Chapter 1 Summary

. .

Contents

Page Introduction ...... 3 Definitions ...... 3 The Technologies ...... 4 Industrial Development...... s Findings ...... 6 Industrial Applications of Biotechnology ...... 6 The U.S. Competitive Position ...... 7 Analysis of International Competitiveness in Biotechnology ...... 8 The Importance of Established and New Firms in the Commercialization of Biotechnology 11 Factors Potentially Important to International Competitiveness in Biotechnology ...... 12 Other Influences on Competitiveness in Biotechnology ...... 20 Conclusion ...... 21 Issues and Options ...... ~...... 22

Figures Figure No). Page l.Major Events in the Commercialization of Biotechnology ...... 4 2. The Relative Importance of Factors Affecting the Commercialization of Biotechnology . . . . 10 Chapter 1 Summary

Introduction

In the past 10 years, dramatic new develop- identified new biotechnology as a promising area ments in the ability to select and manipulate ge- for economic growth and have therefore invested netic material have sparked unprecedented in- quite heavily in R&D in this field, Congressional terest in the industrial uses of living organisms. policy options for improving U.S. competitiveness Following the first successful directed insertion in new biotechnology are identified in this report. of foreign DNA in a host microorganism in 1973, scientific researchers in the United States and other countries began to recognize the potential Definitions for directing the cellular machinery to develop new and improved products and processes in a Biotechnology, broadly defined, includes any wide diversity of industrial sectors. Potential in- technique that uses living organisms (or parts of dustrial applications of those novel genetic tech- organisms) to make or modify products, to im- niques include the production of new drugs, food, prove plants or animals, or to develop microorga- and chemicals, the degradation of toxic wastes, nisms for specific uses. Biological processes and and the improvement of agricultural products. organisms have been used with great success Thus, these new techniques could have a major throughout history and have become increasing- economic impact on industries throughout the ly sophisticated over the years. Since the dawn world. of civilization, people have deliberately selected organisms that improved agriculture, animal hus- Beginning around 1976, many small entrepre- bandry, baking, and brewing. More recently, a neurial firms were formed in the United States better understanding of genetics has led to more specifically to build on the growing body of fun- effective applications of traditional genetics in damental knowledge in molecular biology and to such areas as antibiotic and chemical production. exploit it to a profitable end. Furthermore, large established American, Japanese, and European This report focuses on the industrial use of

companies in a spectrum of industrial sectors ex- recombinant DNA (rDNA, cell fusion~ and panded their research and development (R&D) novel bioprocessing techniques To differen- programs to include the new genetic techniques. tiate between biotechnology using these novel In the United States, private sector investments techniques and the more traditional forms of bio- to commercialize these new techniques exceeded technology, this report uses the terms ‘(new bio- $1 billion in 1983. technology” and “old biotechnology)” respective- ly. Thus, for example, traditional wine produc- This report assesses the competitive position of tion is old biotechnology, but the use of yeast the United States with respect to Japan and four modified with rDNA techniques to produce wine European countries-the Federal Republic of Ger- with a higher alcohol content is new biotech- many, the United Kingdom, Switzerland, and nology. Where no specific distinction is made, the France—believed to be the major competitors in term biotechnology alone henceforth refers to the commercial development of “new biotechnol- new biotechnology. ogy,” as defined below. Although the United States is currently the world leader in both Biotechnology is the most recent phase in a his- basic science and commercial development of torical continuum of the use of biological orga- new biotechnology, continuation of the initial nisms for practical purposes. Furthermore, devel- preeminence of American companies in the opments arising from existing technologies are commercialization of new biotechnology is providing a base from which other technologies not assured. Japan and other countries have will emerge, and new technologies can make even

3 4 . Commercial Biotechnology: An International Analysis the most potentially useful current technology ob- direct which genes are used by cells permits more solete in a short time. Of necessity, this assess- control over the production of biological mole- ment describes the development of biotechnology cules than ever before. Recombinant DNA tech- at a particular point in time, but it is important nology can be used in a wide range of industrial to emphasize that dynamic and progressive sectors to develop micro-organisms that produce change has characterized biotechnology for the new products, existing products more efficient- last decade. Figure 1 shows some prominent ly, or large quantities of otherwise scarce prod- events that illustrate the rapid progress made in ucts. This technology can also be used to develop the development of biotechnology over the last organisms that themselves are useful, such as decade. This pace is likely to continue into the microorganisms that degrade toxic wastes or new 21st century. strains of agriculturally important plants.

The technologies Cell fusion, the artificial joining of cells, com- bines the desirable characteristics of different The novel techniques used in biotechnolo types of cells into one cell. This technique has gy are extremely powerful because they allow been used recently to incorporate in one cell the a large amount of control over biological sys- traits for immortality and rapid proliferation from tems Recombinant DNA technology, one of the certain cancer cells and the ability to produce new techniques, allows direct manipulation of the useful antibodies from specialized cells of the im- genetic material of individual cells. The ability to mune system. The cell line resulting from such

Figure 1 .—Major Events in the Commercialization of Biotechnology

1973 First gene cloned. 1974 First expression of a gene cloned from a different species in bacteria. Recombinant DNA (rDNA) experiments first discussed in a public forum (Gordon Conference). 7975 U.S. guidelines for rDNA research outlined (Asilomar Conference). First hybridoma created. T976 First firm to exploit rDNA technology founded in the United States (Genentech). Genetic Manipulation Advisory Group (U. K.) started in the United Kingdom. —

1980 Diamond v. Chakrabarty— U.S. Supreme Court rules that micro-organisms can be patented under existing law. Cohen/Boyer patent issued on the technique for the construction of rDNA. United Kingdom targets biotechnology (Spinks’ report). Federal Republic of Germany targets biotechnology (Leistungsplan). Initial public offering by Genentech sets Wall Street record for fastest price per share increase ($35 to $89 in 20 minutes). T981 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 Bio- technology”). France targets biotechnology (Pelissolo report). Hoescht/Massachusetts General Hospital agreement. Initial public offering by Cetus sets Wall Street record for the largest amount of money raised in an initial public offering ($1 15 million). Industrial Biotechnology Association founded. DuPont commits $120 million for life sciences R&D. Over 80 NBFs had been formed bv the end of the vear. 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. First R&D limited partnership formed for the funding of clinical trials. 383 First plant gene expressed in a plant of a different species. $500 million raised in U.S. public markets by NBFs.

