biotechnology could be regulated

under existing law and whether new legislation was

necessary at all (53). Australia, Belgium, Brazil,

Canada, France, Japan, The Netherlands, Switzerland, and the United States, for example, have

applied existing laws to biotechnology.

Also important has been the development of a

scientific basis for regulating engineered organisms,

an area in which OECD has been influential (see box

1 l-J). The OECD’s recommendations comprise the

basis of biotechnology regulations in many member

nations.

Since OECD’s 1986 report, other analyses of

biotechnology safety issues, particularly planned

introductions of modified organisms, have been

developed by government task forces or scientific

societies in OECD member nations (15,49,50,57,

68). Most country-to-country differences in biotechnology regulation among OECD members

stem from legal, procedural, and administrative

differences. These differences affect the design

and implementation of all regulations for health

and safety or environmental protection, not just

biotechnology.

Several studies comparing U.S. and European

regulations concerning pesticides, food additives,

industrial chemicals, workplace safety, and air and

water pollution have found that regulatory systems

in other industrial nations are markedly different

from the U.S. system (10,36,73,74). In other countries, bureaucrats are more likely to be granted

discretion in implementing and enforcing regulations, and they often enjoy good working relationships with representatives of regulated industries as

a result. Fines and litigation are rare. Agencies are

more likely to use informal cooperative methods to

obtain compliance, and these agencies see their

interactions with the regulated community less as an

adversarial relationship and more as an opportunity

to provide advice and information. This is possible

because, in other countries, agencies rarely have to

justify their decisions. There is little oversight by

legislatures and courts, and there are few provisions

for public notification or participation.

This situation is beginning to change, however,

particularly with respect to issues of great public

concern, such as nuclear power and biotechnology

(72). Nevertheless, biotechnology regulations probably will not be implemented or enforced using

procedures similar to those used in the United States.

Biotechnology regulatory policies in France, the

United Kingdom, and the United States, for example, vary widely in terms of complexity and enforcement. The French procedures not only are the

simplest but are also voluntary. In the United

Kingdom, the Advisory Committee on Genetic

Manipulation, now called the Advisory Committee

on Genetic Modification, has been overseeing the

use of biotechnology on a case-by-case basis and has

issued guidelines, rather than more inflexible regulations. But the committee has now, apparently,

introduced a more formal system.
Chapter 11--+egulations ● 195

Box 11-J—The Organization for Economic Cooperation and Development

The OECD, an international organization founded in 1%1, is the major forum for discussion of economic

policy by member States. These include most of the industrial world: Australia, Austria, Belgium, Canada,

Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, The Netherlands, New

Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States.

The OECD is committed to economic development and the expansion of world trade, in addition to achieving

the “highest sustainable economic growth and employment” possible, while maintaining financial stability. The

OECD has limited power but often works behind the scenes to promote international understanding of the economic

impact of national policies.

In addition to holding regular meetings attended by each country’s permanent representative, and yearly

meetings at the ministerial level, OECD maintains a number of committees on specific issues, such as economic

policy and development assistance, Delegates from national governments may also meet as expert bodies to discuss

particular issues, such as biotechnology.

In 1983, OECD member countries setup a committee of experts to examine safety issues associated with the

use of engineered organisms in large-wale industrial applications and agricultural and environmental applications.

Recommendations on contained uses were issued in 1986.

The report’s conceptual framework resembles the NIH Guidelines. It describes containment requirements for

organisms, based on the level of estimated risk. It outlines a control standard known as Good Industrial Large-Scale

Practice (GILSP), based on extending industrial experience and practice with micro-organisms to widely used,

low-risk genetically engineered organisms. The containment requirements for low-risk organisms are minimal.

More stringent containment strategies are recommended for organisms that present increased risk. The report lists

criteria for determining whether an organism should be grown under GILSP or under more stringent standards, but

it does not assign specific organisms to risk categories.

The OECD report also recommends a case-by-case review of environmental and agricultural applications of

biotechnology. A stepwise progression of experiments--from the laboratory, to the greenhouse, to the small-scale

field test, and then to larger field tests-is recommended, so that experience can be gained and safety evaluated.

Detailed recommendations on conducting small-scale, low-risk field tests are being prepared.

SOURCE: OftXce of ‘Ikcbnology Assessmen~ 1991.

The development of biotechnology regulations in precedent. But some of the benefits derived from

the United States has been more difficult. Local Federal biotechnology regulations can be listed.

protests have taken place at release sites, and

periodic litigation has been brought by environ- ●

mental groups. Infighting has also taken place

among the Federal agencies responsible for developing regulations and policy statements (14,6 1), which ●

rely more on precise definitions and detailed standards than French and British regulations (see box ●

1 l-B).

EFFECT OF REGULATION ON c

COMPETITIVENESS

At best, regulations that effectively reduce risk

can result in an overall benefit to society. But

Some products produced using biotechnology

warrant premarket review and approval to

reduce risk to health or the environment.

A Federal review process enables agencies to

act as clearinghouses for safety information.

A thorough Federal regulatory system can

alleviate public concern and ensure public

confidence in biotechnology.

The absence of Federal regulations could result

in a confusing array of State and local regulations that, in turn, could stifle commercial

innovation and development while also increasing costs.

measuring the benefits of biotechnology regulations Whether the benefits derived from regulating

are difficult. These regulations are intended to biotechnology outweigh the costs of regulation is the

prevent problems that have never actually occurred; subject of debate. Reduction of risk through more

this means that assessing the probability of an stringent regulation may increase direct and indirect

adverse effect of biotechnology cannot be based on costs to industry, government, and ultimately the
196 ● Biotechnology in a Global Economy

public. When regulations differ from the international norm, either in policy approach or in stringency, investors and researchers may move to other

locations or shift to other investments. This general

problem of regulation is especially acute in biotechnology, because of the wide variety of regulatory

approaches around the world. The direct and indirect

costs associated with biotechnology regulations

include:

●

●

●

●

●

the cost of filing applications and planning and

performing field tests;

benefits lost as a result of keeping useful

products off the market;

delays in product introduction, resulting in lost

revenues, reduced market share, and delayed

returns on investments;

inappropriate health and safety regulations that

pose barriers to trade; and

another layer of uncertainty added to an already

risky investment-for a potential product to be

commercially viable, it must not only meet the

criterion of competitiveness in the marketplace

but must first meet regulatory criteria (33).

Large, diversified corporations are usually better

able to shoulder the costs of regulation than start-up

companies, which may find the costs prohibitive. It

is quite common for small biopharmaceutical firms

to license potential products to larger corporations,

not only for marketing and distribution but also

because the larger firms can finance environmental

assessments and clinical trials more easily.

Regulations may bring on changing patterns of

investment. Several major German corporations are

building plants and research facilities in the United

States and Japan rather than Germany partly because

of the less stringent regulatory environment. For

example, BASF AG is building its new genetic

engineering research facility in Massachusetts,

Bayer AG is expanding a biotechnology laboratory

in Connecticut, and Henkel KGAA is building a new

facility in California (5).

An uncertain regulatory climate also inhibits

investment. Long delays in developing regulations

make analysis of the potential return on an investment much more difficult. The time involved in

establishing a reasonable yet comprehensive oversight mechanism in the United States, particularly a

mechanism applicable to field testing, may have

already contributed to depressing investment in U.S.

agricultural and environmental applications of biotechnology. Ultimately, this loss of investment

results in less innovation and lower technological

competitiveness.

SUMMARY

Internationally, there have been three approaches

to regulation: no biotechnology-specific regulations

in most of the growth-oriented countries of the

Pacific Rim and in some European nations, stringent

regulations in countries with high levels of public

concern about biotechnology (e.g., Denmark and

Germany), and limited restrictions in most

industrialized Nations, including Canada, France,

Japan, the United Kingdom, and the United States.

The EC has enacted directives that are specific to

biotechnology-derived products. In Europe there has

also been proposals for adding an additional criterion for regulatory approval of veterinary products.

This “fourth hurdle” would require socioeconomic

assessments of new products. American manufacturers fear that this criterion will be used to keep their

products off the market in Europe.

In the United States, new legislation is considered

unnecessary because the risks posed by the new

products are thought to be similar in kind to those

associated with similar products developed using

other techniques. Under existing legislation, FDA

has approved many new products, and USDA and

EPA have established procedures for reviewing field

tests of modified plants and micro-organisms. Although farm activists are concerned about the

potential economic effects of BST, public concern

about the contained uses of modified organisms and

their testing in the field has dissipated in the United

States. However, some problems remain:

Mechanisms established to provide Federal

coordination of activities related to biotechnology have, instead, become the center of interagency, ideological disputes over the scope of

proposed regulations.

The time required for clinical trials necessary

for FDA approval of new drugs and biologics

hurts young firms attempting to commercialize

their first products.

The EPA has yet to publish proposed rules for

the regulation of micro-organisms under TSCA

and FIFRA.

The EPA considers micro-organisms to be

chemical substances subject to TSCA, an

interpretation that could be legally challenged.
Chapter 11--Regulations ● 197

●

●

●

There is a lack of information necessary to

assess the risks associated with some planned

introductions, most particularly in microbial

ecology.

The FDA has given little indication of its

intentions concerning the development of regulations and procedures for evaluating the food

safety of genetically modified plants and animals.

Field-testing requirements have been criticized

as too burdensome, especially for the academic

community, and disproportionate to the small

risk associated with these organisms, particularly transgenic crops with no nearby wild,

weedy relatives.

The problems associated with developing regulations add to the costs borne by fins, and are

especially burdensome for small biotechnologybased firms. Despite these difficulties, there is

anecdotal evidence that some European firms have

decided to open research and production facilities in

Japan and the United States, in part, because of the

more favorable regulatory climate.

1.

2.

3.

4.

5.

6.

7.

8.

9.

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Chapter 11--Regulations ● 199

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Chapter 12

Intellectual Property Protection

“Ingenuity should receive a liberal encouragement.”

Thomas Jefferson

“Congress intended statutory subject matter to include anything under the sun made by

man. ’

Chief Justice Warren Burger

majority opinion, Diamond v. Chakrabarty

“What has been is what will be, and what has been done is what will be done; and there

is nothing new under the sun.’

Ecclesiastes 1:9
CONTENTS

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203

U.S. INTELLECTUAL PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203

Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203

Plant Breeders’ Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204

Trade Secrets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205

INTERNATIONAL INTELLECTUAL PROPERTY PROTECTION ................. 205

Paris Convention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206

Patent Cooperation Treaty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206

Budapest Treaty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207

International Union for the Protection of New Varieties of Plants . . . . . . . . . . . . . . . . . . 207

European Patent Convention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .208

INTELLECTUAL PROPERTY RIGHTS IN BIOTECHNOLOGY . . . . . . . . . . . . . . . . . . 208

The Chakrabarty Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209

Federal Patent Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209

ELEMENTS AFFECTING INTERNATIONAL PATENT RIGHTS IN

BIOTECHNOLOGY ... ... ... ... ... ... ... ... ..o. ... ... .  ** **+ *c

. **. cm@.** 210

Patent Application Backlog ... * .......*.*.*............*..**...*.......*.*..+*** 210

Patentable Subject Matter *.*. ... ... ... ... ... ... ... ... ... ... .***. *. Q

. q . ******.*, 214

Procedural Distinctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .217

Process Patent Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .219

Deposit Issues ● . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221

Patent Infringement Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .223

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223

CHAPTER 12 REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .224

Boxes

Box Page

12-A. What Can Be Patented? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209

12-B. PTO Plan To Reduce Biotechnology Patent Backlog . ....,.****...*....,...,.* 213

12-C. Patenting of “ Animals: The Legislative Response . . . ., . . *,, * ., . . . . . . . ..,***.** 216

12-D. The Harvard Mouse Goes to Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217

12-E, The Race to the Home Patent Office . .....*...........*,.........+****.,*,*., 218

12-F. Litigation, 1990-91 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220

Tables

Table Page

12-1. Types of Intellectual Property Protection for Plants ● .4****.**.........,..,.*., 204

12-2. International Intellectual Property Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205

12-3. Member Countries, Paris Union Convention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206

12-4. Member Countries, Patent Cooperation Treaty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207

12-5. Member Countries, Budapest Treaty on the International Recognition of

Micro-organisms for the Purposes of Patent Procedure . . . . . . . . . . . . . . . . . . . . . . . 207

12-6. U.S. Depositories Recognized Under the Budapest Treaty ● * . + * . . . . . * *,*...... 208

12-7. Member Countries, Union for the Protection of New Varieties of Plants . . . . . . . 208

12-8. Member Countries, European Patent Convention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208

12-9. Average Waiting Period, Application to Issue, for

Biotechnology Patents, 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212
Chapter 12

Intellectual Property Protection

INTRODUCTION

Intellectual property law, which provides a

personal property interest in the work of the

mind, is of increasing importance to people who

use biotechnology to create new inventions. Intellectual property involves several areas of the law:

patent, copyright, trademark, trade secret, and plant

variety protection. All affect emerging hightechnology industries because they provide incentives for individuals and organizations to invest in

and carry out research and development (R&D),

while adding important technological information

and products into commerce.

The 1980s provided a harvest of new biotechnological processes and products as well as incentive

for research for future inventions. In industries

affected by biotechnology, old law is merging with

new biological technology, resulting in novel questions regarding the ownership of intellectual property. For example:

1.

2.

3.

4.

5.

Which areas of intellectual property are most

relevant to biotechnology?

What can be patented?

How broad in scope can a patent be?

Is U.S. law adequate to protect inventions

created through biotechnology?

Will inventors receive adequate worldwide

protection for their discoveries?

When discussing a nation’s competitiveness in

industries fostered by the new biology, protection

of intellectual property is seen by many as a

paramount consideration. This chapter briefly

outlines the types of intellectual property protection

available in the United States to protect biological

inventions, the international agreements that may

affect intellectual rights in biotechnology, how U.S.

patent law impacts on new inventions created

through biotechnology, and emerging issues that

affect commercialization of biotechnology-related

patents.

U.S. INTELLECTUAL PROPERTY

Intellectual property protection encompasses several areas of statutory and common law: patent,

copyright, trademark, trade secret, and plant variety

protection. Three categories-patents, trade secrets,

and plant variety protection-are particularly important to biotechnology and are the focus of this

chapter’s discussion.

Patents

United States (U. S.) patent law has its roots in the

Constitution, which gives Congress broad powers to

“promote the Progress of Science and useful Arts,

by securing for limited times to authors and inventors the exclusive right to their respective writings

and discoveries’ (Article I, Section 8). The first

patent act was enacted by Congress in 1790 and,

though amended several times, has retained its broad

scope as to what can be patented.

A patent is a grant issued by the U.S. Government

that gives the patent owner the right to exclude all

others from making, using, or selling the invention

within the United States, its territories, and possessions, during the term of the patent (35 U.S.C. 154).

There are three types of patents. The most common

type-sometimes referred to as a utility patent—

covers processes, machines, manufactures, and compositions of matter. A second category, patents for

plants, includes cultivated sports, mutants, hybrids,

and newly found seedlings. A third category, patents

for designs, is not relevant to biotechnology-related

inventions. To qualify for utility patent protection in

the United States, an invention must meet several

requirements:

. it must be a process, machine, manufacture, or

composition of matter (35 U.S.C. 101);

● it must be new, useful, and not obvious (35

U.S.C. 101-103); and

● it must be disclosed in sufficient detail to

enable a person skilled in the same or the most

clearly related area of technology to construct

and operate it (35 U.S.C. 112).

Patents serve two important policy objectives:

by rewarding successful efforts, a patent provides inventors and their backers with incentive

to risk time and money in R&D; and

by requiring disclosure of the manner and

process of making an invention, a patent

encourages public disclosure of otherwise se-

–203–
204 . Biotechnology in a Global Economy

cret information, so that others are able to use

it.

Although a patent gives the inventor the right to

exclude others from making, using, or selling the

invention for 17 years, it does not grant the inventor

any affirmative right to make or use an invention.

Commercial use of a patented invention, just like

other products, can be regulated by Federal, State, or

local law.

Once obtained, a patent has a term of 17 years,

assuming that maintenance fees are paid (35 U.S.C.

154). One exception to this general term of 17 years

is relevant to biotechnology: where a patent claims

a human drug product, medical device, food, or color

additive that has undergone regulatory review prior

to approval for commercial marketing or use by the

Food and Drug Administration (FDA), the patent

may be eligible for an extension of up to 5 years, if

certain conditions are satisfied (35 U.S.C. 156).

Plant Breeders’ Rights

Intellectual property protection for plant life is

based on several statutes (e.g., the Plant Patent Act,

Plant Variety Protection Act, and 35 U.S.C. 101), a

decision by the U.S. Patent and Trademark Office

(PTO) Board of Appeals, and recognized trade secret

and contract law. These provide a variety of protection for inventions that constitute plant life (see table

12-1).

Plant Patent Act of 1930

Prior to 1930, no intellectual property rights

existed for protecting new plant varieties. Plant

breeding and research were conducted primarily by

federally funded agricultural experiment stations

and, to a limited extent, by amateur breeders.

Financial incentives for private breeders were inadequate, since the breeders’ sole financial reimbursement was through high sales prices of comparatively

few reproductions during the first 2 or 3 years after

the variety’s initial availability. Once the plant left

a breeders’ hands, it could be reproduced in unlimited quantity by anyone.

In 1930, Congress passed the Plant Patent Act

(PPA) (35 U.S.C. 161-164) to extend patent protection to most new and distinct asexually propagated

varieties. The PPA was the first, and to date, only

law passed by Congress specifically providing

patent protection for living matter. Since then,

more than 6,500 plant patents have been issued by

Table 12-1—Types of Intellectual Property

Protection for Plants

Type Citation Subject matter

Plant patent . . . . . . . . . 35 U.S.C. 161-

164

Plant variety protection

certificate . . . . . . . . . . 7 U.S.C. 2321

et seq.

Utilitypatent. . . . . . . . . 735 U.S.C. 101

et seq.

Trade secret . . . . . . . . . State law

Asexually reproduced varieties

Sexually reproduced

varieties

Process, machine,

manufacture,

composition of

matter

Information used in

trade or business

that is kept secret

SOURCE: Office of Technology Assessment, 1991.

PTO covering flowering plants, ornamental and fruit

trees, nut trees, grapes, and vegetable crops. Plant

patents cannot be obtained for seeds, tubers, biotechnology processes, recombinant DNA (rDNA), or

genes (23). On average, more than 225 plant patents

are issued each year (34).

Plant Variety Protection Act of 1970

Commercial and international developments between 1930 and 1970 influenced deliberations in the

United States to protect sexually reproduced plants.

Plant breeders had developed new sexually reproducing plants that could replicate “true-to-type’ but

could not be patented under the PPA. In 1961,

several European countries formed the International

Union for the Protection of New Varieties of Plants

(UPOV) to protect breeders’ rights. Unlike breeders

in UPOV countries, U.S. breeders had no law

protecting their inventions, except for asexually

reproduced plants covered by the PPA.

The Plant Variety Protection Act (PVPA) (7

U.S.C. 2321 et seq.) was enacted by Congress in

1970, to provide patent-like protection for certain

types of new, sexually reproduced plant species. It is

mainly of interest to breeders and farmers of such

sexually reproduced crops as: wheat, alfalfa, soybeans, cotton, corn, lettuce, soybeans, and watermelon (9).

Although PVPA is not a patent statute, the

protection it provides to breeders of new plant

varieties is similar in concept to patent protection. The act is administered by the U.S. Department

of Agriculture (USDA). Upon application to USDA

and examination by this agency, a plant variety

protection certificate may be issued on any novel
Chapter 12-intellectual Property Protection ● 205

variety of sexually reproduced plant--other than

fungi, bacteria, or a frost-generation hybrid. The

novel variety must have distinctiveness, uniformity,

and stability. Amendments in 1980 (Public Law

96-574) added protection for six vegetable crops and

extended coverage to 18 years so the PVPA would

be consistent with UPOV provisions.

Under PVPA, the breeder can exclude others from

selling, offering for sale, reproducing (sexually or

asexually), producing a hybrid from the variety, and

importing or exporting the protected variety.

PVPA contains two important exclusions to a

certificate holder’s protection:

. a research exemption that precludes a breeder

from excluding others from using the protected

variety to develop new varieties; and

. a farmers’ exemption which allows an individual whose primary occupation is growing

crops for sale, for other than reproductive

purposes, to save protected seed for use on his

or her farm or to sell to people whose primary

occupation also is growing crops.

From 1970 through 1988, 2,783 applications for

plant variety protection certificates were filed with

the USDA for some 100 different crops. By December 31, 1988,2,133 certificates had been issued, and

274 applications were pending. Another 376 applications had been abandoned, withdrawn, declared

ineligible, or denied (34).

Utility Patents for Plants

In addition to specified plant patent and plant

variety protection, U.S. inventors may also seek

utility patent protection for plants. In 1985, the PTO

Board of Appeals and Interferences ruled, in Ex

parte Hibberd (16), that a corn plant containing an

increased level of tryptophan, an amino acid, was

patentable subject matter under 35 U.S.C. 101. Since

the Hibberd ruling, utility patents have been granted

on plants.

Trade Secrets

Trade secrets extend protection to information

used in one’s trade or business, that is maintained in

secret by its owner and provides a competitive

business advantage over those not having the

information. A plan, process, tool, mechanism,

recipe, chemical compound, customer list, or forTable 12-2—International Intellectual Property

Agreements

Entered Number of

Agreement into force signatories

Paris Union Convention . . . . . . . July 1884 100

Union for the Protection

New Varieties of Plants . . . . . August 1968 19

European Patent Convention . . . October 1977 14

Patent Cooperation Treaty . . . . . January 1978 45

Budapest Treaty . . . . . . . . . . . . . August 1980 23

SOURCE: Office of Technology Assessment, 1991.

mula, all are examples of information that can be

maintained as trade secrets.

Unlike patents (which are governed exclusively

by Federal law), trade secrets are the subject of State

law. The theft of a trade secret is a tort, and action

lies against the thief for misappropriation. Trade

secret law promotes two beneficial ends: it encourages commercial morality and fair dealing, and it

encourages research and innovation. Unlike patent

law, however, trade secret law does not encourage

public disclosure of technical information.

If a trade secret is disclosed in a nonconfidential

reamer, it is lost forever. Trade secret rights require

that a trade secret be disclosed in confidence only to

those having a reasonable need to know (e.g.,

employees). Measures must be taken to prevent

disclosure of the trade secret to the public or to

competitors (e.g., expressly identifying the information as a trade secret and prohibiting its disclosure).

INTERNATIONAL

INTELLECTUAL PROPERTY

PROTECTION

The need for protection of intellectual property is

well accepted inmost nations. Formal patent statutes

were first enacted by England in the 1600s; the

United States and France adopted laws in the late

1700s. With the development of international trade,

patent protection was formally adopted by other

nations, and mechanisms were adopted to harmonize

intellectual property rights among-trading nations.

Several international agreements are relevant to

protecting biological inventions (see table 12-2).

These agreements provide comity, in the area of

patents, plant breeders’ rights, and deposit of biological materials.
206 . Biotechnology in a Global Economy

Table 12-3--Member Countries, Paris Union Convention

Algeria

Argentina

Australia

Austria

Bahamas

Bangladesh

Barbados

Belgium

Benin

Brazil

Bulgaria

Burkina Faso

Burundi

Cameroon

Canada

Central African Republic

Chad

China

Congo

Cuba

Cyprus

Czech and Slovak Federal

Republic

Denmark

Dominican Republic

Egypt “

Finland

France

Gabon

Germany

Ghana

Greece

Guinea

Guinea-Bissau

Haiti

Holy See

Hungary

Iceland

Indonesia

Iran

Iraq

Ireland

Israel

Italy

Ivory Coast

Japan

Jordan

Kenya

Korea, Democratic People’s

Republic of

Korea, Republic of

Lebanon

Lesotho

Libya

Liechtenstein

Luxembourg

Madagascar

Malawi

Malaysia

Mali

Malta

Mauritania

Mauritius

Mexico

Monaco

Mongolia

Morocco

The Netherlands

New Zealand

Niger

Nigeria

Norway

Philippines

Poland

Portugal

Romania

Rwanda

San Marino

Senegal

South Africa

Soviet Union

Spain

Sri Lanka

Sudan

Suriname

Sweden

Switzerland

Syria

Togo

Trinidad and Tobago

Tunisia

Turkey

Uganda

United Kingdom

United Republic of Tanzania

United States

Uruguay

Viet Nam

Yugoslavia

Zaire

Zambia

Zimbabwe

SOURCE: Office of Technology Assessment, 1991.

Paris Convention

The Paris Convention for the Protection of

Industrial Property, first adopted in 1883, is the

major international agreement providing basic rights

for protecting industrial property. It covers patents,

industrial designs, service marks, trade names,

indications of source, and unfair competition. The

United States ratified this treaty in 1903, and many

other nations have adopted it (see table 12-3).

The treaty provides two fundamental rights:

The principle of national treatment provides

that nationals of any signatory nation shall

enjoy in all other countries of the union the

advantages that each nation’s laws grant to its

own nationals. The purpose is to eliminate

discrimination against foreigners, who, in turn,

must observe the conditions and formalities

imposed on nationals of the member country in

which protection is sought.

The right of priority enables any resident or

national of a member country to, frost, file a

patent application in any member country and,

thereafter, to file a patent application for the

same invention in any of the other member

countries within 12 months of the original

filing and receive benefit of the original filing

date. The effect is to give subsequently filed

applications the right of priority established by

the first filing date.

The convention permits member nations to enter

into separate agreements for the protection of

industrial property-as long as the agreements do

not contravene the provisions of the convention.

This provision has permitted the ratification of other

bilateral and multilateral agreements, between nations, addressing specific areas of intellectual property protection.

Patent Cooperation Treaty

The Patent Cooperation Treaty (PCT) is a worldwide convention, open to the members of any Paris

Convention country. It entered into force in 1978,

and has been ratified or acceded by 45 countries (see

table 12-4). Unlike the Paris Convention, which

addresses substantive intellectual property rights,

the PCT addresses procedural requirements, aiming

to simplify the filing, searching, and publication of

international patent applications.

After an application is filed with the patent office

of a member nation (usually the national patent

office of the country in which the applicant is a

resident or national), the application is transmitted to

the international bureau of the World Intellectua1

Property Organization (WIPO) in Geneva. An inter-
Chapter 12--Intellectual Property Protection ● 207

Table 12-4-Member Countries, Patent

Cooperation Treaty

Australia Korea, Democratic People’s

Austria Republic of

Barbados Korea, Republic of

Belgium Liechtenstein

Benin Luxembourg

Brazil Madagascar

Bulgaria Malawi

Burkina Faso Mali

Cameroon Mauritania

Canada Monaco

Central African Republic The Netherlands

Chad Norway

Congo Romania

Denmark Senegal

Finland Soviet Union

France Spain

Gabon Sri Lanka

Germany Sudan

Great Britain Sweden

Greece Switzerland

Hungary Togo

Italy United Kingdom

Japan United States

SOURCE: Office of Technology Assessment, 1991.

national search is conducted by an appropriate

international searching authority (ISA). In the case

of U.S.-initiated applications, the ISA is the U.S.

Patent and Trademark Office or the European Patent

Office. Following the international search, the

application and the search report are published by

WIPO, and copies are provided to each of the

designated offices in the countries where protection

is sought. These countries then subject the application to their own national procedures.

Budapest Treaty

United States patent law requires applicants to file

a specification ( i.e., a writing, specifying in clear,

concise terms how to make and use the invention and

the best mode contemplated by the applicant for

carrying out the invention). The patenting of living

organisms presents a unique administrative problem, because it is the only known art where-in

some instances-this requirement cannot be satisfied with words alone. In these instances, it is

necessary to deposit micro-organisms and plants for

patent purposes. This practice has become commonplace internationally, leading to the need to harmonize deposit requirements worldwide.

The Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the

Purposes of Patent Procedure is a vehicle harmonizing such requirements. It entered into force in 1980,

Table 12-5-Member Countries, Budapest Treaty on

the International Recognition of Micro-organisms

for the Purposes of Patent Procedure

Australia

Austria

Belgium

Bulgaria

Czech and Slovak Federal

Republic

Denmark

Finland

France

Germany

Hungary

Italy

Japan

Korea, Republic of

Liechtenstein

The Netherlands

Norway

Philippines

Soviet Union

Spain

Sweden

Switzerland

United Kingdom

United States

SOURCE: Office of Technology Assessment, 1991.

and provides that member states recognize a deposit

of a micro-organism strain made in another country

for their own patent procedures. Currently, 23

nations are members of the Budapest Treaty (see

table 12-5).

The key element of the treaty is the establishment

of a series of approved International Depositary

Authorities (IDAs). These depositories are recognized by all member countries for deposit purposes.

Once a viable deposit is made in an IDA, two facts

are recognized: the deposit was made on the

indicated date, and any sample furnished by the IDA

is a sample of the organism or other replicable

material deposited on that date. As of January 1990,

a total of 20 depository institutions had acquired

IDA status; three are located in the United States

(see table 12-6).

International Union for the Protection of

New Varieties of Plants

With the development of plant sciences came the

realization that the rights of plant breeders were

entirely overlooked in many countries. The patent

laws of many countries, for example, specifically

excluded the patenting of any type of lifeform. An

international conference in 1957, led to the drafting

of the International Union for the Protection of New

Varieties of Plants (UPOV); it was signed by several

nations in 1961, and entered into force in 1968.

Currently, 19 nations are members of UPOV (see

table 12-7).

The International Union for the Protection of New

Varieties of Plants was designed “to recognize and

to ensure the breeder of a new plant variety. . . the

right to a special title of protection or of a patent. ”

The goal was to provide a model for the adoption of
208 ● Biotechnology in a Global Economy

Table 12-6--U.S. Depositories Recognized Under the

Budapest Treaty

Table 12-7—Member Countries, Union for the

Protection of New Varieties of Plants

American Type Culture Collection

12301 Parklawn Drive

Rockville, MD 20852

A private, nonprofit institution organized in 1925 for the

purposes of acquiring, preserving, and distributing cultures of

micro-organisms to scientists. Currently holds an estimated

8,000 deposits for patent purposes.

Northern Regional Research Laboratory

1815 N. University Street

Peoria, IL 61604

Established in 1940 as part of the U.S. Department of

Agriculture for the study of micro-organisms of agricultural and

industrial importance. currently has approximately 3,000

cultures on deposit.

In Vitro International, Inc. (IVI)

611 (P) Hammonds Ferry Road

Linthicum, MD 21090

Incorporated in 1983 as a for-profit company for the purpose of

accepting cultures for patent purposes. Approximately 100

cultures are on deposit.

SOURCE: Office of Technology Assessment, 1991.

breeders’ rights statutes in individual countries and

to assure reciprocity between countries in the

convention.

To obtain protection in each member country, it is

currently necessary to file a separate application in

each country. There is no central filing system, and

international protection is not available by filing in

only one member country. While both sexually and

asexually reproduced plants can be protected, the

UPOV convention requires that each protected

variety have a specific, unique name for registration

purposes. In all member nations except the United

States, new varieties are subject to official inspection establishing that conditions for protection are

satisfied.

The UPOV Convention is presently under consideration for revision. A recent diplomatic conference,

held in March 1991, may lead to revision of Article

2, which currently does not allow both patent and

breeders’ rights for the same botanical species or

genus (35).

European Patent Convention

The European Patent Convention (EPC) is an

agreement between European nations to centralize

and standardize patent law and procedure. To date,

14 countries are members of the EPC, which took

effect in 1977 (see table 12-8).

Because the patchwork of traditional national

patent systems in Europe was recognized as creating

Australia

Belgium

Denmark

France

Germany

Hungary

Ireland

Israel

Italy

Japan

The Netherlands

New Zealand

Poland

South Africa

Spain

Sweden

Switzerland

United Kingdom

United States

SOURCE: Office of Technology Assessment, 1991.

Table 12-8-Member Countries, European

Patent Convention

Austria Italy

Belgium Liechtenstein

France Luxembourg

Denmark The Netherlands

Germany Spain

Great Britain Sweden

Greece Switzerland

SOURCE: Office of Technology Assessment, 1991.

a potential conflict with the need for free trade, EPC

established the so-called “European patent,” a

single, supranational patent obtained by filing one

application with the European Patent Office in

Munich. Once granted, the patent matures into a

bundle of individual patents-one in each member

country. The ultimate goal is for each member

country to adopt, in its national law, the same

substantive and procedural law of patents established by the EPC agreement.

EPC streamlines procedural requirements for

applicants seeking a European patent. It avoids

duplicate filing, searching, and examination costs;

minimizes the number of translations that must be

made; and economizes on the use of professional

time, both on the part of the applicant’s domestic

patent representative and representatives in countries where protection is sought (3).

INTELLECTUAL PROPERTY

RIGHTS IN BIOTECHNOLOGY

The merging of intellectual property law and

biotechnology represents the joining of old law

with new technology. In theory, statutes designed to

facilitate creation of unforeseen technologies and

reward inventors for their creativity should blend

easily with the inventions of biotechnology. Although intellectual property laws have fostered
Chapter 12-intellectual Property Protection .209

R&D in biotechnology, novel legal and social

questions have also arisen.

During the 1980s, events in the United States

shaped the application of intellectual property law to

biotechnology. First, the Supreme Court was called

on to determine whether a living organism could be

patented. Second, Congress and the executive

branch took actions making it easier for federally

funded inventions to become commercialized.

These actions ignited a flood of biotechnology

patent activity. By 1989, an examining unit specifically for biotechnology was established at the PTO.

The Chakrabarty Decision

The development of rDNA technology in the

1970’s led to debate regarding what constitutes a

patentable invention. Although patents on biotechnological processes had been issued since the

1800’s, PTO did not permit patents on living

products created by the technology, on the grounds

that such matter were ‘‘products of nature” and not

statutory subject matter as defined by 35 U.S.C. 101

(see box 12-A).

Although proposed patent claims were rejected if

directed to living organisms per se, patent protection

was granted for many compositions containing

living things (e.g., sterility test devices containing

living microbial spores, food yeast compositions,

vaccines containing attenuated bacteria, milky spore

insecticides, and various dairy products) (29).

The issue of whether a genetically engineered

organism could be patented was addressed by the

Supreme Court in 1980, in Diamond v. Chakrabarty

(10). In this case, the patent applicant had developed

a genetically engineered, but not recombinant,

bacterium capable of breaking down multiple components of crude oil. Because no naturally occurring

bacterium possessed this property, Chakrabarty’s

bacterium was thought to have significant value for

the cleanup of oil spills.

Chakrabarty filed a patent application with 36

claims. Process claims for the method of producing

the bacteria were allowed by the PTO; but claims for

the bacterium, itself, were rejected on two grounds:

1) micro-organisms are ‘products of nature,’ and 2)

as living things, micro-organisms are not patentable

subject matter under 35 U.S.C. 101. The case was

eventually heard by the Supreme Court; the justices,

in a 5-4 ruling, held that a live, human-made

Box 12-A—What Can Be Patented?

One section of the U.S. patent law, 35 U.S.C.

101, was part of the first U.S. patent law enacted by

Congress in 1790, It defines what constitutes a

patentable invention:

Whoever invents or disoovers any new and useful

process, machine, manufacture, or composition of

matter, or any new and useful improvement thereof,

may obtain a patent therefore, subject to the

conditions and requirements of this title.

This section of the patent Code has changed little,

and its broad language has made possible the

issuance of more than 5 million U.S. patents.