SOURCE: Office of Technology Assessment Ch. l—Summary ● 5 a fusion, known as a hybridoma, produces large chemical one. As discussed in this report, indus- quantities of monoclinal antibodies (MAbs), so trial applications of biotechnology will be called because they are produced by the progeny, found in several industrial sectors, including or clones, of a single hybridoma cell. MAbs can pharmaceuticals, animal and plant agricul- potentially be used for many purposes, including ture, specialty chemicals and food additives, the diagnosis and treatment of disease and the environmental areas, commodity chemicals purification of proteins. and energy production, and bioelectronics. The commercial success of specific industrial The industrial sector in which the earliest ap- applications of rDNA and cell fusion techniques plications of new biotechnology have occurred will hinge on advances in bioprocess engineering. is the pharmaceutical sector. Reasons for the Bioprocess technology, though not a novel genet- rapid diffusion of the new techniques into the ic technique, allows the adaptation of biological pharmaceutical sector include the following: methods of production to large-scale industrial ● Recombinant DNA and MAb technologies use. Most industrial biological syntheses at pres- were developed with public funds directed ent are carried out in single batches, and a small toward biomedical research. The first bio- amount of product is recovered from large quan- technology products, such as rDNA-produced tities of cellular components, nutrients, wastes, human insulin, interferon, and MAb diagnos- and water. Recent improvements in techniques tic kits, are a direct result of the biomedical for immobilizing cells or enzymes and in bio- nature of the basic research that led to these reactor design, for example, are helping to in- new technologies. crease production and facilitate recovery of many ● Pharmaceutical companies have had years of substances. Additionally, new genetic techniques experience with biological production meth- can aid in the design of more efficient bioreac - ods, and this experience has enabled them tors, sensors, and recovery systems. In the next to take advantage of the new technologies. decade, competitive advantage in areas related ● Pharmaceutical products are high value- to biotechnology may depend as much on de- -added and can be priced to recover costs in- velopments in bioprocess engineering as on curred during R&D, so the pharmaceutical innovations in genetics, immunology, and sector is a good place to begin the costly other areas of basic science. process of developing a new technology. The same technologies that yield commercial Because of the rapid diffusion of the new ge- products will also provide new research tools. The netic techniques into pharmaceutical R&D pro- new genetic technologies described above have grams, the pharmaceutical sector is currently ignited an explosion of fundamental knowledge. most active in commercializing biotechnology. For The widespread use of rDNA and cell fusion tech- this reason, it serves as a model for the industrial niques in the investigation of a wide variety of development of biotechnology in much of this re- biological phenomena in plants, animals, micro- port. It is important to recognize, however, that organisms, and viruses highlights the impact of the development of biotechnology in other indus- these technologies on basic science research and trial sectors will differ from its development in the advances in fundamental knowledge that they the pharmaceutical sector. Regulatory and trade make possible. This new knowledge, in turn, may barriers and a marketing and distribution system reveal new commercial opportunities. unique to the pharmaceutical sector limit its use- fulness as a model. Furthermore, the techniques Industrial development may not diffuse as rapidly into other industrial sectors, such as the chemical industry, because Biotechnology could potentially affect any cur- of difficulties companies may have in recovering rent industrial biological process or any process investments in R&D and physical plants required in which a biological catalyst could replace a to convert to biological methods of production. 6 ● Commercial Biotechnology: An International Analysis

Findings

Industrial applications of dustry in that the regulatory requirements for biotechnology animal health products, especially for vaccines and diagnostics, are significantly less stringent The earliest industrial applications of biotech- than for human health products; markets for ani- nology (i.e., during the next 5 to 10 years) are like- mal products are smaller and more accessible; and ly to occur in pharmaceuticals, animal agriculture, the distribution and delivery systems are differ- and specialty chemicals. Applications of biotech- ent. Because of these features, many NBFs are nology to pharmaceuticals being pursued at finding animal agriculture an attractive field for present are in the production of proteins such the application of biotechnology. as insulin, interferon, and human serum albumin; The potential applications of biotechnology are antibiotics; MAb diagnostics; and vaccines for probably more varied for specialty chemicals viral, bacterial, and parasitic diseases. As more (i.e., chemicals costing more than $Iflb) and food is learned about hormone growth factors, im- additives* than for any other industrial sector mune regulators, and neurological peptides, their at the present time. Possible applications include importance in the treatment of disease may in- improvements in existing bioprocesses, such as crease dramatically. Eventually, the production in the production of amino acids. Other products, of such regulatory proteins may turn out to be such as vitamins and steroid compounds, are cur- the largest application of biotechnology in the rently made in multistep production processes in- pharmaceutical industry. U.S. companies pursu- volving chemical syntheses. Biotechnology could ing biotechnological applications in pharmaceu- provide one or more enzymatic conversion proc- ticals include many of the established pharmaceu- ess to increase the specificity of currently used tical companies* and a large number of small, en- chemical conversions. Generally, complex prod- trepreneurial new biotechnology firms (NBFs). * * ucts, such as enzymes and some polysaccharides, Additionally, many established companies in other can only be made economically using bioproc- sectors are using biotechnology as a way to diver- esses. The production of specialty chemicals rep- sify into pharmaceuticals. resents one of the largest opportunities for the In animal agriculture, biotechnology is being application of biotechnology because of the diver- used to develop products similar to those being sity of potential applications. Several companies developed in the pharmaceutical industry. How- in the United States are pursuing biological pro- ever, since animal producers cannot afford to duction of specialty chemicals, but most special- purchase expensive products made with new ty chemicals currently produced biologically are technology, biotechnologically produced products made almost exclusively in Japan and Europe, and may initially be limited to products for “high these countries intend to pursue new applications value” animals such as pets and breeding stock. for specialty chemical production. The most important products are likely to be vac- Applications of rDNA technology to plant agri= cines and growth promotants. culture are proceeding faster than anyone antici- Unlike the production of pharmaceuticals, the pated 3 to 4 years ago. Some important traits of production of animal health products using tradi- plants, including stress-, herbicide-, and pest- tional technologies is not dominated by a few resistances, appear to be rather simple genetically, large companies. Additionally, the animal agricul- and it may be possible to transfer these traits to ture industry differs from the pharmaceutical in- important crop species in the next few years. Other traits, such as increased growth rate, in- *Establisheci companies pursuing applications of biotechnolo~v are generally processmienkd, multiproduct companies in traditional creased photosynthetic ability, and the stimula- industrial sectors such as pharmaceuticals, energy, chemicals, and food processing. “Fod additives are considered together with specialty chemicals ● *NBFs, as defined in this report, are entrepreneurial ventures because many (though not all) food additives are also specialty chem- started specifically to pursue applications of biotechnology. icals, e.g., amino acids and vitamins. Ch. I—Summary ● 7 tion of nitrogen fixation, are genetically complex, that use enzymes for detecting specific substances and it is likely to be several years before plants are available now. However, their use is limited with these characteristics developed with rDNA by the narrow range of substances they detect technology will be ready for field testing. Micro- and by their temperature instability. Biotechnol- organisms that interact with plants offer possi- ogy could be instrumental in the development of bilities for genetic manipulation that may be more more versatile sensors that use enzymes or MAbs. near-term. For instance, it may be possible to ma- Better sensors would be especially useful in the nipulate micro-organisms to produce pesticides control of industrial bioprocesses. Biotechnology or inhibit frost formation. Companies pursuing may also make it possible to construct devices that these applications include many NBFs and estab- use proteins as a framework for molecules that lished companies in agricultural chemicals and act as semiconductors. The anticipated advan- seed production. tages of these biochips are their small size, relia- bility, and the potential for self assembly. The pro- Environmental applications of biotechnology duction of biochips, however, is one of the most include mineral leaching and metal concentration, distant applications of biotechnology. pollution control and toxic waste degradation, and enhanced oil recovery. These applications may take longer to reach the market, because little is The U.S. competitive position known of the genetics of the most potentially A well-developed life science base, the useful micro-organisms. Additionally, regulation availability of financing for high-risk ven- is expected to be a major factor influencing de- tures, and an entrepreneurial spirit have led velopment of this area because these applications the United States to the forefront in the com- use microorganisms that are deliberately released mercialization of biotechnology. For the most into the environment. The nature and extent of part, the laws and policies of this country have this regulation remains uncertain, and this uncer- made it possible for industrialists and scientists tainty may deter some firms from entering the to capitalize rapidly on the results of basic re- field, thus slowing development. search in biotechnology conducted in the univer- Commodity chemicals, which are now pro- sity system and government laboratories. The rel- duced from petroleum feedstocks, could be pro- ative freedom of U.S. industry to pursue a vari- duced biologically from biomass feedstocks such ety of courses in the development of products has as cornstarch and lignocellulose. Commodity also given the United States a comparative advan- chemical production from cornstarch will prob- tage. The flexibility of the U.S. industrial system ably occur before production from lignocellulose and the plurality of approaches taken by entre- because of the high energy inputs necessary for preneurial NBFs and established companies in the the solubilization of lignocellulose. Although the development of products have facilitated the rapid technology exists now for the cost+ ffective bio- development of biotechnology in the United States. logical production of some commodity chemicals Japan is likely to be the leading competitor such as ethanol, the complex infrastructure of the of the United States for two reasons. First, Jap- commodity chemical industry will prevent the re- anese companies in a broad range of industrial placement of a large amount of commodity chemi- sectors have extensive experience in bioprocess cal production using biotechnology for at least 20 technology. Japan does not have superior bioproc - years. This distant time horizon is due more to ess technology, but it does have relatively more the integrated structure of the chemical industry, industrial experience using old biotechnology, its reliance on petroleum feedstocks, and its low more established bioprocessing plants, and more profit margins than to technical problems in the bioprocess engineers than the United States. Sec- application of the biotechnology. ond, the Japanese Government has targeted bio- In the area of bioelectronics, biotechnology technology as a key technology of the future, is could be used to develop improved biosensors or funding its commercial development, and is new conducting devices called biochips. Sensors coordinating interactions among representatives 8 ● Commercial Biotechnology: An International Analysis from industry, universities, and government. The The United States could have difficulty United States may compete very favorably maintaining its competitive position in the with Japan if it can direct more attention to future if several issues are not addressed. If research problems associated with the scal- U.S. Government funding for basic life science ing-up of bioprocesses for production research continues its decline, the science base, which is the source of innovation in bio The European countries are not moving as technology as well as in other fields, may be rapidly toward commercialization of biotech- eroded. U.S. Government funding of generic nology as either the United States or Japan, in applied research, * especially in the areas of part because the large established pharmaceutical bioprocess engineering and applied micro and chemical companies in Europe have hesitated biology, is currently insufficient to support to invest in biotechnology and in part because of rapid commercialization U.S. Government cultural and legal traditions that tend not to pro- funding for personnel training in these areas mote venture capital formation and, consequent- may also be insufficient. Additionally, clari- ly, risk-taking ventures. Nevertheless, several of fication and modification of certain aspects of the large pharmaceutical and chemical houses in U.S. health, safety, and environmental regu- the United Kingdom, the Federal Republic of lation and intellectual property law may be Germany, Switzerland, and France will surely be necessary for the maintenance of a strong U.S. competitors in selected product areas in the competitive position in biotechnology. future because of their prominent position in world sales of biologically derived products. Ad- ditionally, the increased interest shown recently ● Generic applied research, which is nonproprietary and bridges the gap between basic research and applied research, is aimed at by the British Government in biotechnology may the solution of generic problems that are associated with the use speed its development in the United Kingdom. of a technology by industry.

Analysis of international competitiveness in biotechnology

Often international competitiveness is defined and relatively limited, Furthermore, even the mar- as the relative ability of firms based in one coun- kets for some new animal vaccines are quite small try to develop, produce, and market equivalent when compared to potential markets for applica- goods or services at lower costs than firms in tions of biotechnology in the production of some other countries. Competitiveness is a matter of chemicals or new crop plants. Thus, the biotech- relative prices, and these usually reflect relative nology products that have reached the market to costs of developing, producing, and distributing date may be inaccurate indicators of the poten- goods and services. In the case of biotechnology, tial commercial success in world markets of the two factors preclude a traditional analysis of inter- much larger number of biotechnology products national competitiveness. First, standard analyses and processes still in R&D stages. Which of the of competitiveness examine the marketing of biotechnology products and processes in develop- products, but as of the end of 1983, only a few ment are likely to be marketed and when can- products of new biotechnology had reached the not be accurately predicted. Second, even with marketplace—notably human insulin, some MAb many more products on the market, a traditional diagnostic kits, and some animal vaccines. Most competitive analysis might not be appropriate of these products are substitutes for already ex- because an economic analysis of competitiveness isting products, and the markets are well defined usually addresses a specific industrial sector. The Ch. l—Summary ● 9 set of techniques that constitute biotechnology, dom have good basic biology research and espe- however, are potentially applicable to many in- cially good bioprocess engineering research. dustrial sectors. The first step in the analysis of international Since the technologies are still emerging and competitiveness in biotechnology was to consider most biotechnology products and processes are the aggregate level of industrial activity and the in early development, most of this report focuses number and kinds of firms commercializing bio- on potential rather than actual products and proc- technology in the competitor countries. OTA’S in- esses. In the case of biotechnology, knowledge dustrial analysis, presented in Chapter 4: Firms about market size, distribution systems, custom- Commercializing Biotechnolo~, was approached ers, production* processes, and learning curve from three perspectives: economies is lacking. Thus, traditional parameters ● the number and kinds of companies commer- of competitiveness are difficult or impossible to cializing biotechnology, estimate. Instead of examining the classical meas- ● the markets targeted by industrial biotech- ures of competitiveness, this analysis of interna- nology R&D, and tional competitiveness in biotechnology examines ● the interrelationships among companies ap- the aggregate industrial activity in biotechnology plying biotechnology and the overall organi- in both domestic and foreign firms and 10 fac- zation of the commercial effort. tors that might be influential in determining the competitive position of the United States and The analysis began with the United States and other countries with respect to the commercial- comparisons were then made with other coun- ization of biotechnology. tries. In investigating competitiveness in biotechnol- The second step in providing an overall picture ogy, this report analyzes the commercialization of competitiveness in biotechnology invoIved the efforts of five countries in addition to the United evaluation of the following 10 factors identified States: Japan, the Federal Republic of Germany, as potentially important in determiningg the future the United Kingdom, Switzerland, and France. position of the United States and other countries Although companies from many countries will in the commercialization of biotechnology: have biotechnology products in world markets, ● financing and tax incentives for firms; these five countries were selected because of their ● government funding ’of basic and applied re- research capabilities in biology and their existing search; capabilities in old biotechnology and because, as ● personnel availability and training; a whole, their companies are most likely to reach ● health, safety, and environmental regulation; world markets first with biotechnology-produced ● intellectual property law; products. Japan leads the world both in the micro- ● university/industry relationships; bial production of amino acids and in large-scale ● antitrust law; plant cell culture, and it has a strong position in ● international technology transfer, invest- new antibiotic markets. Japan is also the world ment, and trade; leader in traditional bioprocess engineering. Fur- ● government targeting policies in biotech- thermore, the Ministry of International Trade and nology; and Industry (MITI) in Japan has designated biotech- ● public perception. nology for industrial development. The European pharmaceutical houses, notably in the United The relative importance of each of the factors was Kingdom, France, the Federal Republic of Ger- first evaluated-to determine their importance to many, and Switzerland, lead the world in phar- competitiveness today (see fig. 2) and which ones maceutical sales. Like Japan, three of these Euro- could be important as the technology matures and pean countries, the Federal Republic of Germany, more products reach the marketplace. Then, each the United Kingdom, and France, have national of the factors was analyzed for each of the six plans for the promotion of biotechnology. The competitor countries: the United States, Japan, Federal Republic of Germany and the United King- the Federal Republic of Germany, the United

25-561 0 - 84 - 2 10 ● Commercial Biotechnology: An International Analysis

Figure 2.—The Relative Importance of Factors Affecting the Commercialization of Biotechnology