SOURCE: Mice of Technology Assessm eng 1991.

micro-organism is patentable subject matter under

section 101 as a “manufacture” or “composition of

matter.

The Chakrabarty decision provided a judicial

framework for subsequent PTO decisions to issue

patents under 35 U.S.C. 101 for plants and nonhuman animals. The decision also provided great

stimulus for the economic development of biotechnology processes and products in the 1980’s.

Federal Patent Policy

Other revisions in Federal patent policy encouraged increased patent activity from federally funded

research. Prior to 1980, no single patent policy

existed for such research, resulting in the development of 26 separate patent policies by various

government agencies (33).

To promote efforts to develop a uniform patent

policy that would encourage cooperative relationships and to commercialize government-funded

inventions, Congress passed the Patent and Trademark Amendments of 1980 (Public Law 96-517) and

amendments in 1984 (Public Law 98-260). The law

allows nonprofit institutions (including universities)

and small businesses to retain title to patents arising

out of federally funded research, with the Federal

agency retaining a nonexclusive, worldwide license.

Universities are required to share royalties with the

inventor and to use any net income for research and

education (35 U.S.C. 202).

The law, which gave statutory preference to small

businesses and nonprofit organizations, was extended by executive order to larger businesses (with
210 ● Biotechnology in a Global Economy

some exceptions) in 1983 (24). The Technology

Transfer Act of 1986 (Public Law 99-502) granted

Federal authority to form consortia with private

concerns. Executive order 12591, issued in 1987,

further encouraged technology-transfer programs,

including the transfer of patent rights to government

grantees.

ELEMENTS AFFECTING

INTERNATIONAL PATENT

RIGHTS IN BIOTECHNOLOGY

A number of differences exist among nations,

regarding intellectual property protection for biotechnological inventions. International agreements

have set norms for substantive intellectual property

protection (e.g., national treatment under the Paris

Convention) and for procedures for obtaining patents (e.g., simplified searching and filing under the

Patent Cooperation Treaty and deposits under the

Budapest Treaty), but further harmonization of

intellectual property law is seen by many as necessary for improved trade and effective protection of

intellectual property in a global marketplace.

Biotechnology is a particularly good example of

technology where patent questions are raised by

rapid scientific and technological change. The major

international agreements governing intellectual

property were ratified prior to the development of

new biotechnological inventions (25). As legal

issues are developed and dealt with in various

nations, a primary consideration arises: what impact

do these issues have on the development of an

international marketplace for inventions developed

by biotechnological means?

Intellectual property is an important component

of U.S. competitiveness in fields relying on biotechnology. Without adequate international protection,

this valuable asset is seriously tarnished and diminished in value, and future investment is discouraged.

American competitiveness in this area focuses

largely on securing patents, both in the United States

and abroad, while understanding and operating

smoothly within the procedural requirements for

obtaining substantive patent rights.

This section focuses on six elements that affect

U.S. competitiveness based on international intellectual property rights for biotechnology:

1. the patent application backlog,

2. patentable subject matter,

3. procedural distinctions,

4. process patent protection,

5. deposit issues, and

6. patent infringement litigation.

Patent Application Backlog

The Process

When a patent application is received by the PTO,

it is assigned to 1 of 16 examining groups in the

agency. Each examining group includes a number of

art units, each responsible for a specific area of

technology. Examiners in the art units review patent

applications to decide whether the invention claimed

in the application is entitled to patent protection. The

examination process includes a search through U.S.

patents, available foreign patent documents, and

relevant nonpatent literature.

After the examiner decides whether to grant a

patent, the PTO, through a procedure called an

action, notifies the applicant of the examiner’s

decision, or any objection or requirement, and

provides information that may assist the applicant in

judging whether to pursue the application. If the

invention is not considered patentable subject matter, the claims will be rejected. Some or all of the

claims may be rejected on the first action by the

examiner; relatively few applications result in patents as originally filed (31).

If an application is rejected or objected to, the

applicant can either abandon the application or

request a reconsideration, responding in writing to

every rejection raised by the PTO. The PTO then

issues a second action, which is normally final.

Following a second action rejection, the applicant is

normally limited to administrative review (either

through the PTO Board of Patent Appeals and

Interferences or Federal court action) or to filing a

continuing application.

Continuing applications are an alternative to

appealing the rejected application. If the application

is filed within an allotted period of time and refers to

an earlier application, the applicant is entitled to the

date of the earliest filed application for subject

matter common to both applications (35 U.S.C.

120). The ability to maintain the earliest filing date

is an important benefit to the applicant, since the

earlier priority date determines patent rights.
Chapter 12-intellectual Property Protection ● 211

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The Problem

The abnormally long patent application review

and action by PTO is frequently cited as the

primary impediment to commercialization of

biotechnology-related processes and products.

Recent congressional reports reveal the pendency

period for biotechnology patent applications is

longer than that of any other technology (average

pendency is 36.1 months from the date of application

to the date of issue, compared to 21.0 months for all

patents issued (30). Several reasons have been cited:

. due to the nature of the technology, its newness,

and its rapid development, the level of technical

scrutiny required to process an application for

a biotechnology patent exceeds that required to

process patent applications in most other areas

of technology (30);

● high turnover among patent examiners, lured to

the private sector by higher pay (8);

● failure to retain senior staff, well-trained in

biotechnology patent prosecution, results in a

lack of continuity, increased examination time

per application, and inconsistent examination;

and

● the pressure on examiners to meet certain

efficiency quotas results in increased pressure

and job disenchantment, further causing depletion of personnel.

Two key elements play a part in the patent

application backlog: 1) the number of applications

received by PTO and 2) the amount of time it takes

for an application to be acted on. The number of

biotechnology applications filed has grown at a

significantly higher average rate--20 percent-than
212 . Biotechnology in a Global Economy

that for all patent applications-2.9 percent—from

1983 through 1988 (30). On the other hand, the

amount of time between filing and first action

declined-from 14.5 months in 1989 to 13.1 months

in 1990 (30,31). Despite the improved performance

by PTO in reaching first actions, total pendancy

appears to be increasing.

The effect of delays in obtaining patents varies

between different subgroups in the biotechnology

examining area. Although the average pendency of

a biotechnology patent application is 36.1 months,

the average time is shorter for applications related to

plants and animals (24.9 months) and longer for

applications related to genetic engineering (47.4

months) (see table 12-9). The actual time required

to process inventions disclosed in patent applications is longer than the pendancy reported by the

PTO, because they measure pendancy of applications, not inventions. A patent granted on an

invention may be the result of a chain of replacement applications, or continuing applications.

For example, during 1989, about one-third of all

backlogged patent applications resulted from a chain

of continuing applications. Factoring in the chain of

continuing applications adds 9 months to PTO’s

reported average patent pendance of 26.3 months

(31).

While there is clearly a difference between the

average pendancy in biotechnology, as compared

to an average pendancy for all technologies in the

PTO, patents, even in biotechnology, are granted

faster in the United States than in any major

examining office in the world—and faster by a

significant amount of time (35). In Japan and

Europe, for example, pendancy time does not

normally include the 18 months prior to publication

of the application. In Japan, publication often leads

to oppositions being filed against the application—

nearly 30 such oppositions were filed against the

patent for human tissue plasminogen activator (tPA)

in Japan—further delaying the issuance of the patent

(35).

Effect on Commercialization

Because patents are one of the most important

assets of a startup, high-technology company, failure

to procure timely patent protection can adversely

affect a company’s ability to secure the financing

needed to develop processes and products. From the

viewpoint of an individual inventor or assignee of a

patent, several problems are apparent.

Table 12-9—Average Waiting Period, Application to

Issue, for Biotechnology Patents, 1989

Total Average

Art unit/description patents issued months

181/equipment. . . . . . . . . . . . . 723 37.2

182/immunology . . . . . . . . . . . 417 44.1

183/biochemicals . . . . . . . . . . 665 36.7

184/plants & animals . . . . . . . 754 24.9

185/genetic engineering . . . . . 307 47.4

186/biochemicals . . . . . . . . . . 268 37.7

187/equipment and

immunology . . . . . . . . . . . . . 1 33.4

188/microbiology . . . . . . . . . . 0 0.0

Biotechnology total . . . . . . . 3,135 36.1

SOURCE: General Accounting Office, Biotechnology: Processing Delays

Continue for Growhg 8ack/og of Patent Appkations, 1990.

First, the delay in getting a patent can slow down

efforts to commercialize the invention. A second

problem involves filing for protection in foreign

countries. Under the Paris Convention, an applicant

filing in the United States has 1 year to file in foreign

countries and obtain the benefit of the U.S. filing

date. As a practical matter, this decision is typically

postponed until close to the end of the frost year,

because of the considerable expense of foreign

filing. Thus, it is desirable to have the U.S. patent

examiner decide on patentability prior to the close of

the 1 year period, so that the applicant has the benefit

of the initial PTO search and examiner reaction

before deciding whether foreign filing costs are

justified. Without the PTO action, the decision is

much more difficult and sometimes involves committing substantial funds, even when patent protection is not likely (7).

A third problem relates to the fact that pending

U.S. patent applications are secret (35 U.S.C. 122).

When an inventor makes a preliminary search, to

determine whether the invention is novel, access to

information is limited only to the available prior art

(i.e., printed scientific and trade publications, foreign published applications, and issued patents). The

backlog of patent applications creates a large body

of hidden knowledge that may later become prior art.

As a result, an inventor may file an application, only

to learn years later that the application will be

rejected, because a previously filed application

made the same claims or claims broad enough to

encompass the claims made in the, later application.

If the backlog could be shortened, the amount of

potentially hidden prior art would be reduced

proportionately.

The delay to an inventor caused by the patent

application backlog results in increased costs for
Chapter 12--Intellectual Property Protection ● 213

processing the application. Inmost fields, the cost of

receiving a U.S. patent runs between $3,000 and

$6,000. Biotechnology patents generally cost between $8,000 and $15,000. This difference is

primarily due to attorney fees and the time involved

responding to patent examiners who are not sufficiently skilled in biotechnology patent prosecution

(18).

Proposed Solutions

In an attempt to reduce the backlog of biotechnology patent applications, the PTO instituted a 13-

point, catch up plan (see box 12-B). The plan has not

succeeded in its goal of reducing the backlog of

patent applications. During calendar year 1989 and

the frost half of 1990, the inventory of unexamined

biotechnology patent applications increased by approximately 33 percent (from about 6,200 to about

8,200) (31).

The most immediate way for an applicant to avoid

the current backlog is to request accelerated examination. This is done with a written petition describing the applicant’s preliminary search and description of the prior art. The additional fee of $72, to

request accelerated examination, is worthwhile for

applicants needing to establish a definitive patent

position for investors or licensees. Of approximately

5,000 biotechnology-related applications received

by the PTO in 1987, only 17 were petitions

requesting accelerated examination (30). Legal and

business considerations may explain the limited use

of accelerated examination. From a legal standpoint,

the PTO practice requires that an applicant seeking

an accelerated examination provide a complete

search report of literature and prior art relevant to the

application. Failure to do so can result in a rejected

application. (35) From a business perspective, there

may be little incentive to have the 17-year patent

term begin to run until a product is ready for market.

From this perspective, a company wants their

patents to issue more slowly than those patents

belonging to a competitor (12).

Suggestions for reducing the backlog include:

●

●

increased pay, benefits, and training for PTO

personnel to enhance job satisfaction and

performance.

cutting down on the excessive volume of paper

that an applicant sometimes provides an examiner to support the application (5) .

Box 12-B—PTO Plan To Reduce

Biotechnology Patent Backlog

In 1988, the Patent and Trademark Office initiated a 13-point plan to process biotechnology

patent applications more expeditiously:

1, Creating a new examining group to deal

exclusively with the field of biotechnology.

Called “Group 180,” this examining unit

consolidated units and examiners from

preexisting examining groups.

2. Adjusting examiner complexity factors.

3. Obtaining greater hiring authority from the

Office of Personnel Management.

4. Obtaining special engineering pay rates for

new examiners.

5. Hiring as many new biotechnology examiners as can be trained by senior examiner

staff.

6. Increasing overtime for several years to the

maximum level sustainable.

7. Liberalizing and publicizing, as necessary,

the procedure for requesting accelerated

examination.

8. Identifying examiners in other groups who

can be transferred and retained to examine

biotechnology applications in a reasonable

period of time.

9. Improving communication about Patent Office goals and reeds and improving morale

in the new biotechnology examining group.

10. Examining search tools-especially for

searching DNA, RNA, and protein sequences.

11. Enhancing technical and legal update training for all examiners.

12. Stimulating higher productivity in the new

biotechnology examining group.

13. Hiring and initially training new examiners

for the biotechnology group in other

examining groups.

SOURCE: @neral Accounting Uffice, Biotechnology: Backlog

of Patent Applications, 1989.

. adoption of a selective examination scheme,

whereby applicants select cases for priority

treatment and defer less important applications

for later examination.

. adoption of the 18-month publication system

found in many other countries, whereby all

applications are published within a certain time

period, thus decreasing the amount of potential

hidden prior art; and
214 ● Biotechnology in a Global Economy

● Adoption of a payback system, similar to

Federal medical training grants, whereby, in

exchange for educational assistance, Ph.Dlevel graduates would pay back the Federal

Government’s investment by serving a specified term as an examiner.

As PTO attempts to reduce the patent application

backlog, some applicants complain that the quality

of patent examination has decreased. Procedural

mistakes and a general lack of understanding of the

law occasionally results in erroneous actions by

patent examiners (e.g., the issuance of overly broad

patents, or erroneous rejections). Such errors increase the cost of the patent application process,

either through lost opportunities or through refiling

and appeal costs.

Others, however, claim that the patent application

backlog is not detrimental to U.S. capability in

biotechnology for two reasons:

● Despite the U.S. backlog, it takes significantly

longer to obtain a biotechnology patent in other

countries (35).

. For products that have a long regulatory approval time, the delay in obtaining a patent

extends the period of intellectual property

protection, since the 17-year term does not

begin until the patent is actually issued (1 1).

Patentable Subject Matter

Under U.S. Patent law, four broad areas constitute

the core of patentable subject matter: processes,

machines, manufactures, and compositions of matter

(101). As the Supreme Court noted in Chakrabarty,

Congress plainly contemplated that the patent laws

would be given wide scope and ‘intended statutory

subject matter to include anything under the sun

made by man. ’

After Chakrabarty, the patenting of microorganisms became commonplace in the United

States. In 1985, the PTO’s Board of Patent Appeals

and Interferences relied on Chakrabarty to rule in Ex

parte Hibberd (16) that corn plants, seeds, and plant

tissue culture containing an increased level of the

amino acid, tryptophan, were patentable subject

matter under 35 U.S.C. 101, even though such plants

could be protected under the PVPA. Today, a variety

of protections—plant patents, plant variety protection certificates, utility patents, and trade secrets—

exist for inventions that constitute plant life.

In April 1987, the PTO Board of Appeals and

Interferences ruled that polyploid oysters were

patentable subject matter (15). Subsequently, PTO

announced that it would, henceforth, consider nonnaturally occurring, nonhuman, multicellular organisms (including animals) to be patentable subject

matter. In April 1988, the first patent on a nonhuman

animal was issued to Harvard University for mammals genetically engineered to contain a cancercausing gene (U.S. 4,736,866). Although 120 animal

patent applications are pending, no additional patents on animals have issued (35). The PTO policy

and the issuance of the sole animal patent initiated

a broad public debate and the introduction of

legislation in Congress (see box 12-C).

Europe

European subject matter law is noteworthy in that

1) a convention exists whereby a number of nations

subscribe to one law regarding subject matter

patentability; 2) because of a developed science

base, the issue of subject matter patentability has

arisen in the context of biotechnology; and 3) issues

addressed by the European Patent Office highlight

similarities and differences with U.S. law.

Article 52(1) of the E.P.C. defines patentable

subject matter as inventions that are susceptible to

industrial application, are new, and involve an

inventive step. In this respect, European and U.S.

law both have expansive language defining what can

be patented. Unlike U.S. law, which identifies

classifications that are patentable (i.e., process,

machine, manufacture, and composition of matter),

the European provision does not provide a definitive, positive definition of classes of patentable

inventions. Instead, Article 52(2) narrows the broad

language of Article 52(1) by explicitly excluding

from the term “inventions’

discoveries, scientific theories, and mathematical methods-including naturally occurring

products;

aesthetic creations;

schemes, rules, and methods for performing

mental acts, playing games, or doing business;

programs for computers; and

presentations of information.

Article 53(b) stipulates that European patents not

be issued for plant or animal varieties and essentially

biological processes for the production of plants and

animals (with the exception of microbiological
Chapter 12-intellectual Property Protection ● 215

Photo credit: DuPont

Advertisement for OncoMouse, the subject of the first U.S. patent on a transgenic animal.
216 ● Biotechnology in a Global Economy

Box 12-C—Patenting of Animals: The Legislative Response

Several pieces of legislation were introduced in the 100th and 101st sessions of Congress addressing the

patentability of animals. The following actions occurred during the 100th Congress (in session during 1987 and

1988):

. An amendment to a supplemental appropriations bill (Senate Amendment 245 to H.R. 1827) to prohibit the

use of appropriated funds for the patenting of genetically altered or modified animals. The amendment was

adopted by the Senate by voice vote but not adopted by the conference committee.

. H.R. 3119 to establish a 2-year moratorium on the patenting of animals and to revoke previously granted

patents.

. S. 2111 to prohibit animal patents and revoke previously granted patents.

● H.R. 4970, the Transgenic Animal Patent Reform Act, to provide that exemptions from infringement for:

1) making or using a patented animal solely for research or experimentation without any commercial intent;

or 2) for a person whose occupation is farming, to reproduce through breeding, the use, or to sell a patented

transgenic farm animal under certain circumstances; 3) to permit the Patenting and Trademark Office to

accept a deposit of biological material; and 4) to declare that human beings are not patentable. The bill was

adopted by the House of Representatives, but no action was taken by the Senate.

The following legislation was introduced in the 101st Congress (in session during 1989 and 1990):

● H.R. 1556, similar to H.R. 4970 (see above), later incorporated into H.R. 5598 (a bill addressing several

patent-related issues).

● H.R. 3247, to impose a 2-year moratorium on the granting of patents on genetically altered animals, except

for animals whose commercialization is subject to a Federal regulatory process that imposes environmental,

health and safety, and biomedical ethical standards.

. S. 2169, similar to H.R. 3247 (see above).

SOURCE: Offk of Technology Assessment 1991.

processes or the products thereof). There are two Comparison of Subject Matter Laws

reasons for this approach, adopted in 1973. First,

granting patents in this area would create legal and The principle of patenting micro-organisms is

administrative difficulties. Second, plant variety now widely accepted by many nations (25, 34). Plant

protection enacted in several European nations is the protection generally falls into the domain of national

only system applicable to that category of inventions plant variety rights statutes, which usually apply to

(1). plant products obtained by traditional breeding

.,

The question of whether a process is essentially

biological depends on the extent of technical human

intervention in the process. If such intervention

plays a significant part in determining or controlling

the desired result, the process is not excluded.

According to the EPC, essentially biological processes and specific plant varieties, regardless of

whether they were produced by breeding or genetic

engineering, are not patentable.

Despite the exclusions in the EPC, patents have

issued on microbiological inventions. Plant variety

protection statutes generally offer more limited

protection than that provided by U.S. law, since

protection generally extends only to those varieties

specifically set forth in varietal lists compiled by

each country.

methods-that could not be patented. United States

law offers a plant breeder the most generous menu

of choices for intellectual property protection of

inventions that constitute plant life.

To date, the United States is the only country to

both state a patent policy regarding animals and to

issue a patent for a transgenic animal. The subject

matter of the sole U.S. patent is currently pending at

the European Patent Office (see box 12-D). The

patent offices of Japan and Australia may per-r-nit

animal patents, because their statutes lack subject

matter restrictions analogous to EPC’s Article 53(b).

United States patent law is also noteworthy

because it is, generally, neutral about any potential

use of patented inventions. Such social considerations are left, instead, to Federal, State, and local

laws that regulate the development and use of
Chapter 12--lntellectual Property Protection ● 217

Box 12-D—The Harvard Mouse Goes to Europe

On April 8,1988, the first U.S. patent on an animal was issued to Harvard University for transgenic nonhuman

mammals genetically engineered to contain a cancer-causing gene (U.S. Patent No. 4,736,866).

The so-called “Harvard Mouse Patent” was filed with the European Patent Office on June 24, 1985. In

examining the application, two substantial issues were raised by the patent examiner:

. Article 53(b) of the European Patent Convention (EPC) does not permit claims to animals, per se.

Article 83 of the EPC, which relates to sufficiency, is satisfied only if any embodiment of the invention, as

defined in the broadest claim, is substantially capable of being realized on the basis of the disclosure. The

application in this case “unduly extrapolated to transgenic non-human eukaryotic animals from what has

actually been carried out, namely transgenic mice.

In response to these concerns, the applicant reformulated the application in order to emphasize the

microbiological nature of the invention and to request that “eukaryotic animals” be restricted to “nonhuman

mammalian animals.

Despite these reformulations, the EPO patent examiner rejected the application in July 1989. The decision

stated that Article 53(b), which bars the patenting of animal varieties, was conceived in 1962, when “the question

of patenting transgenic animals was scarcely conceivable. ” Although the EPO Board of Appeals had interpreted

plant varieties, which are also excluded under 53(b) as “excluding from patentability only plants in the genetically

fixed form of a plant variety,’ this interpretation is based, in part, on a desire not to permit double protection under

patenting and plant variety protection. Because no similar situation exists for animal varieties, “the idea behind this

exclusion was that animal varieties are not appropriate subject matter for patent protection. ”

In finding the application objectionable under Article 83, the decision said:

“The Applicant has carried out his experiments with one oncogene, the mouse mycgene, by using a mouse as

the nunhuman mammalian animal. The invention as disclosed in its broadest concept, however, relates to any

oncogene and any conceivable mammalian animal. . . The claims [refer not only to mice] but to any kind of mammals

such as anthropoid apes or elephants, all of which have a highly different number of genes and a differently developed

immune system. . . the success with the transgenic mouse cannot be reasonably extrapolated to all mammals.”

The examiner’s decision was later reversed on appeal, and the application was remanded to the examining unit for

further examination. As of August 1991, the application was still pending at EPO.

SOURCE: European Patent Office, In re President and Fellows of Harvard College, Decision to Rqtkse a European Patent Application,

European Patent Application No. 85304490.7, Refusal Under Art. 97(1) EPC, 1989; European Patent Office, Boards of Appeal, Case

T 19/90-3.3.2, l%cisio~ Oct. 3, 1990.

commercial products. In contrast, Article 53(a) of dural aspects of obtaining a patent. In some respects,

the EPC states, that patents shall not be granted if the

exploitation of the patent would be contrary to

public order or morality.

Absent congressional action restricting subject

matter patentability, U.S. law is more generous

from an inventor’s perspective than the law of

any other nation. The concept of patenting animals

has, however, resulted in broad public debate, and

calls for both a moratorium or prohibition of animal

patents and passage of legislation by the House of

Representatives (H.R. 4970, 100th Congress) that

would specifically preclude the patenting of human

beings.

Procedural Distinctions

The patent statutes of most nations are similar in

many respects. This similarity extends to the procehowever, U.S. law differs from that of other nations.

These differences can affect competitive advantage

and, thus, have become topics of discussion as

nations look for ways to harmonize patent statutes

and practices. All these procedural differences affect

all areas of inventive inquiry. In some ways biotechnology-related inventions are more vitally affected,

due to the novelty of the sciences involved, the

number of applications being filed, and the lack of

experience in many patent offices for dealing with

this art.

The United States has been involved in two sets

of negotiations-one under the auspices of the

World Intellectual Property Organization (WIPO)

and the other as part of the General Agreement on

Tariffs and Trade (GATT)-----to discuss harmonization of patent statutes in countries around the world.
218 . Biotechnology in a Global Economy

Issues raised in these forums have included priority

date, grace period, and patent application publication.

Priority Date

In all Paris Convention countries, the first practical step for gaining worldwide protection for a

patentable invention is to be the first-to-file a patent

application in the home country patent office. This

basic rule, which appears to create a level playing

field for all competitors, becomes muddled when

two factors—1) first-to-invent v. first-to-file and 2)

filing procedures-are considered.

United States law awards patent priority to the

frost inventor to conceive, diligently reduce to

practice, and claim the invention. The United States

and the Philippines are the only nations that grant

priority on this first-to-invent basis. The primary

advantage of the first-to-invent system is that it

permits a patent applicant to determine some of the

scientific implications of an observation before

rushing to the PTO, for fear that someone else will

frost file a patent application for the same invention.

Japan (a first-to-file country), for example, receives

in excess of 500,000 patent application-type disclosures each year, almost 40 percent of which do not

become the subject of a request for examination

(35). If the United States were to adopt a first-to-file

system, the number of patent applications would

likely increase dramatically.

All other nations provide priority on a frost-to-file

basis. Some argue that a patent applicant in a

first-to-file nation has an advantage because the key

requirement is simply to file a registration or

application that can be perfected, as needed, at a later

time. Thus, the result, it is argued, is a far lower cost

to the inventor per patent application and a speedier

filing of each application when compared to U.S.

practice (37). However, a first-to-file system can

cause disadvantages for foreign applicants if other

onerous administrative requirements are present (see

box 12-E).

Grace Period

The United States gives the inventor who publishes patentable information before filing a patent

application or who commercially uses the invention

a l-year grace period to file the patent application.

Other nations either have no grace period or grace

periods of varying and more limited duration. Japan,

for example, has a grace period of 6 months for

Box 12-E—The Race to the Home

Patent Office

Three competitors--one in Germany, one in

Japan, and one in the United States-are working

on the same area of polypeptide chemistry. Each

works independently of the other, and has completed work on anew polypeptide at about the same

time. Which of the three inventors gets worldwide

patent protection?

The answer depends on whether the inventor files

in a “first-to-file” or “first-to-invent” country. In

Japan and Germany (first-to-file), the winner is the

inventor who wins the race to a member country’s

patent office. Even if the American and the German

inventors have made their polypeptide before the

Japanese inventor, if the Japanese inventor files a

patent application in Japan before the German and

U.S. inventors file applications in their respective

countries, then, under the Paris Convention, the

Japanese inventor has worldwide priority before

either competitor.

A different result could occur in the United

States. If the American inventor made the polypeptide before the Japanese inventor, even if the

Japanese inventor was the first to file a patent

application, the Japanese inventor would obtain

certain procedural advantages in an interference

proceeding in the United States but would not be

granted a patent if the American inventor was able

to show that the invention was made by the

American before the Japanese filing date. Under 35

U.S.C. 104, any applicant foreign to the United

States is precluded from relying on dates of

activities in a foreign country before the filing date

of a patent application in a foreign country in order

to establish priority of invention. Consequently, the

Japanese inventor is not likely to prevail in the

United States, in this instance.

SOUR~: OffIce of Teclmology Assessment 1991.

limited public disclosure (i.e., disclosure at a technical meeting in Japan) (4) while Europe has no grace

period.

The grace period in U.S. law can aid inventors of

biotechnological processes and products, especially

smaller companies and individual scientists who feel

the need to publish research findings immediately.

However, lack of grace periods in other industrialized countries can mean that publication (a de facto

professional requirement for many U.S. scientists)

can result in forfeiture of patent rights in other

countries.
Chapter 12--Intellectual Property Protection ● 219

Publication of Patent Applications

In the United States, patent applications are, by

law, confidential (35 U.S.C. 122). In other countries,

a patent application is published 18 months after the

initial filing date. Proponents of secrecy point out

that publication can give competitors the information necessary to reverse-engineer the invention

(i.e., take the idea and, through experimentation,

repeat the invention) (13). On the other hand, the

secrecy provision in U.S. law makes it difficult to

determine whether the invention is being claimed by

another inventor waiting approval of a patent

application. Either way, in determiningg whether to

file for patent protection outside of the United States,

the inventor must determine whether it is commercially acceptable to have the application published

prior to the grant of a patent.

Process Patent Protection

A major concern of U.S. biotechnology companies is the adequacy of U.S. law to protect against

patent piracy. Process patents constitute the majority

of patents issued in the biotechnology area. Such

patents can be vital, especially if they cover a new

process for making a known product. Purified

human insulin, for example, has been produced

before and thus, is unpatentable. New processes for

making insulin, however, are patentable (22). Concern has mounted that processes patented in the

United States are being used abroad and the resulting

products then exported to the United States. Congress enacted legislation in 1988, to address concerns regarding process patent protection. Debate,

however, continues as to whether additional protection is needed.

Process Patent Amendments Act

Until recently, the import, sale, and use in the

United States of a product made abroad according to

a process patented in the United States was not

considered to be an act of patent infringement. The

patent owner had no recourse in a U.S. court of law

but could only request an investigation by the

International Trade Commission (ITC). The ITC

could issue an import exclusion order if it was shown

that the responding party had used abroad a process

patented in the United States and imported the

product into the United States, since such action, by

law, was considered to be an unfair method of

competition. However, this alternative was seen by

some as inadequate; no monetary damages could be

obtained, and the U.S. manufacturer had to show

injury to an established domestic industry.

In an attempt to correct this problem, Congress in

1988 enacted the Omnibus Trade and Competitiveness Act (Public Law 100-418). The new law holds

that whoever without authority imports into the

United States or sells or uses within the United

States a product made by a process patented in the

United States shall be liable as an infringer if the

import, sale, or use of the product occurs during the

term of such process patent. This provided the U.S.

patent holder with access to Federal courts as a

means of enforcement action in addition to any ITC

action. The legislation noted two limitations: a

product made by a patented process will no longer be

so considered after 1) it is materially changed by

subsequent processes, or 2) it becomes a trivial and

nonessential component of another product (35

U.s.c. 271(g)).

The legislative record indicates that it will be

difficult for an alleged infringer to rely on these two

exceptions:

In the biotechnology field it is well known that all

living organisms contain within them particular

genetic sequences composed of unique structural

characteristics. The patented process may be for the

process of preparing a DNA molecule comprising a

specific genetic sequence. A foreign manufacturer

uses the patented process to prepare the DNA

molecule which is part of the patented process. The

foreign manufacturer inserts the DNA molecule into

a plasmid or other vector and the plasmid or other

vector containing the DNA molecule is, in turn,

inserted into a host organism; for example, a

bacterium. The plasmid-containing host organism

still containing the specific genetic sequence expresses that sequence to produce the desired polypeptide. Even if a different organism was created by

this biotech procedure, it would not have been

possible or commercially viable to make the different organism and product expressed therefrom but

for the patent process, the product will be considered

to have been made by the patented process (32).

Despite the Federal legislation, issues surrounding the scope and use of process patents will

continue to arise. In 1988, the ITC instituted an

investigation into whether the import of certain

recombinant erythropoietin (EPO) constituted an

unfair act under the Tariff Act (see box 12-F).

Despite unresolved problems in this area, the

Omnibus Trade and Competitiveness Act of 1988,

292-870 - 91 - 8 : QL 3
220 ● Biotechnology in a Global Economy

——. .—-— --- —- . . . --- -— — —— -.-— — ——

—. —.——— — — —-——.

Box 12-F—Litigation, 1990-91

Moore v. Regents of the University of California

The California Supreme Court, in 1990, ruled that a patient does not have a property right to his body tissues

after they were used by researchers to develop a commercially important cell line.

Xoma v. Centocor

On the same day, in May 1990, that the University of California received a U.S. patent covering the therapeutic

use of certain monoclinal antibodies for treatment of septic shock, Xoma (Berkeley, CA) (the exclusive licensee

of the patent) sued Centecor (Malvern, PA), which had filed its patent application 7 years ago.

Upjohn v. Syntro

In August 1990, plaintiff and defendant settled their patent dispute over rights to a genetically engineered

veterinary product, a vaccine used against pseudorabies disease of swine. Under the terms of the agreement, Synto

(San Diego, CA) will take a license under the Upjohn (Kalamazoo, MI) patent and pay a royalty to Upjohn.

Genentech v. Genetics Institute and Wellcome Foundation

A Federal District Court found that the defendants infringed three Genentech tPA patents.

Cetus v. DuPont

In February 1991, a Federal court jury upheld two Cetus patents for polymerase chain reaction. Cetus had

charged DuPont with patent infringement. DuPont claimed that it should not be liable under Cetus’ patents, on the

grounds that work done in the early 1970s at the Massachusetts Institute of Technology anticipated PCR technology.

Amgen v. Genetics Institute and Chugai Pharmaceuticals

In a dispute concerning patent and marketing rights to Erythropoietin (EPO), a naturally occurring glycoprotein

produced by the kidneys, Amgen (Thousand Oaks, CA) filed four patent applications and was issued a patent

claiming rights to genetic materials and host cells used in the recombinant production of EPO. Genetics Institute

(GI) (Cambridge, MA) later filed an application with the Patent and Trademark Office. The GI application claimed

a purified and isolated sequence for EPO, the vectors used, and the transected host cells. The PT0 declared two

interferences between GI’s and Amgen’s patent in May 1989. The interference proceeding, which allows the PTO

to investigate and determine which company was actually the first to invent, is still pending and is expected to take

several years to decide.

Both companies established marketing agreements with other companies to market EPO. Amgen has a joint

venture with Kirin Brewery Ltd. of Japan (known as Kirin/Amgen) and GI entered an exclusive licensing agreement

with Chugai Pharmaceutical Co., Ltd. of Japan. As a result of these agreements, other subsidiaries and licensing

agreements were established.

In January 1988, Amgen filed a complaint before the International Trade Commission (ITC) to prevent the

import of EPO by Chugai U.S.A. into the United States for clinical trials. The ITC, in 1989, decided that the

importation of EPO into the United States did not violate Section 337 of the Tariff Act of 1930. The ITC

investigation marks the first time that a trade law has been used to challenge a product developed through

biotechnology and is indicative of the problems of process protection for biotechnology in the United States.

Amgen received FDA approval in June 1989, for the treatment of anemia associated with chronic renal failure,

which includes both dialysis and predialysis patients. Genetics Institute has yet to receive approval for its EPO in

the United States.

In April 1991, the U.S. Court of Appeals for the Federal Circuit held that Amgen’s patents were valid,

enforceable, and infringed by GI. The ruling blocks GI from selling its version of EPO in the United States.

Following the ruling, Amgen’s stock increased by 12 percent, and GI’s stock dropped 35 percent.

SOURCE: Office of Technology Assessment, 1991

_—.——————.. .-..— .-— - --- --- .- ——..—————

.,altered the the rules of patent-based Section 337 actions. development, or licensing, is sufficient to establish

domestic industry relating to the patented invention. Another controversy in the area of process patent

Activities such as substantial investment in exploit- protection is the so-called Durden Doctrine, named

ing the patent. including engineering, research, after a 1985 case of increasing importance to
Chapter 12-intellectual Property Protection ● 221

biotechnology patent applicants (19). Durden involved a challenge to the denial of a patent for a

process to make a novel chemical. The process to

make the chemical, although similar to that of a

previously issued patent, used a novel though related

starting material and produced a novel, though

related, end-product. Although PTO denied a patent

for the process, it did grant a patent for the novel

starting materials and the novel end-product. The

court, in Durden, concluded that a chemical process,

otherwise obvious, is not patentable--even if the

specific starting material employed or the product

obtained are novel and nonobvious.

Although the technology in Durden was not

biotechnology, the Durden decision has been a

source of frustration to biotechnology-related patent

applicants; examiners are increasingly using the

doctrine to deny certain process patents on the basis

that a patent should not be issued when the process

is old and predictable (38).

Opponents of the application of Durden to biotechnology cases argue that the case applies to

chemicals, and its application to biotechnology

cases is not warranted. As one commentator notes,

expressing a gene in a cell is not always easy or

obvious and thus, in certain cases should be patentable (36). Another critic of the doctrine argues, that

Durden is in direct conflict with another case (20) in

which it was held that a new microbe could not be

treated as prior art in determining the patentability of

a method of using the microbe to produce an

antibiotic, therefrom, by an otherwise standard

process. In essence, novelty and unobviousness of

the microbe imparted patentability to a method of

using it (2). A third commentator questions, why a

conventional process using a novel starting material

is not patentable, yet a pharmaceutical compound

comprising a novel ingredient and a conventional

carrier is patentable (4).

Despite widespread dissatisfaction with the Durden doctrine, efforts to legislate a solution have met

resistance from some companies and patent attorneys involved in biotechnology R&D. Some argue,

that overruling Durden by legislative action would

lead to the issuance of excessive numbers of process

patents, thus diluting the obviousness requirement.

Another argument is, any legislative action will

result in additional uncertainty and additional patent

infringement suits. Proponents of legislative change

note that until the alleged loophole is closed,

Photo Culture Collection

Glove box for handling deposited cultures.

processes using novel and patentable starting materials will be produced outside of the United States

and then imported back to the United States. This

approach, would deny to product patent holders

royalties that would have been required had the

product been produced in the United States. The

controversy has resulted in public debate among

patent practitioners and various companies (17,36).

Deposit Issues

United States patent law requires a patent application to include a specification-a written description

of the invention in such clear, concise, and exact

terms that any person skilled in the art to which it

pertains can make and use the invention. This

requirement, called enablement, presents a unique

procedural issue when words alone cannot fully

describe the invention.

In 1949, PTO began recommending that patent

applications for inventions involving microorganisms include the deposit of the pertinent

micro-organism with a culture collection. Although

not a formal requirement, patent examiners advised
222 ● Biotechnology in a Global Economy

applicants that, in cases where words alone were not

sufficient to describe the invention adequately, a

deposit was advisable. PTO first published guidelines on the deposit of micro-organisms in 1971. In

1977, the Budapest Treaty instituted a system of

International Depositary Authorities, making deposits a normal part of international patent practice.

Three issues of deposit practice raise international

questions. When is a deposit required? When should

a deposit be released to the public? What is the scope

of the so-called “research exemption’

When is a Deposit Required?

All Budapest Treaty nations require deposits

when it is not possible to reproduce a claimed

invention without reference to deposit. The requirement for a deposit is determined on a case-by-case

determin ation in all countries. When a patent

applicant is able to disclose how to re-create the

invention with mere words alone, then a deposit is

not required (21).

Uniquely, however, the United States requires

that the application disclose the best mode for

practicing the invention, and thus, the “best”

sample may sometimes be required for compliance,

if that best sample cannot be recreated from the

words of the patent application alone. The best mode

requirement is essentially a requirement against

concealment. As a result, U.S. patentees are encouraged to err on the safe side; and on issuance of a U.S.

patent, deposit their best biotechnology samples,

which on patent issuance are then easily available to

others, including those who would take such samples outside of the jurisdiction of the United States.

Public Access to Deposits

The role of the depository is to retain and be a

convenient source of an inventor’s deposit. The

depository is an objective entity-independent of

the patent applicant and the PTO. The availability of

samples from U.S. depositories for cultures involved

in the patenting process is straightforward. If the

depository number and the U.S. patent number are

known, the culture may be requested and is routinely

made available on payment of a minimal fee. There

is no record of a U.S. depository ever denying access

to someone eligible to receive a culture (34).

Some patent owners contend that free access to a

deposit amounts to super-disclosure (giving away

the invention itself in addition to the written recipe).

Some owners of hybridoma patents, for example,

contend that open access to a hybridoma deposit

amounts to giving away their invention plus all the

know-how the inventors might have been able to sell

separately. This claim of loss may be exaggerated,

however, since knowledge of how to produce and

maintain hybridoma cells in culture does not generally permit large-scale operation. The latter methods

must either be reverse-engineered, or the knowledge

must be purchased separately (34). Nevertheless, it

is generally easier to reproduce a deposited microorganism than to create it from a written description.

To some patent owners, another issue is the timing

of public accessibility to the deposit. For patenting

outside of the United States, if a deposit is needed to

teach the invention, that deposit must be made

before the first priority filing date. In the United

States, where patent applications are maintained in

secrecy up until the grant of the patent (often several

years from the filing date), deposits must be made

prior to issuance of the patent. In Europe, however,

patent applications are published 18 months from

the filing date, which limits any secrecy (both in

terms of the contents of the patent application and

any enabling deposit) to a specific time-frame. For

those desiring a longer period of secrecy, this limited

timeframe is seen as inadequate, because biotechnology-related applications take far longer than 18

months for processing. The result is de facto release

of the intellectual property before the inventor

knows whether a patent will issue. Another potential

problem for patent owners involves the export of an

accessed deposit to countries where there is no

patent protection. This could result in a major loss of

property rights (6).

The Research Exemption

Once a sample that relates to a patented invention

is released, there is controversy over the degree to

which that sample can be used in the United States

and other nations.

Generally, use of a deposited culture that is the

enablement of an invention constitutes patent infringement. The United States, Japan, and Europe,

however, all have research exemptions that permit

various uses of a patented invention for experimental inquiry.

Japan and Europe have statutory exemptions that

freely permit the use of a patented invention in the

laboratory to create new inventions. Thus, a depos-
Chapter 12--Intellectual Property Protection .223

ited sample of a hybridoma may be used without

patent infringement to create new technology.

Whether the new technology can be commercialized

without patent infringement depends on whether or

not the claims of the patent cover the new product.

In the United States, the experimental-use defense

to patent infringement is a court-created doctrine,

holding that an experiment with a patented invention

for the sole purpose of gratifying true scientific

inquiry or philosophical curiosity does not attack the

right of a patentee and thus, does not constitute

infringement. In 1984, the Court of Appeals for the

Federal Circuit ruled that “the limited use of a

patented drug for testing and investigation strictly

related to FDA drug approval requirements during

the . . . term of the patent” did not fall within the

experimental-use exemption and thus constituted

infringement (26).

In the wake of this case, Congress amended the

patent code (Public Law 98-417), which now

provides:

It shall not be an act of infringement to make, use,

or sell a patented invention (other than a new animal

drug or veterinary biological product (as those terms

are defined in the Federal Food, Drug, and Cosmetic

Act . . .) which is primarily manufactured using

recombinant DNA, recombinant RNA, hybridoma

technology, or other processes involving site specific genetic manipulation techniques) solely for the

purposes reasonably related to the development and

submission of information under a Federal Law

which regulates the manufacture, use, or sale of

drugs (35 U.S.C. 271(e)(l).

To date, the courts have been divided on what

activities are permissible under 271(e)(l) (14,27,

28).

Patent Infringement Litigation

The emergence of biotechnology as an important

field in patents has resulted in a surge of litigation,

as companies seek to enforce their rights against

infringement and defend the patent grant in opposition or revocation proceedings. Such litigation is not

surprising, given the web of partially overlapping

patent claims, the high-value products, the problem

of prior publication, and the fact that many companies are interested in the same products (see box

12-F).

Because biotechnology is a new area in patent

law, litigation is not something that Congress can

readily alleviate. By its nature, infringement is an

area that can only be addressed by Congress in

general terms, leaving to the courts the jurisdiction

for settling property disputes between companies.

How the courts interpret biotechnology patent

claims, and how well U.S. companies protect patent

rights abroad will be issues facing biotechnology

companies during the years ahead. Uncertainty over

patent rights will be costly and will affect the way

many biotechnology-related companies structure

R&D strategies. Until precedents are set in court

rulings, predicting the outcome of patent litigation

will be extremely difficult.

SUMMARY

Intellectual property law, which provides a personal property interest in the work of the mind, is of

increasing importance to people who use biotechnology to create new inventions. Three areas of

intellectual property law—patents, plant variety

protection, and trade secrets-are particularly important to biotechnology.

Broad patent protection exists for all types of

biotechnology-related products and processes in the

United States. The Supreme Court holding in

Diamond v. Chakrabarty that a living organism was

patentable along with action by Congress and the

executive branch to change Federal policy to increase patent activity from federally funded research

have spurred biotechnology-related patent activity.

Internationally, several agreements (e.g., the Paris

Union Convention, the Patent Cooperation Treaty,

the Budapest Treaty, the Union for the Protection of

New Varieties of Plants, and European Patent

Convention) provide substantive and procedural

protection for inventions created through the use of

biotechnology.

Despite a generally favorable international climate, a number of elements affect U.S. competitiveness in protecting intellectual property. The patent

application backlog at PTO, uncertainties in the

United States and internationally regarding what

constitutes patentable subject matter, procedural

distinctions in U.S. law (e.g., first-to-invent v.

frost-to-file, grace period, secrecy of patent applications, and deposit considerations), uncertainties in

interpreting process patent protection, and the spate

of patent infringement litigation all constitute unsettled areas that could affect incentives for developing

new inventions.
224 . Biotechnology in a Global Economy

Congress has considered legislation addressing

concerns, such as patentable subject matter and

process patent protection. Other problems, particularly scope of patent protection and infringement,

will be litigated in the courts as stakeholders in new

biological technologies attempt to assert their property rights.

International forums, such as World Intellectual

Property organization, General Agreement on Tarriffs and Trade, and bilateral and multilateral trade

negotiations, can serve as arenas for discussions

relating to harmonization of intellectual property

issues.

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

CHAPTER 12 REFERENCES

Baeumer, L., “Protection of Inventions in the Field

of Biotechnology,’ Symposium on the Protection of

Biological Inventions, World Intellectual Property

Organization and Cornell University, Ithaca, New

Yorlq June 1987.

Beier, D., vice president of governmental affairs,

Genentech, “Biotechnology Patent Protection Act,”

position paper, 1989.

Bent, S.A. et. al., National Property Rights in

Biotechnology Worldwide (New York, NY: Stockton

%SS, 1987).

Biggart, W., attorney, Sughrue, Mien, Zinn,

Macpeak & Seas, personal communication, August

1990.

Bureau of National Affairs, Biotechnology Patents:

A Business Manager’s Legal Guide (Washington,

DC: Bureau of National Affairs, 1989).

Cabot, S. S., director, corporate development, DNX,

Inc., personal communication, July 1990.

Carter, P., director of biotechnology, North Carolina

State University, testimony before U.S. Congress,

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Small Business, Backlog of Patent Applications at

the U.S. Patent and Trademark O@ce and Its Effect

on Small High-Technology Firms, Mar. 29, 1988

(Washington, DC: U.S. Government Printing Office,

1988).

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1, No. 19, my 18, 1990.

Cooper, I.P., Biotechnology and the Luw (New Yorlq

NY: Clark Boardrnan Co, Ltd., 1989).

Diamond v. Chakrabarty, 477 U.S. 303 (1980).

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1990.

12.

13.

14.

15.

16.

17.

18.

19.

20.

21.

22.

23.

24.

25.

26.

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28.

29.

Dit.zel, R., director, technology management, University of California, personal communication, December 1990.

Dryden, S.J., “The U.S. and Japan Imok for a Patent

Medicine,” Business Week, no. 3068, Sept. 5, 1988,

p. 28,.

Eli Lilly & Co. v, Medtronic, Inc., 110 S. Ct. 2863,15

USPQ2d 1121 (1990).

Ex parte Allen, 2 USPQ 2d 1425 (PTO Bd.App. &

Int. 1987).

Exparte Hibberd, 227 USPQ 443 (I?TO Bd.App. &

Int. 1985).

Gershon, D., “Leading Biotechnology Companies

bave the IBA,” Nature, vol. 344, No. 5, p. 481,

April 1990.

Hostetler, W., director of technology transfer, Oregon State University, testimony before U.S. Congress, House of Representatives, Subcommittee on

Regulation and Business Opportunities, Committee

on Small Business, Backlog of Patent Applications at

the U.S. Patent and Trademark Of6ce and Its E#ect

on Small High-Technology Firms, Mar. 29, 1988

(Washington, DC: U.S. Government Printing Office,

1988).

In re Dur&n, 763 F.2d 1406 (Fed.Cir., 1985).

In re Mancy, 499 F.2d 1289, 182 U.S.P.Q. 303

(CCPA 1974).

In re Wands, 858 F.2d 731, 8 USPQ 1400 (Fed.Cir.

1988).

Industrial Biotechnolo~ Association, “Process Patent Legislation Needed to Protect Against Unfair

Trade Practices,” Briefiig at National Press Club,

Washington, DC, March 1987.

Jondle, R.J., “Overview and Status of Plant Proprietary Rights,” Intellectual proper~ Rights Associated With Plants (Madison, WI: American Society of

Agronomy, 1989).

Memorandum dated Feb. 18, 1983, born the Pnxident to the Heads of Executive Departments and

Agencies on Government Patent Policy, 19 Way

Comp. Pres. Doe. 252.

Organization for Economic Co-Operation and Development, Biotechnology: Economic and Wider Impacts (Paris: OECD, 1989).

Roche Products, Inc v. Bolar Pharmaceutical Co.,

733 F.2d 858,221 USPQ 937 (Fed.Cir 1984).

Scripps Clinic & Research Foundation v. Baxter

Travenol Laboratories, Inc., 7 USPQ 1562 (D.Del.

1988).

Scripps Clinic and Research Foundation v. Genentech, Inc., 707 F. Supp. 1547, 11 USPQ2d 1187

(N.D.Cal. 1989).

Tanenhbltz, Alvin E., “Genetic Engineering—

Twhnological Trends From the Perspective of a U.S.

PI’0 Examiner,” Fourth Annual BiotechnologyLuw
Chapter 12--Intellectual Property Protection .225

Institute (Clifton, NJ: Prentice Hall Law & Business,

1988).

30. U.S. Congress, General Accounting OffIce, Biotechnology: Backlog of Patent Applications (Washington

DC: U.S. Government Printing OffIce, 1989).

31. U.S. Congress, General Accounting Office, Biotechnology: Processing Delays Continue for Growing

Backlog of Patent Applications (Washington DC:

U.S. Government Printing Office, 1990).

32. U.S. Congress, House Conference Report 100-576

(1988).

33. U.S. Congress, Office of Technology Assessment,

New Developments in Biotechnology: Ownership of

Human Tissues and CellMpecial Report, OTABA-337 (Washington, DC: U.S. Government Printing Office, April 1989).

34. U.S. Congress, Office of Technology Assessment,

New Developments in Biotechnology: Patenting

Life-Special Report, OTA-BA-370 (Washington,

DC: U.S. Government Printing Office, April 1989).

35. Van Horn, C.E., patent policy& programs administrator, U.S. Patent and Trademark Office, personal

communication, December 1990.

36. Vaughan, C., “Patent Protection Act Seeks to

Improve Competitiveness of U.S. Firms,” Genetic

Engineering News, April 1990, p. 3.

37. Wegner, H. C., attorney, Wegner & Bretschneider,

Washington, D. C., personal communication, December 1989.

38. Wiseman, T.G., ‘‘Biotechnology Patent Practice-A

Primer,” AZPLA Quarterly Journal, vol 16, Nos. 3 &

4 (Washington, DC: American Intellectual Property

Law Association, 1989).
Appendixes
Contents

Page

Appendix A: A Global Perspective: Biotechnology in 14 Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229

Biotechnology in 14 Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229

Appendix A References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242

Appendix B: Comparative Analysis: Japan .*. ..** ... o.. ... ..*o. .o*. oo. .*. .. e*.,***..**.****** * 243

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243

Appendix C: Federal Funding of Biotechnology Research and Development . . . . . . . . . . . . . . . . . . . . 249

National Institutes of Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249

National Science Foundation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251

Department of Defense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252

Department of Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252

U.S. Department of Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253

Department of Commerce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254

Agency for International Development (AID) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254

U.S. Environmental Protection Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255

Department of Veterans Affairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255

National Aeronautics and Space Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255

Food and Drug Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256

Appendix D: List of Workshops and Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257

Biotechnology in a Global Economy: International Conference July 6-7, 1989 . . . . . . . . . . . . . . . . . . . . . 257

Participants, Workshop on Federal Coordination of Biotechnology Research and

Regulation May 2, 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258

Participants, Workshop on Financial Issues Affecting Biotechnology: At Home and

Abroad September 13, 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259

Appendix E: Acknowledgments ..** **. *.. ..** .* .*.**.*..**.***.**,...**....****.*.*..**.*..*.*.. 260

Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260

Table

A- 1. Strengths

A- 2. Strengths

A- 3. Strengths

A- 4. Strengths

A- 5. Strengths

A- 6. Strengths

A- 7. Strengths

A- 8. Strengths

A- 9. Strengths

A-10. Strengths

A-n. Strengths

A-12. Strengths

A-13. Strengths

A-14. Strengths

B- 1.

B- 2.

and

and

and

and

and

 and

 and

 and

 and

 and

 and

 and

 and

 and

Weaknesses,

Weaknesses,

Weaknesses,

Biotechnology in

Biotechnology in

Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Biotechnology in Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weaknesses, Biotechnology in Denmark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weaknesses, Biotechnology in the Federal Republic of Germany . . . . . . . . . . . . . . .

Weaknesses, Biotechnology in France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weaknesses, Biotechnology in Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weaknesses, Biotechnology in

Weaknesses, Biotechnology in

The Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weaknesses, Biotechnology in South Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weaknesses, Biotechnology in Sweden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weaknesses,

Weaknesses,

Weaknesses,

Weaknesses,

Biotechnology Budgets for

Biotechnology in

Biotechnology in

Biotechnology in

Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Taiwan (Republic of China) . . . . . . . . . . . . . . . . . . . .

United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Biotechnology in Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1985-89 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

229

231

231

233

233

235

236

236

237

238

239

240

240

241

243
Appendix A

A Global Perspective: Biotechnology in 14 Countries

Introduction

Modern biotechnology (i.e., recombinant DNA, cell

fusion, and other novel bioprocessing techniques) is now

practiced in many nations of the world. Increasing

attention has been exerted by nations desiring to develop

basic and applied science and commercial development of

the new biotechnology.

This appendix provides a brief description of

biotechnology in 14 industrialized and newly industrialized nations. Appendix C provides a more detailed

description of biotechnology in Japan. These 15 countries

were selected to analyze trends in a variety of countries

and thus provide material useful in writing the substantive

chapters analyzing commercial activity and industrial

policy. The inclusion of these 15 nations is not exhaustive-it is recognized that nations not included in this

appendix are important to the development of biotechnology in a global economy.

The primary source of information for this chapter was

developed from an international conference hosted by the

Office of Technology Assessment (OTA) in July 1989

(see app. D). Participants at the conference were asked to

describe the development of biotechnology in their

countries, with particular emphasis on government funding, industrial policies, the industrial sector, regulations,

intellectual property, and public opinion.

Biotechnology in 14 Countries

Australia

The Australian economy currently has one of the

highest growth rates among industrialized nations. Although Australia is geographically the size of the continental United States, its manufacturing sector is limited

by a small domestic population of approximately 17

million people. Government policy aims to redress this

difficulty by encouraging the manufacturing and service

sectors to be more export oriented (21).

Australia sees itself as a Pacific Rim nation and sees its

political and economic future being closely aligned with

Japan, Singapore, Korea and, in a geographical sense,

with the West Coast of the United States. It is far closer

geographically to these nations than to the United

Kingdom (U.K.) and Brussels. The Federal Government

has realized that it is vital to develop and sustain

high-technology, including biotechnology (see table A1).

Government Support-Approximately half of all

financial support for biotechnology comes from Federal

Table A-l-Strengths and Weaknesses,

Biotechnology in Australia

Strengths

Strong research base.

Biotechnology targeted as enabling technology.

Weaknesses

Small domestic market.

Difficulty in establishing venture capital funding.

SOURCE: Office of Technology Assessment, 1991.

Government agencies, with the Commonwealth Scientific

and Industrial Research Organization (consisting of 6

institutes with 35 divisions) providing the greatest direct

government commitment to biotechnology research (19).

Australia’s public research capability is particularly

strong in agriculture and human health, especially in

immunology and endocrinology, that have resulted in a

number of world-firsts. The discovery of blood cell

growth factors, and the cloning of key hormones, such as

human growth hormone, and interleukin 3 were made by

Australian scientists (6).

In addition to Federal support, some assistance is

provided by State governments in New South Wales,

Victoria, and West Australia. These efforts range from the

establishment of a biotechnology desk in one State to

making contacts with other Southeast Asian countries in

an attempt to develop new markets (6).

The government, at both the Federal and State levels,

supports the development of biotechnology businesses

through funding for research, tax incentives for research

and development (R&D), and an immigration policy that

encourages the migration of skilled scientists and entrepreneurs. Biotechnology has been designated by the

Federal Government as an enabling technology, and a

special committee to fund biotechnology research on a

competitive basis has been established. Tariffs have been

eliminated or substantially lowered, the financial sector

has been deregulated, and foreign banks have been

admitted. These changes in industrial policy, coupled

with an abundance of raw materials and a scientific base

that is a leader in immunology, molecular biology, and

plant sciences, provide Australia with incentives for the

development of biotechnology products and processes.

Industry--Currently, 65 modern biotechnology-based

businesses (including brewing but excluding cheese,

wine, and food) exist in Australia, supported by approximately 200 companies that provide commercialization,

research, and financial support services (21). Total

–229–
230 ● Biotechnology in a Global Economy

private-sector investment in biotechnology is valued at

approximately $45 million annually.

Biotechnology firms can avail themselves of the

benefits of several industry-wide programs, including an

R&D taxation incentive (i.e., companies undertaking

appropriate research can receive a tax break at 150 percent

of the value of the research), grants, and a range of

consulting services through the National Industries Extension Service.

To encourage the development of a venture capital

industry, the government provides tax benefits for those

who invest in licensed venture capital companies. This

scheme, however, has only been modestly successful in

raising biotechnology venture capital. Of the 39 investment firms listed in the 1990 Australian Venture Capital

Directory, only six had a stated preference for biotechnology investment.

Regulatory Environment--Regulation of biotechnology at the Federal level occurs through the Genetic

Manipulation Advisory Committee (GMAC). Established in 1988, to oversee all proposals for research and

commercial work involving genetic manipulation, including planned releases, the committee is comprised of

university faculty from a wide range of disciplines.

Because of its faculty-based membership, GMAC is seen

as being independent of interest groups and thus has been

accepted by the public (19).

Because biotechnology has a variety of applications in

many industries, a number of regulatory agencies are

involved. Most of the agencies are based at the State level,

and currently, a group of Federal Government officials is

working to map the current regulatory climate.

Intellectual Property-The Australian Patent Office

(APO) takes a liberal view on patenting issues. As a

general rule, anything is patentable if it meets normal

patent criteria (e.g., novelty, nonobviousness). The patent

law is regarded as helpful by the biotechnology community, which enjoys a good dialogue with APO.

Costs incurred on intellectual property issues are seen

as burdensome for small biotechnology companies,

particularly when they are dealing with overseas registration. The absence of a common international position on

biotechnology patent and registration issues is seen as a

problem (19).

Brazil

Brazil is a large country rich in natural resources. While

this nation features traits found in other newly industrialized nations in Latin America-a vast domestic market,

a highly stratified income structure, and a huge external

debt—Brazil is noteworthy because of its emergence in

1985 from a long period of authoritarian military rule,

with a pledge by the new government to alleviate poverty

and other social ills. This pledge to ‘‘redeem the social

debt” has had repercussions on the shaping of industrial

policy in Brazil (14).

Brazil is interested in the advancement of biotechnology. This is best demonstrated by the existence of a

branch of government devoted solely to biotechnology.

However, as a newly industrialized nation, Brazil lags

behind many other nations in the number of R&D

professionals supporting biotechnology, and the country

is handicapped by weak intellectual property protection

for biotechnological products and processes (see table

A-2). A program of economic policy reform was introduced in 1990 to promote productivity gains and technological competitiveness. The program includes a doubling

of science and technology funding and liberalization of

the nation’s patent law, both of which would be beneficial

to the commercialization of biotechnology (16).

Government Support—The Brazilian Government has

targeted biotechnology as one of four areas of scientific

priority. A committee for biotechnology has been established to formulate principles for promoting scientific and

industrial policy; the committee assists an associate

secretariat for biotechnology in the president’s secretariat

for science and technology. The main issues facing the

committee are: regulation of environmental release,

safety of laboratory work, intellectual property protection,

high-technology development and capitalization, and

national and international trade regulations.

The government is currently the largest contributor to

biotechnology R&D. Primary recipients are universities

and research institutes (95 percent of the funds) with some

funding allocated to industry in the form of risk-free loans

(i.e., repayment is made in case of success) and cofinancing schemes. Industry funds biotechnology at a level

half that of the Federal Government. The hallmark of

Brazil’s strategy for the advancement of biotechnology is

their program of biotechnology science parks supported

by government, academia, and industry. The program

calls for the development of biotechnology centers at

several major university campuses.

Industry--As a newly industrialized nation, the use of

biotechnology is generally limited to basic research

conducted by academic research scientists (20). Although

classical biotechnology industries (e.g., fermentation,

paper and pulp, mining) have developed, modern biotechnological processes and products are limited to plant

micropropogation, cell manipulation, and human diagnostics. Nearly 60 companies are struggling toward

technological modernization in such areas as plant tissue

culture, pharmacological biochemistry, diagnostic kits,

cattle embryo transplants, and urban waste treatment.

Although Brazil has yet to market its first product

stemming from recombinant DNA (rDNA) or hybridoma

technology, the number of companies using modern
Appendix A--A Global Perspective: Biotechnology in 14 Countries ● 231

Table A-2—Strengths and Weaknesses,

Biotechnology in Brazil

Table A-3-Strengths and Weaknesses,

Biotechnology in Canada

Strengths

Government commitment to biotechnology.

Emergence of biotechnology-related industrial consotia

Weaknesses

Shortage of trained personnel in biotechnology.

No patent protection for biotechnology products or

processes.

Economic constraints.

Strengths

Revised patent act.

Biotechnology strategy to foster growth.

National networks.

Weaknesses

Federal budget cutbacks.

Limited sources of capital.

Few Iarge companies.

SOURCE: Office of Technology Assessment, 1991,

biotechnology is increasing. The Brazilian Association of

Biotechnology Enterprises counts 36 member companies

interested in different sectors of biotechnology with many

more nonmember companies interested in modern biotechnology (15).

Regulatory Environment—At present, Brazil follows

U.S. National Institutes of Health (NIH) and U.S.

Environmental Protection Agency (EPA) guidelines for

laboratory and environmental safety.

Intellectual Property-Brazil does not provide patent

protection for food or pharmaceutical products and

provides only process patents for chemical products.

Although no law prohibits the patenting of biotechnological products and processes, the Brazilian Patent Office has

been, so far, unwilling to act on the more than 300

biotechnology applications currently pending. As part of

a new economic program in Brazil, new legislation to

extend patent protection to all areas of industrial endeavor, including biotechnology, is expected in late 1991

(16).

Canada

Canada has a mixed economy. Although production

and services are primarily privately owned and operated,

the Federal and Provincial governments are significantly

involved in the economy. Canada is the most important

trading partner of the United States (25). While biotechnology is becoming a more important tool in Canadian

industries, challenges to its continuing development

remain. Sources of capital are limited, budgetary cutbacks

are beginning to strain Federal support programs, and

foreign acquisitions of Canadian enterprises are increasing (see table A-3).

Government Support-A major theme of the Federal

Government’s general economic policy has been the

reduction of the deficit. In general, government programs

have been cut, the size of the civil service reduced, and the

development of new programs strenuously resisted (2).

Federal funding for biotechnology R&D is relatively

small, amounting to Can$157 million in fiscal year

1988-1989, up from Can$105 million in 1986-1987 (3).

Universities and Federal research facilities claimed the

SOURCE: Office of Technology Assessment, 1991.

bulk of Federal funds. Additional funding is available

from Provincial governments, the majority of which

support research in agriculture, health care, and forestry.

Eight Federal agencies are involved in biotechnology

research, with the National Research Council and Agriculture Canada playing the largest roles.

Industry--In 1981 a Federal task force on biotechnology, initiated by the Ministry of State for Science and

Technology, concluded that “a practically nonexistent

biotechnological industrial base, a rapidly shrinking

Federal Government research capability and a highly

fragmented and unfocused university effort are the major

features of Canada’s current biotechnological activities. ”

(2)

In response to these findings, the Canadian Government launched the National Biotechnology Strategy in

1983 to stimulate growth in the biotechnology sector. The

strategy included the creation of a national advisory

committee, the identification of priority areas, and the

creation of networks between researchers from industry,

universities, and government. Although the strategy has

reaped benefits, several factors continue to threaten the

health of Canada’s biotechnology base:

●

●

●

●

●

Although many new companies have emerged since

1981, most are very small (less than four employees

and annual sales under US$l million). Such companies face uncertain futures with the increase in

international competition.

The new U.S.-Canada Free Trade Agreement has

increased competition for small Canadian ventures.

The difficulty in raising capital for high-technology

enterprises is a continuing problem.

Complex regulations confront companies exploring

new biotechnological applications.

Process patent protection is unavailable for new

varieties of plants or animals (2).

Over 200 commercial firms are involved in biotechnology. However, most are quite small, and only about 30

companies may be fully involved with modern biotechnological techniques. Only one company has more than

100 employees, and firms having the highest amount of
232 ● Biotechnology in a Global Economy

sales tend to be large traditional companies with interests

in biotechnology (2).

Venture capital, a staple of U.S. biotechnology companies, has played only a small role in the development of

biotechnology in Canada. Only about one dozen Canadian venture capital funds have backed biotechnology.

This limited role hinders the sharing of risks that occur

when a number of venture capital firms back a company.

In the absence of a strong equity market for raising capital

(less than 20 Canadian biotechnology companies have

secured financing through public equity markets), most

small firms are financed through service contracts and

government R&D grants. With competition increasing

and government funding decreasing, an increase in

mergers and bankruptcies is likely.

Regulatory Environment—The regulatory framework

for biotechnology in Canada consists of seven statutes

administered by three Federal agencies. In addition,

Provincial restrictions concerning environmental protection and occupational health add additional layers of

regulatory complexity. The 1988 Canadian Environmental Protection Act seeks to remedy this quagmire by

consolidating the range of legal issues into one law

addressing safety in research, production, use, and

disposal of products. Specific regulations are still in the

drafting stage, however, and many problems remain

concerning their application to products and processes.

The regulatory problem in Canada is two-fold:

● industry needs a clear set of laws and regulations in

order to do business, and

. in the absence of a clear regulatory framework,

industry has difficulty in attracting much needed

financial support (2).

Intellectual Property-Canada’s Patent Act, which

previously had empowered the Commissioner of Patents

to issue compulsory licenses permitting Canadian generic

manufacturers to import, formulate, and market copies of

patented pharmaceutical products, has been altered to

provide patent protection to brand-named pharmaceutical

manufacturers. This change prompted manufacturers to

announce spending intentions in excess of $1 billion on

R&D over a 10-year period (2).

Intellectual property protection, in the form of patents

is available for microbiological processes and their

products, but protection does not extend to processes for

producing new genetic strains or varieties of plants and

animals. Canada has not yet enacted plant breeders’

rights, although pending legislation would amend the

Patent Act to provide such protection.

Denmark

Denmark is a small country with a population of 5

million. Of the five Nordic countries, Denmark is the only

one that is a member of the European Community (EC).

Denmark’s industrial development, which has been

linked primarily to agriculture, has been prolonged and

more gradual than other Western European nations (17).

Denmark has long been associated with advancements

in classical biology. In the late 1800s, Danish companies

became the first to use pure yeast strains in fermentation

and to market pure bacterial cultures and enzymes for use

in cheese production. In the 1920s Denmark launched the

production of insulin and now supplies 40 percent of the

world’s supply of this important protein (see table A-4).

Government Funding for R&D-Statistics for R&D

funding are gathered biannually in Denmark. The collected data do not provide precise information on

biotechnology funding, but rather, for subject-group

funding (e.g., medical science, natural science, technical

science, agricultural and veterinary science) and subgroups (e.g., genetics, biochemistry, microbiology). Further, 41 percent of government-supported R&D is performed at universities from their normal budgets.

Direct government funding for biotechnology R&D in

1987 was approximately $37 million. Funding has been

provided for two government-led programs-a 5-year

program focusing on techniques in molecular biology,

launched in 1984 and a much larger program for R&Din

biotechnology, launched in 1987. The latter is by far the

largest government-funded R&D program ever undertaken in Denmark; its 1990 budget equals nearly half the

combined budget for the country’s six research councils

for that year.

Industrial Policy and Sector—Traditionally, the Danish Government has taken a laissez-faire attitude toward

private-sector R&D efforts in biotechnology. While

encouraging such efforts, it has not provided much direct

support. Now, that is beginning to change, though slowly.

The government sponsors 14 “centers without walls” for

various aspects of biotechnology that is hoped will lead

to increased interaction between academia and industry.

Other forms of governmental support include a modest

tax incentive and loan programs totaling about $1.5

million annually (9).

Industrial efforts are dominated by well-established

firms, primarily in pharmaceuticals. The pharmaceutical

sector enjoys a trade surplus second only to Switzerland

in terms of dollars per capita. Roughly 92 percent of all

production is exported, as compared to 60 percent for

Danish industry as a whole. One Danish firm, NOVONordisk, today supplies roughly 40 percent of the world’s

insulin.

By comparison, the foodstuffs industry is weak. This is

cause for some concern, given that agriculture accounts

for 20 percent of the country’s total exports.
Appendix A--A Global Perspective: Biotechnology in 14 Countries ● 233

Table A-4-Strengths and Weaknesses,

Biotechnology in Denmark

Table A-5-Strengths and Weaknesses,

Biotechnology in the Federal Republic of Germany

Strengths

Strong tradition in classical biology.

Well-established pharmaceutical firms.

Biotechnology seen as a priority for public and private

sectors.

Weaknesses

Fragmented research base.

Weak university-industry links.

Restrictive legislation on use of genetic technology.

SOURCE: Office of Technology Assessment, 1991.

Regulatory Environment—The Environmental and

Gene Technology Act of 1986 sets tough health and safety

standards for laboratories experimenting with rDNA. The

act requires that processes involving rDNA receive prior

approval from local authorities and prohibits controlled

releases. Denmark was the first nation to pass specific

legislation requiring that products and processes from

rDNA and cell fusion technologies be regulated differently than those obtained by normal biological and

chemical processes. This regulatory system is the most

stringent one in existence, and some fear it will interfere

with the competitiveness of Danish industry. Danish

industry has found the 1986 law difficult to live with and

is pressing to have a domestic law that is similar to other

EC nations. The law was revised in May 1989 to loosen

restrictions on pilot plant experiments (9).

Intellectual Property-Denmark is a party to a number

of treaties addressing protection of intellectual property,

and U.S. citizens are entitled to receive national treatment

(25). Patents for food products have been granted since

1989 and for pharmaceuticals since 1984 (9).

Federal Republic of Germany

The events of 1989 portend immense change as the two

German states become one. The speed and sheer complexity of the political and economic mergers of West and East

Germany extend to all sectors, including biotechnology.