Commercialization of [ biotechnoloav )

I I I

SOURCE Office of Technology Assessment

Kingdom, Switzerland, and France. Since the im- commercialization, the lack or abundance of par- portance to competitiveness of any given factor ticular natural resources, and the tendency is not necessarily the same for every industrial toward risk taking in each country. These other sector in which applications are being pursued— considerations were used as modifiers of the for instance, a country’s intellectual property laws results of the analysis. may protect pharmaceuticals better than plants— OTA’S principal findings with respect to the the importance of each factor was evaluated for types and activities of firms commercializing bio- different industrial sectors. technology, the factors potentially important to international competitiveness in biotechnology, Additional considerations taken into account in and the other considerations just mentioned are the analysis are historical patterns of industrial presented below. Ch. l—Summary ● 11

The importance of established and they excel. The established companies, on the new firms in the commercialization other hand, have assumed a major share of the of biotechnology responsibility for production and marketing of, and, when necessary, obtaining regulatory ap- U.S. and foreign efforts to develop and commer- proval for, many of the earliest biotechnology cialize biotechnology differ substantially in char- products— the commercial stages where their re- acter and structure. In the United States, two dis- sources are strongest. Since established compa- tinct sets of firms are pursuing commercial appli- nies control the later stages of commercializa- cations of biotechnology -NBFs and established tion for many new products being developed companies. Because NBFs were founded specifi- through production and marketing agree cally to exploit perceived research advantages, ments with NBFs, they will also have consid- they are providing the United States with a com- erable control over the pace at which these mercial edge in the current research-intensive new products reach the market. Whether the phase of biotechnology’s development. Through dynamism arising fmm the competition and their R&D efforts, NBFs are contributing to in- complementarily between NBFs and estab novation, expansion of the U.S. research base, lished companies will continue giving the technology diffusion, and encouragement of tech- United States a comparative advantage in the nical advances through the increased domestic context of product introduction remains un- competition they create. All of these contributions clear. Some established companies, for example, provide the United States with a competitive might have disincentives to market new products advantage. because the new products might compete with products they already have on the market. Although NBFs have assumed much of the risk for biotechnology’s early development in the In Japan, the Federal Republic of Germany, the United States, established U.S. companies are United Kingdom, Switzerland, and France, bio- making substantial contributions to the U.S. com- technology is being commercialized almost ex- mercialization effort. Through equity investments clusively by established companies. The Japa- and licensing and contract research agreements nese consider biotechnology to be the last ma- with NBFs, established U.S. companies are pro- jor technological revolution of this century, viding many NBFs with the necessary financial and the commercialization of biotechnology resources to remain solvent. Through joint de- is accelerating over a broad range of indus- velopment agreements with NBFs, many estab- tries, many of which have extensive bioproc- lished companies will also provide the necessary essing experience. The general chemical and production and marketing resources to bring petroleum companies especially are leaning many NBF products to world markets. These re- strongly toward biotechnology, and some of them sources could help to sustain the rapid pace of are making rapid advances in R&D through their technical advance spurred by NBFs. Recently, efforts to make biotechnology a key technology more and more established U.S. companies have for the future. In Europe, large pharmaceutical been investing in their own research and produc- and chemical companies, many of which already tion facilities, so the role of established companies have significant strength in biologically produced in the U.S. biotechnology effort is expanding. product markets, are the major developers of biotechnology. Their inherent financial, produc- U.S. efforts to commercialize biotechnology tion, and marketing strengths will be important are currently the strongest in the world. The factors as the technology continues to emerge strength of U.S. efforts is in part derived from internationally. the unique complementarily and competition that exists between NBFs and established U.S. com- The commercial objectives of biotechnology panies in developing biotechnology for wider R&D vary across national boundaries. In the commercial application. At present, most NBFs are United States, commercial research projects ap- still specializing in research-oriented phases of de- pear primarily focused on pharmaceutical and velopment, precisely the commercial stage where plant and animal agriculture, and American com- 12 ● Commercial Biotechnology: An International Analysis

petitive vigor in these application areas is cor- penetration. There seem to be fewer European respondingly strong. Much of the investment in companies than Japanese companies strong in bio- animal agriculture has been made by NBFs technology now, but the competitive strength of whereas much of the investment in plant agricul- European multinationals such as Hoechst (F. R.G.), ture has been made by major U.S. agrichemical Rhone Poulenc and Elf Aquitaine (France), ICI, companies. Glaxo, and Wellcome (U.K.), and Hoffmann-La Roche (Switzerland) in the long run should not In Japan, a competitive drive has been launched be underestimated. to enter international pharmaceutical markets. Furthermore, Japanese companies are world lead- Factors potentially important to ers in large-scale plant tissue culture, and MITI international competitiveness has identified secondary compound synthesis in biotechnology from plants as a major area for commercializa- tion. Unlike the United States, Japanese companies MOST IMPORTANT FACTORS appear to be dedicating a great deal of biotech- The three factors most important to the com- nology R&D to specialty chemical production, an mercial development of biotechnology are financ- area where they are already internationally ing and tax incentives for firms, government prominent. funding of basic and applied research, and per- To the extent that large companies in Europe sonnel availability and training. began their commercialization efforts later than Financing and Tax Incentives for Firms— U.S. companies and may also lack the dynamism The availability of venture capital to start new and flexibility to compete with the combined ef- firms and tax incentives provided by the U.S. forts of NBFs and established companies in the Government to encourage capital formation United States, European companies could initial- and stimulate R&D in the private sector are ly be at a competitive disadvantage. The United very important to development of biotechnol- Kingdom’s major pharmaceutical companies are ogy in the United States. Since 1976, private ven- among the leading producers of biologically pro- ture capital in the United States has funded the duced products, however, and their expertise in startup of more than 100 NBFs. Many of these bioprocessing is impressive. Furthermore, the firms have already obtained second- and third- United Kingdom possesses some of the strongest round financing, while others, still seeking addi- basic research in interdisciplinary plant sciences. tional funds, are relying heavily on the current- Whether or not the basic research will be com- ly strong stock market, R&D limited partnerships, mercialized successfully is difficult to predict. and private placements to fund research, produc- U..S. competitive strength in biotechnology will tion scale-up, clinical trials, and early product be tested when large-scale production begins and development. Between March and July of 1983, bioprocessing problems are addressed. Pharma- 23 NBFs raised about $450 million. R&D limited ceutical markets will be the first proving ground partnerships in biotechnology are expected to for U.S. competitive strength. The Japanese have total $500 million in 1983 and $1.5 billion by 1984. extensive experience in bioprocess technology, Corporate equity investment in NBFs, although and dozens of strong “old biotechnology” com- now diminishing, has also been an important panies from several industrial sectors in Japan are source of financing for the new firms. From 1977 using new biotechnology as a lever to enter prof- to August 1983, corporate venture capital sup- itable and expanding pharmaceutical markets. In plied over $350 million to NBFs in equity in- addition to competing against Japanese compa- vestments alone. nies, U.S. pharmaceutical and chemical compa- Current price/earnings ratios* for NBFs appear nies will be competing against pharmaceutical and high, because most NBFs still have negative earn- chemical companies of Western Europe, all of *A price/earnings ratio (~~&~e;p~cWPL;?&-) reflects the stock mar- whom expect to recover their biotechnology in- ket’s anticipation of the company’s future performance based on vestments through extensive international market the earnings per share. Ch. I—Summary ● 13 ings records. Continued reliance on the stock Kingdom, the Federal Republic of Germany, and market and R&D limited partnerships to raise France have provided the private sector with funds will place increased pressure on the new public funds for biotechnology. firms to begin showing profits. If NBFs do not begin showing profits within the time frame ex- After the United States, Japan has the most pected by investors, additional financing from financing available for companies using biotech- public offerings and R&D limited partnerships nology. The Japanese Government has made may be difficult to obtain. the commercialization of biotechnology a na- tional priority and is financing cooperative in- The future performance of NBFs now extensive- terindustry biotechnology projects. Most of ly using the stock market and R&D limited part- the established companies commercializing bio- nerships for financing may influence the avail- technology in Japan have at least one bank as a ability of financing for other firms seeking capital major shareholder that provides the company in the future. If some of these companies do not with low-interest loans for R&D. Wealthy indi- begin to manufacture soon in order to generate vidual investors in Japan, although few in num- product revenues, investors may lose confidence ber, have also provided some risk capital for new in many of the firms’ ability to commercialize ventures. biotechnology. Tax incentives relevant to established com- In the United States, venture capital is general- panies commercializing biotechnology are those ly more difficult to obtain for later rounds of which stimulate R&D investments and those financing than for initial rounds, in part because which encourage capital formation. Corporate tax venture capitalists are more eager to invest in the rates are also important. For purposes of inter- earlier rounds to maximize their investment re- national comparisons, the most reliable basis is turns. The difficulty in getting subsequent financ- the overall effective corporate tax rate. Unlike ing for production scale-up may prove to be an statutory rates, the effective rate takes into ac- insurmountable problem for some NBFs; the abil- count different definitions of taxable income and ity to self-finance may still be 5 to 10 years away. treatments of depreciation. Available studies sug- Of all the six competitor countries, the United gest that Switzerland, followed by Japan and the States has the most favorable tax environment for United Kingdom, have the lowest effective cor- capital formation and financing small firms. Tax porate tax rates. The effective rates in the United incentives, more than government funding, are States, the Federal Republic of Germany, and used in the United States to stimulate business France are higher and about equal. and encourage R&D expenditures. Thus, R&D Government Funding of Basic and Applied limited partnerships, low capital gains tax rates, Research.-The objective of basic research is to R&D tax credits (due to expire in 1985), and sub- gain a better understanding of the fundamental chapter S provisions all benefit small firms. aspects of phenomena without goals toward the In Japan and the European competitor coun- development of specific products or processes. tries, venture capital has played a very minor role Such research is critical to maintaining the science in the commercialization of biotechnology, be- base on which a technology rests and to stimu- cause these countries do not have tax provisions lating advances in a technology. Basic research that promote the formation of venture capita-1 and is usually conducted by academic researchers investment in high-risk ventures. As a conse- who receive government funds. The objective of quence, few NBFs exist outside the United States. applied research is to gain the knowledge needed Instead, established foreign companies have to supply a recognized and specific need, through initiated efforts to commercialize biotechnology a product or process. Such research is usually because they generally can finance R&D activities funded by industry. Generic applied science can through retained earnings. Established companies be viewed as bridging a gap between basic science also have access to financing from bank loans. Ad- done mostly in universities and applied, proprie- ditionally, the governments of Japan, the United tary science done in industry for the development — —

14 ● Commercial Biotechnology: An International Analysis

of specific products. Such research is aimed at The rationale for this policy has been that most the solution of general problems that are associ- applied science, regardless how general, is the ated with the use of a technology by industry. responsibility of industry. This policy has con- Generic applied research areas in biotechnology, tributed to a widening scientific gap between for instance, include development of bioreactors, purely basic research funded by the U.S. Govern- screening of microorganisms for potential prod- ment and short-term, relatively product-specific ucts, and better understanding of the genetics and applied research funded by private industry. biochemistry of industrially important micro- In fiscal year 1983, the Federal Government organisms. Support of basic science and of generic spent $511 million on basic biotechnology re applied science is generally viewed as the respon- search ● compared to $6.4 million on generic sibility of government, because it ultimately con- applied research in biotechnology. The rela- tributes to the public good and because it is high tively low level of U.S. Government funding risk and too expensive for individual firms. for generic applied research in biotechnology may cause a bottleneck in this country’s bio Controversy exists over the relative importance technology commercialization efforts, of national support of basic and applied science. Some argue that since the findings of basic re- The Japanese Government, in contrast, is de- voting proportionately more public funding to the search are readily accessible worldwide because they are published in journals with international solution of generic applied science problems than to basic research, The pattern of funding in Japan distribution, strong government support for basic may reflect a policy of placing a greater priority research is therefore not required for the main- on generic applied research in lieu of basic re- tenance of a leading position in the development search because the Japanese may rely on the of a technology. Others argue that the develop- United States and other countries to prove the ment of a technology within a country will pro- early feasibility of new technologies for commer- gress faster if companies have access to local basic cialization. This strategy worked well in the semi- research scientists for consulting and contractual conductor industry, and Japan may very well , arrangements. Domestic technology transfer can attain a larger market share for biotechnology help give industry a lead in innovation. products than the United States because of its Of the competitor countries, the United ability to rapidly apply results of basic research States, both in absolute dollar amounts and in available from other countries, relative terms, has the largest commitment to Personnel Availability and Training.—Ade- basic research in biological sciences Like the quately trained scientific and technical person- United States, the Federal Republic of Germany, nel are vital to any country’s industrial competi- the United Kingdom, and Switzerland have a tiveness in biotechnology. For the most part, strong basic science base. On the other hand, the countries with good science funding in a field also U.S. Government% commitment to generic ap have a good supply of well-trained people in that plied research in biotechnology is relatively field. small The governments of Japan, the Federal Republic of Germany, and the United Kingdom The commercial development of biotechnology fund a significant amount of generic applied will require several specific types of technical per- science in biotechnology. sonnel. Especially important categories include specialists in rDNA and MAb technology such as During the past few decades, the U.S. Govern- molecular biologists and immunologists; special- ment increased its commitment to basic biologi- ists in scale-up and downstream processing such cal sciences, although this commitment has de- as microbiologists, biochemists, and bioprocess creased in the last few years. While the Govern- engineers; and specialists for all aspects of bio- ment was increasing its commitment to basic technology such as enzymologists and cell culture science, there was a concomitant decrease in its ● From $20 million to $30 million of the $511 million may actual- commitment to generic applied fields such as ly be generic applied research, because definitions of biotechnology bioprocess engineering and applied microbiology. differ among agencies. Ch. l—Summary ● 15 specialists. Scale-up personnel will become more that U.S. researchers could be visiting were fund- important as companies using biotechnology ing available. move into production. The United States currently has a competi- FACTORS OF MODERATE IMPORTANCE tive edge in the supply of molecular biologists The three factors found to be of moderate and immunologists able to meet corporate importance to international competitiveness in needs, in part because the U.S. Government biotechnology are health, safety, and environmen- has provided substantial funding since World tal regulation; intellectual property law; and War 11 for basic life sciences research in U.S. university/industry relationships. universities The supply of Ph. D. plant molec- ular biologists and scaleup personnel in the Health, Safety, and Environmental Regula- United States, however, may be inadequate. tion.—The analysis of the effect of health, safe- Like the United States, the United Kingdom and ty, and environmental regulation on competi- Switzerland have funded life sciences well and tiveness in biotechnology was made by determin- have a sufficient supply of basic biological scien- ing how restrictive a country’s laws would be with tists. Unlike the United States, Japan, the United respect to marketing biotechnology products and Kingdom, and the Federal Republic of Germany whether there were any uncertainties about their maintained a steady supply of both industrial and application. The analysis focused on the drug laws government funding for generic applied micro- for humans and animals and, to a lesser extent, biology and bioprocess engineering in the past on laws governing the production of chemicals few decades and have adequate personnel in and the deliberate release of novel organisms into these fields. In Japan and the Federal Republic the environment. In all the competitor coun- of Germany, slight shortages of molecular biolo- tries, there is some uncertainty as to the en- gists and immunologists exist; Japanese companies vironmental regulation governing the deliber are seeking to train personnel abroad. France ap- ate release into the environment of genetically pears to have shortages in all types of personnel. manipulated organisms. The training of personnel is important to the The only government controls directed specifi- continuing commercialization of biotechnology. cally toward biotechnology are the rDNA guide- The United States has, for the most part, good lines adopted by the six competitor countries. training programs for basic scientists. Specialists They are essentially voluntary and directed pri- in plant molecular biology may be in short sup- marily at research. Their containment and over- ply now, but training in this discipline can be sight provisions have been substantially relaxed readily achieved with interdisciplinary programs since they were originally adopted, and this trend in biology departments in universities. On the is expected to continue. The United States has the other hand, the United States does not have more most liberal guidelines, whereas Japan has the than a handful of training programs for person- most stringent. nel in the more applied aspects of biotechnology, Since companies generally approach domes- nor does it have Government programs, such as tic markets first, the countries with the least training grants, to support training in these fields. stringent regulation may have products on the The training of bioprocess engineers and indus- market earlier. Japan has the most stringent trial microbiologists will require greater inter- health and safety regulation for pharmaceuticals disciplinary cooperation between engineering and and animal drugs, followed by the United States. biology departments within universities. Switzerland appears to be the most liberal. Thus, The United States promotes and funds the train- the regulatory environment favors the Euro- ing of foreign nationals in laboratories in the pean companies over those of Japan and the United States, yet funds very little training of United States reaching their own domestic Americans abroad. Foreign countries have many markets sooner for pharmaceuticals and ani- significant research programs in biotechnology mal drugA In the United States, the Food and 16 ● Commercial Biotechnology: An International Analysis