Germany is Europe’s hot spot with regard to

biotechnology. Public- and private-sector activity outpaces that of its European neighbors. The domestic

chemical and pharmaceutical industries rank among the

most profitable in the world. Government policy actively

promotes development. And extreme opposition to gene

technology thrives to an extent unparalleled in most other

countries. Whatever the outcome of its regulatory battles,

the Federal Republic of Germany (FRG) is likely to

remain a strong player in biotechnology well into the

future (see table A-5).

Government Support-Germany became the first

country to establish, a government research institute

devoted exclusively to biotechnology (the National Research Center for Biotechnology, founded in 1976).

Strengths

First nation to establish biotechnology program and

institute.

Europe’s highest concentration of biotechnology in

pharmaceutical and chemical fields.

High-quality science training and research base.

Strong industry-university relationships.

Weaknesses

Public opposition to genetic technology.

Limited venture capital presence.

Dominance of large companies could limit small market

opportunities typical in biotechnology.

SOURCE: Office of Technology Assessment, 1991.

Within the national government the primary body handling the financing of R&D is the Ministry of Research

and Technology. Other ministries (defense, education and

science, and research) disseminate the remainder. The

ratio of Federal-to-State funding for R&D is approximately 1 to 2. Federal outlays go entirely to large-scale

centers and smaller public institutes, while States commit

their research funding exclusively to R&D facilities and

universities located within their respective borders.

Industry-Germany is the world’s largest chemical

exporter and boasts Europe’s highest concentration of

biotechnological activities. In 1974 it became the first

nation to launch a national biotechnology program. The

next major government action occurred in 1984 when the

Federal Ministry of Research and Technology reiterated

the government’s commitment to biotechnology by

launching a research program with six announced objectives:

1. to enable top scientific performance through the

proper allocation of political and financial resources,

2. to foster industrial innovation,

3. to promote R&Din the field of health,

4. to evaluate risks associated with new techniques and

to adopt safety regulations accordingly,

5. to increase the pool of R&D professionals through

the support of young scientists, and

6. to encourage international cooperation and technology transfer (28).

Industry invests heavily in R&D-58 percent of the

national total--and the pattern extends to biotechnology.

The majority of biotechnology activities are being conducted by large firms including Bayer, BASF, Boehringer

Ingelheim, Boehringer Mannheim, and Hoechst. Some of

the firms, such as Bayer and Hoechst, are funding

biotechnology R&D at the rate of $70 to $100 million a

year-amounts equivalent to U.S. companies such as

DuPont and Monsanto (18). Licensing agreements, strategic alliances, and even acquisitions involving U.S. firms
234 . Biotechnology in a Global Economy

(e.g., BASF’s $1 billion acquisition of Inmont) may help

German firms gain access to cutting-edge technology.

Venture capital companies are usually less than 6 years

old in Germany, indicating a much earlier stage of

development than their counterparts in the United States.

At present, they number approximately 40 and are on

average quite small (28).

Regulatory Environment—Many Germans oppose the

application of new biotechnological techniques, particularly in regard to genetic manipulation. The Green Party,

for example, has made opposition to genetic engineering

its second political target, after opposition to nuclear

power. The party, which comprises a mix of environmentalists, socialists, anti-technologists, and others generally

dissatisfied with other established political parties, currently holds 8.3 percent of the seats in the National

Parliament.

In 1984 the National Parliament appointed a commission on the prospects and risks of genetic engineering. In

January 1987 the commission issued a report urging more

than 170 specific measures, covering such areas as

cloning of human beings, release of genetically engineered cells, and genome analysis by employers and law

enforcement agencies. This has led to debate on a

proposed “Gene law’ to rigidly define the legal environment within which industry could conduct R&D. Some

companies have begun shifting investments to more

favorable climates in other countries.

A West German State Court dealt a blow to the

country’s biotechnology industry in November 1989,

when it blocked the chemical company Hoechst from

completing a plant to manufacture genetically engineered

insulin. The court ruled that since German law did not

‘‘expressly permit the application of genetic engineering,

such facilities may not be built and operated.’ The verdict

is binding on all States in Germany (l).

The court decision led to passage of a national gene law

in 1990, which has provided a legal basis to permit R&D

in genetic engineering. An additional factor that might

stem the tide of Germany’s growing opposition to

biotechnology is the harmonization of European markets

in 1992. This could force Germany to adapt its regulations

to meet those of other European nations which generally

have less restrictive regulatory procedures.

Intellectual Property-Germany is party to major

international intellectual property accords. United States

firms and citizens are entitled to national treatment (i.e.,

German law does not distinguish between nationalities of

registered property (25).

France

France is the world’s fourth largest industrial economy;

its Gross National Product (GNP) is about one-fifth that

of the United States. France has a centuries-old tradition

of centralized administrative and governmental control of

its market economy. This tradition extends to biotechnology, for in the words of one spokesman, “laissez-faire

would not work” (see table A-6) (23).

Government Support-In 1982 the French Government established biotechnology as an area of national

priority with the creation of the “Mobilization Program:

Rise of Biotechnology” within the Ministry of Research

and Technology. Over the next 3 years, government

funding for biotechnology research increased dramatically. Then, in 1986, it began to decrease. Still, biotechnology is seen as an area of strategic importance for

France (23). Despite decreased funding, France has a

strong tradition of scientific research (e.g., vaccine

development), support of world renowned facilities (e.g.,

the Pasteur Institute), and other programs (e.g., tax

incentives) to nurture scientific activity in the public

sector.

Government funding for R&D has been on the decline

since reaching a peak in 1985. From 1986 to 1989 the

French Government spent an average of US$215 million

annually on biotechnology R&D. This funding is focused

toward national centers for scientific research, agronomic

research, health and medical research, and atomic research; the Pasteur Institute (a private institute renowned

for its work in immunology); and direct funding to

industry.

In addition to direct government funding of biotechnology research, France has set up two logistical tools under

the auspices of its national biotechnology program:

. A databank for biotechnology that collects and stores

available information on the sequence of biological

molecules. This databank is connected to major

foreign biotechnology databanks.

. Improved microbial strain collections. A study

conducted by the Ministries of Research and Agriculture led to improved collections and the creation

of new collections for yeasts and other microorganisms of biotechnological interest.

Industry-Approximately 700 companies are involved

to some extent in biotechnology in France. Of these,

however, only 100 play a major role (23). Industrial R&D

is generally carried out by large firms, many of which are

or were nationalized (5). Agriculture, vaccines, cosmetics, and water treatment are top areas of biotechnological

application today (23).

The promotion of technology transfer has been

problematic in France. This is due to a traditional

separation within academia between basic science (traditionally taught in universities) and technological training

(offered only in professional colleges). Furthermore,
Appendix A--A Global Perspective: Biotechnology in 14 Countries ● 235

Table A-6—Strengths and Weaknesses,

Biotechnology in France

Strengths

Government targeting of biotechnology as a priority area.

Favorable public attitude toward biotechnology.

Historic scientific tradition (e.g., vaccine development) and

research facilities (e.g., Pasteur Institute).

Weaknesses

Decreasing government funding for R&D.

Weak mechanisms for technologv transfer.

SOURCE: Office of Technology Assessment, 1991.

commercial biotechnology research facilities often lack

scientific expertise.

Regulatory Environment—The handling of rDNA is

governed by good laboratory practice and good

manufacturing practice regulations. In addition, the Genetic Engineering Commission within the Ministry of

Research and Technology is responsible for classifying

all micro-organisms according to the level of risk

associated with their release. A committee is in place to

address ethical questions raised by biotechnology. Within

the Ministry of Agriculture, the Bimolecular Engineering Commission is in charge of providing preliminary

approval of the controlled release of micro-organisms.

This commission comprises a collection of representatives from the science community, consumer groups, and

France’s Green Party. In contrast to the situation in

Germany, the French Green Party does not oppose

biotechnology (23).

Intellectual Property-France is a strong defender of

intellectual property rights and an advocate of improving

protection. The nation is a signatory to major international

agreements governing patents, copyrights, and trademarks (25).

Ireland

Ireland’s recent economic policy has been directed in

large measure to a recovery from an extended period of

high international indebtedness. Ireland’s national debt

reached its peak in 1986. In 1987 there was a change of

government followed by a period of cooperation among

major political parties, labor, and employers toward the

government’s program for national recovery. Although

personal income taxes remain extremely high (the highest

rate is 53 percent), the corporate income tax rate of 10

percent is the lowest in Europe. Emigration poses a

significant problem. Biotechnology in Ireland enjoys

public and private support. The government has targeted

biotechnology as a matter of national priority, and

universities have emerged as major forces for furthering

biotechnology (see table A-7).

Government Support—Figures isolating funding for

biotechnology per se are not calculated. Further, distinction is not made between classical forms of biology (e.g.,

agriculture, racehorse breeding, cheese and dairy production) and modern biotechnology. In 1988 the Irish

Government spent US$580 million on science and

technology. R&D funding--US$lOl million in 1988—

had doubled since 1986 (12). Funding is provided for

industrial production and technology, agricultural research, and university R&D programs.

Some 16,000 graduate students and 300 post-graduate

students study life sciences at seven universities and nine

colleges of technology. However, many of these students

emigrate. Still, it is estimated that as many as 60 percent

of recent emigrants with graduate qualifications wish to

return to Ireland and that 5,000 highly skilled, internationally experienced graduates are available to work in

biotechnology-related concerns (12).

The government has also provided startup funding to

BioResearch Ireland (BRI), a contract research organization formed in 1987 to facilitate the commercialization of

biotechnology. BRI is involved in establishing, equipping, and staffing biotechnology research centers. As of

1989, five centers had been established at existing

universities with specialization in diagnostics, pharmaceuticals, food, cell and tissue culture, and agricultural

and veterinary biotechnology.

Industry-In 1987 the government created the office

of State Science Minister and identified biotechnology,

microelectronics, and optronics as areas of strategic

priority. A national biotechnology program ensued. Three

agencies direct biotechnology policy in Ireland: 1) BRI;

2) IDA Ireland, which supports growth within the Irish

manufacturing and service industries and promotes Ireland as a location for foreign investment; and 3) EOLAS,

the Irish Science Agency, which promotes science,

technology, and the provision of technical services to

industry.

The pharmaceutical and food industries rate second and

third (behind electronics) as sectors spending the most on

R&D. Agriculture is an area of weak industry R&D

funding.

Regulatory Environment

Ireland’s regulatory environment has posed negligible obstacles to industrial development. NIH guidelines

have been adopted for use in Ireland for two reasons: 1)

the guidelines were seen as being adequate, and 2) U.S.

companies based in Ireland are comfortable with them.

Ireland applies EC-wide regulatory guidelines and has

had a rDNA committee since 1983 (13).

The Irish Government has adopted a vigorous corporatist strategy for the advancement of biotechnology. Its

national biotechnology policy is clearly directed toward
236 . Biotechnology in a Global Economy

Table A-7—Strengths and Weaknesses,

Biotechnology in Ireland

Table A-8-Strengths and Weaknesses,

Biotechnology in The Netherlands

Strengths

Strategy for enhancing high-technology and attracting new

business from abroad.

Lowest corporate tax in Europe.

Highly skilled labor force.

Weaknesses

High emigration rate of skilled personnel.

High personal income taxes.

Small domestic market.

Strengths

Strong science base.

High coordination between government, industry, and

academia.

Good geographical position.

Weaknesses

Lack of venture capital industry.

Small domestic market.

High income and corporate taxes.

SOURCE: Office of Technology Assessment, 1991. SOURCE: Office of Technology Assessment, 1991.

enhancing the commercial viability of biotechnology

industries and luring new business from abroad (12).

Intellectual Property-The government is currently

drafting legislation that would allow Ireland to become a

signatory to the European Patent Convention (EPC). The

legislation will introduce short-term patent protection (10

years) available without detailed searches and is designed

to meet the needs of small domestic industries in Ireland.

The Irish Government encourages foreign investment,

especially in high-technology industries such as

biotechnology. Consequently, protection of intellectual

property rights has been an important part of the

government’s business policy. Protection is generally on

a par with other developed countries in Europe, and the

government is responsive to problems that arise (25).

The Netherlands

The Netherlands has an advanced industrial economy

with a strong record of prosperity. It is the sixth largest

U.S. export market; the United States has traditionally

recorded a trade surplus with The Netherlands. The

Netherlands is also the second largest foreign investor in

the United States (25). Although The Netherlands got a

late start in biotechnology, the nation has a strong science

base and a sense of cooperative entrepreneurship that is

welcome to outside traders (see table A-8).

Government Support--The Dutch Government plays

an active role in coordinating the activities of biotechnology programs. The government funds biotechnology

R&D through two national programs: 1) the Innovation

Oriented Program for Biotechnology (IOP-b), targeting

universities and research institutes, and 2) the Industrial

Stimulation Scheme for Biotechnology, supporting private-sector activity.

IOP-b, which was launched in 1982, helps stimulate

multidisciplinary research by engaging the country’s five

university biotechnology centers in cooperative research.

The government directly provides catalytic funding

(approximately f.10 per year) that is augmented by

additional funding (f.20-f.30 per year) from general

research budgets, creating a so-called ‘multiplier effect.

The Industrial Stimulation Scheme was initiated in

1987 to support high-risk ventures in areas of new

biotechnology and to foster technology transfer from the

public sector to the private sector. In its first 2 years, the

program funded 100 industry projects in such areas as

fermentation, pharmaceuticals, waste water treatment,

fine chemicals, and biotechnological equipment (26).

Industry--In 1988 the Dutch commercial biotechnology sector was formed by four large firms (AKZO, DSM,

Shell, Unilever), 12 medium-sized companies, and 34

dedicated biotechnology companies (DBCs). The key

sectors are food and dairy (industries of traditional

importance in Holland), accounting for 85 percent of

Dutch biotechnology sales in 1987. The second largest

sector—human and veterinary pharmaceuticals-is expected to play an increasingly important role, accounting

for almost half of the new company startups in 1988 (26).

Regulatory Environment—Holland is both economically and politically stable. The Netherlands has enjoyed

an extensive public discussion of rDNA technology.

Unlike some other European countries, there is no Green

Party in Holland (1 1).

Intellectual Property-The Netherlands is a signatory

of major international intellectual property accords. The

Netherlands Patents act follows the EPC. In the beginning

of the 1980s, patenting by universities was virtually

nonexistent. By late in the decade, the concept of

patenting biotechnology inventions had become accepted, although industry remained more effective in

bringing applications to patent than were universities

(26).

Singapore

An island nation of 2.5 million people, Singapore is a

leading port and major crossroads of trade, transport, and

communications, as well as an important provider of

financial and business services. It has a highly developed

but narrowly based economy dominated by trade and

international services. This city-state is home to more than

3,400 multinational corporations, giving Singapore the

region’s highest concentration of foreign investment.
Appendix A--A Global Perspective: Biotechnology in 14 Countries ● 237

In its aspiration to become a developed country,

Singapore has placed priority on developing technology

and knowledge-intensive industries that are high-valueadded, skilled, and R&D oriented. Biotechnology is one

such industry that is considered important to Singapore’s

economic development for the future (see table A-9).

Government Support-Between 1981 and 1987 the

Singapore Government spent an average of US$l.2

million on biological and medical sciences. Since that

time the government has taken two actions resulting in

increased activity in biotechnology: 1) the establishment,

in 1987, of the Institute of Molecular and Cell Biology

(IMCB); and 2) the creation of a capital venture fund,

Singapore Bio-Innovations, established with US$10.8

million to invest in promising startup companies (7).

As a result of these actions, the Singapore Government’s annual commitment to biotechnology has risen

from the 1987 average of US$l.2 million to roughly

US$4.5 million (approximately 54 percent of the government’s funding for life sciences) in 1989. Two-thirds of

this supports basic research at IMCB, while one-third

funds industry and joint industry-university projects in

applied research (22).

Industrial Policy and Sector—The focal point of

Singapore’s industrial policy for biotechnology is the

National Biotechnology Program, which was initiated in

1988 to strengthen the R&D base, promote universityindustry collaboration, build up the human resource pool,

and spur industrial activity. This policy is supported

through tax incentives for industrial R&D and universityindustry collaboration and available funding. Foreign

investment-very important to Singapore given the

presence of 3,400 multinational corporations-is encouraged by providing foreign licensers with exemptions on

taxes for royalties and know-how fees.

Private-sector development in biotechnology is still in

the early stages in Singapore with total annual output

estimated at US$20 million to US$25 million annually

(7). However, the pool of potential investment funds to

finance increased industrial participation is significant

(22).

Regulation--The regulation of biotechnology has not

been seen as a problem to date in Singapore. Government

efforts have focused on developing an awareness of

biotechnology (22).

Intellectual Property-At present, Singapore does not

have its own patent act. Consequently, the country relies

on the United Kingdom (U.K.) Patents Act. Under this

procedure, domestic or foreign companies must first

apply for a patent in the United Kingdom and then register

in Singapore within a year to receive patent protection.

Table A-9-Strengths and Weaknesses,

Biotechnology in Singapore

Strengths

Strong international orientation.

Favorable entrepreneurial environment.

Availability of specifically targeted venture capital.

Weaknesses

Limited human resources.

Inadequate science base.

SOURCE: Offics of Technology Assessment, 1991.

Recognizing the importance of patents in promoting

and encouraging R&D initiatives, the government has

taken steps to codify its own patent act. Legislation is now

being reviewed by the Patent Bureau and is expected to be

finalized in the near future (22).

South Korea

Beginning in the mid-1960s, the Government of South

Korea set out to strengthen the country’s infrastructure for

science and technology in order to curb the growing

volume of high-technology imports. Its first action was to

establish the Korea Institute of Science and Technology

(KIST), aided by investment from the U.S. Government.

The formation of KIST produced several important side

effects. It fostered public recognition of the value of

high-technology to South Korea’s future development,

created confidence in the country’s R&D programs, and

sparked an upsurge in private-sector research activity. In

the 1970s KIST began to promote biotechnology within

the government and industry. Since then, biotechnological development has advanced steadily, and business,

backed by strong government support, has taken the lead

in R&D activities (see table A-10).

Government Support-Public funding for biotechnology R&D is carried out by four governmental bodies: the

Ministry of Science and Technology, the Ministry of

Agriculture and Fishery, the Ministry of Education, and

the Ministry of Health and Social Welfare. Of these, the

Ministry of Science and Technology spends approximately half of all Federal funds. Government funding

totaled US$7 million in 1988 representing a doubling of

the level 3 years earlier. The government’s R&D investment projections call for steadily increasing commitments

by both the government and the private sector (27).

Industry-The bulk of biotechnology R&D in Korea

has been conducted by industry. In 1988, of a total of

US$46 million invested, US$39 million came from

industry. The government serves largely as conductor,

encouraging private activities and orchestrating the direction industrial R&D will take. In many ways this parallels

the Japanese model.

Much of South Korea’s biotechnology efforts are

linked to its strong fermentation industry (sales in this
238 ● Biotechnology in a Global Economy

Table A-10--Strengths and Weaknesses,

Biotechnology in South Korea

Strengths

Long tradition in fermentation industry.

Strong government targeting.

Weaknesses

Shortage of technical manpower.

SOURCE: Office of Technology Assessment 1991.

area constituted 4 percent of total GNP in 1986). In

addition, production of pharmaceuticals is rising. The

Korea Institute for Economics and Technology estimates

that production of biologically based pharmaceuticals has

increased 30 percent each year since 1981, and that by the

year 2000, Korea will produce 2 percent of the world’s

biotechnologically produced pharmaceuticals (27).

No data exist on the breakdown of industrial sources of

capital for biotechnology commercialization. Nineteen

large firms (members of the Korean Genetic Research

Association) dominate industrial activity. No startup

DBCs exist in South Korea (27).

Regulatory Environment—The Genetic Engineering

Promotion law was passed in 1983. Its purpose was to

effectively promote and develop genetic engineering

technology by formation of research programs and also to

contribute to sound development of the national economy

by promotion of industrialization of newly developed

technology. The law called for the establishment of a

basic plan for the promotion of biotechnology, a yearly

enforcing plan, and the creation of a council for genetic

engineering policy.

Intellectual Property-South Korea’s new patent law

took effect in 1987, extending the patent term to 15 years

and expanding subject matter coverage to include protection for chemical and pharmaceutical products and

micro-organisms. U.S. industry complaints regarding the

Korean environment for patent protection focus on

interpretation of patent claims by the Korean Patent

Office (KPO), possible discrimination by KPO in granting patents, interpretation of patent claims by the Korean

courts in patent infringement actions, adequacy of sanctions for patent infringement, and lack of discovery

procedures (25). It is likely that these complaints will also

be voiced by biotechnology patent practitioners.

Sweden

In Sweden, the government has not adopted explicit

policies for biotechnology nor has it created a department

charged exclusively with promoting biotechnological

development. Despite this lack of administrative control,

the Swedish biotechnology industry has achieved a

degree of success, relying largely on access to innovation

and free market forces.

Acquiring risk capital in Sweden was not difficult prior

to the 1987 stock market crash. Since 1987, risk capital for

the biotechnology sector has become more difficult to

obtain, especially for small- and medium-sized firms. In

addition, public perception of biotechnology has become

more volatile, and government regulation is increasing

(see table A-n).

Government Support-Between 1986 and 1989 the

Swedish Government allocated the equivalent of US$60

million to biotechnology R&D. Recipients of these funds

include universities, research institutes, and private industries. Funding takes on the form of faculty grants, project

grants, and support for public-private ventures.

Several Swedish research councils offer grants to

scientists on a research project basis. Funding for

university-industry collaboration is available from the

National Board for Technical Development, and private

funding is secured largely through research parks (supported by a joint foundation with contributions by county

councils, local businesses, and universities). At present,

there are three science parks that emphasize biotechnological development in Sweden (10).

industry-Unlike many of the countries discussed in

this chapter, Sweden has not adopted a national policy for

the promotion of commercial biotechnology. Nor has a

government body been formed to coordinate biotechnology R&D. Rather, a collection of public and private

entities associated with biotechnological activity carry

out development as they see fit.

While not actively promoting biotechnology as a

separate area of priority, the government has, nonetheless,

taken several policy actions that have indirectly aided

biotechnological development. For example, a decision in

1982 to permit the trading of stocks in small- and

medium-sized companies on an unofficial stock exchange

benefited the biotechnology industry by providing a new

way to finance innovative ventures other than through

bank loans. In addition, the formation of regional

development funds and direct financing schemes targeting small businesses has given biotechnology companies

a means of offsetting startup costs.

There are about 40 companies dealing with biotechnology in Sweden. This number has remained constant. Only

a few have gone bankrupt. Newcomers have been

balanced by those companies that have merged with

others. The traditional strengths of Swedish biotechnology have been in the sectors of laboratory equipment,

separation, and fermentation. New areas include growth

factors, carbohydrate-based substances, and pharmaceuticals. R&D companies are financed primarily through

venture capital. Swedish biotechnology companies are

internationally active, a necessity since the domestic

market is so small (10).
Appendix A--A Global Perspective: Biotechnology in 14 Countries ● 239

Table A-1 l-Strengths and Weaknesses,

Biotechnology in Sweden

Strengths

Good university-industry cooperation.

Traditional international stance of Swedish firms.

Weaknesses

Increasing difficulty in obtaining private capital.

Overly stringent regulation.

SOURCE: Office of Technology Assessment, 1991.

Regulatory Environment—The regulatory environment concerning biotechnology has until recently been

entirely favorable to industry. No specific legislation

concerning biotechnology R&D existed prior to 1988.

Industry largely regulated itself through adherence to NIH

guidelines for laboratory safety and Organization for

Economic Co-operation and Development (OECD)

guidelines covering rDNA. The only official body currently charged with monitoring laboratory work is the

Swedish Delegation for rDNA, an advisory body to

industry and government.

The climate, however, has begun to change. In 1988

animal protection legislation took effect regulating the

use of gene technology in mammals and animal experiments as well as the use of hormones in cattle breeding.

A 1989 amendment to the Plant Protection Act was passed

that gives the government a mandate to restrict the use of

gene technology in plants, genetically modified plants,

and genetically modified organisms in plant breeding. In

1990 the government decided that a permit would be

required for growing genetically altered plants. The

government further appointed a commission with representatives from both political parties and the scientific

community to conduct a 2-year study on the use of gene

technology and release of genetically engineered organisms. The commission commenced its study in fall 1990

(10)0

Intellectual Property-Sweden is a signatory to major

international agreements providing for patent protection.

A Swedish patent is valid for 20 years. Undercurrent law,

plant varieties, animal species, or essentially biological

procedures are not patentable. On the other hand,

microbiological processes and plants or seeds that have

been treated for a specific reason (e.g., disease resistance)

are patentable. In addition, pharmaceuticals and feedstuffs are patentable.

In academia, university scientists are given ownership

of their patents and therefore have the right to commercialize their inventions (10).

Switzerland

In Switzerland, the government does not espouse any

direct industrial policy regarding biotechnology. Instead,

emphasis is on basic research within universities and

Federal research institutes. Public perception of biotechnology remains relatively benign, which is reflected in the

Swiss attitude toward regulation. This nation is home to

several major multinational corporations that conduct

biotechnology domestically. These factors, coupled with

Switzerland’s strong infrastructure in basic sciences,

make future growth within the biotechnology sector

probable (see table A-12).

Government Support-Support for biotechnologyrelated R&D is dominated by the private sector. Government accounts for only about one-fourth of the national

commitment. This, coupled with the absence of an official

strategy for biotechnology, means that industry makes

most of the decisions concerning development in the

biotechnology sector. Federal Government funding goes

exclusively to universities and government research

centers and primarily targets basic research. The Swiss

Federal Institutes of Technology, in Zurich, receives the

largest amount of Federal funding (8).

Industrial Policy and Sector—Industry policy is

limited to the establishment of a favorable political and

regulatory climate. Direct mechanisms (e.g., R&D grants,

tax incentives, and incentives for foreign investment) do

not exist. This philosophy pertains to all sectors, including biotechnology.

Industry accounts for 75 percent of all R&D investment

in Switzerland (approximately US$3.25 billion annually).

Commercial investment in biotechnology goes toward

basic research. Because of production costs, most Swiss

companies prefer to produce products abroad. Switzerland, which has often been termed the pharmaceutical

capital of the world, is home to large international

chemical companies, including Ciba-Geigy, Sandoz, and

Hoffman-LaRoche.

Regulatory Environment—There are no specific laws

regulating biotechnology products or processes. At the

present time, public perception is generally favorable

toward biotechnology. In its capacity as advisory panel

for biotechnology regulation, the Swiss Commission for

Biological Safety in Research and Application takes

public reaction into account. Concerns for public safety

and moral concerns, therefore, have an official outlet for

expression. The emergence of the Green Party as a minor

political force in Switzerland will likely escalate the

debate on biotechnology in the future (8).

Intellectual Property-Patent applications filed in

Switzerland must be made in one of the country’s three

official languages (German, French, and Italian). Under

Swiss patent law, the following items are not patentable:

species of plants and animals and biological processes for

their breeding; surgical, therapy, and diagnostic processes

for application on humans and animals; and inventions

liable to offend ‘good morals.” Drugs and foodstuffs are

patentable.
240 . Biotechnology in a Global Economy

Table A-12-Strengths and Weaknesses,

Biotechnology in Switzerland

Table A-l Strengths and Weaknesses,

Biotechnology in Taiwan (Republic of China)

Strengths

Availability of pharmaceutical capital.

International outlook spurred by multinational

corporations.

Strong university-industry links.

Weaknesses

Lack of specific government programs for enhancing high

technology.

SOURCE: Office of Technology Assessment, 1991.

Taiwan (Republic of China)

Taiwan’s economy is export-oriented; the nation is the

United States’ fourth largest trade partner and trails only

Japan in the amount of its trade surplus with the United

States.

Biotechnology has been pronounced one of eight

strategic sciences and, as such, receives priority funding

for R&D. In addition, the government has labeled

biotechnology as one of the country’s four strategic

industries, thereby entitling relevant companies to a

generous array of financial incentives (see table A-13).

Government Support—Eight strategic sciences are

targeted for R&D funding (energy, automation, materials,

information, biotechnology, hepatitis control, electrooptics, and food technology) by the Taiwanese Government. Of the national expenditure of US$808 million in

1986 for all R&D, these eight areas received over US$346

million.

Of the money spent on strategic sciences, roughly 80

percent is channeled into applied research, with the

remainder going toward basic research. Applied research

is primarily conducted at strategic science institutes

funded by the Ministry of Economic Affairs, while basic

research is funded by the National Science Council and

occurs mainly at universities. Biotechnology has claimed

an average of 5 percent of the government’s R&D budget

for strategic science and technology since 1985.

At the time biotechnology was labeled as a strategic

area of science, a four-pronged effort was initiated:

●

●

●

Funding for biotechnology was increased. By 1985,

37 college departments around the country had

begun offering advanced academic degrees in biotechnology, graduating approximately 200 master’s

and 30 doctoral students per year.

Developmental institutions were strengthened, and

in 1984 the Development Center for Biotechnology

was established to promote the biotechnology industry and develop internationally competitive products.

Training courses in genetic engineering, cell fusion,

fermentation control, and bioreactor design were

Strengths

Strong government targeting of new technology.

Receptive public opinion toward biotechnology.

Broad base of graduates trained in Taiwan and foreign

universities.

Weaknesses

Lack of experienced managers.

Lack of regulatory program.

SOURCE: Office of Technology Assessment, 1991.

initiated.

● A venture capital funding system was developed to

help finance new startup companies. Government

banks led the investment effort, and special income

tax exemptions were launched. Thirteen venture

capital firms have been established since 1986 under

this program (24).

Industry-Three years after making biotechnology a

strategic science priority, the Taiwanese Government

designated it as a strategic industry. Criteria for inclusion

in this category included high-technology-based, highvalue-added potential, large market potential, large economic fringe benefits, low-energy requirements, and

low-pollution production. Other strategic industries at

present include machinery manufacturing, information

and electronics, and materials (e.g., metals, fiber optics,

and industrial plastics).

As a result of receiving this designation, biotechnology

firms became eligible for a raft of financial incentives,

including government support covering half of technical

development and management costs on approved projects, free technical or management consulting from

designated public institutes, preferred investment consideration and long-ten-n loans from government banks at

reduced interest rates, and corporate income tax deductions.

Capitalizing on governmental incentives, three

biotechnology firms were chartered in 1984 with a

handful of firms starting later. In terms of total sales,

Taiwanese biotechnology companies reached $22 million

in 1987. By the year 2000, Taiwan aims to have taken 2

percent of the worldwide market for biotechnology

products (24).

Regulatory Environment—As a strategic industry, the

focus of government efforts is on promoting biotechnology as opposed to regulating it (24).

Intellectual Property-Taiwan’s patent law was

amended in 1987 so that pharmaceutical ingredients and

chemicals are now patentable. The defendant in a patent

action now bears the burden of proof in a legal action, and

in a few prominent cases, convicted violators received jail

sentences (24).
Appendix A--A Global Perspective: Biotechnology in 14 Countries ● 241

Pirating of new technologies has been cited as a

problem for U.S. inventors (25). However, OTA is not

aware of any problem in this area affecting inventors of

biotechnological products and processes.

United Kingdom

In the United Kingdom, the government has never

adopted a national leadership role in biotechnology.

Rather, it has allowed government agencies to develop

their own policy schemes within tight budget constraints.

The result has been a relatively successful policy emphasizing university-industry links and the promotion of

small companies. However, some friction between agencies has occurred over the issue of where priorities should

lie, particularly in respect to support for basic versus

applied science (see table A-14). This problem has tended

to blur priorities.

Government Support—As in the United States,

government support for R&D in the United Kingdom

generally targets basic research. Applied research is

funded largely through university-industry programs.

The government’s direct annual spending on all

biotechnology for 1987-88 was approximately $130

million, of which 30 percent went to applied research and

70 percent to basic research. Government funding for

biotechnology R&D is handled by the Department of

Education and science (DES) and the Department of

Trade and Industry (DTI). Within DES, money is

allocated by research councils, three of which share a

major interest in biotechnology: 1) the Medical Research

Council, 2) the Agricultural and Food Research Council,

and 3) the Science and Engineering Research Council.

The Natural Environmental Research Council supports

biotechnology R&D to a lesser degree.

Applied research support has come primarily from

DTI, whose Biotechnology Unit (established in 1982) has

been the prime source of aid to firms seeking help with

novel investments and innovation. During most of the

1980s, DTI provided innovation funding (up to 25 percent

of each proposal); this scheme has, however, been

withdrawn on the grounds that there is no need for

government to support near-market research. The only

support now available for firm-based research is linked to

collaborative programs run in conjunction with one or

more of the research councils or with other European

firms via EC programs (18).

Industry--In general, the U.K. Government’s policy

toward the development of biotechnology has been one of

laissez-faire. In response to a 1980 report arguing for a

coordinated policy to promote biotechnology in the

United Kingdom, the government took the view that if

biotechnology promoted such riches, then the private

sector would promote it, thus limiting the government

Table A-14-Strengths and Weaknesses,

Biotechnology in United Kingdom

Strengths

High quality of science.

Public acceptance of biotechnology.

Weaknesses

Decreased government funding.

Lack of venture capital for startup companies.

Lack of coordination between government ministries.

SOURCE: Office of Technology Assessment, 1991.

role to providing an environment conducive to its

development.

Four points today constitute the main planks of the

U.K. Government’s policy toward biotechnology:

●

●

●

●

Supporting the science base. Although the government claims to have increased the science budget by

10 percent in real terms since 1982, many academics

disagree, maintaining that no real budgetary growth

has occurred.

Creating university-industry links. Establishing

closer links between the public and private sectors

has been accomplished through a number of industrial liaison efforts instituted by government research

councils. These ventures have made academicindustry links much more prevalent than a decade

ago. However, there has, at times, also been some

hostility between research councils that has limited

the potential of some schemes.

Promoting the venture capital market. The establishment of unlisted securities and over the counter

markets in the early 1980s has helped increase the

financing of new technology enterprises in general.

Still, it is difficult for small startup companies with

no proven track record to obtain pilot financing.

Providing a regulatory environment. Safety in drugs

and food, environmental release, and health and

safety in the workplace constitute the three main

categories of regulatory concern in the United

Kingdom. In all three areas, present U.K. regulations

demand a case-by-case approach, and the mix of

statutory and voluntary powers has generally worked

successfully. The United Kingdom has been at the

forefront of experiments involving environmental

release. With these experiments being subject to

scrutiny by the Advisory Committee on Genetic

Manipulation, there has been no public resistance to

deliberate release experiments of genetically modified organisms. Approximately 12 have occurred

since 1986 (18).

Although nearly 300 British firms are involved in some

form of biotechnology, only about 40 companies actively

engage in genetic engineering or monoclinal antibody

engineering. One British company, Celltech, with a

current value of roughly $190 million has emerged as the
242 . Biotechnology in a Global Economy

world leader in monoclinal antibody production. In

general, large firms predominate in British biotechnology, although the United Kingdom boasts more small

innovative firms than any other European country (18).

Intellectual Property-United Kingdom intellectual

property laws are strict, comprehensive, and rigorously

enforced. The government’s positions in international

forums, such as the World Intellectual Property Organization and the General Agreement on Tariffs and Trade talks

(Uruguay Round) have been virtually identical to U.S.

positions (25).

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15,

Appendix A References

Bachter, B., “Court Blocks German Biotech Plant,”

Science vol. 246, No. 4932, 1989, p. 881.

Farina, C., director, Investment Prospecting Group, Investment Canada, presentation before U.S. Congress, Office of

Technology Assessment, International Conference on Biotechnology in a Global Economy, July 6, 1989.

Farina, C., director, Investment Prospecting Group, Investment Canada, personal communication, December 1990.

Fujimara, R., Biotechnology in Japan: U.S. Department of

Commerce (Springfield, VA: National Technical Information Service, 1988).

Genesis Technology Group, “Capital Availability for

Commercial Biotechnology,” contract or report prepared

for the Office of Technology Assessment, November 1989.

Gmm, G., “Biotechnology in Australia-1990, The Genetic Engineer & Biotechnologist vol. 10, No. 2, May/June

1990.

Hsu, M., president, Asia/Pacif3c Bioventures Co., personal

communication, October 1990.

Hutter, R., Vizepriisident Forschung, Eidgenossische Technische Hochschule, Zurich, presentation before U.S. Congress, Office of Technology Assessment, International

Confenxwe on Biotechnology in a Global Economy, July 6,

1989.

Larsen, P.O., director, Danish Research Administration,

Ministry of Research and Education, p~sentation before

U.S. Congress, Office of Technology Assessment, International Conference on Biotechnology in a Global Economy,

Jrdy 6, 1989.

Larsson, A., Technical R&D Division, Ministry of Industry,

Stockholm, presentation befoxe U.S. Congress, Office of

Technology Assessment, International Conference on Biotechnology in a Global Economy, July 6, 1989.

McCormick, D., “Holland Is Busy in Biotechnology,”

Biotechnology vol. 5, No. 9, 1987, pp. 911-913.

McSweeney, B., director, BioResearch Ireland, presentation before U.S. Congress, Office of Technology Assessment, International Conference on Biotechnology in a

Global Economy, July 6, 1989.

McSweeney, B., director, BioResearch Ireland, personal

communication, December 1990.

Organization for Economic Cooperation and Development

(OECD), The Newly Industrzizlized Countries: Challenge

and Opportunity for OECD Industries (Paris, France:

OECD Publications Offke, 1988).

Paes De Carvalho, A., president, Associacao Brasileira Das

Empresas de Biotechnologi~ Rio de Janiero, presentation

16.

17.

18.

19.

20.

21.

22.

23.

24.

25.

26.

27.

28.

befo~ U.S. Congress, Ofllce of Technology Assessment,

International Conference on Biotechnology in a Global

Economy, July 6, 1989.

Paes De Carvalho, A., president, Associacao Brasileira Das

Ernpresas de Biotechnologia, Rio de Janiero, personal

communication, August 1990.

Pedemen, J. L., and Wiegrnan, I.M., Biotechnology in

Denmark (Jyngby: Institute of Socialk Sciences, Technical

University of Denmark, 1987).

Sharp, M., senior research fellow, Science Policy Research

Unit, University of Sussex, Brighton, presentation before

U.S. Congnxs, Office of Technology Assessment, International Conference on Biotechnology in a Global Economy,

Jtdy 6, 1989.

Smith, B., Australia Department of Industry, Technology

and Commerce, presentation before U.S. Congress, Office

of Technology Assessment, International Confenmce on

Biotechnology in a Global Economy, July 6, 1989.

Sorj, B., and Wilkinson, R.J., “Brazilian Policies in

Biotechnologies: A Post-Ethanol Strategy?” Bio/

Technology vol. 6, No. 2, 1988, pp. 150-155.

Stark, P., Biotechnology and Environment Management

Industries, Department of Industry, Technology and Commerce, Canberra, Australia, personal communication, September 1990.

Teoh, Y.S., di.mctor, National Biotechnology Programrne,

Singapore Economic Development Board, presentation

before U.S. Congress, OffIce of Technology Assessment,

International Conference on Biotechnology in a Global

Economy, July 6, 1989.

Thomas, D. F., professeur, Universitt5 de Compi~gne, Laboratoire de Technologies Enzymatique, Compi8gne, France,

presentation before U.S. Congnxs, Offke of Technology

Assessment, International Conference on Biotechnology in

a Global Economy, July 6, 1989.

Tien, W., president, Development Center for Biotechnology, Taipai, presentation before U.S. Congress, Offke of

Technology Assessment, International Conference on Biotechnology in a Global Economy, July 6, 1989.

U.S. Department of State, Country Reports on Economic

Policy and Trade Practices, report submitted to the

Committee on Foreign Affairs and Committee on Ways and

RAea.ns, U.S. House of Representatives, Joint Committee

Print, IOlst Congress, 1st sess. (Washington, DC: U.S.

Government Printing Office, March 1989).

van der Meer, R.R., project manager, HOM Consultancy

BV, Scheveningseweg, The Netherlands, presentation before U.S. Congress, Offke of Technology Assessment,

International Conference on Biotechnology in a Global

Economy, July 6, 1989.

Yun, Y.G., executive vice president, Korea Development

Investment Corp., Seoul, presentation before U.S. Congress, OffIce of Technology Assessment, International

Confenmce on Biotechnology in a Global Economy, July 6,

1989.

Ziehr, H., assistant director, Gesellschaft fiir Biotechnologische Forschung, Braunschweig, Federal Republic of

GermanY, presentation before U.S. Congress, Office of

Technology Assessment, International Conference on Biotechnology in a Global Economy, July 6, 1989.
Appendix B

Comparative Analysis: Japan

Introduction

This appendix, which accompanies appendix A, is a

summary of information regarding biotechnology in

Japan that is found in chapters 2 through 12 of this report.

The commercialization of biotechnology in Japan, as in

the United States, has matured and developed over abroad

range of industries. In 1984, the Office of Technology

Assessment (OTA) identified Japan as the major potential

competitor to the United States in biotechnology commercialization. In the view of some, Japan continues to be the

United States’ main competitor in the early 1990s. Others,

however, assert that Japan, in the immediate past and for

the near term is not a threat. However, the diffusion of

biotechnology into several industrial sectors, the changing financial markets, the emergence of the European

Community (EC) as a single economic and political force,

and the increasing internationalization of business (e.g.,

communications, strategic alliances, and technology

transfers) blur geographical lines and make simple

comparison of the competitiveness of various countries

more difficult than in the past (see table B-l).

In Japan, industry dominates biotechnology research

and development (R&D). Industrial researchers working

in the field of natural sciences outnumber their government and university counterparts nearly two to one, and

the majority of biotechnology research facilities are

corporate-led. In addition, government strategies for

advancement of biotechnology in Japan consistently

target commercial development. Most government funding for R&D is channeled toward applied research, and

government-led initiatives invariably enjoy wide industry

participation.

These circumstances contrast sharply with the United

States, where government and academia represent the

driving forces behind advancement in biotechnology, and

basic research claims a larger share of public R&D funds.

Table B-l-Strengths and Weaknesses,

Biotechnology in Japan

Strengths

Fermentation and bioprocess industry.

Strong domestic market for pharmaceuticals.

Strong applied research base.

Strong government support.

Weaknesses

Insufficient basic research science base.

Lack of innovative basic research personnel.

Lack of venture capital.

Rivalry between ministries inhibits cooperation.

SOURCE: Office of Technology Aesesement, 1991.

Additionally, U.S. Government policy tends not to

provide direct industry leadership.

There are notable differences between R&D expenditures in Japan and in the United States. Japan directs a

relatively small amount of government funding to R&D

and very little of those funds go to defense. The

government’s share of total R&D spending in Japan has

continued to fall over the last decade. Industrial sponsorship is four times greater than government sponsorship

and continues to grow as a percentage of the Gross

National Product (GNP). As a percentage of GNP, Japan’s investment in R&D has already reached an international high of 2.8 percent. Still, Japan’s research expenditure in absolute numbers is only 38 percent of that spent

by the United States.

Research relevant to economic growth is sponsored

more frequently in Japan than in the United States. Japan

gives less emphasis to basic research compared to applied

research, a not surprising situation given the dominance

of industry funding. Trends in Japan have actually been

toward relatively more spending by industry on basic

research (up from 5 percent of total industrial R&D in

1978, to 6.6 percent in 1988) but less spending by the

government (down from 14.5 percent of total R&D in

1980, to less than 13 percent in 1988).

Japanese universities and staff are more oriented

toward teaching than research. Japanese Government

funding goes primarily to institutions and senior researchers, who control funding, rather than to individual

researchers thus, perpetuating what many feel is a rigid,

hierarchical system that stifles innovation. Despite strong

formal and informal ties existing between senior faculty

and industry, barriers to cooperation remain between the

universities and industry. Until 1990, national university

professors were considered to be government employees

and were prohibited from receiving industry funds.

However, many professors have acted and continue to act

as industrial consultants. Industry funding of university

research is only 2.6 percent of total university research in

Japan, as compared to 6.2 percent in the United States.

Government Funding

The Japanese Government funds approximately 20

percent of biotechnology-related R&D-a much smaller

portion than the U.S. Federal Government’s stake (which

is approximately 50 percent). Japanese Government

spending for biotechnology was Y82.5 billion in 1989, an

increase of Y12 billion (US$900 million) from the

previous year (see table B-2). This total includes expenditures by seven ministries. The Japanese Government’s

–243–
244 ● Biotechnology in a Global Economy

Table B-2—Biotechnology Budgets for 1985-89 (In billions of Yen)

1986 1987 1988 1989

Ministry of International Trade and Industry . . . . . . . . . . . . . . 5.4 5.8 5.7 7.6

Ministry of Agriculture, Forestry, and Fisheries. . . . . . . . . . . . 3.1 3.2 6.6 7.4

Ministry of Health and Welfare . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 12.1 31.1 34.5

Science and Technology Agency . . . . . . . . . . . . . . . . . . . . . . . 10.3 12.0 13.8 18.2

Ministry of Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.6 13.6 14.0 14.4

Environmental Protection Agency . . . . . . . . . . . . . . . . . . . . . . 0.1 0.1 0.3 0.3

Ministry of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1 0.1 0.1 0.1

SOURCE: Nikkei Biotechnology, Mar. 13, 19S9; JFWS Report, Nov. 1, 1990.

current pattern of investment in biotechnology R&D is to

provide limited seed money, as a catalyst to encourage

companies to explore new R&D options.

The Ministry of International Trade and Industry

(MITI) sponsors two important collaborative applied

research programs.

● the Japan BioIndustry Association (JBA), a nonprofit organization dedicated to the promotion of

biotechnology and bioindustry, involving 320 companies from many industrial areas; and

. the Research Association for Biotechnology which

includes large Japanese firms, such as Ajinomoto,

Mitsui, and Mitsubishi Chemicals.

MITI also provides core funding in diverse areas, such as

chemicals, pharmaceuticals, food, marine biotechnology,

and alcohol fuel production.

Other ministries funding biotechnology-related programs include the Science and Technology Agency

(promotion activities); the Ministry of Health and Welfare

(research in dementia, acquired immunodeficiency syndrome, circulatory diseases, cancer, maternal and child

health, food safety, and drugs); the Ministry of Agriculture, Forestry, and Fisheries (development of leadingedge biotechnology in agricultural, forestry, fishery, and

food industries); and the Environment Agency (to cope

with environmental problems associated with biotechnology).

The government supports biotechnology indirectly

through tax incentives with R&D tax credits and attractive

depreciation schedules on equipment, loans, and education, as well as training for personnel. Often, however,

incentives for R&D are more attractive overseas than in

Japan. These incentives have driven several firms, such as

Otsuka Pharmaceuticals and Hitachi Chemicals, to establish R&D branches in the United States. Another important factor is lower prices on higher quality research

abroad.

In contrast to Japan, the Federal Government is the

driving force behind R&D funding for biotechnology in

the United States. In fiscal year 1990, the U.S. Government provided $3.4 billion to support R&Din biotechnology-related areas (see app. C). As in Japan, funding

supports a diverse portfolio of potential commercial

applications; unlike Japan’s focus on applied research, the

bulk of U.S. Federal R&D is targeted toward basic

research. Several other factors differentiate the U.S. and

Japanese approach to funding:

●

o

●

The U.S. system of authorization and appropriation

of Federal programs is inherently driven by pluralism in the political process. The U.S. Congress plays

afar stronger role in funding and oversight than does

the Japanese Diet, and executive agencies have

markedly less discretion than their counterparts in

Japan.

The structure of the U.S. research and technology

base is also vastly different. The U.S. Federal

Government provides significantly more funding

than does the government of Japan, in both relative

and absolute amounts. The United States has a

decentralized research system, and several cabinetlevel departments have internal research divisions

responsible for the research needs of their particular

missions (e.g., enhancing health).

The system for setting research budgets in the United

States is inherently political. Each Federal agency

has its own culture. These cultures contribute to their

success, perhaps simply by embodying the “way

things are done.” However, the culture is a powerful

determinant of future directions, and specific goals

may only be reflected in the collective knowledge of

agency personnel.

Targeting of Technology and Financing

In 1981, MITI designated biotechnology to be a

strategic area of science research, marking the first official

pronouncement encouraging the industrial development

of biotechnology in Japan. Over the next few years,

several ministries undertook programs to fund and

support biotechnology.

Of particular interest, today, is governmental activity in

the pharmaceutical industry. The Ministry of Health and

Welfare (MHW) annually lowers prices on existing drugs,
Appendix B--Comparative Analysis: Japan ● 245

while allowing premium prices for innovative or important new drugs, thus forcing companies to be innovative

and to seek larger markets. This trend is reinforced by the

emergence of new foreign and domestic competitors. The

push toward innovation is part of the government’s

overall effort to provide care for its aging population—

without bankrupting the national health insurance program.

Despite well-coordinated efforts on the part of government to stimulate biotechnology R&D, several weaknesses persist. For example, overall funding levels remain

comparatively low, and competition among ministries

and agencies has developed. This state of affairs has

resulted in some duplication of research and also has

created a situation in which companies wishing to test

various processes may need authorization from more than

one ministry. Furthermore, this rivalry among governmental bodies tends to inhibit coordination between

universities (performing basic research) and firms (focusing on applied research).

Approximately 300 Japanese firms report some type of

activity related to biotechnology. A 1985 survey, placed

this number at 268; of these, 19 used recombinant DNA

(rDNA) techniques commercially. Large, traditional

firms dominate the commercial sector. The few startup

companies that do exist usually show some link to

traditional firms.

Current figures on Japanese private spending for

biotechnology are hard to obtain from Japanese sources.

Estimates for 1987, place industrial biotechnology R&D

at US$l billion, roughly half the amount of U.S. industrial

spending.

The Japanese stock market has played only a small role

in allocating capital. Most capital is heavily concentrated

in the banking system. Venture capital plays a limited role

in high-technology and biotechnology financing. However, most Japanese venture capital fund managers lack

entrepreneurial management skills and usually operate

out of their parent headquarters (e.g., banks, security

houses, or giant corporations), and these managers invest

conservatively. Most American venture capitalists would

hold that Japanese venture capital really isn’t venture

capital in the U.S. sense. Indeed, Japanese venture

capitalists are willing to accept returns at two-fifths or

even less than the level that U.S. venture capitalists

typically expect. Several other reasons exist for the

conservative nature of Japanese venture capitalists. These

include the stigma of failure and the emphasis on personal

relationships rather than depersonalized sales of equity,

resulting in equity sales primarily occurring between

cooperating firms-a condition hardly conducive to U.S.

style venture capital.

Although MITI in 1981 announced its goal of matching

U.S. biotechnology within 5 years, its catch-up, get-ahead

motto has fallen flat in recent months. The initial positive

public perception of biotechnology-demonstrated by

sales of products such as bio-lipsticks, genetically modified eels, BeWell bread, and other everyday items whose

sales were bolstered by advertising their biotech origins--

is changing. According to a recent survey, 90 percent of

respondents were dubious about biotechnologists’ claims

of environmental safety, and 77 percent felt that

biotechnology would eventually develop into a major

social problem. This development combined with the

Illustrations of young scientists over not getting enough

support, led one writer to note that: Japan may not be the

“land of tPA milk and recombinant honey. ”

Recent disenchantment with biotechnology at a commercial level goes back to a failure by several companies

to rapidly commercialize products. Although biotechnology is losing its luster among Japanese investors, one

analyst projects that funding will not decline, but instead

will be spent in a more focused fashion on fewer projects.

With one exception, the purchase of Gen-Probe by

Chugai Pharmaceuticals of Japan, international biotechnology-related mergers and acquisitions have not involved the purchase of a U.S. company by a Japanese

company or vice versa. By comparison, 33 biotechnology-related acquisitions between 1982 and 1988 involved

a firm from the United States and a firm from Europe.

North Carolina Biotechnology Center (NCBC) databases reveal 12 cases of U.S.-Japanese equity arrangements. Of these, six explicitly mention marketing or

research funding. This seems to indicate that most foreign

biotechnology companies believe that the only route to

the Japanese market is by teaming up with a large

Japanese corporation. As biotechnology companies grow

to have product sales and their own sales forces, some of

the marketing agreements can even switch direction.

Genentech is the leader in what may become a more

commonplace occurrence by the early to mid-1990s: in

1987 the Japanese chemical firm Mitsubishi Kasei

selected Genentech to develop and market some of its

Pharmaceutical products in the United States.

Japanese companies are investing in U.S. dedicated

biotechnology companies (DBCs). Examples include:

●

●

c

Chugai Pharmacautical’s arrangements with Genetics Institute and Upjohn, and Chugai’s acquisition of

Gen-Probe for$110 million;

Tokyo’s Institute for Immunology’s $20 million

investment in IDEC pharmaceuticals; and

the collaboration . between Genetics Institute and

Japan’s Yamanouchi“ Pharmaceutical Co., and CalBio’s deal with Daiichi Pharmaceutical Co.
246 ● Biotechnology in a Global Economy

Industrial Sector: Health

The United States is the largest pharmaceutical market

in the world, with an estimated value of $29 billion in

1987. It is followed, closely, by Japan at $25 billion. It is

important to remember, however, that the population of

the United States is 2.5 times larger than the population

of Japan. Three of the top five brand name pharmaceuticals in Japan are produced by U.S. companies. Of the top

50 brand names, U.S. companies produce 23; Japan

produces only 5. The United States is very competitive

and has maintained a positive trade balance in this

high-technology sector. Japan is increasing the strength of

its pharmaceutical industry and placed second in the

number of new drugs introduced between the years 1981

and 1985.

Historically, the Japanese market has been difficult to

enter without a Japanese partner. Just 20 years ago,

foreign companies were prohibited from operating independently in Japan. It was not until 1984, that foreign drug

companies could go directly to the Konseisho, the

Japanese equivalent of the U.S. Food and Drug Administration, for drug approval. To ensure market presence,

U.S. and European companies have collaborated with the

Japanese companies that dominate the Japanese market.

For many years, U.S. and European companies have been

increasing their presence in Japan by establishing their

own marketing forces and, in a few cases, building

research facilities or acquiring a Japanese company. Very

recently, efforts have begun to establish joint R&D

programs between U.S. companies and their Japanese

counterparts.

At the same time, Japanese companies faced with

sharply rising health care costs that have involved

drastically reduced reimbursement levels for drugs, are

feeling the push to increase their export markets and are

slowly beginning to globalize their operations. In the last

2 years, Japanese firms have acquired four smaller U.S.

pharmaceutical concerns.

Despite these developments, the main competitors for

the world market in pharmaceuticals are U.S. and

European companies. These organizations are large

multinationals with research, manufacturing, and marketing operations worldwide, particularly in the United

States, Europe, and Japan, the three major markets. Focus

on leadership in world markets, not only domestic

markets, is key to success in the pharmaceutical industry.

Although the Japanese share of foreign markets is

currently behind the United States and Europe, considerable time, effort, and money could increase the Japanese

share of the U.S. pharmaceutical market. It is unlikely,

however, that serious inroads will be made by the

Japanese into the U.S. market during the 1990s.

Industrial Sector: Agriculture

Because biotechnology products for agricultural use

are still in development, it is not possible to compare the

numbers of products manufactured in different countries.

Field tests of many products, however, are regulated by

national agricultural or environmental authorities. There

is no official census of such tests, but the U.S. Department

of Agriculture (USDA) keeps an unofficial tally.

Through the summer of 1990, 93 field tests of

transgenic plants with potential commercial value had

been approved in the United States-far more than in any

other country. In contrast, there is little activity in Japan.

In general, transgenic plants are being developed in

nations that are major exporters of agricultural products,

with the greatest activity in the United States. However,

the Japanese have made important advances in the area of

ornamental plants and flowers, and serious work is

underway with vegetables and rice.

Industrial Sector: Chemicals

In both the United States and Japan, biotechnology’s

greatest impact in the chemical industry is likely to have

little to do with the production per se of industrial

chemicals. Instead, its greatest impact will be the result of

the industry’s expanding investment in pharmaceuticals

and agriculture. Recent trends in the chemical industry

have forced restructuring worldwide. In response, chemical firms are emphasizing the development and production of high-value-added products, such as specialty

chemicals, advanced materials, pharmaceuticals, pesticides, and related agricultural products (e.g., seeds).

The use of biological means for producing chemicals

has, historically, received a great of deal of attention in

Japan. Unlike the United States, Japan lacks large

deposits of coal or oil, the raw materials on which the

chemical industry in the rest of the world is based. Thus,

Japanese firms have always had a financial incentive to

explore alternatives. When Japan’s MITI targeted biotechnology in 1980, three research areas were specifically

named: rDNA, mass cell culture, and bioreactors. Although in the United States, the word “bioreactor”

usually refers to large chambers used for mass cell culture,

MITI defines bioreactors, more generally, as fermentation

vessels. The more advanced research in bioreactor development funded by MITI emphasizes the use of microorganisms or immobilized enzymes for the production of

fine chemicals. Six Japanese chemical firms have taken

part in a government-sponsored joint research effort in

this area.

Biosensors combine biotechnology with materials

science and electronics to produce sophisticated monitoring devices, an area of active R&D, especially in Japan.

Potential applications of biosensors include: human

diagnostics, agricultural and veterinary diagnostics, food
Appendix B-Comparative Analysis: Japan . 247

testing, environmental monitoring, and industrial process

control.

Industrial Sector: Environmental Applications

In the nascent bioremediation field, microbial products

packaged for sale are available in both the United States

and Japan; these, however, have developed only small

markets to date. Both nations have been pursuing

biotechnology R&D in improved waste treatment. Still,

research efforts are generally minimal, and the diffusion

of research results into commercial applications has been

slow for a variety of reasons, including lax regulations

that encourage the payment of fines by industry for waste

emission rather than the use of systems to reduce

pollution.

In the United States, several Federal agencies support

biological research related to waste management. In 1987,

eight Federal agencies spent $11 million on environmental biotechnology-related research. In Japan, the

Ministry of Construction launched a 5-year, Y5 billion

(US$40 million) project on waste water treatment through

biotechnological processes during the 1980s.

Regulation

In Japan, relevant policymaking is dominated by

tension between competing bureaucracies and powerful

industries. In the United States, policymaking is driven by

the dynamics of interest-group politics. Although Japan is

far from monolithic, the sheer number of actors in the

United States makes achieving consensus and continuity

much more difficult.

As elsewhere, responsibility for regulating biotechnology

●

●

●

●

●

in Japan is divided among several ministries.

University research is regulated by the Ministry of

Education, Science, and Culture’s (MESC) “Guidelines to Experiments in DNA Recombination in

relation to University Research,” first introduced in

1979.

Research organizations other than universities rely

on the Science and Technology Agency’s (STA’s)

“Guidelines to Experiments in DNA Recombination,” also introduced in 1979.

The MITI oversees the “Guidelines for Industrial

Application of Recombinant DNA Technology,”

introduced in 1986.

The MHW applies “Guidelines to the Technical

Application of DNA Recombination in the Production of Pharmaceuticals,” introduced in 1986.

The Ministry of Agriculture, Forestry, and Fisheries

(MAFF) employs “Guidelines to the Usage of

Recombined Substances in the Fields of Agriculture,

Forestry, and Fisheries,” proposed in 1986, and

published in 1989.

Both the United States and Japan allow the use of

biotechnology with some restrictions and oversight. In

both countries, regulations based on existing legislation

governing drugs, worker health and safety, agriculture,

and environmental protection are being developed to

cover the use of biotechnology.

Intellectual Property

Japan is a party to the major international treaties

designed to protect intellectual property. Still, Japanese

patent practice presents several problems.

Dozens of firms in Japan file well over 5,000 patent

applications annually. The top three filers in the

United States in 1987 were Japanese firms. As a

result, a U.S. filer often finds that Japanese patent

rights are closely circumscribed by applications

already filed for a similar invention or process.

On average, the Japanese Patent Office (JPO) takes

3 years to examine a patent application, compared to

21 months in the United States. Anecdotal evidence

indicates that the slow pace of patent examination is

even worse for biotechnology-related patent applications.

The permissible scope of claims in a Japanese patent

application is narrower than that permitted in U.S.

applications. Delays in resolving scope problems

can keep applications in limbo for years.

Adjudication of patent infringement is also slow.

Direct evidence cannot be obtained through the

discovery process, and infringement can be difficult

to prove.

Although there have been some negotiations between

the U. S., Japanese, and European patent offices regarding

harmonization of patent practice, major differences remain that hinder inventors in high-technology fields,

including biotechnology. In part, to avoid some of the

tangles of patent practice in Japan, U.S. firms tend to

license their patents to Japanese companies in lieu of

exporting a product.

Pharmaceutical and health care patents accounted for

greater than half of the biotechnology patents issued in

1988. Over three-quarters of genetic-related patents

granted were related to pharmaceuticals and health care.

U.S. corporations were the largest source of genetic

engineering patents. They garnered twice as many health

and pharmaceutical genetic engineering patents as U.S.

universities and six times as many as U.S. nonprofit

research institutions. Thirty-six percent of biotechnology

patents were issued to foreigners in 1988, as compared to

47 percent of all patents. Japan is the United States’

leading competitor, followed by Western Europe.

In recent years, legislation was passed in the United

States and Japan to extend patent protection to make up

for the years lost during clinical development. Similar
248 . Biotechnology in a Global Economy

draft legislation is being considered by the EC. This The interagency dispute, therefore, is between JPO and

extension of effective patent life recognizes the impor- MAFF. JPO urges that Japanese patent law should not

tance of patent protection, the effect of the regulatory exclude plants per se from patent protection. MAFF, on

process on new product development, and the need for the other hand, argues that the Seed and Saplings law

public policies to provide incentives for companies to should protect plants, as well as plant varieties. Similar to continue investing in R&D. Unfortunately, there still

remains a serious interagency controversy in Japan, which what has happened worldwide, Japanese applicants seekhampers the predictability of plant patent protection. The ing broad protection for a generic agricultural biotechnolkey issue is whether new plants are to be protected by a ogy invention are critical of the weak protection currently

Japanese patent or by a registration under the Japanese afforded under the Japanese Seeds and Saplings Act.

Seeds and Saplings Act, the latter resembling the U.S.

Plant Variety Protection Act.
Appendix C

Federal Funding of Biotechnology Research and Development

Historically, the United States, both in absolute dollar

amounts and as a percentage of its research budget, has

had the largest commitment to basic research in the

biological sciences worldwide. The vast majority of

Federal research support in the biological sciences goes to

university scientists conducting basic research, whereas

applied research and development (R&D) has always

been considered the responsibility of industry. This

appendix catalogues the extent to which 12 Federal

agencies are funding research in biotechnology-related

areas.

Basic research is the primary mission of several of

these agencies, such as the National Institutes of Health

(NIH) and the National Science Foundation (NSF). The

National Aeronautics and Space Administration (NASA),

the Department of Energy (DOE), and the National

Oceanic and AtmosphericAdministration (NOAA) have

large technological development programs but are also

substantial supporters of basic research, including biotechnology. Other agencies with diverse missions, such as

the Department of Defense (DoD) and the U.S. Department of Agriculture (USDA), fund large numbers of R&D

projects related to biotechnology. In addition, agencies

with substantial regulatory functions, such as the Food

and Drug Administration (FDA) and the U.S. Environmental Protection Agency (EPA), fund research relevant

to their regulatory and scientific missions. Finally,

agencies traditionally viewed as service oriented, such as

the Veterans Administration (VA), the National Institute

of Standards and Technology (NET), and the Agency for

International Development (AID), fund biotechnology

research relevant to their service roles.

National Institutes of Health

While the biotechnology industry is rapidly becoming

one of the most significant “growth industries” in the

United States, its creation and sustained expansion over

the recent past is in large part due to the major role in

support of basic research and research training played by

several Federal agencies, in particular, NIH. The NIH

supports research conducted either within its own laboratories, or, through a system of grants, contracts, and

training awards at academic institutions, research institutes, and industrial organizations throughout the country.

In the area of biotechnology, NIH-supported research

can be divided in two categories. The first is basic

research directly related to biotechnology, which includes

recombinant DNA techniques; gene mapping and DNA

sequencing; isolation, separation, and detection of DNA;

the creation of hybridomas; the production of monoclinal

antibodies; protein engineering; production of antibodytom chimeras (immunotoxins); and the computer analysis

of DNA and protein sequences. The second category

relates to the broad research base underlying biotechnology and refers to studies in the fields of genetics, cellular

and molecular biology, biological chemistry, biophysics,

immunology, virology, macromolecular structure, and

pharmacology. For the basic research studies directly

related to biotechnology, NIH provided an estimated

$1.19 billion in fiscal year 1990. For the broadly based

research area, NIH provided an estimated $1.7 billion in

fiscal year 1990. Thus, for fiscal year 1990, NIH provided

an estimated $2.9 billion for biotechnological research

through its research grants and contracts mechanisms and

its intramural component.

The basic research discoveries made over the past

several years have led to an era of astounding biotechnological progress. These achievements include:

●

●

●

●

●

●

●

●

●

●

●

●

●

●

●

●

the elucidation of DNA structure;

chromosomal sorting methodologies;

improved techniques for the molecular cloning of

large DNA fragments;

the genetic mapping of human disease genes by the

use of restriction fragment length polymorphisms;

the construction of physical maps of several complex

genomes;

improved DNA sequencing methodologies and

microchemical instrumentation;

enhanced technologies for hybridoma and monoclonal antibody production;

the discovery of, and highly specific use of, restriction endonucleases;

methods for amplification of gene expression for

site-directed mutagenesis and chemical synthesis of

DNA probes;

new methodologies for the detection, separation and

characterization of DNA;

development of posttranscriptional RNA splicing

methods and of synthesis, posttranslational processing, modification, transport, and secretion of proteins;

protein structure and design;

elucidation of hormone and cell surface receptor

molecules;

tissue and cell culture methodologies;

separation technologies; and

informatics for gene mapping, DNA sequencing, and

protein structure.

Advances in basic understanding of biological processes and the development of methodologies for manipulating both biological and chemical processes at the

molecular level have created numerous opportunities for

–249-
250 . Biotechnology in a Global Economy

commercial biotechnology companies. The rapid coalescence of basic science knowledge and advanced technologies have decreased the time interval between scientific

discoveries and their application to the development of

commercially significant products and/or diagnostic tests.

New products developed as a result of basic molecular

genetic research have enabled biotechnology firms to

diagnose human genetic disorders otherwise not detectable by conventional methods. A substantial number of

such diagnostic tests are currently available and many

others are under investigation.

NIH also supports biotechnology research in several

other ways. NIH contributes significant funds to the Small

Business Innovation Research (SBIR) Program, which

funds industry research. It supports research collaborations with industry, which facilitate the translation of

basic research discoveries to the development of commercially significant products. These collaborations, usually

in the form of cooperative agreements between NIH

scientists and biotechnology companies, have focused on

several areas, including: molecular genetics, DNA cloning, genetic-based diagnosis, hybridoma, monoclinal

antibody, immunology, and virology research, and the

development of therapeutic agents.

NIH provides research resources to university scientists, state-sponsored biotechnology organizations, and

biotechnology companies. These resources include the

Genetic Sequence Data Bank (GenBank), the Human

Genetic Mutant Cell Repository (Cell Bank), the Protein

Identification Resource, the American Type culture

Collection of Microorganisms and Cell cultures, the

Hybridoma Data Bank, the Human DNA Probe Repository, BIONET, large-scale cell production facilities, an

Instrumentation Grants program, and a central database of

biotechnology databases. In addition, NIH supports

research training at both the predoctoral and postdoctoral

levels in basic biomedical disciplines that serve to fuel

growth in biotechnology. In addition to institutional

training programs, NIH funds predoctoral training specifically for biotechnology through the Lawton Chiles

Fellowships in Biotechnology program.

As the new biotechnology has emerged, so have new

partnerships between the developing industries and

universities, the institutional sites for most NIH-funded

extramural basic research relevant to biotechnology.

These interactions, established between research universities and chemical, agricultural, and pharmaceutical

firms, range from informal exchanges of information and

consulting arrangements to research contracts, formal

partnerships, and the creation of private corporations.

There are many university-industry biotechnology research programs encompassing industry sponsored university research; cooperative industry-university research; joint commercial ventures; research consortia; and

biotechnology research training centers.

NIH supports the interaction of universities with

industry as long as safeguards against conflicts of interest

are maintained and government-supported research results are disseminated freely. NIH awards grants to

institutions in support of investigators who have meritorious proposals, regardless of whether the research will be

done at a university, a private company, some combination of the two, or involves support by another Federal

agency. All evidence indicates that this arrangement is

working well for both universities and the biotechnology

industry whether it is a part of the private sector or is

state-sponsored.

There is substantial interest in the nature and scope of

collaborative relationships between NIH, its academic

grantees, and biotechnology companies. This interest is

partly due to the remarkable basic science achievements

that have occasioned commercial interests in marketing

the products of biotechnology; a desire to enhance the

transfer of research findings to commercial applications;

and the desire to effectively utilize Federal biomedical

research funds not only for basic research but also to

support private industry in the translation of such research

to the development of products. NIH interacts with

industry in diverse ways. NIH grants over $6 billion per

year to academic research institutions with the grantee

retaining invention rights for licensing to industry.

Through these means, the Federal Government transfers

knowledge and commercial products to the private sector.

Inventions made by government investigators in the

course of intramural research are patented and licensed to

companies under provisions of the patent law and are

transfered to industry with the aid of the Federal

Technology Transfer Act of 1986 (FTTA).

The Federal Technology Transfer Act of 1986 (Public

Law 99-502), was designed to promote the transfer of

government-developed technology into the private sector.

The FTTA authorizes the Cooperative Research and

Development Agreement (CRADA). Under a CRADA,

Federal laboratories and private sector companies conduct

research jointly and the collaborating company acquires

patent rights at the outset of the collaboration. As an

incentive and a reward, the FTTA also provides for the

sharing of royalties with government inventors from the

licensing of inventions developed under CRADAs and

from inventions made through an Agency’s intramural

research programs. NIH currently has roughly 150 patent

license agreements and over 100 CRADAs in effect, and

about 100 additional CRADAs in various stages of

negotiation.

NIH provides the lion’s share of Federal support for the

basic research that is critical to the continued vitality and

growth of biotechnology in the United States. In addition,

NIH promotes the development of productive relationships between scientists in the public and private sectors.

All of these efforts will permit the pooling of resources
Appendix C-Federal Funding of Biotechnology Research and Development .251

and expertise under well-defined conditions and thereby

facilitate the transfer of basic science findings to commercial research and development activities.