Drug Administration has taken the position that intellectual property law provides several alter- rDNA products whose active ingredients are iden- native ways for companies to protect biotechno - tical to ones already approved or to natural logical inventions, it is more likely to be com- substances will still need to go through the new petitive in biotechnology. product approval process. However, data require- The patent laws of the competitor countries ments may be modified and abbreviated. This ap- provide fairly broad protection for biotechno- pears not to be the situation in the competitor logical inventions, but the laws differ to some countries, although there have not been definitive degree in the types of inventions that are pro- pronouncements by their regulatory agencies. tected, the effect of publication on patent rights, Regulation may also influence where companies and the requirements regarding public disclosure locate their production facilities. A country with of the invention, which is the quid pro quo for liberal regulation may attract production facilities the grant of the patent. The United States pro- and, as a consequence, gain access to technology, vides the widest coverage, Patents are available Alternatively, companies may set up facilities in for living organisms (including plants and possibly the United States and Japan regardless of regula- animals), their products, their components, and tion because of market size and as a way to avoid methods for making or using all of these. In ad- certain nontariff trade barriers on imports. NBFs dition, patents can be granted on therapeutic and may not have the capital to establish foreign sub- diagnostic methods, In the United Kingdom, the sidiaries in order to avoid regulatory barriers. Federal Republic of Germany, France, Switzer- Thus, they may beat a competitive disadvantage land, and Japan, patent coverage is almost as with respect to larger firms for entering world broad, but patents are not permitted on plants markets. and animals nor on therapeutic and diagnostic methods. In addition, Switzerland does not per- Countries wishing to market their products mit patents on microaganisms. In Japan, the abroad will have to abide by the regulations of relatively strict guidelines governing rDNA re- the countries to which they are exporting. Thus, search also may bar patents on those genetically countries can control access to their domestic manipulated organisms viewed as hazardous. markets by the regulations they impose. This is a form of nontariff trade barrier. These barriers With regard to the effect of publication on pat- are considered further in the discussion of trade ent rights, the United. States also has a slight ad- policy. vantage over the other countries analyzed here. The four European countries do not permit a pat- Intellectual Property Law.—The ability to ent to be granted to an inventor who has disclosed secure property interests in or otherwise protect his or her invention in a publication before the processes, products, and knowhow will encour- patent application is filed, assuming the disclosure age development of biotechnology, because it pro- enables others to make it. This absolute novelty vides incentives for a private company to invest requirement is viewed as impeding the free ex- the time and money for R&D. Without the abili- change of scientific information and possibly pro- ty to prevent competitors from taking the results viding a disincentive for scientists to seek patent of this effort, many new and risky R&D projects rights. The United States, on the other hand, pro- would not be undertaken. Thus, a strong intellec- vides a l-year grace period between the date that tual property law system will enhance a country’s an inventor publishes an article and the date on competitiveness in biotechnology. which the patent application must be filed. Japan The areas of intellectual property law most rele- provides a 6-month grace period for certain ac- vant to biotechnology are those dealing with tivities, such as presenting scientific papers. The patents, trade secrets, and plant breeders’ rights. U.S. advantage is limited, however, because when These areas work together as a system; an inven- U.S. inventors wish to secure patents in other tion may be protected by one or more of them, countries, they must refrain from publication in and if one has disadvantages, a company can look order to protect their patent rights in those to another. Thus, to the extent that a country’s countries. Ch. l—Summary ● 17