National Science Foundation

The NSF, until 1991, generically described its

biotechnology efforts by categorizing research related to

biotechnology. This included activities in fundamental

genetics, cell physiology, cell culture biology, basic

biochemistry and enzymology, and bioprocessing engineering, which are generally regarded as being directly

related to the further development of biotechnology. In

1991, an internal task force study was completed that

redefined the biotechnology research being done at NSF.

NSF’s current definition of biotechnology is consistent

with that used by the Office of Technology Assessment:

a technique that uses living organisms or par&s of

organisms to make or modify products, to improve plants

or animals, or to develop micro-organisms for specific

uses. In addition, it encompasses the development of

materials that mimic structure and functions occurring in

living systems. NSF’s work categorized as research

related to biotechnology includes all activities listed in the

old definition plus microbial ecology, bimolecular

materials, bioelectronics, and bionetworks. Funding figures for fiscal year 1990 reflect the new definition.

NSF’s mission is the support of basic research in

colleges and universities in the United States. The NSF

budget accounted for approximately 7 percent of the fiscal

year 1990 Federal nondefense budget for research and

development. Approximately 94 percent of the NSF

budget goes to basic research, with only 6 percent

awarded for applied research.

In addition to Engineering Research Centers, first

established in 1985 to facilitate technology transfer and

multidisciplinary research, NSF established the Science

and Technology Centers program (STC) in 1987 as a

mechanism to exploit opportunities in science and engineering requiring complex approaches, to facilitate cooperation among students, faculty, and industry; and to

encourage rapid and timely transfer of knowledge.

Twenty-five centers have been established-n in fiscal

year 1989 and 14 in fiscal year 1991. The central focus of

four of those centers is biotechnology-plant resistance to

pathogens (University of California, Davis), protein and

nucleic acid technology (California Institute of Technology), light microscope imaging (Carnegie Mellon University), and microbial ecology (Michigan State University).

NSF monitors its biotechnology spending by using a

data collection system based on review of all new awards

for biotechnology relatedness on a subjective scale from

none to all, by one-third increments. NSF specifies a

category of work as related to biotechnology if it includes

research activities related to the following: environmental

applications; bioprocessing and bioconservation; bimolecular materials; bioelectronics and bionetworks; agricultural applications; medical applications; and impact of

biotechnology.

Biotechnology research is supported by all NSF

research directorates: Biological, Behavioral, and Social

Sciences; Engineering; Mathematical and Physical Sciences; Computer and Information Science and Engineering; Geosciences; and Scientific, Technological, and

International Affairs.

The Directorate for Biological, Behavioral, and Social

Sciences (BBS) supports basic research that provides the

basic underpinnings for biomaintenance, bioremediation,

biology-based waste management, environmental diagnostics, bioprocessing and bioconversion, bimolecular

materials, bioelectronics, and bionetworks. In addition,

within BBS are programs in Ethics and Values Studies,

the History of Science, and Social and Economic Sciences, which offer an opportunity for scholarly work on

the impact of biotechnology.

The Engineering Directorate’s (ENG) largest amount

of support for biotechnology is in bioprocessing and

bioconversion. The Divisions of Biological and Critical

Systems (BCS) and Chemical and Thermal Systems

(CTS) support bioseparations for downstream processing.

The Bioengineering Program supports research to seek

engineering solutions to health-related problems with an

emphasis on research leading to new technology or to

novel applications of exising technology. The Environmental and Ocean Systems program supports projects

using micro-organisms for detoxification of contaminated

water sources.

The Directorate for Mathematical and Physical Sciences (MI%) supports basic research that provides the

chemical and mathematical underpinning of biotechnology, and that uses the methods of biotechnology in the

formulation of new biomolecular materials. Relevant

research is conducted in the Division of Materials

Research (DMR), the Chemistry Division (CHE), and the

Division of Mathematical Sciences (DMS).

The Directorate for Computer and Information Science

and Engineering (CISE) supports research in the areas of

bioelectronics and bionetworks and medical applications.

Bioelectronics projects include work on algorithms and

devices for vision/imaging and speech/auditory processes, as well as neuron/silicon circuits and devices.

Support is provided for work in computer algorithms,

techniques, and software tools pertinent to bimolecular

data modeling and management in high-performance,

networked computing environments.

The Oceanography Division (OCE) of the Geosciences

Directorate (GEO) is involved in marine biotechnology

and supports research in: the basic biochemistry and
252 ● Biotechnology in a Global Economy

physiology of organisms from extreme environments;

chemically mediated interactions between organisms;

development of methods for rapid taxa-specific characterization and identification of marine microbial populations; microbial decomposition and degradative processes; molecular studies of the nitrogenase genes of

marine nitrogen-fixing cyanobacteria; and marine viruses.

The Directorate for Scientific, Technological, and

International Affairs (STIA) supports biotechnology in

three divisions. The Science Resource Studies (SRS)

Division studies biotechnology trends and research and

development activities in industry, creating a database to

be used in monitoring the trends of biotechnology and its

industrial applications. The International Division (INT)

supports projects in biotechnology through its bilateral

agreements with many countries such as Japan and

Mexico. The Division of Industrial Science and Technological Innovation (ISTI), through its Small Business

Innovation supports research projects in molecular and

cell biology, environmental applications, aquiculture,

waste management, water treatment, biochemical and

bioprocess engineering, biomass processing, and biomedical engineering.

NSF’s total support for biotechnology-related research

in fiscal year 1990 was $167.9 million. The total is broken

down as follows:

●

●

●

●

●

●

●

Environmental Applications, $34.93 million;

Bioprocessing and Bioconversion, $34.02 million;

Bimolecular Materials, $12.85 million;

Bioelectronics and Bionetworks, $23.12 million;

Agricultural Applications, $39.69 million;

Medical Applications, $20.69 million; and

Impact of Biotechnology, $2.54 million.

Department of Defense

DOD defines biotechnology to be any technique that

uses living organisms (or parts of organisms) to make or

modify products, to improve plants, or to develop

micro-organisms for specific uses. The technologies

specifically included in this definition are recombinant

DNA, novel bioprocessing techniques, cell fusion technology including hybridomas, and somatic cell genetics.

DOD’s efforts in biotechnology are divided between

medical and materials efforts. The Army is the principal

participant in medical biotechnology, with the Navy

contributing to the effort through an extramural contract

program. In materials biotechnology, the Navy is the

principal participant, with the Army, Air Force, and

Defense Advanced Research Projects Agency providing

additional support.

Medical biotechnology is primarily directed toward

characterization of etiologic agents of disease, development of vaccines, and improved diagnosis of disease and

identification of agents. Vaccine development is targeted

against militarily relevant diseases that are not of U.S.

public health concern, but occur primarily in overseas

areas. Examples of this work include vaccine development for dengue, malaria, anthrax, and Rift Valley Fever.

Malaria vaccine research is a collaborative effort between

DOD and NIH. The diagnostics efforts focus on use of

DNA probes and monoclinal antibodies, which are also

utilized by DOD for its chemical/biological defense

program. The materials biotechnology programs in DOD

are diverse. The spectrum of effort includes work on

biopolymers, fibers, adhesives, intermediate compounds

for synthesis of composites, biosensors, biocorrosion,

biofouling control, compliant coatings, and bimolecular

electronics.

In fiscal year 1990, DOD’s support for both medical

and nonmedical biotechnology research and development

was about $98 million. The funding was divided about

evenly between intramural and extramural programs.

Medically related biotechnology R&D accounted for

approximately $60 million, nonmedical expenditures

totaled $38 million.

Department of Energy

The DOE’s total expenditures for biotechnology R&D

were approximately $82.2 million in fiscal year 1990.

DOE supports both basic and applied research relevant to

biotechnology research. DOE has three main programs

that fund biotechnology: Basic Energy Sciences and

Biological and Environmental Research, which are part of

the Office of Energy Research, and Conservation and

Renewable Energy.

The Basic Energy Sciences program includes Energy

Biosciences and is focused on understanding the

fundamental mechanisms of how plants produce biomass,

and on the biological transformation of crude, abundant

biomass into other usable forms. The program provides

the foundation for the broad exploitation of new sophisticated knowledge in molecular genetics. Fiscal year 1990

funding for Energy Biosciences was approximately $20.4

million.

The bulk of DOE’s biotechnology funding is from the

Office of Energy Research’s Biological and Environmental Research program. This program was funded at

$54.9 million in fiscal year 1990. The primary biotechnology efforts are the human genome and structural biology

programs. These programs are directed at accelerating the

mapping of the entire human genome by improving DNA

sequencing technology, developing new instrumentation,

applying robotics technology, and exploiting unique

Departmental facilities to investigate the structurefunction relationships of biomolecules. Research is also

conducted to investigate cellular processes, such as
Appendix C-Federal Funding of Biotechnology Research and Development ● 253

growth and protein synthesis, by molecular approaches,

and development of monoclinal antibody technologies

labeled with radionuclides for diagnostic and therapeutic

applications.

The Conservation and Renewable Energy Program

funded $6.9 million of biotechnology research in fiscal

year 1990. Research in biotechnology is focused on the

application of bioprocessing to industrial and municipal

wastes to produce fuels. The conversion processes are

environmentally benign. The products, such as methane

fuel or biodegradable agricultural mulch, are substitutes

for fossil liquids and gases.

U.S. Department of Agriculture

Four agencies of USDA fund biotechnology R&D:

. the Agricultural Research Service (ARS);

. the Cooperative State Research Service (CSRS);

● the Forest Service; and

. the Economic Research Service (ERS).

In fiscal year 1990, the four agencies reported combined

funding of just under$116 million. A description of each

agencies’ commitment to biotechnology follows.

Agricultural Research Service

The ARS is the primary research agency within USDA.

It funds both intramural research programs and cooperative agreements. ARS conducts research for specific user

groups within USDA, including the Animal and Plant

Health Inspection Service, Food Safety Inspection Service, and Soil Conservation Review. ARS uses biotechnology to study and understand fundamental biological

processes, and to modify and regulate these processes for

the solution of agricultural problems.

ARS’ biotechnology efforts include projects that use

techniques such as gene cloning in micro-organisms,

nucleic acid hybridization, biological and biochemical

synthesis of nucleic acids and proteins, use of monoclinal

antibodies, affinity column separation of antigens, use of

immobilized enzymes and cells, protoplast fusion, regeneration of plants from tissue culture, transfer of embryos,

gene mapping, and synthesis of peptide neurohormones.

In fiscal year 1990, ARS projects using biotechnology

totaled about $59.5 million. By the end of 1990, it was

estimated that about 400 scientists would be using the

tools of molecular biology to address agricultural problems.

Cooperative State Research Service

The CSRS is the USDA’s liaison to the State university

system for the conduct of agricultural research. Of all the

Federal agencies, CSRS handles the most diverse types of

research funding, including formula funds, such as the

Hatch Act funds, McIntire-Stennis Cooperative Forestry

funds, 1890 Colleges and Tuskegee University funds, and

the Animal Health and Disease Section 1433 funds. In

addition, CSRS provides competitive grants through its

Special Research Grants program and the Competitive

Research Grants program. The Competitive Research

Grants program received funding through fiscal year

1990. A new program, the National Research Initiative,

started receiving funds in fiscal year 1991. There are

biotechnology programs in all of these funding categories.

According to CSRS, biotechnology refers to the

improved or modified organism, microbe, plant, or

animal, and “new research techniques’ or ‘technology”

refers to contemporary “tools” available to scientists for

the purpose of biotechnology development. CSRS’s total

funding for biotechnology amounted to $52.2 million in

fiscal year 1990. The individual funding figures for 1990,

and estimates for 1991, follow:

●

●

●

●

●

●

●

Hatch Act: $13.3 million (1990);

McIntire-Stennis Cooperative Forestry: $617,000

(1990);

1890 Colleges and Tuskegee University: $1.0 million (1990);

Special Research Grants: $10.9 million (1990);

Competitive Research Grants: $24.9 million (1990);

National Research Initiative: $0 (1990); and

Animal Health and Disease Section 1433: $1.5

million (1990).

Forest Service

The Forest Service is the primary forestry research

agency within USDA and conducts the largest forestry

biotechnology research program in the United States.

Current biotechnology research is directed toward developing and testing basic techniques to employ biotechnology in accelerating tree growth and in improving the

quality of woody plants. Research is also directed to

understanding stress and disease resistance mechanisms;

the development of improved natural biological control

agents; and the development and testing of new and

efficient industrial processes for wood use. The Forest

Service’s biotechnology research budget was $3.6 million

for all phases of the program in fiscal year 1990, and

included both matching and cooperative funding. Approximately 90 percent of this funding was allotted to

in-house activities and 10 percent to support college and

university research.

Economic Research Service

The ERS monitors developments in agricultural

technology and assesses their potential economic impacts

on farmers, resource use, national and international

commodity markets, consumers, and the general economy. ERSs analyses provide information for assessing the

social, environmental, and economic tradeoffs for new
254 ● Biotechnology in a Global Economy

technologies. In the area of biotechnologies, research has

ranged from assessing the economic conditions under

which animal growth hormones are most likely to be

adopted, to the potential consumer impacts of biotechnology, to the examination of strategies for regulating the

risks of biotechnology. The technology program at ERS

includes two research sections and 7 staff-years, plus

technology components of programs throughout ERS. In

total, technology program expenditures were $500,000 in

fiscal year 1990, with about one-half, focused on economic analyses of biotechnology.

Department of Commerce

The National Oceanic and Atmospheric Administration (NOAA) and the National Institute of Standards and

Technology (NIST) operate within the Department of

Commerce and fund biotechnology research.

National Oceanic and Atmospheric

Administration

NOAA defines biotechnology as the application of

scientific and engineering principles to the processing of

materials by biological agents to provide goods and

services. For the past several years, the National Sea Grant

College Program of NOAA has invested a small but

significant share of its budget in the development of

fundamental science which will provide the basis for

biotechnological development of marine resources.

NOAA’s biotechnology research falls in four categories:

biochemistry and pharmacology, molecular biology, biochemical engineering, and microbiology and phycology.

Research in biochemistry and pharmacology is directed

toward the isolation, identification, and biological evaluation of novel marine substances of potential use in

medicine or industry. Biochemical engineering research

results are also being applied in the commercial sector.

For example, estuarine bacteria have been adapted to

efficiently metabolize, and thereby detoxify, certain

organic substances in industrial effluents that are severely

impacting coastal areas. The technology is also being

applied to toxic substances. Basic studies in molecular

biology are directed to providing the science for genetic

engineering of fish and algae and developing diagnostic

reagents and vaccines for use in aquaculture. Research in

microbiology aims to control biologically mediated

corrosion and biofouling.

In fiscal year 1990, there were 47 active projects in

these categories. They were supported with $2.0 million

in Federal funds and an additional $1.6 million in

non-Federal matching funds. The level of Federal support

and number of projects are down 11 percent from fiscal

year 1989.

National institute of Standards and Technology

NIST’s current biotechnology efforts are based on a

number of perceived industrial needs including:

●

●

●

●

●

●

the development of clinical standards for testing new

biotechnology products, such as standards used to

calibrate scientific instruments and to validate and

evaluate data;

knowledge and measurement methods for understanding protein structure-function, modification,

and expression;

traceability to national standards for key measurement parameters in commercial fermenters (parameters such as cell mass and activity level, product

population, glucose and oxygen concentration, and

pH);

measurement methods, databases, and predictive models for effective and efficient separation/purification

of bioproducts and for optimizing the design of

commercial processes;

kinetics, thermochemical, and thermophysical

properties data for biochemical solutions needed for

process design and control; and,

improved analytical measurement methods, standards, and standard reference materials for use in

determining composition of biological solutions.

NIST (formerly the National Bureau of Standards-NBS)

funded $4.8 million of biotechnology-related research in

1990.

Agency for International Development (AID)

AID broadly defines biotechnology to be cellular and

molecular biology and the new techniques derived from

them for improving the genetic makeup and/or management of human and animal health care, crops, livestock

and microbes. In accounting for biotechnology research

spending, AID also used a narrower definition of biotechnology that refers only to research using genetic engineering or cell fusion.

AID is an agency of the State Department and is the

foreign assistance arm of the U.S. Government. It is not,

per se, a research agency. The Agency’s mandate is to

work with developing countries in their efforts to improve

economic development and meet basic human needs-to

overcome the problems of hunger, illiteracy, disease, and

early death. Technology development and transfer, including biotechnology, is one of the basic components in

the Agency’s strategy to achieve its goal. Given the nature

of this goal, the research supported by AID is clearly

directed to the development of specific products or

systems that will be useful in improving human health

conditions, agricultural production, and rural development in developing countries. AID supports projects in

the United States and overseas. In general, AID finances
Appendix C--Federal Funding of Biotechnology Research and Development ● 255

research that is expected to produce usable results within

3 to 5 years.

The overall research portfolio is comprised of projects

supported from several offices within AID, and reflect the

Agency’s organization. AID is divided into central and

regional bureaus and independent offices. Regional

bureaus focus on the needs of a specific geographic region

and serve as the Washington coordinating arm of the field

activities conducted by AID missions. Central bureaus

address agencywide questions, e.g., private enterprise.

The central Bureau for Science and Technology provides

technical assistance for the entire agency, and supports

and initiates worldwide programs in science and technology. This bureau also coordinates AID’s support of the 13

International Agricultural Research Centers. An additional locus of research activity was established in 1980,

with the creation of the Office of the Science Adviser. The

purpose of this office is specifically to encourage an

innovative and collaborative approach to development

research, technology transfer, and related capacity building.

The latest available funding information is for fiscal

year 1989. In fiscal year 1989, biotechnology funding

figures were $24.0 million (broad definition) and $4.7

million (narrow definition).

U.S. Environmental Protection Agency

EPA is primarily a regulatory agency, although it

maintains a significant R&D budget for research programs providing a scientific basis for its regulatory

activities. Much of the research conducted by EPA deals

with biotechnology risk assessment. The research program attempts to develop the capabilities for the regulatory programs within EPA to predict, and thus avoid,

unreasonable adverse effects on the environment. The

strategy for program development has, as a critical

component, the establishment of an in-house, scientific

staff to conduct risk assessments. Concurrently, the staff

scientists share responsibility for developing a complimentary extramural program, and fostering interactive

information exchange with outside scientists. Extramural

funding comprises approximately 75 percent of the total

resources expended for biotechnology risk assessment

research.

Certain micro-organisms fall within the regulatory

framework of EPA under the Toxic Substances Control

Act (TSCA) and the Federal Insecticide, Fungicide, and

Rodenticide Act (FIFRA). For regulatory purposes, EPA

is developing procedures to assess the potential risks and

benefits of the use of these micro-organisms. As a

cooperative adjunct, the Office of Research and Development (ORD) initiated a research program to develop

evaluative methodology and gather scientific information

that would identify and adequately describe effects on

human health or the environment that may result from the

introduction of genetically altered micro-organisms into

the environment.

With the emphasis of the program on risk assessment,

six areas of research were identified as essential:

1.

2.

3.

4.

5.

6.

The

development of methods for the detection and

enumeration of novel organisms in complex environmental samples;

determination of survival and growth in the environment;

assessment of the stability and transfer frequency of

introduced genetic material in the intra- and

extracellular environment;

development of data and predictive models for

transport from the point of application or release to

other locations;

detection of adverse environmental response (e.g.,

ecological effects, toxicity, host range change) due

to introduced organisms; and

determination of changes in host range.

program deals with both recombinant and

nonrecombinant bacteria, fungi, and viruses. In all areas,

a primary objective is to produce appropriate scientific

information for developing protocols. In fiscal year 1991,

two additional areas of research will be pursued. One area

deals with environmental studies on pollution prevention

through the application of bioregulation techniques. The

second new area of research will develop testing procedures, cell bioassays and screening methods to elucidate

the potential effects of biotechnology products on human

health. EPA’s total biotechnology funding for fiscal year

1990 was $8.3 million.

Department of Veterans Affairs

The Department of Veterans Affairs adopted the OTA

definition of biotechnology-any technique that uses

living organisms (or parts of organisms) to make or

modify products, to improve plants or *s, or to

develop micro-organisms for specific use-for the purpose of accounting. Specifically, funding data were

provided for projects involving cell fusion, gene splicing,

monoclinal antibodies, and recombinant DNA.

The VA’s expenditures in biotechnology-related research for fiscal year 1990 were $7.5 million.

National Aeronautics and Space

Administration

Space biotechnology uses biological materials, such as

cells and proteins, to examine how the reduced gravity

environment affects these materials, to examine what

unique products or factors are produced by cells in

reduced gravity, and to use this unique environment to

292-870 - 91 - 10 : QL 3
256 ● Biotechnology in a Global Economy

improve processes already done on Earth, such as protein

crystallization and separations of cells or proteins.

Biotechnology research at NASA is conducted principally within the Microgravity Science and Applications

Program. The program objectives are:

●

●

●

●

improve methods for the crystallization of proteins

in space and their complexes with other biological

materials.

utilize the microgravity environment to perform

fundamental research on basic biological processes

in cells and tissues.

investigate new separation processes and approaches

for purification of biological materials, and

improve methods for the formation of complex

biological systems such as fused cells, liposomes,

and biopolymer films and matrices.

Funded at a level of $4.5 million in fiscal year 1990, the

program includes nine investigators from universities and

three investigators from NASA research centers. The

largest and most active laboratory for doing biotechnology in space is at the University of Alabama, Birmingham, where the effort to refine techniques for growing

better protein crystals in space is centered.

Of the $4.5 million, NASA spent $2.0 million on

research on protein crystal growth and macromolecular

crystallography; $1.0 million on separation techniques,

theoretical flow analysis, cell culture, and productivity in

reduced gravity; and $1.5 million was spent between the

Marshall Space Flight Center and the Johnson Space

Center to support the above research areas or to develop

flight hardware that will support taking these experiments

to space.

Food and Drug Administration

FDA is a scientific, regulatory agency responsible for

the safety of the Nation’s foods, cosmetics, drugs,

biologics, medical devices, and radiological products. In

this role, FDA monitors and evaluates the manufacturing

industry to assure the consumer that the products produced are safe as well as effective. Evaluation of product

safety requires, in part, that FDA conduct scientific

research focused on developing technology, such as

biotechnology. Since biotechnology affects all of FDA’s

product areas, all products evolving from biotechnology

must be evaluated from the appropriate scientific perspective in order to judge their safety and efficacy. FDA’s

research efforts, including those related to biotechnology,

are targeted toward:

●

●

●

●

●

●

product testing;

scientific review of new product applications;

identification of hazards;

development of new or improved physical, biological, toxicological, or chemical tests;

determination and establishment of standards, and

product compliance with those standards; and

clarification of mechanisms underlying toxicologic

and pharmacologic effects.

Biotechnology is already having a major impact on the

development of products that FDA regulates; and the

agency’s focus is to maintain a research expertise in the

field in order to have the knowledge necessary to approve

new pharmaceuticals, new food products, and other items

regulated by FDA in a minimum of time. In fiscal year

1990, FDA spent approximately $19.4 million on biotechnology research.
Appendix D

List of Conference and Workshop Participants

Biotechnology in a Global Economy: International Conference

July 6-7,1989

Steven C. Bent, Conference Chair

Foley and Lardner

Alexandria, VA

Chummer Farina

Investment Canada

Ottawa, Ontario, Canada

Ralf Hutter

Eidgenossische Technische Hochschule

Ziirich, Switzerland

Peder Olesen Larsen

Danish Research Administration

Copenhagen, Denmark

Asalie Larsson

Ministry of Industry

Stockholm, Sweden

Barry McSweeney

BioResearch Ireland

Dublin, Ireland

Antonio Paes De Carvalho

Associagao Brasileira Das Empresas De Biotechnologia

Rio de Janeiro, Brazil

Margaret Sharp

University of Sussex

Brighton, East Sussex, United Kingdom

Barry Smith

Department of Industry, Technology, and Commerce

Canberra, Australia

Yong-Sea Teoh

Economic Development Board

Singapore

Daniel F. Thomas

Universite de Compiegne

Compiegne, France

Weichen Tien

Development Center for Biotechnology

Taipei, Taiwan

Ryuichiro Tsugawa

Ajinomoto Co., Inc.

Kawasaki, Japan

Robert R. van der Meer

HOM Consultancy B.V.

Den Haag, Holland

Yeo-Gyeong Yun

Korea Development Investment Corp.

Seoul, Korea

Holger Ziehr

Gesellschaft fur Biotechnologische Forschung

Braunschweig, Germany

NOTE: OTAappmciates and is grateful for the valuable assistance and thoughtful critiques provided by the conference participants.

The conference participants do not, however, necessarily approve, disapprove, or endorse this report. OTA assumes full

responsibility for the report and the accuracy of its contents.

–257–
258 ● Biotechnology in a Global Economy

Workshop Participants—Federal Coordination of Biotechnology Research and Regulation

May 2,1989

Nanette Newell, Workshop Chair

Synertech Group, Inc.

Research Triangle Park, NC

Beverly Berger

Office of Science and Technology Policy

Washington, DC

Harry Broadman

Senate Governmental Affairs Committee

Washington, DC

Mary Clutter

National Science Foundation

Washington, DC

John Cohrssen

Council on Environmental Quality

Washington, DC

Janet Dorigan

Office of Science and Technology Policy

Washington, DC

Robert Frederick

U.S. Environmental Protection Agency

Washington, DC

Elke Jordan

National Institutes of Health

Bethesda, MD

Ruth Kirschstein

National Institutes of Health

Bethesda MD

Rachel Levinson

National Institutes of Health

Washington, DC

Waker Lockwood

U.S. Department of State

Washington, DC

Terry Medley

U.S. Department of Agriculture

Hyattsville, MD

Kathleen Merrigan

Senate Agriculture Committee

Washington, DC

Elizabeth Milewski

U.S. Environmental Protection Agency

Washington, DC

Henry Miller

U.S. Food and Drug Administration

Rockville, MD

Mike Miller ,

Office of Management and Budget

Washington, DC

Joseph Osterman

U.S. Department of Defense

Washington, DC

Greg Simon

House Committee on Science and Technology

Washington, DC

David Smith

U.S. Department of Energy

Washington, DC

Greg Thies

Senate Agriculture Committee

Washington, DC

Alvin Young

U.S. Department of Agriculture

Washington, DC

NOTE: OTA appreciates and is gratefid for the valuable assistance and thoughtful critiques provided by the workshop participants.

The workshop participants do not, however, necessarily approve, disapprove; or endorse this report. OTA ass~es ~

responsibility for the report and the accuracy of its contents.
Appendix D-List of Conference and Workshop Participants ● 259

Workshop Participants-Financial Issues Affecting Biotechnology: At Home and Abroad

Sept. 13,1990

Peter Drake, Workshop Chair

Vector Securities

Deerfield, Illinois

Kenneth Bate

Biogen

Cambridge, MA

M. Kathy Behrens

Robertson, Coleman, & Stephens

San Francisco, CA

Fred Frank

Shearson Lehman Hutton, Inc.

New York NY

Cary Garner

Transgenic Sciences, Inc.

Worcester, MA

Grant Heidrich

Mayfield Fund

Menlo Park CA

Bruce Peacock

Centocor, Inc.

Malvern, PA

David Shaw

IDEXX

Portland, ME

NOTE: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the workshop participants.

The workshop participants do not, however, necessarily approve, disapprove, or endorse this report. OTA assumes Ml

responsibility for the report and the accuracy of its contents.
Appendix E

Acknowledgments

OTA thanks the members of the advisory panel, conference and workshop participants, contractors, and the many

individuals and organizations that supplied information for this report. In addition, OTA acknowledges the following

individuals for their comments on drafts of this report:

Toni K. Allen

Piper & Marbury

Washington, DC

Mads Bryde Andersen

University of Copenhagen

Copenhagen, Denmark

Bruce I. Andrews

cyanamid International

Wayne, NJ

Ludwig Baeumer

World Intellectual Property Organization

Geneva, Switzerland

Robert F. Barnes

American Society of Agronomy

Madison, WI

John Barton

Stanford Law School

Stanford, CA

M. Kathy Behrens

Robertson, Coleman, & Stephens

San Francisco, CA

David Beier

Genentech, Inc.

Washington, DC

Evan Berman

University of Miami

Coral Gables, FL

Waddell A. Biggart

Sughrue, Mien, Zinn, Macpeak & Seas

Washington, DC

Daniel F. Burton

Council on Competitiveness

Washington, DC

L.J. (Bees) Butler

University of California at Davis

Davis, CA

Noel J. Byrne

University of London

London, England

Mark F. Cantley

Commission of the European Communities

Brussels, Belgium

Mason C. Carter

Louisiana State University

Baton Rouge, LA

Ananda M. Chakrabarty

University of Illinois

Chicago, IL

David Cheney

Council on Competitiveness

Washington, DC

Mary Dell Chilton

Ciba-Geigy Corp.

Research Triangle Park NC

Ralph E. Christoffersen

SmithKline Beecham

King of Prussia PA

Mary Clutter

National Science Foundation

Washington, DC

Tom Copmann

Pharmaceutical Manufacturers Association

Washington, DC

James H. Davis

Crop Genetics International

Hanover, MD

Lois Davis

Sybron Chemicals, Inc.

Salem, VA

Sue Markland Day

University of Tennessee

Knoxville, TN

Dreux de Nettancourt

Commission des Communautes Europeennes

Brussels, Belgium

Kate Devine

Applied BioTreatment Association

Washington, DC

–260-
Appendix E--Acknowledgments ● 261

Mark Dibner

North Carolina Biotechnology Center

Research Triangle Park NC

R. Dietz

Laboratory of the Government Chemist

Teddington, England

Roger Ditzel

University of California

Alameda CA

Harvey Drucker

Argonne National Laboratory

Argonne, IL

George D. Duda

U.S. Department of Energy

Washington, DC

William H. Duffey

Monsanto Co.

St. Louis, MO

Donald N. Duvick

Johnston, IA

Gary B. Ellis

Institute of Medicine

Washington, DC

Don Emlay

Calgene

Davis, CA

Guilherme Emrich

Biobras-Bioquimica De Brasil

Belo Horizonte, Brazil

Bruce Eisen

Genetics Institute

Cambridge, MA

Kenneth H. Evans

U.S. Department of Agriculture

Beltsville, MD

Ron Evans

U.S. Environmental Protection Agency

Washington, DC

Chummer Farina

Investment Canada

Ottawa, Ontario

Peter Farnham

American Society for Biochemistry and Molecular

Biology

Bethesda MD

Nina Federoff

Carnegie Institute of Washington

Baltimore, MD

Walter Fehr

Iowa State University

Ames, IA

Robert A. Fildes

Danville, CA

J. Lawrence Fox

Texas Research and Technology Foundation

San Antonio, TX

Fred Frank

Shearson Lehman Hutton, Inc.

New York NY

Paul E. Freiman

Syntex Corp.

Palo Alto, CA

Nicholas Frey

Pioneer Hi-Bred International

Des Moines, IA

Akira Fujiyoshi

Eisai America, Inc.

Teaneck NJ

Jean-Christophe Galloux

Lyon, France

Cary Garner

Transgenic Sciences, Inc.

Worcester, MA

Luther Val Giddings

U.S. Department of Agriculture

Hyattsville, MD

David J. Glass

Biotechnica International, Inc.

Cambridge, MA

Rebecca J. Goldburg

Environmental Defense Fund

New York NY

Norman Gomm

Embassy of Australia

Washington, DC

James D. Grant

T Cell Sciences, Inc.

Cambridge, MA

Jones Grubbs

Solmar Corp.

Orange, CA

Leonard Guarraia

Monsanto Co.

St. Louis, MO
262 . Biotechnology in a Global Economy

Robert Z. Gussin

Johnson & Johnson

New Brunswick NJ

Susan K. Harlander

University of Minnesota

St. Paul, MN

Zsolt P. Harsanyi

Porton International, Inc.

Washington, DC

Patricia Hoben

Howard Hughes Medical Institute

Bethesda, MD

Michael Hooker

University of Maryland

Baltimore, MD

Ralf Hutter

ETH-Zentrum

Zurich, Switzerland

Roger D. Jennings

British Embassy

Washington, DC

Daniel F. Jones

U.S. Department of Agriculture

Washington, DC

Nigel Jones

Linklaters & Paines

London, England

Elke Jordan

National Institutes of Health

Bethesda, MD

Yoshiki Kaneiwa

Sumitomo pharmaceuticals Co., Ltd.

Osaka Japan

John Kirschman

FSC Associates

Lewisville, NC

Ruth L. Kirschstein

National Institute of General Medical Sciences

Bethesda, MD

Arthur Klausner

Domain Associates

Princeton, NJ

Edward L. Korwek

Hogan & Hartson

Washington, DC

Sheldon Krimsky

Tufts University

Medford, MA

Asalie Larrson

Swedish Patent and Registration Office

Stockholm, Sweden

Peder Olesen Larsen

Danish Research Administration

Copenhagen, Denmark

Robert Leach

Genencor International

South San Francisco, CA

Charles C. Leighton

Sharp & Dohme Research Laboratories

West Point, PA

William Lesser

Cornell University

Ithaca, NY

M.S. Linskens

State University of Leiden

Leiden, The Netherlands

David MacKenzie

U.S. Department of Agriculture

Washington, DC

William E. Marshall

Pioneer Hi-Bred International, Inc.

West DeMonies, IA

Don Marzullo

Alexandria, VA

Barbara Mazur

DuPont Experimental Station

Wilmington, DE

John McClelland

U.S. Department of Agriculture

Washington, DC

Barry McSweeney

BioResearch Ireland

Dublin, Ireland

Laura R. Meagher

Rutgers, The State University of New Jersey

New Brunswick NJ

Terry L. Medley

U.S. Department of Agriculture

Hyattsville, MD

Margaret Mellon

National Wildlife Federation

Washington, DC

Steven Mendell

XOMA Corp.

Berkeley, CA
Appendix E--Acknowledgments ● 263

Chris Messina

Genesis Technology Group, Inc.

Cambridge, MA

Elizabeth Milewski

U.S. Environmental Protection Agency

Washington, DC

Michael J. Montague

Monsanto Co.

St. Louis, MO

David Mowery

University of California

Berkeley, CA

John T. Neilson

University of Florida

Gainesville, FL

Nan Newell

Synertech Group, Inc.

Research Triangle Park, NC

Ashok Nimgade

Genesis Technology Group, Inc.

Cambridge, MA

Suzanne M. Nowak

The Upjohn Co.

Kalamazoo, MI

Kirsten A. Nyrop

KPMG Peat Marwick

Chicago, IL

Gilbert S. Omenn

University of Washington

Seattle, WA

Michael Ostrach

Cetus Corp.

Emeryville, CA

Antonio Paes De Carvalho

Associacao Brasileira Das Empresas De Biotechnologia

Rio de Janeiro, Brazil

Bruce Peacock

Centocor, Inc.

Malvern, PA

Walter Plosilla

Montgomery County High Technology Council, Inc.

Rockville, MD

Isaac Rabino

Empire State College

New York NY

Lisa Raines

Industrial Biotechnology Association

Washington, DC

George Rathmann

ICOS

Bothell, WA

Craig J. Regelbrugge

National Association of Plant Patent Owners

Washington, DC

Alice Sapienza

Simmons College

Boston, MA

Gabriel Schmergel

Genetics Institute

Cambridge, MA

John W. Schneller

Spencer & Frank

Washington, DC

Sidney A. Shapiro

University of North Carolina

Chapel Hill, NC

Margaret Sharp

University of Sussex

Brighton, East Sussex, England

Frances E. Sharples

Martin Marietta Energy Systems, Inc.

Oak Ridge, TN

David Shaw

IDEXX

Portland, ME

Robert Shaw

Franklin Pierce Law Center

Concord, NH

David A. Smith

U.S. Department of Energy

Washington, DC

Martha Steinbeck

U.S. Department of Agriculture

Washington, DC

Robert E. Stevenson

American Type Culture Collection

Rockville, MD

Jacob C. Stucki

Upjohn Co.

Kalamazoo, MI

Tadao Suzuki

Daiichi Pharmaceutical Co., Ltd.

Tokyo, Japan

Paul Tauber

Ithaca, NY
244 ● Biotechnology in a Global Economy

James Tavares

National Research Council

Washington, DC

Yong-Sea Teoh

Economic Development Board

Singapore

David T. Thelwall

Prospect Management Services

North Yorkshire, England

James Thompson

State University of New York

Alfred, NY

Weichen Tien

Development Center for Biotechnology

Taipei, Taiwan

Ryuichiro Tsugawa

Ajinomoto Co., Inc.

Tokyo, Japan

Robert R. van der Meer

Florigene

Aalsmeer, The Netherlands

Charles E. Van Horn

Patent and Trademark Office

Washington, DC

D. Vandergheynst

Commission of the European Communities

Brussels, Belgium

Anne K. Vidaver

University of Nebraska

Lincoln, NE

Judith Wagner

Office of Technology Assessment

Washington, DC

Bill Westermeyer

Office of Technology Assessment

Washington, DC

William J. Whelan

Miami Biotechnology Winter Symposium

Miami, FL

Thomas G. Wiggins

Serono Laboratories, Inc.

Norwell, MA

Bernard Wolnak

Bernard Wolnak & Associates

Chicago, IL

Akihiro Yoshikawa

Stanford University

Palo Alto, CA

Yeo-Gyeong Yun

Korea Development

Seoul, Korea

Investment Corp.

Holger Ziehr

Gesellschaft fr Biotechnologische Forschung mbH

Braunschweig, Germany

Raymond Zilinskas

Maryland Biotechnology Institute

Baltimore, MD

Robert G. Zimbleman

American Society of Animal Science

Bethesda MD
Appendix F

Acronyms and Glossary of Terms

List of Acronyms

ACGM —Advisory Committee on Genetic

Manipulation (U.K.)

ACRE —Advisory Committee on Release to the

Environment (U.K.)

ADAMHA —Alcohol, Drug Abuse, and Mental Health

Administration (DHHS)

—Agency for International Development,

U.S. (State Department)

AIDS —acquired immunodeficiency syndrome

ANDA —Abbreviated New Drug Application (FDA)

APHIS —Animal and Plant Health Inspection

Service (USDA)

—Australian Patent Office

ARC —AIDS-related complex

ARS —Agriculture Research Service (USDA)

ATCC —American Type Culture Collection

BAP —Biotechnology Action Program (EC)

BBS —Biological, Behavioral, and Social

Sciences Directorate (NSF)

BEP —Biomolecular Engineering Program (EC)

BIDEC —Biotechnology Development Center (Japan)

BMFT —Federal Ministry of Research and

Technology (Germany)

BRI —BioResearch Ireland

BRIDGE —Biotechnological Research for Industrial

Development and Growth in Europe (EC)

BRS —Biotechnology Research Subcommittee

(OSTP)

BSC —Biological and Critical Systems Division

(NSF, ENG)

BSCC —Biotechnology Science Coordinating

committee (OSTP)

bST —bovine somatotropin

BT —Bacillus thuringiensis

CAA —Clean Air Act (U. S.)

CAP —Common Agricultural Policy (EC)

CCL —Commodity Control List (U.S.)

Cell Bank —Human Genetic Mutant Cell Repository

—Committee for European Standardization

CERCLA —Comprehensive Environmental Response,

Compensation, and Liability Act (U.S.)

—Chemistry Division (NSF, MPS)

CISE —Computer and Information Science and

Engineering Directorate (NSF)

CoCom —Coordinating Committee on Multilateral

Export Controls

CRADA —Cooperative Research and Development

Agreement

CSRS

CTS

CUBE

CWA

DARPA

DBC

DECHEMA

DES

DGxxII

DHHS

DMR

DMS

DNA

DOC

DoD

DOE

DTI

EC

ECLAIR

EGTA

EMS

ENG

EOLAS

EPA

EPO

ERATO

ERS

EUP

EUREKA

FASB

FCCSET

FDA

FDCA

–CooperativeResearch Service (USDA)

—Chemical and Thermal Systems Division

(NSF, ENG)

—Concertation Unit for Biotechnology in

Europe (DGXXII)--EC

—Clean Water Act (U.S.)

—Defense Advanced Research Projects

Agency (DoD)

—dedicated biotechnology company

,—German Society for Chemical Equipment,

Chemical Technology and Biotechnology

—Department of Education and Science

(U.K.)

—Directorate General for Science, Research

and Development (EC)

—Department of Health and Human

Services, U.S.

—Division of Materials Research (NSF,

MPS)

—Division of Mathematical Sciences (NSF,

MPS)

—deoxyribonucleic acid

—Department of Commerce, U.S.

—Department of Defense, U.S.

—Department of Energy, U.S.

—Department of Trade and Industry (U.K.)

—European Community

—European Collaborative Linkage of

Agriculture and Industry through

Research (EC)

—Environmental and Gene Technology Act

(Denmark)

—Eosinophilia-Myalgia Syndrome

—Engineering Directorate (NSF)

—Irish Science Agency

—Environmental Protection Agency, U.S.

—European Patent Convention

—erythropoietin

—Promotion of Exploratory Research for

Advanced Technology System (STA,Japan)

—Economic Research Service (USDA)

—Experimental Use Permit (EPA)

—European Research Coordination Agency

—Financial Accounting Standards Board

—Federal Coordinating Council for Science,

Engineering and Technology

—Food and Drug Administration, U.S.

—Federal Food, Drug, and Cosmetic Act

(U.S.)

—Federal Insecticide, Fungicide, and

Rodenticide Act (U.S.)

–265–
266 ● Biotechnology in a Global Economy

FRG

FSIS

FTC

FTTA

GAAP

GAO

GATT

G-CSF

GDR

GenBank

GEO

GILSP

GMAC

GM-CSF

GNP

GRAS

HIV

IDAs

IFBC

IMCB

IOP-b

ISA

ISTI

ITC

JBA

JPO

JRDC

KIST

KOGERA

MC

MCTL

MEOR

MEsc

MOSS

—Food-Linked Agro-Industrial Research

program (EC)

—Federal Republic of Germany

—Food Safety and Inspection Service (USDA)

—Federal Trade Commission, U.S.

—Federal Technology Transfer Act of 1986

(U.S.)

—generally accepted accounting principles

(FASB)

—General Accounting Office, U.S.

—General Agreement on Tariffs and Trade

—granulocyte-colony stimulating factor

—German Democratic Republic

—Genetic Sequence Data Bank

—Geosciences Dictorate (NSF)

—Good Industrial Large-Scale Practice

(OECD)

—Genetic Manipulation Advisory

Committee (Australia)

—granulocyle macrophage colony

stimulating factor

—Gross National Product

—generally recognized as safe

—human immunodeficiency virus

—International Depositary Authorities

—International Food Biotechnology Council

—Institute of Molecular and Cell Biology

(Singapore)

—International Division (NSF, STIA)

—Innovation Oriented program for

Biotechnology (The Netherlands)

—initial public offering

—international searching authority

—Industrial Science and Technological

Innovation Divison (NSF, STIA)

—International Trade Commission

—Japan Bio-Industry Association

—Japanese Patent Office

—Japanese Research Development

Corporation

—Korea Institute of Science and Technology

(South Korea)

—Korean Genetic Research Association

(South Korea)

—Korean Patent Office (South Korea)

—Ministry of Agriculture, Forestry, and

Fisheries (Japan)

—Ministry of Construction (Japan)

—Militarily Critical Technologies List (U.S.)

—microbial enhanced oil recovery

—Ministry of Education, Science and

Culture (Japan)

—Ministry of Health and Welfare (Japan)

—Ministry of International Trade and

Industry (Japan)

—Market-Oriented Sector Selective talks

MPBC

MPs

MSG

NASA

NBS

NCBC

NDA

NEPA

NICs

NIST

NOAA

NRC

NSF

OCE

OECD

OMB

OPEC

ORD

OSHA

OSTP

OTA

PCBs

PCR

PCT

PERI

PHS

PLA

PMA

PPA

PQA

PTO

PVPA

R&D

RAC

RCRA

RDLP

rDNA

RFLP

SARA

—Midwest Plant Biotechnology Consortium

—Mathematical and Physical Sciences

Directorate (NSF)

—monosodium glutamate

—National Aeronautics and Space

Administration, U.S.

—National Bureau of Standards (DOC)

—North Carolina Biotechnology Center

—New Drug Application (FDA)

—National Environmental Protection Act

(U.S.)

—Newly Industrializing Countries

—National Institutes of Health (U. S.)

—National Institute of Standards and

Technology (DOC)

—National Oceanic and Atmospheric

Administration (DOC)

—National Research Council (U.S.)

—Northern Regional Research Laboratory

—National Science Foundation (U. S.)

—Oceanography Division (NSF, GEO)

—Organisation for Economic Co-operation

and Development

—Office of Management and Budget (U. S.)

—Organization of Petroleum Exporting

Countries

—Office of Research and Development (EPA)

—Occupational Safety and Health

Administration (U. S.)

—Office of Science and Technology Policy

(White House)

—Office of Technology Assessment (U.S.

Congress)

—polychlorinated biphenyls

—polymerase chain reaction

—Patent Cooperation Treaty

—Protein Engineering Research Institute

(Japan)

—Public Health Service, U.S. (DHHS)

—Product License Application (FDA)

—Pharmaceutical Manufacturers

Association

—Plant Patent Act (U.S.)

—Plant Quarantine Act (U.S.)

—Patent and Trademark Office (U. S.)

—Plant Variety Protection Act (U.S.)

—research and development

—Recombinant DNA Advisory Committee

(NIH)

—Resource Conservation and Recovery Act

—research and development limited

partnership

—recombinant DNA

—restriction fragment length polymorphism

—Superfund Amendments and

Reauthorization Act
Appendix F--Acronyms and Glossary of Terms .267

SBIR

SDI

SIC

SPC

SRS

STA

STC

STIA

tPA

TSCA

U.K.

U.N.

UPov

USDA

U.S.S.R.

USTR

VA

WHo

ZKBS

.

—Small Business Innovation Research

Agency

—Strategic Defense Initiative (Star Wars)

(U.S.)

—standard industrial classification system

(DOC)

—Supplementary Protection Certificate (EC)

—Science Resource Studies Division (NSF,

STIA)

—Science and Technology Agency (Japan)

—Science and Technology Centers (NSF)

—Scientific, Technological, and

International Affairs Directorate

—Tumor Necrosis Factor

—tissue plasminogen activator

—Toxic Substances Control Act of 1976

—United Kingdom

—United Nations

—International Union for the Protection of

New Varieties of Plants

—Department of Agriculture, U.S.

—Union of Soviet Socialist Republics

—United States Trade Representative

—Veteran’s Administration (U. S.)

—World Health Organization (U.N.)

—World Intellectual Property Organization

—Advisory Board for Biological Safety

(Germany)

Glossary of Terms

Acquisition: One company taking controlling interest in

another company. Investors are always looking for

companies that are likely to be acquired because those

who want to acquire such companies are often willing

to pay more than the market price for the shares they

need to complete the acquisition.

Aerobic: Living or acting only in the presence of oxygen.

Allele: Alternative form of a genetic locus (e.g., at a locus

for hair color there may be alleles for blonde or black

hair); alleles are inherited separately from each parent.

Amino acid: Any of a group of 20 molecules linked

together in various combinations to form proteins.

Each different protein is made up of a specific

sequence of these molecules with the unique sequence

coded for by DNA.

Amortization: Accounting procedure that gradually reduces the cost-value of a limited life or intangible asset

through periodic charges to income.

Anaerobic: Living or acting in the absence of oxygen.

Animal: A nonhuman living being with a capacity for

spontaneous movement and a rapid motor response to

stimulation. “ Animals can be divided into two groups,

invertebrates (animals without backbones) and vertebrates (animals with backbones).

Animal patents: The patenting of nonhuman transgenic

animal life forms. The United States is currently the

only country that has issued a patent for an animal

developed using biological techniques. The ability to

patent animals introduces a new legal concept of

animal ownership and raises a number of ethical,

economic, and practical issues.

Antibody: A protein (immunoglobulin) produced by the

immune system of humans and higher animals in

response to exposure to a specific antigen and characterized by specific reactivity with its complementary

antigen. (See also antigen and monoclinal antibodies.)

Antigen: A molecule (usually a protein or carbohydrate)

that when introduced into an organism (usually

humans or higher animals) is recognized as a foreign

substance and elicits an immune response (antibody

production, lymphokine production, or both) directed

specifically against that molecule. (See also antibody

and monoclinal antibodies.)

Applied research: Research done to gain knowledge or

understanding necessary for determiningg the means by

which a recognized and specific need may be met. In

biotechnology, it is the use of rDNA, hybridomas, and

other tools to develop specific products or processes

(e.g., rDNA use to develop vaccines for specific

antigens, such as malaria or HIV; the transfer of

herbicide or pesticide resistance to a particular plant

species; or the use of monoclinal antibodies as

purification tools in bioprocessing). (See also generic

applied research.)

Asexual reproduction: Reproduction of plants by purely

vegetative means without the function and interaction

of the two sexes. Examples of asexually produced

plants are roses, peach trees, and lilies.

Assets: Anything having commercial or exchange value

that is owned by a business, institution, or individual.

B lymphocyte: A specialized white blood cell involved

in the immune system response of vertebrates that

originates in the bone marrow and produces antibody

molecules after challenge by an antigen. In hybridoma

technology, these cells contribute antibody-producing

capability to the hybridoma. (See also T lymphocyte.)

Bacterium (p]. bacteria): Any of a group of unicellular

or noncellular micro-organisms having round, rodlike,

spiral, or filamentous bodies that are enclosed by a cell

wall or membrane and lack fully differentiated nuclei.

Bacteria may exist as free-living organisms in soil,

water, organic matter, or as parasites in the live bodies

of plants or animals.

Base pair: Two complementary nucleotides (adenosine

and thymidine or guanosine and cytidine) held together by weak bonds. Two strands of DNA are held

together in the shape of a double helix by the bonds

between base pairs.

Basic research: Research performed to gain fuller

knowledge or understanding of the fundamental as-
268 ● Biotechnology in a Global Economy

pects of phenomena and of observable facts, without

specific applications toward products or processes in

mind. In biotechnology it is the use of its component

tools (e.g., DNA and hybridomas) to study ways in

which biological systems work and to identify the

mechanisms that govern how they work.

Biologics: Vaccines, therapeutic serums, toxoids, antitoxins, and analogous biological products used to induce

immunity to infectious diseases or harmful substances

of biological origin.

Biomass: All organic matter that grows by the photosynthetic conversion of solar energy.

Bioprocess engineering: Process that uses complete

living cells or their components (e.g., enzymes,

chloroplasts) to effect desired physical or chemical

changes.

Bioreactor: A vessel used for bioprocessing.

Bioremediation: A strategy that uses biotechnological

methods to cleanup wastes. These methods involve

engineering systems that use biological processes to

degrade, detoxify, or accumulate contaminants. Bioremediation, or biotreatment, systems can use naturally

occurring or laboratory-altered microbes, or both.

Biosynthesis: Production, by synthesis or degradation,

by a chemical or living organism.

Biotechnology: Any technique that uses living organisms

or substances from those organisms to make or modify

a product, to improve plants or animals, or to develop

micro-organisms for specific uses. These techniques

include the use of novel technologies such as recombinant DNA, cell fusion, and other bioprocesses. (See

also genetic engineering and recombinant DNA.)

Black Monday: October 19, 1987, when the Dow Jones

Industrial Average plunged a record 508 points following sharp drops the previous week-reflecting investor

anxiety about inflated stock price levels, Federal

budget and trade deficits, and foreign market activity.

Book value: Net asset value of a company’s securities,

calculated as total assets minus intangible assets

(goodwill, patents, etc.), minus current liabilities,

minus any long-term liabilities and equity issues that

have prior claim. The total net asset figure, divided by

the number of bonds, shares of preferred stock, or

shares of common stock, gives the net asset value, or

book value, per bond or per share of preferred or

common stock Book value can be a guide in selecting

stocks and is an indication of the ultimate value of

securities in liquidation.

Capital gain: The difference between an asset’s purchase

price and selling price, when the difference is positive.

Carrier: See vector.

Cash burn rate: The rate at which a company uses cash,

i.e., cash flow. Biotechnology companies are generally

cash users, not generators. Cash burn rates are very

high in the years before the first profits are made.

Cell: The smallest component of life. A membrane-bound

protoplasmic body capable of carrying on all essential

life processes.

Cell culture: The in vitro growth of cells isolated from

multicellular organisms; also used to refer to any

particular individual sample. (See also tissue culture.)

Cell fusion: The joining of the membrane of two cells,

thus creating a hybrid cell that contains the nuclear

matter from the parent cells.

Chloroplasts: Cellular organelles where photosynthesis

occurs.

Chromosome: A thread-like structure contained in the

nucleus of a cell that carries the genes that convey

hereditary characteristics.

Claim: The part of a patent that points out and distinctly

specifies the subject matter that the applicant regards

as the invention. Claims represent the metes and

bounds of the property to be protected.

Clone: A group of genetically identical cells or organisms

produced asexually from a common ancestor.

Cloning: The process of producing clones. In rDNA

technology, the process of using a variety of DNA

manipulation procedures to produce multiple copies of

a single gene or segment of DNA.

Common law: Law created by judicial decisions, as

distinguished from law created by the enactments of

legislatures. In the United States, common law encompasses that portion of the common law of England

(including such acts of Parliament as were applicable)

that had been adopted and was in force (in the United

States) at the time of the American Revolution.

Common stock: Units of ownership of a public corporation. Owners typically are entitled to vote on the

selection of directors and other important matters as

well as to receive dividends on their holdings. In the

event that a corporation is liquidated, the claims of

secured and unsecured creditors and owners of bonds

and preferred stock take precedence over the claims of

those who own common stock. For the most part,

however, common stock has more potential for appreciation.

Convertible debt: Debt that is exchangeable in another

form for a prestated price. Convertible debt is appropriate for investors who want higher income than is

available from common stock Most commonly corporate securities (usually preferred shares or bonds) are

purchased and later traded for common shares.

Copyright: A patent-like instrument that protects the

expression of the idea, not the idea itself.

Cost of capital: The rate of return that a business could

earn if it chose another investment with equivalent

risk-in other words, the opportunity cost of the funds

employed as the result of an investment decision or

actual debt costs as part of the capital structure of the

company.
Appendix F--Acronyms and Glossary of Terms ● 269

Cultivar: Often used to refer to plant strains. (See strain.)

Culture deposits: See &posits.

Cytoplasm: The substance within a cell, external to the

nuclear membrane.

Deoxyribonucleic acid (DNA): 20 The molecule that is

the repository of genetic information in all organisms

(with the exception of a small number of viruses in

which the hereditary material is ribonucleic acid—

RNA). The information coded by DNA determines the

structure and function of the organism.

Deposit: Placement of micro-organisms, vectors, cells,

plant tissues, seeds, and other biological materials that

are newly isolated, novel, manmade, or not generally

available to the public on a long-term basis in

recognized patent depositories as part of the patent

application process.

Depositories: A facility that accepts, maintains, classifies, and distributes cultures of micro-organisms,

viruses, cells, and other genetic or biological material.

Since 1983, a few depositories have begun to accept

seeds and plant tissue cultures, but to date no

depository has accepted any animal. Depositories can

be public, private, for-profit, or nonprofit. Three

depositories in the United States are recognized as

International Depositary Authorities (IDAs) for patent

purposes.

Enablement: A patent requirement for adequate public

disclosure of an invention, enabling others in the

relevant field to build or use the invention.

Endotoxin: A poison produced by some gram-negative

bacteria present in the cellular membrane and released

only on cell rupture; it is composed of complex

lipopolysaccharide and is more heat-stable than protein exotoxins. (See also exotoxin).

Enzyme: A protein that acts as a catalyst, speeding the

rate at which a biochemical reaction proceeds, but not

altering its direction or nature and without itself being

destroyed.

Equity: In economics, the monetary value of property, or

of an interest in a property, in excess of claims or liens

against it. Also, ownership interest possessed by

shareholders in a corporation stock as opposed to

bonds. Shares can be common or preferred. In law, a

body of law separate from common law that is

designed to achieve a lawful result when legal

procedure is inadequate.

Equity capital: Capital proceeds arising from the sale of

company stock.

Equity investment: An investment made in a company

in exchange for a part ownership of that company.

Eukaryote: A cell or organism with membrane-bound,

structurally discrete nuclei and well-developed cell

organelles. Eukaryotes include all organisms except

viruses, bacteria, and blue-green algae. (See prokaryote.)

Exit opportunities: A term commonly used by venture

capitalists to describe opportunities for investors to

realize their investment or pullout of a deal. Examples

are the public markets, mergers, and acquisitions.

Exotoxin: A poison excreted by some gram-negative or

gram-positive organisms; it is composed of protein.

(See also endotoxin.)

Fermentation: An anaerobic process used for growing

micro-organisms for the production of various chemical or pharmaceutical compounds. Microbes are normally incubated under specific conditions in the

presence of nutrients in large tanks called fermenters.

Gamette: A mature reproductive cell (haploid set of

chromosomes) capable of fusing with a similar cell of

the opposite sex to yield a zygote; it is also called a sex

cell.

Gene: The fundamental physical and functional unit of

heredity; an ordered sequence of nucleotide base pairs

that produce a specific product or have an assigned

function.

Gene pool: The sum total of genes in a breeding

population.

Gene probe: A molecule of known structure and/or

function used to locate and identify a specific region or

nucleotide sequence of a genome. It is usually a piece

of complementary DNA that has been labeled with a

tracer substance, such as a dye or radioactive label.

Generic applied research: Research that falls between

the extremes of basic and applied research. This

research may be characterized as follows: 1) it is not

committed to open-ended expansion of knowledge as

university-like basic research usually is but is less

specific than the typical industrial product or process

development effort; 2) it has more well-defined

objectives than basic research but is long term, relative

to product or process development; and 3) it is high

risk, in the sense that the stated objectives may fail and

the resources committed may be lost for practical

purposes.

Genetic engineering: Technologies (including rDNA

methods) used to isolate genes from an organism,

manipulate them in the laboratory,, and insert them

stably in another organism. (See also recombinant

DNA and biotechnology.)

Genome: All the genetic material in the chromosomes of

a particular organism: its size is generally given as its

total number of base pairs.

Genome projects: Research and technology development efforts aimed at mapping and sequencing some

or all of the genome of human beings and other

organisms.

Genotype: The genetic constitution of an organism as

distinguished from its physical appearance (phenotype).
270 . Biotechnology in a Global Economy

Germ line: The earliest, primitive stage of development;

P e “ g to tissues or cell lineages producing gam- -

etes. (See also somatic.)

Germplasm: The total genetic variability available to a

species.

Gram negative/positive: A classification of bacteria

based on differential staining utilizing the GramWiegert procedure.

Host: A cell whose metabolism is used for growth and

reproduction of a virus, plasmid, or other form of

foreign DNA.

Hybrid: An offspring of a cross between two genetically

unlike individuals.

Hybridization: The act or process of producing hybrids.

More specifically, in cell culture, the formation of new

cells as a result of the fusion of whole cells or cell parts

of different parental origin. In rDNA, a procedure in

which single-stranded nucleic acid segments are allowed to bind to identical or nearly identical sequences, forming double-stranded heleices.

Hybridoma: A cell produced by fusing a myeloma cell

(a type of tumor cell that divides continuously in

culture and is ‘‘immortal’ and a lymphocyte (an

antibody-producing cell). The resulting cell grows in

culture and produces the specific antibody produced

by the parent lymphocyte (a monoclonal antibody).

Immune response: The reaction of an organism to

invasion by a foreign substance. Immune responses are

often complex and may involve the production of

antibodies in special cells (lymphocytes), as well as the

removal of the foreign substance by other cells.

Immunoglobulin: See antibody.

In vitro: Literally, in glass; pertaining to a biological

reaction taking place in an artificial apparatus.

In vivo: Literally, in life; pertaining to a biological

reaction taking place in a living cell or organism.

Intellectual property: The area of law encompassing

patents, trademarks, trade secrets, copyrights, and

plant variety protection.

Linkage: The proximity of two or more markers (e.g.,

genes, RFLP markers) on a chromosome; the closer

together the markers are, the lower the probability that

they will be separated during meiosis and hence the

greater the probability they will be inherited together.

Liquidity: Ability of an individual or company to convert

assets into cash or cash equivalents without significant

loss. Having a good amount of liquidity means being

able to meet maturing obligations promptly, earn trade

discounts, benefit from a good credit rating, and take

advantage of market opportunities.

Locus (pi. loci): A specific, physical position on a

chromosome occupied by a particular gene or its

alleles.

Lymphocytes: See B lymphocytes and T lymphocytes.

Lymphokines: Proteins that mediate interactions among

lymphocytes and are vital to proper immune function.

Microphage: A large specialized cell that originates in

the bone marrow and is involved in many stages of the

immune response, including consumption of foreign

particles such as viruses and lymphokine production.

Marker: A gene with a known location on a chromosome

and a clear-cut phenotype that is used as a point of

reference when mapping another locus.

Market capitalization: Value of a corporation as determined by the market price of its issued and outstanding

common stock It is calculated by multiplying the

number of outstanding shares by the current market

price of a share. Institutional investors often use

market capitalization as one investment criterion.

Analysts look at market capitalization in relation to

book or accounting value for an indication of how

investors value a company’s future prospects.

Meiosis: The process of two consecutive cell divisions in

the diploid progenitors of sex cells. Meiosis results in

four rather than two daughter cells, each with a haploid

set of chromosomes.

Merger: Combination of two or more companies, either

through a pooling of interests, where the accounts are

combined; a purchase, where the amount paid over and

above the acquired company’s book value is carried on

the books of the purchaser as goodwill; or a consolidation, where anew company is formed to acquire the net

assets of the combining companies.

Mitochondria: Structures, or organelles, within cells

where energy is produced and stored; they contain

DNA molecules, inherited from the mother only, that

replicate independently.

Monoclinal antibodies: Identical antibodies that recognize a single antigen; they are produced by a clone of

specialized cells.

Mutation: Any change in DNA sequence that results in

a new characteristic that can be inherited. (See also

polymorphism.)

National treatment: A principle which provides that,

with regard to the protection of industrial property,

nationals of any country are to enjoy the advantages of

the laws concerning industrial property granted to

nationals of the country in which protection is being

sought.

Neoplasm: A growth of tissue serving no physiological

function (e.g., a tumor).

Nitrogen fixation: A biological process (usually associated with plants) whereby certain bacteria convert

nitrogen in the air to ammonia, thus forming a nutrient

essential for growth.

Novelty: One of the criteria used in the evaluation of

patent applications . The invention or discovery must

be new and not have previously existed through the

work of others in order to be accepted on the grounds

of novelty.

Obviousness: One of the criteria used in the evaluation of

patent applications. Obviousness addresses the degree
Appendix F--Acronyms and Glossary of Terms .271

of difference between the invention being evaluated

and that which is already known or available. (See also

prior art.)

Oncogene: A gene, one or more forms of which is

associated with cancer. Many oncogenes are involved,

directly or indirectly, in controlling the rate of cell

growth.

Operating profit (or loss): The difference between the

revenues of a business and the related costs and

expenses, excluding income derived from sources

other than its regular activities and before income

deductions.

Organelle: A structure in the cytoplasm of a cell that is

specialized in its ultrastructure and biochemical composition to serve a particular function (e.g., mitochondria, chloroplast).

Pathogenic: Able to cause disease; often utilized to

express inactivation or lethality.

Phenotype: The observable characteristics of an organism produced by the interaction of the genotype and

the environment

Plant patents: Plant patents protect asexually reproduced

plant varieties, including cultivated sports, mutants,

hybrids, and newly found seedlings. They cannot be

obtained for tubers or wild varieties found in nature

that are not asexually reproduced.

Plant variety protection: Patent-like protection for

certain sexually produced plants.

Plasmid: An extrachromosomal, circular piece of DNA

found in the cytoplasm and capable of replicating and

segregating independently of the host chromosome.

Polymerase chain reaction (PCR): An in vitro process,

through which repeated cycling of the reaction reproduces a specific region of DNA, yielding millions of

copies from the original.

Polymorphism: Difference in DNA sequence among

individuals. Genetic variation in more than 1 percent

of a population would be considered useful for genetic

linkage analysis. (See also mutation.)

Preferred stock: A class of stock that pays dividends at

a specific rate and that has preference over common

stock in the payment of dividends and the liquidation

of assets. Preferred stock does not ordinarily carry

voting rights.

Prior art: That which is already known or available, part

of the criteria of obviousness used in evaluating patent

applications. (See also obviousness.)

Prokaryote: An organism (e.g., bacteria, virus, and

blue-green algae) whose DNA is not enclosed within

a nuclear membrane. (See eukaryote.)

Protein: A polypeptide consisting of amino acids whose

structure is determined by the sequence of nucleotides

in DNA. Proteins, in their biologically active states

function as catalysts in metabolism and as structural

elements of cells and tissues.

Recombinant DNA (rDNA): A broad range of techniques involving the manipulation of the genetic

material in organisms. The term is often used synonymously with genetic engineering. It is also used to

described a DNA molecule constructed by genetic

engineering techniques composed of DNA from different individuals on species. (See also biotechnology and

genetic engineering.

Restriction enzymes: Certain bacterial enzymes that

recognize short sequences of DNA and cut the DNA

where these sites occur. Restriction enzymes can be

used to isolate a gene that has been identified in the

heredity material of an organism.

Restriction Fragment Length Polymorphisms (RFLPs):

Variation in DNA fragment sizes cut by restriction

enzymes; polymorphic sequences that are responsible

for RFLPs are used as markers on genetic linkage

maps.

Retrovirus: A family of viruses whose genetic material

is RNA and is further characterized by the presence of

reverse transcriptase in the viron; it is also called tumor

virus.

Reverse transcriptase: An enzyme capable of directing

the production of a single strand DNA copy from an

RNA template.

Ribonucleic acid (RNA): A molecule existing in three

forms-messenger RNA, transfer RNA, and ribosomal RNA-responsible for translating the genetic

information encoded by an organism (i.e., DNA) into

a protein product; the heredity material of some

viruses.

Right of priority: A right that enables any resident or

national regardless of nationality to first file a patent

application in a country and thereafter file the same

patent application in another country, thus ensuring

that the subsequently filed applications enjoy the right

of priority established by the first filing date.

Royalty: Payment to the holder for the right to use

property such as a patent, copyrighted material, or

natural resources. Royalties are set in advance as a

percentage of income arising from the commercialization of the owner’s rights or property.

Somatic: Pertaining to all diploid cells of an organism

except the germ line, i.e., sex cells-sperm and eggs

(See also germ.)

Species: Reproductive communities and populations that

are distinguished by their collective manifestation of

ranges of variation with respect to many different

characteristic and qualities.

Specifications: In law, relating to patents, machinery, and

building contracts, a particular or detailed statement of

the various elements involved.

Statute: A law enacted and established by the legislative

branch of a government.
272 ● Biotechnology in a Global Economy

Strain: A pure culture of organisms within a species,

characterized by one or more particular physical or

genetic properties.

Strategic alliances: Associations between separate business entities that fall short of a formal merger but that

unite certain agreed on resources of each entity for a

limited purpose. Examples include equity purchase,

licensing and marketing agreements, research contracts, and joint ventures.

T lymphocyte: Specialized white blood cells involved in

the immune response of vertebrates that originate in

the bone marrow, mature in the thymus gland, and

produce some lymphokines. Subclasses of T lymphocytes are important to antibody production and the

enhancement or suppression of an immune response.

(See also B lymphocyte.)

Technology transfer: The process of converting scientific knowledge into useful products. This most often

refers to the flow of information between public and

private sectors or between countries.

Tissue culture: In vitro growth in a nutrient medium of

cells isolated from tissue. (See also cell culture.)

Tissue plasminogen activator (tPA): A genetically

engineered protein drug that helps to dissolve blood

clots.

Tort law: Derived from legal principles governing

wrongful acts, except those involving a breach of

contract, committed against a person or property for

which civil action would be valid.

Toxin: See endotoxin and exotoxin.

Transgenic animals: Animals whose hereditary DNA

has been augmented by the addition of DNA from a

source other than parental germplasm, usually from

another animal or human, and done in a laboratory

using rDNA techniques.

Transgenic plants: Plants whose hereditary DNA has

been augmented by the addition of DNA from a source

other than parental germplasm, usually from a related

species, using rDNA techniques.

Utility patents: These are patents issued to inventors of

any new and useful process, machine, manufacture, or

composition or any new and useful improvement

thereof.

Vector: A DNA molecule used to introduce foreign DNA

into host cells.

Venture capital: An important source of financing for

start-up companies that entails some investment risk

but offers the potential for above-average future

profits.