The patent Iaw requirement that an invention biotechnology has dramatically increased univer- be described in sufficient detail so that it could sity/industry interactions, especially in the United be replicated creates unique problems for biologi- States. Established U.S. and foreign companies cal inventions. Since a living organism generally have invested substantial amounts of money in cannot be described in writing with sufficient U.S. universities doing work in biotechnology in specificity to allow others to make and use it, order to gain a “window on the technology.” Many granting of patents on such organisms and meth- university/industry agreements in biotechnology ods of using them generally is contingent on their focus on research directed toward applications deposit in a public depository. However, these de- of biotechnology in a specific industrial sector, posits, in effect, turn over the factory for mak- whereas other university/industry agreements are ing a product to one’s competitors, unlike patents directed at many applications of biotechnology. in other technologies. The four European coun- The various agreements in the United States tries, and particularly the Federal Republic of Ger- appear to be working well and fears concern- many, place restrictions on access to such deposits ing conflict of interest and commingling of that may be advantageous for their inventors. Government and industry funds have di- minished. Most aspects of biotechnology lend themselves to protection as trade secrets, and owners of such The increase of industry funding of university technology may rely on trade secrets when pat- research in the United States in several disciplines ent rights are uncertain or when they judge trade came at a time when Federal funding of science secrecy to be more advantageous. All of the com- was decreasing in constant dollars. Although the petitor countries protect trade secrets relating to infusion of industry funds to the U.S. universities biotechnology, but the Federal Republic of Ger- has been substantial, it accounts for only a small many and, to a lesser extent, Switzerland, pro- fraction (less than 10 percent) of the total fund- vide the greatest degree of protection. Japan ap- ing of university research. In some university de- pears to provide the least degree of protection. partments, however, such as electrical engineer- All of the competitor countries recognize prop- ing, chemistry, and possibly now molecular biolo- erty rights in new varieties of plants, but the gy, industrial funding of university research may United States provides the greatest degree of pro- exceed 10 percent. Even with the increase in in- tection. Protection in the United States is most dustrial support, industrialists agree that private favorable because the plant breeder has the funding can never replace Federal funding of greatest number of options among which to basic science research if past and current levels choose in securing property rights for a new va- of basic research are to continue. riety of plant, including pursuing a patent under University/industry interactions are a very ef- the traditional patent laws. fective way of transferring technology from a In the final analysis, the U.S. intellectual prop research laboratory to industry. Such interactions erty system appears to offer the best protec- promote communication between industrialists tion for biotechnology of any system in the and academicians, a two-way interaction that world, thus providing the United States with a benefits both sides. Industrial scientists learn the competitive advantage with regard to this factor. latest techniques and research results, while acad- This advantage results from the fact that the emicians gain increased familiarity with chal- system provides the widest choice of options for lenges of industrial R&D. protecting biotechnological inventions, the broad- Neither Japan nor the European competitor est scope of coverage, and some of the best pro- countries identified in this assessment have as cedural safeguards. many or as well-funded university/industry rela- University/Industry Relationships.-A factor tionships as the United States does, but varying that has moderate overall importance is the rela- degrees of cooperation do exist. In Japan, the ties tionship that exists between universities and in- between university applied research departments dustries. Interest in the commercial potential of and industry have always been close. Additionally, 18 ● Commercial Biotechnology: An International Analysis the Japanese Government is implementing new The antitrust laws of the United States and the policies to encourage closer ties between basic other major competitors in biotechnology are research scientists and industry. In the Federal generally similar in that they prohibit restraint Republic of Germany, the Federal Ministry of Sci- of trade and monopolization. However, the for- ence and Technology (BMFT, Bundesministerium eign laws generally provide for exemptions and fur Forschung und Technologies) has a history of vest much discretion with the enforcement au- promoting close contact between academia and thorities, especially in Japan. Thus, in practice, industry and is cosponsoring with industry many they are often less restrictive than in the United projects important to biotechnology. Switzerland States. In addition, countries differ in the conse- encourages communication between individuals quences to firms for failure to comply with anti- in academia and industry, and relationships are trust laws, In the United States, the consequences easy to maintain. The universities in both the of noncompliance can be more severe than in the United Kingdom and France have had very few competitor countries because private, in addition ties with industry in biotechnology, but the gov- to Government, suits can be brought against al- ernments of both countries have recently set up leged antitrust violators, and treble damages are programs designed to encourage university/indus- assessed if a violation is found. try relationships. U.S. companies commercializing biotechnol- Industrial funding for research in American ogy face no major antitrust compliance prob universities is helping to promote the transfer of lems, because the lack of concentration and technology. However, the multimillion dollar ar- the absence of measurable markets mean that rangements that have characterized the initial most types of joint research arrangements relationships in biotechnology are most likely would not be anticompetitive. Technology short term and will probably become less im- licensing agreements can raise antitrust concerns, portant as the firms develop in-house expertise but these generally are not unique to biotechnol- and their research becomes more applied. As in ogy. However, there is some degree of uncertain- other fields, consulting and contractual re- ty about the scope and applicability of the anti- search agreements are likely to predominate trust laws to R&D joint ventures and licensing in university/industry relationships in bio agreements. This uncertainty, plus the expense technology in the future. of litigation and the threat of treble damages, could deter some activities that might lead to in- LEAST IMPORTANT FACTORS novation in biotechnology, thus limiting the ability The least important of the 10 factors analyzed of U.S. companies commercializing biotechnology were found to be antitrust law; international tech- to exploit their technology. * For these reasons, nology transfer, investment, and trade; govern- the current U.S. antitrust laws may have some ment targeting policies in biotechnology; and modest adverse effect on biotechnology. public perception. Any of these factors, however, International Technology Transfer, Invest- could become important as the technology devel- ment, and Trade.—Technology transfer across ops and products reach the marketplace. national boundaries can be promoted or inhibited Antitrust Law.—Antitrust laws are based on by export control laws and by laws governing the general economic assumption that competi- international joint ventures and technology tion among a country’s industries will result in licensing. Most export controls are directed at greater productivity, innovation, and general con- overseeing technology transfer for national sumer benefits than will cooperation. Recently security reasons, and the concept of national there has been much public debate about wheth- security is fairly narrowly interpreted in all of er US. antitrust laws have, in fact, accomplished the competitor countries except the United States. these goals in all cases and whether they place Therefore export controls may not be very U.S. companies at a competitive disadvantage in the international marketplace when foreign com- ● In addition, the rigid application of certain “per se rules” in the panies face allegedly less restrictive antitrust laws. area of licensing may actually lead to anticompetitive results. Ch. 1—summary ● 19 important for the international development of nology by foreign firms. The United States has biotechnology. However, the export controls of the fewest controls, whereas Japan and France the United States, which are the most restrictive have the most control mechanisms. Japanese con- of the competitor countries, include the control trols exist in the form of nontariff barriers such of pharmaceuticals and of many microorganisms as ministerial review and screening of foreign in- that potentially could be used in biotechnology vestments and licensing agreements with respect product production. These controls may have to a number of criteria ranging from national se- a slightly adverse affect on the competitive curity to competition with other Japanese busi- ness of U.S. companies commercializing bio- ness. Ministries also have the power to designate technology because they could cause delays specific companies for special controls on foreign that result in sales’ being lost to foreign com- ownership. In France, the Government has the petitors. U.S. export control laws may need ability to object or order alteration of licensing clarification as biotechnology products proceed agreements and foreign investments. Foreign to the marketplace because there is some uncer- direct investment in certain domestic industries tainty as to what products or data will be re- is not encouraged. Thus, U.S. markets are the stricted. In addition, the current U.S. export con- most accessible to foreign firms and therefore trol law expired in October 1983. While it is vir- the most vulnerable to foreign competition, tually certain that a new law will be passed, the whereas Japanese and French markets are the form that law will take is still unclear. least accessible and the most protected against foreign competition. The U.S. Government has no laws governing in- ternational joint ventures and technology licens- Trade policy was assessed by examining the ing among U.S. and foreign companies. As a con- competitor countries’ abilities to protect domestic sequence, technology can be transferred readily industries from imports and to control foreign to other countries. The predominance of NBFs in investment in domestic industries. Trade policy the United States and their need for capital has is not important for the commercialization of led to the formation of many transnational joint biotechnology today because of the small ventures involving NBFs, Because of this, the number of products that have reached the United States appears to be transferring more market and because trade in biotechnologi- technology outside of its national borders than cally produced products is not likely to raise are other countries at the present time. However, any unique trade issues. However, trade policy as biotechnology products reach the market, for- will become increasingly important as more prod- eign firms will probably set up subsidiaries in the ucts reach the marketplace, especially in the area United States in order to have access to U.S. of pharmaceuticals, where significant nontariff markets. If this happens, the United States could barriers, such as conforming to country stand- become a net importer of technology. ards with appropriate testing data, quality con- In contrast with the United States, France and trol standards, and packaging requirements ex- Japan have Government programs for the review ist. Problems with nontariff barriers are now be- of potential transnational agreements, but it is ing negotiated with Japan and other countries uncertain whether such programs help or hinder including the European Economic Community, the transfer of technology into those countries. and it apears as though some trade barriers may As of now, laws governing the transfer of tech- become less stringent. nology are not very important to the U.S. com- Government Targeting Policies in Biotech- petitive position in biotechnology. However, if nology.-The governments of four of the com- other countries establish themselves more favor- petitor countries-Japan, the Federal Re- ably in world markets, the current outward flow public of Germany, the United Kingdom, and of technology from the United States may hurt France-have instituted comprehensive pro the U.S. competitive position. grams to help domestic companies develop Foreign exchange and investment control laws certain areas of biotechnology. The targeting help prevent access to domestic markets and tech- policies are intended to reduce economic risk and 20 ● Commercial Biotechnology: An International Analysis lessen corporate duplication in biotechnology literacy in the various competitor countries be- R&D. A variety of policy measures are used comes important, as judgments must be made within each country. In Japan and West Germany, concerning complex issues. In the United States, the Governments carry out their policies mostly survey data show that only a small fraction of the through projects that combine the resources of public is fully informed about genetics in general the Government and private companies to meet and therefore, probably, about biotechnology in specific objectives set by the Government. The particular. Survey data also suggest that there is United Kingdom and France have adopted a dif- public apprehension concerning applied genetics. ferent approach; they support startup of small Thus, an accident associated with biotechnology firms, which are expected to commercialize the could arouse strong public reaction in the United results of Government-funded basic and applied States, a reaction that might be greater than in research. the competitor countries. At this early stage, any evaluation of the Given the lack of public knowledge in the eventual success of foreign targeting pro United States, it is particularly important that the grams is preliminary. History has shown that media play a responsible role with respect to bio- even the best thought-out targeting policies do not technology. The role of the media already extends guarantee competitive success. Whether targeting beyond mere reporting of the facts, by virtue of policies of foreign governments in biotechnology the events and issues the media elect to cover. are superior to the U.S. Government policy of At the current time, public perception is not an funding basic research in the life sciences and en- important factor in the commercialization of bio- couraging R&D in all industries with tax credits technology. However, the volatility of a potential remains to be seen. Though targeting policies are public response must be noted. Were thereto be not of great importance when compared to other an accident due to commercial biotechnology, the competitive factors, they could tip the balance of public’s reaction could be extremely important a competitive position in the future. to the future of biotechnology. Public perception. —Public perception of the risks and benefits of biotechnology is of greater Other influences on competitiveness importance in countries with representative, dem- in biotechnology ocratic forms of government than it is in coun- tries with other forms of government, simply Three other considerations that should be noted because of the greater attention paid to public in evaluating competitive positions in the commer- opinion in democracies and the independence of cialization of biotechnology are, for each coun- the media. Therefore, public perception could try, historical patterns of industrial commercial- influence commercialization of biotechnology ization, the availability of natural resources, and in all of the countries examined here. As a fac- cultural attitudes toward risk-taking. tor influencing competitiveness, however, public Historically, industries in some countries have perception is probably of greater importance in moved research results into commercialization the United States than in the other competitor rapidly, while industries in other countries have countries. Historically, the American public has moved more slowly. This observation is especially been more involved than the public in Japan or important in this analysis of biotechnology. For the European countries with issues pertaining to instance, the United Kingdom has a good science genetic research and technology (e.g., issues base, trained personnel, and industries that could regarding the safety of rDNA research). be using these new technologies; however, the In all countries, the importance of public United Kingdom may not be a major contender perception as a factor influencing competi- in the commercialization of biotechnology mainly tiveness will be greatly increased in the event because it does not have a history of rapid com- of an accident or perceived negative conse mercialization. On the other hand, both the quence of biotechnology. Particularly in such United States and Japan historically commer- a case, the level of scientific and technological cialize scientific advances rapidly. Ch. l—Summary ● 21

Another historical consideration is the quanti- terested in applying biotechnology in the chemical ty of sales of specific products in a country. For industry than a country, such as the United King- example, Japan’s per capita consumption of phar- dom, which has domestic petroleum resources, maceuticals is significantly higher than that of the The United States, a country that produces ex- other competitor countries; therefore, Japan may cesses of grain each year, may find commercial- have more interest than other countries have in ization of processes that can use grain as a applying biotechnology to the production of phar- feedstock particularly attractive. However, it is maceuticals. In other words, cultural differences too early to predict the degree to which natural will probably play a role in determining the resources will determine the commercial applica- markets each country will attempt to dominate. tions of biotechnology a country may undertake. The absence or presence of certain natural re- The United States, as a general rule, is not sources may also determine how quickly a coun- averse to risk-taking in business. Risk-taking is a try moves into the commercialization of biotech- part of the American lifestyle. European countries nology. For instance, Japan does not have domes- are more risk averse. Since investment in biotech- tic petroleum resources. Because biomass can nology is considered risky, countries that are potentially replace petroleum as a feedstock in more risk averse are less likely to move rapidly the chemical industry, Japan may be more in- to commercialize biotechnology.

Conclusion

The unique complementarities between estab- of biotechnology. Japan has a very strong bio- lished and new firms, the well-developed science process technology base on which to build, and base, the availability of finances, and an entre- the Japanese Government has specified biotech- preneurial spirit have been important in giving nology as a national priority. The demonstrated the United States its present competitive advan- ability of the Japanese to commercialize rapidly tage in the commercialization of biotechnology. developments in technology will surely manifest In order to maintain this advantage, increased itself in biotechnology. funding of research and training of personnel in The Federal Republic of Germany, the United basic and generic applied sciences, especially Kingdom, Switzerland, and France lag behind the bioprocess engineering and industrial micro- United States and Japan in the commercialization biology, may be necessary. The United States may of biotechnology. The European countries gen- also need to be concerned with the continued erally do not promote risk-taking, either indus- availability of finances for NBFs until they are self- trially or in their government policies. Addition- supporting. on most of the other factors influ- ally, they have many fewer companies commer- encing competitiveness, the United States rates cializing biotechnology. Thus, the European very favorably, although there are changes in countries are not expected to be as strong laws and policies that could potentially improve general competitors in biotechnology as the or help maintain the U.S. competitive position. United States and Japam In markets for specific These changes include clarification and modifica- products, including some pharmaceuticals, spe- tion of particular aspects of intellectual proper- cialty chemicals, and animal agriculture products, ty law; health, safety, and environmental regula- however, some European companies will un- tion; antitrust law; and export control law. doubtedly be strong international competitors. Japan will be the most serious competitor of the United states in the commercialization —

22 . Commercial Biotechnology: An International Analysis —

Issues and options

Congressional issues and options for improv- Policy options in some areas are not specific to ing the competitive position of the United States biotechnology but apply to high technology or in biotechnology are presented at the end of most industry in general. These options are to: of the chapters in part IV. To improve the com- ● improve U.S. science and engineering educa- petitive position of the United States, legislation tion and the retraining of industrial person- could be directed toward any of the 10 factors nel, OTA identified as influencing competitiveness, ● change U.S. antitrust law to promote more although coordinated legislation directed toward research collaboration among domestic firms, all of the factors might be more effective in pro- ● regulate imports into the United States to pro- moting U.S. biotechnology efforts. The chapters tect domestic industries, in part IV discuss only those options that are spe- ● regulate the transfer of technology from the cific to the development of biotechnology. Some United States to other countries, and of the options presented in part IV are limited and ● target specific industries or technologies for straightforward, such as some options concern- Federal assistance. ing health and safety regulation and R&D limited partnerships. Other options are much broader There are many arguments for and against with potentially large political, ethical, and finan- these options that are beyond the scope of this cial considerations. Some examples of the latter report. Because of their broad applicability to in- include establishing university/industry cooper- dustry in general, these options are not discussed ative research centers, regulating the deliberate in part IV. It is important to note, however, that release of genetically manipulated organisms into legislation in any of these areas could affect the the environment, and changing patterns of re- development of biotechnology and potentially search funding. Thus, the adoption of some op- have a large influence on the U.S. competitive tions may occur more rapidly than others. position.