Virus: Any of a large group of organisms containing

genetic material but unable to reproduce outside a host

cell.
Index
Index

Abbreviated New Drug Application (ANDA), 93

Acquisitions, 54-57

defined, 8

foreign participation in, 54-56

of independent seed companies, 108

premium paid for stock during, 57

See also Consolidation

Advisory Board for Biological Safety (ZBKS)-Germany, 191

Advisory Committee on Genetic Modification (ACGM)--

United Kingdom, 193

Advisory Committee on Release to the Environment (ACRE)-

United Kingdom, 193

Agriculture

biopesticides for, 102-103, 105-106

biotechnology-related R&D directed toward, 10,11,103-105,

108, 109-110

biotechnology’s commercial applications to, 8-10, 11, 100-

107

cell culture and, 104-105

environmental applications of biotechnology to, 8-10, 11,

103-105, 108, 109-110, 129-131

public opinion on biotechnology applied to, 10, 112-113

Agricultural Research Service (ARS)--USDA, 104

Agrigenetics, 109

Agroceres SA, 108,109

AIDS (acquired immunodeficiency syndrome), biotechnology

research to combat, 76-77,78, 79

Alcohol, Drug Abuse, and Mental Health Administration

(ADAMHA), conflict of interest regulations of, 24

American Bionetics, Inc., 124

American Cyanamid Co.

consolidations by, 57

diversification by, 123

product marketing arrangements by, 8

Amgen, 88,92

cost of biotechnology products of, 84

financing strategies, 6,48,49,50,56,59,61,63

product marketing arrangements by, 80

Animal and Plant Health Inspection Service (APHIS), deliberate

release regulation by, 179, 180

Applied Biosystems, 156

Applied Biotechnology, 124

Ares-Serono Group, 57

Argentina

food exports by, 112

intellectual property protection in, 92

seed company subsidiaries in, 108

Asgrow Seed Co.

acquisition of, 109

patent infringements and, 110

Asia

consolidations involving companies in, 55

public opinion of agricultural biotechnology, 10, 112-113

strategic alliances involving companies in, 58,59,60,61

See also individual countries in

Australia

pharmaceutical cost-containment in, 84

plant patenting in, 110

research policies and regulation in, 15, 151

seed company subsidiaries in, 108

Austria, 108

Bacillus thuringiensis (BT), 113

gene transferred to plant, 105, 106-107

use in biopesticides of, 102-103

Bager, 89

Bangu Pharmaceutical, 85

Belgium

biotechnology infrastructure in, 21

centralized waste treatment facilities in, 135

patent term extension proposal in, 93

Biogen, financing strategies used by, 47

Bio-oriented Technology Research Advancement Institution,

156-157

Biopesticides

agricultural use of, 105-106

approval of Mycogen’s, 103

market for, 102-103

BioProbe International, Inc., 124

Bioremediation

advantages of, 136-137

case study, 131-140

constraints on use of, 12,40

environmental protection laws effect on use of, 40

Biotechnica International Diversification of, 109

Biotechnology

in chemical industry, 120-122

commercial activity overview, 3-12, 29-32,39-41

defining, 3,5,29,33

environmental applications of, 129-140

intellectual property rights in, 208-210

in pharmaceutical industry, 73-94

policy overview concerning industrial commercialization of,

13-19,31-32, 147

products under development, 79

as a singular coherent entity, 3,31,39

Biotechnology Development Center (BIDEC), 157

Biotechnology Directorate (U.K.), 160

Biotechnology General Corp, 124

Biotechnology Joint Research Association, 153

Biotechnology Research for Industrial Development and

Growth in Europe (BRIDGE) program, 104

Biotechnology Research Subcommittee (BRS)-OSTP, 23,174

Biotechnology Science Coordinating Committee (BSCC)-

OSTP, 22-23

interagency agreements concerning regulatory policy and,

173, 176

See also Biotechnology Research Subcommittee

“Black Monday”

effect on biotechnology financing of, 6-7,46,47, 51,54

See also Financing; Wall Street

Boehringer-Mannheim Corp., 60,89

Bovine somatotropin (bST), 102, 190-191, 194, 1%

farmer resistance to, 40

See also Agriculture; Pharmaceuticals

Boyer, Herbert, 56

–275–
276 ● Biotechnology in a Global Economy

Brazil

food exports by, 112

intellectual property protection for pharmaceuticals in, 92-93

pharmaceutical cost-containment policy in, 84

regulation of biotechnology in, 15

seed company subsidiaries in, 108

Bristol-Myers Squibb Corp., 88

Budapest Treaty on the International Recognition of the Deposit

of Microorganisms for the Purposes of Patent Procedure,

207

Burroughs Wellcome Co., 60,82

Bush, George (President), 177

Calgene, Inc.

diversification of, 109

product approval requested by, 183

California

DBCs in, 89

deliberate release protests in, 188

California Biotechnology, Inc., 89

Canada, 51

animal vaccine development and approval in, 101

biohydrometallurgy program in, 131

intellectual property protection in, 92-93

pharmaceutical cost-containment policy in, 84

seed company subsidiaries in, 108

Canadian Center for Mineral and Energy Technology, 131

Cancer, biotechnology research on, 76

Capital

variations in cost of (international), 6,50,51-53

See also Costs; Economics; Financing

Cardo, 109

Cargill, 109

Celanese Research Co., 123

Cellular Products, 124

Center for Biologics Evaluation and Research (FDA), 75,90

Center for Drug Evaluation and Research (FDA), 75

Centocor

FDA product regulation and, 79

marketing alliance by, 84,85

Cetus Corp.

FDA regulatory decision effect on, 79,90

marketing alliance by, 89

merger with Chiron, 6, 54

Proleukin export by, 91

chemical industry, 119-124

biotechnology’s commercial applications in, 10-12, 120-122

restructuring of, 10-11,40, 122-124

See also Industry

Chile, 108

Chiron Corp.

financing strategies and market value of, 48-49

merger with Cetus by, 6, 54

Chugai Pharmaceutical, Inc., 7,54,57,89

Ciba-Geigy Corp., 58,59,60,82,89,108

Cistron, 124

Clause Co., acquisition of, 109

Clean Water Act (CWA), 138

Commercialization

activity concerning biotechnological, 3-12,29-32,39-41

barriers to bioremediation, 137-139

congressional options to promote biotechnology, 22

factors affecting biotechnology, 31,32

national (worldwide) policies effecting biotechnological,

13-19,31-32, 147, 151,

152, 161-166,169

U.S. policy effects on industrial biotechnological, 151, 152,

161-166,169

U.S. policy concerning technology transfer and

biotechnological, 166-167,169

Competitiveness, 19-21,3941

European industrial biotechnology commercialization’s, 21

Japanese industrial biotechnology commercialization’s, 19-

21

prerequisites for biotechnology, 14

U.S. industrial biotechnology commercialization’s, 19

See also Commercialization

Comprehensive Environmental Response, Compensation,

Liability Act (CERCLA), 138

Congress, U.S.

global biotechnology competitiveness interest by, 32

Orphan Drug Act amendment attempt by, 92

policy options for, 21-25

USDA basic research finding increase by, 111

Consolidation

of seed companies, 108

trends in biotechnology, 6-7,53-57

See also Acquisitions

Containment

EC regulations covering, 192

of genetically altered micro-organisms, 177-178

NIH Guidelines for, 173,174, 186

Coordinated Framework for Regulation of Biotechnology, 180

OSHA Guidelines in, 178, 179

product approval under, 15-16

regulation under, 22, 184, 186

Corporate relationships. See Acquisitions; Consolidation;

Strategic alliances

costs

bioremediation, 136

pollution cleanup, 131, 139-140

of receiving a U.S. patent, 215-214

See also Economics; Financing

Crick, Francis H.C., 31

Crop Genetics International, Inc. (CGI), 103

Cytel Co., 89

Cytogen Corp., 124

Dedicated biotechnology companies (DBCs)

acquisition of U.S. pharmaceutical, 87,88

agreements with established pharmaceutical companies for

marketing by, 84-85

capital acquisition methods of U.S., 3-6,7,39,50-51,53

consolidation trends of, 6-7,53-57, 87, 88

patent piracy problems of, 19, 110,223

strategic alliances’ use by U.S., 88-89

tax law changes to aid, 24-25

venture capital available for, 3-6,7,39, 50

DeKalb Seed Co., 108

Denmark

biotechnology regulation development in, 15,40, 189

centralized waste treatment facilities in, 135

pharmaceutical cost-containment policy in, 84

public opinion of agricultural biotechnology, 10
Index ● 277

research policies in, 151

Department of Agriculture, U.S. (USDA)

plant genome mapping program, 104

product approval by, 15

regulation of plants and animals for food by, 172, 180

Department of Commerce, Us. (DOC), 119

Department of Energy, U.S. (DOE)

genome project funding by, 104

MEOR incentives of, 131

Department of Health and Human Services, U.S. (DHHS)

biotechnology regulation by (proposed), 24

FDA review by, 90

See also commission’s and programs under jurisdiction of

d’Estaing, Giscard, 159

Developed countries. See Industrialized nations

Developing countries

difficulty in meeting regulatory requirements by, 186

field-tests in, 112

food exports by, 112

See also Newly Industrializing Countries; individual

countries

Development. See Commercialization

Diamond v. Chakrabarty, importance and effects of, 16,209,

214,223

Dow chemical Co., diversification by, 123

Dow Jones Industrial Average. See Black Monday; Wall Street

DNA Plant Technology Corp.

agricultural cell culture R&D by, 105

diversification by, 123

Drugs. See Pharmaceuticals

Drug Export Amendments Act of 1986,91

Drug Price Competition and Patent Term Restoration Act of

1984,93

du Pent& Nemours Co., E.I.

agricultural cell culture R&D by, 105

diversification by, 123, 124

Eastman Kodak Co., 59

Economics

of bioremediation’s commercialization, 139

of biotechnology companies (worldwide), 6,45-53

of consolidation involving biotechnology companies, 53-64

of resource use, 12

See also Costs; Financing

Elf Aquitaine Corp. diversification by, 124

Eli Lilly & Co.

acquisitions by, 88

licensing deals by, 80

Enimont Corp., diversification by, 124

Environment

applications of biotechnology to, 12,129-140

planned introductions of genetically altered micro-organisms

into, 21, 177-182

Environment and Gene Technology Act (EGTA)--Denmark,

189

Environmental Protection Agency (EPA)

bioremediation use by, 139

Exxon Valdez cleanup involvement by, 134

micro-organism regulation by, 15-16, 17,23, 172, 181

pesticide regulation by, 102-103, 172, 181

regulation of field testing by, 40

waste disposal R&D conducted by, 137

Ernst & Young, biotechnology survey by, 45,50,82,88

-Erythropoietin (EPO)

orphan drug status and profitability of, 92

price of, 84

See also Pharmaceuticals

Europe

animal vaccine development and approval in, 101

biotechnology programs in, 160-161, 162,163-164

biotechnology regulation and promotion policies in, 14, 15,

21,40,112,151,.152,191-194

chemical industry in, 10, 123-124

food exports from, 112

intellectual property protection for plants in, 110

national technology policies in, 14, 151, 152, 158-160

pharmaceutical market competition by, 21,85

pollution cleanup costs in Western, 131

public opinion of biotechnology in, 10,40, 112

seed trade by, 108

strategiC alliance Use in, 58,59,60,61, 89

See also European Community; individual countries in

European Community (EC)

biotechnology programs in, 160-161, 162,163-164

biotechnology promotion in, 14, 152

biotechnology regulation in, 15,21,112$191-194

bST moratoriums in, 102

contaminatiton inventories in countries of, 135-136

financial-related information on countries in, 50,52-53

food exports by, 112

gene mapping work by, 104

market for drugs in, 85

pharmaceutical patent term extension legislation in, 93

See also Europe; member countries of

European Patent Convention (EPC), requirements of, and rights

protected under, 208

Experimental Use Permit (EUP), 179,180

Exxon Valdez

bioremediation project, 134

public attention on bioremediation after oil spill in, 129

Federal Coordinating Council on Science, Engineering, and

Technology (FCCSET), 176

Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA),

deliberate release regulation under, 16, 179, 180

Federal Meat Inspection Act, U.S., 184

Federal Register, 23

Federal Trade Commission (FTC), 56

Field tests

countries performing agricultural biotechnology-related, 10,

11

EPA regulation of U. S., 15-16, 17,40

See also Agriculture; Regulation

Financial Accounting Standards Board (FASB), 25

Financing

biotechnology R&D strategies, 45-53

biotechnological environmental cleanup research efforts, 137,

139, 140

congressional options for biotechnology research, 21-22

German biotechnology, 160

Japanese biotechnology research and development, 154,155,

157, 158

overview of biotechnology, 3-7

supporting microbiological mining, 131
278 . Biotechnology in a Global Economy

Swiss biotechnology, 160

U.S. Government R&D$ 3,19,20,21-22,111,131, 137,140

See also Costs; Economics

Food

biotechnological applications to processing, 107

uses of transgenic animals, 184-186

uses of transgenic plants, 182, 183

basis of biotechnology-based product regulation authority by,

15, 16,22,76,

107, 111, 176-177

biotechnology-based drug approval process of, 7,56,75-78,

79

bST approved by, 102

L-tryptophan recall by, 120

orphan drug approval by, 92

regulation effects on financial status of DBCs, 52,75-76,78,

79

regulation of plants and animals as food, 173, 176-177, 178,

182

regulatory delay’s effect on biotechnology-based industry,

75-76,78,79,90-91

review by HHS,90

Food, Drug, and Cosmetic Act (FDCA), FDA regulation of

biotechnology products under, 15,16,22,76, 107, 111,

176-177, 183

Food Safety and Inspection Service (FSIS), 185, 186

France

biotechnology infrastructure in, 21

biotechnology policy in, 159

biotechnology regulations in, 15, 193

biotechnology R&D in, 83, 135

patent term extension proposal in, 93

pharmaceutical cost-containment policy in, 84

seed company subsidiaries based in, 108

Fresh World Venture, 105, 123

Fuji Film, 156

Funai Pharmaceuticals Co., Ltd., 123

Funding. See Financing

Funk Seed Corp., acquisition of, 108

Garst Co., consolidation activity by, 108

Gen-Probe, Inc., acquisition of, 54,57,89

Genentech

biotechnology product pricing by, 84

FDA regulatory decision’s effect on, 90

financing strategies and market value of, 47,4849,50,53,80

merger with Hoffmann-La Roche by, 6, 54, 56, 57, 82, 89

Ministry of Health and Welfare (Japan) grant to, 156

product marketing arrangements by, 80

General Agreement on Tariffs and Trade (GATT, 217-218,224

patent law harmonization effort using, 23-24

pharmaceutical industry protection under, 91

See also Regulation

Generally recognized as safe (GRAS), 177,182

Genetic Systems, 54,57,88

Genetic Technology Law (Germany), 190

Genetics Institute, Inc., merger by, 48,89,92

Genex, Inc., merger by, 47

Genofit SA, 124

Genzyme Corp., proposed takeover by, 57

Germany

biotechnology infrastructure in, 21

biotechnology policy and regulation in, 15,40, 160,189

biotechnology R&D funding in, 83, 135

centralized waste treatment facilities in, 135

Green Party’s strength in, 186-187

pharmaceutical market competition by, 83,85

public opinion of biotechnology commercialization in, 10,40,

186, 187

seed company subsidiaries in, 108

Gilead Sciences, 89

Gist-Brocades, Inc., industrial enzyme production by, 121

Glaxo, InC.

multilateral nature of, 81, 82

R&D investments by, 93

strategic alliance use by, 89

Goodwill, amortizing, 25,67

Goodwill Industrial Large-Scale Practice (GILSP), 180, 195

Government, U.S. See United States

Granulocyte colony stimulating factors. See Pharmaceuticals

Greece, pharmaceutical cost-containment in, 84

Green parties, makeup, policies, and opinions of biotechnology

by, 186-187

Gross national product (GNP)

chemical industry and, 122

See also Wall Street

Growth hromones. See Human growth hormone

Guidelines

NIH laboratory safety, 174, 195.

NIH standards as basis for industrializednations’, 173, 174,

175

technology transfer, 165

See also Regulation

Hansens Co., industrial enzyme production by, 121

Harmonization. See Intellectual property; Patents

Hawaii, deliberate release regulation in, 188

History

of chemical industry growth rate compared to GNP, 122

of seed companies, 108

of U.S. commercial biotechnology, 45-48

Hitachi Corp., second-generation genome sequencer, 156

Hixson, Harry, 61

Hoechst Chemical Corp., diversification by, 123

Hoffmann-La Roche, Inc.

licensing deals by, 80

mergers by, 6,7,48,56,57,82, 89

multilateral nature of, 82

Holden’s Foundation Corn Seeds, 108

Human growth hormone

orphan drug status and profitability of, 92

price of, 84

See also Pharmaceuticals

Human immunodeficiency virus (HIV). See Acquired

immunodeficiency syndrome

Hybrids

developing new, 107, 110

RFLP techniques for producing, 103, 104

seed, 109, 110

See also Agriculture; Plant breeders’ rights

Hybritech, InC., 88
Index ● 279

ICI Chemical Corp.

diversification by, 123-124

seed company subsidiaries of, 108

Illinois, deliberate release regulation in, 188

Immunex Corp., product marketing arrangements by, 80

Immunomedics, Inc., 89

Incentives

bioremediation product development, 140

biotechnological R&D, 64-66,91-93

intellectual property protection, 91-93

investment and cooperation in biotechnology, 64-66,153-154

microbial enhanced oil recovery use, 131

India

intellectual property protection in, 92

seed company subsidiaries in, 108

Industrialized nations

agricultural applications of biotechnology in, 9-10

biotechnology regulation in, 14-15, 188-195

financial health of biotechnology companies in, 50-64

food exports by, 112

See also Newly Industrializing Countries; individual nations

Industry

biotechnology as a singular, coherent, 3,31,39

case study of seed, 107-112

congressional options for improving university relationships

with, 24

consolidation within, 53-64

facility location and regulation of European, 16

financing and market values of “biotechnology”, 46-53

international biotreatment, 135-136

Japanese weakness in biotechnology-related sectors of, 20

policy concerning biotechnology’s commercialization by,

13-19,31-32, 147

R&D focus of “biotechnology”, 4546

U.S. biotreatment, 132-135

See also Commercialization; individual industries

In re Durden, 220-221

Institute for Immunology (Japan), DBC investment by, 89

Institute of Life Sciences, 153

Institute of Molecular and Cell Biology, 154

Integrated Genetics, Inc., 57

Intellectual property protection, 203-224

agricultural-related, 110

biotechnology commercialization and, 16-19,208-210

congressional options concerning; 23-24

international agreements concerning, 205-208

See also individual forms of

Interleukin II

export of, 91

FDA regulatory decision on, 90

See also Pharmaceuticals

International agreements

on intellecual property, 205-208

See also individual conventions, treaties

International Trade Commission (ITC), 24, 219

International Union for the Protection of Plant Varieties

(UPOV),requirements of,and rights provided under, 110,

207-208

Investigational New Drug (IND) application, 76

Italy

biotechnology regulation in, 14-15

pharmaceutical cost-containment in, 84

pharmaceutical R&D funding by, 83

seed company subsidiaries in, 108

Japan, 151

biotechnology promotion and commercialization in, 13-14,

19-21, 152

biotechnology regulation development in, 15,40,91, 192

chemical industry in, 120-121, 123, 124

consolidation activity in, 88

economic growth policies of, 84, 152, 153, 155, 158

economics of biotechnology companies in, 50,53

government-industry relations in, 157-158

market penetration in, 85, 86, 91

pharmaceutical industry in, 83,84,85,86,88

pharmaceutical patent-term extension legislation in, 93

plant patenting in, 110

public opinion of biotechnology in, 10, 112-113

research in, 83, 155

seed company subsidiaries in, 108

strategic alliances use in, 89

waste treatment in, 135

Japan Association of Industrial Fermentation, 157

Japan Development Bank, 20, 154

Japan Health Sciences Foundation, 156-157

Japan Research Development Corp. (JRDC), 156

Johnson & Johnson, 59,82,88

Key Technology Center, 157

Keyworth, George, 164

Korea, South, biotechnology policy& research in, 13-14, 154

Korea Genetic Research Association (KOGERA), 154

Latin America

seed trade in, 108

See also individual countries in

Legislation

bioremediation-relevant, U.S., 138

biotechnology-related, 15,214

patent term extension, 93

process patent protection (proposed), 24

See also individual statutes

Limagrain, 108

Litigation

biotechnology-related, 219,220,223

financial drain from patent-related, 19

See also individual cases

Lubrizol Enterprises

diversification by, 124

seed company acquisition by, 109

Market-Oriented Sector-Selective (MOSS) talks, 86

Massachusetts General Hospital, 123

Max Planck Institute (Germany), 191

Medicaid, 84

Medicare, 83,84,92

Medicare Pharmaceutical and Prudent Purchasing Act, 84

Merck & Co., Inc.

licensing deals by, 80,89

multinational nature of, 82

Merck Frosst, 93

Mergers. See consolidation

Merrill (U.S.), 123
280 ● Biotechnology in a Global Economy

Mexico, 108

Microbial Enhanced Oil Recovery (MEOR), state of and

challenges to, 131, 132

Midwest Plant Biotechnology Consortium (MPBC), 166

Mining, microbiological, 131

Ministry of Agriculture, Forestry, and Fisheries (MAFF)-

Japan

biotechnology support by, 156-157

field testing regulated by, 111

gene mapping work by, 104

Ministry of Education, Science and Culture (MESC)--Japan,

biotechnology support by, 153, 154-155

Ministry of Health and Welfare (MHW)--Japan, biotechnology

SUpport by, 86, 156

Ministry of International Trade and Industry (MITI)--Japan

biotechnology initiatives of, 19-20, 153-154

biotechnology’s targeting by, 11-12, 19, 120-121, 154

industry-government cooperation and, 157-158

Next Generation projects of, 153

Minnesota, bST moratorium in, 102

Missouri, deliberate release protests in, 188

Mitsubishi chemical Industries, agricultural cell culture R&D

by, 105

Mitsubishi Kasei Corp., 153

Mitsubishi Knowledge Industry, 156

Mitsui Toatsu Chemical Co., agricultural cell culture R&D by,

105

Molecular Biosystems, Inc., 124

Molecular Genetics

diversification by, 124

original genetically engineered vaccine introduced by, 101

Monosodium glutimate (MSG), 120

Monsanto Agricultural Co.

diversification by, 123-124

relationship with Oxford University by, 160

Morita, Katsura, 157

Morocco, 108

Mycogen

biopesticide development by, 103

financing strategies used by, 48

Nakasone (Prime Minister Japan), 155

National Biotechnology Policy Board, 177

National Institute of Agrobiological Resources, 157

National Institute of Genetics (Japan), 154

National Institutes of Health (NIH)

basic research funding by, 21-22, 164-165

bST safety confirmed by, 102

conflict of interest regulations of, 24

genome project funding by, 104

laboratory-safety guidelines of 173, 174, 195

recombinant DNA—Advisory Committee (RAC), 173

National Program in Biotechnology-Singapore, 154

National Research Initiative, 111

National Science Foundation (NSF), genome project funding by,

104

National Technical Information Service (NTIS), 32

Netherlands, The, 15

pharmaceutical cost-containment in, 84

seed company subsidiaries in, 108

waste treatment research by, 135

New Developments in Biotechnology: Patenting Life, 23

New Developments in Biotechnology: U.S. Investment in

Biotechnology, 24,74

New Drug Application (NDA )--PTO, 76,93

Newly Industrializing Countries (NICs)

biotechnology promotion and research polices of, 151-152

biotechnology regulation in, 14, 188-189

contaminated areas in, 135-136

economic growth policies of, 152, 154

intellectual property protection in, 92

See also individual countries

Nippon Telephone & Telegraph, 157

Northrup King, 109

Nova Pharmaceutical Corp., 89

Novo-Nordisk, industrial enzyme production by, 121

Office of Management and Budget (OMB), role in BSCC

dissension of, 176

Office of Scientific and Technical Policy (OSTP)

BSCC and BRS formation by, 23, 176, 181

regulatory policy promulgated by, 15

Office of Technology Assessment (OTA), 5,23,29,31

biotechnology funding conclusions in reports by, 151, 152

international competitiveness measurement by, 19,20

planned introduction report by, 131

workshops and conferences conducted by, 32-33

Okazaki National Research Institute (Japan), 154-155

Omnibus Budget Reconciliation Act of 1990,25,66

Organization of Economic Co-operation and Development

(OECD)

basis of differences in biotechnology regulation in, 194

EC biotechnology directives based on recommendations by,

191-195

waste treatment R&D in countries of, 135-136

See also individual member nations of

Organization of Petroleum Exporting Countries (OPEC), 122

Orphan Drug Act

biotechnology products and, 91,92

cost-containment and, 83, 84, 85

intentions of, 40

tax credits and, 66-67

See also Pharmaceuticals

Ortho Biotech, 88

FDA product regulation and, 79

licensing deals by, 80

Oxford University, 160

Pacific Rim countries. See Newly Industrializing Countries

Paris Convention for the Protection of Industrial Property, 206

Patents

biotechnology protection under, 17-18,203-204,205,210-

223

farmers exemptions to, 222-223

harmonization of procedural requirements worldwide for,

18-19,23-24,203-204

legislation affecting, 18-19,23-24,93

piracy of U.S., 19,213-214

plant protection using utility, 205

requirements for, objectives of, and protection offered by,

203-204

See also Intellectual property protection

Patent and Trademark Office, U.S. (FTO)

application backlog effects, 16-17,212-124
Index ● 281

See also Intellectual property protection; Patents

Patent Cooperation Treaty (PCT), requirements of and rights

provided by, 206-207

Personnel

brain-drain of experienced English biotechnology, 160

shortage of trained bioremediation, 139

Pesticides

nonchemical, nonrecombinant, 102-103

recombinant, 105-106

regulation of genetically engineered, 173, 179, 181

Pfizer, Inc., 107

Pharmaceutical industry, 7-16

acquisition activity in, 7-8,9, 10,54-59,85-87

biotechnology used in, 73-94

characteristics, 7,10, 81-82

Japan’s, 85,86, 156

multinational nature of, 81-82

regulation of, 89-91

strategic alliance use by, 88-89

Pharmaceutical Manufacturer’s Association (PMA),

biotechnology-derived drug survey by, 75-78,79

Pharmaceuticals

approval of biotechnology-based, 75,76-78

cost-containment and, 83, 84, 85

marketing, 81,85,86

orphan drug status and price of, 84, 85

patent term extension for, 93

planned use of recombinant, 178-179

price manipulation in Japan of, 156, 158

See also Pharmaceutical industry

Philippines, 108

Pioneer Hi-Bred International, 108, 109

Planned introductions

criteria for risk assessment of, 179

of genetically altered micro-organisms, 178-182, 183

of plant pest derivatives, 179

of transgenic animals, 182

of transgenic plants, 182-183

of vaccines, 178-179

regulation of, 189

See also Regulation

Plant breeders’ rights, 110,204-205

Plant Genetic Systems

hybrid development by, 110

transfer of insecticide resistant gene by, 106

Plant genome projects, 103,104

Plant Patent Act of 1930, requirements for and protection under,

110,204

Plant Pest Act (PPA), deliberate release regulation under, 179,

180

Plant Quarantine Act (PQA), deliberate release regulation under,

179, 180

Plant Variety Protection Act of 1970 (PVPA)

intentions of, 40, 110

requirements of and protection under, 31,204-205

Policy

categories of, and examples of national biotechnology R&D,

152-166

national regulatory, 186-195

options concerning industrial commercialization of

biotechnology for Congress, 21-25,41

overview of biotechnological industrial commercialization,

13-19,31-32, 147

overview of biotechnological R&D, 13-14, 147

U.S. national, in a global environment, 166-167

Pollution

control using biotechnological techniques, 129, 134

See also Toxic waste

Poultry Products Inspection Act, 184

Praxis Biologic

American Cyanamid’s takeover of, 57

product marketing arrangements by, 80

Product License Application (PLA), 76

Protein Engineering Research Institute (PERI), 153, 157,158

Provisional Council for Educational Reform (Japan), 155

Public Health Service (PHS)--(DHHS), 24

Public Opinion of risks and ethics of biotechnology-related

R&D, 10,40, 112-113, 129, 136-137, 186, 187

Quayle, Dan (Vice President, U.S.) 176,177

Raab, Kirk, 56

Recombinant DNA Advisory Committee (RAC), 173

Regeneron Pharmaceuticals, 7

Regulation

agricultural, 111

bioremediation commercialization and, 138-139

congressional options for developing industrial

biotechnology, 22-23

of contained uses of micro-organisms, 177-178

effect on competitiveness of, 14-16, 111, 195-196

national policies for, 186-195

pesticide, 103-104,173, 179,181

pharmaceutical industry, 89-91

planned release, 178-182, 183, 189

State biotechnology-related, 180

Remet, 107

Repligen, Inc., 89

Research

associations (Japan), 157

biotechnology-related product, 3-7,21-22,45-46,79,154,

155, 157,158

congressional options for funding biotechnology, 21-22

environmental applications of biotechnology, 131-132, 134-

135, 137, 139-140

funding biotechnology, 45-68

importance of Japanese cooperative, 157, 158

Japanese search for access to foreign, 20

microbiological mining, 131

problems with bioremediation, 137

regulation’s effect on locating facilities for, 16

seed industry, 109-110

types of, 31

U.S. Government biotechnology, 3,19,20,21-22, 111, 131,

137, 150

Research and development (R&D). See Commercialization;

Research

Research and Development Limited Partnerships (RDLPs),

biotechnology investment using, 53

Research and Development Tax Credit, 24-25,64-67

Research base

French, 159

German, 160

Japanese, 153, 155, 156
282 ● Biotechnology in a Global Economy

relative strength of European, Japanese, and United States, 20,

40

Swiss, 160-161

United Kingdom’s, 160

Resource Conservation and Recovery Act (RCRA), 138

Restriction fragment length polymorphism (RFLP) analysis,

plant breeding using, 103, 104

Rhone-Poulenc

diversification by, 124

seed company acquisition by, 108-109

Risk assessments

biotechnological, based on similar technologies, 14

See also Guidelines; Regulation

Roche Holdings, Ltd., acquisition of Genentech by, 56,82,89

Rohm & Haas

diversification by, 123

industrial enzyme production by, 121

Royol Dutch-Shell, diversification by, 124

San Diego, 31

Sandoz, Inc.

diversification by, 124

in-home biotechnology expertise by, 89

intellectual property protection’s effect on R&D investment

by, 93

seed company acquisition by, 109

Sanofi (France), 88

Schering AS, 57

Schering-Plough Corp.

acquisitions by, 57

licensing deals by, 80

Science and Technology Agency (STA)--Japan, biotechnology

support by, 153, 156

Seiko, human genone mapping research by, 156

Shearson Lehman Hutton, survey of biotechnology use in

companies, 4849,50,51,58,59

Showa Denko (Japan), 120

Singapore

biotechnology policies of, 154

biotechnology promotion in, 13-14

regulation in, 14-15

Small Business Finance Corp. (Japan), 20, 154

SmithKline Beckman, merger by, 82

SmithKline Beecham PLC, licensing deals by, 80

South Africa, biohydrometallurgy program in, 131

South Korea, regulation in, 14-15

Spain

regulation in, 14-15

seed company subsidiaries in, 108

Standard industrial classification (SIC), 119

Standards. See Guidelines; Regulation; individual agencies’

Standard and Poors 500. See Financing; Wall Street

Start-up companies. See Dedicated biotechnology companies

States

biotechnology regulation by individual, 188

See also individual States

Stauffer Seeds, 109

Stoneville, acquisition of, 109

Strategic alliances

European companies use of, 58,59,60,61,89

increased use of, 57-60

types of and trends in, 8,57-67

U.S. pharmaceutical DBCs’ use of, 88-89

Strategies. See Policy

Subsidies

European Community agricultural, 161

See also incentives

Superfund Amendments and Reauthorization Act (SARA), 138

Supplementary protection certificate (SPC), 93

Swanson, Robert, 56

Switzerland

biotechnology infrastructure in, 21

biotechnology policy of, 160-161

pharmaceutical firms in, 81,82,83,85

Synergen, 124

Syntex Corp., multinational nature of, 82

System for Promotion of Exploratory Research for Advanced.

Technology (ERATO), 156, 158

T Cell Sciences, Inc., 89

Taiwan

biotechnology promotion in, 13-14, 154

regulation in, 14-15

Takeda, 153

Tanox Biosystems, 89

Tax Reform Act of 1986,24

Taxes

congressional options for structuring coherent policies

concerning, 24-25

R&D financing influenced by, 64-67

Technology transfer

restructuring, 167

U.S. policy concerning, 166-167, 168

Thailand

food exports by, 112

seed company subsidiaries in, 108

Third-party payers,phannaceutical cost-containment and, 83-84

Third World. See Developing countries; Newly Industrializing

Countries

Tissue plasminogen activator (tPA)

FDA regulatory decision on, 90

See also Pharmaceuticals

Toxic Substances Control Act of 1976 (TSCA), EPA regulation

of micro-organisms under, 16,23, 179, 180, 181

Toxic Waste

biotechnology’s use in treating, 129

cleanup costs for, 131, 139-140

See also Pollution

TOyO Soda 156

Trade secrets. See Intellectual property protection, 205

Training, Japanese need for foreign, 20

Transgenic animals, 183-186,214-216,217

Transgenic plants, 105-107, 182, 183

Tsukuba, Japan, 104

UCLA (University of California at Los Angeles), hybrid

development by, 110

Union for the Protection of New Varieties of Plants (UPOV), 24,

207,208,217,218

United Kingdom (U.K.)

biohydrometallurgy program in, 131

biotechnology-altered baker’s yeast approved in, 107

biotechnology infrastructure in, 21

biotechnology policy in, 15,159-160,182, 193
Index ● 283

gene mapping work by, 104

pharmaceutical industry in, 81,82,83,84,85

R&D funding in, 83

united states (Us.)

acquisition activity in, 85-89

agricultural biotechnology applications in, 108, 112

biohydrometallurgy program, 131

biotechnology policy in, 14,15-16,152,161-167

chemical industry in, 10, 122-123, 124

commercialization trends in, 3, 19-20, 165

cooperative research in, 164-167

drug approval process in, 75,76-77,101

environmental cleanup in, 131, 136

financial situation of biotechnology companies in, 48-50,51

historical view of commercial biotechnology in, 45-48

intellectual property variety and protection in, 16-18, 19,93,

203-205

patent policy in, 93,209-210

pharmaceutical industry characteristics and trends in, 81,82,

83,85-89,93

research funding in, 3,21-22,83, 111-112

strategic alliances’ use in, 88-89

university-industry research agreements in, 164-165, 167

Universities

congressional options for improving industrial relationships

with, 24

hybrid development by, 110

relationship with industry of, 164-165, 167

role of Japan’s national, 154-155

See also individual universities

Upjohn Co., The, 89, 109

U.S. Department of Agriculture (USDA)

basic research funding by, 3,21-22,83, 111

field test estimate by, 112, 113

PVPA administration by,1 0

Vaccines. See Pharmaceuticals

Venture capital

financing in the United States, 3-6,7,39,50-51

role of, in Europe and Japan, 40,51-53

trends in availability to DBCs, 3-6,7

See also Costs; Economics; Financing

Virus-Serum-Toxin Act, 178, 184

Volvo, 109

wall Street

analyses of biotechnology firms, 6,7,49-50

effects of regulatory decisions on, 90

See also, “Black Monday”

Watson, James D., 31

Wellcome Foundation Ltd., The, 82

Wisconsin, bST moratorium in, 102, 191

World Intellectual Property Organization (WIPO), patent

harmonization effort by, 23-24,207,217-218,234

World War II, 73

Wyngaarden, James, 164

Xoma Corp., 79,84,85,89
Other Related OTA Reports

. Ownership of Human Tissues and Cells4peciai Report

OTA-BA-337, March 1987; 176p.

GPO stock #052-003-01060-7; $7.50 per copy

NTIS order #PB 87-207536

. Public Perceptions of Biotechnology

OTA-BP-BA-45, May 1987; 136p.

NTIS order #PB 87-207544

● Field-Testing Engineered organisms: Genetic and Ecological IssuesApecial Report

OTA-BA-350, May 1988; 160p.

NTIS order #PB 88-214101

● U.S. Investment in Biotechnolog+i’pecial Report

Free summary available horn OTA

OTA-BA-360, July 1988; 304p.

NTIS order #PB 88-246939

● Patenting L@+$pecial Report

OTA-BA-370, Apti 1989; 204p.

GPO stock W52-003-01 137-9; $8.50 per copy

NTIS order #PB 89-1% 612

● Commercial Biotechnology: An International Analysis

OTA-BA-218, January 1984; 616p.

NTIS order #PB 84-173608

● Impacts of Applied Genetics: Micro-organisms, Plants, and Animals

OTA-HR-132, April 1981; 332p.

NTIS order #PB 81-206609.

● Mapping Our Genes: GerlOme PrOjectsaOw Big? How Fast?

OTA-BA-373, Apd 1988; 232p.

NTIS order #PB 88-212402

NOTE: Reports are available from the U.S. Government Printing Offk, Superintendent of Documents, Dept. 33,

Washington, DC 20402-9325, (202) 783-3238; and/or the National Technical Information Service, 5285

port Royal Road, Springfield, VA 22161-0001, (703) 487-4650.